UNIT 1: INTRODUCTION

Introduction – Definition - Understanding A Corporation and Its Facets - The Four P ‘S of

Corporate Governance - Corporate Structure - Why Is Corporate Structure Important?

INTRODUCTION

• Corporate governance is a multi-faceted subject. An important theme of corporate

governance is to ensure the accountability of certain individuals in an organization through
mechanisms that try to reduce or eliminate the principal-agent problem.
• Corporate governance is the combination of rules, processes or laws by which businesses are
operated, regulated or controlled.
• The term encompasses the internal and external factors that affect the interests of a
company’s stakeholders, including shareholders, customers, suppliers, government regulators
and management.
DEFINITION

The Cadbury Committee Report in 1992 had a clear but narrow definition,

“Corporate governance is the system by which companies are directed and controlled. Boards of
directors are responsible for the governance of their companies. The shareholders’ role in
governance is to appoint the directors and auditors and to satisfy themselves that the
appropriate governance structure is in place.”
What is Corporate Governance?

• Corporate Governance is the system of rules, practices and processes by which a company is
directed and controlled.
• Corporate Governance essentially involves balancing the interest of the company’s many
stakeholders such as shareholders, management, customers, suppliers, financiers, government
and the community.

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CORPORATE GOVERNANCE - CHANNEL OF GROWTH AND DEVELOPMENT

COUNTRY LEVEL

SECTOR LEVEL

INDIVIDUAL FIRMS

Fig 1

EFFECTIVE MANAGEMENT RELATIONSHIPS

• Among various participants in determining the direction and performance of a corporation :

• Managers
• Board of directors
• Employees
• Customers
• Creditors
• Suppliers
• Community

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 Why Corporate Governance?

Corporate governance is about enabling organisations to achieve their goals, control risks and
assuring compliance. Good corporate governance incorporates a set of rules that define the
relationship between stakeholders, management and the board of directors of a company and
influence how the company is operating.

PEOPLE

FOUR P’s OF CORPORATE

GOVERNANCE

PERFORMANCE
PROCESS

PURPOSE

Fig 2

FOUR P’S OF CORPORATE GOVERNANCE

• Experts break corporate governance into four simple words: People, Purpose, Process

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 and Performance.

People

• People come first in the Four Ps because people exist on every side of the business equation.

• They are the founders, the board, the stakeholder and consumer and impartial observer.

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 • People are the organisers who determine a purpose to work towards, develop a consistent
process to achieve it, evaluate their performance outcomes, and use those outcomes to grow
themselves and others as people.
Purpose

• Purpose is the next step. Every piece of governance exists for a purpose and to achieve a
purpose.
• The ‘for’ is the guiding principles of the organisation. Their mission statements.

• Every one of their policies and projects should exist to further this agenda.

Process

• Governance is the process by which people achieve their company’s purpose, and that process
is developed by analysing performance.

• Processes are refined over time in order to consistently achieve their purpose, and it’s always
smart to take a critical eye to your governance processes.

Performance

• Performance analysis is a key skill in any industry.

• The ability to look at the results of a process and determine whether it was successful (or
successful enough), and then apply those findings to the rest of your organisation, is one of
the primary functions of the governance process.
Principles of corporate governance

• While corporate governance structure may vary, most organizations incorporate the
following key elements:
• All shareholders should be treated equally and fairly. Part of this is making sure shareholders
are aware of their rights and how to exercise them.
• Legal, contractual and social obligations to non-shareholder stakeholders must be upheld.

• This includes always communicating pertinent information to employees, investors,

vendors and members of the community.
• The board of directors must maintain a commitment to ensure accountability, fairness,
diversity and transparency within corporate governance.

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 • Board members must also possess the adequate skills necessary to review management
practices.
• Organizations should define a code of conduct for board members and executives, only
appointing new individuals if they meet that standard.
• All corporate governance policies and procedures should be transparent or disclosed to
relevant stakeholders.
CORPORATE STRUCTURE

Fig 3

Corporate Structure

• Corporate structure is also known as corporate governance, it is the way of running a

business.

• Corporate structure is a way of organizing a company in three parts.

• This includes:

• Board of directors, who control the business

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 • Corporate officers, who oversee operations

• Shareholders, who own the business

Board of Directors

The board's tasks include:

• The board of directors reports to the shareholders.

• Making sure managers are effective

• Keeping the chief executive officer (CEO) on track

• Reviewing the company's plans, budgets, and goals

• Ensuring the business follows the law

• Writing bylaws

• Creating committees

• Protecting shareholders

• Holding annual meetings

• The board can be one or many people with diverse experience. Shareholders elect board
members.
• The company's by laws will say how many members the board needs.

• Usually, the board of directors has an odd number of members to avoid tied votes.

Directors may include

• Chairman:

• This person leads the business and is responsible for the board's actions.

• They work with top officers. He or she acts as the public face of the company.

• Usually, the chairman starts as a board member.

• Inside Directors: These people are in charge of budgets.

• They may be shareholders or top managers. Sometimes they are called executive directors.

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 Fig 4

Corporate Officers

• Corporate officers are chosen by the board. They are also called upper management. Officers
handle day-to-day tasks. They look out for the company's interests.
• There are four kinds of officers:

• President or CEO: This officer enforces policy, signs documents, and works with the board
of directors. They may also be the president. CEOs enforce decisions.
• Vice President or Chief Operations Officer (COO): This officer is a senior executive. VPs
replace the president if he or she can no longer act as president. COOs run the daily business,
marketing, production, sales, and staff.
• Treasurer or Chief Financial Officer (CFO): This officer is in charge of finances. The CFO
writes budgets, and tracks spending, and writes reports. Most CFOs give reports to the
board, the Securities and Exchange Commission (SEC), and other agencies.
• Secretary: This officer keeps records, minutes, and books.

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Shareholders

• Shareholders own the company. They don't typically take part in daily business.

• Different kinds of corporations have different numbers of shareholders. These people

own common stock shares.
• They get a return from the company in the form of profits. Shareholders are not personally
liable for the company.
• Shareholders help make decisions. Those who own more shares have more interest in the
company.
• While a corporation's owners are usually its first shareholders, larger companies can have
many public shareholders.
• Shareholders can vote on:

• Members of the board of directors

• Changing bylaws or the Articles of Incorporation

• Dissolving or merging the company with another

• Disposing of assets

Why Is Corporate Structure Important?

• Corporate structure separates owners and managers. Clear structure can grow a small family
business into an international company that's traded around the world.
• A well-defined structure helps a business shape its goals. Corporate structure is useful for
start-ups because it helps them to outline positions and responsibilities. This can also attract
investors who easily understand how a company plans to make profits.

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THREE PILLARS OF CORPORATE GOVERNANCE

Fig 5

First Pillar of Corporate Governance: Transparency

• In simplest terms, transparency means having nothing to hide.

• For a company, this means it allows its processes and transactions observable to outsiders.

• It also makes necessary disclosures, informs everyone affected about its decisions, and
complies with legal requirements.
• Transparency is a critical component of corporate governance because it ensures that all of a
company’s actions can be checked at any given time by an outside observer.

• This makes its processes and transactions verifiable, so if a question does come up about a
step, the company can provide a clear answer
Second pillar of corporate governance

• Accountability

• It takes more than transparency to build integrity as a company.

• It also takes accountability, which can also mean answerability or liability.

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 • Shareholders are deeply interested in who will take the blame when something goes wrong in
one of a company’s many processes.

Third pillar of corporate governance

• Security

• A company is expected to make their processes transparent and their people accountable
while keeping their enterprise data secure from unauthorized access.
• There is simply no compromise for this.

• Companies that experience security breaches involving the exposure of their clients’ personal
information quickly lose their credibility.

Types of corporate governance mechanisms

• A corporate governance structure is often a combination of various mechanisms.

Internal Mechanism

• The foremost sets of controls for a corporation come from its internal mechanisms.

• These controls monitor the progress and activities of the organization and take corrective
actions when the business goes off track.
• Maintaining the corporation's larger internal control fabric, they serve the internal objectives
of the corporation and its internal stakeholders, including employees, managers and owners.
• These objectives include smooth operations, clearly defined reporting lines and performance
measurement systems.
External Mechanism

• External control mechanisms are controlled by those outside an organization and serve the
objectives of entities such as regulators, governments, trade unions and financial institutions.
• These objectives include adequate debt management and legal compliance.

• External mechanisms are often imposed on organizations by external stakeholders in the

forms of union contracts or regulatory guidelines.

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Independent Audit

• An independent external audit of a corporation’s financial statements is part of the overall

corporate governance structure.

• An audit of the company's financial statements serves internal and external stakeholders at
the same time
• An audited financial statement and the accompanying auditor’s report helps investors,
employees, shareholders and regulators determine the financial performance of the
corporation.
Organizations are complex adaptive systems:

• To understand the organization and operate it all parts of the organization need to focus on
understanding the system as a whole and not parts of the system.
• As a network of people, groups, and connections there aren’t one direction interactions; any
interaction is bidirectional.

• Any change to one element in the system might end up with unknown outcomes impacting
the entire system.
• Purpose: The organization must have a clear and appealing purpose.

• Each group within the organization should have its purpose, directly derived from the
company’s purpose.

• No central control: Control and authority should distribute to different groups and
individuals in the organization.
• The organization should be decentralized. There’s always a need for coordination and
collaboration, but not central control.

• Self-Organized: People and teams will organize by themselves to reach a common goal or
reach emergent property that they can’t achieve alone.
• Although it looks like chaos, the organization needs to give people and groups to self-
organize.
• No-silos: individuals contribute to the organization at least one area of expertise and a set of
competencies.

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 • Groups should be a collection of people with different expertise needed to reach the group
purpose.
• Govern by feedback loops: Instead of boards and governance body, which are an attempt of
few to understand the complexity of the organization’s internal and external environment,
organizations need to establish many feedbacks loop between environments and the groups
or functions that need to respond to the feedback.
• Always emerging: The ability of groups to create properties that their members can’t create
by themselves (emergent properties) is a critical capability of a system to be adaptive and to
adjust itself to feedbacks coming from the environments.
• Organizations need to focus on finding new emergent properties or increasing
existing emergent properties.
Clear boundaries

To enable decentralization and distribution of authority all roles/function and groups/entities within
an organization should have a clear definition of their purpose, managed assets, responsibilities and
connection to other roles or groups.
Continuous indications

• Each group should define simple to track and understand an indication on how a group or
function progressing to reach their purpose.
• Those indicators should always be available publicly to anyone in the organization

Define conflict resolution

• Without central authority organizations need to agree on a common conflict resolution

mechanism.
• This mechanism should be available for anyone to use and its decision should be respected.

• The most common mechanism now is voting with merit factor.

GOVERNANCE AND MANAGEMENT

• Governance is the job of the governing body, such as a committee or board, to provide
direction, leadership and control.

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 • Management is typically the job of a management or executive team, led by a coordinator or
chief executive and his/her staff and volunteers.
• The governing body's role is to oversee management, not to manage. It must be satisfied that
the management team is doing its job in accordance with policy and resources.
An effective and productive governing body/chief executive relationship is built on:

• Mutual respect for their separate but interdependent roles and responsibilities

• A clear definition of the results to be achieved

• Clearly defined and documented delegation and authority

• Mutual agreement about the boundaries of freedom granted to the chief executive to carry

• out his/her role and tasks

• A fair, ethical and transparent process for evaluating the chief executive's performance

• Open and regular communication

• An ability to engage in robust debate and a mutual willingness to challenge and to offer and
receive constructive criticism.
SEPERATION OF OWNERSHIP AND CONTROL

• Mutual respect for their separate but interdependent roles and responsibilities

• A clear definition of the results to be achieved

• Clearly defined and documented delegation and authority

• Mutual agreement about the boundaries of freedom granted to the chief executive to carry

• out his/her role and tasks

• A fair, ethical and transparent process for evaluating the chief executive's performance

• Open and regular communication

• An ability to engage in robust debate and a mutual willingness to challenge and to offer and
receive constructive criticism.
SEPERATION OF OWNERSHIP AND CONTROL

• Ownership means that having legal title.

