A Report on

Assessing Elements of Effective Corporate Governance : A

Suggested Approach

Submitted by

B.R.Harish
09132
Batch XVII
2009-2011

Vignana Jyothi Institute of Management

Hyderabad

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 A REPORT ON

Assessing Elements of Effective Corporate Governance : A

Suggested Approach

BY

B.R.Harish
ROLL NO: 09132

COURSE OF INDEPENDENT STUDIES

A Report submitted in the partial fulfillment of requirements of

PGDM
BATCH-VII

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Table of Contents
Acknowledgement.......................................................................................................................4
List of Tables...............................................................................................................................5
List of Abbreviations...................................................................................................................6
Executive Summary.....................................................................................................................7
1.0 Introduction...........................................................................................................................8
2.0 Objective................................................................................................................................9
2.1 Scope of the Study.................................................................................................................9
2.2 Limitations of the Study.........................................................................................................9
2.3 Methodology..........................................................................................................................9
3.0 Importance of Corporate Governane in Organizations.........................................................10
3.1 Influence of Corporate Governance on Developed and Developing Nations Corporations10
4.0 Elements of Effective Corporate Governance.....................................................................15
4.1 Assessing the Elements of Effective Corporate Governance...............................................16
5.0 Assessing the Elements of Corporate Governance in Tata Motors Limited and Maruti….18
Suzuki India Limited..................................................................................................................21
5.1 Factors influencing the Elements of Corporate Governance...............................................23
6.0 Findings from the Research..................................................................................................26
7.0 Conclusions and Recommendations…………………………………………………. 27
8.0 Appendices...........................................................................................................................29
References..................................................................................................................................33

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Acknowledgement

I hereby convey my deep acknowledgement to all those who made it possible for me to complete
this independent study, by extending their support and continuous co-operation.

I would like to acknowledge the consistent encouragement extended by Dr. Kamal Ghosh Ray,
Director and Dr. Ch. S. Durga Prasad, Dean-Academic Planning of Vignana Jyothi Institute of
Management. I would also like to thank my faculty members and my coordinator Col. (Retd.)
Saeed Ahmad.

Finally I would like to thank all my friends, batch mates and staff members without whom this
project work would not have been successfully completed.

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List of Tables : P.No

1. 98 Individual Transparency and Disclosure questions…………………………… 29

2. Disclosure Scores……………………………………………………………….. 26
3. Disclosure Scores on the basis of sub-categories……………………………….. 27

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List of Abbreviations :

OECD - The Organization for Economic Co-operation and Development

U.S - United States of America

U.K - United Kingdom

FSGO - Federal Sentencing Guidelines for Organizations

CPA - Certified Public Accountant

T&D - Transparency and Disclosure

BSE - Bombay Stock Exchange

ODI - Overall disclosure index

MSIL - Maruti Suzuki India Limited

TML - Tata Motors Limited

ROA - Return on Assets

ROE - Return on Equity

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Executive Summary :

Increasingly, policy makers have come to recognise that effective corporate governance --
transparency, accountability and the fair and equitable treatment of shareholders -- is a necessary
component of efforts to promote sustainable development. However, corporate governance
reform requires both governmental and private sector support. In this regard, there is a need for a
public-private partnership, both to raise awareness of the value of corporate governance
improvement, and to assist in implementing corporate governance reform. However, reform
efforts must take into account the fact that every nation has its own national personality and
social and economic priorities. Likewise, every corporation has its own unique history, culture
and business goals. All of these factors influence the optimal governance structures and practices
for nations and individual corporations. Therefore, international agreement on a single model of
corporate governance or a single set of detailed governance rules is both unlikely and
unnecessary. Of course, the influence of international capital markets will lead to some
convergence of governance practices. This simply reflects the market reality that “[a]s regulatory
barriers between national economies fall and global competition for capital increases, investment
capital will follow the path to those corporations that have adopted efficient governance
standards, which include acceptable accounting and disclosure standards, satisfactory investor
protections and board practices designed to provide independent, accountable oversight of
managers.
The paper uses disclosure scores to examine corporate governance practices of two Indian listed
Companies i.e Maruti Suzuki India Limited and Tata Motors Limited. A content analysis of these
two companies has been carried out and a disclosure index developed to determine the level of
disclosure by the companies. This study finds that the disclosure level of Tata Motors Limited
(TML) is higher than Maruti Suzuki IndiaLimited(MSIL) . The findings of the research will add
to the increasingly inadequate literature relating to corporate governance in developing countries.
However this research is limited because it focuses on only the two companies. The study is
important because of the recent flow of international capital into developing countries as a result
of World Bank and IMF led economic restructurings. Due to these, transparency and disclosure
have gained increased impetus. There is thus the need to understand corporate governance
practices in the developing world.

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1.0 Introduction

1.1 What is Governance :

Governance is the activity of governing. It relates to decisions that define expectations, grant
power, or verify performance. It consists either of a separate process or of a specific part of
management or leadership processes. In the case of a business or of a non-profit organisation,
governance relates to consistent management, cohesive policies, processes and decision-rights
for a given area of responsibility. As a process, governance may operate in an organization of
any size: from a single human being to all of humanity; and it may function for any purpose,
good or evil, for profit or not. A reasonable or rational purpose of governance might aim to
assure, (sometimes on behalf of others) that an organization produces a worthwhile pattern of
good results while avoiding an undesirable pattern of bad circumstances.

