Corporate Governance

• Module 1: Concept of Corporate Governance:

Its importance, Principles of corporate
governance, OECD Principles of corporate
governance, Theories of corporate governance-
Agency theory and stewardship theory, Models
of corporate governance around the world,
Need for good corporate governance, present
scenario and case studies.
• Module 2: Corporate Governance and Role of
committees in India: Need and Importance of
Committee Reports, Emergence of corporate
governance, corporate governance committees-
Cadbury Committee on corporate governance,
1992, Sarbanes-Oxley Act, 2002, Kumar
Mangalam Birla Committee, 1999, Naresh
Chandra Committee Report, 2002, Narayana
Murthy committee Report, 2003, Dr. J. J. Irani
Committee Report on Company Law, 2005, - case
studies.
 Tata group
• the Insecure TATA -outlook sept 15 1997
• Why is it that ever since rathan Tata has taken
charge as Cmof Tata sons, every two years there
isa messy fight within the group
• Washing of dirty linen in public
• Rathan Tata taking up the CM of yet another tata
co.
• Nothing seems to have changed two decades
later
• The messy fight this time stems from the tata’s in
• Tata’s insecurity that Cyrus Mistry’s actions may
spoil his legacy.
• While CG is often viewed through visible events
such as the recent one
• True CG is about designing processes and
institutions within the group to maximize returns
to the suppliers of cap to the group
• Other stake holders are also imp. If busi practices
hurt other stakeholders are not consistent with
good CG
• Good CG is about taking good care of employees
while at the same time maximising retruns to the
suppliers of capital
• The tata group capitalization has grown up by 57
times in 20 years
• But in mistry period just 2 times.
• Comparing tata performance to Mistry is not
correct
• Since it represents a diversified conglomerate,
compare to conglomerate index.
• The
• Tata 2012-16 14.50 conglomerate index 5.20
• RIL 6.20 godrej 10.40 Adani- -31.00
• Tata group has performed better than other
groups
• Corus acqisition was a poor decision
• Tata hotel not doing well-
• Nano cross-subsidised by cahs cow TCS
• Debt overhang from acquisitions is severe.
• Mistry put corus on sale to end the pouring of
good money after bad
• Governance:
• Th root of the word is from Gubernate
• meaning to steer
• CG means to steer an orgn in the desired
direction.
• The responsibility lies with Board of directors
• Corporation is a word derived from latin term
corpus
• the term corpus means body.
• Governance means managing the processes
and systems placed for satisfying the stake
holders expectations.
• CG means a set of systems, procedures,
policies, practices, standards used by a co to
ensure relationship is maintained in
transparent and honest manner.
• James-d Wolfen son:
• CG is promoting corporate fairness,
transparency and accountability.
• Robert Ian Tricker:
• CG is concerned with the way the corporate
entities are governed , as distinct from the
way business within the cos are managed.
• CG addresses the issues facing board of
directors
• Many people have potential but lack fire
• Two birds flying – the diff is there is a fire in wings –wings
of fire
• Heart say yes from heart.
• They touch your heart- ads
• Passion comes from heart.
• Plan is good selling is poor.
• 1.Remain enthusiastic for –josh at least one hour
• 2.keep smiling 3.I shall experiment for 21 days learning-
because –experts say it needs 21 days to change your habit
• 90 days to become part of habit
• 1 year to become new
• Time tested people tested and country tested
• If we do not change – we resist change.
• Graduate of yesterday grows today becomes
illiterate tomorrow. Out of market day after
tomorrow.
• The wave of change comes from us japan and
envelopes you.
• Life is a triangle-need to have three things.
• K-knowledge-have knowledge
• Ac ki motor dc ki motor chalige ya na chalegi
• A –attitude
• S-skill
• We die at 35 and when we reach grave yard it will be 70 years
• Flow of water=river
• Why it is called Ganga
• Two things-quality-purest
• qualitative direction-touches holy pilgrimages
• Flow of water= flow of thoughts=mind
• If quality of thoughts is good and direction is good it becomes a positive
attitude.
• Attitude is nothing but quality and direction of your thought process.
• Clmb mountain- edmund hilary.
• When 5 years old he had a dream to climb mount everest-why do you
want to climb the answer
• Power of innocence- because it is there.
• After 5 years- conditioning starts- conditioning of thoughts.
• a question was asked to sai authority-why australians play such a good
cricket.
 May 29, 1953, he and a Nepalese Sherpa, Tenzing Norgay, set foot on the

.
29,028-foot (8,848-metre) summit of Everest, the highest point on earth

• I was just an enthusiastic mountaineer of

modest abilities who was willing to work quite
hard and had the necessary imagination and
determinatio
• It is not the mountain we conquer but
ourselves"
• India and australia no diff in potential
• If australian boy climbs tree his mother says go up if
you fall I will catch you
• Uparse girega ho marega. It gets recorded in mind.
• Only knowledge will not work.
• He tried 3 times-edmond hilary
• Came down – arranged party-
• Don’t change profession but upgrade yourself.
• Skill –attittudinal skill technical skill
• If you want to marry don t ask your friend you can not
marry according to his desire.
• Jo karna chahate ho apni margi se karo.
• Cadbury committee UK:
• CG is a system of structring, operating and
controlling a co with the following specific aims:
• 1.fulfilling long term strategic goals
• 2.a consideration for the local envt and local
community
• 3. taking care of interest of employees
• 4.Maintaining excellent relations with customers
and suppliers.
• 5. proper compliance with all the legal and
regulatory requirements.
• Principles of CG:
• 1.sustainable development of all stakeholders:
• Ensure growth of all individuals associated with
or affected by the enterprise on sustainable
basis.
• 2.Effective management and distribution of
wealth:
• Create max wealth
• judicious use to maximum advantage of the
stake holders.
• 3.discharge of social responsibility: ensure that
enterprise is acceptable to the society
• 4.application of best mngt practices:
ensure excellence in functioning of enterprises
and optimum creationof wealth
5.Compliance of law in letter and spirit:
Ensure value enhancement for all stake holders
guaranteed by the law for maintaining soc-eco
balance.
6.Adherence to ethical standards
• Ensure integrity, transparency, independence
and accountability in dealings with all stake
holders.
• Need for CG:
• CG is needed to create transparency,
accountability and disclosure.
• It refers to compliance with all the moral and
ethical values legal frame work
• It enhaces customer satisfaction, shareholder
wealth.
• The following points highlight the need for CG:
• 1.corporate performance:
• improved gov structures, and processes help
ensure quality decision making,
• - ensure effective succession planning;
-enhance long term prosperity of the cos.
- this helps improve cor performance.
2.Enahnced investor trust;
-Investors evaluate, besides finl performance ,
CG
• High levels of disclosure and transparency attracts
investment.
• Investors prepared to pay 40% premium
• 3.Better access to global markets:
-good CG attracts invst from different parts of the
world.
- the participation of global investors enhances
competitiveness of the capital market.
4.Combating corruption:
Transparent cos ensure full disclosure
Allow transparency in transaction
• Provide corruption free environment
• CG prevents malpractices and frauds within the
orgn.
• 5.Easy finance from institutions:
• with the entry of more intermediaries,
financial institutions,
• Increased competition, and risk exposure
• Monitoring use of capital has become complex .
• with good CG, the cos receive high market
valuation
•
• 6.Enhancing enterprise valuation:
-improved management accountability and
operational transparency fulfill investors’
expectations.
-this enhances corporate valuation.
7.Accountability:
investors’ relation is essential part of CG
-investors have entrusted the mngt the
responsibility of enhancing the value for invst.
-CG creates accountability on the part of Mngt
• OECD PRINCIPLES OF CG:
• The Principles were originally developed by the
OECD in 1999 and last updated in 2004.
• -Good corporate governance is not an end in
itself.
• It is a means to support economic efficiency,
sustainable growth and financial stability.
• It facilitates companies' access to capital for long-
term investment and
• helps ensure that shareholders and other
stakeholders who contribute to the success of
the corporation are treated fairly.
the principles have since become an
international benchmark for policy makers,
investors, corporations and other
stakeholders worldwide.
-They have advanced the corporate
governance agenda and provided specific
guidance for legislative and regulatory
initiatives in both OECD and non OECD
countries
Principles of CG:
a. the principles call on Govt to have in place
an effective institutional and legal framework
to support good CG practices.
b. The principles call for a CG frame work that
helps in protection of shareholder rights
- also facilitating of shs rights
c.They also strongly support the equal
treatment of shareholders- minority and
foreign shareholders.
 oecd
• D.they recognize the importance of role of
stakeholders in CG.
• E. they look at the importance timely, accurate
and transparent disclosure mechanisms.
• F.they deal with broad structures,
responsibilities, and procedures
• Agency theory having its roots in economic
theory was exposited by Alchian and Demsetz
(1972).
-Further developed by Jensen and Meckling
(1976).
-Agency theory is defined as “the relationship
between the principals, such as shareholders
and agents such as the company executives
and managers”
• In this theory, shareholders who are the
owners or principals of the company, hires
the agents to perform work
• two factors can influence the prominence of
agency theory:
• First :
• The theory is conceptually simple theory
• It reduces the corporation to two parties:
• 1.Managers 2.Shareholders
• Second it suggests that managers may
become self-centred.
• According to this theory, the shareholders
expect their agents to act in the interest of
principal;
• the agent may not necessarily make decisions
in the best interests of the principals (Padilla,
2000).
• Such a problem was first highlighted by Adam
Smith in the 18th century
• In agency theory, the agent may be
succumbed to self-interest, opportunistic
behavior and
• falling short of congruence between the
aspirations of the principal and the agent’s
pursuits
• agency theory was introduced basically as a
separation of ownership and control
• Stewardship theory:
• The theory has its roots from psychology and
sociology.
• Davis, Schoorman &Donaldson define
steward
• Steward as “a steward protects and
maximises shareholders wealth through firm
• performance, because by so doing, the
steward’s utility functions are maximised.
• In this perspective, stewards are;
company executives and managers working for
the shareholders, protects and make
profits for the shareholders.

