Corporate Governance &

Ethics
Prof. Harisankar M

SIBM-Bengaluru, Semester II
MBA - Batch 2018-20
What is Ethics?

Ethics is derived from the word

Ethikos – which stands for
manners or character

Ethics as a subject is the study of

situations, activities, and
decisions where issues of right
and wrong are addressed. right & wrong
Ethics and the Law
Law
Meaning Systematic body of rules &
regulations that govern a whole
society and the actions of its
individual members
Governed by Government /Regulatory
Authorities
Expressed as Written and Published as set of
rules and regulations
Objective/Intent Maintain social order and peace,
Provide protection to all citizens
Violation leads to Law is binding and hence any
violation is punishable
Ethics
Branch of Moral philosophy that
guides people about basic
human conduct
Norms set by individuals or by
society as a whole
Abstract set of guidelines
Help people decide what is right
or wrong and how to act
Not binding in nature – there is
no direct punishment for
violation
 Focus of Business Ethics as a field of
study has been shifting
Financial
Consumer Bribes
Mismanagement
Rights/Protection
Influence Peddling
Global Trade (Product
Civil Rights safety/IPR)
Deceptive
Environmental Issues Advertisements
Sustainability
1970s 1990s 2010+
1960s 1980s 2000s Privacy
Employee Rights Financial Fraud

Human Rights Sweatshop/ Cyber Crimes

Outsourcing
Transparency Sustainable
Corporate’s Consumption
Disadvantaged Liabilities for
Consumers personal damage
 Ethical Dilemmas
What would you do when faced with a difficult choice?
Consider this..
Imagine that you are an employee working for
the train company as a switch operator. One
day, as a speeding train approaches,
suddenly you get a distress call from its driver
- That the train has had a malfunction and is
unable to stop.
You look ahead of the train and see five
workers working on the track. If you allow
the train to go ahead, it will surely kill all five.
However, you could divert the train by
switching tracks. On the alternate track,
there is one worker, working alone.
If you switch the train, you cause the death of
one worker; if you do nothing, five will die.
What will you do?
Sophie’s choice
Sophie is locked at a Nazi concentration camp. She has two young
children. One day, she is confronted by a Nazi soldier who offers
her the following choice: He says, “I am going to shoot one or
both of your children. You tell me which one to shoot, or I will
shoot them both.” What do you do?
Ethical Dilemma

• A situation that arises when ALL alternative choices have been

deemed undesirable because...

• ALL have potentially negative ethical consequences - making it

difficult to distinguish right from wrong

8
Characteristics of Ethical/Moral Issues

• Decision likely to have significant effects on others

• Decision likely to be characterised by choice, in that alternative
courses of action are open
• Issues are open ended, often controversial, disagreements are
common and consensus decision is unlikely
How does one take decisions in such
dilemmas?
Ethical theories
• These theories consider a set of rules/guidelines, when
applied to a context help decision maker recommend what
is right
• Traditional normative ethical theories generally can be
differentiated into two groups

Motivation
/ Action Outcomes
Principles

Non-consequentialist Ethics
Consequentialist Ethics

Source: Crane and Matten (2010)