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 • Control means having the ability to determine use.

• Many feel that the management of a company are not sufficiently incentivized to ensure the
company is responsibly managed and hence are encouraged to take excessive risk.
• Shareholders generally have little input into the management of the company and are
thought to be predominately concerned with increasing the value of their investment.
• It is against this backdrop that corporate governance has developed, ensuring that the
management of a company do not take excessive risks and run the company with due care
and skill.
Theoretical basis of corporate governance

• There are six broad theories to explain and elucidate corporate governance. These are:

• Agency Theory

• Stewardship Theory

• Resource Dependency Theory

• Stakeholder Theory

• Transaction Cost Theory

• Political Theory

Agency Theories

• Agency Theories( Stephen Ross and Barry Mitnick in 1973)

• Agency theories arise from the distinction between the owners (shareholders) of a company or
an organization designated as "the principals" and the executives hired to manage the
organization called "the agent.“
• Agency theory argues that the goal of the agent is different from that of the principals, and they
are conflicting .
• The assumption is that the principals suffer an agency loss, which is a lesser return on
investment because they do not directly manage the company.
• Part of the return that they could have had if they were managing the company directly goes to
the agent.

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Stewardship Theories

• Stewardship Theories (Donaldson and Davis 1989)

• Stewardship theories argue that the managers or executives of a company are stewards of the
owners, and both groups share common goals.
• Therefore, the board should not be too controlling, as agency theories would suggest.

• The board should play a supportive role by empowering executives and, in turn, increase the
potential for higher performance .
Resource-Dependence Theories

• This theory originated in the 1970s with the publication of “The external control of
organisation: A Resource dependence perspective by Jeffery Pfeffer and Gerald R Salanick.

• Resource-dependence theories argue that a board exists as a provider of resources to

executives in order to help them achieve organizational goals .
• Resource-dependence theories recommend interventions by the board while advocating for
strong financial, human, and intangible supports to the executives.
• For example, board members who are professionals can use their expertise to train and
mentor executives in a way that improves organizational performance.
• Board members can also tap into their networks of support to attract resources to the
organization. Resource-dependence theories recommend that most of the decisions be made
by executives with some approval of the board.
Stakeholder Theories

• The stakeholder theory of corporate governance focuses on the effect of corporate

activity on all identifiable stakeholders of the corporation.
• This theory posits that corporate managers (officers and directors) should take into
consideration the interests of each stakeholder in its governance process.
• Stakeholder theories argue that clients or customers, suppliers, and the surrounding
communities also have a stake in a corporation.
• They can be affected by the success or failure of a company.

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 • Therefore, managers have special obligations to ensure that all stakeholders (not just the
shareholders) receive a fair return from their stake in the company
• Stakeholder theories advocate for some form of corporate social responsibility, which is a
duty to operate in ethical ways, even if that means a reduction of long-term profit for a
company (Jones, Freeman, & Wicks, 2002).
Transaction Cost Theory

• Transaction cost theory states that a company has number of contracts within the company
itself or with market through which it creates value for the company.
• There is cost associated with each contract with external party; such cost is called
transaction cost.
• If transaction cost of using the market is higher, the company would undertake that
transaction itself.
Political Theory

• Political theory brings the approach of developing voting support from shareholders, rather
by purchasing voting power.
• It highlights the allocation of corporate power, profits and privileges are determined via the
governments’ favor

INSTANCES OF GOOD AND BAD GOVVERNANCE

Eight Elements of Good Governance

• Good governance has 8 major characteristics.

• It is participatory, consensus oriented, accountable, transparent, responsive, effective and

efficient, equitable and inclusive, and follows the rule of law.
Good governance is responsive to the present and future needs of the organization, exercises
prudence in policy-setting and decision-making, and that the best interests of all stakeholders are
taken into account.
1. Rule of Law

Good governance requires fair legal frameworks that are enforced by an impartial regulatory body,
for the full protection of stakeholders.

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 2. Transparency

Transparency means that information should be provided in easily understandable forms and media;
that it should be freely available and directly accessible to those who will be affected by governance
policies and practices, as well as the outcomes resulting therefrom; and that any decisions taken and
their enforcement are in compliance with established rules and regulations.
3. Responsiveness

Good governance requires that organizations and their processes are designed to serve the best
interests of stakeholders within a reasonable timeframe.
4. Consensus Oriented

Good governance requires consultation to understand the different interests of stakeholders in order
to reach a broad consensus of what is in the best interest of the entire stakeholder group and how
this can be achieved in a sustainable and prudent manner.
5. Equity and Inclusiveness

The organization that provides the opportunity for its stakeholders to maintain, enhance, or generally
improve their well-being provides the most compelling message regarding its reason for existence
and value to society.
6. Effectiveness and Efficiency

Good governance means that the processes implemented by the organization to produce favorable
results meet the needs of its stakeholders, while making the best use of resources – human,
technological, financial, natural and environmental – at its disposal.
7. Accountability

Accountability is a key tenet of good governance. Who is accountable for what should be
documented in policy statements? In general, an organization is accountable to those who will be
affected by its decisions or actions as well as the applicable rules of law.
8. Participation

Participation by both men and women, either directly or through legitimate representatives, is a key
cornerstone of good governance. Participation needs to be informed and organized, including
freedom of expression and assiduous concern for the best interests of the organization and society in
general.

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Towards Improved Governance:

• Good governance is an ideal which is difficult to achieve in its totality.

• Governance typically involves well-intentioned people who bring their ideas,

experiences, preferences and other human strengths and shortcomings to the policy-
making table.
• Good governance is achieved through an on-going discourse that attempts to capture
all of the considerations involved in assuring that stakeholder interests are addressed
and reflected in policy initiatives.

INTRODUCTION TO SECURITY EXCHANGE BOARD OF INDIA (SEBI)

 The Securities and Exchange Board of India (SEBI) is the regulator of the securities
and commodity market in India owned by the Government of India.
 It was established on 12 April 1988 and given Statutory Powers on 30 January 1992
through the SEBI Act, 1992.
 SEBI sets governance standards in which the securities market must operate,
protecting the rights of issuers and investors.
 SEBI has power to investigate circumstances where the market or its players have
been harmed and can enforce governance standards with directives.
PURPOSE AND ROLE OF SEBI

SEBI was set up with the main purpose of keeping a check on malpractices and protect the
interest of investors. It was set up to meet the needs of three groups.

1. Issuers:
For issuers it provides a market place in which they can raise finance fairly and easily.

2. Investors:
For investors it provides protection and supply of accurate and correct information.

3. Intermediaries:
For intermediaries it provides a competitive professional market.

THE ORAGANIZATIONAL STRUCTURE OF SEBI

 SEBI's organisation structure comprises of 9 members: A chairman is chosen by

the Union Government of India.
 2 members are officers from the Union Finance Ministry.
 1 member from the RBI.
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  SEBI is working as a corporate sector.
 Its activities are divided into five departments. Each department is headed by an
executive director.
 SEBI has formed two advisory committees to deal with primary and secondary markets.
 These committees consist of market players, investors associations and eminent
persons.
OBJECTIVES OF THE TWO COMMITTEES

To advise SEBI to regulate intermediaries.

To advise SEBI on issue of securities in primary market.

To advise SEBI on disclosure requirements of companies.

To advise for changes in legal framework and to make stock exchange more transparent.

To advise on matters related to regulation and development of secondary stock exchange.

These committees can only advice SEBI but they cannot force SEBI but they cannot force
SEBI to take action on their advice
OBJECTIVES OF SEBI

The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The objectives
of SEBI are:

1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their investment.

3. To prevent fraudulent and malpractices by having balance between self-regulation of

business and its statutory regulations.

4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters,
etc.

FUNCTONS OF SEBI

The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are:

i. Protective functions

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ii. Developmental functions

iii. Regulatory functions.

THE ROLE OF SEBI IN CORPORATE GOVERNANCE AND CAPITAL MARKET

1. To provide power to make rules for controlling stock exchange

2. To provide license to dealers and brokers
3. To Stop fraud in Capital Market
4. To control the Merge, Acquisition and Takeover the companies
5. To audit the performance of stock market
6. To make new rules on carry – forward transactions
7. To create relationship with ICAI
8. Introduction on derivative contracts on volatility index
9. To require report of portfolio management activities
10. To educate the investors

CASE STUDY

• Byrraju Ramalinga Raju (born 16 September 1954) is the former chairman and CEO
of Satyam Computer Services, from 1987 until 7 January 2009.
• In 2015, he was convicted of corporate fraud, which led to the collapse of Satyam
Computers.
• The Satyam scandal was a Rs 7,000-crore corporate scandal in which chairman
Ramalinga Raju confessed that the company’s accounts had been falsified.

• On January 7, 2009, Ramalinga Raju sent off an email to Sebi and stock exchanges,
wherein he admitted and confessed to inflating the cash and bank balances of the
company.
• Raju also manipulated the books by non-inclusion of certain receipts and payments,
resulting in an overall misstatement to the tune of Rs 12,318 crore, shows an analysis
of findings of Sebi’s probe.
• As many as 7,561 fake bills which were even detected in the company’s internal audit
reports and were furnished by one single executive.

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 • Merely through these fake invoices, the company’s revenue got over-stated by Rs 4,783
crore over a period of 5-6 years.
• The probe itself continued for almost six years and found that fictitious invoices were
created to show fake debtors on the Satyam books to the tune of up to Rs 500 crore.
What happened to Satyam auditors?

• The institute has cancelled the membership of six chartered accountants with respect to
the accounting fraud at Satyam Computer Services.
• SEBI has also directed the audit major and its two partners who worked on the IT firm's
accounts to disgorge wrongful gains worth over Rs 13 crore.
Takeover by Tech Mahindra

• After the fraud came to the light, the government had ordered an auction for sale of the
company in the interest of investors and over 50,000 employees of Satyam Computers.
• It was acquired by Tech Mahindra, and was then renamed as Mahindra Satyam, and
was eventually merged into the parent company.
• The Satyam saga eventually turned out to be a case of financial misstatements to the
tune of approximately Rs 12,320 crore,
• As per SEBI’s probe then Citibank froze all its 30 accounts in 2009.