• stewardship theory stresses not on the

perspective of individualism (Donaldson & Davis,
1991),
• but rather on the role of top management being
as stewards,
• integrating their goals as part of the
organization.
• The stewardship perspective suggests that
stewards are satisfied and motivated when
organizational success is attained.
• stewardship theory recognizes the importance of
structures that empower the steward and offers
maximum autonomy built on trust.
• It stresses on the position of employees or
executives to act moreautonomously
• so that the shareholders’ returns are maximized.
• Indeed, this can minimize the costs aimed at
monitoring and controlling behaviours (Davis,
Schoorman & Donaldson, 1997
• Stewardship model can have linking or resemblance in
countries like Japan,
• where the Japanese worker assumes the role of
stewards and takes ownership of their jobs and work at
them diligently.
• executives and directors are inclined to operate the firm
to maximize financial performance as well as
shareholders’ profit.
• . stewardship theory suggests unifying the role of the
CEO and the chairman
• so as to reduce agency costs and to have greater role
as stewards in the organization.
• It was evident that there would be better safeguarding
of the interest of the shareholders
• Resource Dependency Theory
• Whilst, the stakeholder theory focuses on relationships with many
groups for individual benefits, resource dependency theory
concentrates on the role of board directors in providing access to
resources needed by the firm.
• Hillman, Canella and Paetzold (2000) contend that resource
dependency theory focuses on the role that directors play in
providing or securing essential resources to an organization through
their linkages to the external environment.
• resource dependency theorists provide focus on the appointment
of representatives of independent organizations as a means for
gaining access in resources critical to firm success.
• For example, outside directors who are partners to a law firm
provide legal advice, either in board meetings or in private
communication with the firm executives that may otherwise be
more costly for the firm to secure.
• the provision of resources enhances organizational
functioning, firm’s performance and its survival
• that directors bring resources to the firm, such as
information, skills, access to key constituents such as
suppliers, buyers, public policy makers, social groups as
well as legitimacy.
• Directors can be classified into four categories of
insiders, business experts, support specialists and
community influentials.
• First, the insiders are current and former executives of
the firm and they provide expertise in specific areas
such as finance and law on the firm itself as well as
general strategy and direction.
• Second, the business experts are current, former senior
executives and directors of other large for-profit firms
and they provide expertise on business strategy,
decision making and problem solving.
• Third, the support specialists are the lawyers, bankers,
insurance company representatives and public
relations experts and these specialists provide support
in their individual specialized field.
• Finally, the community influentials are the political
leaders, university faculty, members of clergy, leaders
of social or community organizations.
• Transaction Cost Theory
• Transaction cost theory was first initiated by Cyert and March (1963)
and later described and exposed by Williamson (1996)
• . Transaction cost theory was an interdisciplinary alliance of law,
economics and organizations.
• This theory attempts to view the firm as an organization comprising
people with different views and objectives.
The underlying assumption of transaction theory is that firms have
become so large they in effect substitute for the market in
determining the allocation of resources.
• In other words, the organization and structure of a firm can
determine price and production.
• The unit of analysis in transaction cost theory is the transaction.
Therefore, the combination of people with transaction suggests that
transaction cost theory managers are opportunists and arrange
firms’ transactions to their interests (Williamson, 1996).
• In other words, the organization and
structure of a firm can determine price and
production.
• The unit of analysis in transaction cost theory
is the transaction.
• Therefore, the combination of people with
transaction suggests that transaction cost
theory managers are opportunists and arrange
firms’ transactions to their interests
(Williamson, 1996).
• Political Theory
• Political theory brings the approach of developing
voting support from shareholders, rather by
purchasing voting power. Hence having a political
influence in corporate governance may direct
corporate governance within the organization.
• Public interest is much reserved as the
government participates in corporate decision
making, taking into consideration cultural
challenges (Pound,1993).
• The political model highlights the allocation of
corporate power, profits and privileges are
determined via the governments’ favor.
• The political model of corporate governance
can have an immense influence on
governance developments.
Over the last decades, the government of a
country has been seen to have a strong
political influence on firms.
As a result, there is an entrance of politics
into the governance structure or firms’
mechanism (Hawley and Williams, 1996).
• Ethics Theories and Corporate Governance

• Other than the fundamental corporate

governance theories of agency theory,
stewardship theory, stakeholder theory,
resource dependency theory, transaction cost
theory and political theory, there are other
ethical theories that can be closely associated
to corporate governance.
• These include business ethics theory,
• virtue ethics theory,
• feminist ethics theory,
• discourse ethics theory,
• postmodern ethics theory.
•
• Business ethics is a study of business activities,
decisions and situations where the right and
wrongs are addressed.
• The main reasons for this are the power and
influence of business in any given society is
stronger than ever before.
• Businesses have become a major provider to
the society, in terms of jobs, products and
services.
• Business collapse has a greater impact on
society than ever before and the demands
placed by the firm’s stakeholders are more
complex and challenging.
• Only a handful of business giants have had any
formal education on business ethics but there
seems to be more compromises these days.
• Business ethics helps us to identify benefits and
problems associated with ethical issues within the
firm and
• business ethics is important as it gives us a new
light into present and traditional view of ethics
(Crane and Matten, 2007).
• In understanding the ‘right and wrongs’ in
business ethics, Crane & Matten, (2007) injected
morality that is concerned with the norms, values
and beliefs fixed in the social process which helps
right and wrong for an individual or social
community.
• Ethics is defined as the study of morality and
the application of reason which sheds light on
rules and principle, which is called ethical
theories that ascertains the right and wrong for
a situation.
• Whilst business ethics theory focuses on the “rights
and wrongs’ in business, feminist ethics theory
emphasizes on empathy, healthy social relationship,
loving care for each other and the avoidance of harm.
• In an organization, to care for one another is a social
concern and not merely a profit centered motive.
• Ethics has also to be seen in the light of the
environment in which it is exercised.
• This is important as an organization is a network of
actions, hence influencing transcommunal levels and
interactions (Casey, 2006).
•
• On the other end, discourse ethics theory is
concerned with peaceful settlement of
conflicts.
• Discourse ethics, also called argumentation
ethics, refers to a type of argument that tries
to establish ethical truths by investigating the
presuppositions of discourse.
• It contends that such kind of settlement
would be beneficial to promote cultural
rationality and cultivate openness
• Virtue ethics theory focuses on moral excellence, goodness,
chastity and good character. Virtue is a state to act in a given
situation. It is not a habit as a habit can be mindless .
• Aristotle calls it as disposition with choice or decision. For
example, if a board member decides to be honest, now that a
decision which he makes and thus strengthens his virtue of
honesty.
• Virtue involves two aspects, the affective and intellectual.
• The concept of affective in virtue theory suggests “doing the
right thing and have positive feelings”, whilst, the concept of
intellectual suggests “to do virtuous act with the right reason”.

