Commonly accepted principles of corporate governance include

i. Rights and equitable treatment of shareholders: Organizations should respect the rights
of shareholders and help shareholders to exercise those rights. They can help shareholders
exercise their rights by effectively communicating information that is understandable and
accessible and encouraging shareholders to participate in general meetings.
ii. Interests of other stakeholders: Organizations should recognize that they have legal and
other obligations to all legitimate stakeholders
iii. Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the ability to review
and challenge management performance. It needs to be of sufficient size and have an
appropriate level of commitment to fulfill its responsibilities and duties. There are issues
about the appropriate mix of executive and non-executive directors. The key roles of
chairperson and CEO should not be held by the same person.

iv. Integrity and ethical behaviors: Ethical and responsible decision making is not only
important for public relations, but it is also a necessary element in risk management and
avoiding lawsuits. Organizations should develop a code of conduct for their directors and
executives that promotes ethical and responsible decision making. It is important to
understand, though, that reliance by a company on the integrity and ethics of individuals
is bound to eventual failure. Because of this, many organizations establish Compliance and
Ethics Programs to minimize the risk that the firm steps outside of ethical and legal
boundaries.

v. Disclosure and transparency: Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide shareholders with a level
of accountability. They should also implement procedures to independently verify and
safeguard the integrity of the company's financial reporting. Disclosure of material matters
concerning the organization should be timely and balanced to ensure that all investors have
access to clear, factual information.
Definition of corporate governance

“Corporate governance is the system by which companies are directed and controlled….”

 Cadbury Report (UK) 1992

“Corporate governance deals with the ways in which suppliers of finance to corporations assure
themselves of getting a return on their investment.”

 Shleifer and Vishny

The term corporate governance has come to mean two things

 The processes by which companies are directed and controlled.

A field in economics, which studies the many issues arising from the separation of ownership
and control.

Relevant rules include applicable laws of the land as well as internal rules of a corporation.
Relationships include those between all related parties, the most important of which are the owners,
managers, directors of the board, regulatory authorities and to a lesser extent employees and the
community at large. Systems and processes deal with matters such as delegation of authority. The
corporate governance structure specifies the rules and procedures for making decisions on
corporate affairs. It also provides the structure through which the company objectives are set, as
well as the means of attaining and monitoring the performance of those objectives.

Origin of corporate governance

Roots of Corporate Governance

  Kautilya’s (Chanakya) Arthashastra (around 300 B.C)- “In the happiness of the subjects
lies the benefit of the king and in what is beneficial to the subjects is his own benefit”
(1.19.34)
 The East India Company introduced a Court of Directors, separating ownership and control
(U.K., the Netherlands) in 1600s
 In 1991 Sir Adrian Cadbury was asked in May’1991 to chair the committee in the financial
aspects of Corporate Governance by the financial reporting council the London Stock
Exchange and the accounting profession.
 In Dec 1992 Sir Adrian Cadbury Committee, UK report on Financial Aspects of Corporate
Governance and it took the view that governance was not a matter of legislation and the
report produced a code of Best Practice, comprising 19 provisions and 14 notes dealing
with Board and committee structures, remuneration and financial reporting and describing
the appropriate relationship with auditors.
 This led to London Stock exchange asking the listed companies whether they complied with
Cadbury rules or were asked to explain in case of non-compliance.
 Alongside, Fat cat corporate scandals, on fixing remuneration, were on the rise. This led to
constitution of Greenburg committee on director remuneration in Jan ’1995 reporting in
July’1995.
 The Greenburg committee produced its own code in relation to director’s remuneration and
this code was adopted with the listing rules on a “Comply or explain “basis.
 Following the recommendations of Cadbury and Greenburg committees, a committee on
CG was established of Sir. Ronald Ham bell the then Chairman of ICI.

The final report of Ronald Hampbell came in Jan’1998 which is popularly known as “Hampbell
committee report”

Corporate Governance in Listed Companies Clause 49 of the Listing

Agreement

SEBI is the regulating body which regulates all the companies. The rules and regulations are
prescribed by SEBI for all the companies. SEBI has prescribed Clause 49 of the Listing Agreement
for all Stock Exchanges. All Stock Exchanges are hereby directed to amend the Listing Agreement
by replacing the existing Clause 49 of the Listing Agreement.

The provisions of the revised Clause 49 shall be implemented as per the schedule of
implementation given below:

 The entities seeking listing for the first time, at the time of seeking in- principle approval
for such listing is required.

 The existing listed companies which are required to comply with revised clause 49 of the
Listing Agreement should have a paid up capital of Rs. 3 cores and above or net worth of
Rs. 25 corers or more at any time in the history of the company, by April 1, 2005.

 The companies complying with revised Clause 49 of the Listing Agreement have to submit
a quarterly compliance report to the stock exchange as per the sub clause VI (ii) in the
revised Clause 49 of the Listing Agreement, within 15 days from the end of every quarter.
The report shall be signed either by the Compliance Officer or the Chief Executive Officer
of the company.

 The Stock Exchanges shall ensure that the provisions of the revised clause are complied
with, by companies seeking listing for the first time. For this the company had to set up its
Board and constituted committees such as Audit Committee, Shareholders/investors
Grievances Committee etc. before seeking approval for listing.

 The Stock exchange should set up a separate monitoring cell to monitor the compliance
with the provisions of the revised Clause 49 on Corporate Governance. The cell, after
receiving the quarterly compliance reports from the companies complying with the
requirements of the revised Clause 49, shall submit a consolidated compliance report to
SEBI within 60 days from the end of each quarter.