UNIT 4: CORPORATE CONDUCT

Important Corporate Governance Codes and Principles in India - Best Governance Practices -
Reasons For Corporate Misconduct - Whistle Blowers Protection - Factors Responsible For
Obstructing Effective Corporate Governance Practices - Corporate Fraud – Significant Cases

CORPORATE CODE OF CONDUCT

Corporate code of conduct (CCC), codified set of ethical standards to which a corporation
aims to adhere. Commonly generated by corporations themselves, corporate codes of

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 conduct vary extensively in design and objective. Crucially, they are not directly subject to
legal enforcement.
Corporate governance code in India

• The code refers to standards for good practices relating to: Board composition,
Shareholder relations.
• Using best practices as its foundation, the Corporate Governance Code outlines the
standards for the expectations for corporate boards in protecting shareholder investments
• The Desirable Corporate Governance Code by CII (Confederation of Indian Industry
1998) for the first time introduced the concept of independent directors for listed
companies and compensation paid to them.
• Such remuneration and stock option is required to be disclosed in the annual report of
the company

Confederation of Indian Industry (CII)

• For over a decade, the Confederation of Indian Industry (CII) has been at the forefront of
the corporate governance movement in India.
• Moreover, the CII Code was the first and probably a unique instance where an industry
association took the lead in prescribing corporate governance standards for listed
companies.
Role of CII

• CII works to

• create and sustain an environment conducive to the development of India,

• partnering industry, Government, and civil society, through advisory and consultative
processes
• by engaging business, political, academic and other leaders of society to shape global,
regional, and industry agendas.
BEST GOVERNANCE PRACTICES

• Every corporation should follow best practices for corporate governance.

• Best practices apply equally to new corporations as they do to well-established ones.

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 • Best practices for corporate governance apply to large companies, small companies,
public companies and private companies.
• They even apply to nonprofit organizations and other entities.

• The benefits of following best practices for good corporate governance are many and the
potential impact is boundless.
• Good corporate governance improves overall performance and promotes trust among
shareholders and other stakeholders.
• Good corporate governance provides for sound strategic planning and better risk
management.
Corporate misconduct

• The new face of corporate misconduct can be described as

• A failure of corporate governance and critical functions such as board oversight
and supervision, ethical business decision making, lack of a speak up culture and
failures of critical compliance functions such as legal and audit.
Examples of misconduct

• Types of misconduct may differ from company to company and there is no complete list
of the types of misconduct an employee can commit.
• Specific forms of misconduct would thus be dependent on the type of industry the
company is operating in, its culture and specific workplace rules and regulations.
• Typical examples of misconduct are

• Theft,

• Fraud,

• Assault,

• Willful damage to company property,

• Intimidation, insubordination, unauthorized absenteeism,

• Consumption of alcoholic beverages on company premises,

• Arriving at work under the influence of alcohol or narcotic substance,

• Willful poor work performance and racial harassment, to name but a few.
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How to regulate misconduct?

• Misconduct can be managed by a company’s Disciplinary Code, which should highlight

the various forms of misconduct,

• As well as further elaborate upon the disciplinary action imposed if an employee be found
guilty of such misconduct.
DISCIPLINARY CODE

• A Code would provide a framework, setting out how employees are to conduct
themselves and behave at work, as well as the procedures to be adopted in addressing
such misconduct.
• Employees have certainty regarding the consequences of any unacceptable behavior in
the workplace and cannot plead ignorance to what constitutes misconduct.
• Both employers and employees have rights

• Misconduct, if not properly and fairly managed, can become a serious problem in the
workplace.
• It is important to bear in mind that although employees have the right to fair treatment,

• employers have the right to expect satisfactory work performance and conduct from their
employees.
CODE OF CONDUCT

A code of conduct and a code of ethics aren't the same thing, though the two documents can
reference each other and be used to support each other. A code of ethics is a document that states
the principles the company and its employees are expected to follow. A code of conduct spells
out how employees are to follow the code of ethics and clearly states which actions are
acceptable and encouraged and which are unacceptable.
Writing a Code of Conduct

By writing a code of conduct, a company explains its culture. It answers many of the questions
employees have about working with the employer and eliminates “gray area” challenges
managers might face.
A code of conduct clearly spells out exactly what kind of behavior is expected from an
organization’s members. An employer’s code of conduct for employees might state the avenue
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through which they're to file complaints about issues in the workplace; how they are to report
metrics like profit, consumer engagement and company losses; how employees are to conduct
themselves toward consumers as well as among their colleagues and the actions for which they
can expect to face disciplinary measures. These disciplinary measures should be included in the
code of conduct.
Types of Code of Conduct

In many cases, an organization creates multiple codes of conduct. This is because the
organization needs different things from the different groups it serves and is served by. A
school, for example, might have a code of conduct for students as well as a code of conduct for
faculty and staff.
A code of conduct for students might address:

 Plagiarism.
 Reporting misconduct.
 Dress code.
 Absence policy.
 Proper technology usage.
 Whereas a code of conduct for teachers would instead address:
 The avenue through which to contact students’ parents.
 Recording and submitting students’ grades.
 Dress code.
 Leave policy.
 Developing a Code of Conduct

Companies can find examples of code of conduct rules by looking at other companies’ codes of
conduct. Some choose to draw inspiration from other companies in their industry to ensure that
they cover all industry-specific concerns like certain legal or ethical standards that companies in
other industries don't have to follow. One example of this is a medical practice including HIPAA
privacy rules in its code of conduct. In a similar vein, many companies look at other local
businesses' codes of conduct to ensure that they don't miss any city- or state-specific employer
requirements like anti-discrimination policies for certain protected classes.
Many companies also look at big, well-known brands’ codes of conduct, particularly brands
widely known for having employee-friendly workplace cultures, to find effective examples of
code of conduct requirements. The Google code of conduct is available online for anybody to
read and draw inspiration from, as are Coca-Cola’s and IKEA’s code of conduct for their

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suppliers.

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An easy way to find examples of code of conduct guidelines is to google “code of conduct.” A
well-developed code of conduct clearly states what's expected of the group it is written for and
provides a sufficient amount of supporting material to ensure that the reader understands each part
of the code. This supporting material can include:
Infographics that demonstrate the cause-and-effect outcomes of following (or not following) the
code of conduct.
Real-life anecdotes that invoke the code of conduct.

Hypothetical situations where various points in the code of conduct come into play.

Principles for a Code of Conduct

An effective code of conduct is one that's fair, transparent and clearly spells out expectations for
all members of an organization, not just employees. When writing a code of conduct, a business
owner or human resources director should focus on the following principles:
 Fairness.
 Accountability.
 Clarity.
 Ethical practices.
 Respect for people.
 Legal requirements, such as labor laws, antitrust laws, reporting requirements and
environmental regulations.
 Safety.
 Integrity.
A well-developed code of conduct protects employees as well as the employer. Clear information
about the disciplinary measures in use for specific employee actions can help the company avoid
a retaliation complaint, while clear information about the company’s ethical practices can help an
employee determine whether he has actual grounds to make a whistle blower complaint.
Code of Conduct

What needs to be in a code of conduct depends on the type of organization it's written for. A non
profit organization needs a different code of conduct from a business, and a public school needs a
different code of conduct from a private fraternal organization.

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Although there are overlaps between the different types of codes of conduct, each type of
organization has type-specific needs that should be considered when developing a code of
conduct for individual groups within it. For example, a school’s code of conduct needs to be
developed around creating an atmosphere that's conducive to learning and fostering student
success, while a non profit organization’s code of conduct would instead focus on
promoting the cause the organization supports.
An employer’s code of conduct may include:

 Employee leave policy.

 The company’s operating hours.
 If employees are expected to be reachable after hours.
 The company’s definitions of conflicts of interest and how to handle them.
 Employees’ probationary period.
 Legal reporting requirements, such as those imposed by the Sarbanes-Oxley Act.
 Proper email, internet and other technology usages.
 The company’s community involvement.
 Business operational procedures.
 Gift and entertainment policies.
 How employees are to use their expense accounts.
 Meal and rest break policies.
 Behavioral standards.
 Violations of the company’s behavioral standards and the consequences.
 How to report issues like safety violations and sexual harassment.
 The company’s values.
 Compliance resources.

When developing a code of conduct, it can be helpful for a business owner or Human Resources
department to look at the company’s code of ethics template document. Although a code of
conduct is much more granular and actionable than a code of ethics, using the code of ethics
template document can put the reader into a behavior-focused mindset. She can also use the
ethical standards she reads as a guide for the code of conduct and rely on the code of ethics
template document to
create a well-organized, visually appealing code of conduct that communicates its points clearly
while complementing the rest of the employee handbook.
Examples of Code of Conduct Styles

Some organizations create simple codes of conduct and organize them as numbered or bulleted
lists. Others get more creative and create acronyms or organize key points in a question-and-

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answer format. Some, like the Google code of conduct, use very conversational language that
aims to read like a chat between the employee and human resources, while others take a more
formal tone.
An effective code of conduct is one that leaves no room for confusion. A clear, somewhat
uninteresting code of conduct is a far better choice than a creative yet confusing one. Although a
company can work its branding into its code of conduct, the code of conduct’s author should
always remember that clarity is her top priority because when a code of conduct is unclear,
misunderstandings can easily lead to employee mistakes.
Corporate Fraud

Corporate fraud consists of activities undertaken by an individual or company that are done in a
dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual
or company. Corporate fraud schemes go beyond the scope of an employee’s stated position, and
are marked by their complexity and economic impact on the business, other employees and
outside parties.
Regulatory Legislations: -

1. Indian Contract Act 1872.

2. Indian Penal Code 1860.

3. Prevention of Corruption Act 2013.

4. Prevention of Money laundering Act 2012.

5. The Companies Act 1956& 2013.

6. Information Technology Act 2008.

7. Prohibition of Insider Trading.

Types of Fraud: -

There are many types of corporate fraud, including the following common frauds:

1. Theft of cash, physical assets or confidential information

2. Misuse of accounts

3. Procurement fraud

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4. Payroll fraud

5. Financial accounting mis-statements

6. Inappropriate journal vouchers

7. Suspense accounting fraud

8. Fraudulent expense claims

9. False employment credentials

10. Bribery and corruption.

Who conducts the investigation?

Corporate fraud

HR managers are increasingly being called upon to conduct in-house investigations. The question
of whether to bring in law enforcement, a regulatory agency, external audit teams, a private law
firm, or handle the matter in-house is an open one. This decision is fact and case specific, and
will depend upon the duration and breadth of the potential problem as well as potential in-
house investigatory skills. Many times the in-house investigations are coordinated with outside
counsel. If the company initially decides that it will conduct an internal investigation instead of
an external investigation, the roles of the individuals involved in the investigation should be
clearly delineated. If the investigation is conducted in-house under the supervision of an HR
manager, the benefits may include:
1. Heightened knowledge about the company’s business, employees, and procedures;

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2. Increased control over the investigation as well as the possible resulting publicity;

3. An unfiltered view of the fraud and the extent of it.

Keeping the investigation in-house will also prevent possible problems with the Fair Credit
Reporting Act (FCRA). The FCRA applies generally to workplace investigations, but does not
apply when the investigation is done completely in-house. On the other hand, the disadvantages
to keeping the investigation in-house may include:
1. Lack of attorney-client privilege;

2. Insufficient training In carrying out fraud investigations;

3. Less objectivity than an external investigation;

4. Possible conflicts between the company’s well-being and management’s professional

obligations; and

5. Possible loyalty issues between the investigator and the employees and lack of support.4
although some of the disadvantages are not damaging to the company generally, the existence of
such factors when conducting an in-house investigation might be problematic.
How to Prevent Fraud: -

One of the best ways to develop policies and procedures that are effective in prevention corporate
fraud is with the assistance of an experienced anti-fraud professional who has investigated
hundreds of frauds to develop the most relevant and most effective anti-fraud controls including:
1. Establish clear and easy to understand standards from the top down. Have an employee manual
that clearly outlines these standards and keeps the rules from becoming arbitrary.
2. Always check references and perform background checks that include employment, credit,
licensing and criminal history for all new hires.
3. Secure physical assets, access to data, and money at all levels including monitoring and using
pre-numbered checks, keep checks locked up, have a “voided check” procedure and never sign
blank checks. Review all disbursements regularly.