• Disposition= tendency
• the Prime Minister has shown a disposition to alter policies
• The man has a disposition of a saint( inherent qualities of
mind and character)
• Virtues can be instilled with education. Aristotle
mentions that knowledge on ethics is just like
becoming a builder (Annas, 2003).
• Through the process of educating and exposure to
good virtues, the development of ethical values in a
child’s life is evident.
• Hence, if a person is exposed to good or positive
ethical standards, exhibiting honesty, just and fairness,
than he would exercise the same and it will be
embedded in his will to do the right thing at any given
situation.
• Virtue ethics is eminent to bring about the intangibles
into an organization.
•
• Virtue ethics highlights the virtuous character
towards developing a morally positive
behavior (Crane and Matten, 2007).
• Virtues are a set of traits that helps a person
to lead a good life. Virtues are exhibited in a
person’s life.
• Benchmarking: comparing or measuring
• we are benchmarking our
performance against external criteria
• Aristotle believed that virtue ethics consists of
happiness not on a hedonistic sense, but rather on a
broader level.
• Nevertheless, postmodern ethics theory goes beyond
the facial value of morality and addressed the inner
feelings and ‘gut feelings’ of a situation.
• It provides a more holistic approach in which firms
may make goals achievement as their priority,
foregoing or having a minimal focus on values, hence
having a long term detrimental effect.
• On the other hand, there are firms today who are so
value driven that their values become their ultimate
goal (Balasubramaniam, 1999).
• Hedonistic= engaged in pursuit of pleasure
• The corporate governance structure of joint
stock corporations in a given country is
determined by several factors:
• the legal and regulatory framework outlining
the rights and responsibilities of all parties
involved in corporate governance;
• the de facto realities of the corporate
environment in the country;
• and each corporation’s articles of
association.
• In each country, the corporate governance structure
has certain characteristics or constituent elements,
which distinguish it from structures in other countries.

• the corporate governance structure in each country

• develops in response to country-specific factors and
conditions.
• To date, three models of corporate governance in
developed capital markets. These are the Anglo-US
model,
• the Japanese model,
• and the German model
• The Anglo-US Model1
• The Anglo-US model is characterized by share
ownership of individual, and increasingly
• Institutional investors not affiliated with the
corporation (known as outside shareholders or
• “outsiders”);
• a well-developed legal framework defining the rights
and responsibilities of three key
• players, namely management, directors and
shareholders;
• and a comparatively uncomplicated procedure for
interaction between shareholder and corporation as
well as among shareholders during or outside the
AGM.
• Equity financing is a common method of
raising capital for corporations in the United
• Kingdom (UK) and the US.
•
• There is a causal relationship between the
importance of equity financing, the size of the
capital market and the development of a
corporate governance system.
• The US is both the world’s largest capital
market and the home of the world’s most-
developed system of proxy voting and
shareholder activism by institutional investors.
• Institutional investors also play an important
role in both the capital market and corporate
governance in the UK.
• Key Players in the Anglo-US Model
• Players in the Anglo-US model include
management, directors, shareholders (especially
institutional investors), government agencies,
stock exchanges, self-regulatory organizations and
consulting firms which advise corporations and/or
shareholders on corporate governance and proxy
voting.
• Of these, the three major players are
management, directors and shareholders.
• They form what is commonly referred to as the
"corporate governance triangle.”
• The interests of shareholders and
management may not always coincide.
• Laws governing corporations in countries using
the Anglo-US model attempt to reconcile this
conflict in several ways.
• Most importantly, they prescribe the election
of a board of directors by shareholders and
require that boards act as fiduciaries for
shareholders’ interests by overseeing
management on behalf of shareholders
• Composition of the Board of Directors in the
Anglo-US Model
• The board of directors of most corporations that
follow the Anglo-US model includes
both“insiders” and “outsiders”.
• A synonym for insider is executive director; a
synonym for outsider is non-executive director
or independent director.
• Currently there is, however, a discernible trend
towards greater inclusion of “outsiders” in
• both US and UK corporations
• Regulatory Framework in the Anglo-US Model
• In the UK and US, a wide range of laws and
regulatory codes define relationships among
management, directors and shareholders.
• Disclosure Requirements in the Anglo-US Model
• As noted above, the US has the most
comprehensive disclosure requirements of any
jurisdiction.
• While disclosure requirements are high in other
jurisdictions where the Anglo-US model is
followed, none are as stringent as those in the
US.
• Japanese model
• The Japanese model is characterized by a high
level of stock ownership by affiliated banks and
companies;
• a banking system characterized by strong, long-
term links between bank and corporation;
• a legal, public policy and industrial policy
framework designed to support and promote
“keiretsu” (industrial groups linked by trading
relationships as well as cross-shareholdings of
debt and equity);
• boards of directors composed almost solely of
insiders; and
• a comparatively low (in some corporations,
non-existent) level of input of outside
shareholders, caused and exacerbated by
complicated procedures for exercising
shareholders’ votes.
• Equity financing is important for Japanese
corporations.
• However, insiders and their affiliates are the major
shareholders in most Japanese corporations.
• Consequently, they play a major role in individual
corporations and in the system as a whole.
• Conversely, the interests of outside shareholders are
marginal.
• The percentage of foreign ownership of Japanese
stocks is small, but it may become an important factor
in making the model more responsive to outside
shareholders.
• The main bank system and the keiretsu are
two different, yet overlapping and
complementary,elements of the Japanese
model
• . Almost all Japanese corporations have a
close relationship with a main bank..
• The bank provides its corporate client with
loans as well as services related to bond issues,
equity issues, settlement accounts, and related
consulting services.
• The main bank is generally a major
shareholder in the corporation
• In the Japanese model, the four key players
are:
• main bank,
• affiliated company or keiretsu (a major inside
shareholder),
• management and
• the government.
 Composition of board of directors
• The board of directors of Japanese
corporations is composed almost completely
of insiders, that is, executive managers,
usually the heads of major divisions of the
company and its central administrative body.
• Japanese boards are generally larger than
boards in the UK, the US and Germany.
• Theaverage Japanese board contains 50
members.
Regulatory framework
• In Japan, government ministries have traditionally
been extremely influential in developing
industrial policy.
• The ministries also wield enormous regulatory
control.
• However, in recent years, several factors have
weakened the development and implementation
of a comprehensive industrialpolicy.
• In 1971, in response to the first wave of
foreign investment in Japan, new laws were
enacted to improve corporate disclosure.
• The primary regulatory bodies are the
Securities Bureau of the Ministry of Finance,
and the Securities Exchange Surveillance
Committee, established under the auspices of
the Securities Bureau in 1992.
 Disclosure Requirements in the
Japanese Model
• Disclosure requirements in Japan are relatively
stringent, but not as stringent as in the US.
• Corporations are required to disclose a wide
range of information in the annual report and or
agenda for the AGM,
• including: financial data on the corporation
(required on a semi-annual basis);
• data on the corporation’s capital structure;
• background information on each nominee to the
board of directors
• Corporate Actions Requiring Shareholder
Approval in the Japanese Model
• In Japan, the routine corporate actions
requiring shareholder approval are: payment of
• dividends and allocation of reserves; election
of directors; and appointment of auditors.
• The German corporate governance model
differs significantly from both the Anglo-US
andthe Japanese model, although some of its
elements resemble the Japanese model.
• Banks hold long-term stakes in German
corporations, and, as in Japan, bank
representatives are elected to German boards.
• .
• However, this representation is constant, unlike
the situation in Japan where bank representatives
were elected to a corporate board only in times of
financial distress.
• Germany’s three largest universal banks (banks
that provide a multiplicity of services) play a
major role; in some parts of the country, public-
sector banks are also key shareholders.
• There are three unique elements of the German
model that distinguish it from the other models
• Key Players in the German Model
• German banks, and to a lesser extent, corporate
shareholders, are the key players in the German
corporate governance system.
• banks usually play a multi-faceted role as
shareholder, lender, issuer of both equity and
debt, depository (custodian bank) and voting
agent at AGMs.
• The mandatory inclusion of labor/employee
representatives on larger German
• supervisory boards further distinguishes the
German model from both the Anglo-US and
• Japanese models
• Composition of board of directors
• The two-tiered board structure is a unique construction
of the German model.
• German corporations are governed by a supervisory
board and a management board.
• The supervisory board appoints and dismisses the
management board, approves major management
decisions; and advises the management board
• . The supervisory board usually meets once a month. A
corporation’s articles of association sets the financial
threshold of corporate acts requiring supervisory board
approval.
• The management board is responsible for daily
management of the company
• Regulatory Framework in the German Model
• Germany has a strong federal tradition; both federal and
state (Laender) law influence corporate governance.
• Federal laws include: the Stock Corporation Law, Stock
Exchange Law and Commercial Law, as well as the above-
mentioned laws governing the composition of the
supervisory board are all federal laws.
• Regulation of Germany’s stock exchanges is, however,
the mandate of the states.
• A federal regulatory agency for the securities industry
was established in 1995.
• It fills a former void in the German regulatory
environment
• Disclosure Requirements in the German Model
• Disclosure requirements in Germany are relatively
stringent, but not as stringent as in the US.
• Corporations are required to disclose a wide range
of information in the annual report and/or agenda
for the AGM, including: corporate financial data
(required on a semi-annual basis);
• data on the capital structure; limited information
on each supervisory board nominee (including
name, hometown and occupation/affiliation);
• aggregate data for compensation of the
management board and supervisory board;
• any substantial shareholder holding more than
5 percent of the corporation’s total share
capital;
• information on proposed mergers and
restructurings; proposed amendments to the
articles of association;
• and names of individuals and/or companies
proposed as auditors
 brain teaser
• It is not surprising, therefore, that the US is
the largest capital market in the world, and
that the London Stock Exchange is the third
largest stock exchange in the world (interms of
market capitalization) after the New York
Stock Exchange (NYSE) and Tokyo.
• in every way:
• He's a ​Conservative to the core.›
• to an ​extreme degree:
• I was ​shocked to the core.
• The ​lack of g
​ overnment funding is at the core of
the ​problem.
• the b​ asic and most ​important part of something:
• most ​important or most ​basic:They
are ​cutting back ​production of some
of their core ​products.
• Opaqueness:
• The opaqueness in banking creates considerable information
asymmetries
• I don’t buy this theory
• Don’t demonize him
• Disparaging him
• How one starts morning sets the pace for remaining part of
the day so as to regulate metabolism physical and emotional
well being.
• Gst hangs fire burn the candle at both ends burn the
midnight oil, burgeoning business nascent industry, brash
confidence, scuffling, primordial don’t portray him as a
terrorist deliver course correction message, side burn defied
conventional wisdom
• Wisdom conventional defied, modsiw lanoitnevnoc gut
instinct tcnitsni tug rhapsody
• INDIAN MODEL OF CORPORATE GOVERNANCE

