Project report on

Corporate Governance in Public Sector Undertakings in India

International School of Business & Media

Submitted to:-

Prof. I. Sridhar

Submitted by:Anand Doshi(12073) Sec D

1

Table of Content

1. Introduction

... 4 . .. 7

2. Conceptual Discussion (Basic concepts to be discussed)

3. State and explain the implementation of the existing system . . 15 .. .26

4. Alternative systems prevailing in other countries

5. Data Analysis and Interpretation

37 41 . 43

6. Conclusion 7. Bibliography

Introduction

Introduction

Corporate Governance involves a set of relationships between a companys management, its Board, its shareholders and other stakeholders. Corporate governance provides a principled process and structure through which the objectives of the company, the means of attaining the objectives and systems of monitoring performance are also set. Corporate governance is a set of accepted principles by management of the inalienable rights of the shareholders as a true owner of the corporation and of their own rule as trustees on behalf of the shareholders. It is about commitment to values, ethical business conduct, transparency and makes a distinction between personal and corporate funds in the management of a company.

There are about 240 Central Public Sector Enterprises. A large number of them do not make enough profits. There may be many reasons for such companies incurring losses and becoming sick. It is imperative that ethics, probity and public accountability are maintained in the functioning of all public enterprises. In other words good Corporate Governance practices should be inbuilt in the management system of Public Enterprises.

These guidelines on corporate governance are formulated with the objective that the Central Public Sector Enterprises follow the guidelines in their functioning. Proper implementation of these guidelines would protect the interest of shareholders and relevant stakeholders.

The Department of Public Enterprises (DPE) has issued guidelines on composition of Board of Directors of Central Public Sector Enterprises (CPSEs) According to these guidelines at least one-third of the Directors on the Board of a CPSE should be non-official Directors. The Navratna and Miniratna schemes provide that exercise of the enhanced powers delegated to these CPSEs is
4

subject to the condition that their Boards are professionalised by inducting adequate number of non-official Directors, with minimum four in case of Navratna and minimum three in case of Miniratnas. The schemes for Navratna and Miniratna CPSEs also provide for setting up of Audit Committees.

In November 2001 DPE issued further guidelines on composition of Board of Directors of listed CPSEs . It provided that the number of Independent Directors should be at least one-third of the Board if the Chairman is non-executive and not less than 50% if the Board has an executive Chairman. Relevant extracts of Clause 49 of the Listing Agreement with Stock Exchanges issued by Securities and Exchange Board of India (SEBI) form part of the said guidelines.

Apart from these instructions of DPE, the CPSEs are governed by the Companies Act, 1956 and regulations of various authorities like Comptroller and Auditor General of India (C&AG), Central Vigilance Commission, administrative Ministries, other nodal Ministries, etc. The Right to Information Act 2005 is also applicable to the CPSEs. The CPSEs fall under the definition of State as provided in Article 12 of the Constitution of India Further, some principles of corporate governance are already in vogue in public sector because (a) the Chairman, Managing Director and Directors are appointed independently through a prescribed procedure; (b) Statutory auditors are appointed independently by the C&AG; (c) Arbitrary actions, if any, of the Management could be challenged through writ petitions; (d) remuneration of Directors, employees, etc. are determined on the basis of recommendations of Pay Committees constituted for this purpose; etc.

Corporate Governance as a concept is fast rising as a decisive conceptual tool to control, contain and also facilitate corporate operations across the world. In these days of globalization, dominated by the flows of global capital, corporate governance is a means of assuring investors both individual and institutional shareholders that the corporation does not intend to misuse their money in their
5

operations. The structures of corporate governance ensue that the corporate entities do not engage in fraud and continue to grow and make profits. The public sector utilities with important social responsibilities to fulfill other than make profits also come under the scanner because they use the taxpayers money for their operations. The non-government organizations use donor moneys for their non-profit programmers and are answerable to the donors for proper and befitting use of funds.

Corporate governance is high on the agenda of company Boards worldwide. As institutional investments from financial institutions such as lending institutions, insurance companies and pension funds are growing; investors have been increasingly demanding transparency in company accounts, fair treatments and periodic updates about the companys performance. Corporate governance, however, does not mean protecting the interests of investors alone; it aims at achieving fairness and transparency in transactions with all the stakeholders including customers, employees, investors, vendors, government and the society at large. Corporate governance seeks to build confidence and trust of the stakeholders by observing fairness and transparency in all company affairs. Shareholders, in the technical sense, are the owners of a company but they mostly regard themselves as investors. As shareholders are residual claimants, in well performing capital and financial markets, whatever maximize shareholder value should maximize corporate security and best satisfy the claims of creditors, employees and society at large. Moreover, there exist well defined laws to protect the interest of employees and creditors. Therefore, corporate governance regulations in India promote the rights of shareholders; while at the same time ensure the interests of other stakeholders are also simultaneously protected.