Egoism
• Theory of egoism : an action is morally right if the decision-maker
freely decides an action to pursue either their long-term interests.
• This is rooted in a belief that invisible hand of market creates benefit
for all (Adam Smith, 1793)
• In a market with free competition and good information,
competitive forces will ensure that everyone always takes right
decision – or else it’s at risk of their own peril
• However, this approach finds many critics as markets do not always
function perfectly
Utilitarianism
• According to utilitarianism, an action is morally right if it results in
the greatest amount of good for the greatest number of people
affected by the action
• Also called the ‘greatest happiness principle’
• Based on ‘pleasure’ v/s ‘pain’ comparison
• Based on cost-benefit analysis
• Criticism : It is subjective and utility can not always be quantified
Kantian Theory
Derived from work of Immanuel Kant
Part of Deontological School of Ethics - Argues that morality is not
dependant on situation or consequences of action
Also known as Theory of Duties
Follows a theoretical frame work ‘Categorical Imperative’ that should
be applied to every moral issue
• Maxim 1: Universality
• One should do only those things that can be done by all equally, in all contexts/scenarios.
• Maxim 2: Human Dignity
• People’s dignity should be maintained. People should be used always as an ‘end’ and never as
means only. While using humans as means (employees, labour) it should not be forgotten that
they have their own needs and goals
• One should act only after asking if his/her action violates human dignity in any way.
• Maxim 3: Autonomy
• One must act as if he/she is the ultimate moral authority.
• This puts onus on every decision maker to consider that actions meet Maxim 1 and 2 and at the
same time have full autonomy to do what he/she thinks is right.
Theory of Justice
• Derived from work of John Rawls
• Considers certain basic, important, unalienable entitlements for
all that should be respected and protected in every single action.
• Rooted in belief that certain rights (like freedom, right to life, right to
expression etc are universal)
• Any action that has potential to violate these rights should be
considered wrong.
• Theories of justice advocate fairness for all decisions in two ways
• Procedural justice – Fair procedure should be applied (whether
everyone has been free to acquire rewards for their efforts)
• Distributive justice – Fairness should apply in distribution of rewards or
punishment
Major normative theories
Egoism Utilitarianism Ethics of Duties Rights & Justice

Contributors Adam Smith, Ayn Rand Jeremy Bentham Immanuel Kant John Locke
John Stuart Mill John Rawls

Focus Individual desires or Collective welfare Duties Rights

interests

Rules Maximization of Cost-Benefit or Pain v/s Categorical imperative Respect for human
desires/self interest Gain (3 Maxims) Rights & Justice

Concept of Man as an actor with Man is controlled by Man is a rational moral Man is a being that is
human beings limited knowledge and avoidance of pain and actor distinguished by dignity
objectives gain of pleasure
(“hedonist”)

Type Consequentialist Consequentialist Non-consequentialist Non-consequentialist

Source: Crane and Matten (2010)

Application of Ethical Theories in business
• Helps an individual decide what is right – when facing an ethical
dilemma
• Helps businesses justify action to be right or wrong when settling
human conflicts
• Each individual has a ‘natural’ style of decision making when
confronted with ethical dilemma
• If organisations want all employees to have similar approach, then
ethical code/organisational principles need to be created and
conveyed – ethical theories help generate these guidelines as well
as convey it to employees
Pragmatic use of Ethical Theories
Typical Perspective

Ethical
Dilemma Single normative consideration
for solving the ethical dilemma

‘Lens’ of any single

ethical theory
Pluralistic Perspective

Ethical
dilemma

“Prism” of
ethical theories

Variety of normative considerations in

solving the ethical dilemma
Ethical issues in Marketing
What are Consumers’ basic
rights/entitlements?
• Products (be it physical goods/services) that are
‘’Fit for Consumption’’
• Fair treatment when entering into exchanges
with sellers
• Respect for their dignity

Any act on the part of business/brand/marketer that violates any

of these rights can be considered an ethical issue in business-
consumer relation
Ethical issues in ‘Product’ related policies
and decisions
• Safety of products
• Are products sufficiently tested? Is packaging safe?
• Are there harms that can be result of excessive use or long term use?
• ‘Safety’ is not an unlimited right for consumers, it is a function of the
consumer and their actions and precautions
• Most of safety concerns are not just ethical in nature, consumers are
likely to get legal protection too
• Disclosures
• Lack of complete information about products/Hiding partial information
• Disclosures about long term impact of consumption
• Deceptions
• Size, Content
• Me too products
• Product Testing (on animals/humans)
Ethical issues in Marketing Communication

• Misleading/Unverified claims
• Use of surrogates
• Comparative Advertisements
• Stereotyping
• Subliminal Advertisements
• Using children in advertisements
Ethical issues in Pricing
• Deceptive Pricing
• Price Fixing
• Price Gauging/Excessive Pricing
• Bait & Switch Tactics
• Bid Rigging
• Predatory Pricing
• Variable Pricing
• Price Skimming
Ethical issues involving Place (distribution)
related decisions

• Preferential Treatment for some channel partners

(exclusivity)
• Misuse of power – Pressurising channel partners
• Dumping
• ‘’Gifting’’ to gain preferred supplier status
Other Questionable Practices