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4. Segregation of duties of employees. Divide activities so one employee doesn’t have too much
control over an area or duty. Separate important accounting and account payable functions.
Small- business owners and managers should review every payroll check personally. The person
who has custody of the checks should never have check signing authority. The person opening
the mail should not record the receivables and reconcile the accounts.
5. Proper authorization of transactions, ensuring that employees aren’t exceeding their authority.

6. Independent checks on performance, using audits, surprise check-ups, inventory counts, or

other procedures to verify compliance with policies and procedures, as well as accuracy.
7. Instil an anonymous reporting mechanism, such as an employee fraud hotline.

8. Small-business owners should control who first receives the bank statements and other
sensitive documents. Consider a separate post office box for the purpose of receiving bank
statements, customer receipts or any other sensitive documents.
9. All account reconciliations and general ledger balances should have an independent review by
a person outside the responsibility area such as an outside accountant. This allows for reviews,
better ensuring nothing is amiss and providing a deterrent for fraudulent activities.
10. Conduct annual audits to motivate all bookkeeping- related staff to keep things honest
because they can never be sure what questions an auditor is going to ask or what documents an
auditor may request to review.
11. While no company, even with the strongest internal controls, is completely protected from
fraud, strengthening internal control policies, processes and procedures will go a long way
towards making your company a less attractive target to both internal and external criminals.
Corporate Scandals: –

One of the most reputed company revealed in September that it had installed software on millions
of cars in order to trick the Environmental Protection Agency’s emissions testers into thinking
that the cars were more environmentally friendly than they were, investors understandably
deserted the company.

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Company lost roughly $20 billion in market capitalization, as investors worried about the cost of
compensating customers for selling those cars that weren’t compliant with environmental
regulations.
The company not only has to deal with compensating their customers, but it will also need to
contend with potential fines from regulators as well as a reputational hit that could severely affect
its market share.
Other Example of Corporate Scandal is one of the biggest Ponzi schemes in West Bengal that
enjoyed political patronage and lured millions of investors to deposit money with the promise of
abnormally high returns including fancy holidays etc. The chit fund eventually collapsed leading
to defaults after a crackdown by SEBI and the Reserve Bank of India. The default, apart from
leaving small depositors high and dry, also led to 10 media outlets owned by company being
forced to wind up, leaving 1000 journalists jobless.
And an online business survey firm that collected thousands of cores of rupees from over 24 lakh
investors, asking them to fill surveys and guaranteeing to quadruple their income in one year,
company was accused of running a Ponzi scheme. A criminal case was registered against the
company in 2011, some accounts frozen and its business shutdown.
Penalty or Punishment under the various acts :-

As Per Section 447 of Companies Act 2013, prescribes that the person who is guilty of fraud
shall be punishable with imprisonment for a term not less than 6 months and up to 10 years
and fine, which shall not be less than the amount involved in the fraud and may extend to
thrice of such amount.
If the fraud involves public interest, the minimum imprisonment to be awarded shall be 3 years.

As per Prevention of Money laundering Act 2012 if any person convicted offence in this act,
there can be punishment of imprisonment up to 3-7 years with fine up to 5 lakh rupees.
As per Indian Penal Code 1860, punishment of offences, every person shall be liable to
punishment under this Code and not otherwise for every act or omission contrary to the
provisions thereof, of which he shall be guilty within India.

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As per Section 66F (Acts of cyber terrorism) of Information Technology Act 2002, If a person
denies access to authorized personnel to a computer resource, accesses a protected system or
introduces contaminant into a system, with the intention of threatening the unity, integrity,
sovereignty or security of India, then he commits cyber terrorism and he is liable for
Imprisonment up to life.
The corporate world is witnessing various changes. Corporate world’s networks are increasingly
being targeted by cyber criminals. Each passing day comes up with some news about breaches on
corporate networks at global and Indian levels. For running the day-to-day affairs of corporates,
the electronic format is the defacto format.
Corporates need to be aware to the facts that the law has gone ahead and given an expansive
definition of personal information to mean any information that relates to a natural person,
which, either directly or indirectly, in combination with other information available or
likely to be available with a body corporate, is capable of identifying such person. Further, the
law has gone ahead and defined what constitutes sensitive personal data or information.
Sensitive personal data or information of a person has been defined to mean such personal
information which consists of information relating to; ―
1. Password;

2. Financial information such as Bank account or credit card or debit card or other payment
instrument details;
3. Physical, physiological and mental health condition;

4. Sexual orientation;

5. Medical records and history;

6. Biometric information;

7. Any detail relating to the above clauses as provided to body corporate for providing service;
and
8. Any of the information received under above clauses by body corporate for processing, stored
or processed under lawful contract or otherwise.

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9. Companies are required to have detailed terms and conditions, rules and regulations as also
privacy policies, while handling or dealing with information including sensitive personal
information or data. Companies should also have policies for collection, preservation, retention,
disclosure and transfer of sensitive personal information.
Precautions Taken by the Companies

1. Know Your Employees

2. Make Employees Aware/Set Up Reporting System

3. Implement Internal Controls

4. Monitor Vacation Balances

5. Hire Experts

6. Live the Corporate Culture

According to me, the top five mechanisms, which are vital for implementing better and effective
Corporate Governance in any organisation, are:
• Independence of Board

• Role of Auditors (Internal and Statutory) and Audit Committee

• Whistle Blowing

• Shareholder Activism

• Fast Track Redressal Forums and Independent compliant mechanisms.

Any code on corporate governance can only provide the framework or structure to ensure that
companies are governed to the best interest of stakeholders at large.
Whistle Blowing- An Indispensable Tool of ensuring good Corporate Governance Practices in
Spirit:
A very famous quote by Edward Thurlow (1731-1806):

“Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and
no body to be kicked?”

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The above quote describes that corporations have neither bodies to be punished nor souls to be
condemned, they therefore do as they like.
• Whistle blowing is relevant and plays a critical role in implementing Corporate
Governance Practices.
• This was evident when Sherron Watkins blew the whistle on Enron’s Management in the
U.S and when Harry Templeton challenged Robert Maxwell’s prowling of the pension
fund, better known as the “Maxwell Saga” in the U.K.
• Our society has become so entrenched in doing wrong that corruption and violation has
become the inherent part of the public and private life of the society.
• This issue is to be tackled by adopting best approach, which encourages and requires
corporate to set up channels for blowing the whistle.
Whistleblowing in corporate governance

• Whistle Blowing can be defined in a number of ways.

• In common, it is speaking out on Malpractices, Corruption, Misconduct or

Mismanagement.
• In its simplest form, whistle blowing involves the act of reporting wrongdoing within an
organization to internal and external parties.
• It is raising a concern about malpractices within an organization or through an
independent structure associated with it.
Key Highlights of Whistleblower Protection Act, 2014

• The act establishes a mechanism to receive complaints related to disclosure of allegations

of corruption or willful misuse of power or discretion, against any public servant, and to
inquire or cause an inquiry into such disclosure.
• The act also provides adequate safeguards against victimization of the person making
such complaints.

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 • It allows any person, including a public servant, to make a public interest disclosure
before a Competent Authority.
• The law has elaborately defined various competent authorities.

• For instance, Competent authority to complaint against any union minister is the Prime
Minister.
• The law does not allow anonymous complaints to be made and clearly states that no
action will be taken by a competent authority if the complainant does not establish his/her
identity.
• The maximum time period for making a complaint is seven years.

• Exemptions: The act is not applicable to the Special Protection Group (SPG) personnel
and officers, constituted under the Special Protection Group Act, 1988.
• Court of Appeal: Any person aggrieved by any order of the Competent Authority can
make an appeal to the concerned High Court within a period of sixty days from the date
of the order.
• The scenario of whistle blowing is very complicated in India.

• References of whistle blowing and whistle blowers is made in various committee reports
(for eg: in 1998 by CII Code of Corporate Governance, in 1999 by Kumar Mangalam
Birla Committee, in 2002 by Naresh Chandra Committee and in 2003 by N.R Narayana
Murthy Committee), listing agreement and Voluntary Guidelines of Corporate
Governance .
• There is Whistle blower Protection Laws in US, UK, Norway but in India, awareness is
yet to come.
The Whistle blower policies effective implementations not only reduce the fraudulent activities
but also send a signal to both internal and external agencies that organisations exercises good
corporate governance.
The key aspects are:

• Clear definition of individuals covered by the Policy

• Non retaliation provisions

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 • Confidentiality

• Process

• Communication

Whistle Blower Policy

• The Whistle Blower Policy should include the methods to encourage employees,
vendors, customers and shareholders to report evidence of fraudulent activities.
• It should properly address the processes that the employees should follow in
filing their claims.
• Specific Reporting Mechanisms within the process could include telephone,
emails, hotlines, websites or suggestion boxes.
• The first steps of creating an environment where a whistleblower will report
problems that exist is the crucial one, to be fully effective whistle blower policy
must be consistently implemented, claims investigated and evaluated and proper
enforcement taken when necessary.
• Clause 49 of the Listing Agreement keeps whistle blowing as non-mandatory item
but it should be mandatory
• Good corporate Governance focuses on conducting the business with all integrity,
fairness, and being as transparent as possible regarding all the transactions.
• The Company makes all the necessary disclosures and decisions by complying with
all the laws of the land.
• It takes accountability and responsibility towards the stakeholders. Commit to
conducting business in an ethical manner.
• As per the SEBI reports on the essentials of corporate Governance, the controller
of the companies must be able to distinguish between personal and corporate
funds.

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Basic Features or Elements of Good Governance:
Good governance has 8 major characteristics. It is participatory, consensus oriented,
accountable, transparent, responsive, effective and efficient, equitable and inclusive and
follows the rule of law. It assures that corruption is minimized, the views of minorities are
taken into account and that the voices of the most vulnerable in society are heard in decision-
making. It is also responsive to the present and fixture needs of society. Participation Good
governance requires that civil society has the opportunity to participate by both men and
women during the formulation of development strategies. This aspect of governance is an
essential element in securing commitment and support for projects and enhancing the quality
of their implementation. Participation needs to be informed and organized. This means
freedom of association and expression and an organized civil society should go hand in hand.
Rule of law Good governance requires a fair, predictable and stable legal framework enforced
impartially. Full protection of human rights, especially minorities should be covered.
Impartial law enforcement requires a judiciary to be independent and police force should be
impartial and incorruptible. Transparency Transparency in government is an important
precondition for good governance, and those decisions taken and their enforcement are done
in a manner that follows rules and regulations. Transparency ensures that enough information
is provided and that it is provided in easily understandable forms and media. Responsiveness
Good governance requires the institutions to serve all stakeholders in a given time-frame.
There are several actors and viewpoints and the different interests in society needs mediation.
The best interest of the community should be analysed and achieved which requires a broad
and long-term perspective on what is needed and how to achieve the goals of sustainable
development. Self-Instructional Material NOTES 16 Corporate Governance: An Overview
and Historical Equity and inclusiveness A society’s wellbeing depends on ensuring that all
men and women have opportunities to improve or maintain their well-being. This requires all 19
groups, especially the most vulnerable, should have opportunities to improve or maintain
their standards of life. Effectiveness and efficiency Good governance means Processes and
institutions produce results that meet needs while making the best use of resources. The
concept of efficiency covers the sustainable use of natural resources and the protection of the
environment. Accountability It is a key requirement of good governance. Both Public and
private sector and civil society organizations must be accountable to the public and to their
institutional stakeholders. An organization or an institution is accountable to those who will
be affected by its decisions or actions. Accountability can be enforced only with transparency
and the rule of law. Rule of Law Rule of law supports the demand for equity and fairness and
means to be impartial, not corrupt and to protect the human rights of all. These are the leading
criteria becoming benchmarks one has to keep in mind when striving for good Governance in
the decision-making processes.