Conceptual Discussion

Conceptual Discussion

The Government of India (GOI) has taken a number of steps over the years to improve the efficiency and performance of its Central Public Sector Enterprises (CPSEs). Corporate governance has been an important part of GOIs broader CPSE and economic reforms, aimed at improving the performance and competitiveness of some of Indias most important national assets, allowing companies easier access to the capital markets, and making companies more transparent and accountable. The underlying goal is to reorient the states role away from a market player to a market regulator and away from day-to-day management of CPSEs towards exercising its core ownership rights based on sound corporate governance principles.

To this end, the Department of Economic Analysis (Ministry of Finance) and the Department of Public Enterprises (Ministry of Heavy Industry and Public Enterprises) requested World Bank support in assessing CPSE corporate governance in light of good practice based on the OECD Guidelines on Corporate Governance of State-Owned Enterprises, and in light of Indias own Guidelines on Corporate Governance of State-Owned Enterprises issued in 2007. This report carries out the review and offers recommendations for improving CPSE governance. It is based on a review of the legal and regulatory framework, the findings and reports carried out by various government commissions and expert groups on CPSEs, background research on CPSE performance, discussions with key stakeholders and corruption others.

The governance framework for CPSEs is consistent with several aspects of international good practice. Substantial progress has been made in removing barriers to competition, reducing government financial support, and listing of CPSEs on the capital markets. Almost all CPSEs are corporatized and come under the same laws as private sector companies. Key decision making powers
8

have been delegated to leading enterprises and other profitable CPSEs. Memorandums of Understanding (MOUs) have been signed by most CPSEs and have emerged as a key tool in monitoring and motivating performance. Clause 49 of the Listing Agreement has helped put listed CPSEs on the same footing as private companies and the 2007 Corporate Governance Guidelines have helped to extend these practices to non-listed CPSEs. CPSE boards are required to have independent members and are now bringing in directors with private sector experience. Extensive information is provided on CPSEs to the public, at both the sector and enterprise level.

Yet governance challenges still remain and further reforms are needed to build on the substantial gains that have already been achieved. There are still critical differences with the private sector that distort competition and market incentives. These include certain legal and financial privileges that favor CPSEs on the one hand and social obligations and human resource rules that constrain them on the other .A complex ownership framework combines the conflicting roles of policymaking and ownership in some ministries, allows political interference in board appointments and commercial decision-making to continue, and weakens board powers. CPSE boards continue to be oriented to the public sector and are rarely if ever evaluated on their performance. Implementing disclosure requirements is a challenge for many CPSEs, particularly in light of relatively weak internal audit and control functions, lack of guidance on disclosure for non-listed firms, and potential duplication and delays in the various CPSE audits. This report addresses these challenges. The main findings and recommendations of the report are summarized blow.

First, corporate governance reforms are and should be seen as part and parcel of the broader CPSE reform program rather than as a stand-alone or substitute reform. Reforms aimed at improving governance and increasing CPSE autonomysuch as board appointment and empowerment, separation of ownership from policy functionscan facilitate broader policy reforms aimed at
9

increasing market discipline through exposure to competition, tightening of budget constraints, listing of CPSEs on the stock exchange, and bringing in private sector participation. Market discipline in turn puts pressure on CPSE to adopt further governance reforms and ensure transparency and accountability. It also helps maximizeand sustainthe gains from improved governance.

Second, GOI should target corporate governance efforts at Navratnas, Miniratnas, and other profitable companies. In tandem with other policy reforms, this would help achieve even higher levels of performance of some of Indias most important companies. It would allow companies to graduate to higher categories, giving them greater delegation of powers and more autonomy while requiring higher levels of transparency and accountability. It would also help facilitate listing of such companies on the capital markets. For consistently loss-making or unviable companies, the focus should be on restructuring through freeing up land for more productive use elsewhere in the economy, implementation of VRS and retraining programs, and closure or liquidation.

Third, expanding and deepening corporate governance reforms requires action on three main fronts. These are as follows (detailed recommendations are provided in Table 1):

Strengthening the states ownership role: How the state organizes and exercises its ownership rights is central to improving CPSE governance. The main challenge lies in making a complex and control oriented ownership framework more effective in striking the right balance between CPSE autonomy and accountability. This can be achieved by: (i) reforming ownership arrangements with a view to focusing the role of administrative ministries on policy-making and limiting their day-to-day role in commercial decision-making, giving boards greater decision-making powers in practice, and considering moving to a more centralized ownership model in the longer-term; (ii) improving the ways in which GOI exercises its key ownership functions, in particular
10

enhancing transparency in the board appointment process and improving performance monitoring; (iii) enhancing the role and capacity of the Department of Public Enterprises as a nodal agency to make it a more active promoter of the governance agenda; and (iv) improving the Corporate Governance Guidelines so that they become a more effective governance tool.