1.2 Corporate Governance :

Corporate Governance is defined as 'an internal system encompassing policies, processes and
people, which serves the needs of shareholders and other stakeholders, by directing and
controlling management activities with good business savvy, objectivity, accountability and
integrity. Sound corporate governance is reliant on external marketplace commitment and
legislation, plus a healthy board culture which safeguards policies and processes. Corporate
governance also includes the relationships among the many stakeholders involved and the goals
for which the corporation is governed. The principal stakeholders are the shareholders, the board
of directors, employees, customers, creditors, suppliers, and the community at large. There has
been renewed interest in the corporate governance practices of modern corporations since 2001,
particularly due to the high-profile collapses of a number of large U.S. firms such as Enron
Corporation and MCI Inc. (formerly WorldCom).

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2.0 Objective
To study the importance of Effective Corporate Governance in Organizations and Assessing the
Elements of Corporate Governance in Organizations by following some methodologies given by
OECD and FSGO

2.1 Scope of the Study

The study deals with Assessing the elements of Corporate Governance in Organizations by
following the mehodologies given by FSGO. The study concentrates on Assessing the Elements
of Corporate Governance of two listed Indian Companies i.e Tata Motors Limited and Maruti
Suzuki India Ltd using a Transparency and Disclosure Index .

2.2 Limitations of the Study

Since the study is on Assessing the Elements of Corporate Governance in Organizations , it is
not possible to come to conclusion directly depends on only one or two methods.The opinions
given by the consultants and the methodologies used are subjective and differ from person to
person and oganization to organization.

2.3 Methodology
The study was conducted mainly based on secondary data which is available in websites,
books, magazines, journals, etc. Primary research is also conducted by doing some pilot
study like conducting small interviews with the managers of the companies of Tata Motors
Limited and Maruti Suzuki India Limited, Hyderabad.

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3.0 Importance of Corporate Governane in Organizations :

As markets become more open and global, and business becomes more complex, societies
around the world are placing greater reliance on the private sector as the engine of economic
growth. Corporations mobilise and combine capital, raw material, labour, management expertise
and intellectual property from a variety of sources to produce goods and services that are useful
to members of society. In so doing, corporations purchase goods and services, generate jobs and
income, distribute profits, pay taxes, and contribute to foreign exchange. In sum, corporations
contribute to economic growth and development, which lead to improved standards of living and
poverty alleviation, which in turn should lead to more stable political systems.
Corporate governance is important because the quality of corporate governance impacts: (1) the
efficiency with which a corporation employs assets; (2) its ability to attract low-cost capital; (3)
its ability to meet societal expectations; and (4) its overall performance.
(1) Effective corporate governance promotes the efficient use of resources both within the firm
and the larger economy. When corporate governance systems are effective, debt and equity
capital should flow to those corporations capable of investing it in the most efficient manner for
the production of goods and services most in demand, and with the highest rate of return. In this
regard, effective governance helps protect and grow scarce resources, and helps ensure that
societal needs are met. In addition, effective governance should make it more likely that
managers who do not put scarce resources to efficient use, or who are incompetent or -- at the
extreme -- corrupt, are replaced.
(2) For related reasons, effective corporate governance assists firms (and economies) in
attracting lower-cost investment capital by improving both domestic and international investor
confidence that assets will be used as agreed (whether that investment is in the form of debt or
equity). For corporations to succeed in competitive markets, corporate managers must innovate
relentlessly and efficiently, and constantly evolve new strategies to meet changing
circumstances. This requires that managers have latitude for discretionary action. However, as
Adam Smith recognised long ago, managers may have incentives to deviate from acting in the
interests of capital providers. Therefore, rules and procedures to protect capital providers are
necessary. These include: independent monitoring of management; transparency as to corporate
performance, ownership and control; and participation in certain fundamental decisions by
shareholders -- in other words, corporate governance.

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(3) To be successful in the long term, corporations must comply with the laws, regulations and
expectations of the societies in which they operate. Corporations have proven to be neither
inherently good nor bad. Many corporations take their responsibilities as corporate citizens
seriously and contribute greatly to civil society. Unfortunately, however, some corporations are
opportunistic and seek to profit, for example, from the use of child labour or without regard to
environmental impact. Such examples represent not only failures of corporate responsibility --
and firm governance but larger failures of government to provide the framework needed to hold
corporations responsible on issues that are important to a given society.
(4) When corporate governance is effective, it provides managers with oversight and holds
boards and managers accountable in their management of corporate assets. This oversight and
accountability -- combined with the efficient use of resources, improved access to lower-cost
capital and increased responsiveness to societal needs and expectations -- should lead to
improved corporate performance. Effective corporate governance may not guarantee improved
corporate performance at the individual firm level; there are simply too many other factors that
impact firm performance. But it should make it more likely that managers focus on improving
firm performance and are replaced when they fail to do so. The empirical evidence of a link
between governance and performance is mixed (due to the difficulty in factoring out governance
from all the other influences on firm performance). Nonetheless, the connection between
effective governance and firm performance makes considerable intuitive sense. Effective
corporate governance is also closely related to efforts to reduce corruption in business dealings.
Effective governance systems should make it difficult for corrupt practices to develop and take
root in a company. Strong governance may not prevent corruption, but it should make it more
likely that corrupt practices are discovered early and eliminated.