The Role of Agency Theory in Corporate Governance? Agency theory is used to understand
the relationships between agents and principals. The agent represents the principal in a
particular business transaction and is expected to represent the best interests of the principal
without regard for self-interest. The different interests of principals and agents may become a
source of conflict, as some agents may not perfectly act in the principal’s best interests. The
resulting miscommunication and disagreement may result in various problems within
companies. Incompatible desires may drive a wedge between each stakeholder and cause
inefficiencies and financial losses. This leads to the principal-agent problem. The principal-
agent problem occurs when the interests of a principal and agent are in conflict. Companies
should seek to minimize these situations through solid corporate policy. These conflicts
present normally ethical individuals with opportunities for moral hazard. Incentives may be
used to redirect the behavior of the agent to realign these interests with the principal’s.
Corporate governance can be used to change the rules under which the agent operates and
restore the principal’s interests. The principal, by employing the agent to represent the
principal’s interests, must overcome a lack of information about the agent’s performance of
the task. Agents must have incentives encouraging them to act in unison with the principal’s
interests. Agency theory may be used to design these incentives appropriately by considering
what interests motivate the agent to act. Incentives encouraging the wrong behavior must be
removed and rules discouraging moral hazard must be in place. Understanding the
mechanisms that create problems helps businesses develop better corporate policy.

The Cadbury Committee 1992 defined corporate governance as “the system by which
companies are directed and controlled.” Numerous theories have been proposed on corporate
governance best practice, none more popular than the shareholder and stakeholder theories.
Shareholder Theory The shareholder theory was originally proposed by Milton Friedman and
it states that the sole responsibility of business is to increase profits. It is based on the premise
that management are hired as the agent of the shareholders to run the company for their
benefit, and therefore they are legally and morally obligated to serve their interests. The only
qualification on the rule to make as much money as possible is “conformity to the basic rules
of the society, both those embodied in law and those embodied in ethical custom.” The
shareholder theory is now seen as the historic way of doing business with companies realising
that there are disadvantages to concentrating solely on the interests of shareholders. A focus
on short term strategy and greater risk taking are just two of the inherent dangers involved.
The role of shareholder theory can be seen in the demise of corporations such as Enron and
Worldcom where continuous pressure on managers to increase returns to shareholders led
them to manipulate the company accounts. Stakeholder Theory Stakeholder theory, on the 20
other hand, states that a company owes a responsibility to a wider group of stakeholders,
other than just shareholders. A stakeholder is defined as any person/group which can affect/be
affected by the actions of a business. It includes employees, customers, suppliers, creditors
and even the wider community and competitors. Edward Freeman, the original proposer of
the stakeholder theory, recognized it as an important element of Corporate Social
Responsibility (CSR), a concept which recognizes the responsibilities of Self-Instructional
Material NOTES 20 Corporate Governance: An Overview and Historical corporations in the
world today, whether they be economic, legal, ethical or even philanthropic. Nowadays, some
of the world’s largest corporations claim to have CSR at the centre of their corporate strategy.
Whilst there are many genuine cases of companies with a “conscience”, many others exploit
CSR as a good means of PR to improve their image and reputation but ultimately fail to put
their words into action. Recent controversies surrounding the tax affairs of well known
companies such as Starbucks, Google and Facebook in the UK have brought stakeholder
theory into the spotlight. Whilst the measures adopted by the companies are legal, they are
widely seen as unethical as they are utilising loopholes in the British tax system to pay less
corporation tax in the UK. The public reaction to Starbucks tax dealings has led them to
pledge £10m in taxes in each of the next two years in an attempt to win back customers.

What are the 4 P’s of corporate governance?

 People,
 Process,
 Performance,
 Purpose.
People
People come first amongst the 4 P’s of Corporate Governance considering their existence in
every business equation. People include the management that determines the purpose, the
board that is responsible for formulating the policies and strategies, the stakeholders’ and
investors having an interest in the organization along with the outside consumers and
observers.
Process
The process consists of a series of actions and steps taken in order to achieve the purpose.
Corporate Governance is one such process by which an organization achieves its objectives.
These processes are designed by evaluating various performances at different levels in an
organization. They can also be refined over time to maintain efficiency and consistency and
minimize losses from external threats.
Performance
Performance analysis is one of the key skills for any organization. It means analyzing the
actual performance with the standard performance to determine its efficiency. Performance
analysis in Corporate Governance can be used to minimize deviations as well as to eliminate
the non-performing policies and strategies.
Purpose
Every equation of Corporate Governance exists for a purpose and to achieve a purpose. The
purpose is the mission statement of an organization and every strategy, policy and process
should be formulated for fulfilling the purpose.

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Corporate Governance in India
Introduction
Corporate Governance is a mechanism based on certain systems and principles by which a
company is governed. The governance ensures that a company is directed and controlled in a
way so as to achieve the goals and objectives which include providing benefits to the
stakeholders like shareholders, employees, suppliers, customers and society in the long term
and adding value to the company. It is actually conducted by the board of Directors and the
concerned committees for the benefit of stakeholders' company'. Corporate governance is all
about balancing individual and societal goals as well as economic and social goals.
Corporate Governance consists of:
1. Explicit and implicit contracts between the company and the stakeholders for
distribution of responsibilities, rights and rewards.
2. Procedures for reconciling the conflicting interests of stakeholders in accordance with
their duties, privileges and roles.
3. Procedures for proper supervision, control, and information that flows to serve as a
system of checks and balances.

According to the Cadbury Committee of U.K,

"Corporate governance is the system by which companies are directed and controlled."
Need for Corporate Governance in India
The need for corporate governance has emerged because of the increasing concerns about the
non-compliance of standards of financial reporting and accountability by boards of directors
and management of companies causing heavy losses to investors. Following are the needs for
corporate governance in India:
1. Changing Ownership Structure:
A corporate firm has lots of stakeholders with different attitudes towards corporate
affairs, corporate governance protects the stakeholders' right by implementing it
through its code of conduct. Today a company has a very large number of
stakeholders spread all over the nation and even the world and a majority of
shareholders act unorganised with an indifferent attitude towards corporate affairs.
Maintaining a proper structure of a corporate body requires a practical
implementation of rules and regulations through a code of conduct of corporate
governance.
 
2. Social responsibility:
Society having greater expectations from corporate, they expect that corporates take
care of the environment, pollution, quality of goods and services, sustainable
development etc. Fulfilment of all these expectations is only possible with proper
corporate governance.
 
3. Takeovers and Mergers:
Takeovers and mergers of corporate entities created lots of problems in the past. It
affects the right of various stakeholders in the company and creates a problem of
chaos, this factor also pushes the need of corporate governance in the country.
 
4. Confidence booster:
Corporate scams or frauds in the recent years of the past have shaken public
confidence in corporate management. The need for corporate governance is then
crucial for reviving investors' confidence in the corporate sector towards the economic 22
 development of society.
 
5. Mismanagement and corruption:
It has been observed in both developing and developed economies that there has been
a great increase in the monetary payments and packages of top level corporate
executives. There is no justification for exorbitant payments to top ranking managers,
out of corporate funds which is a property of shareholders and society. This factor
necessitates corporate governance to restrict the ill-practices of top managements in
the companies.
 
6. Investors' influence:
Large corporate investors are becoming a challenge to the management of the
company as they influence the decisions of the company. Corporate governance set
the code to deal with such situations.
 
7. Globalization:
Globalization made the communication and transport between countries so easy and
frequent. Many Indian companies are listed with international stock exchange which
also triggers the need for corporate governance in India to structure the companies at
par with international level.
 
8. Efficiency of management:
Hostile takeovers of corporations witnessed in several countries put a question mark
on the efficiency of managements of take-over companies. Lack of efficient code of
conduct for corporate managements points out to the need for corporate governance.

Importance of Corporate Governance in India

Corporate governance safeguards not only the management but also the interests of
stakeholders and fosters the economic progress of India in the roaring economies of the
world. A company that has good corporate governance experiences much higher level of
confidence amongst the shareholders associated with that company.

Confident and independent directors contribute towards a positive outlook of the company in
financial market which positively influences the share prices. Corporate Governance is one of
the important criteria for foreign institutional investors to decide on which company to invest
in.
Importance of corporate governance is stated below:
1. Good corporate governance ensures success and economic growth of a firm
worldwide.
2. Strong corporate governance maintains investors' confidence in the financial market,
as a result of which company can raise capital efficiently and effectively.
3. International flows of capital enable companies to access financing from a large pool
of investors. If countries are to reap the full benefits of the global capital markets, and
if they are to attract long-term capital, corporate governance arrangements must be
credible and well understood across borders. The large inflows of foreign investment
will contribute immensely to economic growth.
4. Properly structured governance lowers the capital cost.
5. The importance of good corporate governance lies in the fact that it will enable the
corporate firms to attract capital and perform efficiently. Investors will be willing to 23
invest in the companies with a good record of corporate governance.
 6. New policy of liberalization and deregulation adopted in India in the year 1991, has
given greater freedom to managements which should be prudently used to promote
investors' interests. But there are several instances of corporate failures due to lack of
transparency and disclosures and instances of falsification of accounts. This problem
will only be overcome by a proper corporate governance.
7. A strong corporate governance is indispensable for a vibrant stock market. A healthy
stock market is an important instrument for investors protection. Insider trading is a
destruction of stock market. It means trading of shares of a company by insiders like
directors, managers and other employees of the company on the basis of information
which is not known to outsiders of the company.
8. Corporate governance provides proper encouragement to the owners as well as
managers to achieve objectives that are in the interest of stakeholders and the
organization by.
9. It also minimizes wastages, corruption, risks and mismanagement.
10. It helps in brand formation and development of a company. Many studies in India and
abroad has shown that foreign investors take notice of well- managed companies and
respond positively to them. Capital flows from foreign institutional investors (FII) for
investment in the capital market and foreign direct investment (FDI) in joint ventures
with Indian corporate companies if they are convinced about the implementation of
basic principles of good corporate governance.
11. It make sures an organization is managed in a manner that fits the best interests of all.
Corporate governance is a means through which the company signals to the market
that effective self-regulation is in place and that investors are safe to invest in their
securities. Prohibiting inappropriate actions and self-regulation are effective means of
creating shareholders value.
12. Officials of a corporate company take undue advantage at the expense of investors
through insider tradings. It is a kind of fraud and one way of dealing with this
problem is enacting legislation through corporate governance prohibiting such trading
and enforcing criminal action against violators.

Key Principles of Corporate Governance

Transparency
A principle of good governance is that stakeholders should be informed about the company's
activities regarding its plans in the future and any risks involved in its business strategies.
 Transparency means openness by the company willing to provide clear information to
shareholders and other stakeholders. For example, it refers to the openness to disclose
financial performance figures which are truthful and accurate.
 Disclosing materials concerning the organization's performances and activities should
be will timed and accurate to ensure that all investors have access to clear, factual
information which reflects the financial, social and environmental position of the
organization. A company should clarify the roles and responsibilities of the board and
management to provide a level of accountability.
 Transparency ensures that stakeholders can have confidence in the decision-making
and management processes of a company.