Professionalizing CPSE boards: While boards have come a long way in becoming more professional over the years, there is still substantial room for improvement. Particularly in the case of Navratnas, Miniratnas, and other profitmaking companies, boards could be made more effective by bringing in independent directors from the private sector, empowering boards with greater decision-making authority while ensuring fair and responsible behavior through integrity and accountability mechanisms, strengthening audit committees, introducing performance-based board evaluation and remuneration practices, and making board development and leadership programs mandatory.

Enhancing transparency and disclosure: CPSE disclosure standards are comparable to many OECD countries while the Right to Information Act has pushed the frontier even further on transparency and accountability.

Implementation is the main challenge. These requires improving company reporting and disclosure, strengthening internal audit functions, and continue to streamline the audit system to avoid duplication and ensure timeliness.

11

12

Fourth, successful implementation requires careful management of the corporate governance reform process. A number of commissions and expert groups have studied CPSE governance in depth and have offered

recommendations for improvement. Indeed, much of this report draws from and reflects on the findings of these studies. In short, the policy and technical solutions are known. The challenge going forward is instead one of implementation. Entrenched groups may oppose or find other ways to resist governance reforms. Implementation requires fundamental changes in

organization, incentives, and behavior that can be difficult to achieve. And governance reforms are ongoing processes that evolve and unfold over time. Managing these challenges will therefore require attention to the reform process itself, in particular to the need for: (i) political leadership and commitment; (ii) phasing or sequencing of reforms based on the political and institutional feasibility of reform; (iii) creation of strong institutions with dedicated reform teams to manage and sustain the process; (iv) building of public support to overcome stakeholder resistance to reform; and (v) development of monitoring systems early in the process to evaluate impacts, ensure transparency and accountability, and provide a feedback loop to adjust course as needed.

Fifth, the following steps are suggested for taking the CPSE corporate governance agenda forward. These include:

Development of a strategy for implementing the CPSE reform agenda: A sequenced or phased strategy could be considered, based on political and institutional feasibility. Based on further political economy analysis, recommendations and actions can be categorized into two groups: (i) lowhanging fruit or a set of recommendations that are not particularly controversial and can be relatively easily donefor example, bringing in more independent directors from the private sector, improving MOU indicators, enhancing disclosure; and (ii) the more difficult set of recommendations that may require
13

time and a change in mindset, for example, development of a more centralized approach to managing the states ownership functions, disinvestment of state shares, and exit of unviable companies.

Revision of the CG Guidelines: As discussed in the report, the current Guidelines are too narrow in scope and may also require making certain provisions mandatory in order to give it teeth and enforce implementation. DPE should take stock of CPSE compliance with the Guidelines to date and based on the findings the Guidelines should be revised with a view to also making them more comprehensive.

Monitoring of compliance with the CG Guidelines: In developing such a monitoring system, DPE could draw from the monitoring requirements established for listed companies and from international experience with performance monitoring systems in general.

Implementation of company-level governance reforms in 2-3 pilot cases of Miniratnas and profitable companies. A pilot exercise along these lines may help upgrade their status and facilitate listing on the stock exchange. It would also provide tangible improvements and benefits that could create momentum for more widespread implementation across CPSEs.

Enhance DPEs capacity to carry out the above steps. Some of the above activities (e.g. development of the strategy, revision of the Code, monitoring indicators) may require inputs from specialized experts or consultants to help with design and implementation and/or exposure of DPE staff to training and international good practice. Donor agencies could help support this process.

14

State and explain the implementation of the existing system

15

State and explain the implementation of the existing system Corporate Governance as a Development Tool

At a first glance, corporate governance may seem like an odd answer to the questions outlined above. After all, the popular perception of corporate governance is that it is something more applicable to multinational corporations, large stock exchanges, and CEOs rather than average entrepreneurs, SME loans, and job creation. Corporate governance is frequently discussed in the context of complex accounting procedures and disclosure mechanisms and certainly not in the context of poverty alleviation. Yet, a closer look at corporate governance, its broader application, and, most importantly, its institutional underpinnings, underscores its role as an essential component of public governance and private sector development, both of which are recognized poverty alleviation solutions. This paper uncovers some of these linkages.