• Although India has been rather slow in establishing

corporate governance principles over the last two decades,
2012 was a positive year for progression in the Indian
corporate governance arena.
• The Companies Bill 2012, passed by Lok Sabha (the lower
house) on 18 December 2012, includes a number of new
provisions aimed at improving the governance of public
companies.
• Interestingly, despite the structure of Indian businesses
differing significantly from those in the UK, the foundations
of the new Indian corporate governance model are drawn
from the Anglo-Saxon governance model.
•
• The investor base in the Indian corporate
market, for instance, largely consists of the
company founders, their respective family
members and the government.
• In contrast, shareholders in UK companies are
less concentrated towards a certain group of
people, are geographically dispersed and
largely held by professional investors.
• Director duties:
• Currently rely on common law duties – Codification of director’s
duties is proposed by the Companies Bill, 2009,
• Board composition:
• No distinciton between large and small quoted companies.
• Half of the board of all quoted companies must comprise of non-
executive directors.
• If the chairman of the board is an independent director, 1/3 rd of
the non-executive directors must be independent and if the
chairman is not independent, half of the non-executive directors
must be independent.
• Same individual can act as chairman and chief executive.
• No requirement for a board evaluation process. There is no
requirement for annual re-election of all directors. Appointment and
election of directors is governed by the companies Act 1956
• Nomination committee:
• A committee that monitors appointment of board, and
makes recommendations to the board;
• Nomination committee is not mandatory though some
companies have voluntarily set up a nomination
committee.
• Audit committee:
• All quoted companies must have an audit committee
comprising of 3 members. Unquoted public companies
with a paid up capital of more than Rs. 50,000,000 must
also have an audit committee – 2/3rd of the audit
committee must comprise of independent directors
• Remuneration committee:
• Remuneration of directors of public
companies (listed or unlisted) within specified
limits, must be approved by a remuneration
committee if the company has no or
inadequate profits.
• Committee must consist of at least 3 non-
executive independent directors including
nominee directors.
• Recent developments:
• The Indian market regulator, the Securities
and Exchange Board of India (SEBI), recently
issued a consultative paper on the “Review of
Corporate Governance” encouraging a wider
debate on governance.
• SEBI goes on to propose making radical
changes. These changes include:
• the appointment of independent directors by
minority shareholders,
• independent directors to receive compulsory
training and pass examinations; and
• the adoption of a principle-based approach
for certain principles
 Recent development
• There has been a clear move in India to develop the corporate
market to attract foreign investment.
• Foreign investment is slowly increasing shareholder diversity in
some companies.
• This in turn pushes the agenda for the introduction of a regulated
and universal corporate governance model. It appears from the
recent SEBI proposals that the adoption of a corporate governance
model based on the Anglo-Saxon model will be a useful starting
point but the adoption of certain UK-based concepts such as
'comply or explain' should be adopted cautiously given the radical
nature of certain proposals and significant effects they will have on
the structure of Indian businesses. New regulatory institutions may
need to be created, existing institutions strengthened and hybrid
approaches adopted but, on the whole, the Anglo-Saxon model
may well be a useful foundation.
 Need for corporate governance:

• Need has arisen for non-compliance of financial

stds reporting and
• lack of accountability by boards of directors,
and management inflicting heavy losses.
• The collapse of international giants likes enron,
world com, are due to absence of CG.
• In India, SEBI realized the need for CG and
appointed several committees-
• Narayana murthy committee, Naresh chandra
committee,Kumar mangalam birla committee.
• Importance of CG: A good system of CG is
important on account of the following reasons:
• 1. investors need adequate protection of
investment.
• lack of adequate financial reporting standards
and accountability.
• Cos raise capital at high price by projecting
wrong picture
• Increasing awareness among investors to
invest in cos that observe good CG practices.
• 2.CG is an important means to listen to the
grievances of the share holders.
• Kumaramangalam birla committee found that
the cos were not providing information
• Good CG is needed to consider the grievances.
• 3.CG will enable cos to1. attract capital
• 2. Perform efficiently – it helps in winning the
confidence of investors
• there are several ex of corporate failures dueto
lack of tranparancy, and disclosures and
falsification of accounts.
• This is due to poor corporate gov standards.
• Global perspective:
• The adoption CGPs attract foreign investment
• With the removal of restriction, the
relationship between CG and foreing
investment has become very important factor
• The inflow of invst from FII and FDI depends on
the CG practices.
• The large flow of invst will fuel eco growth
• Indispensible for healthy and vibrant stock
market:
• A healthy stock market provides investors
protection.
• Insider trading is a bane of stock market
• a fraud committed by the directors and other
executives
• Better way to prevent is self-regulation ie
corporate gov.
• http://www.economicsdiscussion.net/busines
s-environment/corporate-
governance/corporate-governance-in-india-
need-importance-and-conclusion/1014
 Unit-2
• Corporate Governance and Role of Committees in
India: Need and Importance of Committee
Reports, Emergence of corporate governance,
corporate governance committees- Cadbury
Committee on corporate governance, 1992,
Sarbanes-Oxley Act, 2002, Kumar Mangalam Birla
Committee, 1999, Naresh Chandra Committee
Report, 2002, Narayana Murthy committee
Report, 2003, Dr. J. J. Irani Committee Report on
Company Law, 2005- SEBI guidelines and Clause
49 - Concept of whistleblowing- whistle-blower
policy-case studies.
 ii unit
• CG and Committees In India
• With the formation of corporate form of
organizations, the frame work of corporate
governance got wide recognition
• it was prevalent in various manifestations
throughout the world.
• The theme of Corporate Governance has got
recognition due to the constitution and formation
of various committees and formulation of various
laws throughout the world.
• With respect to India, after the economic
initiatives in 1991,
• the Govt. of India thought it fit to respond to the
developments taking placing the world over and
• accordingly the initiatives recommended by
Cadbury Committee Report got prominence.
• In order to give due prominence,
• Confederation of Indian Industry (CII), the
Associated Chambers of Commerce and Industry
(ASSOCHAM) and, the Securities and Exchange
Board of India (SEBI) constituted committees to
recommend initiatives in Corporate Governance
• The report of various committees helped a lot to
streamline the corporate throughout the world.
Some of the Committees with its formation is
given under the following table
• Sl No Committee country date of submision
• 1. Cadbury England 1992
• 2. King committee S Africa 1994 and 2002
• 3.CII India 1996
• 4.Hampel England 1998
• 5.Kumara mangalam
• Birla India 2000
• 6. SEBI India 2000
• 7. Narayana Murthy India 2003

