A CRITICAL ANALYSIS OF ISSUES RELATED TO CORPORATE

GOVERNANCE IN INDIA

Dissertation submitted to SRM University, Delhi-NCR, Sonepat for award of Master of Law (LL.M.)degree.

ABHINAV MALIK

LL.M BATCH OF 2020-21

REG. NO 45820210030
 UNDERTAKING BY THE CANDIDATE

I, Abhinav Malik, Registration no. 45820210030, student under the supervision of Mr.
D.D.Sharma, Assistant Professor of Law, SRM University, Delhi-NCR, Sonepat undertake that
the dissertation titled “A CRITICAL ASSESSMENT OF ADMINISTRATION OF JUSTICE
RELATING TO CRIMINAL LAW IN INDIA” submitted for the degree of Masters of Law
(LL.M.) is a record of first hand research work done by me during the period of study.

I avail myself to responsibility such as an act will be taken on behalf of me, mistakes, errors of
fact and misinterpretation are of course entirely my own.

Date: 24th July 2020

Place: Sonepat, Haryana Abhinav Malik

 ACKNOWLEDGEMENT

Research is essentially a collective work, where steps are taken with caution and care. As
investigator I feel duty bound to thank all those who have helped me in doing my research work.
The acknowledgement usually turns out to be the most pleasant part of the dissertation to write.

I would like to express a deep feeling of gratitude and indebtedness to my learned supervisor
Mr. D.D.Sharma, ASSISTANT PROFESSOR, SRM UNIVERSITY, for her support, constant
encouragement and constructive criticism. Under her guidance I successfully overcame many
difficulties and learned a lot. Despite all, she used to review my research progress, give her
valuable suggestions and made corrections. I can only say a proper thanks to her through my
future work. It is to her that I dedicate this work that helped me in successful completion of this
research.

Abhinav malik
 TABLE OF CONTENTS

CONTENT PAGE NO.

1.UNDERTAKING BY CANDIDATE I

2.ACKNOWLEDGEMENT II

3.TABLE OF CONTENT Iv

4.ABSTRACT 6
5.INTRODUCTION 7

6.CHAPTER-1 8-18
A.WHAT IS CORPORATE GOVERNANCE 8
B.CORPORATE CONSTITUENTS 10
C.ENFORCEMENT MECHANISMS 13
D. DOES CORPORATE GOVERNANCE 14
MATTER
E.CORPORATE GOVERNANCE IN INDIA 16
PAST,PRESENT AND FUTURE

7.CHAPTER-2 19-47
A.GOOD CORPORATE GOVERNANCE 19
B.GUIDING PRINCIPLES OF CORPORATE 21
GOVERNANCE
C.KEY CORPORATE ACTORS 23
D.KEY RESPONSIBILITIES OF BOARD OF 25
DIRECTORS AND MANAGEMENT
E.BOARD STRUCTURE 29
F.BOARD COMITTEES 33
G.BOARD OPERATIONS 40
8.CHAPTER-3 48-62
A.REFORMS IN CORPORATE 48
GOVERNANCE
B.REGULATION 54
C.BOARD OF DIRECTORS 55
D.AUDIT COMITTEES 56
E.ROLE OF INSTITUTIONAL INVESTORS 58
F. ETHICS 60
G.EXECUTIVE REMUNERATION 61

9.CHAPTER-4 63-88
A.WHY THE ISSUES OF CORPORATE 63
GOVERNANCE IMPORTANT?
B.CORPORATE GOVERNANCE FALIURES 64
IN INDIA
C.THE IMPACT OF CORPORATE 71
GOVERNANCE ON PRODUCTIVITY AND
THE CORPORATE SECTOR IN INDIA
D.ISSUES AFFECTING CORPORATE 75
GOVERNANCE PRACTICES
E.PROBLEMS UNDER INDIAN 79
CORPORATE GOVERNANCE MODEL
F. WHAT ARE CURRENT TROPICAL 81
ISSUES
G. WHAT IS ROLE OF SHAREHOLDER 87
ACTIVISM
10.CHAPTER-5 89-102
A.STEPS FOR IMPROVING CORPORATE 89
GOVERNANCE
B.PERSONAL SUGGESTIONS 94
11.CONCLUSION 103
12.REFERENCES 104
 ABSTRACT

Good governance encompasses all actions aimed at providing its citizens, a good quality of life.
With the rapid change in the business environment and emergence of new regulations by world
bodies like EEC, WTO, OECD, World Bank etc. the concept of Corporate Governance (CG) is
introduced and also been impetus. Corporate governance provides the fundamental value
framework for the culture of an organization, which ensures efficient functioning of enterprise on
sound ethical values and principle. It focuses on appropriate management and control structure of
a company. t defines and confines the rights and responsibilities of the constituents of the
corporate like boards, managers, shareholders and other stakeholders. Corporate governance
mainly

(a) Long-term relationship, which has to deal with checks and balances, incentives of managers
and communications between management and investors

(b) Transactional relationship involving matters relating to disclosure and authority. Most of the
definitions of Corporate Governance cited above focuses on laying down minimum standards
and defining the role of the various players involved in Corporate Governance.
 INTRODUCTION

Over the past two decades, countries across the development spectrum have instituted corporate
governance reforms. These reforms have been propelled both by corporate scandals and a greater
global focus on corporate governance. While corporate governance reforms have long been a
central issue in developed economies, developing economies are increasingly playing major roles
in the corporate governance arena.

One result of this corporate governance reforms around the wold has been what corporate
governance actually is ,there are various definitions available for corporate governance so in the
first chapter we will discuss about what is corporate governance and why do we need corporate
governance.

Second thing we will discuss is regarding idiol corporate governance I will try to give a model
features that are required to be followed when we can state good governance is a corporation.

Another result for these reforms are complications regarding framework and regulatory bodies
for corporate governance so in third chapter we will discuss about various regulatory bodies and
latest developments in corporate governance.

In chapter 4 we will discuss about issues regarding corporate governance and lastly in our last
chapter we will discuss how we can solve these issues for which I have provided various steps.
 CHAPTER 1

PRINCIPLE FEATURES OF CORPORATE GOVERNANCE

A.What is Corporate Governance?

The absence of any real consensus of what corporate governance is means there is no single
definition of the term. One author in the early nineties described corporate governance as a topic
recently conceived, as yet ill defined and consequently blurred at the edges. However this
opinion does not stand in the present age given the plethora of academic writing and research in
this area. Over the years the subject has been written on extensively from the standpoint of
academics, legal practitioners, economists and the like .

Academicians like Monks and Minow have defined corporate governance as the relationship
among various participants in determining the direction and performance of corporations. The
primary participants being: the shareholders, the management (led by the chief executive
officer), and the board of directors. Other participants include the employees, customers,
suppliers, creditors and the community.

An internationally accepted definition used by the Organization for Economic Development

Cooperation reads:

“Corporate governance is the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as, the board, managers,
shareholders and other stakeholders and spells out the rules and procedures for making
decisions on corporate affairs. By doing this, it also provides the structure through which the
company objectives are set, and the means of attaining those objectives and monitoring
performance.”

One common theme coming through is that corporate governance is ‘a matrix of legal
responsibilities’ among the different participants. This is because the right, obligations and
impact of the relationships amongst them play a role in determining the corporate direction,
strategy and performance. Corporate governance also calls for the study into the intricacies of the
relationships of the various parties of the corporation and the relationship it shares with persons
that own it, manage it and other stakeholders .

When we look back at the Berle and Means theory of the modern public corporation, they
demonstrated that the direction of the business corporation was no longer in the hands of those
who owned stock in them, the shareholders, but was in the hands of those hired to operate the
company, the managers and directors. This was considered to be the inevitable feature of the
public corporation at the time. It was not until recently that the possibility of uniting ownership
and control existed .

The advent of institutional investors changed the corporate scenario as shareholding became
more concentrated and the Berle and Means theory model of public held corporations was no
longer valid. The impact of the institutional investors will be further discussed in the next
chapter. Suffice to say, for the moment, that where individual shareholders previously had no
clout, this new breed of investors has the power and influence to demand accountability from the
corporations. Today's institutional investors have the largest concentration of investment dollars
and the sharpest growing rates. Unsatisfied shareholders no longer divest themselves of their
interests in companies but demand reform on a myriad of issues ranging from environmental
issues to social reform and even changes in corporate practice.
B. Corporate Constituents

The law speaks of a corporation as a ‘legal person’ created separate from its owners and having
statutory rights and responsibilities. There are four main characteristics that are essential to a
corporate form. These are; limited liability, legal personality. transferable investor rights and
centralized management. The concept of the corporation in countries whose governance
structures this paper will review; Germany, Japan, United Kingdom and United States, is
basically the same. However the precise details and governance mechanisms differ.

The most significant players in the corporate world are the shareholders, the board of
directors and the executive managers. Although for countries like Japan and Germany it shall
later be shown that banks and other investors that own indirect controlling interests in the
corporations occupy prominent positions in the governance systems.

The notion of accountability in governance shows that it is a two way street. Just as the
corporation is responsible towards its shareholders and other stakeholders, governance practices
determine how these shareholders and stakeholders monitor and control the corporation.

Shareholders

Shareholders are people who own a certificate representing entitlement to a proportional share of
the corporation. The fact that the shareholders are the owners of a corporation goes to the root of
corporate governance. This ownership confers certain rights and obligations that are determined
by law. Some of the more important rights the shareholders have are; to vote, transfer their
shares, to sue the directors or managers for breach of duty, the right to certain information from
the company and when the company is liquidated, to residual rights once the creditors are paid.
Shareholders influence the corporation management by exercising their voting rights at the
general meeting to elect the board of directors. They may also use the proxy process to introduce
shareholder proposals. In the United States they also have additional power to commence
derivative suits against the corporation to correct wrongs done to the corporation. Individual
shareholders may have little impact because of their minority shares, but the advent of
institutional shareholders, at least in the common law jurisdictions, has seen a greater influence
exerted on managers. However in many countries in the civil jurisdiction the shareholders have
less influence. For instance in Japan they virtually have none except to supply capital .

The Board of Directors

The Board of directors is a crucial part of the corporate structure. It is the link between those
involved in the day-to-day running of the corporation, the managers, and those who own it, the
shareholders. The board is concerned with a broader view and long term strategic planning. It
determines the corporate strategy, monitors the implementation processes and supervises
management. It adds the element of checks and balances to the corporate structure. The board
members have a fiduciary duty to all their shareholders and are accountable to them and to the
corporation. There is no standard global practice that maps out how the board ought to be
composed or the methodology of how to achieve its role. Each board determines its own
procedures. However what remains constant is that it lies at the center of all governance models.

Governance is concerned about the need for directors to stand for elections regularly, to
disclose their remuneration, the presence of non-executive directors and the establishment of
independent committees of the board. However in certain situations like bankruptcy, the
structure of corporate control is altered and does not rest with the board of directors. In these
instances corporate control may rest with a Trustee, Receiver or by whatever name they may be
called in different jurisdictions.

Executive Management

The managers are the technocrats involved in the day to day running of the business. Their
traditional focus is on planning, organizing, motivating, controlling and coordinating. They are
concerned with internal relationships and procedures. Corporate governance is not concerned
with this level of running the corporation per se, but with giving it an overall direction that
normally starts at the level of Executive Director. It is a function that is quite distinct from
management. Governance is largely concerned with the relationship of the corporation to the
institutions and environment within which it functions. It involves setting the corporate direction
and is involved in executive action, supervision and accountability.

Corporate Stakeholders

These stakeholders include the employees, banks, auditors, regulators, creditors, customers,
suppliers and the community. Corporate stakeholders are generally free to bargain their contracts
and agreements with the company that, to a large degree, defines the relationship of the
stakeholders to the corporation.

For instance in the civil law jurisdiction of Germany and Japan, banks plays a huge role in
the corporate structure. Overall governance must take into account the existence of duties and
responsibilities that a corporation has, under general law, to all these bodies. It makes managers
internalize the welfare of these stakeholders in the firm.
C. Enforcement Mechanisms

Improving corporate governance standards has been a matter of priority for Indian policymakers
over the past two decades. While scandals heightened awareness of corporate governance issues
and public outcry forced the government to protect public interest and restore confidence in the
market, the continuing impetus for corporate governance has been economic growth, the desire
to remain competitive, international capital flow and growth of global financial market. Laws
have been strengthened and regulation deepened to prevent further corporate misdeeds. The
compliance regime has been tightened, and criminal and administrative penalties have been
toughened. It can be stated that awareness of the importance of good corporate governance
practices is now reasonably widespread.

Yet corporate misdeeds continue to stalk the country and make headlines every few months,
each time in a different avatar. This only reinforces the view many experts hold that strong laws
and tough regulation do not offer a complete solution to corporate governance issues.

There are many reasons why enforcement of corporate governance remains an unfinished
agenda in the country. India has adopted international best practices, but their implementation,
outside of their natural context, has remained problematic. In many respects, extreme measures
have been introduced, such as the cap on number of drop down subsidiaries. Such extreme
measures conflict with ease of doing business and lead to discontent in the corporate world.
Regulatory competition has fragmented corporate law enforcement. Criminal sanctions provide
strong deterrent value, but are subject to procedural delays of the court system because of the
high burden of proof that is demanded. Regime of class action is underdeveloped. There are of
course many other reasons.
D. Does Corporate Governance Matter?

Efficiency and Corporate Governance

There has been skepticism about the benefits of corporate governance especially in the light of so
many other issues like competitors, financing and marketing which seem to have the investors’
priority. One of the issues that corporate governance is concerned about is finding that delicate
balance between the need to hold companies accountable without making the requirements too
burdensome that the economic efficiency of the corporation is impaired.

A research in the United States asked Chief Executive Officers and other top executives whether
they were willing to pay more for the stock of a well-governed corporation. They were asked to
compare two well performing companies and state whether they would pay more for the stock of
one of these companies if it was well governed. The response was in the affirmative. As one
Chief Executive Officer explained,

“Good corporate governance is somewhat akin to the headlights of a car. If these two
companies are in a daytime race nothing goes wrong – then they are evenly matched. If the race
goes past dusk, however, the company with good governance has the headlights to deal with the
problem.”.

According to this research, over one hundred investors, chief executive officers and senior
executives said that good governance made a difference which investors were willing to pay for.
The study identified three types of investors who cared about good governance. They could be
separated into three groups; the investors with lower turnover ratios who held shares longer and
believed that good governance would improve the companies performance in the long run,
investors who pursued a ‘value strategy’ by investing in under valued corporations with low
price/earnings ratio in the hope that the company would grow. They believed a good board
would help improve under performing stock and capture hidden value. The third group were
investors who managed money for high net worth individuals, endowments, foundations and
public pensions.
The four main reasons these investors would pay a good premium for good governance were; a
belief that a company would perform well over time and this would lead to higher returns, that it
reduced the likelihood of bad things happening to the company and even if they did happen, a
well governed company would rebound more easily. Finally some investors did so because the
governance debate was a considered ‘a fad’.

While this study did not show that corporate governance was a top priority, because items like
strategy, cash flow, and competitive position ranked higher, it nonetheless showed that
governance occupied a position somewhere on the priority list. This led to the conclusion that
believing in the value of corporate governance should no longer be a question of good faith.

That said, however, the existence of a clear link between corporate governance and corporate
performance is not self-evident. It is a mere hypothesis. There have been some empirical studies
done that have been undertaken to establish this connection. Some of these studies have
established that regulatory and institutional structures influence the development of stock
markets. Another has shown that the mandatory disclosure of reliable information is directly
proportional to a firm’s ability to encourage investor participation in the stock market. While a
third study done to test national systems against different indices like shareholder protection,
ownership concentration and the financial system showed a positive co-relation between the
level of legal investor protection on the one hand and the size of the market and prevalence of
dispersed shareholders on the other hand .

The Role of Competition

One argument raised about the relationship between corporate governance and efficiency is the
role of competition. It has been argued that competition is a powerful force for ensuring good
corporate governance. For instance, if managers of a firm are wasteful or consume large amounts
of resources, the firm will be unable to compete favorably and will go bankrupt.

That the role of competition in providing information and an environment for comparison acts as
a catalyst for efficiency. It forces the board and management to be disciplined.
E.CORPORATE GOVERNANCE IN INDIA PAST, PRESENT & FUTURE

Good corporate governance in the changing business environment has emerged as powerful tool
of competitiveness and sustainability. It is very important at this point and it needs corporation
for one and all i.e. from CEO of company to the ordinary staff for the maximization of the
stakeholders’ value and also for maximization of pleasure and minimization of pain for the long
term business.

Global competitions in the market need best planning, management, innovative ideas,
compliance with laws, good relation between directors, shareholders, employees and customers
of companies, value based corporate governance in order to grow, prosper and compete in
international markets by strengthen their strength overcoming their weaknesses and running
them effectively and efficiently in an efficient and transparent manner by adopting the best
practices.

Corporate India must commit itself as reliable, innovative and prompt service provider to their
customers and should also become reliable business partners in order to prosper and to have all
round growth.

Corporate Governance is nothing more than a set of ideas, innovation, creativity, thinking having
certain ethics, values, principles etc which gives direction and shape to its people, employees and
owners of companies and help them to flourish in global market.

Indian Corporate Bodies having adopted good corporate governance will reach themselves to a
benchmark for rest of the world; it brings laurels as a way of appreciation. Corporate governance
lays down ethics, values, and principles, management policies of a corporation which are
inculcated and brought into practice. The importance of corporate governance lies in promoting
and maintains integrity, transparency and accountability throughout the organization.