3.1 Influence of Corporate Governance on Developed and Developing Nations

Corporations

Corporate governance practices vary across nations and firms, and this variety reflects not only
distinct societal values, but also different ownership structures, business circumstances and
competitive conditions. It may also reflect differences in the strength and enforceability of
contracts, the political standing of shareholders and debt holders, and the development and

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enforcement capacity of the legal system. In developed countries, the discussion of corporate
governance improvement tends to assume in place well-developed and well-regulated securities
markets; laws that recognise shareholders as the legitimate owners of the corporation and require
the equitable treatment of minority and foreign shareholders; enforcement mechanisms through
which these shareholder rights can be protected; securities, corporate and bankruptcy laws to
prevent bribery that enable corporations to transform to merge, acquire, divest and downsize and
even to fail; anti-corruption laws to prevent bribery and protections against fraud on investors;
sophisticated courts and regulators; an experienced accounting and auditing sector, and
significant corporate disclosure requirements.
Many developing and emerging market nations have not yet fully developed the legal and
regulatory systems, enforcement capacities and private sector institutions required to support
effective corporate governance. Therefore, corporate governance reform efforts in these nations
often need to focus on the fundamental framework. Reform needs vary, but often include basic
stock exchange development, the creation of systems for registering share ownership, the
enactment of laws for basic minority shareholder protection from potential self-dealing by
corporate insiders and controlling shareholders, the education and empowerment of a financial
press, the improvement of audit and accounting standards, and a change in culture and laws
against bribery and corruption as an accepted way of doing business.
In addition to differences in the development of legal and regulatory systems and private
institutional capacity, nations differ widely in the cultural values that mould the development of
their financial infrastructure and corporate governance. These differences in culture may make
certain concepts difficult to accept. For example, the long history of communism in Russia may
have impacted that culture’s understanding of property rights. Ultimately, corporate governance
and the framework that supports it must have relevance to a nation’s own unique legal
environment and cultural values. While common elements of effective governance can be
identified to enable national systems to attract global capital and heighten investor confidence --
and some market driven convergence of systems may be inevitable -- governance reform is
largely a matter for each nation and the private sector within each nation to determine.

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4.0 Elements of Effective Corporate Governance

In April 1998 an influential report detailed the common principles of corporate governance from
a private sector viewpoint. The OECD(The Organisation for Economic Co-operation and
Development ) Business Sector Advisory Group on Corporate Governance, chaired by renowned
governance expert Ira M. Millstein, focused on “what is necessary by way of governance to
attract capital.” According to the Millstein Report, government intervention in the area of
corporate governance is likely to be most effective in attracting capital if focused on four
essential areas:

Fairness :

The OECD Principles expand on the concept of “fairness” with two separate principles. Principle
I states that: “The corporate governance framework should protect shareholders’ rights.”
Generally, this Principle recognises that shareholders are property owners, and as owners of a
legally recognised and divisible share of a company, shareholders have the right to hold or
convey their interest in the company. Effective corporate governance depends on laws,
procedures and common practices that protect this property right and ensure secure methods of
ownership, registration and free transferability of shares.
Principle I also recognises that shareholder generally have certain participatory rights on key
corporate decisions, such as the election of directors and the approval of major mergers or
acquisitions. Governance issues relevant to these participatory rights concern voting procedures
in the selection of directors, use of proxies for voting, and shareholders’ ability to make
proposals at shareholder meetings and to call extraordinary shareholder meetings.
Principle II also relates to “fairness” in holding that: “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.” This means that the legal framework should include laws that protect
the rights of minority shareholders against misappropriation of assets or self dealing by
controlling shareholders, managers or directors. Rules that regulate transactions by corporate
insiders and impose fiduciary obligations on directors, managers and controlling shareholders --

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and mechanisms to enforce those rules, such as shareholder derivative actions -- are some
examples.

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. This recognises that investors and
shareholders need information about the performance of the company its financial and operating
results as well as information about corporate objectives and material foreseeable risk factors to
monitor their investment. Financial information prepared in accordance with high-quality
standards of accounting and audit should be subject to an annual audit by an independent auditor.
This provides an important check on the quality of accounting and reporting. (Of course,
accounting standards continue to vary widely around the world. Internationally prescribed
accounting standards that promote uniform disclosure would enable comparability, and assist
investors and analysts in comparing corporate performance and making decisions based on the
relative merits.) Information about the company’s governance, such as share ownership and
voting rights, identity of board members and key executives and executive compensation, is also
important to potential investors and shareholders and is a critical component of transparency.