• However with respect to India, the

recommendations of Naresh Chandra
Committee, Dr. J. J. Irani Committee
constituted by Ministry of Corporate Affairs,
the Kumar Mangalam Birla Committee and N.
R. Narayana Murthy Committee constituted by
SEBI are more prominent.
• Apart from these committees, there are OECD
principles and reviews by various other
corporate bodies like FICCI, KPMG, ICSI etc. on
the corporate governance practices in India.
• Evolution of corporate governance:
• CG is one of the important factors that
impacts the growth, profitability and
sustainability of a busi.
• Creating value for the stakeholders requires
that business has to be run with code of
conduct and good governance.
• Historical perspective:
• in 1947, India had functioning stock market,
manufacturing sector, banking sector,
• It also had comparatively good corporate
governance practices developed by British.
• 1947 to 1991 India, pursued the socialist
policies.
• The state owned financial institutions were
major providers of finance to private sector.
• These financial institutions were evaluated on
the basis of amount of invst rather than
return on such lending.
• foreign competition was suppressed.
• Private financial institutions faced with lot of
hurdles, inrelation to supervision and recovery
of debts.
• Public cos were required to comply with a
limited governance standards and disclosure
standards.
• Faced with 1991 crisis govt came out with
series of reforms which aimed to improve eco
growth.
• The sebi was established in 1992, by Mid-
1990s the economy started growing steadily.
• Indian firms had begun to seek equity capital
to finance expansion into the market spaces
created by liberalization and growth of
oursourcing.
• The need for capital led to corporate
governance reform and many major CG
initiatives launched in India,
• Most of these initiatives were focused on
improving the CG climate
• The major intiative was CII came up with first
voluntary code of governance.
• It contained detailed provisions, and focused
onlisted cos.
• The second initiative in the country was
undertaken by SEBI.
• In early it set up Kumara mangalam Birla
committee to promote and raise the
standards of CG.
• The committee placed emphasis on
independent directors and made specific
recommendations regarding board
representation and independence.
• Cadbury report:
sir Ardian Cadbury committte set up by the
London stock exchange in 1992
• The recommendations of the report are :
• Role of board of directors:
• The report introduced the code of best
practice
• All listed cos and other cos are encouraged to
comply with code. The code consists of the
following four sections:
• 1.Board of directors:
• a.the board meet regularly, retain full and
complete control over the co and monitor the
executive mngt.
• b. clearly accepted division of responsibilities
to ensure balance of power; no one has
absolute power of decisions
• c.where chairman is also chief executive,
ensure strong and independent element on
the board,- there should be a senior member
who is an indep director
• All directors should have access to services of
co sec.
• sec responsible for ensuring procedures are
followed.
• 2. Non-exe directors:
• 1. they bring independent judgement to
bear on issues of strategy performance etc
• 2. the majority of inde directors be non-exe
dire, t
• 3.Executive directors:
• There should be full and clear discl of
remuneration of chairman, highest paid
directors, stock option etc in annual report.
• show separately the salary and performance
pay.
• 4. financial reporting and controls:
• Duty of the board to present a balanced and
understandable assessment of co’s position.
• In reporting of financial stats for providing
true and fair picture of financial reporting.
• The board should ensure that an objective
and professional relationship maintained
with auditors.
• Role of auditors:
• Recommended constitution of audit
committee
• min of 3 non exe members; majority inde
directors.
• To provide a true and fair view of fin stats
• Maintain an objective and professional rship
bet auditors and BOD
• Auditor design audit in such a mannner to
ensure f.stats are free from material
misstatements.
• recommends rotation of audit partner to
prevent the relationship between the mngt
and auditors
• Rights and responsibilities of shareholders:
• the report emphasizes the need for fair and
free reporting of financial progress
• The report placed imp on the role of
institutional investors.
• Make greater use of voting rights and take
positive int in board functioning.
 The Sarbanes-Oxley Act (or SOX
Act)2002
• The Sarbanes-Oxley Act (or SOX Act) is a U.S.
federal law that aims to protect investors by
making corporate disclosures more reliable
and accurate.
• The Act was spurred by major accounting
scandals, such as Enron and WorldCom (today
called MCI Inc.), that tricked investors and
inflated stock prices.
•
• Spearheaded by Senator Paul Sarbanes and
Representative Michael Oxley, the Act was
signed into law by President George W. Bush
on July 30, 2002.
 Major Provisions

• The SOX Act consists of eleven elements (or

sections). The following are the most important
sections of the Act:

• Section 302
• Financial reports and statements must certify
that:
• The documents have been reviewed by signing
officers and passed internal controls within the
last 90 days.
• The documents are free of untrue statements or
misleading omissions.
• The documents truthfully represent the
company’s financial health and position.
• The documents must be accompanied by a list
of all deficiencies or changes in internal
controls and information on any fraud
involving company employees.
•
• Section 401
• Financial statements are required to be accurate.
Financial statements should also represent any
off-balance liabilities, transactions, or obligations.
•
• Section 404
• Companies must publish a detailed statement in
their annual reports explaining the structure of
internal controls used.
• The information must also be made available
regarding the procedures used for financial
reporting.
• The statement should also assess the
effectiveness of the internal controls and
reporting procedures.

• The accounting firm auditing the statements

must also assess the internal controls and
reporting procedures as part of the audit
process.
•
• Section 409
• Companies are required to urgently disclose
drastic changes in their financial position or
operations, including acquisitions,
divestments, and major personnel
departures.
• The changes are to be presented in clear,
unambiguous terms.
• Section 802
• Section 802 outlines the following penalties:
• Any company official found guilty of concealing,
destroying, or altering documents, with the intent
to disrupt an investigation, could face up to 20
years in prison and applicable fines.
• Any accountant who knowingly aids company
officials in destroying, altering, or falsifying
financial statements could face up to 10 years in
prison.
•
 most important SOX requirements:
• CEOs and CFOs are directly responsible for the
accuracy, documentation, and submission of all
financial reports as well as the internal control
structure to the SEC.
• Officers risk jail time and monetary penalties for
compliance failures – intentional or not.
• SOX requires an Internal Control Report that
states management is responsible for an
adequate internal control structure for their
financial records.
• Any shortcomings must be reported up the chain
as quickly as possible for transparency.
• SOX requires formal data security policies,
communication of data security policies, and
consistent enforcement of data security policies.
Companies should develop and implement a
comprehensive data security strategy that
protects and secures all financial data stored and
utilized during normal operations.
• SOX requires that companies maintain and
provide documentation proving they are
compliant and that they are continuously
monitoring and measuring SOX compliance
objectives.
• SOX Compliance Audits
• SOX mandates companies complete yearly
audits and make those results easily available
to any stakeholders.
• Companies hire independent auditors to
complete the SOX audits, which must be
separate from any other audits to prevent a
conflict of interest.
• The primary purpose of the SOX compliance
audit is the verification of the
company’s financial statements.
• Auditors compare past statements to the
current year and determine if everything is
copasetic.
• Auditors can also interview personnel and
verify that compliance controls are sufficient
to maintain SOX compliance standards.
• Preparing for a SOX Compliance Audit
• Make sure to update your reporting and
internal auditing systems so you can pull any
report the auditor requests quickly.
• Verify that your SOX compliance software
systems are currently working as intended so
there will be no surprises with those systems.
• SOX Internal Controls Audit
• Your SOX auditor will investigate four internal
controls as part of the yearly audit. To be SOX
compliant, it is crucial to demonstrate your
capability in the following controls:
• Access: Access means both physical controls
(doors, badges, locks on file cabinets) and
electronic controls (login policies, least privileged
access, and permissions audits).
• Maintaining a least permissive access model
means each user only has the access necessary to
do their jobs and is a requirement of SOX
compliance.
• Security: Security in this context means that you
can demonstrate protections against data
breaches. How you choose to implement this
control is up to you.
• Data Backup: Maintain SOX compliant off-site
backups of all of your financial records.
• Change Management: Have defined processes to
add and maintain users, install new software, and
make any changes to databases or applications
that manage your company financials.
• Benefits of SOX Compliance
• SOX provides the framework that companies need
to follow to be better stewards of their financial
records, which in turn improves many other
aspects of the company.
• SOX compliant companies report that their
financials are more predictable, which makes
stockholders happy.
• Companies also report that they have easier
access to capital markets due to their improved
financial reporting.
• By implementing SOX, companies are safer
from cyberattack and the expensive,
embarrassing aftermath of a data breach.

• SOX compliance builds a cohesive internal

team and improves communication between
teams involved with the audits.
• The benefits of a companywide program like
SOX can have other tangible effects on the
company – like improved cross-functional
communication and cooperation.
• Benefits to Investors
• After the implementation of the Sarbanes-
Oxley act, financial crime and accounting
fraud became much less widespread than
before.
• Organizations were deterred from attempting
to overstate key figures such as revenues
and net income.
•
• Thus, investors benefited from access to more
complete and reliable information
• They are able to base their investment
analyses on more representative numbers.
 Kumar Mangalam Birla Committee, 1999