Corporate governance has existed since past but it was in different form. During Vedic times
kings used to have their ministers and used to have ethics, values, principles and laws to run their
state but today it is in the form corporate governance having same rules, laws, ethics, values, and
morals etc which helps in running corporate bodies in the more effective ways so that they in the
age of globalization become global giants.
Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance are some of
the global giants which have their flag of success flying high in the sky due to good corporate
governance.

Today, even law has a great role to play in successful and growing economy. Government and
judiciary have enacted several laws and regulations like SEBI, FEMA, Cyber laws, Competition
laws etc and have brought several amendments and repeal the laws in order that they don’t act as
barrier for these corporate bodies and developing India. Judiciary has also helped in great way by
solving the corporate disputes in speedy way.

Corporate bodies have their aim, values, motto, ethics and principles etc which guide them to the
ladder of success. Big and small organizations have their magazines annual reports which reflect
their achievements, failure, their profit and loss, their current position in the market. A few
companies have also shown awareness of environment protection, social responsibilities and the
cause of upliftment and social development and they have deeply committed themselves to it.
The big example of such a company can be of Deepak Fertilizers and Petrochemicals
Corporation Limited which also bagged 2nd runner up award for the corporate social
responsibility by business world in 2005.

Under the present scenario, stakeholders are given more importance as to shareholders, they even
get chance to attend, vote at general meetings, make observations and comments on the
performance of the company.

Corporate governance from the futuristic point of view has great role to play. The corporate
bodies in their corporate have much futuristic approach. They have vision for their company, on
which they work for the future success. They take risk and adopt innovative ideas, have futuristic
goals, motto, and future objectives to achieve.

With increase in interdependence and free trade among countries and citizens across the globe,
internationally accepted corporate governance standards are of paramount importance for Indian
Companies seeking to distinguish themselves in global footprint. The companies should always
keep improving, enhancing and upgrading themselves by bringing more reliable integrated
product and service quality. They should be more transparent in their conduct.
Corporate governance should also have approach of holistic view, value based governance,
should be committed towards corporate social upliftment and social responsibility and
environment protection. It also involves creative, generative and positive things that add value to
the various stakeholders that are served as customers. Be it finance, taxation, banking or legal
framework each and every place requires good corporate governance.
 CHAPTER-2

A.Good Corporate Governance

Corporate governance is a collection of principles and practices that determine how an
organization is directed and managed. It should ensure that a company is performing at or near
its peak and that all stakeholders are playing a role in the company's success., governance
today often include certification schemes, codes of conduct, grievance mechanisms, and
stakeholder panels. Beneath all of these are are four basic principles of effective corporate
governance: accountability, transparency, sound documentation, and sound decision making.

Accountability of the Organization's Leaders

The first page of any corporate governance book should be accountability. Good corporate
governance ensures stakeholders know the company's mission, values, short and long term
strategic goals and the role they must play in helping the company accomplish them. Not only
must stakeholders be aware of what is expected of them, they should be cognizant of what the
repercussions are if these expectations are not met. An effective board of directors will make
sure a company's senior leadership is steering the company in the right direction. A talented
senior leadership team will confirm that mid-level managers and the employees who report to
them are executing the company's strategy as instructed.

Transparency of Governance Policies

Companies that have an effective corporate governance structure in place know that transparency
must be a core principle. Stakeholders want reassurance that the company is operating within the
law and that business is being conducted in a way that is ethical and fair.

An organizational culture that values transparency increases both trust and confidence among
stakeholders, asserts the American Society of Association Executives, which includes everyone
from the board itself to the staff and those involved with the organization in the general public.

Transparency within an organization can come in the form of an annual report, a corporate
retreat to discuss direction and strategy, or in the form of documented policies, procedures or
best practices that give entry-level employees an understanding of how the company operates.
Documentation of Policies and Procedures

Documented policies and procedures allow employees across an organization to understand how
the company functions and to determine whether organizational objectives are being met. Both
private and public companies document policies and procedures to assist employees throughout
the organization in their efforts to gain clarity on processes and expectations. When policies and
procedures are documented, it helps reassure employees that the company is in compliance with
all legal and regulatory requirements, establishing a framework through which the organization
can operate seamlessly and successfully.

Sound Decision-Making Within the Organization

Good corporate governance is designed to drive company profitability and higher returns through
sound decision-making. Employee and customer surveys, market analysis reports and managerial
and departmental meetings are all avenues through which a company's executive leadership team
can gather data and insight to inform their decisions.

For a company's board of directors, the interest of shareholders and stakeholders are always a
primary concern. The board has the ultimate authority regarding the company's management and
must have sufficient information to approve annual budgets, determine executive compensation
and authorize the hire or release of the company's chief executive officer.
B.Guiding Principles of Corporate Governance
Business Roundtable supports the following core guiding principles:

1. The board approves corporate strategies that are intended to build sustainable long-term
value; selects a chief executive officer (CEO); oversees the CEO and senior management
in operating the company’s business, including allocating capital for long-term growth
and assessing and managing risks; and sets the “tone at the top” for ethical conduct.

2. Management develops and implements corporate strategy and operates the company’s
business under the board’s oversight, with the goal of producing sustainable long-term
value creation.

3. Management, under the oversight of the board and its audit committee, produces financial
statements that fairly present the company’s financial condition and results of operations
and makes the timely disclosures investors need to assess the financial and business
soundness and risks of the company.

4. The audit committee of the board retains and manages the relationship with the outside
auditor, oversees the company’s annual financial statement audit and internal controls
over financial reporting, and oversees the company’s risk management and compliance
programs.

5. The nominating/corporate governance committee of the board plays a leadership role in

shaping the corporate governance of the company, strives to build an engaged and diverse
board whose composition is appropriate in light of the company’s needs and strategy, and
actively conducts succession planning for the board.

6. The compensation committee of the board develops an executive compensation

philosophy, adopts and oversees the implementation of compensation policies that fit
within its philosophy, designs compensation packages for the CEO and senior
management to incentivize the creation of long-term value, and develops meaningful
goals for performance-based compensation that support the company’s long-term value
creation strategy.

7. The board and management should engage with long-term shareholders on issues and
concerns that are of widespread interest to them and that affect the company’s long-term
 value creation. Shareholders that engage with the board and management in a manner that
may affect corporate decisionmaking or strategies are encouraged to disclose appropriate
identifying information and to assume some accountability for the long-term interests of
the company and its shareholders as a whole. As part of this responsibility, shareholders
should recognize that the board must continually weigh both short-term and long-term
uses of capital when determining how to allocate it in a way that is most beneficial to
shareholders and to building long-term value.

8. In making decisions, the board may consider the interests of all of the company’s
constituencies, including stakeholders such as employees, customers, suppliers and the
community in which the company does business, when doing so contributes in a direct
and meaningful way to building long-term value creation.
C.Key Corporate Actors
Effective corporate governance requires a clear understanding of the respective roles of the
board, management and shareholders; their relationships with each other; and their relationships
with other corporate stakeholders. Before discussing the core guiding principles of corporate
governance, Business Roundtable believes describing the roles of these key corporate actors is
important.

 The board of directors has the vital role of overseeing the company’s management and
business strategies to achieve long-term value creation. Selecting a well-qualified chief
executive officer (CEO) to lead the company, monitoring and evaluating the CEO’s
performance, and overseeing the CEO succession planning process are some of the most
important functions of the board. The board delegates to the CEO—and through the CEO
to other senior management—the authority and responsibility for operating the
company’s business. Effective directors are diligent monitors, but not managers, of
business operations. They exercise vigorous and diligent oversight of a company’s
affairs, including key areas such as strategy and risk, but they do not manage—or
micromanage—the company’s business by performing or duplicating the tasks of the
CEO and senior management team. The distinction between oversight and management is
not always precise, and some situations (such as a crisis) may require greater board
involvement in operational matters. In addition, in some areas (such as the relationship
with the outside auditor and executive compensation), the board has a direct role instead
of an oversight role.

 Management, led by the CEO, is responsible for setting, managing and executing the
strategies of the company, including but not limited to running the operations of the
company under the oversight of the board and keeping the board informed of the status of
the company’s operations. Management’s responsibilities include strategic planning, risk
management and financial reporting. An effective management team runs the company
with a focus on executing the company’s strategy over a meaningful time horizon and
avoids an undue emphasis on short-term metrics.

 Shareholders invest in a corporation by buying its stock and receive economic benefits

in return. Shareholders are not involved in the day-to-day management of business
 operations, but they have the right to elect representatives (directors) and to receive
information material to investment and voting decisions. Shareholders should expect
corporate boards and managers to act as long-term stewards of their investment in the
corporation. They also should expect that the board and management will be responsive
to issues and concerns that are of widespread interest to long-term shareholders and affect
the company’s long-term value. Corporations are for-profit enterprises that are designed
to provide sustainable long-term value to all shareholders. Accordingly, shareholders
should not expect to use the public companies in which they invest as platforms for the
advancement of their personal agendas or for the promotion of general political or social
causes.

 Some shareholders may seek a voice in the company’s strategic direction and
decisionmaking—areas that traditionally were squarely within the realm of the board and
management. Shareholders who seek this influence should recognize that this type of
empowerment necessarily involves the assumption of a degree of responsibility for the
goal of long-term value creation for the company and all of its shareholders.

Effective corporate governance requires dedicated focus on the part of directors, the CEO and
senior management to their own responsibilities and, together with the corporation’s
shareholders, to the shared goal of building long-term value.
D. Key Responsibilities of the Board of Directors and Management
An effective system of corporate governance provides the framework within which the board and
management address their key responsibilities.

Board of Directors
A corporation’s business is managed under the board’s oversight. The board also has direct
responsibility for certain key matters, including the relationship with the outside auditor and
executive compensation. The board’s oversight function encompasses a number of
responsibilities, including:

 Selecting the CEO. The board selects and oversees the performance of the company’s
CEO and oversees the CEO succession planning process.

 Setting the “tone at the top.” The board should set a “tone at the top” that demonstrates
the company’s commitment to integrity and legal compliance. This tone lays the
groundwork for a corporate culture that is communicated to personnel at all levels of the
organization.

 Approving corporate strategy and monitoring the implementation of strategic

plans. The board should have meaningful input into the company’s long-term strategy
from development through execution, should approve the company’s strategic plans and
should regularly evaluate implementation of the plans that are designed to create long-
term value. The board should understand the risks inherent in the company’s strategic
plans and how those risks are being managed.

 Setting the company’s risk appetite, reviewing and understanding the major risks,
and overseeing the risk management processes. The board oversees the process for
identifying and managing the significant risks facing the company. The board and senior
management should agree on the company’s risk appetite, and the board should be
comfortable that the strategic plans are consistent with it. The board should establish a
structure for overseeing risk, delegating responsibility to committees and overseeing the
designation of senior management responsible for risk management.

 Focusing on the integrity and clarity of the company’s financial reporting and other
disclosures about corporate performance. The board should be satisfied that the
 company’s financial statements accurately present its financial condition and results of
operations, that other disclosures about the company’s performance convey meaningful
information about past results as well as future plans, and that the company’s internal
controls and procedures have been designed to detect and deter fraudulent activity.

 Allocating capital. The board should have meaningful input and decisionmaking

authority over the company’s capital allocation process and strategy to find the right
balance between short-term and long-term economic returns for its shareholders.

 Reviewing, understanding and overseeing annual operating plans and budgets. The

board oversees the annual operating plans and reviews annual budgets presented by
management. The board monitors implementation of the annual plans and assesses
whether they are responsive to changing conditions.

 Reviewing the company’s plans for business resiliency. As part of its risk oversight
function, the board periodically reviews management’s plans to address business
resiliency, including such items as business continuity, physical security, cybersecurity
and crisis management.

 Nominating directors and committee members, and overseeing effective corporate

governance. The board, under the leadership of its nominating/corporate governance
committee, nominates directors and committee members and oversees the structure,
composition (including independence and diversity), succession planning, practices and
evaluation of the board and its committees.

 Overseeing the compliance program. The board, under the leadership of appropriate

committees, oversees the company’s compliance program and remains informed about
any significant compliance issues that may arise.
CEO and Management
The CEO and management, under the CEO’s direction, are responsible for the development of
the company’s long-term strategic plans and the effective execution of the company’s business in
accordance with those strategic plans. As part of this responsibility, management is charged with
the following duties.

 Business operations. The CEO and management run the company’s business under the
board’s oversight, with a view toward building long-term value.

 Strategic planning. The CEO and senior management generally take the lead in
articulating a vision for the company’s future and in developing strategic plans designed
to create long-term value for the company, with meaningful input from the board.
Management implements the plans following board approval, regularly reviews progress
against strategic plans with the board, and recommends and carries out changes to the
plans as necessary.

 Capital allocation. The CEO and senior management are responsible for providing
recommendations to the board related to capital allocation of the company’s resources,
including but not limited to organic growth; mergers and acquisitions; divestitures; spin-
offs; maintaining and growing its physical and nonphysical resources; and the appropriate
return of capital to shareholders in the form of dividends, share repurchases and other
capital distribution means.

 Identifying, evaluating and managing risks. Management identifies, evaluates and

manages the risks that the company undertakes in implementing its strategic plans and
conducting its business. Management also evaluates whether these risks, and related risk
management efforts, are consistent with the company’s risk appetite. Senior management
keeps the board and relevant committees informed about the company’s significant risks
and its risk management processes.

 Accurate and transparent financial reporting and disclosures. Management is

responsible for the integrity of the company’s financial reporting system and the accurate
and timely preparation of the company’s financial statements and related disclosures. It is
management’s responsibility—under the direction of the CEO and the company’s
 principal financial officer—to establish, maintain and periodically evaluate the
company’s internal controls over financial reporting and the company’s disclosure
controls and procedures, including the ability of such controls and procedures to detect
and deter fraudulent activity.

 Annual operating plans and budgets. Senior management develops annual operating

plans and budgets for the company and presents them to the board. The management
team implements and monitors the operating plans and budgets, making adjustments in
light of changing conditions, assumptions and expectations, and keeps the board apprised
of significant developments and changes.

 Selecting qualified management, establishing an effective organizational structure

and ensuring effective succession planning. Senior management selects qualified
management, implements an organizational structure, and develops and executes
thoughtful career development and succession planning strategies that are appropriate for
the company.

 Business resiliency. Management develops, implements and periodically reviews plans

for business resiliency that provide the most critical protection in light of the company’s
operations.

o Risk identification. Management identifies the company’s major business and

operational risks, including those relating to natural disasters, leadership gaps,
physical security, cyber security, regulatory changes and other matters.

o Crisis preparedness. Management develops and implements crisis preparedness

and response plans and works with the board to identify situations (such as a crisis
involving senior management) in which the board may need to assume a more
active response role.
E. Board Structure
Public companies employ diverse approaches to board structure and operations within the
parameters of applicable legal requirements and stock market rules. Although no one structure is
right for every company, Business Roundtable believes that the practices set forth in the
following sections provide an effective approach for companies to follow.

Board Composition
 Size. In determining appropriate board size, directors should consider the nature, size and
complexity of the company as well as its stage of development. Larger boards often bring
the benefit of a broader mix of skills, backgrounds and experience, while smaller boards
may be more cohesive and may be able to address issues and challenges more quickly.

 Composition. The composition of a board should reflect a diversity of thought,

backgrounds, skills, experiences and expertise and a range of tenures that are appropriate
given the company’s current and anticipated circumstances and that. collectively, enable
the board to perform its oversight function effectively.

o Diversity. Diverse backgrounds and experiences on corporate boards, including

those of directors who represent the broad range of society, strengthen board
performance and promote the creation of long-term shareholder value. Boards
should develop a framework for identifying appropriately diverse candidates that
allows the nominating/corporate governance committee to consider women,
minorities and others with diverse backgrounds as candidates for each open board
seat.

o Tenure. Directors with a range of tenures can contribute to the effectiveness of a

board. Recent additions to the board may provide new perspectives, while
directors who have served for a number of years bring experience, continuity,
institutional knowledge, and insight into the company’s business and industry.

 Characteristics. Every director should have integrity, strong character, sound judgment,

an objective mind and the ability to represent the interests of all shareholders rather than
the interests of particular constituencies.
 Experience. Directors with relevant business and leadership experience can provide the
board a useful perspective on business strategy and significant risks and an understanding
of the challenges facing the business.

 Independence. Director independence is critical to effective corporate governance, and

providing objective independent judgment that represents the interests of all shareholders
is at the core of the board’s oversight function. Accordingly, a substantial majority of the
board’s directors should be independent, according to applicable rules and regulations
and as determined by the board.

o Definition of “independence.” An independent director should not have any

relationships that may impair, or appear to impair, the director’s ability to exercise
independent judgment. Many boards have developed their own standards for
assessing independence under stock market definitions, in addition to considering
the views of institutional investors and other relevant groups.

o Assessing independence. When evaluating a director’s independence, the board

should consider all relevant facts and circumstances, focusing on whether the
director has any relationships, either direct or indirect, with the company, senior
management or other directors that could affect actual or perceived independence.
This includes relationships with other companies that have significant business
relationships with the company or with not-for-profit organizations that receive
substantial support from the company. While it has been suggested that long-
standing board service may be perceived to affect director independence, long
tenure, by itself, should not disqualify a director from being considered
independent.

 Election. Directors should be elected by a majority vote for terms that are consistent with
long term value creation. Boards should adopt a resignation policy under which a director
who does not receive a majority vote tenders his or her resignation to the board for its
consideration. Although the ultimate decision whether to accept or reject the resignation
will rest with the board, the board and its nominating/corporate governance committee
should think critically about the reasons why the director did not receive a majority vote
and whether or not the director should continue to serve. Among other things, they should
 consider whether the vote resulted from concerns about a policy issue affecting the board
as a whole or concerns specific to the individual director and the basis for those concerns.