• MLM
• Targeting Vulnerability
• Exclusion of certain consumers
• Intrusion of Privacy
Ethical Issues in HRM
Moral Development

• Jean Piaget’s theory of moral development

• Very early ages (0-2 years) –no morality
• Young Kids (2-10) – bound by rules, what’s been told
by adults as right and wrong)
• Older Kids and Adults – Own reasoning
Lawrence Kohlberg’s Six Stages of Moral
Development
• Stage 1: Obedience and punishment
• Actions motivated by fear of punishment only
• No concern with the interests of others
• Doesn’t care if actions harm other people
• Stage 2: Individualism
• Egoistic. Actions based on self-interest
• Will follow the rules if it is in own self-interest
• Motivated by incentives or fear of punishment
• Right is “what’s fair” or an equal exchange
Lawrence Kohlberg’s Six Stages of Moral
Development
• Stage 3: Conformity and Relationships
• Actions are motivated by desire to be a good person
• Approval-oriented, with an aim to conform to the majority
• Living up to what is expected by people close to you
• Stage 4: Maintenance of Social Order
• Individual develops understanding of wider social rules
• Actions influenced by respect for authority, maintaining the social order
and laws
• Values institutions and the social system as a whole
• Empathy for individuals with whom he/she interacts
Lawrence Kohlberg’s Six Stages of Moral
Development
• Stage 5: Social Contract and Individual Rights
• Realization that what is good for greater numbers may not always be right
• Acceptance of fundamental values and rights of every individual
• Willing to make personal sacrifices if sacrifice will produce benefit for others
• Unlikely to act against own conscience
• Stage 6: Universal Ethical Principles
• Individual chooses to live life according to universal moral principles of justice,
human rights, respect for individual dignity
• Willing to defend these principles, even if it means going against the rest of society
or having to pay consequences
• Acts according to ideals regardless of the reactions of others – typical whistleblower

Individuals have different levels of development when it

comes to moral judgment
What Makes Moral People Behave
Unethically?
• The desire to conform to one’s peers
• Environmental pressures
• Rigid hierarchy
• Fear, insecurity
• Ambition
• Work characteristics
• Organizational culture
How do organizations encourage ethical behavior by
employees?
• Ethics Compliance Programs help
• Written code of ethics/standards of conduct
• Ethics training
• Reporting network where employees can report inappropriate
behavior without fear of retaliation
• Discipline for violating ethical standards.
• Better if it’s driven as a culture
• Management sets the tone, they must “walk the talk.”
• The importance of ethics must be communicated at all levels of the
organization
• Include ethical behavior as a part of the performance appraisal
system
• Reward ethical behavior. Assess how the job was done, not just if the
job was completed.
 What are the ethical issues that
organizations face when dealing with
‘human’ resources?
Ethical Issues HR Managers face

• Fair treatment without any discrimination

• Protection of Privacy
• Access to fair, due process
• Participation & association
• Healthy & Safe working environment
• Fair wages
• Freedom of conscience and speech
• Right to work
Issues of Discrimination

• Not having equal

Common
opportunities
Issues • Affirmative Action
Involving • Reverse Discrimination
Discrimination
• Harassment (of various kinds)
Privacy
• Protection of Physical,
Social, Informational
Common and Psychological
Issues Privacy
Involving
Employee
• Data Privacy
Privacy • Intrusive Testing –
selection/performance
monitoring
Employee Right :
Right to Work

Common
• Job Security/Continuity
Issues • Automation
Involving • Means for Improving
Right to Work Performance
• Career Planning
Access to Fair, Due Process

• Selection
Common • Appraisals & Promotions
Issues
Involving • Disciplinary Proceedings
Due Process • Layoffs/Firing
Participation & Association

Common • Participation in Decision

Issues Making
Involving • Freedom to form
Right to
Participation
associations
Safe Working Conditions

• Poor Working Conditions

Common
Issues
• Occupational Hazards
Involving • Health & Safety Issues
Working • Lack of Insurance/Security
Conditions • Work-Life Balance
Fair Wages