• Mandatory Recommendations-
• 1.applicability: applicable to Listed Cos- PUC -
3 crore and above
• 2.Board of Directors: The B OD- Optimum
combination of ED and NEDs.
• Inde Directors- 1/3- if Co has NE chairman
• -1/2 of the Board, if co has an Executive
chairman.
• Ind Directors- as directors who apart from
receiving director’s remuneration
• - do not have any material pecuniary r.ship or
transactions with co, its promoters, its
management, or its subsidiaries,
• 3.audit committee- a qualified and ind audit
committee should be set up to enhance;
- the credibility of financial disclosures and
-promote transparency
• Must - min of 3 members, majority NEDs/Ids
• - one director –knowledge of finance and accg.
• Meet - atleast 3 times a year- gap not exceeding
6 months;
• One meeting before the finalization of annual
accounts;
• Quorum- two members or 1/3 WEH
• -invite executives in addition to Head of internal
audit
• -a rep of external auditor as invitee-must
• 4.Remu committee of Board-
• BOD decide- remuneration of NEDs
• Full disclosure of Directors’ remuneration package-
salary- bonus-stock options etc.
• 5. Board procedures-
• meeting – at least 4 times a year
• - min gap 4 months bet two meetings
• -min information on annual operating plans
• and cap budgets etc
• - to ensure total commitment to board meetings,
• director should not be member of more than 10
committees and chairman of more than 5 committees
across all cos
• Management- MD & A report- focus on
• - industry structure
• - opportunities and threats,
-segment-wise or product-wise performance;
- Quarterly results
- These details should form part of Directors’ report
- 7.shareholders- in case of an appointment of a new
director, or reappointment-
- Share with shareholders following
- Brief resume
-nature of expertise
-details of cos- where directorship held
• Shareholders’ Dividends’ grievances redressal
committee- under CM ship of NED
• 8.manner of implementation-
• A separate section on CG in Annual Reports;
• - Co’s philosophy on code of governance;
• Board of directors, audit committee,
remuneration committee etc
• Non-compliance with mandatory
recommendations – reasons and extent of
adoption of NMRs should be highlighted
• Non mandatory Recommendations-
• 1.CM of the board-
• Role of CM of board is different from CEO
• As the role is very important- CM should be
entitled to maintain office at the Co’s
Expense;
• -allow reimbursement of expenses
• 2.Remuneration committee-
• Co must have a policy –determining and
accounting for remuneration of directors
• Enough to attract talents;
• -at least 3 directors-all NEDs; CM-
independent director
• -all the members must be present for the
purpose of quorum;
• -CM present in AGM to answer querries
• 3.share holders rights- Half-yearly declaration
of financial performance-
• Summary of significant events in 6 months
sent to each of SHs.
• 4.Postal Ballot- if share holders unable to
attend meeting, PB is necessary
- critical matters decided
a. Alteration of MOA
b. sale of undertaking
• C.sale of investments in cos- where the
shareholding or voting rights of Co exceeds
25%
• corporate restructuring etc.,
• Nareshchandra committee report(2002):
• the Enron debacle of 2001, the scams of world
com, quest, Global crossing, xerox and global
crossing, led the indian govt to wake up.
• the Naresh chandra committee was appointed
to examine, recommend, among other things,
law relating to auditor relationship role of
independent auditor.
• Highligts of Naresh chandra committee
report:
• 1.prohibition of any direct financial interest in
audit client. The audit firm, partner or any
relative or member shall not have a share
holding more than 2%.
• 2.prohibition of receiving any loan and
guarantees from the audit client
• 3.prohibition of any business rship with the
client by the audit firm, or member of the
team, or direct relatives.
• 4.prohibition of personal relationship with the
client. It excludes the audit partner, or
member of the team being relative of key
officers of co. ex ceo cfo or co secretary etc
• 5.prohibition of service or cooling off period:
• the joining of audit firm or member the
client or key officers joining the audit firm is
prohibited till 2 years from preparation of
accounts.
• 6.Prohibition of undue dependence on an
audit client:
• The fees received shall not exceed 25% of
the total revenue of the firm. Not applicable
for small firms having a revenue of less than
15 lakhs for first five years.
• 7.compulsory audit rotation:
• the partners and atleast 50% of the team
members must be rotated once in 5 years.
• They can return after a break of 3 years.
• Applicable to cos having a capital of 10 crores
or turnover of 50 crores.
• 8.Disclosure of contingent liabilities in the
financial statements. A description in plain
english, of nature of liability and risk and
auditors comment.
• 9.disclosure of qualifications in report.
• Qualifications to accounts read out in the GM
• Mandatory to send a copy of report to ROC
and SEBI
• 10.managment’s certification of replacement
of auditor:
• Sec 225 of co’s act needs to be amended to
require a spl resoln of shareholders, in case
he is to be replaced.
• 11.appointement of auditors:
• the audit committee of the BOD shall be the
first point of reference reg appointment of
auditors.
• Discuss the annual work programme with
auditor.
• Review the independence of the audit firm
• Recommend to the board with reasons, the
appointment or removal of external auditor.
• 12. Board size
• The min is 4 independent directors-cos
having a PUC of 10crores and above,or TO 50
crores,
• No applicable to unlisted cos with less than 50
share holders.
• N R Narayana murthy committee(2003):
• In the year 2002, SEBI set up the committee
to review implementationof code of CG and
clause 49 of the listing agreement:
• Highlights
• 1.audit committees of public ltd cos required
to review :
• 1.finl stats, and draft audit report quarterly
half yearly
• Mngt discussion and analysis of finl conditions
and results of operation.
• Reports relating to compliance with laws and
risk mngt.
• Records of related party transactions.
• 2. in case a co has followed a different
treatment of any item- justify why
• 3.a stat of all related party transactions and
place before independent audit committee
for approval.
• 4.cos should provide training to the directors in
the business model, risk profile and
responsibilities.
• 5.to inform board members about risk
assessment and minimization procedures.
• periodical review
• Ensure mngt controls risk with a framework.
• 6.mngt should place a report quarterly before
BOD documenting the risk faced by co
• Measures taken and limitations of co to deal
with the risk
• Report approved by BOD
• 7.Cos raising the funds through IPOs should
disclose to the audit committee
• -the uses and applilcation of funds category
wise quarterly
• Annualy prepare a funds utilization stat if
utilized for any other purposes.
• -the stat certified by Independent auditors.
• 8. obligatory upon board to lay down code of
conduct for all board members and mngt of
co.
• 9. No nominee directors- if an institution
wants to appoint a director,
• Such appointment shall be made by directors.
• 10.all compensation paid to non-executive
directors approved by shareholders in GM
• limits set for stock options to NEDs
• The stocks shall vest only one year after
retirment
• The co shall state the philosophy of the
compensation.
• 11. Definition of independent director:
• ID is defined as a NED of a co who:
• -apart from receiving remuneration does not
have any material pecuniary rship or
transactions with co, its promoters or mngt or
holding co or ss co.
• -is not related to promoters or mngt at the
board level or at one level below the board.
• -not been executive of the co in the
immediately 3 preceeding finl year.
• Is not a partner or exe of the statutory audit
firm or internal audit firm and not a partner or
exe for the last three years.
• Is not a supplier or customer or service
provider of the co.no lessor or lessee rship.
• Is not a substantial shareholder of co, ie
owning 2 percent or more of the block of
voting shares of the co.
• 12. persons who observe an unethical
practice approach audit committee
• cos shall take measures to protect the whistle
blowers.
• 13.cos shall annually affirm that they have not
denied access to the audit committee.
• 14.the appointment, removal and
remuneration of internal auditor shall be
subject to review by the audit committee.
• 15.the provisions relating to BOD shall be
applicable to BOD of SS co.
• Atleast one ind dir of holding co shall be on
the board of ss co.
• 16.the perfomance evln of non-ex directors
shall be by a peer group comprising BOD
excluding the director being evaluated.
JJ irani committee report on
company Law-2005
• in 2004 govt constituted a committee –
• CM DR J J Irani –DIRECTOR -TATA SONS.
• Entrusted with the tasks of advising govt on
the proposed revisions to Cos act.
• The highlights of the recommendations are:
• 1.Board composition: law should provide only
min no of directors- no max limit to no of dire
• No limit on age be specified in the act.
• 2.appointment and resignation of directors.:
• Every co to have atleast one director resident
in India.
• 3.Approval of appointment of non-resi
managers not necessary
• Duty to inform the ROC about death or
appointment or resignation rests with the co.
• 4.Independent directors:
• Presence of Ind directors lead to greater
transparency
• Law should recognize their role, qualifications
liabilities etc
• 5. manner of appointment etc
• 6.Remuneration of directors:
• Decision of remuneration requires no approval
from the govt
• Left to the co
• No limits be prescribed
• In case of loss also be allowed to pay with
the approval of rem committee and
shareholders.
• 7.Committees:
• Certain committees to be constituted with
the participation of ind dire- mandated for
certain category of cos.
• In other cases it is left to the discretion of the
cos.
• Law should specify the manner and
composition of various com like:
• i.audit committee ii.stake-holders comm
• iii.rem comm
• 8.DISQUALIFICATION OF DIR:
• FAILURE TO ATTEND MEETINGS FOR ONE
FULLYEAR –with leave of absence also- ground
for vacation of office.
• Specific provisions to be made to regulate the
process of resignation of director.
• 9.Annual general meeting:
• Use of postal ballot during meeting of
members be allowed
• Law provide electronic voting
• AGM conduct at other place if 10% of the
members reside in such place
• Small cos need not conduct AGMs
• 10.Appointment of MD/WTD:
• MD/WTD Should be in the full time
employment of only one co at a time.
• Provisions relating to appointment directors
through proportionate representation shall be
continued.
• Limit of PUC –sec 269- be increased to 10
crores- for appointment of WTD
• :
• 11.KEY MANAGERIAL PERSONNEL
• Every co required to appoint, a chief exe
officer CFO and CS as key managerial
personnel
• Whose appointment and removal shall be by
BOD
• Special exemptions for small cos.
• Such cos may obtain service from qualified
professionals in practice.
• Clause 49 of SEBI Listing Agreement
• As a major step towards codifying the corporate
governance norms, SEBI enshrined the Clause
49 in the Equity Listing Agreement (2000),
-it now serves as a standard of corporate
governance in India.
• With clause 49 was born the requirement
that half the directors on a listed company’s board
must be Independent Directors.
• In the same clause, the SEBI had put forward the
responsibilities of the Audit Committee, which
was to have a majority Independent Directors.
• Clause 49 of the Listing Agreement is
applicable to companies which wish to get
themselves listed in the stock exchanges. This
clause has both mandatory and non-
mandatory provisions.
• Key Mandatory provisions :

