CG - Combined (Pre Finals)

VI SEM CORPORATE GOVERNANCE
MODULE 1
CONCEPTUAL FRAMEWORK OF CORPORATE GOVERNANCE
Conceptual Framework Of Corporate Governance: Meaning; theories and models of

Corporate Governance; various approaches to business ethics; ethical theories; ethical
governance; code of ethics; Key managerial Personnel (KMP)
Learning Outcomes of the Module
 To learn the Conceptual Framework of Corporate Governance

 To know the implications of models and theories of Corporate Governance on
the Society in General
 To analyze role of ethics in Business
MEANING OF CORPORATE GOVERNANCE
• Corporate Governance involves a set of relationships and the networks between

a company’s management, its board of directors, its shareholders and
stakeholders.
FEATURES
• Corporate Governance refers to the way a corporation is governed.

• It is the technique by which companies are directed and managed. It means
carrying the business as per the stakeholders’ desires.
• Corporate Governance is actually conducted by the board of Directors and the
concerned committees for the company’s stakeholder’s benefit.
• Corporate Governance is all about balancing individual and societal goals, as
well as, economic and social goals.
Note: This module is strictly for Private circulation only- JU-CMS. This Module is compiled by Sunitha.B.K and
Abhishek Do not upload on any websites
• Corporate governance is the structure and the associations which govern

corporate direction and performance. The board of directors have dominant role
in corporate governance. Its relationship to the other primary participants,
typically shareholders and management, is critical.
• Other members include employees, customers, suppliers, and creditors. The
corporate governance framework also depends on the legal, regulatory,
institutional and ethical environment of the community.
• Usually, corporate governance is described as the host of legal and non-legal
principles and practices affecting control of publicly held business firms.
• Broadly speaking, corporate governance affects not only who controls publicly
traded corporations but also the allocation of risks and returns from the firm's
activities among the various contributors in the firm, including stockholders and
managers as well as creditors, employees, customers, and even societies.
VALUES OF CORPORATE GOVERNANCE
BENEFITS OF CORPORATE GOVERNANCE

 Enhanced Performance- helps a company improve overall performance. Without
corporate governance, a company tends to be weak and sluggish.
 Access to Capital- The better corporate governance a company has, the more
easily it can access outside capital that the business can use to fund its projects.
Since corporate governance includes major shareholders, it connects investors
with the business itself, and these investors use their resources and contacts to
support the company monetarily. Shareholder wealth creation assured
 Better Standards- Corporate governance makes many decisions about business

operations, but one of the most important decisions involves corporate
standards.
 Standards affect the quality of products and the goals that the business has in
technology, customer service, and marketing.
 Better Talent Utilization- With a strong corporate governance structure, people
can find positions that utilize their talents more effectively, and the board of
directors and top leaders of the business are always looking to add more talented
people to their numbers.
STAKEHOLDERS IN CORPORATE GOVERNANCE
STAKEHOLDERS GOVERNING BODIES IN CORPORATE GOVERNANCE
PRINCIPLES OF CORPORATE GOVERNANCE
 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 openly and effectively
communicating information and by encouraging shareholders to participate in
general meetings.
 Interests of other stakeholders:- Organizations should recognize that they have
legal, contractual, social, and market driven obligations to non-shareholder
stakeholders, including employees, investors, creditors, suppliers, local
communities, customers, and policy makers.
 Role and responsibilities of the board:-- The board needs sufficient relevant
skills and understanding to review and challenge management performance. It
also needs adequate size and appropriate levels of independence and
commitment
 Integrity and ethical behavior:- Integrity should be a fundamental requirement
in choosing corporate officers and board members. Organizations should
develop a code of conduct for their directors and executives that promotes ethical
and responsible decision making.
 Disclosure and transparency:- Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide
stakeholders 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.
Models of Corporate Governance
Corporate governance is the process by which large companies are run. There are
various different models that are applied across the world. There is disagreement over
which is the best or most effective model as there are different advantages and
disadvantages with each model. Methods are developed according to the laws and
other factors specific to the country of origin.
Anglo-US Model
The Anglo-US model is based on a system of individual or institutional shareholders

that are outsiders of the corporation. The other key players that make up the three sides
of the corporate governance triangle in the Anglo-US model are management and the
board of directors. This model is designed to separate the control and ownership of any
corporation. Therefore the board of most companies contains both insiders (executive
directors) and outsiders (non-executive or independent directors). Traditionally,
though, one person holds the position of CEO and chairman of the board of directors.
This concentration of power has led many companies to include more outside directors
now. The Anglo-US system relies on effective communication between shareholders,
management and the board with important decisions being put to the vote of the
shareholders.
Japanese Model
The Japanese model involves a high level of ownership by banks and other affiliated
companies and "keiretsu," industrial groups linked by trading relationships and cross-
shareholding. The key players in the Japanese system are the bank, the keiretsu (both
major inside shareholders), management and the government. Outside shareholders
have little or no voice and there are few truly independent or outside directors. The
board of directors is usually made up entirely of insiders, often the heads of the
different divisions of the company. However, remaining on the board of directors is
conditional on the company& continuing profits, therefore the bank or keiretsu may
remove directors and appoint its own candidates if a company& profits continue to fall.
Government is also traditionally influential in the management of corporations through
policy and regulations.
German Model
As in Japan, banks hold long-term stakes in corporations and their representatives serve
on boards. However they serve on boards continuously, not just during times of
financial difficulty as in Japan. In the German model, there is a two-tiered board system
consisting of a management board and a supervisory board. The management board is
made up of inside executives of the company and the supervisory board is made up of
outsiders such as labor representatives and shareholder representatives. The two boards
are completely separate, and the size of the supervisory board is set by law and cannot
be changed by the shareholders. Also in the German model, there are voting right
restrictions on the shareholders. They can only vote a certain share percentage
regardless of their share ownership.
Indian model
The model of corporate governances found in India is a mix of the Anglo-American and
German models. This is because in India, there are three types of Corporation viz.
private companies, public companies and public sectors undertakings (which includes
statutory companies, government companies, banks and other kinds of financial
institutions). Each of these corporations has a distinct pattern of shareholding. For e.g.
in case of companies, the promoter and his family have almost complete control over
the company. They depend less on outside equity capital. Hence in private companies
the German model of corporate governance is followed.
THEORIES OF CORPORATE GOVERNANCE

1. Agency Theory
Agency theory having its roots in economic theory was exposited by Alchian and
Demsetz (1972) and further developed by Jensen and Meckling (1976). Agency theory is
defined as ‚the relationship between the principals, such as shareholders and agents
such as the company executives and managers‛.
The literature on agency theory addresses three types of problems that could transpire
from the separation of ownership and management, which might consequently affect
firm value. They are the effort problem, the assets’ use problem and differential risk
preferences problem. The effort problem concerns whether or not managers apply
proper effort in managing corporations so as to maximize shareholders’ wealth.
Problems arise because principals are not able to determine if the managers are
performing their work appropriately. Managers may not exert the same high effort
levels required for firm value maximization as they would if they owned the firm.
The use of assets problem concerned the insiders who control corporate assets. They
might abuse these assets for purposes that are harmful to the interests of shareholders
such as diverting corporate assets, claiming excessive salaries and manipulating
transfer prices of assets with other entities they control. The differential risk preferences
problem arises because the principal and managers have different views on risk taking.
Managers may not act in the best interest of shareholders and may have different
interests and risks preferences. For example, managers have a wider range of economic
and psychological needs (such as to maximize compensation, security, status and to
boost their own reputation), which may be adversely affected by a project that increases
a firm’s total risk or has rewards in the longer-term. This may result in managers being
too cautious in making investments and thus failing to maximize shareholders’ wealth.
Hence, agency theorists recommended that corporate governance mechanisms are

needed to reduce these agency conflicts and to align the interests of the agent with those
of the principal. These mechanisms include incentive schemes for managers which
reward them financially for maximizing shareholder interests. Such schemes typically
include strategies whereby senior executives acquire shares, conceivably at a bargain
price, thus aligning financial interests of executives with those of shareholders. Other
mechanisms include fixing executive compensation and levels of benefits to
shareholders returns and having part of executive compensation deferred to the future
to reward long-run value maximisation of the corporation.
Stewardship Theory
Stewardship theory has its roots from psychology and sociology and is defined by
Davis, Schoorman & Donaldson (1997) as ‚a steward protects and maximises
shareholders wealth through firm performance, because by so doing, the steward’s
utility functions are maximised‛. In this perspective, stewards are company executives
and managers working for the shareholders, protects and make profits for the
shareholders.
Unlike agency theory, stewardship theory assumes that managers are stewards whose
behaviors are aligned with the objectives of their principals. The theory argues and
looks at a different form of motivation for managers drawn from organizational theory.
Managers are viewed as loyal to the company and interested in achieving high
performance. The dominant motive, which directs managers to accomplish their job, is
their desire to perform excellently. Specifically, managers are conceived as being
motivated by a need to achieve, to gain intrinsic satisfaction through successfully
performing inherently challenging work, to exercise responsibility and authority, and
thereby to gain recognition from peers and bosses. Therefore, there are non-financial
motivators for managers.

The theory also argues that an organization requires a structure that allows
harmonization to be achieved most efficiently between managers and owners. In the
context of firm’s leadership, this situation is attained more readily if the CEO is also the
chairman of the board. This leadership structure will assist them to attain superior
performance to the extent that the CEO exercises complete authority over the
corporation and that their role is unambiguous and unchallenged. In this situation,
power and authority are concentrated in a single person. Hence, the expectations about
corporate leadership will be clearer and more consistent both for subordinate managers
and for other members of the corporate board. Thus, there is no room for uncertainty as
to who has authority or responsibility over a particular matter. The organization will
enjoy the benefits of unity of direction and of strong command and control.
2. Stakeholder Theory
Stakeholder theory, states that a company owes a responsibility to a wider group of

stakeholders, other than just shareholders. A stakeholder is defined as any
person/group which can affect/be affected by the actions of a business. It includes
employees, customers, suppliers, creditors and even the wider community and
competitors.
Edward Freeman, the original proposer of the stakeholder theory, recognised it as an

important element of Corporate Social Responsibility (CSR), a concept which recognises
the responsibilities of corporations in the world today, whether they be economic, legal,
ethical or even philanthropic. Nowadays, some of the world’s largest corporations claim
to have CSR at the centre of their corporate strategy. Whilst there are many genuine
cases of companies with a ‚conscience‛, many others exploit CSR as a good means of
PR to improve their image and reputation but ultimately fail to put their words into
action.
3. Resource Dependency Theory

The basic proposition of resource dependence theory is the need for
environmental linkages between the firm and outside resources. In this
perspective, directors serve to connect the firm with external factors by co-opting
the resources needed to survive. This means that boards of directors are an
important mechanism for absorbing critical elements of environmental
uncertainty into the firm. Environmental linkages could reduce transaction costs
associated with environmental interdependency. The organization’s need to
require resources leads to the development of exchange relationships between
organizations. Further, the uneven distribution of needed resources results in
inter-dependent organizational relationships. Several factors would appear to
intensify the character of this dependence, e.g. the importance of the resource(s),
the relative shortage of the resource(s) and the extent to which the resource(s) is
concentrated in the environment.
In this context, many of the resources are directly and indirectly controlled by the
government. Hence, appointing directors that have influence and access to key
policy-makers and government is seen as an important strategy for survival
because of their knowledge and prestige in their professions and communities,
firms are able to extract useful resources. This could enhance the firm's
legitimacy in society and to help it achieve their goals and improve performance.
Through the resource dependence role, directors may also bring resources such
as specialized skills and expertise. This concept has important implications for
the role of the board and its structure, which in turn affects performance. In
summary, resource dependence theory provides a convincing justification for the

creation of linkages between the firm and its external environment through
boards as firms that create linkages could improve their survival and
performance.
4. Transaction Cost Theory
Transaction cost theory was first initiated by Cyert and March (1963) and later
theoretical described and exposed by Williamson (1996). Transaction cost theory was an
interdisciplinary alliance of law, economics and organizations. This theory attempts to
view the firm as an organization comprising people with different views and objectives.
The underlying assumption of transaction theory is that firms have become so large
they in effect substitute for the market in determining the allocation of resources. In
other words, the organization and structure of a firm can determine price and
production. The unit of analysis in transaction cost theory is the transaction. Therefore,
the combination of people with transaction suggests that transaction cost theory
managers are opportunists and arrange firms’ transactions to their interests
(Williamson, 1996).
5. Political Theory
Political theory brings the approach of developing voting support from shareholders,
rather by purchasing voting power. Hence having a political influence in corporate
governance may direct corporate governance within the organization. Public interest is
much reserved as the government participates in corporate decision making, taking into
consideration cultural challenges (Pound, 1993). The political model highlights the
allocation of corporate power, profits and privileges are determined via the
governments’ favor. The political model of corporate governance can have an immense
influence on governance developments. Over the last decades, the government of a
country has been seen to have a strong political influence on firms. As a result, there is
an entrance of politics into the governance structure or firms’ mechanism (Hawley and
Williams, 1996).
Ethics
Definition: The Ethics is the branch of philosophy that deals with the principles of
morality and the well-defined standards of right and wrong that prescribe the human
character and conduct in terms of obligations, rights, rules, benefit to society, fairness,
etc. In other words, the ethics encompass the human rights and responsibilities, the
way to lead a good life, the language of right and wrong, and a difference between good
and bad. This means it is concerned with what is right or wrong for the individuals and
society. The term “ethics” have been derived from the Greek word “ethos” which
means character, habit, disposition or custom.
Business Ethics
Definition
Business Ethics is a form of applied ethics that examines ethical rules and principles
within a commercial context; the various moral or ethical problems that can arise in a
business setting; and any special duties or obligations that apply to persons who are
engaged in commerce.
General business ethics would cover the following:
1. Determining the fundamental purpose of the organisation or the philosophy of

business.
2. Corporate Social Responsibility (CSR), can be understood in terms of over-all
corporate responsibility, but with greater stress laid upon the obligations a company
has to the community, particularly with respect to charitable activities and
environmental stewardship for instance.
3. Issues regarding the moral rights and duties between a company and its
shareholders.
4. Ethical issues concerning relations between different companies: e.g. hostile take-
overs, industrial espionage etc.
5. Corporate governance issues.
6. Political contributions and relationships that will be maintained and pursued.
7. The position that the organisation will take on legal reform.
8. Issues relating to the misuse of corporate ethics policies as marketing instruments.
Professional or Business ethics

Professional/ Business ethics covers the myriad of practical ethical problems and
phenomena which arise out of specific functional areas of companies or in relation to
recognized business professions. For instance, the ethics of finance and accounting, of
human resource management, of sales and marketing, of production and of intellectual

property, knowledge and skills.
Ethics of finance and accounting would cover the following sorts of issues:
1. Policies and issues relating to creative accounting, earnings management,

misleading financial analysis etc.
2. Issues and polices on avoiding of insider trading, securities fraud, forex scams and
criminal practices generally.
3. In recent years there has been concerns expressed on excessive payments made to
corporate CEO's.
4. Bribery, kickbacks and facilitation payments: while these may be in the (short-term)
interests of the company and its shareholders, these practices may be anti-
competitive or offend against the values of society.
Ethics of human resource management covers the ethics of human resource management
(HRM) and covers those ethical issues arising around the employer-employee relationship, such
as the rights and duties owed between employer and employee. Some of the important issues
under this category are:
1. Discrimination issues including discrimination on the basis of age (ageism), gender,

race, religion, disabilities, weight and attractiveness.
2. Issues surrounding the representation of employees and the democratization of the
workplace: relations with worker unions and policies on strikes.
3. Issues affecting the privacy of the employee: workplace surveillance like email and
phone tapping of employees, health tests, drug testing etc.
4. Issues relating to whistle-blowing.
5. Issues relating to the fairness of the employment contract and the balance of power
between employer and employee: slavery, indentured servitude, employment law
etc.
6. Occupational safety and health.
Ethics of sales and marketing deals with questions like when marketing goes beyond the mere
provision of information about (and access to) a product and seeks to manipulate people’s values
and behaviour. To some extent society regards this as acceptable, but where should the ethical
line to be drawn?. Some of the issues under this sub-category are:
1. Pricing issues like price fixing, price discrimination, price skimming.

2. Anti-competitive practices: these can include but go beyond pricing tactics to cover
issues such as manipulation of loyalty and supply chains.
3. Ethical acceptability and propriety of specific marketing strategies like greenwash,
bait and switch, shill, viral marketing, spam (electronic/email), pyramid scheme,
planned obsolescence etc.
4. Content of advertisements: attack ads, subliminal messages, sex in advertising etc.
5. Ethical propriety of marketing to Children and marketing in schools.
6. Dealing with black markets and grey markets.
Ethics of production is an area of business ethics that deals with the duties of a company to
ensure that products and production processes do not cause harm. Some of the more acute
dilemmas in this area arise out of the fact that there is usually a degree of danger in any product
or production process and it is difficult to define a degree of permissibility, or the degree of
permissibility may depend on the changing state of preventative technologies or changing social
perceptions of acceptable risk. Some of the issues grappled with are:
1. Defective, addictive and inherently dangerous products and services.