• Minimum wages & Fair Pay

Common • Performance Related Pay
Issues
• Difference between top and
Involving
bottom level employees
Fair Wages
• Long Term incentives
• ESOPs
Freedom of Conscience & Speech

Common • Freedom to follow self

Issues conscience
Involving • Whistle Blowing
Freedom of
Speech
Whistle Blowing in India
• Whistle Blower Protection Act passed in 2011
• Demand still exists for stronger legislation to protect whistle blowers
• Many organisations have created whistle blower policies
• In 2014, SEBI made it mandatory for listed companies to have whistle-
blower protection mechanism
• Still remains a key concern area – many/most employees still hold
back for fear
"In looking for people to hire, you look for three qualities: integrity,
intelligence, and energy. And if they don't have the first, the other two
will kill you." --Warren Buffet

‘’If ethics are poor at the top, that behaviour is copied down through
the organisation’’ – Robert Noyce
Corporate Governance
What is a Corporation?
• A corporation is essentially defined in terms of legal status and the
ownership of assets
• Corporations are typically regarded as ‘artificial persons’ in the eyes of the
law
• Corporations are notionally ‘owned’ by shareholders, but exist
independently of them
• Managers and directors have a ‘fiduciary’ responsibility to protect the
investment of shareholders
• Corporations enjoy all the ‘rights’ of citizens and have to obey legal duties
• Artificial nature of firms raises questions of morality and moral duties
Artificial Nature Can/Should a Corporation
of Corporations have Social
Responsibilities?

Disconnect
between How must Corporations be
Ownership & governed?
Control
Functioning of a Corporate:
A principal-agent relation

Seeks profits, rising share price, etc.

Principal: Agent:

Shareholder Seeks remuneration, power, esteem etc. Manager

Key challenges in principal-agent relations

1. Informational asymmetry
2. Ownership v/s Control
Peculiarities of Corporate Ownership
• Locus of control
• Shareholders only have indirect and impersonal control over
their property (the firm)
• Fragmented ownership
• So many shareholders and one can hardly consider oneself to
be the owner
• Divided functions and interests
• Shareholders seek profits, managers seek remuneration and
growth
• Shareholders don‘t hold any responsibility or task other than
investing money
Rights for shareholders
• Rights of shareholders
• The right to sell their stock
• The right to vote in the general meeting
• The right to certain information about the company
• Certain residual rights in case of the corporation’s
liquidation

Shareholders don’t have a guaranteed right to certain amount of profits or

dividend – It depends on the skill and effort of the management and subject to
decision by other shareholders
How can shareholders control their own
business?
 Seeks profits, rising share price, etc.

Principal: Agent:

Shareholder Seeks remuneration, power, esteem etc. Manager

Board of
Directors
 Company
Vision

Company Risk
Values Mitigation

Functions
Protect
of the Optimum
Shareholder
Confidence Board Resource
Utilization

Adhere to Design
compliance Policies and
mandates Procedures
Key Players in Corporate Governance

Principal players act, keeping in mind the interest of other stakeholders :

Employees, Regulators, Suppliers, Customers

Corporate governance
Describes the codes, mechanisms, processes, procedures and relations
through which shareholders seek to ensure that ‘their’ corporation is run
according to their intentions.

Creation of Governance structures that clearly identify distribution of rights

and responsibilities among different participants in the corporation (such as
BOD, managers, shareholders, creditors, auditors, regulators and other
stakeholders)

CG Norms include rules and procedures for making decisions in corporate

affairs, which are transparent and in accordance with social, regulatory and
market environment

CG deals with creation of safeguards against unethical business practices and

mis-management
Why is CG an important issue in the world of
business

• It has gained importance following major scams (Enron,

Worldcom, Satyam, Securities Scams)
• In modern world, it is not enough to be profitable – a
company needs to demonstrate ethical behaviour and
sound governance
• A good track record in governance and transparency are
critical to attract investors and raise capital
Key Issues that CG seeks to address

• Distribution of responsibility among various members of

the CG structure
• Executive Accountability, Control and Remuneration
• Disclosure of Information
• Safeguards against ethically questionable practices
• Checks and Balances in the role of external parties such
as financial intermediaries, auditors, credit rating
agencies
 MODELS OF CORPORATE GOVERNANCE

• Corporate governance systems vary around the world.