The conventional view of corporate governance has much to do with separation of ownership and control issues that arise between owners and managers of corporations. Managers and owners, the theory holds, may have different interests, and fully removed from managing the day-to-day activities of the enterprise, owners need guarantees that managers act in the interest of a company (or its owners) rather than in their own interest. This is where corporate governance comes in it establishes the mechanisms necessary to ensure proper actions on behalf of managers of a corporation. For example, it helps prevent theft of property or its misuse by management.

How Does Corporate Governance Affect Development?

Increased access to external financing by firms ,which can lead to greater investment, higher growth, and more employment creation.

16

Lower cost of capital and associated higher firm valuation, which makes more investments attractive to investors and leads to growth and employment. Better operational performance, through better allocation of resources and better management, which creates wealth. Reduced risk of financial crises, a particularly important effect, as financial crises can impose large economic and social costs. Better relationships with all stakeholders, which helps improve social and labor relationships and areas such as environmental protection.

From this simple concept, corporate governance extends into many areas of creating sustainable business. How do boards of directors actually function? What is the role of the board of directors? How do you define the rights of stakeholders? What mechanisms are available to prevent the abuse of minority shareholders rights? What are the key disclosure mechanisms and which areas of company operations should not be disclosed to the general public? But such a narrow view of corporate governance as a tool only useful for large corporations, with many shareholders and powerful managers, listed on stock exchanges in developed countries is increasingly questioned by reformers and business communities around the world. Weak corporate governance, for example, has been linked to the inability of countries to attract investment, financial collapses, persistent corruption, failures of privatization, weak property rights, and many other development challenges countries around the world face. As such, many economies are warming up to the idea that good corporate governance is essential to their overall health. Companies are improve governance practices.

APLLICABILITY OF GUIDELINES For the purpose of evolving Guidelines on corporate governance, CPSEs have been categorized into two groups ,namely, (i) those listed in the Stock Exchanges; (ii) those not listed in the Stock Exchanges.

17

CPSEs listed in Stock Exchanges:

In so far as listed CPSEs are concerned, they have to follow the SEBI guidelines on corporate governance. In addition, they may follow those provisions in these guidelines which do not exist in the SEBI guidelines and also do not contradict any provisions in the SEBI guidelines .

Non-listed CPSEs:

Each PSE should strive to institutionalize good corporate governance practices broadly in conformity with the SEBI guidelines. The listing of the non-listed CPSEs in the stock exchanges may also be considered within a reasonable time frame to be set by the Administrative Ministry concerned in consultation with the CPSEs concerned. The non-listed CPSEs may follow the Guidelines on Corporate Governance given in the subsequent chapters, which are voluntary in nature.

APPLICABILITY OF GUIDELINES GUIDELINES ON CORPORATE GOVERNANCE FOR CPSEs

the succeeding chapters under the following headings. Board of Directors Audit Committee Subsidiary Companies Disclosures Report, Compliance and Schedule of Implementation

18

Composition of Board

The Board of directors of the company shall have an optimum combination of functional, nominee and independent directors. The number of functional directors (including CMD/MD) should not exceed 50% of the actual strength of the Board. The number of nominee directors shall be restricted to a maximum of two. In case of CPSEs listed in Stock Exchanges, the number of independent directors shall be at least 50% of Board Members. In case of CPSEs not listed in the Stock Exchanges, at least one-third of the Board Members should be independent directors. The expression independent director shall mean a parttime director of the company. (all corporate governance rule).

Part-time directors compensation and disclosures

All fees/compensation, if any paid to part-time directors, including independent directors, shall be fixed by the Board of Directors subject to the provisions in the DPE guidelines and Companies Act, 1956 .

Other provisions as to Board and Committees

Number of Board meetings:- The Board shall meet at least once in every three months and at least four such meetings shall be held in every year. The minimum information to be made available to the Board is given in( Annex-IV. www.dep.nci.in).

A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.

19

Compliance of Laws to be reviewed:- The Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of noncompliances.

Code of Conduct

The Board shall lay down a code of conduct for all Board Members and senior management of the company. The code of conduct shall be circulated and also posted on the website of the company.

All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the Chief Executive.

Guidelines and policies evolved by the Central Government with respect to the structure, composition, selection, appointment and service conditions of their Boards of Directors and senior management personnel shall be strictly followed.

There shall be no extravagance in expenditure on the part of Board members and senior management personnel. PSE executives shall be accountable for their performance in conformity with established norms of conduct.

Any external/internal changes made from time to time, due to addition of or amendment to laws/regulatory rules, applicable to CPSEs, need to be dealt with carefully by the respective boards/senior management personnel.

A suggested list of items to be included in the code of conduct is given at (Annex-V www.dep.nci.in) Further, to assist the CPSEs in the formulation of the code, a model Code of Business Conduct and Ethics for Board Members and Senior Management is given at Annex-VI.( www.dep.nci.in).