 Time commitments. Serving as a director of a public company requires significant time

and attention. Certain roles, such as committee chair, board chair and lead director, carry
an additional time commitment beyond that of board and committee service. Directors
must spend the time needed and meet as frequently as necessary to discharge their
responsibilities properly. While there may not be a need for a set limit on the number of
outside boards on which a director or committee member may serve—or for any limits on
other activities a director may pursue outside of his or her board duties—each director
should be committed to the responsibilities of board service, and each board should
monitor the time constraints of its members in light of their particular circumstances.

Board Leadership
 Approaches. U.S. companies take a variety of approaches to board leadership; some
combine the positions of CEO and chair while others appoint a separate chair. No one
leadership structure is right for every company at all times, and different boards may
reach different conclusions about the leadership structures that are most appropriate at
any particular point in time. When appropriate in light of its current and anticipated
circumstances, a board should assess which leadership structure is appropriate.

 Lead/presiding director. Independent board leadership is critical to effective corporate

governance regardless of the board’s leadership structure. Accordingly, the board should
appoint a lead director, also referred to as a presiding director, if it combines the positions
of CEO and chair or has a chair who is not independent. The lead director should be
appointed by the independent directors and should serve for a term determined by the
independent directors.

 Lead directors perform a range of functions depending on the board’s needs, but they
typically chair executive sessions of a board’s independent or nonmanagement directors,
have the authority to call executive sessions, and oversee follow-up on matters discussed
in executive sessions. Other key functions of the lead director include chairing board
meetings in the absence of the board chair, reviewing and/or approving agendas and
 schedules for board meetings and information sent to the board, and being available for
engagement with long-term shareholders.

Board Committee Structure

 An effective committee structure permits the board to address key areas in more depth
than may be possible at the full board level. Decisions about committee membership and
chairs should be made by the full board based on recommendations from the
nominating/corporate governance committee.

 The functions performed by the audit, nominating/corporate governance and

compensation committees are central to effective corporate governance; however, no one
committee structure or division of responsibility is right for all companies. Thus, the
references in Section IV to functions performed by particular committees are not intended
to preclude companies from allocating these functions differently.

 The responsibilities of each committee and the qualifications required for committee
membership should be clearly defined in a written charter that is approved by the board.
Each committee should review its charter annually and recommend changes to the board.
Committees should apprise the full board of their activities on a regular basis.

 Board committees should meet all applicable independence and other requirements as to
membership (including minimum number of members) prescribed by applicable law and
stock exchange rules.
F. Board Committees

Audit Committee

 Financial acumen. Audit committee members must meet minimum financial literacy
standards, and one or more committee members should be an audit committee financial
expert, as determined by the board in accordance with applicable rules.

 Overboarding. With the significant responsibilities imposed on audit committees,

consideration should be given to whether limiting service on other public company audit
committees is appropriate. Policies may permit exceptions if the board determines that
the simultaneous service would not affect an individual’s ability to serve effectively.

 Outside auditor. The audit committee is responsible for the company’s relationship with
its outside auditor, including:

o Selecting and retaining the outside auditor. The audit committee selects the
outside auditor; reviews its qualifications (including industry expertise and
geographic capabilities), work product. independence and reputation; and reviews
the performance and expertise of key members of the audit team. The committee
reviews new leading partners for the audit team and should be directly involved in
the selection of the new engagement partner. The committee oversees the process
of negotiating the terms of the annual audit engagement.

o Overseeing the independence of the outside auditor. The committee should

maintain an ongoing, open dialogue with the outside auditor about independence
issues. The committee should identify those services, beyond the annual audit
engagement. that it believes the outside auditor can provide to the company
consistent with maintaining independence and determine whether to adopt a
policy for preapproving services to be provided by the outside auditor or
approving services on an engagement-by-engagement basis.

 Financial statements. The committee should discuss significant issues relating to the

company’s financial statements with management and the outside auditor and review
earnings press releases before they are issued. The committee should understand the
 company’s critical accounting policies and why they were chosen, what key judgments
and estimates management made in preparing the financial statements, and how they
affect the reported financial results. The committee should be satisfied that the financial
statements and other disclosures prepared by management present the company’s
financial condition and results of operations accurately and are understandable.

 Internal controls. The committee oversees the company’s system of internal controls

over financial reporting and its disclosure controls and procedures, including the
processes for producing the certifications required of the CEO and principal financial
officer. The committee periodically reviews with both the internal and outside auditors,
as well as with management, the procedures for maintaining and evaluating the
effectiveness of these systems. The committee should be promptly notified of any
significant deficiencies or material weaknesses in internal controls and kept informed
about the steps and timetable for correcting them.

 Risk assessment and management. Many audit committees have at least some

responsibility for risk assessment and management due to stock market rules. However,
the audit committee should not be the sole body responsible for risk oversight, and the
board may decide to allocate some aspects of risk oversight to other committees or to the
board as a whole depending on the company’s industry and other factors. A company’s
risk oversight structure should provide the full board with the information it needs to
understand all of the company’s major risks, their relationship to the company’s strategy
and how these risks are being addressed. Committees with risk-related responsibilities
should report regularly to the full board on the risks they oversee and brief the audit
committee in cases where the audit committee retains some risk oversight responsibility.

 Compliance. Unless the full board or one or more other committees do so, the audit
committee should oversee the company’s compliance program, including the company’s
code of conduct. The committee should establish procedures for handling compliance
concerns related to potential violations of law or the company’s code of conduct,
including concerns relating to accounting, internal accounting controls, auditing and
securities law issues.
  Internal audit. The committee oversees the company’s internal audit function and
ensures that the internal audit staff has adequate resources and support to carry out its
role. The committee reviews the scope of the internal audit plan, significant findings by
the internal audit staff and management’s response, and the appointment and replacement
of the senior internal auditing executive and assesses the performance and effectiveness
of the internal audit function annually.

Nominating/Corporate Governance Committee

 Director qualifications. The committee should establish, and recommend to the board

for approval, criteria for board membership and periodically review and recommend
changes to the criteria. The committee should review annually the composition of the
board, including an assessment of the mix of the directors’ skills and experience; an
evaluation of whether the board as a whole has the necessary tools to effectively perform
its oversight function in a productive, collegial fashion; and an identification of
qualifications and attributes that may be valuable in the future based on, among other
things, the current directors’ skill sets, the company’s strategic plans and anticipated
director exits.

 Succession planning. The committee, together with the board, should actively conduct
succession planning for the board of directors. The committee should proactively identify
director candidates by canvassing a variety of sources for potential candidates and
retaining search firms. Shareholders invested in the long-term success of the company
should have a meaningful opportunity to nominate directors and to recommend director
candidates for nomination by the committee, which may include proxy access if
shareholder support is broad based and the board concludes this access is in the best
interests of the company and its shareholders. Although the CEO meeting with potential
board candidates is appropriate, the final responsibility for selecting director nominees
should rest with the nominating/corporate governance committee and the board.

o Background and experience. In connection with renomination of a current

director, the nominating/corporate governance committee should review the
director’s background, perspective, skills and experience; assess the director’s
 contributions to the board; consider the director’s tenure; and evaluate the
director’s continued value to the company in light of current and future needs.
Some boards may undertake these steps as part of the annual nomination process,
while others may use a director evaluation process.

o Independence. The nominating/corporate governance committee should ensure

that a substantial majority of the directors are independent both in fact and in
appearance. The committee should take the lead in assessing director
independence and make recommendations to the board regarding independence
determinations. In addition, each director should promptly notify the committee of
any change in circumstances that may affect the director’s independence
(including but not limited to employment change or other factors that could affect
director independence).

o Tenure limits. The committee should consider whether procedures such as

mandatory retirement ages or term limits are appropriate. Other practices, such as
a robust director evaluation process, may make these tenure limits unnecessary,
but they may still serve as useful tools for ensuring board engagement and
maintaining diversity and freshness of thought. Many boards also require that
directors who change their primary employment tender their resignation so that
the board may consider the desirability of their continued service in light of their
changed circumstances.

 Board leadership. The committee should conduct an annual evaluation of the board’s

leadership structure and recommend any changes to the board. The committee should
oversee the succession planning process for the board chair, which should involve
consideration of whether to combine or separate the positions of CEO and board chair
and whether events such as the end of the current chair’s tenure or the appointment of a
new CEO may warrant a change to the board leadership structure.

 Committee structure. Annually, the committee should recommend directors for

appointment to board committees and ensure that the committees consist of directors who
meet applicable independence and qualification standards. The committee should
 periodically review the board’s committee structure and consider whether refreshment of
committee memberships and chairs would be helpful.

 Board oversight. The committee should oversee the effective functioning of the board,
including the board’s policies relating to meeting agendas and schedules and the
company’s processes for providing information to the board (both in connection with,
and outside of, meetings), with input from the lead director or independent chair.

 Corporate governance guidelines. The committee should review annually the

company’s corporate governance guidelines, if any, and make recommendations about
changes in those guidelines to the board.

 Shareholder engagement. The committee may oversee the company’s and

management’s shareholder engagement efforts, periodically review the company’s
engagement practices, and provide to senior management feedback and suggestions for
improvement. The committee and the full board should understand the company’s efforts
to communicate with shareholders and receive regular briefings on such communications.

 Director compensation. The committee also may oversee the compensation of the board
if the compensation committee does not do so, or the two committees may share this
responsibility.

Compensation Committee

 Authority. The compensation committee has many responsibilities relating to the

company’s overall compensation philosophy, structure, policies and programs. To assist
it in performing its duties, the compensation committee must have the authority to obtain
advice from independent compensation consultants, counsel and other advisers. The
advisers’ independence should be assessed under applicable law and stock market rules,
and the compensation committee should feel confident and comfortable that its advisers
have the ability to provide the committee with sound advice that is free from any
competing interests.

 CEO and senior management compensation. A major responsibility of the

compensation committee is establishing performance goals and objectives relating to the
 CEO, measuring performance against those goals and objectives, and determining and
approving the compensation of the CEO. The compensation committee also generally
approves or recommends for approval the compensation of the rest of the senior
management team.

 Alignment with shareholder interests. Executive compensation should be designed to

align the interests of senior management, the company and its shareholders and to foster
the long-term value creation and success of the company. Compensation should include
performance-based elements that reward the achievement of goals tied to the company’s
strategic plan but are at risk if such goals are not met. These performance goals should be
clearly explained to the company’s shareholders.

 Compensation costs and benefits. The compensation committee should understand the

costs of the compensation packages of senior management and should review and
understand the maximum amounts that could become payable under multiple scenarios
(such as retirement; termination for cause; termination without cause; resignation for
good reason; death and disability; and the impact of a transaction, such as a merger,
divestiture or acquisition). The committee should ensure that the proper protections are in
place that will allow senior management to remain focused on the long-term strategies
and business plans of the company even in the face of a potential acquisition, shareholder
activism, or unsolicited takeover activity or control bids.

 Stock ownership requirements. To further align the interests of directors and senior
management with the interests of long-term shareholders, the committee should establish
stock ownership and holding requirements that require directors and senior management
to acquire and hold a meaningful amount of the company’s stock at least for the duration
of their tenure and, depending on the company’s circumstances, perhaps for a certain
period of time thereafter. The company should have a policy that monitors, restricts or
even prohibits executive officers’ ability to hedge the company’s stock and requires
ongoing disclosure of the material terms of hedging arrangements to the extent they are
permitted.

 Risk. The compensation committee should review the overall compensation structure and
balance the need to create incentives that encourage growth and strong financial
 performance with the need to discourage excessive risk-taking, both for senior
management and for employees at all levels. Incentives should further the company’s
long-term strategic plans by looking beyond short-term market value changes to the
overall goal of creating and enhancing enduring value. The committee should oversee the
adoption of practices and policies to mitigate risks created by compensation programs,
such as a compensation recoupment, or clawback, policy.

 Director compensation. The compensation committee may also be responsible, either

alone or together with the nominating/corporate governance committee, for establishing
director compensation programs, practices and policies.
G. Board Operations

 General. Serving on a board requires significant time and attention on the part of
directors. Certain roles, such as committee chair, board chair and lead director, carry an
additional time commitment beyond that of board and committee service. Directors must
spend the time needed and meet as frequently as necessary to discharge their
responsibilities properly.

 Meetings. The board of directors, with the assistance of the nominating/corporate

governance committee, should consider the frequency and length of board meetings.
Longer meetings may permit directors to explore key issues in depth, whereas shorter,
more frequent meetings may help directors stay current on emerging corporate trends and
business and regulatory developments.

 Overboarding. Service on the board of a public company provides valuable experience

and insight. Simultaneous service on too many boards may, however, interfere with an
individual’s ability to satisfy his or her responsibilities as a member of senior
management or as a director. In light of this, many boards limit the number of public
company boards on which their directors may serve. Business Roundtable does not
endorse a specific limit on the number of directorships an individual may hold,
recognizing that decisions about limits on board service are best made by boards and their
nominating/governance committees in light of the particular circumstances of individual
companies and directors.

 Executive sessions. Directors should have sufficient opportunity to meet in executive

session, outside the presence of the CEO and any other management directors, in
accordance with stock exchange rules. Time for an executive session should be placed on
the agenda for every regular board meeting. The independent chair or lead director should
set the agenda for and chair these sessions and follow up with the CEO and other
members of senior management on matters addressed in the sessions.

 Agenda. The board’s agenda must be carefully planned yet flexible enough to

accommodate emergencies and unexpected developments, and it must be structured to
maximize the use of meeting time for open discussion and deliberation. The board chair
 should work with the lead director (when the company has one) in setting the agenda and
should be responsive to individual directors’ requests to add items to the agenda.

 Access to management. The board should work to foster open, ongoing dialogue

between management and members of the board. Directors should have access to senior
management outside of board meetings.

 Information. The quality and timeliness of information that the board receives directly
affects its ability to perform its oversight function effectively.

 Technology. Companies should take advantage of technology such as board portals to

provide directors with meeting materials and real-time information about developments
that occur between meetings. The use of technology (including e-mail) to communicate
with and deliver information to the board should be accompanied by safeguards to protect
the security of information and directors’ electronic devices and to comply with
applicable document retention policies.

 Confidentiality. Directors have a duty to maintain the confidentiality of all nonpublic

information (whether or not it is material) that they learn through their board service,
including boardroom discussions and other discussions between and among directors and
senior management.

 Director compensation. The amount and composition of the compensation paid to a

company’s non-employee directors should be carefully considered by the board with the
oversight of the appropriate board committee. Director compensation typically consists of
a mix of cash and equity. The cash portion of director compensation should be paid in the
form of an annual retainer, rather than through meeting fees, to reflect the fact that board
service is an ongoing commitment. Equity compensation helps align the interests of
directors with those of the corporation’s shareholders but should be provided only
through shareholder-approved plans that include meaningful and effective limitations.
Further, equity compensation arrangements should be carefully designed to avoid
unintended incentives such as an emphasis on short-term market value changes. Due to
the potential for conflicts of interest and the duty of directors to represent the interests of
all shareholders, directors or director nominees should not be a party to any
 compensation related arrangements with any third party relating to their candidacy or
service as a director of the company, other than those arrangements that relate to
reimbursement for expenses in connection with candidacy as a director.

 Director education. Directors should be encouraged to take advantage of educational

opportunities in the form of outside programs or “in board” educational sessions led by
members of senior management or outside experts. New directors should participate in a
robust orientation process designed to familiarize them with various aspects of the
company and board service.

 Reliance. In performing its oversight function, the board is entitled under state corporate
law to rely on the advice, reports and opinions of management, counsel, auditors and
expert advisers. Boards should be comfortable with the qualifications of those on whom
they rely. Boards are encouraged to engage outside advisers where appropriate and
should use care in their selection. Directors should hold advisers accountable and ask
questions and obtain answers about the processes they use to reach their decisions and
recommendations, as well as about the substance of the advice and reports they provide
to the board.

 Board and committee evaluations. The board should have an effective mechanism for
evaluating its performance on a continuing basis. Meaningful board evaluation requires
an assessment of the effectiveness of the full board, the operations of board committees
and the contributions of individual directors on an annual basis. The results of these
evaluations should be reported to the full board, and there should be follow-up on any
issues and concerns that emerge from the evaluations. The board, under the leadership of
the nominating/corporate governance committee, should periodically consider what
method or combination of methods will result in a meaningful assessment of the board
and its committees. Common methods include written questionnaires; group discussions
led by a designated director, employee or outside facilitator (often with the aid of written
questions); and individual interviews.
Senior Management Development and Succession Planning

 Succession planning. Planning for CEO and senior management development and
succession in both ordinary and emergency scenarios is one of the board’s most
important functions. Some boards address succession planning primarily at the full board
level, while others rely on a committee composed of independent directors (often the
compensation committee or the nominating/corporate governance committee) to address
this key area. The board, under the leadership of the responsible committee (if any),
should identify the qualities and characteristics necessary for an effective CEO and
monitor the development of potential internal candidates. The board or committee should
engage in a dialogue with the CEO about the CEO’s assessment of candidates for both
the CEO and other senior management positions, and the board or committee should also
discuss CEO succession planning outside the presence of the CEO. The full board should
review the company’s succession plan at least annually and periodically review the
effectiveness of the succession planning process.

 Management development. The board and the independent committee (if any) with
primary responsibility for oversight of succession planning also should know what the
company is doing to develop talent beyond the senior management ranks. The board or
committee should gain an understanding of the steps the CEO and other senior
management are taking at more junior levels to develop the skills and experience
important to the company’s success and build a bench of future candidates for senior
management roles. Directors should interact with up-and-coming members of
management, both in board meetings and in less formal settings, so they have an
opportunity to observe managers directly and begin developing relationships with them.