2. Ethical relations between the company and the environment: pollution,
environmental ethics, carbon emissions trading etc
3. Ethical problems arising out of new technologies: genetically modified food, mobile
phone radiation and health.
4. Product testing ethics: animal rights and animal testing, use of economically
disadvantaged groups (such as students) as test objects.
Ethics of intellectual property, knowledge and skills deals with the fact that these
are valuable but not easily "own able" objects. Nor is it obvious who has the greater
rights to an idea: the company who trained the employee or the employee
themselves? The country in which the plant grew, or the company which discovered
and developed the plant's medicinal potential? As a result, attempts to assert

ownership and ethical disputes over ownership arise and lead to some of the
following issues:
1. Patent infringement, copyright infringement, trademark infringement issues.

2. Misuse of the intellectual property systems to stifle competition: patent misuse,
copyright misuse, patent troll, submarine patent etc.
3. The notion of intellectual property itself has been criticized on ethical grounds.
4. Employee raiding issues: the practice of attracting or weaning away or do poaching
of key employees away from a competitor to take unfair advantage of the
knowledge or skills they may possess.
5. The practice of employing all the most talented people in a specific field, regardless
of need, in order to prevent any competitors from employing them.
6. Bioprospecting (ethically done) and biopiracy (unethical).
7. Business intelligence and industrial espionage.
International business ethics was not regarded as important until the late 1990's, and became
relevant as a consequence of the international developments of that decade. New practical issues
arose out of the international context of business. Theoretical issues such as cultural relativity of
ethical values receive more emphasis in this category of ethical issues. Other, older issues can be
grouped here as well as follows:
1. The search for universal values as a basis for international commercial behaviour.
2. Comparison of business ethical traditions in different countries.
3. Comparison of business ethical traditions from various religious perspectives.
4. Ethical issues arising out of international business transactions; e.g. bioprospecting
and biopiracy in the pharmaceutical industry; the fair trade movement; transfer
pricing.
5. Issues such as globalisation and cultural imperialism (particularly relevant for
media companies in Hollywood for instance).
6. Varying global standards on labour practices - e.g. the use and social acceptance of
child labour in some countries and it’s criminality in some others.
7. The way in which multinationals take ruthless advantage of international
differences, such as outsourcing production (e.g. clothes) and services (e.g. call
centres) to low-wage countries thereby causing job losses in the original countries of
production and consumption.
8. The permissibility of international commerce with pariah states or states that are
regarded as supporters or sponsors of terrorism for instance.
Ethics of economic systems is not really regarded as a part of, but only indirectly related, to
business ethics. Ultimately businesses support or oppose one political economic system over
another by participation in it thereby supporting it and in other ways like through political
contributions and payments to politicians for instance. This is the realm of ethics applied to the
business world where business ethicists venture into the fields of political economy and political
philosophy, focusing on the rights and wrongs of various systems for the distribution of
economic benefits.
Codes of Ethics
Written Codes of Conduct and Ethics are a tool of ethics just like other tools like
appointing ethics officers or running ethics training programs for employees. An ethical
code is also styled as a code of professional responsibility, which may dispense with
difficult issues of what behaviour is ethical.
A written code of ethics is a formal statement of the organization's values on certain

ethical and social issues. Some set out general principles about an organization's beliefs
on matters such as quality, employees or the environment. Others set out the
procedures to be used in specific ethical situations - such as conflicts of interest or the
acceptance of gifts for instance, and lays down the procedures to determine whether a
violation of the code of ethics occurred and what remedies should be imposed. The
effectiveness of such codes of ethics depends on the extent to which to management
supports them with sanctions and rewards. Violations of a private organization's code
of ethics usually can subject the violator to the organization's remedies (in an
employment context, this can mean termination of employment; in a membership
context, this can mean expulsion). Of course, certain acts that constitute a violation of a
code of ethics may also violate a law or legal regulation and can then be punished by
the appropriate governmental organ.
Ethics Codes Don't Make People Ethical
Michael Josephson has the following warning for those who may value a code of
ethics too highly and think it goes a long way in making people ethical. He comments:
‘ …..ethics codes don't make people ethical. They don't make bad people good. Nor
do they make people with poor judgment wise. An ethics code would not have
prevented most of the objectionable behaviour we've seen in recent years.
You see, there are two aspects to ethics: discernment (knowing right from wrong)
and discipline (having the moral will power to do what's right). A code can help define
what's right and acceptable and provide a basis for imposing sanctions on those who
don't follow it. But unless it reinforces an established ethical culture, it won't do much
to assure that people do what's right.
It's proper and prudent to clarify obligations under existing laws and establish
standards of conduct in areas not governed by law. In effect, ethics codes transform one
perspective of a moral obligation into a binding rule. For example, it's helpful to set
clear parameters for the use of e-mails, private information or company property, hiring
or doing business with relatives and the acceptance of gratuities. In more complex
cases, codes can mandate disclosure or certification and forbid or restrict transactions
such as loans and reimbursements that could create real or apparent conflicts of
interest. To the extent we need more clarity we need more codes. To the extent we need
more character, we need a lot more.’
Various Approaches to Business Ethics

Several philosophers have propounded different types of ethical theories which are
listed below
1. Teleological Ethical Theories
2. Deontological Ethical Theories
3. Virtue Ethical Theories
4. System Development Ethical Theories
Teleological Ethical Theories

Definition: The Teleological Ethical Theories are concerned with the consequences of
actions which means the basic standards for our actions being morally right or wrong
depends on the good or evil generated.
Types of Teleological Ethical Theories
1. Ethical Egoism: The ethical egoism is a teleological theory that posits, an action is good
if it produces or is likely to produce results that maximize the person’s self-interest as
defined by him, even at the expense of others. It is based on the notion that it is always
moral to promote one’s own good, but at times avoiding the personal interest could be a
moral action too. This makes the ethical egoism different from the psychological
egoism which holds that people are self-centered and self-motivated and perform
actions only with the intention to maximize their personal interest without helping
others, thereby denying the reality of true altruism (sacrificing one’s personal interest in
the welfare of others).
2. Utilitarianism: The Utilitarianism theory holds that an action is good if it results
in maximum satisfaction for a large number of people who are likely to get affected by
the action. Suppose a manager creates an annual employee vacation schedule after
soliciting the vacation time preferences from all the employees and honor their
preferences, then he would be acting in a way that shall maximize the pleasure of all the
employees.
3. Eudaimonism: Eudaimonism is a teleological theory which posits, that an action is
good if it results in the fulfilment of goals along with the welfare of the human
beings. In other words, the actions are said to be fruitful if it promotes or tends to
promote the fulfilment of goals constitutive of human nature and its happiness.
Suppose manager enforce employee training and knowledge standards at work, which
are natural components of human happiness.
Thus, a moral theory that maintains that the rightness or wrongness of actions solely
depends on their consequences is called as a teleological theory.
Deontological Ethical Theories

Definition: The Deontological Ethical Theories hold that the actions are morally right
independent of their consequences.
Types of Deontological Ethical Theories
1. Negative and Positive Rights Theories: The negative rights theory asserts that an
action is right if it protects the individual from harm or unwarranted interference from
other people or the government while exercising his right. Suppose an individual has
the right to use, sell or dispose of his personal car then the other persons have the
correlative duty to not to prevent him from doing whatever he want to do with his car.
The positive rights theory posits that an action is right if it provides or tends to provide
an individual with anything that he needs to exist. Suppose an individual has the right
to adequate health care services to survive this means other agents, perhaps the
government has the correlative duty to provide him with the necessary health care
services.
2. Social Contract Theories: The social contract theories posit that people contract with
each other to abide by the moral and political obligations towards the society in which
they live. This theory is based on the notion that if there is no order and law in the
society, then people will have unlimited freedoms, i.e. the right to all things and will
resort to all misdeeds such as rape, murder, plunder, etc.
Thus, there will be an endless ‚war of all against all‛ and in order to overcome such
situation people enter into an agreement with each other to give up some of their
freedoms and accept the obligation to respect and safeguard the rights of the others.
Thus, an individual gains the civil rights that constitute the social benefits that he is
entitled to the extent he fulfils his due obligations towards the society.
3. Social Justice Theories: The social justice theories state that the action will be
considered right if it confirms the fairness in the distributive, retributive and
compensatory dimensions of cost and rewards. The distributive dimension means the
perceived fairness in the distribution of social benefits and burden among the group
members. The retributive dimension considers the punishment proportionate to the
extent of crime while the compensatory dimension is the way people are compensated
in relation to the injuries inflicted upon them.
For example, if the second-hand smoke hurts the passive or non-smokers at work, there
should be a fair distribution of health risk burden and the proportionate punishment
should be imposed on the party responsible for it. Also, the affected parties shall be
compensated to the extent they have suffered the injuries. Thus, a theory asserts that the
rightness or wrongness of actions does not depend on the goodness or badness of their
consequences.
Virtue Ethical Theories

Definition: The Virtue Ethical Theories hold that ethical value of an individual is
determined by his character. The character refers to the virtues, inclinations and
intentions that dispose of a person to be ready to act ethically.
Major Types of Virtue Ethical Theories
1. Individual Character Ethics: The individual character ethics hold that the identification
and development of noble human traits help in determining both the instrumental and
intrinsic value of human ethical interactions. These noble traits are courage, self-
discipline, prudence, gratitude, wisdom, sincerity, understanding, benevolence, etc.
2. Work Character Ethics: The identification and development of reflective, practitioner,
noble traits at works such as creativity, honesty, loyalty, honor, trustworthiness, civility,
dependability, shared work pride, empathy, etc. determine the intrinsic and
instrumental ethical quality of work life.
For example, Suppose a manager is facing global competition, huge productivity
expectations and requires an effective teamwork, then his work character behavior
should be such that he is considered as a role model for task accomplishment and his
considerate relations with everyone at the workplace.
3. Professional Character Ethics: The professional character ethics hold that self-
regulation, loyalty, impartial judgment, altruism, truthfulness, public service determine
the intrinsic and instrumental ethical quality of an individual associated with some
communities.
For example, if a business manager of a firm of doctors detects the double billing for the
OT’s services, then his ethical professional behavior will enforce him to inform about
this to the doctors-in-charge to get the problem solved. And in case the problem still
persists, then he will act as a whistleblower and inform about this to the public outside
and will not be silent until the problem is rectified. He does all this because of his
loyalty towards the professional code of ethics. Thus, the Virtue Ethical Theories are
based on the notion that developing a sound character is what the life is all about. The
character builds a substantive moral foundation for one’s actions.
System Development Ethical Theories

Definition: The System Development Ethical Theories state that the extent to which
organization system is sensitive to the need to develop a work culture supportive of
ethical conduct determines the ethical value of actions.
Major Types of System Development Ethical Theories
1. Personal Improvement Ethics: The personal improvement ethics posits that the action
is good if it is intended to promote the individual’s personal responsibility for the
continuous learning, improvement, holistic development and moral excellence.
For example, the employees in order to gain expertise in their work enroll in the
company’s training programmes with a view to improving themselves as well as the
organization’s functioning.
2. Organizational Ethics: The organizational ethics hold that the action is right if it
confirms the development of the formal and informal organizational processes which in
turn enhances the procedural outcomes, respectful caring, innovation in ethical work
culture and systematic justice.
For example, If there is no employee complaints Redressal system in the organization

and also the employees do not have a voice system for feedback then it is the
responsibility of the manager to implement such system and give a voice to the
employee. By doing so, the manager supports individual and organizational moral
development and reduce the intense resistance to the overall moral development.
3. Extraorganizational Ethics: The extra organizational ethics asserts that the action is
right if it promotes or tends to promote the collaborative partnerships and respect the
global and domestic constituencies representing the diverse political, economic, legal,
social ecological and philanthropic concerns that affect the firm.
For example, it is the social responsibility of a manager to consider all the factors
external to the organization such as political, legal, social, environmental, etc. that can
affect the organizational business processes.
Thus, the managers who cautiously assess the moral conduct of his employees and
retribute (punish) their wrong doings then he is said to have successfully developed the
system of ethics. In case, the manager relies exclusively on the character of his
employees and do not implement morally supportive Intra-organizational systems and

stable processes; then the organization is exposed to the future ethical risk.
Further, ethics can be classified into three major study areas:
 Meta-ethics is concerned with the theoretical meaning of morality and ethical
principles, i.e. what we understand when we talk about what is right or wrong.
 Normative ethics deals with the content of moral judgments i.e. determining the moral
course of action and includes the criteria for what is right or wrong, good or bad, kind
or evil, etc.
 Applied ethics is concerned with the actions which a person is obliged to perform in a
particular situation.
Thus, ethics are the well-defined standards that impose obligations to refrain human
beings from any misconduct, which could be harmful to the self as well as for the
society.
KEY MANAGERIAL PERSONNEL

WHO IS A KEY MANAGERIAL PERSONNEL?
The definition of the term Key Managerial Personnel is contained in Section 2(51) of the
Companies Act, 2013. The said Section states as under:
“key managerial personnel”, in relation to a company, means—
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed;
WHICH COMPANIES ARE MANDATORILY REQUIRED TO APPOINT KEY

MANAGERIAL PERSONNEL
As per Section 203 of the Companies Act, 2013 read with the Companies (Appointment
and Remuneration of Managerial Personnel) Rules, 2014, the following class of
Companies, namely
 Every listed company, and

 Every other public company having paid up share capital of Rs. 10 Crores or more
Further, as per recently notified Rule 8A of the Companies (Appointment and

Remuneration of Managerial Personnel) Rules, 2014, a company other than a company
which is required to appoint a whole time key managerial personnel as discussed above
and which is having paid up share capital of Rs. 5 Crores or more shall have a whole
time Company Secretary.
MANNER OF APPOINTMENT OF KMP
 Every whole-time key managerial personnel of a company shall be appointed by means

of a resolution of the Board containing the terms and conditions of the appointment
including the remuneration.
 If the office of any whole-time key managerial personnel is vacated, the resulting
vacancy shall be filled-up by the Board at a meeting of the Board within a period of 6
months from the date of such vacancy.
RESTRICTIONS REGARDING APPOINTMENT OF KEY MANAGERIAL
PERSONNEL:
♣ Same person not to act as Chairman and MD/CEO
The same person should not act as both Chairman and Managing Director or Chief
Executive Officer of the Company.
However, in the following circumstances, the above restriction will not apply:
 the articles of the company contain provision for appointment of same

person, or
 the company carries only a single business, or
 the company is engaged in multiple businesses and has appointed one or
more Chief Executive Officers for each such business as may be notified
by the Central Government
♣ Whole time KMP not to hold office in more than one company
PENALTY FOR CONTRAVENTION
On Company: Fine which shall not be less than Rs. 1,00,000/- but
which may extend to Rs. 5,00,000/-
On every director and key Fine which may extend to Rs. 50,000/- and where
managerial personnel of the the contravention is a continuing one, with a
company who is in default further fine which may extend to Rs. 1,000/- for
every day after the first during which the
contravention co
Why Kingfisher Airlines Failed?
Vijay Mallya, the owner of Kingfisher was an experienced businessman in the sector of
breweries. He has acquired fame as a liquor baron. In spite of his skills in that sector, he
lacked experience when it came to managing businesses such as airlines company. Due
to this, he was unable to provide inspiring and effective leadership to the Kingfisher
team. Two decisions made by him, within a couple of years after launching KFA, have
utmost significance.
Acquisition of Air Deccan

The first was the acquisition of Air Deccan which was a no-frills service. Though KFA
obtained all the aircraft of Air Deccan and its market, the former also inherited its
losses.
Expansion into the International Arena
Another decision that impacted the efficiency of KFA was the sudden launch of
international services. Immediately after acquiring Air Deccan, KFA entered the
international arena. This entry into a large market would have been ideal after
consolidating the domestic service which had by then captured a large share of the
Indian market.
KFA’s international venture was a thorough failure. Indeed, it was destined to be so.
How could a man who lacked experience in running domestic airline survive in the
rough waters of international competition? The international skies were dominated by
the likes of Emirates and Etihad and each had its diehard fans. Breaking their monopoly
was too difficult a task for the nascent KFA, and its international venture misfired
shortly after its launch.
Lack of Stability at the Apex Level of Management
Another reason attributed to the decline and downfall of KFA is the lack of continuity at
the apex level of management. As stated earlier, the owner of KFA was a greenhorn in
the airline business, and it was the CEO who guided its course. But no CEO remained
with KFA for more than a year. If KFA appointed an experienced CEO like Gopinath of
Air Deccan and kept him for a full tenure of five years, things would have been
somewhat different.
Mallay’s business interests were many and desperate apart from breweries and KFA.
The breweries were managed by experienced hands, so his liquor business flourished.
KFA was not that fortunate. The owner due to his political (Vijay Mallya was a Rajya
Sabha MP) and business commitments was not able to give KFA the attention it
needed.
Switching from Premium Class Airline to the Low Budget Segment
KFA took off as a premium class airline catering to the needs of luxury-loving business
executives and politicians. It built up its brand systematically over a short period of
time. But it lost its sheen when its switched to the low-cost segment.
Sailing in the low-cost segment was not smooth. The segment was dominated by
players like Indigo, Spicejet and others. It was difficult, especially in the domestic
sector. KFA faced stiff competition, and its dream of making a fast buck lay shattered.
KFA’s service deteriorated over time, and its customer shifted loyalties to better
airlines.
The downfall of KFA from being one of the best airlines in India is due to the lack of
Good Corporate Governance . Acquiring the loss of Air Deccan, the sudden launch of
the service into the international arena and its change in segments which gave rise to
competition are major factors which led to its shut down.
External factors such as the high cost of aviation fuel would also be responsible. KFA’s
expenditure on fuel kept mounting. This was experienced by all airlines including
KFA’s competitors, but they came up with strategies to overcome the challenge.
Reference Questions
SECTION A -2 MARKS
1. What is Corporate Governance?

