Nitin Sangwan

BCom (Hons.)
Section B
Roll No.: 1327

Corporate Governance Principles

The Principles are intended to help policymakers evaluate and improve the legal, regulatory,
and institutional framework for corporate governance, with a view to support economic
efficiency, sustainable growth and financial stability. This is primarily achieved by providing
shareholders, board members and executives as well as financial intermediaries and service
providers with the right incentives to perform their roles within a framework of checks and
balances.
Corporate governance involves a set of relationships between a company’s management, its
board, its shareholders and other stakeholders. Corporate governance also provides the
structure through which the objectives of the company are set, and the means of attaining
those objectives and monitoring performance are determined.
The Principles do not intend to prejudice or second-guess the business judgment of individual
market participants, board members and company officials. What works in one company or
for one group of investors may not necessarily be generally applicable to all of business or of
systemic economic importance. The Principles recognise the interests of employees and other
stakeholders and their important role in contributing to the long-term success and
performance of the company.

The Principles are presented in six different chapters:

I) Ensuring the basis for an effective corporate governance framework.
II) The rights and equitable treatment of shareholders and key ownership functions.
III) Institutional investors, stock markets, and other intermediaries.
IV) The role of stakeholders.
V) Disclosure and transparency.
VI) The responsibilities of the board.
 Ensuring the basis for an effective corporate
governance framework

The corporate governance framework should promote transparent and fair markets,
and the efficient allocation of resources. It should be consistent with the rule of law
and support effective supervision and enforcement.

1. The corporate governance framework should be developed with a view to its impact
on overall economic performance, market integrity and the incentives it creates for
market participants and the promotion of transparent and well-functioning markets.
2. The legal and regulatory requirements that affect corporate governance practices
should be consistent with the rule of law, transparent and enforceable.
3. The division of responsibilities among different authorities should be clearly
articulated and designed to serve the public interest.
4. Stock market regulation should support effective corporate governance.
5. Supervisory, regulatory and enforcement authorities should have the authority,
integrity and resources to fulfil their duties in a professional and objective manner.
Moreover, their rulings should be timely, transparent and fully explained.
6. Cross-border co-operation should be enhanced, including through bilateral and
multilateral arrangements for exchange of information.
 The rights and equitable treatment of
shareholders and key ownership functions

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

1. Basic shareholder rights should include the right to: 1) secure methods of ownership
registration; 2) convey or transfer shares; 3) obtain relevant and material information
on the corporation on a timely and regular basis; 4) participate and vote in general
shareholder meetings; 5) elect and remove members of the board; and 6) share in the
profits of the corporation.
2. Shareholders should be sufficiently informed about, and have the right to approve or
participate in, decisions concerning fundamental corporate changes such as: 1)
amendments to the statutes, or articles of incorporation or similar governing
documents of the company; 2) the authorisation of additional shares; and 3)
extraordinary transactions, including the transfer of all or substantially all assets, that
in effect result in the sale of the company.
3. Shareholders should have the opportunity to participate effectively and vote in
general shareholder meetings and should be informed of the rules, including voting
procedures, that govern general shareholder meetings.
4. Shareholders, including institutional shareholders, should be allowed to consult with
each other on issues concerning their basic shareholder rights as defined in the
Principles, subject to exceptions to prevent abuse.
5. All shareholders of the same series of a class should be treated equally. Capital
structures and arrangements that enable certain shareholders to obtain a degree of
influence or control disproportionate to their equity ownership should be disclosed.
6. Related-party transactions should be approved and conducted in a manner that
ensures proper management of conflict of interest and protects the interest of the
company and its shareholders.
7. Minority shareholders should be protected from abusive actions by, or in the interest
of, controlling shareholders acting either directly or indirectly, and should have
effective means of redress. Abusive self-dealing should be prohibited.
8. Markets for corporate control should be allowed to function in an efficient and
transparent manner.
 Institutional investors, stock markets, and other
intermediaries

The corporate governance framework should provide sound incentives throughout

the investment chain and provide for stock markets to function in a way that
contributes to good corporate governance.

1. Institutional investors acting in a fiduciary capacity should disclose their corporate

governance and voting policies with respect to their investments, including the
procedures that they have in place for deciding on the use of their voting rights.
2. Votes should be cast by custodians or nominees in line with the directions of the
beneficial owner of the shares.
3. Institutional investors acting in a fiduciary capacity should disclose how they manage
material conflicts of interest that may affect the exercise of key ownership rights
regarding their investments.
4. The corporate governance framework should require that proxy advisors, analysts,
brokers, rating agencies and others that provide analysis or advice relevant to
decisions by investors, disclose and minimise conflicts of interest that might
compromise the integrity of their analysis or advice.
5. Insider trading and market manipulation should be prohibited and the applicable rules
enforced.
6. For companies who are listed in a jurisdiction other than their jurisdiction of
incorporation, the applicable corporate governance laws and regulations should be
clearly disclosed. In the case of cross listings, the criteria and procedure for recognising
the listing requirements of the primary listing should be transparent and documented.
7. Stock markets should provide fair and efficient price discovery as a means to help
promote effective corporate governance.
 The 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.

1. The rights of stakeholders that are established by law or through mutual agreements
are to be respected.
2. Where stakeholder interests are protected by law, stakeholders should have the
opportunity to obtain effective redress for violation of their rights.
3. Mechanisms for employee participation should be permitted to develop.
4. Where stakeholders participate in the corporate governance process, they should
have access to relevant, sufficient and reliable information on a timely and regular
basis.
5. Stakeholders, including individual employees and their representative bodies, should
be able to freely communicate their concerns about illegal or unethical practices to
the board and to the competent public authorities and their rights should not be
compromised for doing this.
6. The corporate governance framework should be complemented by an effective,
efficient insolvency framework and by effective enforcement of creditor rights.
 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.

1. Information should be prepared and disclosed in accordance with high quality

standards of accounting and financial and non-financial reporting.
2. An annual audit should be conducted by an independent, competent and qualified,
auditor in accordance with high-quality auditing standards in order to provide an
external and objective assurance to the board and shareholders that the financial
statements fairly represent the financial position and performance of the company in
all material respects.
3. External auditors should be accountable to the shareholders and owe a duty to the
company to exercise due professional care in the conduct of the audit.
4. Channels for disseminating information should provide for equal, timely and cost-
efficient access to relevant information by users.
 The responsibilities of the board

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.

1. Board members should act on a fully informed basis, in good faith, with due diligence
and care, and in the best interest of the company and the shareholders.
2. Where board decisions may affect different shareholder groups differently, the board
should treat all shareholders fairly.
3. The board should apply high ethical standards. It should take into account the
interests of stakeholders.
4. The board should be able to exercise objective independent judgement on corporate
affairs.
5. When employee representation on the board is mandated, mechanisms should be
developed to facilitate access to information and training for employee
representatives, so that this representation is exercised effectively and best
contributes to the enhancement of board skills, information and independence