Accountability:

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. This Principle implicates a legal duty of directors to the company and its
shareholders. As elected representatives of the shareholders, directors are generally held to be in
a fiduciary relationship to shareholders and to the company, and have duties of loyalty and care
which require that they avoid self-interest in their decisions and act diligently and on a fully
informed basis. Generally, each director is a fiduciary for the entire body of shareholders and
does not report to a particular constituency. This Principle also recognises that the board is
charged with monitoring the professional managers to whom the discretionary operational role
has been delegated and holding them accountable in the use of firm assets.14 In this respect, the

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board provides a mechanism for reducing the agency problem described by Adam Smith in 1776
that is inherent in the separation of ownership and control.15 If the board is to serve as an
effective monitor of managerial conduct, however, it must be sufficiently distinct from
management to be capable of objectively evaluating management. (A board comprised wholly or
primarily of management cannot be expected to effectively minimise agency problems.) This
generally requires that some directors are neither members of the management team nor closely
related to them through family or business affairs. Clearly, the quality of corporate governance
also depends on the quality of directors. Objective oversight requires the inclusion of
professionally competent nonexecutives and independent directors, who have the capability,
fiduciary commitment and objectivity to provide strategic guidance and monitor performance on
behalf of shareholders. Much has been written about the practices that boards should follow to
encourage board effectiveness. In general, board “best practices” suggest that the board should
meet often. For most boards, this is at least once per quarter; and usually more frequently. In
addition, the effectiveness of directors -- especially non-executives -- depends upon the quality
of information that is made available to them. To ensure that “independent oversight” has
meaning, directors must have access to important information and such information should be
provided in advance of board meetings. Board committees have provided a useful structure for
performing detailed board work. In the U.S. and the U.K. it is common to rely on an audit
committee, executive compensation (or remuneration) committee and a nomination committee
(and staff them wholly or primarily with non-executives or independent directors).

Responsibility:

The corporate governance framework should recognise the rights of stakeholders as established
by law and encourage active co-operation between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound enterprises. This recognises that
corporations must abide by the laws and regulations of the countries in which they operate, but
that every nation must decide for itself the values it wishes to express in law and the corporate
citizenship requirements it wishes to impose. As with good citizenship generally, however, law
and regulation impose only minimal expectations as to conduct. Outside of law and regulations,
corporations should be encouraged to act responsibly and ethically, with special consideration of

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the interests of stakeholders, and in particular employees. Increasingly, corporations recognise
that active co-operation between corporations and stakeholders assists corporate performance,
and that socially responsible corporate conduct is consistent with the principle of shareholder
maximisation.In many nations, corporations go well beyond legal requirements in providing
health care and retirement benefits, encouraging diversity of race and gender in employment and
promotion practices, financially supporting education, and formulating and adopting
environmentally friendly technologies. Similarly, many companies strive to avoid activities
perceived to be socially undesirable even where not prohibited.
The four principles of corporate governance articulated in the Millstein Report fairness,
transparency, accountability and responsibility -- as expanded into the five OECD Principles of
Corporate Governance require both regulation and private sector initiative for implementation.
Regulation ensures that minimum standards are met; private codes of conduct and voluntary
behaviour can and in many cases should go well beyond minimum legal requirements.

4.1 Assessing the Elements of Effective Corporate Governance :

Assessing corporate governance is elusive at best. The tone at the top, codes of conduct, quality
and effectiveness of ethics programs, and fraud prevention efforts are all critical pieces of
corporate governance that are challenging to assess. In today's highly regulated environment,
such assessments are no longer optional - all organizations must face this challenge.

One useful approach for assessing the compliance and ethics elements of corporate governance is
to use the seven steps of an effective compliance and ethics program contained in the Federal
Sentencing Guidelines for Organizations (FSGO). What makes this approach appealing is that it
gives CPAs criteria to test against when making their corporate governance assessments. This
provides a structured and systematic approach.

Boards of directors, CEOs, and compliance officers will want to be aware of this approach to
assessing corporate governance. They may want to request that their internal auditors or
consultants carry out such an assessment.

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The FSGO

Organizations can be federally prosecuted, and those that are convicted can receive stiff
sentences under the FSGO. Organizations also can be placed on probation. Examples of crimes
for which organizations have been prosecuted include fraud, money laundering, bribery,
embezzlement, antitrust violations, copyright/trademark infringement, and environmental (water,
air, toxic pollutants) violations. If an organization is convicted of a crime, its punishment under
the FSGO can be lessened if it has an effective compliance and ethics program. The seven steps
of an effective compliance and ethics program as defined by the FSGO allow an organization to
police itself, and they provide CPAs with a framework for assessing the elements of corporate
governance.

The Road Map

The seven components provide a road map when assessing the compliance and ethics elements
of corporate governance. The assessment needs to be handled in two steps. First, CPAs must
determine if the programs and procedures that support each of the seven components are well
designed. Second, they must determine if these programs and procedures are operating
effectively.

Internal auditors are best suited to determine if the seven components exist and are operating
effectively. Because internal auditors deal with company operations on a daily basis, they are
intimately familiar with personnel and procedures and can effectively assess corporate
governance. If a company doesn't have an internal audit staff to carry out the assessment,
consultants could be asked to complete this task. External auditors can use the seven steps in
their audit planning to help them assess the potential fraud risks in their audit of clients' financial
statements.

Step One

Determine existence and evaluate design of programs. Each of the seven FSGO guidelines is
very broad in nature. Hence, several programs and procedures may be necessary to satisfy each
guideline.