Functional Role Clarity between Board of Directors and Management A clear definition of the roles and the division of responsibilities between the Board and the Management is necessary to enable the Board to effectively perform its role.
20

Risk Management

Enterprise risk management helps management in achieving CPSE performance and profitability targets. It helps to ensure effective reporting and compliance with laws and regulations, and helps avoid damage to the entitys reputation and associated consequences. Considering the significance of risk management in the scheme of corporate management strategies and their oversight should be one of the main responsibilities of the Board/Management. The Board should ensure the integration and alignment of the risk management system with the corporate and operational objectives and also that risk management is undertaken as a part of normal business practice and not as a separate task at set times.

Training of Directors

The company concerned shall undertake training programmers for its new Board members (Functional, Government, Nominee and Independent) in the business model of the company including risk profile of the business of company, responsibility of respective Directors and the manner in which such responsibilities are to be discharged. They shall also be imparted training on corporate governance, model code of business ethics and conduct applicable for the respective Directors.

AUDIT COMMITTEE
Qualified and Independent Audit Committee

A qualified and independent Audit Committee shall be set up giving the terms of reference. The Audit Committee shall have minimum three directors as members. Twothirds of the members of audit committee shall be independent directors. The Chairman of the Audit Committee shall be an Independent Director.
21

All members of Audit Committee shall have knowledge of financial matters of Company, and at least one member shall have good knowledge of accounting and related financial management expertise. (any many more)

Role of Audit Committee: The role of the Audit Committee shall include the following: Oversight of the companys financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. Recommending to the Board the fixation of audit fees. Approval of payment to statutory auditors for any other services rendered by the statutory auditors. Reviewing, with the management, the annual financial statements before submission to the Board for approval, with particular reference. Reviewing, with the management, the quarterly financial statements before submission to the Board for approval. Reviewing, with the management, performance of internal auditors and adequacy of the internal control systems.(and many more)

Powers of Audit Committee

Commensurate with its role, the Audit Committee should be invested by the Board of Directors with sufficient powers, which should include the following: To investigate any activity within its terms of reference. To seek information on and from any employee. To obtain outside legal or other professional advice, subject to the approval of the Board of Directors. To secure attendance of outsiders with relevant expertise, if it considers necessary. To protect whistle blowers.

22

Meeting of Audit Committee

The Audit Committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the Audit Committee whichever is greater, but a minimum of two independent members must be present.

SUBSIDIARY COMPANIES
At least one Independent Director on the Board of Directors of the holding company shall be a Director on the Board of Directors of a subsidiary company. The Audit Committee of the holding company shall also review the financial statements of the subsidiary company. The minutes of the Board meetings of the subsidiary company shall be placed at the Board meeting of the holding company. The management should periodically bring to the attention of the Board of Directors of the holding company, statement of all significant transactions and arrangements entered into by the subsidiary company.

DISCLOSURES
Transactions

A statement in summary form of transactions with related parties in the normal and ordinary course of business shall be placed periodically before the Audit Committee.

Details of material individual transactions with related parties, which are not in the normal and ordinary course of business, shall be placed before the Audit Committee.

23

Details of material individual transactions with related parties or others, which are not on an arms length basis should be placed before the Audit Committee, together with Managements justification for the same.

Accounting Standards

Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the managements explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report. (and many more).

Board Disclosures Risk management Remuneration of Directors Management

Industry structure and developments Strength and weakness Opportunities and Threats Segmentwise or product-wise performance Outlook Risks and concerns Internal control systems and their adequacy

24

REPORT, COMPLIANCE AND SCHEDULE OF IMPLEMENTATION

Report on Corporate Governance

There shall be a separate section on Corporate Governance in each Annual Report of company, with details of compliance on Corporate Governance. The suggested list of items to be included in the report on Corporate Governance is in Annex-VII.(website mention above)

Compliance

The company shall obtain a certificate from either the auditors or practicing Company Secretary regarding compliance of conditions of corporate governance as stipulated in these Guidelines and Annexes. The certificate with the Directors Report, which is sent annually to all the shareholders of the company, should also be included in the Annual Report.

Chairmans speech in Annual General Meeting (AGM) should also carry a section on compliance with corporate governance guidelines/norms and should form part of the Annual reports of the concerned CPSE.

The grading of CPSEs may be done by DPE on the basis of the compliance with corporate governance guidelines norms.

schedule of implementation

These Guidelines on Corporate Governance are issued for an experimental phase of one year and suitable adjustments would be made in these guidelines in the light of the experience gained. For this purpose, the CPSEs should submit mid-year.