2. Mention any 2 features of corporate governance.
3. Mention the values of corporate governance.
4. Mention any stakeholders of corporate governance.
5. Mention any 2 benefits of corporate governance.
6. Mention any 2 principles of corporate governance.
7. Define corporate governance.
8. Mention any 4 theories of Corporate governance.

9. What is business ethics?
10. What is code of ethics?
11. Mention the 4 approaches of Business Ethics.
12. Who are the key managerial personnel?
13. What is Japanese model of corporate governance?
14. What is German model of corporate governance?
15. Mention any 2 benefits of business ethics.
16. Define teleological ethical theory.
17. Define Deontological ethical theory.
18. Define Virtue ethical theory.
19. Define system developmental ethical theories.
20. What is the fine levied on company not following KMP norms.
SECTION B-4 MARKS
1. Briefly explain the principles of corporate governance.

2. Write a short note on Business Ethics.
3. Write a short note on Code of ethics.
4. ‚Ethics code does not make people ethical‛. Comment
5. Write a short note on Key Managerial Personnel.
6. Briefly explain the features of corporate governance.
7. Write a short note on stakeholders of corporate governance.
8. Briefly explain the benefits of Corporate governance
9. Write a note on Values in corporate governance
10. Write a note on stake holders in corporate governance.
SECTION C-10 MARKS
1. Explain the models of Corporate governance

2. Write a short note on the following
 Anglo US Model
 Japanese Model
 German Model
 Indian Model
4. Explain any 3 theories of corporate governance.
 Stewardship Theory
 Political Theory
6. Write a short on the following

 Business Ethics of Finance and Accounting
 Business Ethics of Production
 Ethics of Intellectual property
7. Explain teleological and Deontological ethical theory.
8. Explain virtue and system development ethical theory.
9. Explain ‚Corporate Governance and business ethics are mere theoretical concepts‛.
Comment
10. Bad Corporate Governance is a reason for failure of Kingfisher Airlines failure.
Comment
( Reference Questions will not mandatorily appear in final exams)
References
 S. Li and A. Nair, ‚Asian corporate governance or corporate governance in Asia?‛ Corporate Governance: An International
Review, vol. 17, no. 4, pp. 407-410, 2009.
 C. S. V. Murthy, Business Ethics and Corporate Governance, Mumbai, India, Publisher: Global Media,
2009.
 R. V. Aguilera and G. Jackson, ‚Comparative and international corporate governance,‛ Academy of
Management Annals, vol. 4, no. 1, pp. 485-556, 2010.
 M. Bhasin, ‚Audit committee mechanism to improve corporate governance: Evidence from a
developing country,‛ Modern Economy, vol. 3, no. 7, pp. 856-872, 2012.
 5 Markets Review, pp. 151-33, 2013
 Peter F. Drucker, ‘Social Needs and Business Opportunities’, in The Frontiers of Management, 1986
 http://businessjargons.com/ethical-theories.html#ixzz4xeB3v2ip
 http://aggie-horticulture.tamu.edu/syllabi/315/ethics/study.html
 https://sol.du.ac.in/mod/book/view.php?id=664&chapterid=410
 https://taxguru.in/company-law/key-managerial-personnel-companies-act-2013.html
 https://www.civilserviceindia.com/subject/General-Studies/notes/accountability-and-ethical-
governance.html
 http://www.yourarticlelibrary.com/business-management/5-different-approaches-towards-
ethical-behaviour-in-business/3443
 https://bizfluent.com/list-6710522-models-corporate-governance.html
 http://ari-glcrc.blogspot.in/2011/12/corporate-governance-theories_07.html
 http://thebusinessprofessor.com/knowledge-base/stakeholder-theory-of-corporate-governance/
 http://www.corplaw.ie/blog/bid/317212/Shareholder-Stakeholder-Theories-Of-Corporate-
Governance
 https://www.lawteacher.net/free-law-essays/company-law/corporate-governance-independant-
directors-agency-theory-company-law-essay.php
 https://www.safaribooksonline.com/library/view/business-ethics-
and/9789332511255/xhtml/c14s11.xhtml.
 https://www.aircraftnerds.com/2018/11/an-airline-that-may-never-touch-sky.html
 https://www.ethicalconsumer.org/retailers/five-unethical-companies
Module 2
Corporate Governance Framework in India: Corporate Boards and Powers,

Responsibilities Disqualifications; Regulatory Framework of Corporate governance
in India; Compensation Governance; Corporate governance in PSUs and Banks.
Whistle –Blowing and Corporate Governance: The concept of Whistle-Blowing;

Types of Whistle-Blowers; Whistle –Blower Policy; Developments in India.
Objectives of the Module
 To understand the Evolution of Corporate Governance in India

 To understand the Framework of Corporate Governance in India
 To understand the Issues of Corporate Governance in Indian Banks and Public
Sector Enterprises
 To understand the Concept of Whistle Blowing
 To the types of Concept of Whistle Blowing
 To the legislative support towards Whistle Blowing in India
CORPORATE GOVERNANCE IN INDIA: HISTORY AND EVOLUTION

There have been several major corporate governance initiatives launched in India since
the mid-1990s. The first was by the Confederation of Indian Industry (CII), India’s
largest industry and business association, which came up with the first voluntary code
of corporate governance in 1998. The second was by the SEBI, now enshrined as Clause
49 of the listing agreement. The third was the Naresh Chandra Committee, which
submitted its report in 2002. The fourth was again by SEBI — the Narayana Murthy
Committee, which also submitted its report in 2002. Based on some of the
recommendation of this committee, SEBI revised Clause 49 of the listing agreement in
August 2003. Subsequently, SEBI withdrew the revised Clause 49 in December 2003,
and currently, the original Clause 49 is in force.
The CII Code
More than a year before the onset of the Asian crisis, CII set up a committee to examine
corporate governance issues, and recommend a voluntary code of best practices. The
committee was driven by the conviction that good corporate governance was essential
for Indian companies to access domestic as well as global capital at competitive rates.
The first draft of the code was prepared by April 1997, and the final document, was
publicly released in April 1998. The code was voluntary, contained detailed provisions,
and focused on listed companies.
This module is strictly for Private circulation only. This is compiled by using the references mentioned. Compiled by
Sunitha.B.K . Do not uploaded on any internet website Page 1
Kumar Mangalam Birla Committee Report and Clause 49
The second major corporate governance initiative in the country was undertaken by
SEBI. In early 1999, it set up a committee under Kumar Mangalam Birla to promote and
raise the standards of good corporate governance. In early 2000, the SEBI board had
accepted and ratified key recommendations of this committee, and these were
incorporated into Clause 49 of the Listing Agreement of the Stock Exchanges. This
report pointed out that the issue of corporate governance involves besides shareholders,
all other stakeholders. The committee recognized that India had in place a basic system
of corporate governance and that SEBI has already taken a number of initiatives
towards raising the existing standards.
Naresh Chandra Committee Report
The Naresh Chandra committee was appointed in August 2002 by the Department of
Company Affairs (DCA) under the Ministry of Finance and Company Affairs to
examine various corporate governance issues. The Committee submitted its report in
December 2002. It made recommendations in two key aspects of corporate governance:
financial and non-financial disclosures: and independent auditing and board oversight
of management. The committee submitted its report on various aspects concerning
corporate governance such as role, remuneration, and training etc. of independent
directors, audit committee, the auditors and then relationship with the company and
how their roles can be regulated as improved.
Narayana Murthy Committee Report On Corporate Governance
The fourth initiative on corporate governance in India is in the form of the

recommendations of the Narayana Murthy committee. The committee was set up by
SEBI, under the chairmanship of Mr. N. R. Narayana Murthy, to review Clause 49, and
suggest measures to improve corporate governance standards. Some of the major
recommendations of the committee primarily related to audit committees, audit reports,
independent directors, related party transactions, risk management, directorships and
director compensation, codes of conduct and financial disclosures.
Corporate Governance voluntary guidelines 2009(MCA)
In December 2009, the Ministry of Corporate Affairs (MCA) published a new set of
Corporate Governance Voluntary Guidelines 2009, designed to encourage companies to
adopt better practices in the running of boards and board committees, the appointment
and rotation of external auditors, and creating a whistle blowing mechanism.
The guidelines are divided into the following six parts: i) Board of Directors, ii)
Responsibility of Board, iii) Audit Committee, iv) Auditors, v) Secretarial Audit vi)
Whistle Blowing mechanism
Uday Kotak Committee on Corporate Governance

21-member Committee on corporate governance headed by banker Uday Kotak has
submitted its report to the Securities and Exchange Board of India (SEBI). The panel
was constituted by SEBI in June 2017. In its suggestions it has recommended major
overhaul of corporate governance norms for listed firms.
Recommendations of Committee
Separation of the roles: Roles of chairman and managing director at listed firms
should be separated and chairmanship should be limited to only non-executive
directors. Listed firms with more than 40% public shareholding should have separate
roles of chairperson and MD/CEO with effect from April 1, 2020. After 2020, SEBI may
examine extending requirement to all listed entities with effect from 2022.
Minimum board strength: It should be increased to 6 members and at least one woman
should be appointed as independent director. At least Five board meetings for listed
companies should be held in year up from current practice of four meetings. Firms’
board should at least once a year discuss succession planning and risk management.
Independent Directors: At least half of board members to be independent directors at

listed companies, while all directors must attend at least half of board meets. Public
shareholders’ nod must be mandatory for non-executive directors over 75 years of age.
Shareholder meeting and cash flow statement: Top 100 firms by market capitalisation
should webcast shareholder meeting and all listed firms should have cash flow
statement every six months. It should be mandatory disclosure of quarterly
consolidated earnings by listed rms.
Credit ratings: Updated list of all credit ratings obtained by the listed entity must be
made available at one place, which would be very helpful for investors and other
stakeholders.
Minimum remuneration: Independent directors must get minimum remuneration of

Rs 5 lakh per annum and sitting fee of Rs 20,000-50,000 for each board meet. It should
be mandatory for firms to seek public shareholders’ approval for annual remuneration
of executive directors from promoter family if amount is above Rs 5 crore or 2.5% of

firms net profit. In case of more than one such director, same condition should apply for
aggregate annual remuneration exceeding 5% of the net profit. The approval of
shareholders must be required every year in which annual remuneration payable to
single nonexecutive director exceeds 50% of total annual remuneration payable to all
nonexecutive directors.
Risk management and IT committee: Top-500 listed companies should have risk
management committee of boards for cyber security. In addition, listed entities must
constitute an information technology committee that will focus on digital and
technological aspects.
Regulatory Framework on Corporate Governance
The Indian statutory framework has, by and large, been in consonance with the
international best practices of corporate governance. Broadly speaking, the corporate
governance mechanism for companies in India is enumerated in the following
enactments/ regulations/ guidelines/ listing agreement:
1. The Companies Act, 2013 inter alia contains provisions relating to board constitution,
board meetings, board processes, independent directors, general meetings, audit
committees, related party transactions, disclosure requirements in financial statements,
etc.
2. Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory

authority having jurisdiction over listed companies and which issues regulations, rules
and guidelines to companies to ensure protection of investors.
3. Standard Listing Agreement of Stock Exchanges: For companies whose shares are
listed on the stock exchanges.
4. Accounting Standards issued by the Institute of Chartered Accountants of India

(ICAI): ICAI is an autonomous body, which issues accounting standards providing
guidelines for disclosures of financial information. Section 129 of the New Companies
Act inter alia provides that the financial statements shall give a true and fair view of the
state of affairs of the company or companies, comply with the accounting standards
notified under s 133 of the New Companies Act. It is further provided that items
contained in such financial statements shall be in accordance with the accounting
standards.
5. Secretarial Standards issued by the Institute of Company Secretaries of India

(ICSI): ICSI is an autonomous body, which issues secretarial standards in terms of the
provisions of the New Companies Act. So far, the ICSI has issued Secretarial Standard
on "Meetings of the Board of Directors" (SS-1) and Secretarial Standards on "General
Meetings" (SS-2). These Secretarial Standards have come into force w.e.f. July 1, 2015.
Section 118(10) of the New Companies Act provide that every company (other than one
person company) shall observe Secretarial Standards specified as such by the ICSI with
respect to general and board meetings.
Key Legal Framework for Corporate Governance in India
The Companies Act, 2013
The Companies Act, 2013 ("New Companies Act"), which replaced the erstwhile
Companies Act, 1956. The New Act has greater emphasis on corporate governance
through the board and board processes. The New Act covers corporate governance
through its following provisions:
 New Companies Act introduces significant changes to the composition of the

boards of directors.
 Every company is required to appoint 1 (one) resident director on its board.
 Nominee directors shall no longer be treated as independent directors.
 Listed companies and specified classes of public companies are required to
appoint independent directors and women directors on their boards.
 New Companies Act for the first time codifies the duties of directors.
 Listed companies and certain other public companies shall be required to
appoint at least 1 (one) woman director on its board.
 New Companies Act mandates following committees to be constituted by the
board for prescribed class of companies:
o Audit committee
o Nomination and remuneration committee
o Stakeholders relationship committee
o Corporate social responsibility committee
Listing agreement – Applicable to the listed companies
SEBI has amended the Listing Agreement with effect from October 1, 2014 to align it
with New Companies Act.
Clause 49 of the Listing Agreement can be said to be a bold initiative towards

strengthening corporate governance amongst the listed companies. This Clause intends
to put a check over the activities of companies in order to save the interest of the
shareholders. Broadly, cl 49 provides for the following:
1. Board of Directors
The Board of Directors shall comprise of such number of minimum independent
directors, as prescribed. In case where the Chairman of the Board is a non-executive
director, at least one-third of the Board shall comprise of independent directors and
where the Chairman of the Board is an executive director, at least half of the Board shall
comprise of independent directors. A relative of a promoter or an executive director
shall not be regarded as an independent director.
2. Audit Committee
The Audit Committee to be set up shall comprise of minimum three directors as
members, two-thirds of which shall be independent.
3. Disclosure Requirements
Periodical disclosures relating to the financial and commercial transactions,
remuneration of directors, etc, to ensure transparency.
4. CEO/ CFO Certification
To certify to the Board that they have reviewed the financial statements and the same
are fair and in compliance with the laws/ regulations and accept responsibility for
internal control systems.
5. Report and Compliance
A separate section in the annual report on compliance with Corporate Governance,
quarterly compliance report to stock exchange signed by the compliance officer or CEO,
company to disclose compliance with non-mandatory requirements in annual reports.
ROLES AND RESPONSIBILITIES OF DIRECTORS UNDER COMPANIES ACT, 2013

WHO IS A DIRECTOR?
 An appointed or elected member of the board of directors of a company.
 He has the responsibility for determining and implementing the company’s policy.
 A company director need not
-to be a shareholder or
-an employee, and
-may hold only the office of director under the provisions of the Act.
TYPES OF DIRECTORS UNDER COMPANIES ACT 2013
 Executive Director
 Non Executive Director
 Shadow Director
 Woman Director
 Independent Director
 Resident Director
 Nominee Director
 Shareholder Director
Executive Director
The term executive director is usually used to describe a person who is both a member
of the board and who also has day to day responsibilities in respect of the affairs of the
company. Executive directors perform operational and strategic business functions such
as
 Managing people
 Looking after assets
 Hiring and firing
 Entering into contracts
Executive directors are employed by the company and paid a salary, so are protected by
employment law.
Non Executive Director

Non executive directors are not in the employment of the company. They are the
members of the Board, who normally do not take part in the day-to-day
implementation of the company policy. They are generally appointed to provide the
company with the benefits of professional expertise and outside perspective to the
board. They play an effective role in governance of listed companies, but they may or
may not be independent directors.
Shadow Director
Shadow Director is a person who is not formally appointed as a director, but in
accordance with whose directions or instructions the directors of a company are
accustomed to act.
The Companies Act, 2013 has taken care of such individuals, who are not a member of
Board of Directors, yet maintain complete control over the affairs of the company. Such
directors are circumstantially categorized under the Companies Act, 2013, as ‚Person in
accordance with whose instructions the board is accustomed to act‛ and can also be
deemed to be Director of a Company. However, in commercial phraseology, such

persons are defined as a ‚Shadow Director‛.
A Shadow Director is an ‚officer‛ within the definition of the terms in Section 2 (59) of
the Companies Act, 2013, as it includes, ‚any person in accordance with whose
directions or instructions the Board of Directors or any one or more of the Directors is or
are accustomed to act‛.
Woman Director
The Companies Act, 2013 in India recognized the importance of gender diversity and
provides for mandatory appointment of atleast one women director in the listed and
other specified class of companies. Rule 3 of Companies (Appointment and
Qualification of Directors) Rules, 2014, prescribes the following class of companies shall
appoint at least one woman director-
 Every listed company;
 Every other public company having :-
 Paid-up share capital of one hundred crore rupees or more; or
 Turnover of three hundred crore rupees or more.
Resident Director
Section 149 (3) of the Act has provided for residence of a director in India as a
compulsory i.e. every company shall have at least one director who has stayed in India
for a total period of not less than 182 days in the previous calendar year.
Independent Director
Independent Directors play a pivotal role in maintaining a transparent working
environment in the corporate regime. Independent Directors constitute such category of
Directors who are expected to have impartial and objective judgment for the proper
functioning of the company.
Section 2(47) of the Companies Act 2013 provides that ‚independent director‛ means an
independent director referred to in sub-section (6) of section 149.
Nominee Director
A nominee director belongs to the category of non-executive director and is appointed
on behalf of an interested party. Naresh Chandra Committee in its report stated that
‘nominee director’ will be excluded from the pool of directors in the determination of
the number of independent directors. Both SEBI (LODR) Regulations, 2015 and section
149(6) of the Companies Act, 2013 specifically exclude nominee director from being
considered as Independent.
Small Shareholders Director