 CEO evaluation. Under the oversight of an independent committee or the lead director,

the board should annually review the performance of the CEO and participate with the
CEO in the evaluation of members of senior management in certain circumstances. All
nonmanagement members of the board should have the opportunity to participate with
the CEO in senior management evaluations if appropriate. The results of the CEO’s
evaluation should be promptly communicated to the CEO in executive session by
 representatives of the independent directors and used in determining the CEO’s
compensation.

Relationships with Shareholders and Other Stakeholders

Corporations are often said to have obligations to stakeholders other than their shareholders,
including employees, customers, suppliers, the communities and environments in which they do
business, and government. In some circumstances, the interests of these stakeholders are
considered in the context of achieving long-term value.

Shareholders and Investors

 Shareholder outreach. Regular shareholder outreach and ongoing dialogue are critical
to developing and maintaining effective investor relations, understanding the views of
shareholders, and helping shareholders understand the plans and views of the board and
management.

o Know who the company’s shareholders are. The nominating/ corporate

governance committee and the board should know who the company’s major
shareholders are and understand their positions on significant issues relevant to
the company.

o Role of management. Members of senior management are the principal

spokespersons for the company and play an important role in shareholder
engagement. This role includes serving as the main points of contact for
shareholders on issues where management is in the best position to have a
dialogue with shareholders.

o Board communication with shareholders. When appropriate and in consultation

with the CEO, directors should be equipped to play a part from time to time in the
dialogue with shareholders on topics involving the company’s pursuit of long-
term value creation and the company’s governance. Communications with
shareholders are subject to applicable regulations (such as Regulation Fair
Disclosure) and company policies on confidentiality and disclosure of
 information. These regulations and policies, however, should not impede
shareholder engagement. Direct communication between directors and
shareholders should be coordinated through—and with the knowledge of—the
board chair, the lead independent director, and/or the nominating/corporate
governance committee or its chair.

 Annual meeting. Directors should be expected to attend the annual meeting of

shareholders, absent unusual circumstances. Companies should consider ways to broaden
shareholder access to the annual meeting, including webcasts, if requested by
shareholders.

 Shareholder engagement. Companies should engage with long-term shareholders in a

manner consistent with the respective roles of the board, management and shareholders.
Companies should maintain effective protocols for shareholder communications with
directors and for directors to respond in a timely manner to issues and concerns that are
of widespread interest to long-term shareholders.

 Board duties. Shareholders are not a uniform group, and their interests may be diverse.
Although boards should consider the views of shareholders, the duty of the board is to act
in what it believes to be the long-term best interests of the company and all its
shareholders. The views of certain shareholders are one important factor that the board
evaluates in making decisions, but the board must exercise its own independent
judgment. Once the board reaches a decision, the company should consider how best to
communicate the board’s decision to shareholders.

 Shareholder voting. While some shareholders may use tools such as third-party analyses
and recommendations in making voting decisions, these tools should not be a substitute
for individualized decisionmaking that considers the facts and circumstances of each
company. Companies should conduct shareholder outreach efforts where appropriate to
explain the bases for the board’s recommendations on the matters that are submitted to a
vote of shareholders.

 Shareholder proposals. The federal proxy rules require public companies to include

qualified shareholder proposals in their proxy statements. Shareholders should not use the
 shareholder proposal process as a platform to pursue social or political agendas that are
largely unrelated and/or immaterial to the company’s business, even if permitted by the
proxy rules. Further, a company’s proxy statement is not always the best place to address
even legitimate shareholder concerns. Shareholders with concerns about particular issues
should seek to engage in a dialogue with the company before submitting a shareholder
proposal. If a shareholder submits a proposal, the company’s board or its
nominating/corporate governance committee should oversee the company’s response.
The board should consider issues raised by shareholder proposals that receive substantial
support from other shareholders and should communicate its response to all shareholders.

Employees

 General. Treating employees fairly and equitably is in a company’s best interest.

Companies should have in place policies and practices that provide employees with
appropriate compensation, including benefits that are appropriate given the nature of the
company’s business and employees’ job responsibilities and geographic locations. When
companies offer retirement, health care, insurance and other benefit plans, employees
should be fully informed of the terms of those plans.

 Misconduct. Companies should have in place and publicize mechanisms for employees

to seek guidance and to alert management and the board about potential or actual
misconduct without fear of retribution. As part of fostering a culture of compliance,
companies should encourage employees to report compliance issues promptly and
emphasize their policy of prohibiting retaliation against employees who report
compliance issues in good faith.

 Communications. Companies should communicate honestly with their employees about

corporate operations and financial performance.

Communities, the Environment and Sustainability

 Citizenship. Companies should strive to be good citizens of the local, national and

international communities in which they do business; to be responsible stewards of the
environment; and to consider other relevant sustainability issues in operating their
businesses. Failure to meet these obligations can result in damage to the company, both in
 immediate economic terms and in its longer-term reputation. Because sustainability
issues affect so many aspects of a company’s business, from financial performance to risk
management, incorporating sustainability into the business in a meaningful way is
integral to a company’s long-term viability.

 Community service. A company should strive to be a good citizen by contributing to the

communities in which it operates. Being a good citizen includes getting involved with
those communities; encouraging company directors, managers and employees to form
relationships with those communities; donating time to causes of importance to local
communities; and making charitable contributions.

 Sustainability. A company should conduct its business with meaningful regard for
environmental, health, safety and other sustainability issues relevant to its operations. The
board should be cognizant of developments relating to economic, social and
environmental sustainability issues and should understand which issues are most
important to the company’s business and to its shareholders.

Government

 Legal compliance. Corporations, like all citizens, must act within the law. The penalties
for serious violations of law can be extremely severe, even life threatening, for
corporations. Compliance is not only appropriate—it is essential. The board and
management should be comfortable that the company has a robust legal compliance
program that is effective in deterring and preventing misconduct and encouraging the
reporting of potential compliance issues.

 Political activities. Corporations have an important perspective to contribute to the

public policy dialogue and discussions about the development, enactment and revision of
the laws and regulations that affect their businesses and the communities in which they
operate and their employees reside. To the extent that the company engages in political
activities, the board should have oversight responsibility and consider whether to adopt a
policy on disclosure of these activities.
 CHAPTER-3

Organizational framework for corporate governance in India

The organizational framework for corporate governance initiatives in India consists of the
Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).
SEBI monitors and regulates corporate governance of listed companies in India through Clause
49. This clause is incorporated in the listing agreement of stock exchanges with companies and it
is compulsory for listed companies to comply with its provisions. MCA through its various
appointed committees and forums such as National Foundation for Corporate Governance
(NFCG), a not-for-profit trust, facilitates exchange of experiences and ideas amongst corporate
leaders, policy makers, regulators, law enforcing agencies and non- government organizations.

A.Reformation in Corporate Governance

The First Phase of India’s Corporate Governance Reforms: 1996-2008

The primary or the first phase of India’s corporate governance reforms were focussed at making
Audit Committees and Boards more independent, focussed and powerful supervisor of
management and also of aiding shareholders, including institutional and foreign
shareholders/investors, in supervising management. These reform efforts were channelled
through a number of different paths with both the Ministry of Corporate Affairs (MCA) and the
Securities and Exchange Board of India (SEBI) playing important roles.

(a) CII—1996

In 1996, CII taking up the first institutional initiative in the Indian industry took a special step on
corporate governance. The aim was to promote and develop a code for companies, be in the
public sectors or private sectors, financial institutions or banks, all the corporate entities. The
steps taken by CII addressed public concerns regarding the security of the interest and concern of
investors, especially the small investors; the promotion and encouragement of transparency
within industry and business, the necessity to proceed towards international standards of
disclosure of information by corporate bodies, and through all of this to build a high level of
people’s confidence in business and industry. The final draft of this Code was introduced in
April 1998

(b) Report of the Committee (Kumar Mangalam Birla) on Corporate Governance

Noted industrialist, Mr Kumar Mangalam Birla was appointed by SEBI—as Chairman to provide
a comprehensive vista of the concern related to insider trading to secure the rights of several
investors. The suggestions insisted on the listed companies for initial and continuing disclosures
in a phased manner within specified dates, through the listing agreement. The companies were
made to disclose separately in their annual reports, a report on corporate governance delineating
the steps they have taken to comply with the recommendations of the Committee. The objective
was to enable the shareholders to know, where the companies, in which they have invested, stand
with respect to specific initiatives taken to ensure robust corporate governance.

(c) Clause 49

The Committee also realised the importance of auditing body and made many specific
suggestions related to the constitution and function of Board Audit Committees. At that time,
SEBI reviewed it’s listing contract to include the recommendations. These rules and regulations
were listed in Clause 49, a new section of the listing agreement which came into force in phases
of 2000 and 2003.

(d) Report of the Advisory Group on Corporate Governance: Standing Committee on

International Financial Standards and Code—March 2001

The advisory group tried to compare the potion of corporate governance in India vis-à-vis the
international best standards and advised to improve corporate governance standards in India.

(e) Report of the Consultative Group of Directors of Banks—April 2001

The corporate governance of directors of banks and financial institutions was constituted by
Reserve Bank to review the supervisory role of boards of banks and financial institutions and to
get feedback on the activities of the boards vis-à-vis compliance, transparency, disclosures, audit
committees, etc. and provide suggestions for making the role of Board of Directors more
effective with a perspective to mitigate or reduce the risks.
(f) Report of the Committee (Naresh Chandra) on Corporate Audit and Governance
Committee—December 2002

The Committee took the charge of the task to analyse, and suggest changes in different areas like
—the statutory auditor and company relationship, procedure for appointment of Auditors and
determination of audit fee, restrictions if required on non-auditory fee, measures to ensure that
management and companies put forth a true and fair statement of financial affairs of the
company.

(g) SEBI Report on Corporate Governance (N.R. Narayan Murthy)—February 2003

So as to improve the governance standards, SEBI constituted a committee to study the role of
independent directors, related parties, risk management, directorship and director compensation,
codes of conduct and financial disclosures.

(h) (Naresh Chandra Committee II) Report of the Committee on Regulation of Private
Companies and Partnerships

As large number of private sector companies were coming into the picture there was a need to
revisit the law again. In order to build upon this framework, the Government constituted a
committee in January 2003, to ensure a scientific and rational regulatory environment. The main
focus of this report was on (a) the Companies Act, 1956; and (b) the Partnership Act, 1932. The
final report was submitted on 23-7-2003.

(i) Clause 49 Amendment—Murthy Committee

In 2004, SEBI further brought about changes in Clause 49 in accordance with the Murthy
Committee’s recommendations. However, implementation of these changes was postponed till 1-
1-2006 because of lack of preparedness and industry resistance to accept such wide-ranging
reforms. While there were many changes to Clause 49 as a result of the Murthy Report,
governance requirements with respect to corporate boards, audit committees, shareholder
disclosure, and CEO/CFO certification of internal controls constituted the largest transformation
of the governance and disclosure standards of Indian companies.
Second Stage of Corporate Governance—After Satyam Scam

India’s corporate community experienced a significant shock in January 2009 with damaging
revelations about board failure and colossal fraud in the financials of Satyam. The Satyam
scandal also served as a catalyst for the Indian Government to rethink the corporate governance,
disclosure, accountability and enforcement mechanisms in place. Industry response shortly after
news of the scandal broke, the CII began examining the corporate governance issues arising out
of the Satyam scandal. Other industry groups also formed corporate governance and Ethics
Committees to study the impact and lessons of the scandal. In late 2009, a CII task force put
forth corporate governance reform recommendations.

In its report the CII emphasised the unique nature of the Satyam scandal, noting that—Satyam is
a one-off incident. The overwhelming majority of corporate India is well run, well regulated and
does business in a sound and legal manner. In addition to the CII, the National Association of
Software and Services Companies (Nasscom, self-described as—the premier trade body and the
Chamber of Commerce of the IT-BPO industries in India) also formed a Corporate Governance
and Ethics Committee, chaired by N.R. Narayana Murthy, one of the founders of Infosys and a
leading figure in Indian corporate governance reforms. The Committee issued its
recommendations in mid-2010.

Latest Developments in Corporate Governance

Self-Regulatory Developments: Self-regulation has played a significant role to improve the

corporate practices. The companies, shareholders, rating agencies and professional bodies
themselves have tried or trying to induce some important measures that lead to increase the level
of corporate governance. The following are the efforts done under the selfregulatory mode.
Corporate Initiatives: The organizations are taking initiatives to enhance the quality of corporate
governance at their own level. Some of the initiatives taken:

1. Controlling the Position of Chief Executive Officer

2. Changes in the Composition of the Board

3. Improvements in the Disclosure of Financial and Non-Financial Operations

4. Reporting on Corporate Governance Practices

5. Linking Managerial Compensation to Performance

6. Employee Stock Option Plans (ESOP)

7. Changing Face of Audit Committee

8. Setting up of National Foundation for Corporate Governance (NFCG)

Ministry of Company Affairs has recently of set up National Foundation for Corporate
Governance (NFCG) in partnership with Confederation of Indian Industry (CII), Institute of
Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI).

Functions of NFCG

a. Creating awareness regarding benefits of implementation of good corporate

governance practices
b. Encouraging research capability in the area of corporate governance.
c. Providing key inputs for developing laws and regulations.
d. Coordinating with the various regulatory authorities for proper implementation
and enforcement of various laws related to corporate governance.
e. Cultivation of international linkages and maintaining the evolution towards
convergence with international standards.
f. Setting up of “National Centers for Corporate Governance” across the country to
provide quality training to Directors and also to produce quality research with the
aim to receive global recognition. .

SEBI initiatives for strengthening Corporate Governance

SEBI has initiated several measures through amendments in listing agreement. Some of these
are:

a. Strengthening of disclosure norms for Initial Public Offering as per the Malegam Committee.
b. Providing information in the director‟s report for utilization/end use of funds and variation in
use of funds.

c. Declaration of un audited quarterly results.

d. Mandatory appointment of Compliance Officer

e. Dispatch of a copy of complete balance sheet to every investor household and arbitrage copy
of balance sheet to all shareholders.

f. Under the SEBI Act, 1992, SEBI has extensive powers to issue directions to market
participants on a wide range of subjects, many of which relate to corporate governance.

Governance by Financial Institutions:

The Financial Institutions have also taken responsibility enforcing corporate governance in
companies where they have substantial stakes. They insists the companies on following:

a. Making adequate disclosures,

b. Moving towards internationally accepted accounting standards,

c. Maintaining distinction between the CEO and Chairman,

d. Holding regular meetings with proper recording and dissemination of proceedings. Financial
Institutions have also implemented new norms for appointment of nominee directors which have
drastically cut down the total number of such directors on company‟s board.

Role played by Credit Rating Agencies:

Two of the leading credit rating agencies – Credit Rating Information Services of India Limited
(CRISIL) and Investment Information and Credit Rating Agency (ICRA) have prepared a
comprehensive instrument for rating the good corporate governance practices of listed
companies.
B.Regulation
The Companies Act, 2013 got assent of the President of India on 29th August, 2013 and it was
enacted on 12th September, 2013 repealing the old Companies Act, 1956. The Companies Act,
2013 provides a formal structure for corporate governance by enhancing disclosures, reporting
and transparency through enhanced as well as new compliance norms. Apart from this, the
Monopolies and Restrictive Trade Practices Act, 1969 (which is replaced by the Competition Act
2002), the Foreign Exchange Regulation Act,1973 (which has now been replaced by Foreign
Exchange Management Act,1999), the Industries (Development and Regulation) Act, 1951 and
other legislations also have a bearing on the corporate governance principles. In addition to
various acts and guidelines by various regulators, non-regulatory bodies have also published
codes and guidelines on Corporate Governance from time to time. For example, Desirable
Corporate Governance Code by the Confederation of Indian Industries (CII) in 2009. The issue
of corporate governance for listed companies came into prominence with the report of the Kumar
Mangalam Birla Committee (2000) set up by SEBI in the to suggest inclusion of a new clause,
Clause 49 in the Listing Agreement to promote good corporate governance. On 21 August 2002,
the Ministry of Finance appointed the Naresh Chandra Committee to examine various corporate
governance issues primarily around auditor – company relationship, rotation of auditors and
defining Independent directors. This was followed by constitution of the Narayana Murthy
Committee (2003) by SEBI, which provided recommendations on issues such as audit
committee’s responsibilities, audit reports, independent directors, related parties, risk
management, independent directors, director compensation, codes of conduct and financial
disclosures. Many of these recommendations were then incorporated in the Revised Clause 49
that is seen as an important statutory requirement. Further, after enactment of the Companies
Act, 2013, SEBI has amended Clause 49 in 2013 to bring it in line with the new Act.
C.Board of Directors
The Desirable Corporate Governance Code by CII (1998) for the first time introduced the
concept of independent directors for listed companies and compensation paid to them. The
Kumar Mangalam Birla Committee (2000) then suggested that for a company with an executive
Chairman, at least half of the board should be independent directors, else at least one-third. The
updated Clause 49 based on the report by the Narayana Murthy Committee further elaborates the
definition of Independent Directors; and also requires listed companies to have an optimum
combination of executive and non-executive directors, with non-executive directors comprising
of at least 50% of the Board. The 2013 Act introduces the requirement of appointing a resident
director and a woman director. The term ‘Key Managerial Personnel’ has been defined in the
2013 Act, comprising of Chief Executive Officer, Managing director, Manager, Company
Secretary, Whole-time director, Chief Financial Officer; and any such other officer as may be
prescribed. The 2013 Act has also introduced new concepts such as performance evaluation of
the board, committee and individual directors. The revised Clause 49 (in 2013) now also states
that all compensation paid to non –executive directors, including independent directors shall be
fixed by the Board and shall require prior approval of shareholders in the General meeting and
that limit shall be placed on stock options granted to non executive directors. Such remuneration
and stock option is required to be disclosed in the annual report of the company. The
independent directors are also required to adhere to a ‘Code of Conduct’ and affirm compliance
to the same annually.
D.Audit Committee
The audit committee’s role flows directly from the board’s oversight function and delegation to
various committees. It acts as an oversight body for transparent, effective anti-fraud and risk
management mechanisms, and efficient Internal Audit and External Audit functions financial
reporting. As per section 177 of the Companies Act, 2013 read with Rule 6 of Companies
(Meetings of Board and its powers) Rules, 2014, every listed company and all other public
companies with paid up capital of Rs. 10 crore or more; or having turnover of 100 crore or more;
or having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding
Rs.50 Crores or more, to have an Audit Committee which shall consist of not less than three
directors and such number of other directors as the Board may determine of which two thirds of
the total number of members shall be directors, other than managing or whole-time directors.