(All Annexes- www.dpe.nic.in)

25

Alternative systems prevailing in other countries

26

Corporate Governance Principles for Caribbean Countries

The Core principles are aimed at improving the legal, institutional and regulatory framework for corporate governance in the Caribbean and facilitating the development of national and/or sector specific codes.

The principles represent a common basis that countries in the Caribbean consider essential for the development of good governance practices.

Like the OECD Principles, the principles focus on publicly held companies. However they are also intended to serve as guiding principles to improve corporate governance in privately held, family owned and state owned enterprises as well as overall public sector governance. They also articulate the role of all stakeholders including customers, employees, pensioners and the public in the governance process.

Consistent with the OECD principles of Corporate Governance, the Principles reflect international best practices. They seek to provide a basis for the development and implementation of sector specific and/or national codes of Corporate Governance appropriate to the developmental context of the Caribbean and supportive of the integration movement within CARICOM.

For countries in the Caribbean that are trying to attract financial capital, corporate governance is essential in bolstering the confidence and commitment of potential investors and contributing to corporate competitiveness. Therefore the principles are expected to facilitate long-term economic development of the countries including the strengthening of market discipline, improved business transparency through enhanced disclosure, effective regulation and corporate social responsibility. Effective corporate reporting will also assist governments and regulators to monitor markets, identify risks and impose appropriate regulations that encourage growth and fair competition.

27

Corporate Governance principles should be cognizant of the importance of public sector governance and/or governance within State-Owned Enterprises as the public sector is a major employer of human capital and economic resources. Accordingly, Governments as policy makers must set the tone for the movement towards good governance nationally, through transparency and accountability, by ensuring that good corporate governance standards are employed within the public sector, and the governance structures of state-owned enterprises.

CORPORATE GOVERNANCE PRINCIPLES Principle I Overall Objective The corporate governance framework within the Caribbean should encourage the development of transparent and efficient markets, have its basis in the rule of law and ethical business practices and foster the division of responsibilities among supervisory, regulatory, and enforcement bodies.

A. The corporate governance framework should be cognizant of the economic peculiarities of the countries of the region, promote market integrity and growth, and underscore market transparency and efficiency and serve the public interest. B. Corporate governance practices should be embedded in the legal and regulatory systems and based on the rule of law. C. Responsibilities among authorities should be clearly delineated. D. Professionalism and objectivity should be the cornerstone of the decision-making processes and other activities of supervisory, regulatory and enforcement bodies, including professional and industry associations. Such bodies should have the requisite authority and resources to fulfill their mandates. Decisions should be timely, transparent and just.

28

Principle II Shareholder Rights The Corporate Governance framework should protect and facilitate the exercise of shareholders rights. A. Basic shareholder rights should include the right to: 1) secure methods of ownership registration; 2) freely convey or transfer shares subject to applicable law; 3) obtain relevant and material information on the entity on a timely and regular basis, subject to any laws or principles of confidentiality; 4) participate and vote in general meetings of shareholders; 5) elect and remove members of the Board; and 6) share in the profits of the entity. B. Shareholders should have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental/material corporate changes such as: 1) amendments to the statutes and/or articles of incorporation or other governing documents of the entity; 2) the authorization of additional shares; and 3) extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the sale of the company. C. All shareholders should have the opportunity to participate effectively and vote in meetings of shareholders and should be informed of the rules, including voting procedures that govern shareholder meetings; Shareholders should be able to make their views known on the remuneration policy for Board members and key executives and the equity component of compensation schemes for Board members and employees should be subject to shareholder approval.

29

D. Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed. E. Markets for corporate control should be allowed to function in an efficient and transparent manner. The rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and are provided recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class. F. The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated and institutional investors should be encouraged to participate actively in the governance of the entity. Equal treatment to share holder

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

A. All shareholders of the same series of a class should be treated equally. 1. Within any series of a class, all shares should carry the same rights. All investors should be able to obtain information about the rights attached to all series and classes of shares prior to purchase. Any changes in voting rights should be subject to approval by those classes of shares, which are negatively affected. 2. Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly, and should have effective means of redress.

30

3. Minority shareholders should be encouraged to seek professional advice before participating in key decisions with respect to corporate governance, corporate restructuring, capital restructuring or asset transfers; 4. The forms of redress available should be made known to all shareholders;

5. Votes should be cast by custodians or nominees in a manner agreed upon with the beneficial owner of the shares; 6. Cross border voting should be facilitated; B. Insider trading and abusive self-dealing should be prohibited. C. Members of the Board and key executives should be required to disclose to the Board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the entity. D. Procedures for dealing with conflicts should be established. Principle IV Rights of other Stakeholders The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between entities, including family owned businesses and stateowned/controlled enterprises, and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. A. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights. B. Performance-enhancing policies for employee participation including employee share ownership and option plans, pension funds and other profit sharing mechanisms should be permitted to develop. C. Stakeholders should have access to relevant, sufficient and reliable information on a timely and regular basis.