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FSGO 1 indicates that organizations need standards and procedures that will prevent and detect
criminal conduct. These preventative and detective internal controls are the responsibility of
management, and management must take ownership of them. In today's environment, a proactive
fraud auditing approach is also needed in high risk areas. A good way to accomplish this is to
have a fraud investigation unit that partners with internal auditors. This investigation unit is an
additional program that helps an organization meet the spirit of FSGO 1.

FSGO 2 states that high-level personnel must ensure that the organization has an effective
compliance and ethics program. CPAs must determine if someone is responsible for such a
compliance and ethics program. This would include determining which executives are
responsible and how the board of directors and audit committee fit in.

FSGO 3 deals with exercising due diligence when putting people into positions of substantial
authority. CPAs must determine when and if background checks are performed on company
personnel and who is responsible for these checks.

FSGO 4 addresses the communication of the company's compliance and ethics program. It also
recommends that employees receive ethics training. CPAs should identify all communication
vehicles by which the compliance and ethics program is communicated to company personnel. In
addition, they must determine if ethics training programs already exist.

FSGO 5 indicates that an organization needs to determine if its compliance and ethics program
is being followed. For CPAs to determine if guideline 5 is being met, they must investigate
whether the management has a procedure to assess if its compliance and ethics program is being
followed. Guideline 5 also requires that there be an anonymous or confidential mechanism by
which employees can report a suspected wrongdoing. In this case, CPAs should determine if
there is a mechanism for this type of reporting, such as an employee hotline or ombudsman
program.

FSGO 6 requires that a compliance and ethics program be promoted and enforced consistently
organization wide. CPAs must determine if there are written policies regarding the escalation
path if there is a violation of the compliance and ethics programs. The policies require consistent
enforcement for both executives and lower level workers.

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FSGO 7 indicates that an organization needs to respond appropriately to detected criminal
conduct. CPAs should determine if there are written policies as to how detected criminal conduct
will be handled. These policies might specify when an employee will be reprimanded, fired, or
expected to make restitution; when a criminal offense will be referred to outside law
enforcement; and so on.

Because the seven FSGO guidelines are general and broad, CPAs must use their professional
judgment as to what programs and procedures in each of the seven areas are adequate to achieve
effective corporate governance. Because this is a new and evolving area, few companies have
attempted to perform, or have an outside consultant perform, a comprehensive assessment of the
compliance and ethics elements of their corporate governance structure.

Consequently, to make judgments as to what constitutes adequate and well designed programs
and procedures to support corporate governance, CPAs should consider the following:

1)Research the professional literature on corporate governance;

2)Attend professional seminars dealing with this topic;

3)Review the websites of relevant professional organizations, such as the AICPA, the Institute of
Internal Auditors, the Association of Certified Fraud Examiners, the Ethics & Compliance
Officer Association; and

4)Have a brainstorming session with the professional staff to gather ideas about what constitutes
adequate corporate governance.

Step Two

Determine if components operate effectively. The mere existence of the seven components is not
enough. As a second step in assessing the compliance and ethics elements of corporate
governance, CPAs must also assess the effectiveness of each of the seven components.

Examples of how CPAs might assess FSGO 3 (background checks) and 5 (ethics program)
follow. The same evaluation strategies can be applied to the other five guidelines.

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Background checks - FSGO 3 states that an organization must exercise due diligence and not
place individuals with questionable backgrounds into positions of substantial authority. This
guideline necessitates that CPAs assess the effectiveness of the background-check process.

CPAs must determine what background check procedures presently exist. If written policies and
procedures exist, CPAs must read and assess them. If written policies do not exist, CPAs must
interview knowledgeable people as to the informal background-check procedures that have
traditionally been followed. If informal policies are the norm or are absent in critical areas, CPAs
should suggest that the organization's human resources department develop formal written
policies for background checks.

Both written and informal policies should be reviewed for reasonableness Since guideline 3
warns against organizations placing individuals with questionable backgrounds into authoritative
positions, CPAs should determine what the organization's policies are when long-term
employees, rather than new hires, are promoted into positions of substantial authority. A good
practice is to check the background of these employees at the time of their promotion. In
addition, a good practice is to periodically - every three to five years- background-check
employees who are in sensitive positions.

After gaining knowledge of and assessing the adequacy of the company's background-checking
procedures, CPAs should test the procedures to see if they are working effectively. Ideally, that
would involve selecting a random sample of employees who were checked. To assess if the
background checks were done appropriately, they should be reperformed. Based on the sample,
CPAs can develop some reasonable conclusions as to the effectiveness of the company's
background-checking procedures.

Ethics program - FSGO 5 indicates, among other things, that organizations must periodically
evaluate the effectiveness of their compliance and ethics program . Assuming that CPAs have
already determined that the compliance and ethics program exists and is adequate (step one,
above), they can move on to testing the effectiveness of the program.

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 There are several procedures a CPA can use to assess the effectiveness of
an organization' s compliance and ethics program. They include questionnaires, interviews, and
the review of appropriate ethics program metrics.

CPAs must first determine if current employees have already responded to a questionnaire about
the effectiveness of the elements of ethics program. If survey data have already been collected,
CPAs should review the survey results, as well as the survey process. It should be taken care that
all the employees should be surveyed and the anonymity of the respondents should be protected.
The questions asked of employees must cover all critical areas.