The Kumar Mangalam Birla Committee, Naresh Chandra Committee and the Narayana Murthy
Committee recommended constitution, composition for audit committee to include independent
directors and also formulated the responsibilities, powers and functions of the Audit Committee.
The Audit Committee and its Chairman are also entrusted with the ethics and compliance
mechanisms of an organization, including review of functioning of the whistleblower
mechanism. The revised Clause 49 expands the role of the Audit Committee with enhancing its
responsibilities in providing transparency and accuracy of financial reporting and disclosures,
robustness of the systems of internal audit and internal controls, oversight of the company’s risk
management policies and programs, effectiveness of anti-fraud and vigil mechanisms and review
and administration of related party transactions of the organization.
Subsidiary Companies
The rationale behind having separate provisions with respect to subsidiary companies in the
Revised Clause 49 was the need for the board of the holding company to have some independent
link with the board of the subsidiary and provide necessary oversight. Hence, the
recommendation of Narayana Murthy Committee to make provisions relating to the composition
of the Board of Directors of the holding company to be made applicable to the composition of
the Board of Directors of subsidiary companies and to have at least one independent director on
the Board of Directors of the holding company on the Board of Directors of the subsidiary
company, were incorporated in the Revised Clause 49 of the Listing Agreement. Besides the
Audit Committee of the holding Company is to review the financial statements, in particular
investments made by the subsidiary and disclosures about materially significant transactions
ensures that potential conflicts of interests with those of the company may be taken care of. The
definition of ‘subsidiary’ is also widened by the Companies Act, 2013 to include joint venture
companies and associate companies.
E.Role of Institutional Investors
Fast growing countries like India have attracted large shareholding by international investors and
large Indian financial institutions with global ambitions. This has resulted in a significant
progress in the standards of corporate governance in the investee companies. Many research
reports published in recent years show that companies with good governance system have
generated high risk-adjusted returns for their shareholders. So, if a company wants institutional
investor participation, it will have to convincingly raise the quality of corporate governance
practices. Indian companies thus need to adopt the best practices such as the OECD Corporate
Governance Principles (revised in 2004) that serve as a global benchmark. In countries like India
where corporate ownership still continues to be highly concentrated, it is important that all
shareholders including domestic and foreign institutional investors are treated equitably.

Institutional investors are expected to actively participate in the AGM voting on the shares held
by them in their portfolio companies along with public disclosure of their voting records and
reasons for non-disclosures. Their reason for assenting or dissenting to any Board Resolution of
their portfolio companies shall be disclosed on their website.

Stakeholders Relationship Committee

As one of its mandatory recommendations, the Kumar Mangalam Birla Committee propounded
the need to form a board committee under the chairmanship of a non-executive director to
specifically look into the redressing of shareholder complaints like transfer of shares, non-receipt
of balance sheet, non-receipt of declared dividends etc. The Committee believed that the
formation of shareholders’ grievance committee would help focus the attention of the company
on shareholders’ grievances and sensitise the management to redress their grievances. The 2013
Act as well as the revised Clause 49 now mandate the formation of such a committee with
broader remit to cover issues and concerns of all stakeholders and not just shareholders.

The 2013 Act now mandates companies with more than one thousand shareholders, debenture-
holders, deposit-holders and any other security holders at any time during a financial year are
required to constitute a Stakeholders Relationship Committee consisting of a chairperson who
shall be a non-executive director and such other members as may be decided by the Board to
resolve the grievances of security holders of the company.

Risk Management
The Kumar Mangalam Birla Committee report included mandatory Management Discussion &
Analysis segment of annual report that includes discussion of industry structure and
development, opportunities, threats, outlook, risks etc. as well as financial and operational
performance and managerial developments in Human Resource /Industrial Relations front.
Clause 49 included this recommendation as a part of management disclosures. Risk Management
was however propounded for the first time by the Narayana Murthy Committee (2003) in its
report by which it required that the company shall lay down procedures to inform Board
members about the risk assessment and minimization procedures. These procedures shall be
periodically reviewed to ensure that executive management controls risk through means of a
properly defined framework and overlooked by a Risk Management Committee. This is
incorporated in Clause 49 as a part of internal disclosures to the Board.

The 2013 Act and Revised Clause 49 specify requirements related to risk management. Audit
Committee and the independent directors of the company are entrusted with the responsibility of
evaluating the robustness of the risk management systems and policy laid down by the Board.
F.Ethics
A code of conduct creates a set of rules that become a standard for all those who participate in
the group and exists for the express purpose of demonstrating professional behaviour by the
members of the organization.The Naresh Chandra Committee for the first time recommended
that companies should have an internal code of conduct. The Report by Narayana Murthy
Committee further recommended that a company should have a mechanism (whistle blower) to
report on any unethical or improper practice or violation of code of conduct observed and that
Audit Committee would be entrusted with the role of reviewing functioning of the mechanism.

Clause 49 incorporated these recommendations further mandating directors of every listed

company to lay down a Code of Conduct and post the code on their company’s website. The
Board members and all senior management personnel are required to affirm compliance with the
code annually and include a declaration to this effect by the CEO in the Annual Report. The
recommendation of Narayana Murthy Committee to make Audit Committee responsible for
reviewing the functioning of the whistle blower mechanism, where it exists, is incorporated in
the Clause 49. The 2013 Act and revised Clause 49 mandate establishing Whistleblower
mechanism to let employees and directors blow whistles on financial and non-financial wrong
doings and also that such mechanism should provide protection to the whistle blower from
victimization and provide direct access to the Chairman of the Audit Committee in exceptional
cases.
G.Executive Remuneration

The overriding principle in respect of directors’ remuneration is that of openness and

shareholders are entitled to a full and clear statement of benefits available to the directors. The
2013 Act and Revised Clause 49 mandate the formation of a Nomination & Remuneration
Committee comprising of at least three directors, all of whom shall be non-executive directors
and at least half shall be independent. The Nomination and Remuneration Committee is to ensure
that the level and composition of remuneration is reasonable and sufficient; the relationship of
remuneration to performance is clear and meets appropriate performance benchmarks; and the
remuneration to directors, key managerial personnel and senior management involves a balance
between fixed and incentive pay reflecting short and long-term performance objectives
appropriate to the working of the company and its goals. There are also compulsory disclosures
to be made in the section on corporate governance of the annual report - All elements of
remuneration package of all the directors i.e. salary, benefits, bonuses, stock options, pension
etc.; Details of fixed component and performance linked incentives, along with the performance
criteria; Service contracts, notice period, severance fees; Stock option details, if any – and
whether issued at a discount as well as the period over which accrued and over which
exercisable.

Directors’ Responsibility Statement

To promote better disclosures and transparency, the 2013 Act, requires the company’s Annual
Report to include a Director’s Responsibility Statement stating the following:

(a) Applicable accounting standards had been followed in the preparation of the annual accounts

(b) The directors have selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view of the
state of affairs of the company

(c) Proper and sufficient care for the maintenance of adequate accounting records in accordance
with the provisions of this Act for safeguarding the assets of the company and for preventing and
detecting fraud and other irregularities
(d) The annual accounts of the company are prepared on a going concern basis

(e) The directors have laid down internal financial controls to be followed by the company and
that such internal financial controls are adequate and were operating effectively

(f) The directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively.

CEO/CFO Certification

Internal control is a process, effected by an entity’s board of directors, management and other
personnel, designed to provide reasonable assurance regarding the achievement of objectives in
the following categories:
− Effectiveness and efficiency of operations,
− Reliability of financial reporting, and
− Compliance with applicable laws and regulations.

The Naresh Chandra Committee for the first time required the signing officers, to declare that
they are responsible for establishing and maintaining internal controls which have been designed
to ensure that all material information is periodically made known to them; and have evaluated
the effectiveness of internal control systems of the company. Also, that they have disclosed to
the auditors as well as the Audit Committee deficiencies in the design or operation of internal
controls, if any, and what they have done or propose to do to rectify these deficiencies. Clause 49
requires the CEO and CFO to certify to the board the annual financial statements in the
prescribed format and establishing internal control systems and processes in the company. CEOs
and CFOs are, thus, accountable for putting in place robust risk management and internal control
systems for their organization’s business processes. The 2013 Act and revised Clause 49 have
also brought much rigour into internal controls certification by making it as one of the parts of
Directors’ Responsibility Statement.
 CHAPTER-4

A.WHY THE ISSUE OF CORPORATE GOVERNANCE IS IMPORTANT?

The Corporate Governance reflects the company‟s values. Corporate governance has been
emphasized in recent years because it has been shown in many companies worldwide, the
governance mechanisms occasionally have failed to adequately monitor and control top-level
mangers‟ decisions. Misangyi & Acharya (2014) findings suggest that high profits result when
CEO incentive alignment and monitoring mechanisms work together as complements rather than
as substitutes. Furthermore, they show that high profits are obtained when both internal and
external monitoring mechanisms are present. Their findings clearly suggest that the effectiveness
of board independence and CEO non-duality--governance mechanisms widely believed to
singularly resolve the agency problem--depends on how each combine with the other
mechanisms in the governance bundle. This situation has resulted in changes in governance
mechanisms in corporations throughout the world, especially with respect to efforts intended to
improve the performance of boards of directors. Robert Monks (2005) , in his paper “Corporate
Governance-USA-Fall 2004 Reform-The Wrong Way and the right Way”, concludes that almost
there is a universal agreement that the Corporate Governance in America is failing. Andrea
Georgescherer and Guiclo Palazzo (2011) in their paper “The New Political Role of Business in
Globalized World: A Review of New Perspective on CSR and its implications for the Firm,
Government and Democracy”, conclude that under the conditions of globalization, the strict
division of labor between private business and nation-state governance does not hold any more.
Many businesses firms have started assuming social and political responsibilities that go beyond
legal requirements and fill the regulatory vacuum in the global presence. A second and more
positive reason for this interest is that evidence suggests that a well-functioning corporate
governance and control system can create a competitive advantage for an individual firm. This is
true for organizations worldwide including India.
B.Corporate governance failures in India

Here’s a look at how corrupt business practices led to some of the biggest corporate governance
failures in India.

Tata-Mistry fallout

Cyrus Mistry was a director of Tata Sons Ltd. since 2006. The majority of shareholding was held
by trusts of the Tata family. This was to ensure that the control remains with the family even
when Cyrus Mistry joined. The Board frequently disagreed with the decisions of Mistry and
ousted him during one such meeting. Mistry alleged that there was dominant control by the
nominee directors of the trust, including Ratan Tata, who were the “shadow directors” of Tata
Sons Ltd.

Mistry said that he was never provided with a free hand by the promoters to manage the
company and that the promoters were stubborn regarding their own projects. He also alleged that
there was no independence in the working of the independent directors. Nusli Wadia, who was
an independent director was also fired for standing up for Cyrus Mistry to maintain his
chairmanship in group companies. This shows the clear abuse of power by the promoters.

ICICI Bank-Videocon bribery case

The Enforcement Directorate had apprehended Deepak Kochhar in September 2020 after it filed
a criminal case for money laundering basis an FIR registered by the Central Bureau of
Investigation (CBI) against the Kochhars, Videocon’s Dhoot, and others.

The federal probe agency alleged that Rs. 64 crore out of a loan amount of Rs. 300 crore
sanctioned by a panel of ICICI Bank headed by Chanda Kochhar (wife of Deepak Kochhar) to
Videocon International Electronics Limited was wired to Nupower Renewables Pvt Ltd (NRPL)
by Videocon Industries on September 8, 2009. The money was transferred a day after the
disbursement of the loan. NRPL, earlier known as Nupower Renewables Limited (NRL), is
owned by Deepak Kochhar.
PNB-Nirav Modi Scam

The Punjab National Bank (PNB), one of the country’s largest public-sector lenders, found itself
in the middle of a Rs. 11,400 crore transaction fraud case in February 2018. The bank had
detected and informed the Bombay Stock Exchange about some “fraudulent and unauthorised
transactions” in one of its branches in Mumbai to the tune of $1771.69 million (approx). The
CBI then received two complaints from PNB against billionaire diamantaire Nirav Modi and a
jewellery company alleging fraudulent transactions worth about Rs. 11,400 crore. This was in
addition to the Rs. 280 crore fraud case that Nirav Modi was already under investigation for,
again filed by PNB. Modi is facing two sets of criminal proceedings. The Central Bureau of
Investigation case relates to the large-scale fraud upon PNB through the fraudulent obtaining of
“Letters of Understanding”, while the Enforcement Directorate is investigating the laundering of
the proceeds of that fraud.

The Satyam scandal

Satyam was a public-listed company and ironically enjoying a good reputation, even winning the
Golden Peacock Global Award for corporate governance at one point. However, the company
colluded with auditors in fraudulent accounting practices to mislead the investors, regulators,
board and other stakeholders. The scandal was unravelled when the company’s Chairman
Ramalinga Raju confessed about the misrepresentation in the accounting practices and thereafter
regulators like SEBI stepped in and started taking action.

The issue started with Satyam’s attempt to invest Rs. 7,000 crores in Maytas Properties and
Maytas Infrastructure. These firms were owned by the family members of Raju. The investments
were cleared by the board on 16th December 2008 but were opposed by the investors. The
accounts of the firm were manipulated by assets like cash and bank deposits being overstated,
debts being understated. As a result, the investors filed various lawsuits against Satyam.

Following the Maytas deal and subsequent lawsuits, the decision of Satyam board was reversed.
The World Bank banned Satyam for 8 years to conduct any kind of business while four
independent directors resigned.
The Satyam case sparked a reaction from various corners of corporate India, calling for urgent
change in policy measures. Several agencies like CII (Confederation of Indian Industries),
National Association of Software and Services committee, SEBI Committee on disclosure and
accounting standards etc. started looking into the policy changes regarding the Audit Committee,
Shareholder Rights, Whistle-blower policy etc. These committees prepared various kinds of
suggestions which were later dealt with by the legislature.

Malvinder and Shivinder Singh

The now infamous Singh brothers Shivinder and Malvinder, who were under the scanner of the
Economic Offence Wing (EoW) of the Delhi police for a fraudulent loan from Laxmi Vilas
Bank, are accused of siphoning nearly $2 billion from their corporate empire that spanned across
listed companies including pharma major Ranbaxy, hospital chain Fortis Healthcare and
financial services company Religare Enterprises Ltd (REL).

Malvinder and Shivinder have been accused of diverting the money of Religare Finvest Limited
(RFL), an REL subsidiary. The broad allegations are that Malvinder and Shivinder, along with
other officials of REL, took loans in the name of RFL and diverted the money to other
companies. This caused the company losses of Rs. 2,387 crore! These allegations against
Malvinder and Shivinder Singh are just the tip of the iceberg. According to a Business Today
report from 2018, the brothers inexplicably managed to squander a whopping Rs. 22,500 crore
over just one decade.

In a complaint Malvinder accused his younger brother, Shivinder, the Dhillon family and Sunil
Godhwani (former head of REL) of criminal conspiracy, cheating and fraud for allegedly
siphoning off thousands of crores from RHC Holdings, the group’s holding company that once
promoted Fortis Hospitals and Religare. Meanwhile, SEBI has accused the Singh brothers of
diverting Rs. 403 crores from Fortis Healthcare to RHC.
Dewan Housing Finance Limited (DHFL)

The DHFL scandal was the biggest corporate fraud of 2019, and is still under investigation. It is
a classic case of meddling with the books – that we mentioned earlier – getting the company into
trouble.  In this case, the “Bandra Books” were at the centre of the massive corporate fraud
which is still under investigation. The supposed Bandra branch for which a parallel set of books
exist, does not exist in reality. It was a completely made up entity for the corrupt business
practices to thrive.

A forensic report declared: “out of the Rs. 23,815 crores shown as disbursed to Bandra Book
entities in the accounts of the Company, only Rs. 11,755.79 crores was actually disbursed” to 91
entities, but was portrayed as comprising 2,60,315 home loan accounts. In fact, when the auditor
“verified some of these “91 entities”, it was found that 34 of them had invested part of the loan
amount back into companies linked with DHFL. According to SEBI, if the fake income in the
Bandra books is taken out, DHFL has been making losses for years on end. The fraud has
allowed DHFL to raise a whipping Rs. 24,000 crores through public issue of debt securities.