According to Section 151 of the Companies Act, 2013 every listed company may have
one director elected by ‚small shareholders‛. For the purpose of this section, ‚small
shareholder‛ means a shareholder holding shares of nominal value of not more than
twenty thousand rupees or such other sum as may be prescribed.
Rule 7 of companies act 2013 laid down the terms and conditions for appointment of
Small Shareholder’s Director. A listed company, may upon notice of not less than 1000
or one-tenth of the total number of small shareholders, whichever is lower, have a Small
Shareholders’ Director elected by the small shareholders. A listed company may suo
moto (on its own accord) opt to have a director representing small shareholders. Thus
the Small Shareholder’s Director’s appointment is optional and made available to listed
companies only
ROLE OF DIRECTORS IN A COMPANY
A Director is part of a collective body of Directors called the Board, responsible for the
superintendence, control and direction of the affairs of the Company.
LEGAL POSITION OF DIRECTOR
a) Directors as b) Directors as c) Directors as d) Director as

Agents :A company employees When officers trustees:
as an artificial the director is  Director treated as Director is treated as
person, acts appointed as whole officers of an trustees of the
through directors time employee of company. company, money
who are elected the company then  They are liable to and property: and of
representatives of that particular certain penalties if the the powers
the shareholders directors shall be provisions of the entrusted to and
and who execute considered as companies act are not vested in them only
decision making for employee director strictly complied as trustee.
the benefit of or whole time with.
shareholders director 
DUTIES OF DIRECTORS
 Director to act in accordance with AOA.
 A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, the community and for the protection of
environment.
 A director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
 A director of a company shall not involve in a situation in which he may have a direct
or indirect interest that conflicts, or possibly may conflict, with the interest of the
company.
 A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates
 A director of a company shall not assign his office and any assignment so made shall be
void.
LIABILITIES OF DIRECTORS
The Liability of the Directors can be both joint and collective for any and every act
prejudicial to the interests of the company. Though the Director and the Company are
separate entities, under the following cases the Director may be held liable on behalf of
the Company
 Tax Liability: Unless a Director or any Past Director can prove that the non-
recovery or non-payment of Taxes are attributable as gross neglect or breach of
duty, then any present or past Director (pertaining to the time period of
defaulter) will be liable to pay the shortfall in tax amount and any penalty
associated.
 Refunding of share application or excess in share application money
 To pay for qualification shares
 Civil Liability in case of misstatement in Prospectus
 Fraudulent Business Conduct and all associated debts and contracts executed
 Failure in making disclosures as stipulated SEBI (Acquisition of Shares &
Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading)
Regulations, 1992 by the directors may attract legal proceedings by SEBI
SOME CRIMINAL LIABILITIES ASSOCIATED WITH A DIRECTORS CONDUCT

ARE AS FOLLOWS:
 Cheques Bounced or dishonored: Under Negotiable Instruments Act 1881,

signing of dishonored by a Director may lead to prosecution along with the
company
 Offences under Income Tax Act, 1961
 Offences under Labour Laws, specifically in case of Employees Provident Funds

and Miscellaneous Provisions Act, 1952 and Factories Act, 1948
DISQUALIFICATION OF DIRECTOR – COMPANIES ACT 2013

The Ministry of Corporate Affairs has started to strike-off companies that are dormant
and disqualify Directors of Companies that have not filed their MCA annual return
continuously for over three years. In this article, we look at the provisions under
Companies Act 2013 relating to disqualification of Director and its consequences.
 The Director is of unsound mind and stands so declared by a competent court.

 The Director is an undischarged insolvent.
 The Director has applied to be adjudicated as an insolvent and his application is
pending.
 The Director has been convicted by a court of any offence, whether involving
moral turpitude or otherwise and sentenced in respect thereof to imprisonment
for not less than six months and a period of five years has not elapsed from the
date of expiry of the sentence. Also any person, who has been convicted of any
offence and sentenced to imprisonment for a period of seven years or more, will
not be eligible to be appointed as a director in any company.
 An order disqualifying the Director for appointment as a director has been
passed by a court or Tribunal and the order is in force.
 The Director has not paid any calls in respect of any shares of the company held
by him, whether alone or jointly with others, and six months have elapsed from
the last day fixed for the payment of the call.
 The Director has been convicted of the offence dealing with related party
transactions under section 188 at any time during the last preceding five years.
 A company in which the Director is a part of the Board has not filed financial
statements or annual returns for any continuous period of three financial
years.
 The company has failed to repay the deposits accepted by it or pay interest
thereon or to redeem any debentures on the due date or pay interest due thereon
or pay any dividend declared and such failure to pay or redeem continues for
one year or more
Canvass of Corporate Governance Guidelines for Banks
Effective corporate governance practices are essential to achieving and maintaining

public trust and confidence in the banking system, which are critical to the proper
functioning of the banking sector and economy as a whole. Poor corporate governance
may contribute to bank failures, which can pose significant public costs and
consequences due to their potential impact on any applicable deposit insurance systems
and the possibility of broader macroeconomic implications, such as contagion risk and
impact on payment systems. In addition, poor corporate governance can lead markets
to lose confidence in the ability of a bank to properly manage its assets and liabilities,
including deposits, which could in turn trigger a bank run or liquidity crisis. Indeed, in
addition to their responsibilities to shareholders, banks also have a responsibility to
their depositors.
From a banking industry perspective, corporate governance involves the manner in

which the business and affairs of banks are governed by their boards of directors and
senior management, which affects how they function:
Set corporate objectives
 Operate the bank’s business on a day-to-day basis;
 Meet the obligation of accountability to their shareholders and take into
account the interests of other recognized stakeholders;
 Align corporate activities and behavior with the expectation that banks will
operate in a safe and sound manner, and in compliance with applicable laws
and regulations; and
 Protect the interests of depositors.
The following are the essential elements of good corporate governance in Banks
1. Transparency in Board’s processes and independence in the functioning of Boards.
The Board should provide effective leadership to the company and management for
achieving sustained prosperity for all stakeholders. It should provide independent
judgment for achieving company's objectives.
2. Accountability to stakeholders with a view to serve the stakeholders and account to
them at regular intervals for actions taken, through strong and sustained
communication processes.
3. Fairness to all stakeholders.
4. Social, Regulatory and Environmental concerns.
5. Clear and unambiguous legislation and regulations are fundamentals to effective

corporate governance.
6. A healthy management environment that includes setting up of clear objectives and
appropriate ethical framework, establishing due processes, clear enunciation of
responsibility and accountability, sound business planning, establishing clear
boundaries for acceptable behavior, establishing performance evaluation measures.
7. Explicitly prescribed norms of ethical practices and code of conduct are
communicated to all the stakeholders, which should be clearly understood and
followed by each member of the organization.
8. The objectives of the company must be clearly documented in a long-term corporate
strategy including an annual business plan together with achievable and measurable
performance targets and milestones.
9. A well composed Audit Committee to work as liaison with the management,
internal and statutory auditors, reviewing the adequacy of internal control and
compliance with significant policies and procedures, reporting to the Board on the key
issues.
10. Risk is an important element of corporate functioning and governance, which
should be clearly identified, analyzed for taking appropriate remedial measures. For
this purpose the Board should formulate a mechanism for periodic reviews of internal
and external risks.
11. A clear Whistle Blower Policy whereby the employees may without fear report to
the management about unethical behaviour, actual or suspected frauds or violation of
company’s code of conduct. There should be some mechanism for adequate safeguard
to employees against victimization that serves as whistleblowers.
Debut of Corporate Governance in Indian banks

As a prelude to institutionalize Corporate Governance in banks, an Advisory Group on
Corporate Governance was formed under the chairmanship of Dr. R.H. Patil. Following
its recommendations in March 2001 another Consultative Group was constituted in
November 2001 under the Chairmanship of Dr. A.S. Ganguly: basically, with a view to
strengthen the internal supervisory role of the Boards in banks in India. This move was
further reinforced by certain observations of the Advisory Group on Banking
Supervision under the chairmanship, Shri M.S. Verma which submitted its report in
January 2003. Keeping all these recommendations in view and the cross-country
experience, the Reserve Bank initiated several measures to strengthen the corporate
governance in the Indian banking sector.
Indian banking system consists of Public/Private sector banks having a basic difference
between them as far as the Reserve Bank’s role in governance matters relevant to
banking is concerned. The current regulatory framework ensures, by and large, uniform
treatment of private and PSBs in so far as prudential aspects are concerned. However,
some of the governance aspects of PSBs, though they have a bearing on prudential
aspects, are exempt from applicability of the relevant provisions of the Banking
Regulation Act, as they are governed by the respective legislations under which various
PSBs were set up. In brief, therefore, the approach of RBI has been to ensure, to the
extent possible, uniform treatment of the PSBs and the private sector banks in regard to
prudential regulations.
In regard to governance aspects of banking, the Reserve Bank prescribed its policy
framework for the private sector banks. It also suggested to the Government the same
framework for adoption, as appropriate, consistent with the legal and policy
imperatives in PSBs as well. Hence the endeavor is to maintain uniformity in policy
prescriptions to the best possible extent for all types of banks.
Since role of Independent Directors form the basis for effective implementation of
corporate governance in banks, it is necessary to reproduce the code of conduct
prescribed under SCHEDULE IV [section 149(7)] as prescribed in Companies Bill 2013
for the guidance to the companies.
Disclosures of the Bank for Good Corporate Governance

Corporate Governance disclosures are
1. Board Structure Strength & Size
The board of the company has an optimum combination of executive and non executive
directors with not less than fifty percent of the board comprising the non executive
directors. The number of independent directors would depend on the nature of the
chairman of the board. In case a company has a non executive chairman at least one
third of board should comprise of independent directors and in case a company has an
executive chairman of least half of board should be independent
2. Director’s Attendance in Board Meetings
Board meeting should be held at least four times in a year with a maximum time gap of
four months between any two meetings maximum attendance at board meetings
ensures good accountability and commitment of the board members
3. Audit Committee
It is required as per clause 49(II) of the listing agreement that a qualified and
independent audit committee should be set up by the board of a company which, will
enhance transparent practices.
4. Shareholder’s/Investor’s Grievances
Board committee under the chairmanship of a non-executive director should be formed
to specifically look into the redressing of shareholder complaints of this committee is
that such a committee will help focus the attention of the company on shareholder’s
grievances and sensitize the management to redressal of their grievances.
5. Remuneration Committee
A company must have a credible and transparent policy in determining and accounting
for the remuneration of the directors. The policy should avoid potential conflicts of
interest between the shareholders, the directors the management. The over-riding
principle in respect of director’s remuneration is that of openness and shareholders are
entitled to a full and clear statement of benefits available to the directors.
6. Mandatory Statutory Disclosures

S Items of Statutory Public Sector Banks Private Sector Banks
N Disclosures
1 Significant related party No Bank has entered into any No Bank has entered into any
transactions having materially significant related party materially significant related
potential conflict with transactions with its Promoters, party transactions with its
the interest of the Directors or Management, their Promoters, Directors or
company subsidiaries or relatives, etc., that may
Management, their
have potential conflict with the interest
subsidiaries or relatives, etc.,
of the Bank at large. that may have potential
conflict with the interest of
the Bank at large.
2 Board Disclosure Risk Laid down procedure to inform board Laid down procedure to
Management member about risk assessment and inform board member about
minimization for boards review reports risk assessment and
minimization for boards
review reports.
3 Shareholder Disclosed Compliance Disclosed Compliance
information on
 Appointment of
new
directors/Reapp
ointment of
retiring directors
 Quarterly result
& presentation
 Share-transfers
 Director’s
responsibility
Statement
7. Non-Mandatory Statutory Disclosures.

S Items of Statutory Public Sector Banks Private Sector Banks
N Disclosures
1 Shareholder right The quarterly / Annual Financial The quarterly / Annual
(e.g. information & half Results of all Banks are sent to Financial Results of all Banks
yearly declaration of NSE/BSE, published in are sent to NSE/BSE,
financial performance newspapers and placed on Bank’s published in newspapers and
sent to shareholders) website including highlights. placed on Bank’s website
Annual reports are also sent to the including highlights. Annual
shareholders before AGM reports are also sent to the
shareholders before AGM.
2 Evaluation of Non- Information provided in corporate Information provided in
Executive directors governance report. corporate governance report.
3 Whistle Blower Policy Information provided in corporate Information provided in
governance report. corporate governance report.
Establishment of Bank Boards Bureau to improve governance in PSU banks

In the Union Budget 2015–2016, the government announced the establishment of the
Bank Boards Bureau (BBB) to improve governance in the public sector banks (PSBs).
The BBB was established based on the recommendations of the ‚Gyan Sangam,‛ a
conclave of public sector banks (PSBs) and foreign investors (FIs) organised in the
beginning of 2015.
Corporate Governance and Public Sector Undertakings/Enterprises

Historical Roots of Public Sector Undertakings/Enterprises
The public sector in India emerged out of a mandate where the state was supposed to
lay a strong industrial base in the economy. At the time of Independence, India was a
poor country with high income inequalities, low growth in income and savings, very
poor infrastructure facilities and inadequate technological resources. The economy was
largely dominated by subsistence farming, hunger and unemployment. India needed
vast industrialization to be able to produce goods of mass consumption and several
other basic and key goods that were needed as inputs for manufacturing. India also
needed to develop infrastructure like power, telecommunications, railways and steel.
There was also a strong need to produce defense equipments and other heavy goods
like automobiles, railway coaches that were imported. Thus, a strategy of laying an
industrial base, rapid industrialization even in the backward regions of the country and
a need for import substitution led to the setting up of a vast empire of public sector
enterprises.
The reason why government had to be in business rather than encourage the private
sector enterprises to grow was because such large scale industrialization often needed
huge investment outlays with low returns. The private sector neither had the resources
at its disposal nor could be asked to make such sacrifices of its commercial interest.
Hence, the central public sector came into being. The public sector mainly dominates in
mining and mineral extraction, manufacturing of metals and other basic goods such as
fertilizers, seeds, chemicals and heavy machinery. In the services, public sector
dominates in agricultural trading, railways, airlines, telecommunication, financial
services, tourism and consultancies.
In addition to the above, the public sector has played an important role in the
achievement of constitutional goals like reducing concentration of economic power in
private hands, increasing public control over the national economy, creating a socialistic
pattern of society, etc. With all its linkages the public sector has made solid
contributions to national self-reliance
(Note: Corporate Governance Regulatory Framework/ Legal Framework for PSUs /