•There is no model of corporate governance which is universally

acceptable as each model has its own advantages and disadvantages.

• Three Main Models are recognized as references by experts in

Corporate Governance:
•Anglo American Model
•German Model
•Japanese Model
The-Anglo American Model
Elect
Board of Directors
Shareholders
(Supervisor)

Appoints and
supervises

Officers
Own (Manager)

Manage

Act as a
balancing Monitors &
force regulates
Creditors Regulatory/Legal
system
Company
 Anglo-American Model

• This model is also called an ‘Anglo-Saxon model’ and is used as basis of

corporate governance in U.S.A, U.K, Canada, Australia, and some common
wealth countries.

• The shareholders appoint directors who in turn appoint the managers to manage
the business. There is separation of ownership and control.

• The board usually consist of executive directors and a few independent

directors. The board often has limited ownership stakes in the company. A single
individual usually (not always) holds both the position of CEO and chairman of
the board.

•This system (model) relies on effective communication between shareholders,

board and management with all important decisions taken after getting approval
of shareholders (by voting).
The German Model
Appoint -50% Appoint 50%
Supervisory Board

Appoints and
supervises

Employees and Shareholders

Labour unions Management Board

Manages

Work for Company Own

 German Model

• This is also called as 2 tier board model as there are 2 boards viz.
The supervisory board and the management board. It is used in
countries like Germany, Holland, France, etc.

• Usually a large majority of shareholders are banks and financial

institutions. The shareholder can appoint only 50% of members to
constitute the supervisory board. The rest is appointed by employees
and labour unions.
The Japanese Model
Monitors and acts in
emergencies
Supervisory Board
Appoint (including President) Provides
members
Ratifies the President’s decision

President

Consults Main bank

Shareholders
Executive Management
(Primarily Board of
Directors)
Manages
Provides Loan
Own
Company
Owns
 Japanese Model
• This model is also called as the business network model, usually
shareholders are banks/financial institutions, large family shareholders and
corporates with cross-shareholding.

• There is supervisory board which is made up of board of directors and a

president, who are jointly appointed by shareholder and banks/financial
institutions.

•This is reflection of the Japanese ‘keiretsu’- a form of cultural relationship

among family controlled corporate and groups of complex interlocking
business relationship, where cross shareholding is common.

•Most of the directors are heads of different divisions of the company. Outside
director or independent directors are rarely found on the board.
Evolution of Corporate Governance
Guidelines/Codes
Milestones in evolution of CG Codes
Year Name of Areas/Aspects Covered
Committee/Body
1992 Sir Adrian Cadbury Financial Aspects of Corporate Governance
Committee, UK
1994 Mervyn E . King’s Committee Corporate Governance
, South Africa
1995 Greenbury Committee , UK Directors’ Remuneration
1998 Hampel Committee, UK Combine Code of Best Practices
1999 Blue Ribbon Committee, US Improving the Effectiveness of Corporate Audit
Committees
1999 OECD Principles of Corporate Governance
1999 CACG Principles for Corporate Governance in
Commonwealth
2002 Derek Higgs Committee, UK Review of role of effectiveness of Non-executive
Directors
2002 Sarbanes Oxley Act, United Corporate Auditing Accountability and
States Responsibility
Cadbury Committee
• Commissioned by FRC, UK
• Chaired by Sir Adrian Cadbury
• Reviewed CG with specific reference to:
• responsibilities of directors
• nature of accounting information required
• audit committees
• relationship between owners, boards and auditors, etc.
Key Cadbury Committee Recommendations

• Board:
• Importance of efficient board emphasised
• Separation of CEO and Chairman
• Executive Directors
• Caps on duration of service contracts
• Disclosure of remuneration
• Non-Executive Directors
• Need for greater role
• Importance of independence
• Reporting and Controls:
• Responsibility of board in relation to accounts
• Importance of supplementary narrative info.
• Audit Committee
• Need for liaising with auditor
• Inclusion of non-executive directors
OECD Guidelines on CG
• OECD is an organization of 34 member countries, founded in 1961
to stimulate economic progress and world trade.
• Enormous variations exist in ownership and control structures
across the world
• OECD principles for Corporate Governance is aimed at providing a
uniform framework for member countries to follow
• Individual member countries are to adopt these principles and
form their own codes/legislations/best practices
• First released 1999 and subsequently revised in 2004 and 2015
Core Elements of the OECD Principles
• Chapter I: Ensuring the basis for an effective corporate
governance framework
• The corporate governance framework should promote transparent and efficient
markets, be consistent with the rule of law and clearly articulate the division of
responsibilities among different supervisory, regulatory and enforcement
authorities