Accountability
Corporate accountability refers to the obligation and responsibility to provide an explanation
or reason for the company's actions and conduct such as: 24
  The board should present a balanced and understandable assessment of the company's
position and prospects.
 The board is responsible for determining the nature and extent of the significant risks
the company is willing to take.
 The board should maintain sound risk management and internal control systems.
 The board should establish formal and transparent arrangements for corporate
reporting and risk management and for maintaining an appropriate relationship with
the company's auditors.
 The board should communicate with stakeholders at regular intervals giving a fair,
balanced and explicit analysis of how the company is achieving its business purpose.

Responsibility
The Board of Directors are given authority to act on behalf of the company. They should
therefore accept full responsibility for the powers that it is given and the authority that it
exercises. The Board of Directors are responsible for overseeing the management of the
business, affairs of the company, appointing the chief executive and monitoring the
performance of the company. In doing so, it is required to act in the best interests of the
company.

Accountability goes hand in hand with responsibility. The Board of Directors should be made
accountable to the stakeholders for the way in which the company has carried out its
responsibilities.
Eight Codes of Corporate Governance
1. Governance Structure:
All organizations should be headed by an effective board and all the responsibilities
and accountabilities within the organisation should be clearly distinguished.
 
2. Structure of the Board and its Committees:
The board should consist of appropriate combination of executive directors,
independent directors and non-independent non-executive directors to prevent one
individual or a small group of individuals from dominating the board's decision. The
board's size and scale should be in proportion with the level of diversity of the
organisation. Appropriate board committees may be formed to assist the board in
effective performances to fulfil the duties.
 
3. Director's Appointment Procedure:
There should be a formal, rigorous and transparent process for various activities like
appointments, election, re-election of directors etc. Members for the board should be
appointment on merit basis fulfilling objective criteria which should include skills,
knowledge, experience, and independence for the benefits of the company. The board
should ensure that a formal, rigorous and transparent procedure be in place for
planning the succession of all key officeholders.
 
4. Directors' duties, remuneration and performance:
Directors should be aware of their legal duties. They must observe and foster high
ethical standards and a strong ethical culture in their organisation. Each director must
be able to give sufficient time to discharge his or her duties effectively. Conflicts of
interest should be disclosed and managed.
25
The board of members is responsible for the governance of the organisation's
 information, information technology and information security. The board, committees
and individual directors should be supplied with informations in a timely manner and
in an appropriate form and quality. The performances of board members should be
evaluated and be held accountable to appropriate stakeholders. The board should be
transparent, fair and consistent in determining the remuneration policy for directors
and senior executives.
 
5. Risk Governance and Internal Control:
The board will be held responsible for risk governance. It must check the
development and execution of a comprehensive and powerful system of risk
management and also ensures the maintenance of a sound internal control system.
 
6. Reporting with Integrity:
The board must present a fair, balanced and understandable assessment of the
performances and outlook of organization's financial, environmental, social and
governance position in its annual report and on its website.
 
7. Audit:
All the organizations should consider having an effective and independent internal
audit function that has the respect, confidence and cooperation of both the board and
the management. The board should establish formal and transparent arrangements to
appoint organisation's auditors and maintain an appropriate relationship with them.
 
8. Relations with Shareholders and other key Stakeholders:
The board should be responsible for ensuring that an appropriate interchange and
disclosure takes place between the organisation, its shareholders and other key
stakeholders. The board should respect the interests of its shareholders and other key
stakeholders within the context of its fundamental purpose.

Regulatory Framework for Corporate Governance in India

1. The Companies Act, 2013
The new Companies Law[4] contains many provisions related to good corporate
governance like Composition of Board of Directors, Admitting Woman Director,
Admitting Independent Director, Directors Training and Evaluation, Constitution of
Audit Committee, Internal Audit, Risk Management Committee, SFIO Purview,
Subsidiaries Companies Management, Compliance center etc.

All such provisions of new Companies Law are instrumental in providing a good
Corporate Governance structure. Few provisions are:
o Section 134:
It mandates to attach a report to every Financial statement by Board of
Directors containing all the details of the matter including the statement
containing director's responsibility.
o Section 177:
It requires Board of Directors of every listed company or any other class of
committee to constitute an Audit Committee. It also provides the manner to
constitute the committee.
o Section 184:
26
It mandates the Director disclose his interest in any company or companies,
body corporate, firms, or other association of Individuals. The director is
 required to disclose any such interest at the first meeting of the board and if
there is any change in the interest, then the first meeting will be held after such
change.
 
2. Securities and Exchange Board of India (SEBI)
SEBI is a regulatory authority established on April 12, 1992 with the main purpose of
curbing the malpractices in the financial market and protecting the interest of its
investors. Its main objective is to regulate the activities of Stock Exchange and to
ensure the healthy development in the financial market. In order to ensure good
corporate governance, SEBI came up with detailed norms of Corporate Governance.
o As per the new rules, the companies are required to get shareholders approval
for RPT (Related Party Transactions), a provision for whistle blower
mechanism, clear mandate to have at least one woman director in the Board
and moreover it elaborated disclosures on pay packages.
 
o Clause 35B of the Listing Agreement is being amended by the regulatory
authority. Now as per the amended clause, Listed companies are required to
provide the option of e-voting to its shareholders on all proposed or passed
general meetings. Those who do not have access to e-voting facility, they
should be entitled to cast their votes in writing on Postal Ballot. The amended
provision was needed so that the provisions of the listing agreement can be
aligned with the provisions of Companies Act, 2013. By doing so, a closer
step is provided to strengthen the Corporate Governance norms in India with
respect to Listed companies.
 
o Clause 49 of the Listing Agreement was also amended by SEBI in order to
strengthen the Corporate Governance framework for Listed companies in
India. The revised clause forbids the independent directors from being eligible
for any kind of stock option. Whistle blower policy is also added in the revised
clause whereby the directors and employees can report any unethical behavior,
any fraud or if there is violation of Code of Conduct of the company.

With the amended provision, Audit Committee is also enhanced, now it will
include evaluation of risk management system, internal financial control and
will keep a check on inter-corporate loans and investments. The amendment
now requires all the companies to form a policy for the purpose of
determination of 'material subsidiaries' and that will be published online.
 
3. Standard Listing Agreement of Stock Exchanges
The Listing Agreement is the basic document which is executed between companies
and the Stock Exchange when companies are listed on the stock exchange. The main
purposes of the listing agreement are to ensure that companies are following good
corporate governance. The Stock Exchange on behalf of the Security Exchange Board
of India ensures that companies follow good corporate governance.

The Listing Agreement comprises of 54 clauses stating corporate governance which

listed companies have to follow and in case of failing to such, companies have to face
disciplinary actions, suspension, and delisting of securities. The companies also have
27
to make certain disclosures and act by the clauses of the agreement.
 
 4. Accounting Standards issued by the ICAI
ICAI stands for Institute of Chartered Accountants of India. It is a statutory body
established by Chartered Accountants Act, 1949. It issues accounting standards for
disclosure of financial information.
o Section 129 of the Companies Act, 2013 states that financial statements of a
company shall comply with the accounting standards notified under section
133 of the Act. It also states that the financial statement shall give true and fair
view of the state of affairs of the company.
 
o Section 133 states that Central government may prescribe the accounting
standards as recommended by ICAI. Accounting standards are provided so
that good corporate governance can be ensured in a company. Some
accounting standards issued by ICAI are:
 Disclosure of Accounting policies followed in preparation of Financial
statement
 Determination of values at which the inventories are carried in a
financial statement,
 Cash flow statements for assessing the ability of an enterprise in
generating cash,
 Standard to ensure that appropriate measurement bases are applied to
provisions and contingent liability,
 Standard prescribing accounting treatment of cost and revenue
associated with construction contracts.
 
5. Secretarial standards issued by ICSI (Institute of Company Secretaries of India)
It is an autonomous body constituted by the Company Secretaries Act, 1980. It is a
body to regulate and develop the profession of Company Secretaries in India. It issues
secretarial standards as per the provision of the Companies Act,2013.

Section 118(10) of the Companies Act states that every company shall observe
secretarial standards specified by Institute of Company Secretaries of India with
respect to General and Board meetings.
o Secretarial standard-1 on Meeting of the Board seeks to prescribe a set of
principles for conducting meetings of Board of Directors. These principles are
equally applicable to the meetings of committees as well. SS-1 principles are
applicable to the Meeting of Board of Directors of all companies except one
person company.
 
o Secretarial standard-2 prescribes a set of principles for conducting and
convening general meetings. This standard also deals with the procedure for
conducting e-voting and postal ballot. SS-2 is applicable to all types of
General meetings of all companies except one person company incorporated
under the act. The principles in SS-2 are applicable mutatis-mutandis to
meetings of creditors and debenture holders. Moreover, it also prescribes that
any meeting of members or creditors or debenture-holders of a company under
the direction of CLB (Company Law Board), NCLT (National Company Law
Tribunal) or any other authority shall be governed by the provisions of this
standard.
28
Biggest Failures of Corporate Governance in India
 1. Harshad Mehta Scam (1992)
It is one of the most Technical Scam done with cleverness in the year 1992. The
protagonist of the scam Harshad Mehta diverted bank funds worth Rs. 3500 crores to
a group of stockbrokers. These funds were then put into the stock market selectively,
causing it to surge to over 4500 points. The immediate impact of Harshad Mehta scam
was sharp felt in share prices and indices. The market faced loss of 0.1 million crores
in terms of market capitalization. This resulted in the postponing of sanctioning of
Private sector Mutual Fund by SEBI. The Euro-Issues Planned by various companies
were delayed due to the scam.
 
2. Ketan Parekh Scam (1999-2001)
Ketan Parekh is described as Pied Piper of Dalal Street. His financing method was
very simple, he used to buy a share when they traded at a low price and when the
price was high enough he pledges to share with the bank as collateral for Funds. He
also borrowed funds from various companies like HCFL. The amount involved in the
scam was Rs.1500 crore.

Impacts of the scam were:

o One of the biggest falls in Bombay stock exchange- 700 points.
o Short selling was banned for 6 months.
o Options and future index derivatives were introduced.
 
3. Satyam Scam (2009)
Satyam Scam took place in the year 2009 and it is regarded as "Debacle of Indian
Financial System". It was one of the biggest accounting scandals where protagonist
Ramalinga Raju accepted that he cooked up accounts of Satyam Computers and
inflated Satyam computers bank balances and accounting entries including the amount
of Rs. 8000 Crores.
 
4. PACL Scheme Scam (2015)
It was the scam of Luring near 55 million investors by the technique of raising money
against bogus allotment letters. The matter involved the alleged collection of about
450 billion rupees ($6.8 billion) from roughly 55 million investors across the country.
 
5. Saradha Chit Fund Scam(2013)
It was one of the biggest Ponzi schemes about fake collective investments involving
the amount of nearly Rs. 4000 crores led by Sudipta Sen. The chit fund ultimately
collapsed leading to defaults after a crackdown by SEBI and the Reserve Bank of
India. The default, apart from leaving small depositors high and dry, also led to 10
media terminals owned by Saradha being forced to wind up, leaving 1000 journalists
jobless.

Panel of Experts
To curb the recurring issue of accounting scandals like above mentioned, a panel of experts
was set up by SEBI.

This panel recommended:

i. Rotation of Audit Partners
29
ii. Selection of CFO by the company's Audit Committee
iii. Standardization of disclosure of earnings
 iv. Streamlining the submission of financial results.