PSEs are same any other company in India. Department of Public Enterprises (DPES)
Guidelines are also merged to have uniformity in Governance Laws)
Additional Corporate Governance Framework for PSUs / PSEs
Presently, Besides Parliament and Ministry of Company Affairs (Companies Act), PSEs
are accountable to other authorities, such as the Comptroller and Auditor General of
India, Central Vigilance Commission, Competition Commission of India and the Right
to Information Act, etc. Besides, listed companies are governed by SEBI norms. These
checks and balances have assured high levels of transparency in PSE functioning, and
contributed to the greater investor confidence enjoyed by PSEs
Corporate Governance: Issues and Challenges of Indian PSUs / PSEs
Complex ownership and governance structure of PSEs
PSEs, although the state is a controlling shareholder, its role does not fit within the
above paradigm. At one level, the state may be considered as a single controller, but
that notion would be rather superficial. Unlike a single private controller, the state is
not a unitary actor. Different governmental bodies and agencies may carry differing
interests that may be difficult to reconcile. In that sense, the state’s position could be
akin to that of a group of controllers with no coherence in approach.
Managerial and Commercial Autonomy
Various committees and commissions set up to make in-depth studies on the public
sector have recommended autonomy. Though various governments have accepted
autonomy, it continues to elude PSUs. The question of accountability imposed by the
ministries is oppressive; there being little evidence of the often stressed need to dilute
and rationalize accountability of PSUs. While formal control by the government, as per
provisions of law or the Memoranda and Articles of Association, is very extensive
covering almost all areas of activities of enterprises, the informal control which
consumes productive time of PSU managements, inhibits their decision making, a
mockery of their autonomy and impairing their performance. If public sector reforms
have to become a reality, accountability not only of PSU managements but also for
bureaucracy and ministers should be defined including its content, limits, mechanics
and benchmarks.
Public enterprises function directly under the control of the government, even when
they do not form departments in the government, there is far too much of interference
in the working of the public sector enterprises. There is thus a question of autonomy of
the public sector enterprise that is crucial for good performance and decision making.
PSUs should be kept immune from political and bureaucratic interference. It is now
well established that political and bureaucratic interference affects the performance of
an enterprise adversely. Therefore, the government should control and monitor PSUs
without interfering in their day-today management. The government should act as an
informed and responsible promoter and majority shareholder of PSUS. The government
policy to provide managerial and commercial autonomy to PSUs, operating in a
competitive environment is much needed.
Board of Directors and Independent Directors
Performance of any enterprise depends to a very large extent on the capability and
value system of the top management. To perform, however, he/she must have the
freedom to put his/her intellect, experience, knowledge, values and ethics to optimum
use. Nominating unqualified and unsuitable persons as top management of PSUs by
vested interests affects their performance. In most cases, the Board o the public sector
enterprises have bureaucrats as members; and this does not qualify as independent
directors. The lack of ‚independence‛ for the independent directors constrains the
independence of the Board and the autonomy of the public sector. The government
should appoint professionals having competence and understanding of business as
board members. It may be a good idea to invite other large shareholders to nominate
their representatives to the Board. An independent director in a PSU board should not
only be independent of the executive management, he/she should also be independent
of the government and the political parties in power. Therefore, the government should
avoid appointing individuals political affiliation to the Board of directors of a PSU as an
independent director.
The government, as the promoter of a PSU and as a majority shareholder, should

closely monitor the performance of the enterprise and the performance of its Board of
directors. The government should enforce control and monitoring through government
officials, who are members of the Board of directors. They should clearly communicate
the government strategy and government views on various issues in the Board meeting
without impeding the independence and authority of other directors.
Role of Investigating Agencies
Effective and quick decision-making involves an element of risk which may mean
occasional losses. The ultimate career decision of PSU executives seems to lie with
officials of investigating agencies and not with Board of management. It would be
desirable to create a cadre of ombudsmen for PSUs making it imperative to refer any
charges against executives to them before any disciplinary action is contemplated.
PSUs Pay Structure
The corporate pay structure is designed more towards attaining social equality and
sometimes may not reward good performance. In other words, there is little connection
between performance and pay in the public sector. This might reduce employee
initiatives in the organization. Since pay and performance are not always related, there
is no adequate structure in corporate governance for the monitoring of organizational
performance.
Non-executive directors on PSU boards are also undercompensated in comparison to

non-executives on private sector boards and this poses challenges in getting the right
composition on PSU boards. It is therefore important to raise the compensation levels of
non-executives on PSU boards.
Risk-Taking Techniques
Though there are also instances of fraud in the public enterprises, yet the disclosures of
the non-financial aspects in these units are not transparent.
Most public sector units do not have systematic risk-taking techniques. In fact there is a
positive risk aversion in the public sector. The general risk aversion of the public sector
Boards also make them less effective and they cannot make as much profit as they could
have. An important factor in the performance of PSUs is ethics, morality and
qualifications of political decision makers. The corrupt nexus between politicians and
bureaucrats in financial deals of PSUs, under public scrutiny has damaged the image of
many PSUs.
Ensuring compliance with the SEBI Listing Agreement
Many listed Navratna and Miniratna PSUs are lagging behind in complying with
minimum requirements stated in Clause 49 of SEBI listing agreement. This directly
hampers the future prospects of India Incorporated when the Ministry of Corporate
Affairs is emphasizing strongly on the implementation of corporate governance
guidelines. The corrective action can be to make proper disclosures within director’s
and corporate governance reports and ensuring accountability. Also implementation of
corporate governance norms for PSEs, both listed and unlisted, should be supervised
consistently.
Selection processes
Selection processes should take cognizance of composition, domain/industry

knowledge, roles, responsibilities, training and compensation.
While the Public Enterprises Selection Board (PESB) can continue to play a critical role
in short-listing candidates and maintaining a database of eligible candidates, the PSU
boards and CMDs should play a larger role in board succession planning.
There are big gaps between the governance standards prevalent in the larger and more
profitable disinvested PSUs versus the smaller and not so profitable ones. Functional
directors on the larger, profitable and better performing PSUs should be allowed to
assume non-executive director roles in the smaller and not so profitable PSUs so as to
promote better sharing of good practices. This is also essential if the wide gaps between
the prevailing standards in state and central PSUs have to be bridged.
Deficiencies in Financial Reporting
Over the years, CAG (Comptroller and Auditor General ) reports have indicated PSUs
for deficiencies in financial reporting including within audit reports and disclosures.
Some of these deficiencies have raised questions with respect to the quality of audits
within PSUs. The audit committee of PSUs should have explicit powers in monitoring
audit quality and ensuring that audit fees are commensurate with the level of audit risk
and effort levels involved in undertaking the PSU audits.
Introduction
The term whistleblower was first discussed by Doggett, J., in the case of Winters v.
Houston Chronicle Pub. Co., The word is derived from the practice of English Police
Officers, who would blow their whistles when they noticed the commission of a crime.
The whistle would alert both law enforcement officers and the general public of danger.
What is Whistle Blowing?
Technically whistle blowing is the act, for an employee or a former employee, of

disclosing what he believes to be unethical or illegal behaviour to higher management
(internal whistle blowing) or to an external authority or the public (external whistle
blowing).
Whistle blowing is essentially a process and is not to be viewed as an individual event.
Prima facie four important subjects of this process involve the whistleblower, the
complaint or revelation, the party to whom the complaint or revelation is made and the
organisation against which it is made. The ultimate aim of the whistle blowing process
is to protect public interest.
FEATURES OF WHISTLE BLOWING
 It relates to an action that takes place with an organisation.
 Whistle blowing can be done by a member of an organisation.
 The information is generally evidence of some significant kind of misconduct on
the part of an organisation or some of its members.
 Release of information must be something that is done voluntarily, as opposed to
being legally required although the distinction is not always very clear.
 Whistle blowing must be undertaken as a moral protest.
Types of Whistleblowers
 Internal: When the whistleblower reports the wrong doings to the officials at
higher position in the organization. The usual subjects of internal whistle
blowing are disloyalty, improper conduct, indiscipline, insubordination,
disobedience etc.
 External: Where the wrongdoings are reported to the people outside the
organization like media, public interest groups or enforcement agencies it is
called external whistle blowing.
 Alumini: When the whistle blowing is done by the former employee of the
organization it is called alumini whistle blowing.
 Open: When the identity of the whistleblower is revealed, it is called Open

Whistle Blowing.
 Personal: Where the organizational wrongdoings are to harm one person only,
disclosing such wrong doings it is called personal whistle blowing.
 Impersonal: When the wrong doing is to harm others, it is called impersonal
whistle blowing.
 Government: When a disclosure is made about wrong doings or unethical
practices adopted by the officials of the Government.
 Corporate: When a disclosure is made about the wrongdoings in a business
corporation, it is called corporate whistle blowing.
Reasons for Whistle-Blowing
 Unlawful Behavior: There are many forms of behaviors and illegal actions so in
this case must to blow the whistle because it will lead to very bad result .for
example, someone will lose his /her life or lose his/her job.
 Un-Procedural Behavior: Behavior may be un-technical since it interrupts clearly
communicated actions in the form of rules and policies that leading the
operations of the organization.
 Immoral Behavior: Its mean the behavior will be illegal because he/she not going
or following the world behavior guidelines for example: Safety, respecting,
honest, responsibility .Illegal behavior may hurt the others feelings .In this kind
of situation you must not blow your whistle.
 Wasteful Behavior: This behavior if the person trying to waste the resource of
company. Example, There was an employee in a municipality. He is a manger of
equipment‘s store and he steals some equipment. His colleague couldn‘t keep
silent he take an action and tell the boss about that.
Essentials of Whistle Blowing in an Organisation
 Addressing concerns and providing feedback
Whistle blowing policies should set out procedures for handling concerns. This
should reassure employees that their concerns will be taken seriously and will
ensure that instances of malpractice are identified and dealt with appropriately.
 Commitment, clarity and tone from the top
Guidance should make clear that any concerns are welcomed and will be
treated seriously. Guidance should reassure the employee who may be
thinking of raising a concern that the organization’s leadership will take the
concern seriously and will not punish the employee if the concern turns out
to be untrue, as long as they had reasonable suspicion of wrongdoing.
 Openness, confidentiality and anonymity
Guidance should make sensible and realistic statements about respecting
whistleblowers’ confidentiality. Guidance should also outline the potential issues
that could arise from employees reporting concerns who wish to remain
anonymous.
 Whistle blowing to external bodies (prescribed persons)
Guidance should make employees aware of how they can raise concerns outside
the department, e.g. to an external auditor or regulator. This is an obligation for
officials in certain circumstances, for example where there is evidence of
criminal activity.
The Benefits of Whistle Blowing
 Raises Security of the Organization: when we feel that the person with ethical
principles is watching others in the organization, the chances of wrong doing
decreases and security of the organization increases. The activity will help in
detecting un-ethical or misconduct in the organization.
 Highlights Organization’s Code of Ethics: Every organization must have their
codes of ethics and behavior to have a better observing of employees acts.
 Advance the Management: Make sure any management that consider about
moral standard will be always successful.
 Enhance Employees' Ethical Behaviors: The employees will be aware that there
is someone watching him/her .So, he /she will be carful before doing something
wrong
Barriers to Whistle-Blowing
 Management apathy or resistance- Many organizations make their internal

reporting system available to staff who may wish to use it, but do not positively
encourage its use. Only a very few seek to instill a sense of obligation by sending
the message that staff who become aware of wrongdoing yet fail to sound the
alarm are complicit by their apathy or indifference.
 Cultural and historical obstacles- On the one hand, there was a general
willingness to foster a culture grounded in strong ethical values, and recently,
this has been given added impetus by the trauma of highly-public corruption
scandals. On the other hand, the idea of positively promoting the use of an
internal reporting system was very often seen as a step too far — and this despite
acknowledging that internal reports had often played a vital role in averting
further scandal. Research shows that in many countries the business community
was not ready to embrace internal reporting mechanisms.
 Union relations- Cooperation with trade unions can be critical to the successful
take-up of an internal reporting mechanism, particularly in companies with a
tradition of active consultation, and where staff resistance is likely to be strong.
 Fear to retaliation- The whistle blowers hesitate in reporting about misdeeds in
the fear of retaliation as when the blow whistle against the people of high
positions they attack them and take revenge. The aim of whistle blowers is to
help the community but when they see that people at key positions are not
supporting them they are discouraged.
Negative Aspects of Whistle Blowing
 Increases cost- When information is shared either with subordinates or superiors

it always increases cost and it also creates mistrust which within the organization
which leads to affect output.
 Demoralize Employees- Whistle blowing creates an atmosphere of spying and
counters spying which demoralizes employees in the organization. Low income
group employees feel scared
 Misuse of Whistle blowing for harassing employees- Whistle blowing may be
used as the tool for harassing people and also for settling previous scores.
Law dealing with Whistle Blowing in India

Laws relating to whistle blowing and protection of whistleblowers are inadequate in
India. However, the Companies Act, 2013 lays down provisions for corporate
governance and elimination of fraud by establishing adequate vigil mechanism.
Sections 206 to 229 of the Companies Act, 2013 lay down laws relating to Inspection,
Inquiry and Investigation incorporate.
Section 208 of the Act empowers an Inspector to inspect company records and furnish
any recommendations to conduct investigations. Section 210 states that the Central
Government may order an investigation into the affairs of the company in the following
cases
 On receipt of a report by Registrar or Inspector of the company.

 On intimation of a Special Resolution passed by a company that the affairs of the
company must be investigated.
 To uphold the public interest.
The Serious Fraud Investigation Office (SFIO), a statutory body is created under Section
211 of the Act which has the power to arrest any person for fraud in the company. The
auditors have the responsibility to report to the Central Government if they have reason
to believe a fraud committed or being committed to the company.
Draft Rule 12.5 of the Companies Act, 2013andSection 177(9) makes it compulsory for
listed companies, companies accepting deposits from public and companies borrowing
more than Rs. 50 crore from banks or public financial institutions to establish a vigil
mechanism for directors and employees to report their genuine concerns. A vigil
committee has to be set up to ensure vigil mechanism in the company.
Additionally, the Securities and Exchange Board of India (SEBI) amended the Principles
of Corporate Governance in 2003. Clause 49 of the Listing Agreement now includes the
formulation of a Whistleblower policy for companies. A company may establish a
mechanism for employees to report concerns regarding unethical behaviour, actual or
suspected fraud or violation of the company’s code of conduct or ethics policy.
However, it is currently not mandatory for companies to have a whistleblowing policy
in place.
Whistle Blowers Protection Act, 2011
The Whistle Blowers Protection Act, 2011 was approved by the Cabinet of India as part
of a drive to eliminate corruption in the country's bureaucracy and passed by the Lok
Sabha and Rajya Sabha on 21 February 2014 and received the President's assent on 9
May 2014. The Act has not come into force till now. The act is provides a mechanism to
investigate alleged corruption and misuse of power by public servants and also protect
anyone who exposes alleged wrongdoing in government bodies, projects and offices.
The wrongdoing might take the form of fraud, corruption or mismanagement. The Act
will also ensure punishment for false or frivolous complaints.
The Key features of the Whistle Blowers Protection Act are as follows
1. Protection of Whistle blowers from victimization in their workplace.
2. Maintain secrecy of whistle blower's identity and violation of the same will be
penalized by the CVC (Central Vigilance Commission).
3. Contains provisions for imprisonment up to 3 years and a fine up to Rs. 50000.
4. Penalization for officials who try to mislead the CVC.
5. Provisions for addressing issues against the Central and state government employees
and employers of Public Sector.
6. Bill also seeks to protect the honest government officials and punishes those who file
false complaints and charges will be liable for Imprisonment up to 2 years and fine up
to Rs. 30000.
The Whistle Blowers Protection (Amendment) Act, 2015
This Act is a modified version of Whistle-blowers Protection Act, 2014. This Act gives a
component to accepting and inquisitive into open intrigue revelations against
demonstrations of debasement, willful abuse of energy or tact, or criminal offenses by
open hirelings.
The Act forbids the announcing of a debasement related revelation on the off chance
that it falls under any 10 classes of data. These classes incorporate data identified with:
 monetary, logical interests and the security of India
 Cabinet procedures
 protected innovation
 that got a trustee limit
A comparison can be drawn in the cases of Sherron Watkins and

Satyendra Dubey to highlight the miserable position of whistle blower
in India.
Basis SHERRON WATKINS SATYENDRA DUBEY
Country USA INDIA
Employer Enron Corporation National Highway Authority of

India, Government of India
Designation Former Vice-President Former Project Director
Reported Irregularities Accounting irregularities Financial irregularities in the

within the company Golden Quadrilateral Project
Consequence of Lauded in the press for her courageous Shot dead by unidentified
Showing Courage actions and received numerous honors assailants
 Persons of the Year for 2002 Court  Whistleblower of the year
Awards and TV Scales of Justice Award Award from the London
Honors  Everyday Hero‘s Award Women based Index on
Mean Business Award from the Censorship
Business and Professional  The Transparency
Women/USA Organization International‘s Annual
 The 2003 Woman of the Year integrity award
Award by Houston Baptist  The Service Excellence
University award from the All India
 Barbara Walters included her as Management Association
one of the 10 Most Fascinating
People of 2002
 Rolfe Award for Educating the
Public about Business and Finance
 Passage of the Sarbanes Oxley Act  CVC launched an
New Regulation on July 30, 2002 initiative to protect
and Legislation  New Governance proposal was whistle blowers
post disclosure approved by Securities and
Exchange Commission in
November 2003
Self Assessment Questions

SECTION A -2 MARKS
1. Mention any four committees on Corporate Governance in India

2. Mention any four components of Regulatory Framework on Corporate Governance.
3. Mention the internal committees required for good Corporate Governance in an
company
4. Mention any four essential elements of good corporate governance in Banks.
5. Mention any four Disclosures of the Bank for Good Corporate Governance
6. Mention any four types of Director in an Indian Company according to Companies
Act 2013.
7. Mention any four Challenges faced by Indian Public sector in Good Corporate
Governance
8. Which organisation plays a crucial role in short-listing candidates for PSU boards?
9. In which year new Companies bill was implemented?
10. Name the current minster of corporate affairs.
11. What is Whistle Blowing?
12. Mention any four types of Whistle Blowing.
13. Mention the legislative support to Whistle Blowing in India.
14. Mention any two prominent whistle blowers in India.
15. Mention the negative effects of Whistle blowing.
16. Define Whistle Blowing
17. Which year was Whistle Blowing Act enacted in India and when was it amended?
18. Mention any 2 features of Whistle Blowing.
19. Which is the statutory body is created under Section 211 of the Act which has the
power to arrest any person for fraud in the company?
20. Who used the word whistleblower for the first time?
SECTION B-4 Marks
1. Briefly explain the features of Whistle Blowing.