• Chapter II: Basic rights of shareholders and key ownership

functions
• The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights

• Chapter III: Equitable treatment of shareholders

• 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.
The OECD Principles (continued)
• Chapter IV: Role of stakeholders in corporate governance
• The corporate governance framework should recognise the rights of stakeholders
established by law or through mutual agreements and encourage active co-
operation between corporations and stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.

• Chapter V: Disclosure and transparency

• The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the
financial situation, performance, ownership, and governance of the company.

• Chapter VI: Board responsibilities

• The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and the board’s
accountability to the company and the shareholders.
 Sarbane Oaxley Act 2002
• Initiated and sponsored in US by congressmen Paul Sarbanes &
Michael Oxley

• Also known as Public Company Accounting Reform and

Investor Protection Act. (Often referred to as Sarbox or SOX)
• Enacted in the backdrop of a number of corporate collapses and
frauds in late 90s and early 2000 (Enron, Worldcom and others)
• Is a federal law that set new or expanded requirements for all U.S
Public company boards, management and public accounting firms
SARBANES-OXLEY
Major Objectives

• Improve corporate governance

• Reform public accounting (auditing)
• Reform Wall Street practices
• Attack insider trading and obstruction of justice (document
retention)

“Restore confidence in capital markets”

SARBANES-OXLEY ACT
Major Provisions

• Title I: Public Company Accounting Oversight Board

• Title II: Auditor Independence

• Title III: Corporate Responsibility, Disclosure and Governance

• Title IV: Enhanced Financial Disclosures

SARBANES-OXLEY ACT
Other Provisions
• Title V – Analyst Conflicts of Interest
• Title VI – Commission (SEC) Resources and Authority
• Title VII – Studies and Reports
• Title VIII – Corporate and Criminal Fraud Accountability
• Title IX – White-Collar Crime Penalty Enhancements
• Title X – Corporate Tax Returns
• Title XI - Corporate Fraud and Accountability
PUBLIC COMPANY
ACCOUNTING OVERSIGHT BOARD

• Established by Sarbanes-Oxley

• Broad powers to regulate audits and auditors of public companies

• Appointed by the SEC

Role of PCAOB
• Register public accounting firms

• Establish auditing standards

• Inspect registered public accounting firms

• Conduct investigations and disciplinary

proceedings – with ability to sanction auditors
and audit firms
AUDITOR INDEPENDENCE
• Prohibits certain “non-audit services”
• Audit Committee is directly responsible for
oversight of external auditors
• Auditor required to discuss
• All critical accounting policies and practices
• All alternative accounting and disclosure
treatments
• Other material written communications
• Audit partner rotation recommended
CORPORATE RESPONSIBILITY &
GOVERNANCE
• Audit Committee = independent directors

• Audit Committee has responsibility to appoint, compensate, and

oversee public accounting firm performing the audit

• Audit Committee has responsibility to resolve disagreements over

financial reporting between management and external auditors

• Audit Committee must establish “whistle-blower” procedures

• New penalties for retaliation against them
CORPORATE RESPONSIBILITY & GOVERNANCE
• Requires executives and financial officers (CEO & CFO) to certify
financial reports are accurate, complete and fairly presented

• Also must certify the state of internal controls

• Outlaws improperly influencing the auditor

ENHANCED FINANCIAL
DISCLOSURES
• Off-balance sheet arrangements and obligations

• Prohibits loans to executives and directors

• Disclosures whether at least one member of the audit committee is

an “Audit Committee Financial Expert”
Sarbane Oaxley Act 2002

• Similar acts enacted across major countries after SOX

• Criticism remains about the cost v/s benefit of SOX
• Many believe it has reduced competitiveness of US firms because
of the overly complex regulatory environment
• In 2012, JOBS (Jumpstart our Business Startups) was passed,
designed to give economic boost to emerging companies by
cutting down on some of the regulations
CORPORATE GOVERNANCE IN INDIA
CORPORATE GOVERNANCE
COMMITTEES IN INDIA
Confederation of Indian Industries Code
(1997)

❖National Task Force Chaired by Rahul Bajaj.