• Composition of Board and its

procedure – frequency of meeting,
• number of independent directors,
• code of conduct for Board of directors
and senior management;
• Audit Committee, its composition, and
role
• Key Non-mandatory provisions :
• Constitution of Remuneration Committee
• Training of Board members
• Peer evaluation of Board members
• Whistle Blower policy
• In 2014, the clause 49 was amended to
include Whistleblower policy as mandatory
provision.
• Provision relating to Subsidiary Companies
• Disclosure to Audit committee, Board and the
Shareholders
• CEO/CFO certification
• Quarterly report on corporate governance
• Annual compliance certificate
• Whistle Blowing
• Definition: When a former or the existing
employee of the organization raise his voice
against the unethical activities being carried out
within the organization is called as whistle
blowing and the person who raise his voice is
called as a whistle blower.
• The companies should motivate their employees
to raise an alarm in case they find any violation of
rules and procedures and do intimate about any
possible harm to the interest of the organization
and the society.
• The misconduct can be in the form of fraud,
corruption, violation of company rules and
policies, all done to impose a threat to public
interest.
• The whistle blowing is done to safeguard the
interest of the society and the general public
for whom the organization is functioning
• Types of Whistle Blowing
• Internal Whistle Blowing: An employee
informs about the misconduct to his officers
or seniors holding positions in the same
organization.
• External Whistle Blowing: Here, the employee
informs about the misconduct to any third
person who is not a member of an
organization, such as a lawyer or any other
legal body.
• Whistle Blower Policy:
• 1. the co shall establish a vigil mechanism for
directors and employees
• - to report about unethical behavious, fraud
or viaolation of Code of conduct or ethics;
• 2. provide for adequate safeguards against
victimization of director or employee;
• 3.the details of mechanism disclosed on
website and in Board report;
• Mandatory for listed cos WEF Oct/01/2014
• Audit committee to review functioning
• Disclosure in Annual report and
• Certfiy that no personnel has been denied
access to audit committeee
• Corporate Social Responsibility: Meaning- CSR
models- corporate social challenges-corporate
accountability-business and ecology-
Sustainability Reporting. Case analysis.
• The 21st century is faced with a lot of challenges
and opportunities;
• These arise from globalization, inclusive
development and climate change;
• Long term success of business is related to
taking care of social, environmental and ethical
responsibilities into the governance of the
business;
• CSR is a concept whereby companies consider
interests of the society And environment
The vedic philosophy “Sarva loka hitham” ie the
well being of all stake holders has gained
importance;
It is used as a strategy and a business opportunity
to earn stakeholder goodwill;
Meaning and Definitions:
CSR is understood to be the way firms integrate
social, environmental and economic concerns
into their
values; culture, decision making strategy and
operations in a transparent and accountable
manner
• 1950s saw the modern era of CSR – Then
known as Social Resp;
• 1953-Howard Bowen published book “Social
responsibilities of the Business man”
• Known as father of CSR;
• accg to Businesss for Social Responsibility
• “ CSR is operating a business in a manner
which meets or excels the ethical, legal,
commercial and public expectations that the
society has from business”.
• Accg to CSR Asia-a social enterprise-
• “ CSR is a company’s commitment to operate
in an economically socially and
environmentally sustainable manner whilst
balancing the interests of diverse stake
holders;
• CSR consists of
• 1.social economic, ethical and moral
responsibility of companies and managers
• 2.compliance with legal and voluntary
requirements for business and professional
practice;
• 3.challenges posed by needs of the economy
and socially disadvantaged groups and
• 4. management of CSR activities
 CSR Defined (2)
“CSR is the commitment of business to contribute to sustainable economic
development-working with employees, their families, the local community
and society at large to improve the quality of life in ways that are both
good for business and good for development” (World Bank, 2008).

“CSR is a commitment to improve community well-being through

discretionary business practices and contributions of corporate
resources”(Kotler & Lee, 2005).

“Social responsibility of business is to encompass the economic, legal,

ethical and discretionary expectations that society has of organizations at
a given point in time” (Carroll, 1979).

Enterprise and its Business Environment ©

189
Goodfellow Publishers 2016
 CSR MODELS
• FRIED MAN MODEL
• Background of the Friedman Doctrine
• The Friedman Doctrine first appeared in the New
York Times in 1970 as an essay by Milton
Friedman. In the essay, the economist explained
that an entity does not have any social
responsibility to the society around it whatsoever.
Instead, he stated that the only responsibility that
an entity should abide by is its shareholders.
• Friedman justified his claim by explaining that
any executives in business are employees of
the owners, and they are, therefore, required
to deliver quality service to the employer first
before any other party.
• Individuals employed in corporate entities are
required to conduct their roles in the business
according to the expectations of the employer.
•
• What is Social Responsibility?
• The Friedman Doctrine holds that decisions
concerning social responsibility rest on the
shoulders of the shareholders, not the
executives of the company. He argues that an
entity is not obligated to any social
responsibilities unless the shareholders
decide to such an effect.
• Any social responsibilities to the society
require resources and should, therefore, be
arranged before they are executed.
• The use of a company’s resources is subject to
approval by the shareholders, who are the
final decision-makers on important decisions
such as the use of financial resources.
• Social responsibility activities such as the
development of social amenities for the
community are capital-intensive and will
affect the financial resources of the entity.
• Friedman insisted that such responsibilities
should not be forced on the company, and the
final decision on whether or not to carry them
out depends on the shareholders.
• Criticism of the Friedman Doctrine
• Despite its success, the doctrine faces its own
fair share of criticism from the surrounding
society.
• The doctrine is seen, to a large extent, as
individualistic, especially from the societal
perspective. Critics consider the doctrine as
defective from many fronts, including legally,
morally, economically, socially, and financially.
• Most critics hold that the doctrine gives
shareholders an upper hand while neglecting the
society surrounding the entity. In as much as the
shareholders are the financial engine for the
business, the entity also needs the community
for it to be successful.
• The business sells its products and services to
the community. Its success depends on the
goodwill from the community to purchase the
products and services. Therefore, both parties
have a mutual relationship, and the business has
a responsibility towards the community.
• ACKERMAN MODEL-
• Ackerman Model (1976) The model has emphasized
on the internal policy goals & their relation to the CSR.
• Four stages involved in CSR.
• Managers of the company get to know the most
common social problem & then express a willingness
to take a particular project which will solve some
social problems.
• Intensive study of the problem by hiring experts &
getting their suggestions to make it operational.
• Managers take up the project actively & work hard.
• Evaluating of the project by addressing the issues.
• Six Strategies in the adoption of CSR.
• Rejection strategy
• Adversary strategy
• Resistance strategy
• Compliance strategy
• Accommodation strategy
• Proactive strategy
Six Strategies in the adoption of CSR.