YES Bank

In the absence of a credible revival plan, and in the interest of YES Bank’s depositors, the RBI
(Reserve Bank of India) took control of YES Bank in March 2020. The story of YES Bank is
nothing short of a John Grisham novel. It was founded as an NBFC (non-bank financial
company) in 1999, and became a full-fledged bank in 2003. Its board members battled constantly
for the top spot, with Former Managing Director and CEO Rana Kapoor being popular for
propping up the market by agreeing to disburse loans to corporate borrowers rejected by other
banks. The bank would charge a huge upfront fee and most borrowers were defaulters at will.

The financial position of Yes Bank has undergone a steady decline largely due to inability of the
bank to raise capital to address potential loan losses and resultant downgrades, triggering
invocation of bond covenants by investors, and withdrawal of deposits. The bank has also
experienced serious governance issues and practices in recent years which have led to its steady
decline. The RBI was in constant engagement with the bank’s management to find ways to
strengthen its balance sheet and liquidity. The bank management had indicated to the RBI that it
was in talks with various investors and they were likely to be successful.

RBI was also engaged with a few private equity firms for exploring opportunities to infuse
capital as per the filing in stock exchange dated February 12, 2020. These investors did hold
discussions with senior officials of RBI but for various reasons eventually did not infuse any
capital. Since a bank and market-led revival is a preferred option over a regulatory restructuring,
the RBI made all efforts to facilitate such a process and gave adequate opportunity to YES
Bank’s management to draw up a credible revival plan, which did not materialise. In the
meantime, the bank was facing regular outflow of liquidity. It wasn’t long before the bank
collapsed and RBI was forced to apply to the Central Government for imposing a moratorium on
YES Bank.

Cafe Coffee Day

The coffee chain Cafe Coffee Day (which loyalists called CCD) had over 1750 outlets across the
nation at one point in time. It was India’s biggest coffee chain in the 2000s. Proprieter V.
Siddhartha came from a prestigious family with a 140-year history of growing coffee beans. A
chat with a German coffee maker inspired him to launch Cafe Coffee Day as a rival to Starbucks
right when the cafe culture had begun to brew among young people. The chain went public in
2015 and it looked like things could only get better, what with rumours of Coca Cola planning to
invest a whopping 2,500 crores into the company.

However, things took a turn in September 2017 when the Income Tax (I-T) department
conducted raids at over 20 locations linked to Siddhartha. He was reportedly heavily in debt. His
Coffee Day Enterprises Ltd had seen net loss widening to Rs. 67.71 crore in the fiscal year ended
March 31, 2018 from Rs. 22.28 crore loss in the previous year. This despite revenues climbing to
122.32 crores. He disappeared suddenly one evening in 2019.

A letter by him to the CCD Board claimed that he was being pressured by “one of the private
equity partners” forcing him to buy back shares, a transaction he had partially completed six
months ago by borrowing a large sum of money from “a friend”. His dead body was found 36
hours after he went missing in Mangaluru. It was apparently a case of suicide.

Evidence points to Siddhartha having taken on debt in his private capacity to buy land and invest
in long gestation projects, and angry lenders hounding him for quick returns. While the 2000s
decade saw the rise of Cafe Coffee Day, the period also saw debt piling up. The company needed
funds for both operations and capex. In 2010, Standard Chartered Private Equity (Mauritius) II
Ltd, KKR Mauritius PE Investments II Ltd, and Arduino Holdings Ltd (which later transferred
the debentures to NLS Mauritius LLC) invested close to $149 million. Compulsorily convertible
preference shares held by Standard Chartered Private Equity (Mauritius) II Ltd and the
compulsory convertible debenture held by KKR Mauritius PE Investments II Ltd and NLS
Mauritius LLC was converted into equity shares at the time of listing. By June 2015, the
consolidated debt was a whopping Rs. 2,700 crore, a knot the board couldn’t wriggle out of.

Jet Airways

Jet Airways was India’s second largest airline until the year 2018 with 13.8% market share. It
saw its last flight on 18th April 2019 after running out of funds to carry out operations and left
more than 15,000 employees in the lurch. The company’s dues to banks are around Rs. 8,500
crores. Jet Airways owes another Rs. 25,000 crores in arrears to lessors, employees and other
firms. Corporate governance failures by its Chairman Naresh Goyal are the culprits. The
downfall of Jet Airways follows a string of other failed airlines including Kingfisher, Sahara and
Deccan, pointing to bad corporate governance in the airline sector.

The Goyal family owned the majority share in the airline and Naresh Goyal was the Chairman of
the board. A promoter-led board is often at the danger of creating a spineless board, often serving
at the wish and command of the promoter-chairman. Two independent directors, Vikram Mehta
Singh and Ranjan Mathai, resigned from the Board in November 2018. The decision by the
board to not accept an investment offer by the Tata Group was financially imprudent as a deal
would have infused capital and saved the airline. It also looks as though the decision was made
with the sole interest of the promoter than the consideration of the stakeholders as well as the
employees.
Ricoh Case

The saga at Ricoh India demonstrates that the radiance of good governance that is automatically
ascribed to MNCs is not ensured the result. In spite of administrative interference after the
Satyam scam and legislative amendments to tighten the governance framework [Companies Act,
2013, SEBI (Listing Obligations and Disclosure Requirements) Regulations, etc.] the Ricoh
scene was almost a replica of the Satyam episode in terms of accounting fraud and resultant
fraud of stock prices interestingly without any promoter being in the saddle. Just a few corrupt
managers were sufficient to obliterate the system with the usual failure of the main regulating
institutions such as the auditors, credit rating agencies, independent directors of repute,
committees of directors including the powerful audit committees manned by independent
directors, etc.

Kingfisher Airlines and United Spirits Case

Mainly regarding illegal internal corporate funding to parties, falsifying accounts. It was entirely
evident that assets had been transferred from United Spirits Ltd. (USL) to subsidise Kingfisher,
that United Breweries (UB) Holdings was utilised as a channel for raising loans and giving them
to his group, that intercorporate credits were given to related groups without the Board’s
approval, accounts were inappropriately expressed, reviews were stage overseen, etc. during the
period Mr Vijay Mallya was responsible for USL.

Sad but true. The list is getting longer by each passing month and newer corporate frauds are
being detected at companies and banks which used to be torchbearers of good corporate
governance.
C.THE IMPACT OF CORPORATE GOVERNANCE ON PRODUCTIVITY
AND THE CORPORATE SECTOR IN INDIA

In India, the idea of Corporate Governance is relatively new. Traditionally few researchers have
written about it. Narayanaswamy, R. et al (2012) provide a brief overview of corporate
governance in India, including a description of Indian contextual differences (as compared to the
U.S. and elsewhere) and a discussion of the major events contributing to the evolution of India's
corporate governance/accounting/auditing practices since economic deregulation in 1991. They
also offer an agenda for future research on important Indian governance/accounting/auditing
issues, and briefly address accounting practice implications.

The Corporate sector operated generally on a philosophy of cost of production plus in the
protected economy. Since they were not exposed to any serious competition, Indian industries
continued with existing technologies and remained insensitive about technological developments
and happening, but this trend is changing in many corporate houses in due course of the time and
the companies in India some of them are becoming very much competitive and are harnessing
technological, process and product innovation to become global players in their field. All such
companies in India have given lot of importance to the issue of corporate governance.

Bhattacharya, CB. et al in McKinsey Report (2011) talks about how companies can use
Corporate Responsibility towards stakeholders as a conduit for furthering its goals. Ultimately
stakeholders prefer companies which produce tangible and psychological benefits – which favor
good Corporate Governance. Better governance reforms reduce uncertainty & are engines of
stability and continued progress has helped Asian Corporate transform themselves during the
period of globalization, as per report by Asian Productivity Organization, Tokyo in 2004 .

The private corporate like the Tata Group, Aditya Birla Group, Infosys Technologies, Wipro
Technologies, Godrej Group, Mahindra & Mahindra Group and Larson & Toubro (L&T.), of
companies are giving a lot of importance to the issue of corporate governance. Some of them had
understood this issue much better quite early, when they started their companies. Recently,
Public sector companies in India, many of them, which have been, listed companies like Oil and
Natural Gas Corporation (ONGC), Indian Oil Corporation Ltd., Bharat Heavy Electricals
Limited (BHEL), National Thermal Power Corporation (NTPC), Gas Authorities of India
Limited (GAIL), Engineers India Limited (EIL), Gujarat Alkalies & Chemicals Ltd., Bharat
Electronics Limited (BEL), and other such companies are applying the codes of good corporate
governance for their organizations. The guidelines and codes have evolved over a period in India
by Securities Exchange Board of India (SEBI) and various Committee setup by the Parliament to
come up with the guidelines on corporate governance to Indian Companies.

Impact of corporate governance reforms on disclosures

In general, almost all countries have issued general guidelines for governance, social and
environmental reporting, but it would result only as a tick-in-the-box activity unless it is checked
to what extent the corporate world is responding and reporting as per the new reforms. Many
researchers have studied the impact of the recent reforms for improving governance, social and
environment disclosures in different economies. In Portugal, Monteiro and Guzman (2010)
explore that the extent of disclosures have improved as compared to the pre reform period but the
amount of disclosures is still low even after the introduction of new reforms. Ioannou and
Serafeim (2017) study the implications of disclosure reforms in China, Denmark, Malaysia and
South Africa and suggest that improvement in sustainability disclosures due to introduction of
reforms is associated with increase in firm value. Kolk (2008) asserts that after the reforms in
disclosure regulations, many countries in Europe and in Japan have started paying attention to
board supervision, ethics compliance and external verifications. Chen, Hung and Wang (2018)
affirm decrease in industrial waste and Sulfur Dioxide (SO2) emissions after the declaration of
disclosure mandate in China but the firms adopting CSR reporting experience decrease in
profitability.

India initiated reforms concerning corporate governance, corporate social responsibility and
environment to improve disclosures by Indian companies. Implementing corporate reforms,
however, is significantly difficult than framing those reforms. There are many challenges in
successful implementation and effective enforcement of reforms such as local inhibitions and
comprehensive rules (Afsharipour, 2009), lack of availability of qualified independent directors
(Malik and Nehra, 2014), underdeveloped external monitoring systems and weak and multiple
regulatory norms (Rajharia and Sharma, 2014a Rajharia and Sharma, 2014b). This gives the need
to explore the actual impact of reforms on corporate governance and disclosures by Indian
companies.
There is an interesting observation about these disclosure regulations that it contains a clause of
“comply or explain”. It means that either the companies should comply by the norms or explain
the reasons for not following the mandatory requirements. Moreover, there is no penalty for non-
compliance as well. It gives an option to the companies either to follow the regulations or safely
escape by giving some explanation. There may be some companies which were following the
best practices in corporate governance even before these reforms were introduced. But, there
may be others, which have started doing the same after these reforms. This argument justifies
that there is no obvious reason to believe that reforms would result into better compliance and
reporting. Therefore, it becomes important to explore the practical implications of these reforms
for Indian companies and for policy makers.

Corporate governance reforms draw increased strategic attention in India. These structural
changes and disclosure reforms make an interesting case to investigate their implications on
Indian companies. Accordingly, this research studies the corporate governance by Indian
companies after the introduction of the above stated recent reforms. No previous research has
investigated the impact of these reforms considering two different periods of reforms.

There is no significant improvement in corporate governance performance of Indian companies

after the introduction of reforms.

Impact of corporate governance reforms on different sectors

Many researchers have studied the impact of corporate governance in different sectors of the
economy. There is a significant impact of corporate governance on firm performance in textile
sector (Ashraf et al. 2017) and in Banking and Financial services sector (Arif and Syed, 2015) in
Pakistan. While comparing different sectors, Banking, Insurance and Service sector companies
listed in Amman stock exchange perform better after the introduction of corporate governance
reforms in Jordan (Mansur and Tangl, 2018). Jizi et al. (2014) find board independence and
board size significantly related to improved CSR disclosures for banking sector in US. Okoye,
Evbuomwan, Achugamonu and Araghan (2016) report a significant impact of corporate
governance on banking sector in Nigeria. Palaniappan and Rao (2015) report significant impact
of corporate governance disclosures on firm performance for manufacturing companies taking
only one company from ten different sectors in India.
Many studies have been conducted testing the impact of corporate governance on firm
performance taking a set of listed companies in varied stock exchanges across different
economies. Gompers, Ishi and Metrick (2003) report better governed firms listed in New York
Stock Exchange (NYSE) show higher market valuation and low expenditure. Bauer et al. (2004)
reveal the same results for companies in Financial Times Stock Exchange (FTSE), Eurotop 300
index giving higher stock returns and enhanced firm valuation for the better governed
companies. Studies on US listed firms also highlight positive relationship between corporate
governance rankings and Tobin Q (Klapper and Love, 2004; Durnev and Kim, 2005). Similar
findings are also reported in studies conducted on Italian (Abatecola et al., 2012) and Swiss
(Beiner et al., 2006) firms which confirm that corporate governance has a significant statistical
relationship with corporate performance variables like Return on Capital (ROC), Return on
Assets (ROA).

An interesting observation from these studies is that most of the research has been done on a
whole set of listed companies in a stock exchange or a set of listed companies in a particular
sector but very few studies have done comparison of corporate governance in different sectors.
Corporate governance reforms along with liberalization and privatization has led to substantial
development and strategic changes in different sectors of the economy (Reed, 2002). This study
investigates the nature and type of corporate governance activities, followed by top 100 listed
Indian companies of different sectors, after the introduction of recent corporate governance
reforms in India and tests the sector differences for two periods of reforms.
D.Issues affecting Corporate governance practices

1. Getting the Board Right

Enough has been said on board and its role as the cornerstone for good corporate governance. To
this end, the law requires a healthy mix of executive and non-executive directors and
appointment of at least one woman director for diversity. There is no doubt that a capable,
diverse and active board would, to large extent, improve governance standards of a company.
The challenge lies in ingraining governance in corporate cultures so that there is improving
compliance "in spirit". Most companies' in India tend to only comply on paper; board
appointments are still by way of "word of mouth" or fellow board member recommendations. It
is common for friends and family of promoters (a uniquely Indian term for founders and
controlling shareholders) and management to be appointed as board members. Innovative
solutions are the need of the hour - for instance, rating board diversity and governance practices
and publishing such results or using performance evaluation as a minimum benchmark for
director appointment.

2. Performance Evaluation of Directors

Although performance evaluation of directors has been part of the existing legal framework in
India, it caught the regulator's attention recently. In January 2017, SEBI, India's capital markets
regulator, released a 'Guidance Note on Board Evaluation'. This note elaborated on different
aspects of performance evaluation by laying down the means to identify objectives, different
criteria and method of evaluation. For performance evaluation to achieve the desired results on
governance practices, there is often a call for results of such evaluation are made public. Having
said that, evaluation is always a sensitive subject and public disclosures may run counter-
productive. In a peer review situation, to avoid public scrutiny, negative feedback may not be
shared. To negate this behaviour, the role of independent directors in performance evaluation is
key.

3. True Independence of Directors

Independent directors' appointment was supposed to be the biggest corporate governance reform.
However, 15 years down the line, independent directors have hardly been able to make the
desired impact. The regulator on its part has, time and again, made the norms tighter: introduced
comprehensive definition of independent directors, defined a role of the audit committee, etc.
However, most Indian promoters design a tick-the-box way out of the regulatory requirements.
The independence of such promoter appointed independent directors is questionable as it is
unlikely that they will stand-up for minority interests against the promoter. Despite all the
governance reforms, the regulator is still found wanting. Perhaps, the focus needs to shift to
limiting promoter's powers in matters relating to in independent directors.

4. Removal of Independent Directors

While independent directors have been generally criticised for playing a passive role on the
board, instances of independent directors not siding with promoter decisions have not been taken
well - they were removed from their position by promoters. Under law, an independent director
can be easily removed by promoters or majority shareholders. This inherent conflict has a direct
impact on independence. In fact, earlier this year, even SEBI's International Advisory Board
proposed an increase in transparency with regard to appointment and removal of directors. To
protect independent directors from vendetta action and confer upon them greater freedom of
action, it is imperative to provide for additional checks in the process of their removal - for
instance, requiring approval of majority of public shareholders.

5. Accountability to Stakeholders

Empowerment of independent directors has to be supplemented with greater duties for, and
accountability of directors. In this regard, Indian company law, revamped in 2013, mandates that
directors owe duties not only towards the company and shareholders but also towards the
employees, community and for the protection of environment. Although these general duties
have been imposed on all directors, directors including independent directors have been
complacent due to lack of enforcement action. To increase accountability, it may be a good idea
to require the entire board to be present at general meetings to give stakeholders an opportunity
to interact with the board and pose questions.

6. Executive Compensation
Executive compensation is a contentious issue especially when subject to shareholder
accountability. Companies have to offer competitive compensation to attract talent. However,
such executive compensation needs to stand the test of stakeholders' scrutiny. Presently, under
Indian law, the nomination and remuneration committee (a committee of the board comprising of
a majority of independent directors) is required to frame a policy on remuneration of key
employees. Also, the annual remuneration paid to key executives is required to be made public.
Is this enough? To retain and nurture a trustworthy relationship between the shareholders and the
executive, companies may consider framing remuneration policies which are transparent and
require shareholders' approval.

7. Founders' Control and Succession Planning

In India, founders' ability to control the affairs of the company has the potential of derailing the
entire corporate governance system. Unlike developed economies, in India, identity of the
founder and the company is often merged. The founders, irrespective of their legal position,
continue to exercise significant influence over the key business decisions of companies and fail
to acknowledge the need for succession planning. From a governance and business continuity
perspective, it is best if founders chalk out a succession plan and implement it. Family owned
Indian companies suffer an inherent inhibition to let go of control. The best way to tackle with
this is widen the shareholder base - as PE and other institutional investors pump in capital,
founders are forced to think about a succession plan and step away with dignity.