❖Desirable Code of Corporate Governance

Recommendations
1. No need for German style two-tiered board.
2. In case of listed company with turnover exceeding Rs.100 crores, independent
directors should consist of:-
30% if Chairman is non-executive director.
50% if Chairman & MD is the same person.
3. No single person should hold directorships in more than 10 listed companies.
4. Non-executive directors should be competent and active.
5. Commission not exceeding 1% (3%) of net profits for a company with (out) a
MD.
6. Attendance record of directors should be made explicit at the time of
reappointment; less than 50% no re-appointment.
7. Key information that must be reported to and placed before the board .
8. Listed companies with turnover over Rs. 100 crores or paid-up capital of Rs. 20
crores should have an audit committee.
9. Additional Shareholders’ Information of Listed Companies.
10. Compliance certificate signed by CEO & CFO.
11. Reduction in number of nominee directors. FIs should withdraw nominee directors
from companies with individual FI shareholding below 5% or total FI holding below
10%.
Kumar Mangalam Birla Committee Report
(2000)
❑Set up by SEBI (for investors).

❑Identified 3 major constituents: Shareholders, BOD &

Management.

❑3 key aspects: accountability,

transparency, and
equal treatment of all stakeholders.

❑Introduction of Clause 49.

Recommendations
1. At least 50% non-executive members.
2. At least 1/2 of the board should be independent directors (executive
Chairman) ,else at least 1/3.
3. Non-executive Chairman should have an office and be paid for job related
expenses.
4. Maximum of 10 directorships and 5 chairmanships per person.
5. Audit Committee:
• Minimum 3 members, all non-executive.
• Chairman should attend AGM.
• Should meet at least thrice a year.
• Act as bridge between Board, Statutory Auditors & Internal Auditors
6. Remuneration Committee (at least 3 directors, all non-executive and
be chaired by an independent director).
7. Disclosure of remuneration information in the AR.
8. Board Meetings
✓4 board meetings a year with a maximum gap of 4 months between any 2
meetings.
Naresh Chandra Committee Report (2002)
❑High Level Committee appointed by Ministry of Corporate Affairs.

❑A pale shadow of SOX.

❑Also known as the “Committee on Corporate Audit and

Governance”.

❑Concentrated on 3 main aspects:-

1. The auditor- company relationship.
2. Role of Statutory Auditors.
3. Independent Directors-role, remuneration & training.
Recommendations
1. Disqualifications of Audit Assignments.
2. List of Prohibited Non-Audit Services.
3. Compulsory Audit Partner Rotation.
4. Auditor’s disclosure of Contingent Liabilities.
5. Management’s certification in the event of auditor’s replacement.
6. Auditor’s annual certification of independence
7. CEO and CFO certification of annual audited accounts.
8. Setting up Independent Quality Review Board, QRB-(ICAI, ICSI, ICWAI)
9. Defining an Independent Director & their percentage.
10. Minimum Board Size of listed companies.
11. Training of independent directors.
N R Narayana Murthy Committee Report
(2003)
• 2nd Committee constituted by SEBI.

• To review the existing corporate governance

practices and codes.

• Committee consisted of members from various

walks of public and professional life.
Recommendations
1. Training of board members.
2. There shall be no nominee directors.
3. Non-Executive Director compensation to be fixed by Board of Directors and
approved by shareholders in the GM. Independent directors should be treated
the same way as non-executive directors.
4. The Board should be informed every quarter of business risk and risk
management strategies.
5. Boards of subsidiaries should follow similar composition rules as that of parent
and should have at least one independent directors of the parent company.
6. Performance evaluation of non-executive directors should be done by a peer
group comprising the entire Board of Directors, excluding the director being
evaluated.
7. Code of conduct for Board members and Senior Management.
8. Whistle Blower Policy.
Naresh Chandra Committee (2009)

❖2nd National Task Force by CII.