• Rejection strategy: reluctance to adopt any

social work or project.
• Adversary strategy: Adopt CSR project only
when pressure comes from external sources.
• Resistance Strategy: Adopt the CSR when
pressurized by the government.
• Compliance strategy:
• A compliance-driven CSR strategic platform
focuses on achieving high levels
of compliance with a broad range of
requirements, including
• environment, health, and safety (EHS);
product integrity; product safety; and
equipment certifications.
• Accommodation Strategy: is assuming social
responsibility only in response to pressure from
interest groups or the government.
• Proactive strategy involves business practices
adopted voluntarily by firms that go beyond
regulatory requirements in order to actively
support sustainable economic, social and
environmental development, and thereby
contribute broadly and positively to society
•
• CARROLL’S PYRAMID CSR MODEL:
• This is one of the leading CSR model. It is
formally known as the model of Carroll’s four-
part pyramid.
• The major focus of the model is to embrace
the complete spectrum of expectations that
society has from a business, defining them
and dividing them into different categories.
• The model can be represented with the help
of diagram-1 shown below.
• there are four kinds of social responsibilities.
This involves economic, legal, ethical and
philanthropic.
• The pyramid is used to show the different
responsibilities of a business in the order of
decreasing importance.
• The most basic responsibility is economic
responsibility
• Next comes the legal responsibility, all the
business whether small or big are expected to
operate within the framework that has been
specified by the law of the land.
• Followed by this in the hierarchy is the ethical
responsibilities;
• On top of the pyramid is the philanthropic
responsibilities, which is considered
discretionary in nature.
• Thus, the pyramid works towards describing the
necessary and the sufficient obligations that
socially responsible businesses should follow
 CORPORATE CITIZENSHIP MODEL
• Corporate citizenship, also known as
corporate social responsibility (CSR), is
becoming more important to employees,
consumers and society.
• Some companies use the terms “corporate
citizenship” or “corporate social
responsibility” and “philanthropy”
interchangeably, but the latter is just one facet
of the former.
• Alessandra Cavalluzzi, author of “A Million
Dollars In Change: How to Engage Your
Employees, Attract Top Talent, and Make the
World a Better Place,” says, “Charitable giving
encompasses donations or grants made to a
nonprofit organisation.
• On the other hand, corporate citizenship
refers to a company holding itself accountable
for the social, financial and environmental
impact it has on the community—and society
in general—and this broad term encompasses
a wide variety of actions from business
operations to corporate philanthropy.”
• ill Huntley, managing director of global corporate
citizenship at Accenture, views corporate
citizenship in two ways.
• “The first is how a company runs itself—its
commitment to building trust by doing business
ethically—and the second is how a company
contributes to the wider society beyond its own
walls: what is the contribution more broadly to
people, the economy and our planet?”
• So what are some examples of corporate
citizenship? Cavalluzzi provides three:
• Designing programs to help improve the well-
being of the community
• Striving to reduce the company’s carbon
footprint.
• Encouraging volunteerism, such as for
employees volunteering their time and talent
to help a local nonprofit.
• The importance of corporate citizenship
• corporate citizenship can provide a
competitive advantage to companies.
• Deloitte’s 2018 Millennial Survey reveals that
this generation—and Generation Z as well—
does not think very highly of corporations or
their leaders.
• They are disappointed in business leaders,
who they perceive as being focused solely on
making a profits.
• She believes, however, that corporate
citizenship holds companies to a higher
standard since these organisations are
accountable for operating ethically.
• The values of transparency, integrity,
community and empathy are hallmarks of
socially-responsible companies,
• . “They attract top talent, enjoy higher levels
of engagement and experience lower
turnover rate
• They’re viewed as being one of the “good”
companies because of their corporate
citizenship.
• Being a corporate citizen also affects a
company’s reputation with consumers and
the wider community.
 Challenges of CSR
• CHALLENGES OF CSR
• 1. Lack of Community Participation in CSR
Activities: There is a lack of interest of the
local community in participating and
contributing to CSR activities of companies.
•
• Need to Build Local Capacities: There is a
need for capacity building of the local
nongovernmental organizations as there is
serious dearth of trained and efficient
organizations that can effectively contribute
to the ongoing CSR activities initiated by
companies
• Issues of Transparency: there exists lack of
transparency on the part of the local
implementing agencies as they do not make
adequate efforts to disclose information on
their programs, audit issues, impact
assessment and utilization of funds
• 4. Non-availability of Well Organized Non-
governmental Organizations: in remote and rural
areas that can assess and identify real needs of
the community and
• work along with companies to ensure successful
implementation of CSR activities.
• 5.Visibility Factor: The role of media in
highlighting good cases of successful CSR
initiatives is welcomed as it spreads good stories
and sensitizes the local population about various
ongoing CSR initiatives of companies.
• But they don’t involve themselves in execution of
programs at grass root level.
• 6.Non-governmental organizations and
Government agencies usually possess a
narrow outlook towards the CSR
• often defining CSR initiatives more donor-
driven than local in approach.
• As a result, they find it hard to decide
whether they should participate in such
activities at all in medium and long run
• 7.Non-availability of Clear CSR Guidelines: There
are no clear cut statutory guidelines or policy
directives to to CSR initiatives of companies;
• 8.Lack of Consensus on Implementing CSR
Issues: There is a lack of consensus amongst
local agencies regarding CSR projects.
• This lack of consensus often results in duplication
of activities by corporate houses in areas of their
intervention
• This results in a competitive spirit between local
implementing agencies rather than building
collaborative approaches on issues
• Triple Bottom Line (TBL)
• Within the broader concept of corporate social
responsibility, the concept of Triple Bottom Line
(TBL) is gaining significance and becoming
popular amongst corporate.
• Coined in 1997 by John Ellington, noted
management consultant, the concept of TBL is
based on the premise that business entities have
more to do than make just profits for the owners
of the capital, only bottom line people
understand. “People, Planet and Profit
• People” (Human Capital) pertains to fair and
beneficial business practices toward labor and
the community and region in which a corporation
conducts its business.
• “Planet” (Natural Capital) refers to sustainable
environmental practices. It is the lasting
economic impact the organization has on its
economic environment
• A TBL company endeavors to benefit the natural
order as much as possible or at the least do no
harm and curtails environmental impact.
• “Profit” is the bottom line shared by all
commerce.
• CORPORATE SUSTAINABILITY REPORTING
• The concept of sustainability reporting is of
recent origin. Conventionally financial
accounting was the tool that aided
management control.
• Then, management accounting has emerged
separately with focus on generating
information for management planning,
control and decision-making.
• In the recent years, with emphasis being
placed on the ways in which companies
match their resources to the needs of the
marketplace, it has given rise to the concept
of corporate performance management and
measurement.
• The new approach is an integrated one
seeking to link strategic management,
management accounting and reporting
• A sustainability report is an organizational
report that gives information about
economic, environmental, social and
governance performance.
• Sustainability reporting aims to communicate
an organization’s sustainability priorities,
policies, programs and performance to its
investors.
• Some of the key drivers of sustainability
reporting are
• Regulations:. Legislation is becoming more
innovative and is covering an ever wider
range of activities. The most notable shift has
been from voluntary to mandatory
sustainability, monitoring and reporting.
• Customers:. Customers significantly influence
a company’s reputation through their
purchasing choices and brand.
• Loyalty: This factor has led the firms to
provide much more information about the
products they produce, the suppliers who
produce them, and the product’s
environmental impact starting from creation
to disposal.
• NGO’s and the media: Public reaction comes
not just from customers but from advocates
and the media, who shape public opinion.
Advocacy organisations, if ignored or
slighted, can damage brand value.
• Employees: Those who work for a company
bring particular pressure to bear on how
their employers behave; they, too, are
concerned citizens beyond their corporate
roles.
• Peer pressure from other companies: Each
company is part of an industry, with the peer
pressures and alliances that go along with it.
• Companies themselves: Corporations, as
public citizens, feel their own pressure to
create a credible sustainability policy, with
performance measures to back it up, but with
an eye on the bottom line as well.
Increasingly, stakeholders are demanding
explicit sustainability reporting strategies and
a proof of the results.
• Investors: Increasingly, investors want to know
that companies they have targeted have
responsible, sustainable, long-term business
approaches.
• SUSTAINABILITY REPORTING FRAMEWORK IN
INDIA;
• Considering the importance of sustainability in
businesses, MCA launched Corporate Social
Responsibility Voluntary Guidelines in 2009.
•
• This voluntary CSR Policy addresses six core
elements – Care for all Stakeholders, Ethical
functioning, Respect for Workers’ Rights and
Welfare, Respect for Human Rights, Respect for
Environment and Activities for Social and
Inclusive Development.
• SEBI in its (Listing Obligations and Disclosure
Requirements) Regulations, 2015 has mandated
the requirement of submission of BRR for top 500
listed entities describing initiative taken by them
from an environmental, social and governance
perspective in the prescribed format [Regulation
34(2)(f)].
• Business Responsibility Report has been
designed to provide basic information about
the company,
• information related to its performance and
processes, and
• information on principles and core elements
of the Business Responsibility Reporting.
• The BRR framework is divided into five sections:
• (a) Section A: General Information about the
Organisation – Industry Sector, Products &
Services, Markets, other general information
• (b) Section B: Financial Details of the
Organisation – Paid up capital, Turnover, Profits,
CSR (Corporate Social Responsibility) spend.
• (c) Section C: Other Details – BR initiatives at
Subsidiaries and Supply-chain Partners
• (d) Section D: BR Information – Structure,
Governance & Policies for Business
Responsibility
• (e) Section E: Principle-wise Performance –
Indicators to assess performance on the
Business Responsibility principles as envisaged
by the National Voluntary Guidelines (NVGs)