Basel Committee on Corporate Governance Basel Committee on Banking Supervision

(BCBS) released Guidelines on Corporate Governance for banks were released by the Basel
Committee on Banking Supervision in July 2015. The principles of corporate governance of
these guidelines are as under: l Principle 1 : Board’s overall responsibilities: The board has
overall responsibility for the bank, 52 EP-GRMCE including approving and overseeing the
implementation of the bank’s strategic objectives, governance framework and corporate
culture. The board is also responsible for providing oversight of senior management. l
Principle 2: Board qualifications and composition: Board members should be and remain
qualified, individually and collectively, for their positions. They should understand their
oversight and corporate governance role and be able to exercise sound, objective judgment
about the affairs of the bank. l Principle 3: Board’s own structure and practices: The board
should define appropriate governance structures and practices for its own work, and put in
place the means for such practices to be followed and periodically reviewed for ongoing
effectiveness. l Principle 4: Senior management: Under the direction and oversight of the
board, senior management should carry out and manage the bank’s activities in a manner
consistent with the business strategy, risk appetite, remuneration and other policies approved
by the board. l Principle 5: Governance of group structures: In a group structure, the board of
the parent company has the overall responsibility for the group and for ensuring the
establishment and operation of a clear governance framework appropriate to the structure,
business and risks of the group and its entities. The board and senior management should
know and understand the bank group’s operational structure and the risks that it poses. l
Principle 6: Risk management function: Banks should have an effective independent risk
management function, under the direction of a chief risk officer (CRO), with sufficient
stature, independence, resources and access to the board. l Principle 7: Risk identification,
monitoring and controlling: Risks should be identified, monitored and controlled on an
ongoing bank-wide and individual entity basis. The sophistication of the bank’s risk
management and internal control infrastructure should keep pace with changes to the bank’s
risk profile, to the external risk landscape and in industry practice. l Principle 8: Risk
communication: An effective risk governance framework requires robust communication
within the bank about risk, both across the organisation and through reporting to the board
and senior management. l Principle 9: Compliance: The bank’s board of directors is
responsible for overseeing the management of the bank’s compliance risk. The board should
approve the bank’s compliance approach and policies, including the establishment of a
permanent compliance function. l Principle 10: Internal audit: The internal audit function
provides independent assurance to the board and supports board and senior management in
promoting an effective governance process and the longterm soundness of the bank. The
internal audit function should have a clear mandate, be accountable to the board, be
independent of the audited activities and have sufficient standing, skills, resources and
authority within the bank. l Principle 11: Compensation: The bank’s compensation structure
should be effectively aligned with sound risk management and should promote long term
health of the organisation and appropriate risktaking behavior. l Principle 12: Disclosure and
transparency: The governance of the bank should be adequately transparent to its
shareholders, depositors, other relevant stakeholders and market participants. l Principle 13:
The role of supervisors: Supervisors should provide guidance for and supervise corporate
governance at banks, including through comprehensive evaluations and regular interaction 30
with boards and senior management, should require improvement and remedial action as
necessary, and should share information on corporate governance with other supervisors.

Biggest Challenges in Corporate Governance In India

 Getting the board right:
In India, it is a common practice that friends and family of promoters to be appointed
as board members. But Innovative solutions are the need of the hour like rating board
diversity and governance practices and publishing such results or using performance
evaluation as a minimum benchmark for director appointment.
 
 Performance evaluation of directors:
Although performance evaluation of directors has been part of the existing legal
framework in India, but it's still an issue. To achieve the desired results on governance
practices, there is often a call for results of performance evaluation to be shared in
public. But corporate firms to avoid public scrutiny, negative feedback may not be
shared by them sometimes.
 
 True Independence of Directors:
Independent directors have hardly been able to make the desired impact in fifteen
years till now as it Independent directors' appointment was supposed to be the biggest
corporate governance reform. The independence of promoter appointed as
independent directors is questionable as it is unlikely that they will stand-up for
minority interests against the promoter.
 
 Removal of Independent Directors:
In most of the cases, the major issue in corporate governance arises as independent
directors were easily removed from their positions by the promoters if they do not
side with promoters' decisions. Under law, an independent director can be easily
removed by promoters or majority shareholders.
 
 Accountability to Stakeholders:
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 but they disregard
it easily due to lack of enforcement action.
 
 Executive Compensation:
Executive compensation is a controversial issue especially when subjected to
shareholder accountability. Companies have to offer competitive compensation to
attract talent. However, such executive compensation needs to stand the test of
stakeholders' scrutiny.
 
 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.
  31
  Risk Management:
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.

Overcoming Existing Issues in Corporate Governance

In the issues mentioned above, to adapt to the standards and practices which are mentioned in
various laws and guidelines its entire onus lies upon the directors of the companies. Other
than the laws and norms prescribed by various institutions from time to time, the companies
are also expected to act responsibly towards the society as a whole because the extent of
corporates have been increased and they affect each and every citizen of the country either
directly or indirectly.

The burden of corporate firms has already been reduced by the amendments done in various
provisions by the regulating bodies. To curb the issues of corporate governance, it is also
required that the stakeholders also participate in the decision making processes with the
directors to make it a contributory job altogether.

Regulating authority has taken various steps to the issues of corporate sector in its
governance and committees are formed by them for recommending solutions.
Committees for Resolving Issues in Corporate Governance
Various committees have been created all across the world for a good corporate governance
covering major aspects:
Committees across the globe
Year Name of the Committee Area Covered
Financial Aspects of Corporate
1992 Sir Adrian Cadbury Committee, UK
Governance
Mervyn E. King's Committee, South
1994 Corporate Governance
Africa
1995 Greenbury Committee, UK  Independent Directors' Remuneration
1998 Hampel committee, UK Combined Code of Best Practices
Improving the Effectiveness of Corporate
1999 Blue Ribbon Committee , US
Audit Committee
The Organisation for Economic
1999 Principles of Corporate Governance
Cooperation and Development (OECD)
Principles for corporate Governance in
1999 CACG
Common Wealth
Review of role of effectiveness of Non-
2003 Derek Higgs Committee , UK
executive Directors
ASX Corporate governance council, Principles of Good Corporate governance
2003
Australia and Best Practice Recommendations

Corporate Governance Committees in India 32

Year Name of the Committee Area Covered
 Confederation of Indian
1998 Desirable Corporate Governance -  A code
Industry (CII)
Kumar Mangalam Birla
1999 Corporate Governance
Committee
2002 Naresh Chandra Committee Corporate Audit and Governance
N R Narayana Murthy
2003 Corporate Governance
Committee

Confederation of Indian Industry (CII) Initiative:

With the emergence of competitions in economies under the liberalized regime, concerns
were raised regarding corporate governance practices in India. The process of 'restructuring
the corporate governance framework' and development of a 'Code of Corporate Governance'
was initiated by CII in 1996. A National Task Force was set up under the Chairmanship of
Rahul Bajaj and presently he is the chairman of Bajaj Group. The Task force made a number
of recommendations related to board constitution, role of non‐executive directors, role of
audit committees and others. The committee submitted its Code in 1998.
National Code on Corporate Governance:
In 1999, government appointed a committee under the leadership of Kumar Mangalam Birla.
The committee released a draft of India's first National Code on Corporate Governance for
listed companies. In 2000, with the due approval of the Code by SEBI, it was implemented in
stages in the following two years.

The Committee made its primary objective to view corporate Governance from the
perspective of the investors and shareholders and to prepare a Code conducive to the
Corporate Environment of India. The shareholders, the Board of Directors and the
Management were identified by the committee as the three important constituents of
Corporate Governance and focused mainly on the roles and responsibilities as well as the
rights of each of these constituents as far as the good governance is concerned.
Kumar Mangalam Birla Committee:
In 1999, SEBI set up a committee under the Chairmanship of Kumar Mangalam Birla to
suggest suitable recommendations for the Listing Agreement of Companies with their Stock
Exchanges to improve the existing standards of Corporate Governance in the listed
companies. The committee paid much attention to role and composition of the Board of
directors, disclosure laws and share transfers.

Acknowledging that accountability, transparency and equal treatment of all stakeholders are
the key elements of corporate governance. The Committee evolved a Code of Governance in
the context of the prevailing conditions in the capital market. The Code was accepted in 2000
by SEBI and incorporated into a new Clause 49, which was inserted into the Listing
Agreement of Companies with their Stock Exchanges.
Clause 49 (2000) of the Listing Agreement
In February 2000, the SEBI revised its Listing Agreement to incorporate the
recommendations of the country's new code on corporate governance, introduced by the Birla
Committee. These rules comprising a new section, Clause 49 of the listing Agreements were
circulated by SEBI through its circular dated February 21, 2000. It took effect in phases over
a period from 2002 to 2003. All the listed companies with a paid up capital of Rs. 3 crores
and above or net worth of Rs. 25 crores or more at any time during the life of the company as
of March 31, 2003 were governed by these principles. 33
RBI Advisory Group headed by Dr. R H Patil
This group recommended some more codes and principles of private sector companies
including consolidation of accounts incorporating performance of subsidiaries, criteria of
independent directors and disclosures to SEBI in the year 2001.

N R Narayan Murthy Committee

In 2002, SEBI formed another committee under the Chairmanship of N R Narayan Murthy,
the then Chief Mentor of Infosys Technologies Ltd. to further streamline the provisions of
Clause 49. Based on the recommendations of the Committee, SEBI revised some sections of
the Clause in August 2003 and later once again after further deliberations in December 2003.
SEBI published a revised Clause 49, relating to corporate governance, which set forth a
schedule for newly listed companies and those already listed to comply with the revisions.
Major changes in the Clause included amendments /additions to provisions relating definition
of independent directors, strengthening the responsibility of Audit Committees and requiring
Boards to adopt a formal Code of Conduct.

In January 2006, SEBI issued some further clarifications on Clause 49. Further amendments
were made in some of the provisions of the Clause in July 2007 which dealt with quarterly
reporting.
Revised Provisions under Clause 49 of the Listing Agreement
In its final form, Clause 49 of the Listing Agreement covered the following provisions
regarding corporate governance by listed companies:
 Mandatory Provisions:
1. Board of Directors: Composition of the Board, Definition of Independent
directors and proportion of Independent Directors in the total board strength,
Compensation of non-executive directors and disclosures, Board meetings,
Information to be made available to the Board, membership of Board level
committees by the directors and Code of Conduct II.
2. Audit Committee: Its constitution, its meetings, role, powers and review of
information,
3. Subsidiary companies: Number of subsidiaries, review of financial statements
of the subsidiaries by the holding company, transactions of the listed holding
company with the subsidiaries and other related disclosures.
4. Disclosures: These include a series of mandatory disclosures like basis of
Related Party Transactions, Accounting treatment, Risk management,
Utilization of proceeds of public issues, Remuneration of Directors,
Management Discussion and Analysis Report in the company's Annual
Report, setting up of Shareholders/Investors Grievances committee and other
items to be reported to the shareholders.
5. CEO/CFO Certification: This certification relates to the review of financial
statements and cash flow statements by the CFO, compliance with existing
accounting standards, laws and regulations, responsibility for maintaining
internal controls, etc
6. Separate Section in the Company's Annual Report on Corporate Governance.
7. Compliance certificate from Auditors or practicing Company Secretaries.
 
 Non-Mandatory provisions
These included provisions regarding the following:
1. Tenure of Independent directors.
2. Constitution of the Remuneration Committee. 34
 3. Declaration of Half yearly Financial Performance including summary of
significant events to be sent to shareholders' residences.
4. Progression towards a regime of Unqualified Financial Statements.
5. Training of Board members in the business model and risk profile of business
parameters of the company including their responsibilities.
6. Evaluation of Non‐executive Board member.
7. Whistle Blower Policy
 
Proxy Services for Corporate Governance Evaluation
A proxy firm plays many roles like a proxy advisor, proxy voting agency, vote service
provider or shareholder voting research provider and so on. It provides services to
shareholders also to institutional investors to vote their shares at shareholder meetings of
listed companies.