8. Risk Management

Today, large businesses are exposed to real-time monitoring by business media and national
media houses. Given that the board is only playing an oversight role on the affairs of a company,
framing and implementing a risk management policy is necessary. In this context, Indian
company law requires the board to include a statement in its report to the shareholders indicating
development and implementation of risk management policy for the company. The independent
directors are mandated to assess the risk management systems of the company. For a governance
model to be effective, a robust risk management policy which spells out key guiding principles
and practices for mitigating risks in day-to-day activities is imperative.
9. Privacy and Data Protection

As a key aspect of risk management, privacy and data protection is an important governance
issue. In this era of digitalisation, a sound understanding of the fundamentals of cyber security
must be expected from every director. Good governance will be only achieved if executives are
able to engage and understand the specialists in their firm. The board must assess the potential
risk of handling data and take steps to ensure such data is protected from potential misuse. The
board must invest a reasonable amount of time and money in order ensure the goal of data
protection is achieved.

10. Board's Approach to Corporate Social Responsibility (CSR)

India is one of the few countries which has legislated on CSR. Companies meeting specified
thresholds are required to constitute a CSR committee from within the board. This committee
then frames a CSR policy and recommends spending on CSR activities based on such policy.
Companies are required to spend at least 2% of the average net profits of last three financial
years. For companies who fail to meet the CSR spend, the boards of such companies are required
to disclose reasons for such failure in the board's report. During the last year, companies which
failed to comply received notices from the ministry of corporate affairs asking for reasons why
they did not incur CSR spend and in some cases questioning the reasons disclosed for not
spending. In these circumstances, increased effort and seriousness by the board towards CSR is
necessary. CSR projects should be managed by board with as much interest and vigour as any
other business project of the company.
 E.PROBLEMS UNDER INDIAN CORPORATE GOVERNANCE MODEL

If the Board is in awe of the family executive, it makes it difficult for the Board sometimes to ask
tough questions or at other times the right questions at the right time in order to serve the
interests of the shareholders better. As a result, truly independent directors are rarely found in
Indian companies. Serving on multiple boards is problematic because doing so can overburden
directors, thus hampering their performance, and increase the potential for directors to
experience conflicts of interest between the various corporations they serve. It is admitted that
contribution of the independent directors is limited because the average time spent in Board
meetings by these directors is barely 14 to 16 hours in a year. In some cases, it has been found
that no proper training and orientation regarding the awareness of rights, responsibilities, duties
and liabilities of the directors is provided to an individual before appointing him or her as a
director on the Board. Also there is unseen but active participation of political class.

The directors on the board are largely reliant on information from the management and auditors,
with their capacity to independently verify financial information being quite limited, while
auditors, as this case suggests, have also been equally reliant on management information. The
relevant issue here is the extent and the depth of auditors’ effort in their exercise of due
diligence. Excessive reliance on information from the management is symptomatic of the
ownership or control of companies in India by business families, and that poses a particular
challenge for corporate governance in India. The greatest drawback of financial disclosures in
India is the absence of detailed reporting on related party transactions. In addition, poor quality
of consolidated accounting and segment reporting leads to misrepresentation of the true picture
of a business group.

Although India’s investor-protection laws are sophisticated, litigants must wait a long time
before receiving a judgment. Delays in the delivery of verdicts, high costs of litigation and the
lengthy judicial appointment process in words make the legal enforcement mechanism
ineffective. According to the OECD, “the credibility and utility of a corporate governance work
rest on its enforceability.” In India, the two audit-related issues which are common lyre cognized
are that of auditor independence (which is a problem worldwide)because of the large if
segmented market in accounting services, and the perceived powerlessness of auditors in the face
of corporate pressure. In many cases, they are ill-equipped to handle the needs of large
companies, because in the face of an audit failure, it is very difficult to discern whether the
auditors were complacent or whether they were pressurized by the concerted efforts of the
insiders. There is no proper system to monitor the work of audit firms or to review the accounts
prepared by the company’s statutory auditors.

However, in the aftermath of the Satyam case, the SEBI has decided to introduce a peer review
mechanism to review the accounts prepared by a company’ statutory auditor. In addition, the
SEBI has also decided to constitute a panel of auditors to review the financial statement of all
BSE Sensex and NSE Nifty companies. Also there is no statutory compliance for .the companies
to obtain a report on Corporate Governance Rating by the Credit Rating Agencies in India.
 F.WHAT ARE CURRANT TROPICAL ISSUES

Change has been the constant as far as corporate governance norms go in India.  Over the last
decade we have seen multiple iterations of the roles and responsibilities of the Board through
amendments and restatements of regulations and laws.  Market expectations, the stabilisation of
the role of proxy advisors, hyperactive business journalism and social media have moved the
governance debate into mainstream Board agendas.  In recent years, various corporate issues
have been definitively categorised as a “governance crisis” and this distinct space has triggered
the expectation of Board behaviour that moves well beyond the standard of mere compliance
with the letter of law.  Some key areas that are currently occupying the mind space of Boards and
managements in India are:

1.  COVID-19 Crisis Management:

The COVID-19 pandemic has presented several companies with a sudden death scenario where
revenue hit zero overnight and costs stayed the same.  Given the unforeseeable nature of the
pandemic, even the best of Boards were not fully prepared for such an extreme global challenge. 
High functioning Boards, however, moved directly into a crisis management zone by ensuring
that the management was sufficiently empowered, the Board was being adequately briefed and
the immediate concerns for the health and safety of employees and customers was addressed.  In
this environment when there is no “ordinary course of business” for most businesses, Boards are
also seen to be much more active and engaged on operational issues like business continuity,
supply chain management and labour/employment issues.

2.   Navigating Trade-offs between Stakeholder Interests:

Strategic matters like fund raising, workforce restructuring, dividend pay-outs and business
partnerships have become complex decisions for Boards.  This is because stakeholder
governance is statutorily mandated under Indian law, and Boards are required to balance the
trade-offs between the different stakeholders while making decisions.  Illustratively, furloughing
employees while continuing to pay out significant dividends to shareholders could be viewed to
be a breach of fiduciary responsibility owed by directors to employees.

3.   The Threat of Class Actions:

A “class” (being the lesser of 2% of the issued share capital, 100 shareholders, or 5% of the total
number of shareholders) can now pursue an action to recover losses from directors and auditors
for fraudulent, wrongful or unlawful actions/omissions.  Third-party funding of class actions is
also a developing model of leverage finance that is being considered by key players looking to
enter the Indian markets.

4.   Increased Stakeholder Engagement and Investor Dissent:

We see a significant increase in stakeholder engagement and heightened sensitivity of company

management to the consequences of investor dissent.  This has been driven by: (a) regulatory
requirements for e-voting facilities; (b) mandatory disclosure of voting policies and procedures
by asset management companies on their websites; (c) the stewardship principles that have to be
implemented by all insurance companies; (d) voting requirements (majority of minority) vis-à-
vis the related party transactions (“RPTs”); and (e) active proxy advisory scrutiny of shareholder
resolutions.  Over 105 resolutions having been defeated over the last six years in a rising trend
across issues pertaining to director reappointment, related party transactions, director
remuneration, employee stock ownership plans, and debt and equity raises.

5.   Greater Regulatory Intervention and Enforcement:

India’s position as Rank 13 of 190 for protection of minority interest in the World Bank Report
on Doing Business 2020 is a carefully curated outcome arising from what is seen as the increased
regulatory will to intervene and enforce.  SEBI’s strong enforcement actions in the cases of Sun
Pharmaceuticals, Yes Bank, Fortis Healthcare, CG Power, etc. have made corporates keen to
ensure compliance, and put in place stricter governance norms.

6.   Real Instances of Director Liability:

There have been increasing instances of onerous consequences of personal liability being
imposed on directors (including IDs) who were seen to have failed to discharge their governance
responsibilities.  The Supreme Court in Jaypee Infratech prohibited directors (including their
immediate dependent family members) from alienating their personal properties or assets in any
manner.  In April 2019, the Supreme Court allowed the arrest of the directors of Amrapali
Group.  The National Company Law Tribunal (“NCLT”) restrained the directors of IL&FS from
transferring or creating any charge on their properties.  These examples, though extreme, are
early mumblings of a definitive movement in corporate jurisprudence to hold directors
personally liable for what are seen as systemic failings of companies.  The impact of such orders
has sought to be moderately diluted by a recent circular of the MCA that clarified that IDs and
non-executive directors (“NED(s)”) should not be indicted in civil and/or criminal proceedings
unless sufficient proof exists that they were a part of the default/non-compliance committed in
question.

7.   Board Composition:

The regulations prescribe various dimensions of Board composition, including the size of the
Board (for sufficient perspective), number of IDs (for accountability), at least one female
director (for diversity), and to limit the maximum number of directorships an individual can hold
(for adequate time and effort).  With effect from April 1, 2020, the LODR Regulations mandated
the Boards of the top 1,000 listed companies to appoint at least six directors and at least one
female ID.  Additionally, with effect from April 1, 2022, the LODR Regulations also mandate
the separation of the roles of the Chairperson and managing director (“MD”)/chief executive
officer (“CEO”) for the top 500 listed companies, with the Chairperson having to be a NED and
not a relative of the MD.

8.   Quality of Disclosures and the Voluntary Adoption of Integrated Reporting:

There is a continued focus on quality disclosure by regulators, investors and proxy advisors.  The
peer-driven adoption of integrated reporting by listed companies is also a key trend of note.  The
top 1,000 listed companies (increased from the earlier requirement of top 500) are now mandated
to provide a business responsibility report.

9.   Auditor Responsibility and Resignations:

Recent regulatory actions to hold auditors responsible for corporate fraud, including SEBI’s
order to ban Pricewaterhouse Coopers for two years on account of complicity in
the Satyam fraud, have brought the role of the audit firm to the fore.  Over the last couple of
years, a large number of auditors resigned prior to the completion of the term in debateable
circumstances (auditors of 35 listed companies resigned in 2019), which has raised concerns on
the veracity of the financial statements and the governance standards.  In order to contain the
impact of untimely resignations of auditors (especially if done prior to completion of the audit of
the financial results of the year) on investor confidence and access to reliable information, SEBI,
last year, tightened the procedures and disclosure requirements with regard to auditor
resignations.

10. Proactive Governance Audits by Boards:

In addition to the hard drivers described above, there are also softer challenges for Boards such
as the increased pressure to improve share value by unlocking governance premium and the
internal dependence on good governance frameworks as a risk management tool for companies. 
To address these challenges, there is an increasing trend of Boards proactively undertaking
governance audits to identify gaps and vulnerabilities.

11.Non-coverage of unlisted corporates

This is one of the major hindrance caused to effective corporate governance as the applicability
of rules and regulations are restricted to the listed entities only as per the clause 49 of the listing
agreement which leads to small and mid-sized firms to perform activities which are legal in
nature but are not ethical.

12.Disclosure of off-balance sheet transactions

There are many transactions which cannot be disclosed in the balance sheet and even if they can
be they cannot be displayed in monetary terms. What transactions are to be disclosed and how to
be disclosed is entirely on the discretion of management. Corporate governance has a basic
principle of transparency but it fails to provide a provision for its compliance.

13.Family owned business

In India, the majority of the businesses are family owned which means there is no provision
regarding the dilution of powers. Ranging from directors to employees all key positions are held
by family members. Also, the company’s and family’s relationship is very ambiguous in
reference to that the assets of the company and the family are not separated legally.

14.Multiplicity of regulations

In India there are many regulatory bodies such as Companies act 2013, Securities and Exchange
Board of India (SEBI), Reserve Bank of India, Insurance Regulatory Development Authority,
etc. and they have no coordination with each other which leads to multiple provisions for a single
type of event/transaction. This creates confusion and leads to chaos. This duplicity provides
companies a loophole to escape from responsibility. These regulatory bodies are reactive but not
proactive which means they only take action when there is a scam.
 What are the current perspectives in this jurisdiction regarding the risks of
short-termism and the importance of promoting sustainable value creation
over the long-term
In line with international markets, given the global outlook of domestic and international
investors, Indian companies also face the pressures of quarterly earnings and the resultant effects
of short-termism.  However, there is a strong counter-balance that is presented through the
structural ethos of being a predominantly family-controlled business environment where the
inter-generational “promoter” mind-set allows for long-termism and sustainability to be part of
the core decision-making methodology.  There is also a slow change that can be seen in the
attitude of institutional investors, from focusing only on financial performance to engaging with
Boards on issues like transparency and disclosure, diversity, climate change, ESG and long-
termism, due to the changing regulatory requirements for institutions to take up an active
stewardship role.

The regulatory push for long-termism and sustainable business practices is also clear from the
collective requirements of mandating a wholesome Board composition, making risk management
a core responsibility of the Board, requiring active engagement with investors and disclosure of
long-term and medium-term strategies.

As companies have been forced to shift from the growth to the survival mindset amidst the
current COVID-19 crisis, the long-term versus short-term nuance has also seen some active
consideration by Boards and stakeholders.
G. WHAT IS ROLE OF SHAREHOLDER ACTIVISM
There is no specific regulation of “shareholder activism” in India.  On account of regulatory
changes in the last decade with respect to e-voting and the exclusion of related party
shareholders from voting on resolutions for RPTs, the ability and the actual exercise of activist
shareholders’ influence on corporate decision-making is, however, palpably higher.  The
enablement of virtual AGMs and EGMs in India, on account of the COVID-19 crisis, is also
expected to result in increased shareholder participation.

Proxy advisory firms, who have become a pillar of the securities market infrastructure, keep a
close watch on corporate actions and provide considered opinions that are highly regarded by the
investor community.  There is also the effect of increased scrutiny, media coverage and social
media bringing growing expectations from companies.

Institutional and retail shareholders have, in the recent past, made proactive efforts to direct the
companies to take or refrain from taking actions, or to change or comply with its governance
rules.  A noteworthy instance in this regard was in 2018 when the investors were able to
successfully have the Board composition of a listed company operating a leading chain of
hospitals across India, altered over concerns as to the Board’s evaluation of certain bids.  In
another significant move, in a matter that is currently before the NCLT, a major corporation that
is a minority shareholder in another listed company in the hospitality sector has alleged
oppression of the minority and mismanagement of the affairs of the company resulting from the
proposed sale of its iconic hotels to repay the debt of the listed company owed to a financial
creditor turned shareholder.  Whilst the sale has been concluded, the matter is still pending
before the NCLT.
May the board/management body consider the interests of stakeholders other
than shareholders in making decisions? Are there any mandated disclosures
or required actions in this regard?

As noted above, under the Companies Act, the directors are duty bound to act in the best
interests of the company, its employees, the shareholders, the community and for protection of
the environment.  Given the statutory status of the five stakeholders who are to be treated at par,
directors are required to weigh and balance the trade-offs between the interests of different
stakeholders while making decisions.

Under the LODR Regulations, the sphere of stakeholders is broader, in that whilst they are not
defined as such, a listed company is mandated to respect the rights of all stakeholders and
provide an effective redressal mechanism for any violation of such rights.  This is in addition to
the specific obligation of ensuring that all stakeholders have access to reliable and adequate
information on a timely basis to enable them to participate in the corporate governance process
and providing them with an appropriate forum to enable them to freely voice their concerns. 

Additionally, the law sets out disclosure, reporting and filing requirements for companies that are
both event-based and periodic.  Under the Companies Act, these cover all companies (public and
private) and most of such filings are available for public viewing in the database of the MCA, for
a fee.  Additionally, the reporting requirements prescribed under the LODR Regulations apply to
listed companies and all such information is available in the public domain.
 CHAPTER-5

HOW TO IMPROVE CORPORATE GOVERNANCE

A.STEPS FOR IMPROVING CORPORATE GOVERNANCE

It is imperative to say companies need to improve corporate governance. In the absence of good
and effective corporate governance companies will suffer financial, legal and reputational harm.
From the risk prospective there is no greater risk to a company than poor governance and to
solve this problem here are some suggestions :-

1. Recognise that good governance is not just about compliance

Boards need to balance conformance (i.e. compliance with legislation, regulation and codes of
practice) with performance aspects of the board’s work (i.e. improving the performance of the
organisation through strategy formulation and policy making). As a part of this process, a board
needs to elaborate its position and understanding of the major functions it performs as opposed to
those performed by management. These specifics will vary from board to board. Knowing the
role of the board and who does what in relation to governance goes a long way towards
maintaining a good relationship between the board and management.

2. Clarify the board’s role in strategy

It is generally accepted today that the board has a significant role to play in the formulation and
adoption of the organisation’s strategic direction. The extent of the board’s contribution to
strategy will range from approval at one end to development at the other. Each board must
determine what role is appropriate for it to undertake and clarify this understanding with
management.

3. Monitor organisational performance

Monitoring organisational performance is an essential board function and ensuring legal

compliance is a major aspect of the board’s monitoring role. It ensures that corporate decision
making is consistent with the strategy of the organisation and with owners’ expectations. This is
best done by identifying the organisation’s key performance drivers and establishing appropriate
measures for determining success. As a board, the directors should establish an agreed format for
the reports they monitor to ensure that all matters that should be reported are in fact reported.

4. Understand that the board employs the CEO

In most cases, one of the major functions of the board is to appoint, review, work through, and
replace (when necessary), the CEO. The board/CEO relationship is crucial to effective corporate
governance because it is the link between the board’s role in determining the organisation’s
strategic direction and management’s role in achieving corporate objectives.

5. Recognise that the governance of risk is a board responsibility

Establishing a sound system of risk oversight and management and internal control is another
fundamental role of the board. Effective risk management supports better decision making
because it develops a deeper insight into the risk-reward trade-offs that all organisations face.