If employees have not been surveyed about the effectiveness of the elements of ethics program,
CPAs should recommend that this be done. CPAs should either conduct the survey themselves or
recommend that an appropriate internal department do so. The following sample questions could
be asked: Do you believe your anonymity would be protected if you called the company's ethics
hotline? Do you believe you understand the organization's policies on conflicts of interest? Do
you believe you have had adequate training regarding the organization's ethics policies? Do you
believe top management is ethical and sets the right tone?

Interviews are another way to assess the effectiveness of the ethics program. CPAs should select
a random sample of employees and conduct private interviews. The interview questions can be
similar to those used on the survey questionnaire. An advantage of the interview format is that
probative follow-up questions can be asked.

A review of ethics program metrics can be helpful in assessing the effectiveness of the elements
of Corporate Governance. For example, the metrics will be collected about the number of hotline
calls, the nature of the complaints, the number of complaints investigated, and the outcome of the
investigations. This information can be reviewed for reasonableness. It can be compared to prior
year data. It can even be used to benchmark against the experience of other companies. Some
other metrics that the CPAs may want to review include the number of ethics training programs
conducted and employees trained per year, the frequency of updates of ethics training material,
the frequency of ethics communications to employees, and the number of employees who signed
off on the ethics documents and training.

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Another consideration when reviewing the effectiveness of the elements of Corporate
Governance is to follow up to see if previously recommended internal control changes were
successfully implemented. For example, if a new hire was later found to have inadequate
educational credentials for her position, an internal control recommendation may have been
made to strengthen the documentation of educational credentials. CPAs should follow up on this
internal control recommendation to ensure that the change was implemented and is operating
effectively.

5. 0 Assessing the Elements of Corporate Governance in Tata Motors

Limited and Maruti Suzuki India Limited :

Fairness, Transparency , Responsibility and Accountability are at the heart of the Corporate
Governance. The OECD principles of Corporate Governance (2004) states that the corporate
governance framework of any organization should ensure that timely and accurate disclosure is
made on all material matters of the organization pertaining to its financial situation ,performance,
ownership and overall governance. Transparency and Disclosure (T&D) practices followed by
firms are an important component and one of the main indicators of the quality of corporate
governance. A firm if commits itself to high quality disclosure , reduces information asymmetry
thereby reducing investor’s risk of loss from trading with more informed investors.

It is pointed out that one of the reasons behind low foreign investor participation in developing
countries is lack of information disclosure among companies in those countries.This lack of
transparency makes it more difficult for foreign investors to assess the amount, timing and
certainty of expected future cash flows. Availability and access of information about listed
companies is very crucial for the participation of investors . The more precise and reliable this
information , the better is the investors perception about the company.

5.1 Factors influencing the Elements of Corporate Governance ;

Firms are expected to increase disclosure when the benefits of disclosure outweigh the costs.
This study will review the literature related to the extent to which four most widely used

23
corporate attributes – firm size, ownership structure , leverage and size of the audit firm affect
the Elements of Corporate Governance.

Company Size :

Firm size has been studied by many researchers as a determinant of the Elements of Corporate
Governance. Most of the studies concluded that extent of disclosure increases with increase in the
firm size.It is pointed out that large companies tend to disclose more for a number of reasons , one
of them being, that they are more exposed to public scrutiny than small firms. Also, large firms
possess sufficient resources for collecting, analyzing and presenting extensive information at
minimal cost.

Ownership Structure ;

The effect of ownership structure on the level of Corporate Governance has also been widely
studied. It has been observed in most cases, that the presence of a majority shareholder has
negative impact on the rights of minority shareholders. Previous studies conclude that ownership
structure affects Corpoarate Governance as it determines the level of monitoring.

Leverage:

It has been argued that, the more levered companies are, lower is the extent of disclosure since
debt holders would demand less information than would shareholders who are in effect owners of
the company. However, another widely held view is that levered firms have to disclose more
information to satisfy the needs of creditors .

Size of Audit Firm

Audit firms are classified into large (Big 4) and small (others). Large firms have more concern for
their reputation and are hence willing to associate themselves with firms that disclose more
information. Small audit firms on the other hand do not have the power to influence the disclosure
practices of their clients; they rather, would meet the needs of their clients in order to retain them.

24
Research Methodology :

Data was collected on the companies i.e Maruti Suzuki India Limited and Tata Motors Limited
which are listed on the BSE, using content analysis. The market capitalization of Tata Motors
India Limited as on 1 February 2010 stood at Rs. 96 crores and the market capitalization of
Maruti Suzuki India Limited 34 crores. These two companies together with their sector/industry
they belong to can be found in Analysis is limited to only one year because disclosure practices
usually do not change dramatically over time . The annual reports of these two companies are
available online on the respective company websites and have been accessed thus. The annual
reports studied for these two companies are for 31, March 2009.