❖Formed with the backdrop of Satyam-Maytas Infra-

Maytas Properties scams.

❖Aim of improving corporate governance standards

and practices both in letter and spirit.
Recommendations
1. Nomination Committee.
2. Letter of Appointment to Directors.
3. Remuneration of NEDs & Independent Directors.
4. Remuneration Committee.
5. Audit Committee.
6. Separation of Offices of Chairman & Chief Executive Officer
7. Board Meetings through Tele-conferencing
8. Liability of Directors & Employees
9. Shareholder Activism
10. Media as a stakeholder
Recent Developments

• Companies Act 2013, (plus amendments)

• Amendments to Clause 49 by SEBI
Key Implications of Companies Act 2013
• Appointment of Directors
• Limit of 15 directors, shareholder approval through special resolution for
more
• Inclusion of at least one woman director
• Min 3 directors a public company, 2 for a privately held company
• Majority of audit committee members should have ability to read and
understand financial statements
• Anyone who has been convicted of related party transaction is disqualified to
be a director
• Composition of Board
• In case of non-executive chairman, board should have minimum 1/3rd IDs
• In case of executive chairman, 50% of board to be IDs
Key Implications of Companies Act 2013
• Independent Directors
• Qualifications/Criteria for one to be considered an ID
• Independent director shall possess appropriate skills, experience and knowledge in or
more fields of finance, law, management, sales, marketing, administration, research,
corporate governance, technical operations or other disciplines related to the company's
business
• None of the relatives of the ID shall be indebted to the company, its holding, subsidiary
or associate company or their promoters, or directors; or has given a guarantee or
provided any security in connection with the indebtedness of any third person to the
company, its holding, subsidiary or associate company or their promoters, or directors of
such holding company.
• Director Identification Number (DIN) required, issued by central government
to an individual
• Databank of qualified IDs authorised by Central Government may be accessed
• Limits the term of appointment
• 5 Year, extension by another term of 5
• Cooling off period of 3 years after two consecutive terms
Key Implications of Companies Act 2013
• Independent Directors (contd..)
• Compensation should not be through grant of stocks
• IDs need to undergo training
• Nomination committee to laydown performance evaluation criteria for IDs
• One individual can not hold directorship in more than 20 companies, not
more than 10 in case of public companies
• In case of listed companies, (SEBI Clause 49) – one individual can be ID in max
7 companies if he/she does not have a WTD position and 3 if he/she holds
WTD position in any listed company.
• At least one meeting exclusively of IDs in a year
Key Implications of Companies Act 2013
• Audit committee
• Need to constitute an Audit committee:
• Non-listed public companies having paid-up share capital of Rs. 10 crores or more;
• Non-listed public companies having a turnover of Rs. 100 crore or more;
• Non-listed public companies with aggregate outstanding loans, or borrowings, or
debentures or deposits of Rs. 50 crore or more
• Nomination and remuneration committee
• 3 or more Non Exec Directors out of which not less than one half shall be IDs
• The chairperson of the company (whether executive or non-executive) may be
appointed as a member of the Nomination and Remuneration Committee but shall
not chair such Committee.
• Identify persons who are qualified to become directors and who may be appointed in
senior management in accordance with the criteria laid down
• Recommend to the Board their appointment and removal and carry out evaluation of
every director’s performance
• Committee should specify a methodology for effective evaluation of the
performance of the board, its committees and individual directors. The evaluation
could be carried out by either the board, the NRC or an independent external agency.
The NRC will review the implementation and compliance of the evaluation system.
Key Implications of Companies Act 2013
• Auditors
• Appointed for 5 years, ratification in AGM every year
• Auditor can be appointed for only 2 terms of 5 years (if auditor is a firm) and
one term of 5 years (if individual)
• New auditor appointed should not have any partner(s) in common with
outgoing auditor
• Auditor is not allowed to render other services to the company directly or
indirectly
• Norms and guidelines on Related Party Transactions
• Compulsory whistle blowing mechanism
• Compulsory electronic voting for all shareholder resolutions