2. Briefly explain the reasons for Whistle Blowing.
3. Briefly explain the essentials of Whistle Blowing in an Organisation.
4. Briefly explain the Barriers to Whistle-Blowing.
5. Write a short on Whistle Blowers Protection Act.
6. Is whistle blowing essential in an organisation? Give Reasons.
7. Briefly explain the benefits of Whistle Blowing.
8. Draw a comparison between the cases of Sherron Watkins and Satyendra Dubey to
highlight the miserable position of whistle blower in India.
9. Briefly explain the features of Whistle Blowers Protection Act.
10. What is Whistle Blowing? Briefly explain the negative aspects of Whistle Blowing
SECTION C-10 MARKS
1. Explain the regulatory and legal framework of Corporate Governance in India

2. Explain the committees on Corporate Governance in India
3. Explain the Challenges faced by Indian Public sector in Good Corporate Governance
4. Explain the types of Director in an Indian Company according to Companies Act 2013.
5. Write an essay on corporate governance in Indian Public sector enterprises
6. Explain the role of a Director in a Company and Mention the reasons for the
disqualifications of a Director.
7. Explain the issues of good corporate governance in Indian Banks
8. Explain the issues of good corporate governance in Indian public sector enterprises
9. Explain the types of Whistle Blowing.
10. Explain the Canvass Of Corporate Governance Guidelines For Banks
References
 http://iosrjournals.org/iosr-jbm/papers/Vol8-issue1/C0811520.pdf
 https://www.ckmpartners.com/single-post/2016/1/28/Indian-Corporate-Governance-Evolution-Evaluation
 https://www.lawctopus.com/academike/corporate-governance-in-india/
 https://iimb.ac.in/research/sites/default/files/WP%20No.%20447%20(Revised)_0.pdf
 http://www.mondaq.com/india/x/456460/Shareholders/Corporate+Governance+Framework+In+India
 https://www.nse-india.com/content/us/ismr2015C.pdf
 http://www.charterededucation.com/general/public-sector-governance-new-for-acca-p1-governance-risk-
and-ethics/
 https://www.iia.org.uk/media/1022989/assessing-organizational-governance-in-the-public-sector.pdf
 http://workspace.unpan.org/sites/internet/Documents/UNPAN93115.pdf
 http://www.ipedr.com/vol20/33-ICHSC2011-M10010.pdf
 https://mropinionatedindian.wordpress.com/2015/06/25/public-sector-undertakings-in-india-forms-issues-
changing-role-challenges/
 https://mpra.ub.uni-
muenchen.de/41038/1/A_note_on_Corporate_Governance_in_Public_Sector_Undertakings_in_India.pdf
 http://www.cag.gov.in/sites/default/files/audit_report_files/Union_Compliance_Commercial_2_2014_Chapt
er_3.pdf.
 https://www.pwc.in/assets/pdfs/services/forensic-services/whistleblowing-
aneffectivemeanstocombateconomiccrime.pdf
 https://blog.ipleaders.in/directors-duties/
 https://www.lawteacher.net/free-law-essays/indian-law/whistle-blower-policy-and-indian.php
 http://journal.lawmantra.co.in/?p=153
 http://www.legalservicesindia.com/article/article/whistleblowers-and-their-protection-in-india-1693-1.html
 https://www.researchgate.net/publication/283083915_System_of_Whistle_Blowing_in_India
 http://www.ijetmas.com/admin/resources/project/paper/f201503031425430684.pdf
 https://www.linkedin.com/pulse/whistleblowing-policy-india-needs-challenges-roychoudhury
 https://economictimes.indiatimes.com/definition/whistleblower
 https://www.myadvo.in/blog/whistleblowing-policy-in-india-the-law-and-challenges/
 http://legodesk.com/blog/whistleblower-protection/
 http://repo.uum.edu.my/1139/1/Hazlina_binti_Shaik.pdf
MODULE 3: Risk Management and Corporate Governance
Types of Risks, Risk Analysis, Risk Management Information System, Risk Governance,
and Responsibility of Risk Profiling, Risk Strategy and Risk Policies.
Learning outcomes:
 To understand the various types of risk faced by organizations in governance.

 To understand risk management framework and policies procedures regarding
risk management in Corporate governance.
 To understand risk performance and assessment process
 To understand risk management information system.
Role of Corporate Governance in effective Risk Management

Risk, associated with a business, has a very broad ratio. With the intention of
understanding the aspect of risk in corporations and businesses, it can be categorized
into “three” kinds of risks namely:
 Counterparty risk
 Interest rate risk
 Liquidity risk
 Market risk management
 Operational risk management
Counterparty risk
 This refers to the kind of risk that an organization/person with which a
corporation has a business relationship with, fails to perform its obligations.
 Defaulting by borrowers on their loan agreements with banks.
 Prospective buyers “fail to close” on the purchase of a contract with home
sellers.
 Domino-like effect (must consider counterparties’ counterparty risk)
Interest rate risk
 This refers to the kind of risk where a shift in interest rates will adversely
affect either the company’s assets or its liabilities.
Liquidity risk
The possibility that the firm will not have sufficient cash on hand or immediately
available credit to pay its bills as they come due.
Market risk management
Market risk management is carried out by ensuring a mutual check and balance system
for business operations through the development of risk management organs and
systems that are independent from profit-making departments.
Operational risk management

With respect to operational risk management, the Group classifies operational risks into
six categories: administrative risk, system risk, human resource risk, tangible asset risk,
reputation risk, and legal and compliance risk.
Other types of risk
1. Product obsolescence risk.
2. Exchange rate risk (mainly for companies doing business internationally).
3. Succession risk: risk that company cannot adequately replace its current
CEO.
What is a Risk Profile?
A major step in appropriate oversight of risk taking by a firm is listing out all of the
risks that a firm is potentially exposed to and categorizing these risks into groups. This
list is called a risk profile.
Risk Management Governance
Appropriate corporate governance for risk management is based on three lines of

defense:
Business line management
Business line management is responsible for the identification, assessment,
management, monitoring, mitigation, and reporting of risks inherent in products,
activities, processes, and systems in their purviews, and for the management of a sound
environment of risk management control. Support functions such as IT management are
part of the first line of defense.
Independent risk management function

An independent risk management function is the second line of defense. Its job is to
complement the management activities of the business line. This function has a
reporting structure independent of the risk-generating business lines and is responsible
for the planning, maintenance, and ongoing development of the banking corporation’s
risk management framework. One of its major duties is to challenge the adequacy of the
business lines’ inputs for risk management, risk measurement, the banking
corporation’s reporting systems, and the adequacy of the outputs obtained. Other
compliance, monitoring, and control functions such as the compliance and anti-money
laundering officer, the Chief Accounting Officer, and control of financial reportage are
part of the second line of defense.
Internal audit
Internal audit provides independent review and challenges the corporation’s risk
management controls, processes, and systems.
A strong risk culture and good communication among the three lines of defense are
important characteristics of appropriate risk governance.
Risk Management Framework
Risk Appetite
The Board shall approve the risk profile or appetite of the Company in material risk
areas. The objective of risk appetite statements is to restrict the overall risk levels of the
Company based on pre-defined strategies.
 Risk appetite is communicated through the Company’s strategic plans. The

Board and management monitor the risk appetite of the Company relative to the
Company’s actual results to ensure an appropriate level of risk tolerance
throughout the Company
 Risk Manager shall develop the Risk Appetite statements and submit to the
Board for review and approval.
 Risk Appetite statements shall be reviewed annually for necessary changes. Any
breach of the appetite statements shall be reported to the Board at the next
meeting.
Risk identification
 Risk identification forms the core of the Risk Management system. Multiple
approaches for risk identification are applied to ensure a comprehensive Risk
Identification process.
 The company shall identify sources of risk, areas of impacts, events and their
causes with potential consequences. Comprehensive identification is critical,
because a risk that is not identified here will be missed from further analysis.
Risk Assessment and Risk Rating
 For all key risks identified during the Risk Identification process, a qualitative
and quantitative assessment is carried out
 Risk assessment involves different means by which to grade risks in order to
assess the possibility of their occurrence and extent of damage their occurrence
might cause.
 Likelihood rating and impact rating is as per the Rating parameters defined by
the Company.
Risk Prioritization
 After the risk assessment is complete, it is the responsibility of the Risk

Management Function to prioritize the key risks to determine which risk are
considered key and need to be addressed on a priority basis.
 Prioritization of risks involves using final ratings. The risks are plotted on a 3X 3
matrix, to identify which risks are materials from a corporate perspective.
 For this purpose, the materiality scales are used to identify the severity and
likelihood of these risks.
 All risks that fall in the red zone are considered high risk and require immediate
attention in terms of risk management.
 The findings of risk prioritization are presented to Senior Management and
Business Units.
Risk Mitigation Process

Once the top or critical risks are prioritized, appropriate risk mitigation and
management efforts to effectively manage these risks are identified.
 Risk mitigation strategy usually involves identifying a range of options for

treating risk, assessing those options, preparing and implementing risk treatment
plans. The risk mitigation strategies may include managing the risk through
implementation of new internal controls, accepting certain risks, taking
insurance, and finally avoiding certain activities that result in unacceptable risks.
 Proposed actions to eliminate, reduce or manage each material risk will be
considered and agreed as part of the Risk Assessment Workshops or as part of
Management/Risk Committee.
Risk Assessment Process
Risk Assessment and rating methodologies take a systematic approach to determine

the impact of occurrence of a risk and its likelihood of happening.
In brief, the assessment involves following key steps Rating of each risk as per the
probability of the risk event occurring
Rating the risk as per the financial impact of that risk event should the risk event occur.
The two parameters provide the quantitative element to risk assessment.
The process of Risk Assessment shall cover the following:
a) Risk Identification and Categorization – the process of identifying the company’s

exposure to uncertainty classified as Strategic / Business / Operational.
b) Risk Description – the method of systematically capturing and recording the

company’s identified risks in a structured format
c) Risk Estimation – the process for estimating the cost of likely impact either by
quantitative, semi-quantitative or qualitative approach.
Risk Monitoring and Risk Reporting
Risk Monitoring
1. The risks are to be monitored and treated by the Risk team under the guidance of
Risk owner on a frequent basis. The risk owner reviews all the risks identified and
profiled on quarterly basis with reference to the risk mitigation plan.
2. A risk mitigation action plan is outlined for all priority risks in the high and medium
categories. Senior Management and Business Heads design an action plan to mitigate
and monitor each of these key risks.
3. An action plan and status reporting is implemented to log actions proposed to

mitigate risks and track status of Evidence, of regular review and monitoring of the
profile and action plan. The action plan and status reporting is circulated quarterly to
stakeholders to update on the status of mitigation efforts.
4. The Company shall also introduce some high level Key Risk Indicators that will
provide leading and lagging indicators on some key risks.
Risk Reporting
1. The Company’s MIS provides the Board and senior management in clear and concise
manner timely and relevant information concerning the risk profile. The MIS is capable
of capturing major policy breaches and effective in promptly reporting such breaches to
senior management, as well as to ensure that appropriate follow-up actions are taken.
2. Most of the internal reporting and day to day interactions between senior
management and Business Functions ensures that senior management is aware of key
risks and unusual incidents or loss events.
3. In addition to this, formal risk reporting has been introduced to highlight risk
profiles, trends, key issues and effectiveness of Risk Management Systems.
4. The ongoing business success of the Company depends to a great extent on risk
awareness and the ability to manage risks. This requires transparency of all risk taking
activities and thus an effective risk reporting system.
Risk management policy and procedures
Definition: The development and implementation of proportionate risk management

policy, guidelines, procedures and action plans.
Leadership Senior level Management Support level
level level
Policy Develops a risk Implements plans Explains the Explains the
management and priorities to purpose, role and purpose of risk
policy that is deliver risk benefits of management
consistent with management embedding risk policy and
the risk policy within management procedures and
management agreed timescales policy and its components.
strategy. and budgets. procedures into
organisational
policies and
procedures.
Roles and Defines risk Implements risk Advises on the Explains the
responsibilities management management appropriate use of features of
accountabilities policy ensuring methodologies, methodologies,
and that ownership tools and tools and
methodologies and techniques within techniques and
that meet responsibilities are the context of the their uses.
strategy fulfilled within risk policy.
requirements. authority limits.
Resources Secures Reviews the Uses a range of Provides
commitment effectiveness of resources to management
and resources risk management analyse information to
that will enable policy and management support
the processes and the information to improvements
implementation use of resources support to risk
of the risk and makes recommendations management
strategy. recommendations. for improvements policies and
to risk procedures.
management
policies and
procedures.
Risk management strategy and architecture
Definition: The development and implementation of risk management strategy and

architecture.
Leadership Senior level Management level Support level
level
Mandate Achieves Evaluates the Explains the Explains the
commitment extent to which purpose and role of components of
and ownership individual risk a risk management a risk
from decision strategies are framework, management
makers to a consistent with strategy and framework,
proportionate the overall risk architecture. strategy and
risk strategy and strategy. architecture.
architecture.
Strategy Develops the Assigns Makes Provides
risk ownership and recommendations management
management levels of for improvements information to
strategy and authority that to the risk support risk
approach that comply with the management strategy
optimises risk requirements of strategy. development.
appetite. the strategy.
Structure Establishes a Ensures Communicates the Describes the
coherent, consistency requirements of the features of an
transparent and between an risk governance effective risk
rigorous risk organisation’s structure. governance
governance risk management structure.
structure that strategy,
supports an organisational
organisation’s strategies and its
risk strategy. governance
structure.
Risk culture and appetite
Definition: The creation of a risk culture that is intrinsic to an organisation’s culture.

level level
Risk Influences an Fosters an Acts as a role Explains an
culture organisation’s organisation’s model of the organisation’s
design leadership in culture through culture expected risk culture and
determining the the design of through acts accordingly.
desired risk organisational personal
culture. systems, behaviours and
processes and actions.
behaviours.
Risk Influences Nurtures the Explains how an Explains the
appetite decision makers’ balance between organisation factors that
understanding risk taking, risk establishes its influence
of risk appetite management risk appetite and people’s
and its and rewards in tolerance. perceptions of
implications. line with an risk and
organisation’s opportunities
risk appetite. and their impact
on risk appetite
Behaviours Ensures an Embeds risk Carries out Identifies the
and values organisation’s management reviews of the level of risk
approach to risk approaches into extent to which maturity and its
management is organisational risk culture is implications for
aligned with its values. demonstrated risk culture and
risk maturity through appetite.
and values. individuals’
behaviour and
operational
activities.
Risk performance and reporting
Definition: The development and implementation of a risk measurement performance

and reporting framework.

level level
Risk Establishes a Reports on the Ensures that Explains the
reporting comprehensive strategic and risk reporting purpose of
systems risk reporting financial impact of systems measuring and
system that is risks. operate reporting risk
aligned with efficiently. performance
other and the use of
organisational technology to
performance support
management effective risk
structures and management.
processes.
Risk Defines Specifies the Uses analytical Complies with
performance organisational design tools and legal, ethical
indicators Key Risk / requirements of techniques to and regulatory
Performance risk performance monitor requirements
Indicators reporting systems. changes to an in the
(KRIs/KPIs) for organisation’s gathering and
evaluating risk risks and recording of
management opportunities risk
performance, and updates information.
strategy, risk
processes and information.
controls.
Risk Ensures that risk Reports Produces risk Explains the
reporting reporting recommendations management uses of risk
protocols systems enable for improvements reports, information
effective based on highlighting and reports
decision making systematic areas of the potential
and are capable analyses of concern, consequences
of identifying information at change, of poor risk
actual and agreed intervals. emerging reporting.
emerging risks. threats and
opportunities.
Risk treatment
Definition: The development, selection and implementation of risk treatment strategies

and controls.

level level
Risk Ensures an Monitors the Implements Explains the
treatment organisation’s effectiveness of an controls to suitability of
and risk approach to the organisation’s manage different risk
appetite treatment of approaches to risk identified risks response
risk is aligned treatment and in accordance options and
with its risk makes with risk control types.
appetite and recommendations. treatment
strategy. strategies and
budgets.
Cost- Determines risk Develops, Supervises the Explains the
effective risk treatment prioritises and quality of risk costs and
treatment strategies and resources suitable monitoring benefits of
investment that controls to treat and mitigation risk treatment
align with an identified risks and actions taken, activities.
organisation’s manage challenging
approach to opportunities. and making
risk interventions
management. when issues
arise.
Business Integrates Ensures the Collates and Explains the
continuity business continuing analyses principles
and crisis continuity coordination of management and features
management strategies and business continuity information to of crisis
crisis and crisis support crisis management
management management management and business
within an strategies and plans and business continuity.
organisation’s with risk continuity
risk management. plans and
management activities.
strategies and
plans.
Risk assessment
Definition: The identification, analysis and evaluation of the nature and impact of risks
and opportunities.
Leadership Senior level Management Support

level level level
Risk Defines the Interprets facts, Uses a range of Contributes
assessment approaches to patterns and trends information to the risk
process risk to reach evidence- sources and assessment
identification, based decisions on assessment process.
analysis and the nature of risks tools and
evaluation and and opportunities. techniques to
establishes the identify,
level of analyse and
investment to evaluate risks
be deployed. and
opportunities.
Analysis of Scopes the Prioritises risks and Explains the Explains
risk impact potential opportunities in range of factors how and
impact of terms of that can why to use
aggregated probability, scale, influence the different risk
risks and worst significance, impact perception of assessment
case scenarios and distribution. risk. tools and
quantitatively techniques.
and
qualitatively.
Evaluation of Evaluates the Evaluates Advises on the Explains
risk impact and interdependencies use of risk how to
consequences value of between risks, assessment display the
potential uncertainties and tools and results of risk
strategic risks opportunities, techniques. assessments.
and critical failure
opportunities. points and resource
implications.
Risk Management Information System
A risk management information system is technology that enables you to capture,

manage and analyze all your organization’ s risk and insurance data in a single, secure
system. Using risk management software, organizations like yours can improve
departmental efficiencies and generate savings on your total cost of risk. But, a RMIS
and the expert support behind it offers much, much more. A RMIS helps you to
improve data accuracy and reduce administrative burdens.
A risk management information system can help in the following ways:
 Automatically highlighting to users, at the point of entry, values that may contain
errors.
 Ensuring consistent synchronization of data from multiple sources.
 Providing context help for users.
 Building adaptive questionnaires forms, and interfaces that ask users for relevant data
only.
 Specifying field constraints (for example, dropdown options), mandatory fields,
defaults, and other validation logic.
 Post data-entry cleaning and automatic validation against business rules.
What is the Governance Cloud or Cloud Governance?
 Cloud Governance is a set of rules. It applies specific policies or principles to the

use of cloud computing services.
This model aims to secure applications and data even if located distantly.
The best Cloud Governance solutions include People, Processes, and Technology.
It basically refers to the decision making processes, criteria, and policies involved
in the planning, architecture, acquisition, deployment, operation, architecture,
acquisition, implementation, operation, and management of a Cloud computing
capability.
Cloud Governance best practices help to optimize the organization
 Operations: Doing it efficiently

 Risk and compliance: Doing it securely
 Financial: Doing more with less
 Governance Policy in Cloud
Governance policies contain a set of protocols of how things should be regulated on

the cloud. So the Cloud Governance policies should be created and regularly reviewed
by the business executives, managers, and IT experts.
The Cloud Governance policy must include
 Standards for the design of infrastructure

 Monitoring of infrastructure and application
 Security Policy
 Programming standards
 Backup recovery services
Reference Questions
2 MARKS
1. Mention any 2 types of risks associated with Corporate Governance.