Disclosure Index Construction

This study uses 98 attributes in all to measure corporate governance and extent of disclosure in
India. These attributes have been compiled by Standard & Poor’s and used in many previous
studies on disclosure. Using an objective methodology, annual reports are analyzed for common
disclosure items grouped into three sub- categories:
1)Ownership structure and investor relations
2) Financial transparency and information disclosure
3) Board and management structure and process
A T&D Score (Transparency and Disclosure) is developed for each company from a binary
evaluation of the number of items present in their annual reports, i.e. if a company discloses a
particular attribute, a score of 1 is awarded and if not a score of 0 is awarded. A similar approach
has been adopted by previous studies on disclosure and corporate governance such as Patel et al.
(2002) and Tsamenyi et al. (2007). Disclosure scores have been calculated for each company and
they have then been divided by the total number of attributes required to be present (98 in our
case). The ratio thus obtained is the overall disclosure index (ODI) for each company. Thus, this
disclosure method measures the overall disclosure index (ODI) of a company as additive as
follows:

25
ODI = Sigma.Di (i=1,n) ; (d=0 if the item di is not disclosed , d=1 if the item di is disclosed, n=
number of items)

6.0 Findings from the Research :

The disclosure scores for these two firms are presented both as actual scores and as percentage of
the total number of attributes assessed in annual reports. The overall level of disclosure and
disclosure percentage together with company ranking for the scores is presented in the table given
below. Overall, disclosure and transparency register an average score of 71.59 which is quite
good. An analysis of the annual reports of the companies reveals that they disclose almost all
information which is mandatory to disclose as per statute. Approximately 40 items in the
disclosure index used for this research are mandatory and these two companies disclose all of
them. It may be imperative to note here that disclosure of one item, voting rights for each class of
shares has recently been mandatory (with effect from financial year 2009-10) . It would be
interesting to compute disclosure scores by differentiating between voluntary and mandatory
items and assigning weights to voluntary items and could form the basis of future research. The
scores attained by companies for each of the sub-categories together with their total scores are
presented in the table below.

Table 2:

Disclosure Scores

Company Names Disclosure Scores % of Score Disclosure Rank

Maruti Suzuki India 65 66.33 1
Ltd.
Tata Motors Ltd. 76 77.55 2

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Table 3:

Disclosure Scores on the basis of sub-categories

Company Ownership Structure Financial Transparency Board Disclosure

Name & Investor Rights & Structur Score
(Max. Score 28) Information Disclosure e& (Max.
(Max. Score 35) Process Score 98)
(Max.
Score 35)
Maruti Suzuki 15 28 22 65
India Ltd.
Tata Motors 24 29 23 76
Ltd.

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7.0 Conclusions and Recommendations

There is a heightened awareness worldwide that effective corporate governance as manifested by

transparency, accountability as well as the just and equitable treatment of shareholders is now a
pre-requisite towards efforts to promote sustainable development. Towards this end, there is a
need for both public (as represented by governments) and private sector partnership to raise the
awareness of the importance of corporate governance improvements and to assist in
implementing corporate governance reform. This paper reports on Assessing the Elements of
Corporate Governance by having a sample of two Indian companies listed on the BSE by
examining their 2008-2009 annual reports. The study uses a transparency and disclosure (T&D)
index for determining the level of disclosure among these two Indian companies. Using a dataset
relating to the companies for 2008-09, the study reveals that firms on average report 70.5% of the
items in the index. The results of this study can be useful for the investment community to assist
them in gauging the level of disclosure by listed Indian companies. It will also be of interest to
researchers, managers, regulators and market participants. This study will help in adding to the
current exceedingly inadequate literature relating to corporate governance and disclosure practices
in developing countries. Finally, the disclosure scores and rankings can serve as a monitoring and
enforcement tool by local and international regulators. Finally, the study gives at best a broad
overview of the level and quality of disclosure among Indian companies . Further research is
needed to evaluate the trends in the disclosure and also to assess the elements of corporate
governance if the level or quality of disclosure has improved over time. However, in spite of these
limitations, this study makes some important contributions to the existing body of work on
corporate governance and disclosure in developing countries

28
8.0 Appendices :
Table 1:
98 Individual Transparency and Disclosure Questions
Attributes Max. Score

Ownership Structure and Investor Rights

Transparency of ownership: Does the Annual Report

Provide a description of share classes? 1
Provide a review of shareholders by type? 1
Provide the number of issued and authorized but non-issued ordinary shares? 2
Provide the par value of issued and authorized but non-issued ordinary shares? 2
Provide the number of issued and authorized but non-issued shares of preferred, 2
non-voting and other classes?
Provide the par value of issued and authorized but non-issued shares of preferred, 2
non-voting and other classes?
Disclose the voting rights for each class of shares? 1
Concentration of ownership: Are the following disclosed?
Top 1, 3, 5, or 10 shareholders 4
Shareholders owning more than 10, 5, or 3 percent 3
Percentage of cross ownership 1

Voting and shareholder meeting procedures: Does the Annual Report

Have a calendar of important shareholder dates? 1

Have a review of shareholder meetings (could be minutes)? 1
Describe procedure for proposals at shareholder meetings? 1
Describe how shareholders convene an extraordinary general meeting? 1
Describe how shareholders nominate directors to board? 1
Describe the process of putting inquiry to board? 1
Refer to or publish Corporate Governance Charter or Code of Best Practice? 2
Have the Articles of Association or Charter Articles of Incorporation published? 1