31

D. Procedures and safe-harbors should be established for complaints by employees, either personally or through their representative bodies, and others outside the company, concerning illegal and unethical behavior should be established. E. The corporate governance framework should be complemented by an effective and efficient insolvency framework and by effective enforcement of creditor rights. F. Principles for public sector accountability and governance should be recognized and implemented; G. Public Accounts Committees should play an active role in the governance of state owned/controlled enterprises. H. An effective system for monitoring and reporting poor governance practices should be instituted within the public and private sectors. I. The development of capacity within stakeholder groups should be facilitated. The development of business associations, shareholder advocacy groups and organized lobbying efforts should be encouraged. Principle V Disclosure and Transparency The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters relating to the entity, including its financial situation, performance, ownership, and governance. A. All material information in relation to the company should be disclosed subject to considerations of confidentiality;

1. The financial and operating results of the company; 2. Company objectives; 3. Major share ownership and voting rights; 4. Remuneration policy for members of the Board and key executives;

32

5. Information about members of the Board, including biographical data, qualifications, shareholding in the entity, other company directorships and whether they are regarded as independent by the Board; 6. Related party transactions; 7. Existing and foreseeable risk factors; and 8. Issues regarding employees and other stakeholders likely to materially affect the performance of the entity. B. The Board of Directors should prominently and clearly disclose its approach to corporate governance, including analyzing the entitys governance issues. The Board should also disclose the processes it employs to ensure an effective system of corporate governance. C. Information should be prepared and disclosed in accordance with legal and regulatory requirements for accounting, financial and non-financial disclosure. 1. Accounting and auditing professions should work to close the gap between accepted international standards and actual practices; 2. The development and implementation of both accounting and auditing standards should be overseen by effective bodies acting in the publics interest; 3. The relevant accounting standards used to prepare the financial statements and reports should be disclosed; 4. The annual reports of companies should contain a Corporate Governance Statement detailing the companys governance structures and/or policies; 5. The Board should ensure that adequate risk management and internal control procedures/processes are in place. D. An annual audit should be conducted by an independent, competent and qualified auditor, appointed by the shareholders, in order to provide an external and objective assurance to the Board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects.
33

E. External auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit. External auditors should be independent in fact and appearance. F. Channels for disseminating information should provide for equal, timely and cost efficient access to relevant information by users G. The corporate governance framework should be complemented by the provision of analysis or advice by analysts, brokers, rating agencies and others, that is relevant to investors and free from material conflicts of interest that might compromise the integrity of such analysis or advice. H. Auditors should not provide non-audit services to the entity unless expressly approved by the Board. Where auditors provide non-audit services, the audit committee should maintain full records of such services in an effort to maintain auditor objectivity. Principle VI Board Responsibilities The corporate governance framework should ensure the strategic guidance of the entity, the effective monitoring of management by the Board, and the Boards accountability to the entity and to stakeholders. A. Every company should be headed by an effective Board whose principal focus should be on optimizing shareholder value. The Board should be the focal point of the corporate governance system and is ultimately accountable and responsible for the performance and affairs of the company; B. The Board of Directors of every entity should meet regularly; C. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the entity and the stakeholders.

34

D. Where Board decisions may affect different shareholder groups differently, the Board should treat all shareholders fairly. E. The Board should seek to codify ethical conduct. At a minimum, the ethical code should seek to set clear limits on the pursuit of private interests, including dealings in the shares of the entity and define conflicts of interest and independence. An overall framework for ethical behavior goes beyond compliance with the law, which should always be a fundamental requirement, and includes consideration of the interests of stakeholders. F. Board training and certification should be encouraged; G. The Board should fulfill certain key functions, including: 1. Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; developing management policies and overseeing major capital expenditures, acquisitions and divestitures; 2. Monitoring the effectiveness of the companys governance practices and making changes as needed; 3. Selecting, developing, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning; 4. Aligning key executive and Board remuneration with the longer-term interests of the company and its shareholders; 5. Ensuring a formal and transparent Board nomination and election process; 6. Monitoring and managing potential conflicts of interest of management, Board members and shareholders, including misuse of corporate assets and abuse in related party transaction.