2. What is Counterparty risk?
3. What is interest rate risk?
4. What is liquidity risk?
5. What is risk profile?
6. What is risk description?
7. What is risk estimation?
8. What is risk management policy?
9. What is risk management strategy?
10. Mention any 2 products of governance cloud eco system.
4 MARKS:
1. Write a short note on counter party risk.

2. Write a short note on interest rate risk
3. Write a short note on liquidity risk
4. Briefly explain 3 lines of defense of risk management in corporate governance.
5. Write a short note on risk appetite
6. Write a short note on risk identification and assessment.
7. Write a short note on risk prioritization
8. Briefly explain the process of risk mitigation.
9. Briefly explain the process of risk assessment
10. Write a short note on risk monitoring.
11. Write a short note on risk reporting.
12. Briefly explain risk management policies and procedures.
13. Briefly explain risk management policies and architecture
14. Briefly explain risk culture and appetite
15. Briefly explain risk performance and reporting
16. Write a short note on risk treatment
17. Write a short note on risk assessment
18. Write a short note on risk management information system.
19. Briefly explain the benefits of RMIS.
20. Briefly explain the concept of Governance cloud.
21. Briefly explain the five disciplines of Cloud Governance
References
 https://blog.ipleaders.in/corporate-governance-and-risk-management/
 https://diligent.com/blog/relationship-risk-management-corporate-governance.
 https://www.boi.org.il/en/BankingSupervision/SupervisorsDirectives/ProperCon
ductOfBankingBusinessRegulations/310_et.pdf
 https://www.alkemlabs.com/admin/Photos/Policies/641124928137876Risk_Mana
gement_Policy.pdf
 https://www.theirm.org/about/professional-standards/strategy-and-
performance/risk-management-policy-and-procedures
 http://blog.ventivtech.com/blog/bid/286243/What-is-a-risk-management-
information-system-what-can-it-do-for-you
Module 4
International Perspective on Corporate Governance
Legislative Framework of Corporate Governance in United Kingdom, USA,
Australia, Brazil, China, South Africa; OECD Principles of Corporate Governance.
Objectives of the Module
 To learn the Legislative Framework of Corporate Governance in USA ,UK
,Australia , Brazil, China and South Africa
 To analyze the OECD Principles of Corporate Governance
Corporate Governance in UK
UK Corporate Governance Journey
1 Note: This module is strictly for Private circulation only- JU-CMS. This Module is
compiled by Sunitha.B.K,. Do not upload on any websites
Whistle Blowing legislation in UK

 The Public Interest Disclosure Act
 The Civil Service Code
 The Data Protection Act 1998
 The UK Bribery Act 2010
 Case Law
Corporate Governance Framework in USA
In the United States there are two primary sources of law and regulation relating to
corporate governance
State Corporate Laws

State corporate law - both statutory and judicial - governs the formation of privately
held and publicly traded corporations and the fiduciary duties of directors. Most of
the states follow Delaware Law.
Federal Securities Laws
The Securities Act of 1933 (Securities Act) and The Securities Exchange Act of 1934
(the Exchange Act)
 The Securities Act regulates all offerings and sales of securities, whether by
public or private companies.
 The Exchange Act addresses many issues, including the organisation of the
financial marketplace generally, the activities of brokers, dealers and other
financial market participants and, as to corporate governance, specific
requirements relating to the periodic disclosure of information by publicly
held, or ‘reporting’, companies.
Evolution of Corporate Governance in USA
Years Developments
1977- The Foreign Provides for specific provisions regarding establishment,
Corrupt Practices Act maintenance and review of systems of internal control.
Prescribed mandatory reporting on internal financial
1979- US Securities controls.
Exchange
Commission
1985- Treadway Emphasized the need of putting in place a proper control
commission environment, desirability and its committees and a
consequence, the Committee of Sponsoring

Organisations(COSO) took birth.
The Act made fundamental changes in virtually every

aspect of corporate governance in general and auditor
2002- Sarbanes – independence, conflict of interests, corporate responsibility,
Oxley Act enhanced financial disclosures and severe penalties for
willful default by managers and auditors, in particular.
The Dodd-Frank The Dodd-Frank Act is legislation signed into law by

Wall Street Reform President
and Consumer Barack Obama in 2010 in response to the financial crisis that
Protection Act, 2010 became known as the Great Recession. Dodd-Frank put
regulations on the financial industry and created programs
to
stop mortgage companies and lenders from taking
advantage of consumers.
The Dodd-Frank Act is a comprehensive and complex bill
that
contains 16 major areas of reform. The law places strict
regulations on lenders and banks in an effort to protect
consumers and prevent another all-out economic recession.
Dodd-Frank also created several new agencies to oversee
the regulatory process and implement certain changes.
New Agencies which were created

1. The Financial Stability Oversight Council (FSOC) for
identifying risks that affect the financial industry
2. The Consumer Financial Protection Bureau (CFPB) for
protecting consumers for fraudulent Banks
3. The Office of Credit Ratings to ensure reliable credit
ratings
Whistle Blowing Laws in USA
• The Whistleblower Protection Act
• The Occupational Safety and Health Act 1970 (“OSHA”) protects those who
have reported or complained about workplace safety and health issues
• The Corporate and Criminal Fraud Accountability Act 2002 (Sarbanes-Oxley

– “SOX”), as expanded by the Wall Street Reform and Consumer Protection
Act 2010 (“Dodd-Frank”), protects securities law related whistleblowers
• The Affordable Care Act protects those blowing the whistle on issues related
to healthcare reform.
Corporate Governance in Australia

Model of Corporate Governance Followed in Australia
Australia has almost, all the times, been traditionally characterized as following
outsider system of corporate governance.
KEY FEATURES OF CORPORATE GOVERNANCE IN AUSTRALIA
The current system of corporate governance in Australia is characterized by a

number of features, including:
 Extensive Regulation And Personal Liability Of Directors,

 A Move Towards Principles-Based Systems Of Governance, And
 Influential Large Institutional Investors and a Strong Investment 'Infrastructure'.
Corporate Governance Framework

The Corporate Governance Framework in place in Australia extends beyond mere
compliance with regulatory requirements and includes a mix of prescriptive and
voluntary elements. Broadly, the three key elements include
 ‘Hard’ Law, being legally binding case law and legislative requirements, such as
the Corporations Act 2001 (Cth) (Corporations Act),
 ‘Soft’ Law, being the listing rules of Australian Securities Exchange Limited (ASX)
which principally have effect as a contract under law, and
 Non-Binding Guidelines, most notably including the third edition1 of the ASX
Corporate Governance Council’s Principles and Recommendations (ASX
Principles).
Regulatory Authority
In the business context/ Governance , the regulators and relevant government

agencies include:
• The Australian Securities And Investments Commission (ASIC)

• The Australian Competition And Consumer Commission (ACCC)
• The Australian Prudential Regulation Authority (APRA)
• The Australian Tax Office (ATO).
Non Regulatory Authority
ASX Corporate Governance Council
The ASX Principles were first introduced in 2003 and set out recommended
corporate governance practices
ASX Corporate Governance Council has recommended that the Board of the listed
entity, before its approval of the entity’s financial statements, should receive a
declaration from the CEO and CFO that the financial records are properly
maintained, financial statements comply with appropriate accounting standards and
give a true and fair view of the financial position and performance of the entity and
their opinion is based on the sound risk management and effective internal controls.
Whistle Blowing
The Australian Government first signalled its intention to legislate in this area in
2002; ASX Corporate Governance Council Principles and Recommendations provide
for it; Corporation Act restricts retaliation against any whistleblower and gives
him/her civil rights including reinstatement of employment, qualified privilege
against defamation; thus, protection is extensive; a proper website has been designed
for the purpose
Corporate Governance in Brazil

OVERVIEW OF GOVERNANCE REGIME
The corporate governance regime applicable to Brazilian listed companies is
basically established by the Brazilian Corporation Law (Federal Law No. 6,404, of 15
December 1976, as amended), the rulings issued by the Brazilian Securities
Commission (CVM), and the listing rules issued by the São Paulo Stock Exchange
(BM&FBOVESPA) to each of its listing segments.
Other Laws
 Brazilian Corporate Governance Code
 Codes issued by the Brazilian Institute of Corporate Governance and by the

Brazilian Association of Listed Companies
CORPORATE LEADERSHIP
Board structure and practices

Brazilian listed companies are managed by a board of directors and by an executive
office. Brazilian companies can also install a fiscal board, which does not have the
nature of a managerial body but rather of a supervisory body.
Board of Directors
The authority of the board of directors established by the Brazilian Corporation Law
cannot be delegated to other bodies. Generally speaking, the director must be
someone with an unblemished reputation who has not been convicted in an
administrative or judicial procedure in relation to corporate crimes or irregularities.
The board of directors shall be composed of at least three members and Level 2
segments, the board must be composed of at least five members and at least 20 per
cent of the members must be considered to be ‘independent’. The members of the
board of directors are not required to be Brazilian residents.
The board of directors can create specific committees (e.g., compensation, related-
party transactions, and audit) to assist it in the management of the company. In this
regard, listed companies must rotate their independent auditor every five years and
must wait at least three years before rehiring the same auditor. However, if the listed
company has installed a statutory audit committee, rotation can occur every 10 years
instead of five.
Executive board
The executive board shall be composed of at least two officers. The officers of
Brazilian listed companies can be elected and removed at any time by the board of
directors.
Among other duties, the executive board represents the company in dealings with
third parties. The by-laws may establish that certain managerial decisions should be
taken in executive board meetings only.
Compensation of the members of the board of directors and executive board

The shareholders’ meeting shall prescribe the aggregate or individual compensation
of the members of the board of directors and executive board, including benefits of
any kind and representation allowances, taking into consideration their
responsibilities, the time devoted to their duties, their skills and professional
standing, and the market value of their services. If the shareholders’ meeting
approves the aggregate compensation to be paid to the company’s directors and
officers, it will fall under the authority of the board of directors to approve the
allocation of the compensation between the company’s directors and officers.
If the company’s by-laws sets forth a compulsory dividend equal to or above 25 per
cent of the net profits, it may establish a share in the company’s profits to the benefit
of the company’s directors and officers, provided that the total amount thereof does
not exceed the annual compensation of the directors and officers, nor one-tenth of
the profits, whichever is the lower. Nevertheless, directors and officers shall only be
entitled to a share in the profits in a financial year for which the compulsory
dividend is paid to the shareholders.
Detailed information on the compensation paid to the company’s directors and

officers, including, but not limited to, the breakdown of the compensation (e.g., fixed
and variable compensation), the minimum, lowest and average compensation paid,
must be disclosed in the company’s reference form.
Fiscal board
The fiscal board is a supervisory body responsible for supervising the company’s
directors and officers and providing information in this respect to the shareholders.
The fiscal board is a compulsory body, but need not operate on a standing basis. A
non-permanent fiscal board must be instated upon the request of shareholders
representing at least 10 per cent of the voting stock or 5 per cent of the non-voting
stock.
The fiscal board is composed of three to five members and a like number of
alternates. The conditions for election and impairment of fiscal board members (who
must be Brazilian residents) are prescribed by law.
The fiscal board has the authority to, among other things:
 Monitor the actions of the company’s officers and directors and verify their
compliance with their legal and statutory duties;
 Review and give an opinion on the board of directors’ annual report;
 Review and give an opinion on proposals of the management to the

shareholders’ meeting relating to changes in capital, issuance of debentures or
warrants, investment plans or capital budgets, dividend distribution and
certain corporate reorganisations;
 Report any error, fraud or criminal act and suggest measures useful to the
company to any officer or member of another administrative body and, if
these fail to take any necessary steps, to act to protect the corporation’s
interest and report to the shareholders’ meeting;
 Review the balance sheet and other financial statements periodically prepared
by the company; and
 Examine the financial statements for the fiscal year and give an opinion about
them.
The fiscal board’s authorities can be neither delegated nor attributed to any other
body of the company.
DISCLOSURE
The Brazilian Corporation Law has adopted the principle of full disclosure when it
comes to acts or facts related to the company that may be considered relevant. The
disclosure of material events is a duty of the company’s investor relations officer,
who may be held personally liable for damages arising as a result of non-disclosure.
CORPORATE RESPONSIBILITY
Pursuant to the Brazilian Corporation Law, all publicly held companies must
prepare on an annual basis, within their financial statement, a value-added
statement, which could be considered as the balance statement of the company’s
‘social account’. This statement provides information on the overall wealth produced
by the company, on the allocation of resources to those areas of the company that
contributed to the generation of that wealth (such as employees, financiers,
shareholders, the government and others) and on the unallocated portion of that
wealth. In addition, some companies seek certification from institutes such as the
Ethos Institute, the Brazilian Institute of Social and Economic Analysis and the
Global Reporting Initiative, but such certification is not mandatory for listed
companies.
Contact with shareholders
Mandatory and best practice reporting to all shareholders

The company must disclose to all of its shareholders, through its website, as well as
on the CVM and BM&FBOVESPA websites, certain ordinary and extraordinary
reports or information, such as the reference form, financial statements, minutes of
the shareholders’ meetings and documents necessary for review by shareholders to
be able to exercise their voting right in shareholders’ meetings.
Whenever the company holds a meeting with a specific shareholder to discuss a

material fact that has not been disclosed, it is usual to have this shareholder sign a
non-disclosure agreement and the shareholder would be subject to a blackout
period, during which it would be unable to trade in the company’s shares, until the
material information is disclosed to the market.
Corporate Governance in China

In China, many entities both inside and outside companies play a role in shaping
the behaviour and governance of Chinese Companies. The inner circle consists of
shareholders’ general meetings, boards, and management personnel who are
engaged in operating the companies and are directly responsible for their
governance. The outer circle is composed of regulators (chiefly, the China
Securities Regulatory Commission-CSRC), stock exchanges {the Shanghai Stock
Exchange (SSE) and the Shenzhen Stock Exchange (SZSE)}, the Chinese legal
system, the auditing system, and institutional investors. China has made rapid
progress in corporate governance, in part because of the gradual removal of
ownership and personnel barriers, coupled with an increasingly globalized and
mature business environment.
Regulatory Bodies for Corporate Governance
China Securities Regulatory Commission
Name of the code
Code of Corporate Governance for listed companies in China
The Code consists of a set of principles covering:

 Shareholder's rights.
 Board structure and composition.
 Directors' duties and remuneration.
 Information disclosure.
The Code has adopted the principle of mandatory regulation, and the Securities
Regulatory Committee of the PRC (CSRC) can order rectification where there has
been non-compliance with the Code. The Code also provides that whether the Code
has been complied with must be disclosed in the company's annual report.
Phases of Corporate Governance
China’s corporate governance development process that can be divided into four
phases
Phase 1: From 1978 to 1984
From 2004 to present
The major feature of this phase was decentralisation. In 1979, the State Council
promulgated a number of rules and regulations on reforming the enterprises’
management 1. THE CORPORATE GOVERNANCE FRAMEWORK IN CHINA 14
CORPORATE GOVERNANCE OF LISTED COMPANIES IN CHINA © OECD 2011
mechanism. These new rules were geared to readjust the relationship between the
state and its enterprises. . Favourable measures in terms of fixed-asset investment,
asset depreciation and working capital management were provided to the
companies to expand their incentives for better business performance.
The major feature of this phase was the change in SOEs’ profit distribution and the
formation of the management responsibility system. In 1984, the idea that the
ownership and management of state-owned enterprises could be separated as

appropriate was suggested for the first time. In 1986, the CPC Central Committee,
together with the State Council, issued a number of documents, including the Terms
of Reference for Managers of State-owned Industrial Enterprises, explicitly
stipulating that the manager is a company’s representative of a legal personality, and
a new type of corporate leadership system featuring “overall responsibility of the
manager, a supervisory and guarantee role for the company’s CPC subcommittee,
and democratic management by the employees” was also established.
The establishment of a modern enterprise system was at the core reform during this
phase. In 1993, it was made clear that “efforts need to be made to transform the
company management mechanism and establish a modern enterprise system that
suits the needs of a market economy, with clearly defined ownership, rights and
responsibilities, and features the separation of government from enterprises and
scientific management. Modern enterprises can have many organisational forms
based on the composition of capital.
Phase 4: From 2004 to present
Historical constraints to good governance of listed companies started to be gradually

addressed from 2004 onwards. With the help of government regulators, such as
those represented by the CSRC, the level of corporate governance among listed
companies has been constantly improving. New laws were introduced like The
Company Law (2006), Securities Law (2006) etc..
The Legal Framework for Corporate Governance
Main Corporate Governance Legislation
 The Company Law, which applies to all corporate entities.
 The Securities Law of the PRC, which mainly applies to public companies,
whether listed or not.
 Various regulations, measures and guiding opinions, including but not limited to
the Code of Corporate Governance of Listed Companies, issued by the Securities
Regulatory Committee of the PRC (CSRC) and other authorities, which apply to
listed companies.
 Various laws and regulations governing corporate governance of state-owned

enterprises (SOEs).
There are laws governing various corporate social responsibilities, such as PRC
employment laws, environment laws and consumer laws.
Brief Explanation of Corporate Governance Laws
The Company Law and the Securities Law, both introduced in 2006, provide the
foundation for drawing up and developing a corporate governance framework in
China.
The revised Company Law improved companies’ governance structure and

mechanisms to protect lawful shareholders’ rights and public interests. It
highlighted the legal obligations and responsibilities of those in actual control of the
company – the directors, senior management and supervisors. It improved
companies’ financing and financial accounting systems of companies and the
systems governing corporate mergers, divisions and liquidation.
Company Law (2006)
The Company Law (2006) (is formulated to standardize the organization and
behavior of companies, to protect the legitimate rights and interests of companies,
shareholders and creditors, safeguard socioeconomic order and promote the
development of a socialist market economy. It governs the incorporation and
organizational structure of limited liability companies, equity transfers of limited
liability companies, the incorporation, organizational structure, issuance and transfer
of shares of companies limited by shares, the qualifications and obligations of
company directors, supervisors and senior executives, corporate bonds, corporate
finance and accounting, company mergers, splits, capital increases and reductions,
company dissolution and clearance, branches of foreign companies and legal
liabilities.
Securities Law (2006)
The Securities Law (2006) was drawn up to standardize securities issues and
transactions, protect the legitimate rights and interests of investors, safeguard
socioeconomic order and public interests and promote the development of a socialist
market economy. It governs securities issues, securities transactions, general

provisions, listing of securities, disclosure of information, prohibited transactions,
acquisition of a listed company, stock exchanges, securities companies, securities
registration and clearance institutions, securities service organizations, securities
industry associations, securities regulatory institution and legal liabilities.
Criminal Law Amendment Act (2006)
Amendment VI to the Criminal Law (2006) was designed to match the amended
Securities Law and Company Law, to give a more complete definition of legal
liabilities in the securities field, improve the laws governing the securities market
and promote its healthy development. The Amendment governs the following
corporate governance related offences: disclosure breaches, non-disclosure of major
information, breach of trust and damage of listed company’s interests, insider
trading and leakage of insider information and manipulation of securities or futures
market.
Regulatory and/or enforcement bodies
While CSRC and stock exchanges in PRC are the main regulatory bodies that
supervise the corporate governance of public companies, the following
governmental agencies are responsible for the enforcement of corporate governance
rules/requirements within their respective authorities:
 The Ministry of Finance (MOF). The MOF is a department of the State Council
that is responsible for the drafting, supervision, and implementation of the
applicable accounting rules and regulations.
 The State-owned Assets, Supervision and Administration Commission

(SASAC). SASAC is the governmental agency responsible for the supervision and
administration of state-owned shares, assets and investments, including
performing the shareholder's responsibilities according to the Company Law and
other laws and administrative regulations pursuant to requirements of the State
Council.
The Ministry of Commerce (MOFCOM), the State Administration of Industry and

Commerce (SIAC), and other local law enforcement departments in respect of tax,
customs and labour also have authority over companies in China in their respective
jurisdictions.
Whistleblower Policy
In China, legislation provides that if the whistle blowing is true, the labor security
administration will offer financial incentives to the whistleblower who has provided
important clues or evidence for investigating material violations of labor security
laws, regulations or rules.
• The Provisions on the Reporting of Crimes to People’s Procuratorates set out

the protection available to whistleblowers who report corruption and bribery
cases to a people's procuratorate. The provisions include a number of
measures which ensure:
 The confidentiality of corruption reports provided to the people's
procuratorates (eg, keeping informers’ personal information
confidential); and
 The personal safety of informers and their close relatives.
• The provisions also provide a reward mechanism for whistleblowers who
report crimes to a people's procuratorate.
• The Criminal Procedure Law also contains several measures that protect the
personal safety of witnesses giving evidence in legal proceedings and their
families.
• An employee who is dismissed for whistle blowing would need to commence
an action for wrongful dismissal against the employer.
• In anti-corruption and anti-bribery cases, the anti-corruption bureau, an
internal organization in the people’s procuratorate, may offer financial
incentives to encourage whistle blowing.
Accountability for disclosure:
The secretary of the board of directors shall be in charge of information disclosure.

In addition to disclosing mandatory information, a company shall also voluntarily
and timely disclose all other information that may have a material effect on the
decisions of shareholders and stakeholders and shall ensure equal access to
information for all shareholders.
Corporate Governance in South Africa
In South Africa, The King Report on Corporate Governance is a ground-breaking

booklet of guidelines for the governance structures and operation of companies in
South Africa. It is issued by the King Committee on Corporate Governance. Three
reports were issued in 1994 (King I), 2002 (King II), and 2009 (King III) and a fourth
revision (King IV) in 2016. The Institute of Directors in Southern Africa (IoDSA)
owns the copyright of the King Report on Corporate Governance. The Compliance
with the King Reports is a requirement for companies listed on the Johannesburg
Stock Exchange. The King Report on Corporate Governance has been cited as "the
most effective summary of the best international practices in corporate
governance". The philosophy of the code consists of the three key elements i.e.
leadership, sustainability and good corporate citizenship.
King Code on Corporate Governance
The King Committee, a private-sector body comprising of former South African

Supreme Court Judge, Mervyn King was formed in 1992, to draft corporate
governance guidelines.
The body issued its first report King I Report on Corporate Governance in South
Africa, in 1994 which was regarded by many as ahead of its time in adopting an
integrated and inclusive approach to the business life of companies, embracing
stakeholders other than shareholders. In 2002, the second King Report on Corporate
Governance was published. It contained a Code of Corporate Practices and Conduct
and referred to seven characteristics of good corporate governance. The King III
report was released on 1 September 2009 which marked a significant milestone in the
evolution of corporate governance in South Africa and brought significant
opportunities for organisations that embrace its principles. The King III was on an
‘apply or explain’ basis. The ‘apply or explain’ approach required more
consideration – application of the mind - and explanation of what has actually been
done to implement the principles and best practice recommendations of governance.
King IV was released on 1 November 2016. It was effective for financial years
commencing from 1 April 2017
King Report IV
 A set of voluntary principles and leading practices.
 Drafted to apply to all organisations, regardless of their form of incorporation.
Sector supplements explain how the King IV Code should be applied by
certain organisations/sectors.
 The King IV Code’s principles and practices are linked to desired outcomes,
therefore articulating the benefits of good corporate governance.
 The Code differentiates between principles and practices. Principles are
achieved by mindful consideration and application of the recommended
practices.
 Philosophical underpinnings in King III retained but refined in King IV™.
 ‘Corporate governance’, for purposes of King IV™, has now been defined
 Corporate governance should be concerned with ethical leadership, attitude,
mindset and behaviour
 The focus is on transparency and targeted, well-considered disclosures
 Remuneration receives far greater prominence, in line with international
developments
 King IV recognises information in isolation of technology as a corporate asset
that is part of the company’s stock of intellectual capital and confirms the
need for governance structures to protect and enhance this asset
 There is a new emphasis on the roles and responsibilities of stakeholders
Regulatory Bodies for Corporate Governance
 The Institute of Directors of South Africa

 Center for Directorship and Corporate Governance
 The Competition Commission.
Name of the code:
The King Reports on Corporate Governance
Laws Governing - Corporate Governance
The Companies Act

1973
The Act has been in existence since 1973 and imposes a number of statutory duties
on directors which if properly observed will result in good corporate management. It
governs how companies should be administered and provides for regulation of
powers, duties and remuneration of directors. However, the Act does not specifically
provide for corporate governance but it imputes liability on directors if it is found
that directors conducted the business of the company fraudulently or recklessly.
2008
The new Companies Act 71 of 2008 into law in 2009. In terms of the government
policy statement issued before the promulgation of the new Act, the revised
company law is expected to promote the competitiveness and development of the
South African economy. This will be achieved by, among other ways, promoting
innovation and investment in South African markets and companies by providing a
predictable and effective regulatory environment that allows for growth, flexibility,
transparency, good governance and ensures compatibility and harmonisation with
best practice internationally.
Securities Services Act 36 of 2004
In an effort to fight insider trading and enhance corporate governance in South

Africa‘s capital markets, the South African government passed the Securities
Services Act in 2004 and established the Insider Trading Directorate within the
Financial Services Board (which supervises the non-banking financial services
industry) to monitor and enforce the law. The Security Services Act makes it a
criminal offence for anyone to make use of ―inside information to buy or sell any
securities or financial instruments in a company in a regulated stock market
Public Finance Management Act 1 of 1999
The Public Finance Management Act introduced much more comprehensive

standards for reporting and accountability by adopting an approach to financial
management in public sector institutions that requires performance in service
delivery, and economic and efficient deployment of state assets and resources.
Broad-Based Black Economic Empowerment Act 53 of 2003
The Broad-Based Black Economic Empowerment Act was thus passed to set up a
legal framework for the promotion of black economic empowerment so that black
people have sufficient influence over strategic direction and core management of
businesses.
The Johannesburg Securities Exchange Listings Requirements
To promote transparency, independence and accountability, the Listings

Requirements provide for declaration of directors‘ interests. Companies seeking a
listing must submit to the JSE a director‘s declaration for each director, evidencing
that the directors are free of conflicts of interest between the duties they owe the
company and their private interests. This is aimed at ensuring that directors do not,
without the informed consent of the company, use the company's assets,
opportunities, or information for their own profit.
Whistleblower Policy
In South Africa the Protected Disclosures Act (no 26 of 2000) makes provision
for procedures in terms of which employees in both the public and private
sector who disclose information of unlawful or corrupt conduct by their
employers or fellow employees, are protected from occupational detriment.
This law is to encourage honest employees to raise their concerns and report
wrongdoing within the workplace without fear. This law should be welcomed
as a crucial corporate governance tool to promote safe, accountable and
responsive work environments.
Accountability for disclosure:
The boards should ensure that the Company makes full and timely disclosure of
material or matters concerning the company.
Organisation for Economic Co-operation and Development (OECD)
Introduction
The Organisation for Economic Co-operation and Development (OECD)
Quick facts
 History: Established in 1961
 Headquarters: Paris, France
 Membership: 35 countries
 Budget: EUR 374 million
 Secretary-General: Angel Gurría
 Secretariat staff: 2 500
History
The OECD was originally called the Organisation for European Economic
Cooperation, or OEEC. It was started in 1947, after World War II, to run the Marshall
Plan to reconstruct Europe. Its goal was to help European governments recognize
their economic interdependence. In this way it was one of the roots of the European
Union.
Current Membership
Today OECD has 35 Member countries span the globe, from North and South
America to Europe and Asia-Pacific.
Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia,

Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan,
Latvia, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland,
Portugal, Slovak Republic, Slovenia, Spain, South Korea, Sweden, Switzerland,
Turkey, the United Kingdom and the United States.
Partner Countries
Brazil, China, India, Indonesia, Russia, and South Africa.
Structure of OECD
OECD Principles of Corporate Governance
The Organization of Economic Cooperation and Development released its first set of
corporate governance principles in 1999. The principles were developed and
endorsed by the ministers of OECD member countries in order to help OECD and
Non-OECD governments in their efforts to create legal and regulatory frameworks
for corporate governance in their countries.
The Principles provide recommendations for national policymakers on shareholder

rights, executive remuneration, financial disclosure, the behaviours of institutional
investors and how stock markets should function.
The Principles were originally developed by the OECD in 1999 and last updated in
2004. The 2015 version addresses developments in corporate governance and the
rapidly changing corporate and financial landscape.
The Principles are non-binding. They are intended to “provide a robust but flexible
reference for policy makers and market participants to develop their own
frameworks for corporate governance”.
Principle 1
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.
Principle 2
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.
Principle 3
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.
Principle 4
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.
Principle 5
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.
Principle 6
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.
Reference Questions
SECTION A -2 MARKS
1. Name any 2 committees of Corporate governance in UK

2. Mention any 2 acts of corporate governance in UK.
3. Mention any 2 acts of corporate governance in USA.
4. Mention any 2 committees of corporate governance in USA.
5. Mention any 2 laws of corporate governance in Australia.
6. Mention any 2 regulatory authorities of corporate governance in Australia.
7. Mention any 2 laws of corporate governance in China.
8. Name the regulatory authorities of corporate governance in South Africa.
9. Mention any 2 laws governing corporate governance in South Africa.
10. What is hard law in Australia?
11. What is soft law in Australia?
12. Mention the any 2 Brazil’s corporate Laws.
13. What is Fiscal Board in Brazilian corporations?
14. What is OCED?
15. Which is Regulatory Bodies for Corporate Governance in China?
16. How many countries are there in OCED?
17. Which is the regulatory authority for Corporate governance in China?
18. Mention the codes of Corporate Governance in South Africa.
19. How many principles of Corporate Governance are recommend by
OCED?
20. In which year OCED was established?
SECTION C-10 MARKS
1. Explain the corporate governance framework in USA.

2. Explain the corporate governance framework in UK.
3. Explain the corporate governance framework in Australia.
4. Explain the corporate governance framework in China.
5. Explain the corporate governance framework in South Africa.
6. Explain the corporate governance framework in Brazil.

7. Explain various federal security laws which influence corporate
governance in USA.
8. Explain the corporate governance environment in Australia.
9. Explain the corporate governance environment in China.
10. Explain the Kings code of corporate governance.
References
https://www.iasplus.com/en-gb/news/2015/09/oecd-principles-for-corporate-
governance
https://usoecd.usmission.gov/our-relationship/about-the-oecd/what-is-the-oecd/
https://www.thebalance.com/organization-economic-cooperation-development-
3305871
https://www.thebalance.com/organization-economic-cooperation-development-
3305871
www.oecd.org.
https://www2.deloitte.com/za/en/pages/africa-centre-for-corporate-
governance/articles/kingiv-report-on-corporate-governance.html
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VI SEM CORPORATE GOVERNANCE

CONCEPTUAL FRAMEWORK OF CORPORATE GOVERNANCE

Conceptual Framework Of Corporate Governance: Meaning; theories and models of

Learning Outcomes of the Module

 To learn the Conceptual Framework of Corporate Governance

MEANING OF CORPORATE GOVERNANCE

• Corporate Governance involves a set of relationships and the networks between

• Corporate Governance refers to the way a corporation is governed.

• Corporate governance is the structure and the associations which govern

BENEFITS OF CORPORATE GOVERNANCE

 Better Standards- Corporate governance makes many decisions about business

STAKEHOLDERS IN CORPORATE GOVERNANCE

STAKEHOLDERS GOVERNING BODIES IN CORPORATE GOVERNANCE

PRINCIPLES OF CORPORATE GOVERNANCE

 Rights and equitable treatment of shareholders-- Organizations should respect

The Anglo-US model is based on a system of individual or institutional shareholders

THEORIES OF CORPORATE GOVERNANCE

Hence, agency theorists recommended that corporate governance mechanisms are

motivators for managers.

Stakeholder theory, states that a company owes a responsibility to a wider group of

Edward Freeman, the original proposer of the stakeholder theory, recognised it as an

3. Resource Dependency Theory

summary, resource dependence theory provides a convincing justification for the

General business ethics would cover the following:

1. Determining the fundamental purpose of the organisation or the philosophy of

Professional or Business ethics

human resource management, of sales and marketing, of production and of intellectual

1. Policies and issues relating to creative accounting, earnings management,

1. Discrimination issues including discrimination on the basis of age (ageism), gender,

1. Pricing issues like price fixing, price discrimination, price skimming.

1. Defective, addictive and inherently dangerous products and services.

and developed the plant's medicinal potential? As a result, attempts to assert

1. Patent infringement, copyright infringement, trademark infringement issues.

A written code of ethics is a formal statement of the organization's values on certain

Ethics Codes Don't Make People Ethical

Various Approaches to Business Ethics

Teleological Ethical Theories

Types of Teleological Ethical Theories

Deontological Ethical Theories

Types of Deontological Ethical Theories

Virtue Ethical Theories

Major Types of Virtue Ethical Theories

System Development Ethical Theories

Major Types of System Development Ethical Theories

For example, If there is no employee complaints Redressal system in the organization

employees and do not implement morally supportive Intra-organizational systems and

KEY MANAGERIAL PERSONNEL

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed;

WHICH COMPANIES ARE MANDATORILY REQUIRED TO APPOINT KEY

 Every listed company, and

Further, as per recently notified Rule 8A of the Companies (Appointment and

MANNER OF APPOINTMENT OF KMP

 Every whole-time key managerial personnel of a company shall be appointed by means

♣ Same person not to act as Chairman and MD/CEO

 the articles of the company contain provision for appointment of same

PENALTY FOR CONTRAVENTION