Financial Transparency and Information Disclosure

Business focus
Is there a discussion of corporate strategy? 1
Report details of the kind of business it is in? 1
Does the company give an overview of trends in its industry? 1
Report details of the products or services produced/provided? 1
Provide a segment analysis, broken down by business line? 1
Does the company disclose its market share for any or all of its businesses? 1

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Does the company report basic earnings forecast of any kind? In detail? 2
Disclose output in physical terms? 1
Does the company give an output forecast of any kind? 1
Does the company give characteristics of assets employed? 1
Does the company provide efficiency indicators (ROA, ROE, etc.)? 1

Attributes Max.
Score
Does the company provide any industry-specific ratios? 1
Does the company disclose its plans for investment in the coming years? 1
Does the company disclose details of its investment plans in the coming years? 1
Accounting policy review: Does the company
Provide financial information on a quarterly basis? 1
Discuss its accounting policy? 1
Disclose accounting standards it uses for its accounts? 1
Provide accounts according to the local accounting standards? 1
Provide accounts in alternate internationally recognized accounting method? 1
Provide each of the balance sheet, income statement & cash flow statements by 3
internationally recognized methods?
Provide a reconciliation of its domestic accounts to internationally recognized 1
methods?

Accounting policy details

Does the company disclose method s of asset valuation? 1

Does the company disclose information on method of fixed assets depreciation ? 1
Does the company produce consolidated financial statements? 1

Related party structure and transactions

Does the company provide a list of affiliates in which it holds a minority stake? 1
Does the company disclose the ownership structure of affiliates? 1
Is there a list/register of related party transactions? 1
Is there a list/register of group transactions? 1

Information on auditors: Does the company

Disclose the name of its auditing firm? 1

Reproduce the auditors’ report? 1
Disclose how much it pays in audit fees to the auditor? 1
Disclose any non-audit fees paid to auditor? 1

Board Structure and Process

Board structure and composition

30
Is there a chairman listed? 1
Are there details about the chairman (other than name/title)? 1
Is there a list of board members (names)? 1
Are there details about directors (other than name/title)? 1
Are details about current employment/position of directors provided? 1
Are details about previous employment/position s provided? 1
Does the annual report disclose when each of the directors joined the board? 1
Attributes Max.
Score
Does the annual report classify directors as an executive or an outside director? 1
Role of the Board
Are there details about role of the board of directors at the company? 1
Is there disclosed a list of matters reserved for the board? 1
Is there a list of board committees? 1
Does the annual repo rt review last board meeting (could be minutes)? 1
Is there an audit committee? 1
Is there a disclosure of names on audit committee? 1
Is there a remuneration/compensation committee? 1
Are names on remuneration/compensation committee disclosed? 1
Is there a nomination committee? 1
Is there disclosure of names on nomination committee? 1
Is there information about other internal audit function besides audit committee? 1
Is there a strategy/investment/finance committee? 1
Director training and compensation: Does the annual report
Disclose whether they provide director training? 1
Disclose the number of shares in the company held by directors? 1
Discuss decision-making process of directors’ pay? 1
Disclose specifics of directors’ salaries (numbers)? 1
Disclose form of directors’ salaries (cash, shares, etc.)? 1
Disclose specifics on performance-related pay for directors? 1
Executive compensation and evaluation: Is there information about the
following?
List of the senior managers (not on the board of directors) 1
Backgrounds of senior managers 1
Number of shares held by the senior managers 1
Number of shares held in other affiliated companies by managers 1
Decision-making of managers’ (not board) pay 1

Numbers of managers’ (not on board) salaries 1

Form of managers’ (not on board) salaries 1
Specifics on performance-related pay for managers 1
Details of the CEO’s contract 1

MAXIMUM TOTAL SCORE 98

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References :

32
Text Books

 Donald Nordberg, Corporate Governance Principles and Issues , Westminster Business

School, December 2010  , SAGE Publications Ltd.

 John R. Schermerhorn. Introduction to Management, Tenth edition, U.K. John Wiley &
Sons (2010).
 A.C.Fernando, Corporate Governance Principles,Policies and Practices, Pearson
Education, 2009

 Business Sector Advisory Group Report to the OECD on Corporate Governance: Improving
Competitiveness and Access to Capital in Global Markets (April 1998) (The “Millstein
Report”), pp.9 and 20.

 Felton, R.F. (1996). ‘Putting a Value on Board Governance’, 4 McKinsey Quarterly, pp.170-
174.

 Wolfensohn, J.D. (1999). ‘A Battle for Corporate Honesty’, The Economist: The World in
1999, p.38.

Websites

 www.allbusiness.com

 www.oecd.org

 www.c-ebs.org/documents/Publications/Consultation-papers/.../CP39.aspx

 http://www.theiia.org/training/index.cfm?act=seminar.detail&semID=153

 http://www.questia.com/PM.qst;jsessionid=L33BG6GGyJ6XNppD6vPCfnz8rS1NWQYg
1QnSTJtHvf178M4vmhln!480740073!1743859799?a=o&d=5035570557

 www.commercial.hsbc.com

 www.sustainabilityforum.com

 press.ifac.org

 download.microsoft.com

 resources.searchcio.com

• www.CSR wire.com

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• www.cSRmoea.gov.tw
• www.karmayog.com
• www.iso.org
• www.emerald.com.

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