7.. Overseeing the process of disclosure and communications; H. The Board should be able to exercise objective independent judgment on corporate affairs.
35

1. Boards should consider assigning a sufficient number of non-executive Board members capable of exercising independent judgment to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are ensuring the integrity of financial and non-financial reporting, the review of related party transactions, nomination of Board members and key executives, and Board remuneration; 2. The establishment of Board committees should be encouraged, in particular, the use of audit committees should be mandated. The committees mandate, composition and working procedures should be well defined and disclosed by the Board; I. In order to fulfill their responsibilities, Board members should have access to accurate, relevant and timely information. J. The Board should institute mechanisms for direct interface with regulators on a regular basis. K. Board appointments should be made through a well managed and efficient process that provides for a mix of proficient directors, each of whom is able to add value and to bring independent judgment to bear on the decision making process. L. Performance evaluation and peer reviews of Board members should be instituted. M. The Board should maintain a system of internal controls to safeguard shareholders investment and the corporations assets. The Board should also seek to publicly disclose assessments of the effectiveness of internal controls within the company. N. Members of the Board and key executives should be required to disclose to the Board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the company.

36

Data Analysis and Interpretation

37

Data Analysis and Interpretation This study attempts to examine and compare corporate governance practices of public bank and to study the importance of governance parameters from investors and financial advisors perspective.

RESEARCH QUESTION

Is there any difference in corporate governance practices in Public sector banks? To what extent Indian Banking sector has accepted & implemented corporate governance principles compared to norms? Which criterias and parameters have been given importance to, by Fund Manager, Advisors, Analysts and Agents or Employees of Financial Institute or Brokers for advising for investment in listed companies?

RESEARCH OBJECTIVE

To study the adherence of governance norms by Public sector banks To study the correlation between corporate governance norms and growth of companies.

To study which parameters have received major importance in different banks.

38

39

INTERPRETATION: Weighted average score was calculated for each parameters as per requirement and from them Weighted arithmetic mean was calculated. Later on, each parameter is given rank. Respondents give ranks and scores to criterias of ethical and governance practices of banks followed by sound risk management practices and other parameters from respondents perspective by providing ease in answering questions.

40

Conclusion

41

Conclusion Experience from across the world and especially from the developed countries of the west has shown us that there can be no single model of corporate governance. Each company has its own peculiar balance of interests and power among its stakeholders and hence, the outcome depends much on how the powers among the contending parties are exercised and influenced. Thus, ideally the actual norms and procedures of corporate governance should be generated internally from within an organization. However, the guiding principles of corporate governance would have to be universal, especially in these days of globalization. This is not to overlook the fact that most legal structures of countries and institutions during the present times are geared to serve the interests of global capital. It is, therefore, also up to the individual countries to balance their own local needs and sovereignty in the face of sweeping globalization. Corporate governance rules, thus, face a set of dilemmas of balancing the individual needs of some common principles guiding the diverse particulars. The rules must also balance out among local need at the national level and the global needs of international capital. While we admit that there can be no set of rules to completely eliminate the undesirable effects of bad corporate governance, we must also admit that there should be some semblance of institutionalization and normalization of corporate governance. There is thus a need for company Boards to increasingly adopt formal governance structures, well defined criteria to evaluate Board performance such as ratings, articulate clear decision making structures and also scientific methods to arbitrate power battles among the stakeholders like executives, management, shareholders and the society at large. The Boards need to develop informed and scientific risk management systems in order to be able to assess the companys strategic decisions. In an overall manner we may conclude that the issues of corporate governance of the public sector in India revolve around autonomy and the monitoring of that autonomy. The autonomy of the public sector paradoxically does not reduce the role of the government, rather increases it. The role of the government however changes from a supervisor and prime decision maker to that of a custodian of resources. Fundamentally, good governance arrangements increase participation, strengthen accountability mechanisms and open channels of communication within, and across, organizations. In this way, the public sector can be more confident about delivering defined outcomes and being accountable for the way in which results are achieved. A focus on good corporate governance can help public bodies deliver the ever more exacting performance imperatives that are expected of them, whilst at the same time meeting demanding standards of accountability. To do this, however, corporate governance must not be simply seen as a narrow compliance obligation. By adopting a more multidimensional approach to corporate governance, there is a greater likelihood that it can be seen as a catalyst to achieve even better performance, allowing public bodies to adapt to their vastly changed circumstances.

42

Bibliography Jha, R. and B.S. Sahni . Measures of Efficiency in Private and Public Sector Industries: The Case of India, Annals of Public and Cooperative Economics, 63(3):489-495, 1992 www.dpe.nic.in www.indianresearchjournals.com Indian institute of corporate affairs report. Indian CG Public sectors ICSi corporate governance report

http://mpra.ub.uni-muenchen.de/41038/
www.econstor.eu IIKA report. KPMG report.

43