6. Ensure the directors have the information they need

Better information means better decisions. Regular board papers will provide directors with
information that the CEO or management team has decided they need. But directors do not all
have the same informational requirements, since they differ in their knowledge, skills, and
experience. Briefings, presentations, site visits, individual director development programs, and
so on can all provide directors with additional information. Above all, directors need to be able
to find answers to the questions they have, so an access to independent professional advice
policy is recommended.

7. Build and maintain an effective governance infrastructure

Since the board is ultimately responsible for all the actions and decisions of an organisation, it
will need to have in place specific policies to guide organisational behaviour. To ensure that the
line of responsibility between board and management is clearly delineated, it is particularly
important for the board to develop policies in relation to delegations. Also, under this topic are
processes and procedures. Poor internal processes and procedures can lead to inadequate access
to information, poor communication and uninformed decision making, resulting in a high level
of dissatisfaction among directors. Enhancements to board meeting processes, meeting agendas,
board papers and the board’s committee structure can often make the difference between a
mediocre board and a high performing board.

8. Appoint a competent chair

Research has shown that board structure and formal governance regulations are less important in
preventing governance breaches and corporate wrongdoing than the culture and trust created by
the chairperson. As the “leader” of the board, the chairperson should demonstrate strong and
acknowledged leadership ability, the ability to establish a sound relationship with the CEO, and
have the capacity to conduct meetings and lead group decision-making processes.

9. Build a skills-based board

What is important for a board is that it has a good understanding of what skills it has and those
skills it requires. Where possible, a board should seek to ensure that its members represent an
appropriate balance between directors with experience and knowledge of the organisation and
directors with specialist expertise or fresh perspective. Directors should also be considered on the
additional qualities they possess, their “behavioural competencies”, as these qualities will
influence the relationships around the boardroom table, between the board and management, and
between directors and key stakeholders.

10. Evaluate board and director performance and pursue opportunities for
improvement

Boards must be aware of their own strengths and weaknesses, if they are to govern effectively.
Board effectiveness can only be gauged if the board regularly assesses its own performance and
that of individual directors. Improvements to come from a board and director evaluation can
include areas as diverse as board processes, director skills, competencies and motivation, or even
boardroom relationships. It is critical that any agreed actions that come out of an evaluation are
implemented and monitored. Boards should consider addressing weaknesses uncovered in board
evaluations through director development programs and enhancing their governance processes.
11. Increase Diversity

Corporate boards suffer from a serious lack of diversity. In 2008, the board composition of
Fortune 100 companies was approximately 71 percent white men and 29 percent women and
minorities. Women make up only 16 percent of the directors of the Fortune 500 companies. This
lack of diversity has been pervasive even though there are many studies which show that
diversity in the boardroom improves company performance.

A recent study issued by Credit-Suisse which examined companies around the globe concluded
that greater gender diversity results in improved financial performance.  Companies with one or
more women on the board outperformed companies with no women by 4 percent in net income
growth.  United States companies lead the world in having one or two women or minority board
members.  European companies lead the world in having three or more women or minority
members.

Diversity is a bottom line issue.  The SEC requires companies to disclose their diversity policies
and such disclosures should lead to increased emphasis on diversity.

12.Policies in line with law and applicable regulations  

Policies and guidelines are important because they address pertinent issues, such as rules and
principles for day-to-day operations. They ensure compliance with laws and regulations, reflect
the culture of the organisation, give guidance for decision-making, risk appetite and streamline
internal processes. These policies and guidelines should be current and in line with
legislation/regulations as well as with the goals and strategy of the organisation.  Additionally,
these should be made easily available to ensure that everyone understands the way things should
be done and how they are expected to behave.

13.Regulations for unlisted companies

The unlisted companies should also be brought under the purview of corporate governance for
healthy competition and better competition goals. Standard and incentives are required for the
mid-sized new entrants of the capital market. Right now there are only few provisions for the
unlisted companies which lets them walk out scot free on the subject of corporate governance.
14.Strictness in regulators vigilance

The role of regulatory bodies should not just be reactive but proactive too. They shouldn’t just
react after the scam but also supervise and regulate the functions of the company to deviate risks
which could be avoided. Precautionary measures have to be taken in order to avoid violation of
any guidelines established by the regulatory bodies.
B.PERSONAL SUGGESTIONS

Defining related party transactions

Related party transactions are one of the most widely used ways that controlling shareholders
exploit the rights of minority shareholders. Formulating a comprehensive definition of the term
“related party” is one of the basic steps in the regulation of RPTs. An accurate and
comprehensive definition should cover all modes of direct and indirect related party transactions
that management/directors or controlling shareholders might undertake.

Adoption of the wider definition of related parties as provided in Ind AS 24 may help to bring
more related party transactions into its purview and ensure more specific disclosures. However,
the definition under Ind AS 24, which is akin to that under IAS 24, might not address the
concerns expressed above.

At the India-OECD Policy Dialogue held in New Delhi on 5-6 March 2013, it was suggested that
the best way to bring indirect RPTs within the ambit of the regulatory framework would be a
hybrid approach providing for a principles-based definition supported by objective rules.
Keeping in mind its enforceability, however, most of the participants agreed that the criteria for
identifying a related party be kept as objective as possible since subjective criteria would be
difficult to implement. While some participants suggested that there should be a harmonised
definition of RPTs that can be used uniformly across all laws/regulations, others suggested that it
would be better to have separate definitions considering the different regulatory
objectives/requirements set forth in different statutory regimes, as is the case in some
jurisdictions such as Israel.

It was suggested that using “control” alone to identify related parties would not be sufficient and
that “influence” should also be considered. Further, it was pointed out that relationships should
be determined over a period of time and not just at a certain point. There were suggestions that
certain types of RPTs may be categorised as “abusive” unless proven otherwise.

Accordingly, the experts concluded that the definition of RPTs should be hybrid in nature: a
principles-based definition ensuring better coverage, supported by objective rules ensuring better
enforceability. The definition should also take into account direct and indirect influence, and not
be confined to the control element for identifying a related party.

Approval of major RPTs by a “majority of the minority”

Many abusive RPTs are undertaken between company groups controlled by the majority
shareholders. In such cases, requiring shareholder approval of RPTs might not serve the intended
purpose, as the controlling shareholders would have a sufficient majority to obtain shareholder
approval of an abusive RPT. Hence, some developed jurisdictions mandate approval of such
RPTs by a majority of the minority or by “disinterested” shareholders. Nevertheless, experience
in some jurisdictions like Israel has shown that classifying shareholders as disinterested might
pose practical difficulties. It may be advisable to clarify legal presumptions and definitions for
the purpose of determining an interested shareholder. In addition, each shareholder who votes in
the General Meeting should notify the company before the vote on whether or not s/he has a
personal interest in the approval of the transaction, to help the company classify him/her as
interested or disinterested. Furthermore, some jurisdictions have imposed safeguards to prevent
abuse by minority shareholders by requiring a minimum percentage of votes that must be
obtained to block a resolution.

As suggested by SEBI, Section 188 of the Companies Act 2013 contains a similar provision
prohibiting interested shareholders from voting on transactions with related parties. This
provision would help mitigate the inherent conflicts of interest presented by shareholder approval
of abusive RPTs.

In some jurisdictions like Israel, a transaction relating to terms of employment of a controlling

shareholder or his/her relatives requires a renewed approval every three years. In case RPTs are
carried out on a continuous basis, whether there should be any validity period for approval of
such recurring RPTs may also be considered. This matter was also deliberated at the India-
OECD meeting in New Delhi. It was proposed that the approval by disinterested shareholders of
recurring RPTs be valid for three years and that fresh approval are sought upon the expiry of this
period.
Pre-approval by the audit committee and third-party evaluation of RPTs

Currently, the audit committee reviews RPTs periodically after RPTs have taken place. Such
reviews are of limited use, given that the transaction cannot be undone even if the audit
committee expresses a negative opinion. This handicap can be removed if the audit committee is
required to approve major RPTs. There were suggestions at the India-OECD Policy Dialogue
that the audit committee be responsible for examining the RPTs and their impact on the company
and shareholders. It was further suggested that the audit committee be responsible for deciding
whether an RPT is abusive and to provide a certification to this effect. Finally, it was suggested
that reasons for the audit committee’s approval of a transaction should be disclosed.

The Companies Act 2013 mandates interalia, the constitution of an audit committee with a
majority of independent directors. It also requires the audit committee to approve or modify
transactions with related parties. The committee is required to specify the reasons for its
classification of a transaction as extraordinary or material, or as non-extraordinary or
nonmaterial. The committee may classify these terms in advance and annually based on its own
criteria, scrutinise inter-corporate loans and investments, and value undertakings or assets of the
company wherever necessary. The duties of the audit committee in this regard shall be as
specified in the terms of reference authorised by the board. Furthermore, the Companies Act
2013 grants the committee the authority to investigate any matter falling under its domain as well
as to obtain professional advice from external sources and have full access to information
contained in the company’s records. These provisions would address the aforementioned issues.
Immediate and continuous disclosures rather than periodic ones

Currently, RPTs are disclosed to stock exchanges on a periodic basis. This limits the
effectiveness of the disclosure, as the information is available to investors considerably later than
when the transactions were concluded.

Certain jurisdictions, such as Italy and Israel, have provisions mandating immediate disclosure of
major RPTs. This would help with better scrutiny of the transactions by investors, the public and
regulators, thereby limiting the scope for abusive RPTs. At the India-OECD Policy Dialogue,
participants agreed that there is a need for more frequent disclosure of RPTs. It was also
proposed to mandate that management certify that all material RPTs have been disclosed. It was
suggested that immediate disclosure of RPTs would address the information asymmetry caused
by non-disclosure to public shareholders. In addition, it was suggested that the focus be on
increasing not only the frequency of disclosures, but also on the quality of information disclosed.
Accordingly, it was agreed that SEBI should consider amending the listing agreement to require
listed companies to disclose major RPTs immediately upon entering into such transactions. This
should include both capital and revenue (recurrent RPTs) transactions. If the shareholders need
to pre-approve at the General Meeting, disclosure should be made before the meeting.

The disclosures should include all relevant details about the transaction that may be considered
important to a reasonable investor or to a reasonable shareholder for the purpose of voting at the
meeting, including, inter alia:

• The description of the main terms of the transaction;

• The name of the controlling shareholder who has a personal interest in the transaction, and
the nature of his/her personal interest;

• The reasons of the audit committee and the board of directors for approving the transaction
and the reasons of the directors opposing it, if any;

• The manner in which the consideration was determined and the name of each director who
has a personal interest in the transaction and the nature of his/her interest.
Requiring approval by shareholders for divestment of major
divisions/subsidiaries

Divestment of major subsidiaries and the hiving off of major divisions of an undertaking do not
require shareholders’ approval under the existing legal framework. There have been cases where
a major subsidiary or division was transferred to controlling shareholders after getting the
approval of the board of directors. Section 292 of the Companies Act 1956 provides that the
powers for investing funds of the company have to be exercised by the board only in its meeting
by means of resolutions passed at the meeting (i.e. they cannot be passed through circulation).
Section 293 (1) (a) of the Companies Act 1956 requires shareholders’ approval for selling off the
whole or a substantial part of an undertaking. There is, however, no specific requirement
regarding the sale of the shares in a subsidiary (i.e. divestment) in the Act. This has led to abuses
committed by controlling shareholders divesting the major subsidiaries, without proper
valuation, to the companies, that are indirectly owned by them.

The matter was discussed at the India-OECD Policy Dialogue in New Delhi. It was noted that
the Companies Act 2013 is silent on this issue. As SEBI’s powers under the SEBI Act 1992, to
prescribe listing conditions are in addition to but not in derogation of the provisions of the
Companies Act, it was suggested that SEBI amend the listing agreement requiring the listed
companies to obtain shareholders’ approval in the case of divestment of shares in major
subsidiaries.
Approval of managerial remuneration by disinterested shareholders

The remuneration paid to CEOs in certain Indian companies is generally higher than that of their
foreign counterparts, and there is no justification given for this. The Companies Act, 1956
specifies the limit on managerial remuneration and provides for central-government approval for
remuneration beyond the limit. The overall cap placed on managerial remuneration is 11% of net
profits of the company, also according to the Companies Act 2013.

Most Indian companies are managed by promoters, which raises concerns about excessive
remuneration to executives forming part of the promoter/promoter group. This can result in
abusive related party transactions.

Section 188 of the Companies Act 2013 prohibits interested shareholders from voting in related
party-transaction approvals. In line with this, it was suggested to consider requiring companies to
obtain approval by shareholders whereby interested/related parties abstain from voting on
managerial remuneration beyond a certain limit.

Improving selection mechanism for independent directors

Currently, the appointment and removal of independent directors is done through election by a
majority. Thus, independent directors occupy their position at the request of the controlling
shareholders and therefore must act in accordance with the will of the majority. This, in effect,
hinders these directors from expressing their opinions independently and honestly and thereby
limits their efficacy and defeats the purpose of appointing independent directors. Some
jurisdictions, like Italy and Israel, have provisions for the appointment of independent directors
by minority shareholders, which ensures more independence. Various international practices on
appointment of independent directors were discussed at the India-OECD Policy Dialogue in New
Delhi. It was suggested that controlling shareholders not be allowed to vote in the election of
independent directors so as to ensure the latters’ independence.

Section 150 of the Companies Act 2013 sets forth the manner that companies appoint
independent directors from a data bank maintained by such institution, body or association as
may be notified by the central government. Further, Section 151 of the Companies Act 2013
provides that a listed company may have one director elected by small shareholders under the
terms and conditions as may be prescribed, where “small shareholders” is defined as a
shareholder holding shares of nominal value of not more than INR 20 000 (equivalent to USD
333) or such other sum as may be prescribed. Listed companies may be required to appoint one
or more smallshareholder directors. Furthermore, there is an enabling provision in the
Companies Act 1956 and Companies Act 2013 for appointment of directors through proportional
representation or cumulative voting, which if implemented would help ensure much-needed
balance in the Board and would address the issues in the current appointment mechanism of
independent directors.

Certain jurisdictions, like Israel, specify the duration of office of external directors. Further, the
controlling shareholder cannot prevent the reappointment of an independent director for an
additional three-year term if a majority of minority shareholders approve the appointment.

Providing training to independent directors on the business of the company

Independent directors should be properly trained on the various aspects of identifying; analysing
and preventing abusive RPTs. Periodic training may be mandated. The India-OECD Policy
Dialogue included discussions on the need for a formal training framework for independent
directors. While it was suggested that formal training may be required only for newly appointed
directors, the importance of an induction programme for independent directors to improve their
competency and effectiveness was also noted. In addition, it was suggested that the training be
based on a gap analysis, with provisions in the articles enabling and encouraging the training of
directors.
Improving investor education for better participation at General Meetings

Investor education has been hailed as the key to improving governance standards and preventing
abusive RPTs. It would improve not only the level of participation in General Meetings but also
the quality of deliberations at the meetings. SEBI has been a leader in conducting investor
education and awareness programmes. The Ministry of Corporate Affairs’ and SEBI’s initiatives
on E-voting will also facilitate dispersed minority shareholders’ exercise of their voting rights in
General Meetings.

Another important factor to improve the level of participation in General Meetings rests with
institutional investors. Institutional investors such as mutual funds are regulated entities and are
expected to exercise voting rights in fiduciary capacity keeping in mind the interest of beneficial
owners. Therefore, they are duty bound to exercise their voting power in matters which are
perceived to harm the interest of the beneficial owners. It remains to be seen whether the recent
SEBI requirement to enhance disclosure on voting policies is sufficient. If not, consideration
could be given to introduce further measures to encourage greater institutional investor
participation in shareholder meetings if there is a RPT on the agenda that they believe could
harm their unit holders.

Establishment of specialised courts

A lack of specialized courts to try commercial cases is a major obstacle to effective enforcement.
The Companies Act 2013 provides for the establishment of Special Courts for the speedy trial of
offences under the Companies Act. Section 436 provides that all offences under the Companies
Act shall be subject to trial only by the Special Court established for the area where the offence
is committed. The Act also empowers the Special Courts to try “in fast track” any offence under
the Companies Act that is punishable with imprisonment for a term not exceeding three years.
The India-OECD Policy Dialogue also highlighted the need for these courts to try corporate
offences and noted that the provisions in the Companies Act 2013 are expected to speed up the
enforcement machinery dealing with abusive RPTs.

There are two modes for regulating RPTs: approval-based controls, which require approval by
the board of directors/shareholders, and disclosure-based controls required under AS-18. The
focus should not be on making approval norms stringent but on making them effective. At the
India-OECD Policy Dialogue, it was pointed out that, while a “name and shame” approach
would help reduce the incidence of abusive RPTs, a little bit of “pain” should also be induced to
ensure effective enforcement of the regulatory framework for RPTs.
 CONCLUSION
On paper, India has the most stringent rules and regulations in the world related to corporate
governance but in reality, the situation is quite different. It has been observed that promoters
have considerable leeway to siphon corporate resources from the minority shareholders with the
help of skewed contracts. This way promoters have a way of having pecuniary benefits for their
personal use. There are independent directors to protect the interests of the minority shareholders
but as was seen in the Tata case, promoters have an influence over the directors such that a
powerful and connected man like Nusli Wadia was dismissed from the board.

Corporate governance in developing countries is still in its infancy stage but many laws and
amendments are being made in order to improve the effectiveness of corporate governance.
There is no doubt that corporate governance if implemented properly, has ample benefits for
stakeholders, shareholders, management employees, customers and community at large.
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