The services provided by them include agenda translation, provision of vote management
software, voting policy development, company research, and vote administration including
vote execution. Not all firms provide voting recommendations and those that do may simply
execute client voting instructions.

Some of the Proxy firms in global network are:

1. Egan-Jones Proxy Services (USA
2. Glass, Lewis & Co (USA)
3. In Govern Research Services (INDIA)
4. Institutional Investor Advisory Services India Limited (IiAS) (INDIA)
5. Institutional Shareholder Services (USA)
6. Stakeholders Empowerment Services (SES) (INDIA)
 
Proxy Firms Controversy
In 2013, the US Securities and Exchange Commission charged fine of ISS $300,000 to
Rockville, Md.-based proxy adviser Institutional Shareholder Services (ISS) for failing to
safeguard the confidential proxy voting information of clients participating in a number of
significant proxy contests. Since then the role of proxy firms has come under considerable
scrutiny.
 
Corporate Governance Rating
Rating practices of corporate governance and value creation for its Stakeholders is being
carried out by leading Rating Agencies like CRISIL. These types of rating helps the
companies by providing unbiased evaluation of the company's corporate governance
practices. It is carried out by an outsider reputed agency and an appropriate Rating Certificate
is given to the company for their performances.

The Company can use this certificate for raising finance from the market as well as from
foreign investors. This results in allocating resources in a better way and enhancing investor's
confidence in the company. The basis for rating a company for its corporate governance
practices is the company's compliance with SEBI Revised Clause 49 of the Listing
Agreement with the Stock Exchanges and also the manner in which the various norms are
fulfilled.
Comments on Corporate Governance
Certain useful comments on the concept of corporate governance are given below: 35
  Corporate governance is more than a company's administration. It refers to fair,
efficient and transparent functioning of the corporate management system.
 Corporate governance refers to a code of conduct to which the Board of Directors
must abide by while running the corporate enterprise.
 Corporate governance refers to a set of systems, procedures and practices which
ensure that the company is managed in the best interest of all corporate stakeholders.
References:
1. Enron Scandal: The Fall of a Wall Street, Enron's shares were worth $90.75. When it
declared bankruptcy on December 2, 2001, they were trading at $0.26 [Enron Corp.
scandal - https://www.investopedia.com/updates/enron-scandal-summary/
2. WorldCom exaggerated profits by around $3 billion in 2001 and $797 in Q1 2002,
and reported a profit of $1.4 billion instead of a net loss. It filed for bankruptcy on
July 21, 2002. [WorldCom scandal] -
https://www.investopedia.com/terms/w/worldcom.asp
3. Xerox overstated its revenues for the past five years by almost $2bn (�1.3bn). [xerox
scandal] - https://www.theguardian.com/business/2002/jun/29/2
4. The Companies Act 2013 enacted by the Parliament of India on 12 September, 2013
contains 98 sections. - http://ebook.mca.gov.in/default.aspx
5. A related-party transaction (RPT) is a business deal or arrangement between two
parties who are joined by a preexisting special relationship.
6. A postal ballot is a system of voting in which person send their votes by post when
they cannot be present.
7. Used when comparing two or more things to say that although changes will be
necessary in order to take account of different situations, the basic point remains the
same.
Principles of Corporate Governance
Although Corporate Governance structure varies from company to company depending on
the nature and scope, certain key elements remain the same. They are:-
1. Discipline – A company's higher management adhere to certain practices and
behaviours that are globally recognised are proper. This refers to corporate discipline.
2. Transparency – This is an important principle of Corporate Governance that
measures how good the management is and all necessary information available in the
most candid manner while maintaining accuracy.
3. Independence – This refers to the extent of using mechanisms to avoid and minimise
the possibility of a clash of interest.
4. Accountability – This implies that the individuals and groups responsible for making
decisions and taking actions should always be accountable for their decisions and
actions.
5. Responsibility – This is yet another important principle of Corporate Governance. It
emphasises that with regard to management, there should be scope for behaviour that
allows corrective actions and has room for penalisation for mismanagement.
Benefits of Corporate Governance
 Corporate success and financial progress are ensured by good Corporate Governance.
 Strong and stable Corporate Governance helps maintain investors' confidence, which
allows companies to raise capital effectively and efficiently.
 Corporate Governance helps to lower capital costs.
 Corporate Governance exerts a positive influence on the share price.
 It provides the right kind of encouragement to owners of businesses and managers to
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attain objectives in the interest of the shareholders and organisations.
 It is instrumental in minimising wastages, corruption, risks, and management.
  Corporate Governance is also instrumental in brand formation and development.
 It ensures that companies are managed in a good manner for the interest of all.
 It helps build an environment of trust, transparency, and accountability that is vital for
financial stability and long-term investment.
Good Corporate Governance thrives on the three primary principles of accountability,
security, and transparency, and these are also the pillars of success for any organisation or
company to perform well. Thus, maintaining healthy and strong Corporate Governance is the
key to success in today's world.
Corporate Governance Principles : The listed entity which has listed its specified securities
shall comply with the corporate governance principles under following broad headings- : (a)
The rights of shareholders : The listed entity shall seek to protect and facilitate the exercise of
the following rights of shareholders: (i) right to participate in, and to be sufficiently informed
of, decisions concerning fundamental corporate changes. (ii) opportunity to participate
effectively and vote in general shareholder meetings. (iii) being informed of the rules,
including voting procedures that govern general shareholder meetings. (iv) opportunity to ask
questions to the board of directors, to place items on the agenda of general meetings, and to
propose resolutions, subject to reasonable limitations. (v) effective shareholder participation
in key corporate governance decisions, such as the nomination and election of members of
board of directors. (vi) exercise of ownership rights by all shareholders, including
institutional investors. (vii) adequate mechanism to address the grievances of the
shareholders. (viii) protection of minority shareholders from abusive actions by, or in the
interest of, controlling shareholders acting either directly or indirectly, and effective means of
redress. (b) Timely information: The listed entity shall provide adequate and timely
information to shareholders, including but not limited to the following: (i) sufficient and
timely information concerning the date, location and agenda of general meetings, as well as
full and timely information regarding the issues to be discussed at the meeting. (ii) Capital
structures and arrangements that enable certain shareholders to obtain a degree of control
disproportionate to their equity ownership. (iii) rights attached to all series and classes of
shares, which shall be disclosed to investors before they acquire shares. (c) Equitable
treatment: The listed entity shall ensure equitable treatment of all shareholders, including
minority and foreign shareholders, in the following manner: (i) All shareholders of the same
series of a class shall be treated equally. (ii) Effective shareholder participation in key
corporate governance decisions, such as the nomination and election of members of board of
directors, shall be facilitated. (iii) Exercise of voting rights by foreign shareholders shall be
facilitated. (iv) The listed entity shall devise a framework to avoid insider trading and abusive
self-dealing. (v) Processes and procedures for general shareholder meetings shall allow for
equitable treatment of all shareholders. (vi) Procedures of listed entity shall not make it
unduly difficult or expensive to cast votes. (d) Role of stakeholders in corporate governance:
The listed entity shall recognise the rights of its stakeholders and encourage co-operation
between listed entity and the stakeholders, in the following manner: (i) The listed entity shall
respect the rights of stakeholders that are established by law or through mutual agreements.
(ii) Stakeholders shall have the opportunity to obtain effective redress for violation of their
rights. (iii) Stakeholders shall have access to relevant, sufficient and reliable information on a
timely and regular basis to enable them to participate in corporate governance process. (iv)
The listed entity shall devise an effective whistle blower mechanism enabling stakeholders,
including individual employees and their representative bodies, to freely communicate their 37
concerns about illegal or unethical practices. (e) Disclosure and transparency: The listed
entity shall ensure timely and accurate disclosure on all material matters including the
financial situation, performance, ownership, and governance of the listed entity, in the
following manner: (i) Information shall be prepared and disclosed in accordance with the
prescribed standards of accounting, financial and non-financial disclosure. (ii) Channels for
disseminating information shall provide for equal, timely and cost efficient access to relevant
information by users. (iii) Minutes of the meeting shall be maintained explicitly recording
dissenting opinions, if any. (f) Responsibilities of the board of directors: The board of
directors of the listed entity shall have the following responsibilities: (i) Disclosure of
information: (1) Members of board of directors and key managerial personnel shall disclose
to the board of directors whether they, directly, indirectly, or on behalf of third parties, have a
material interest in any transaction or matter directly affecting the listed entity. (2) The board
of directors and senior management shall conduct themselves so as to meet the expectations
of operational transparency to stakeholders while at the same time maintaining confidentiality
of information in order to foster a culture of good decisionmaking. (ii) Key functions of the
board of directors : (1) Reviewing and guiding corporate strategy, major plans of action, risk
policy, annual budgets and business plans, setting performance objectives, monitoring
implementation and corporate performance, and overseeing major capital expenditures,
acquisitions and divestments. (2) Monitoring the effectiveness of the listed entity’s
governance practices and making changes as needed. (3) Selecting, compensating,
monitoring and, when necessary, replacing key managerial personnel and overseeing
succession planning. (4) Aligning key managerial personnel and remuneration of board of
directors with the longer term interests of the listed entity and its shareholders. (5) Ensuring a
transparent nomination process to the board of directors with the diversity of thought,
experience, knowledge, perspective and gender in the board of directors. (6) Monitoring and
managing potential conflicts of interest of management, members of the board of directors
and shareholders, including misuse of corporate assets and abuse in related party transactions.
(7) Ensuring the integrity of the listed entity’s accounting and financial reporting systems,
including the independent audit, and that appropriate systems of control are in place, in
particular, systems for risk management, financial and operational control, and compliance
with the law and relevant standards. (8) Overseeing the process of disclosure and
communications. (9) Monitoring and reviewing board of director’s evaluation framework.
(iii) Other responsibilities: (1) The board of directors shall provide strategic guidance to the
listed entity, ensure effective monitoring of the management and shall be accountable to the
listed entity and the shareholders. (2) The board of directors shall set a corporate culture and
the values by which executives throughout a group shall behave. (3) Members of the board of
directors shall act on a fully informed basis, in good faith, with due diligence and care, and in
the best interest of the listed entity and the shareholders. (4) The board of directors shall
encourage continuing directors training to ensure that the members of board of directors are
kept up to date. (5) Where decisions of the board of directors may affect different shareholder
groups differently, the board of directors shall treat all shareholders fairly. (6) The board of
directors shall maintain high ethical standards and shall take into account the interests of
stakeholders. (7) The board of directors shall exercise objective independent judgement on
corporate affairs. (8) The board of directors shall consider assigning a sufficient number of
non-executive members of the board of directors capable of exercising independent
judgement to tasks where there is a potential for conflict of interest. (9) The board of directors 38
shall ensure that, while rightly encouraging positive thinking, these do not result in over-
optimism that either leads to significant risks not being recognised or exposes the listed entity
to excessive risk. (10) The board of directors shall have ability to ‘step back’ to assist
executive management by challenging the assumptions underlying: strategy, strategic
initiatives (such as acquisitions), risk appetite, exposures and the key areas of the listed
entity’s focus. (11) When committees of the board of directors are established, their mandate,
composition and working procedures shall be well defined and disclosed by the board of
directors. (12) Members of the board of directors shall be able to commit themselves
effectively to their responsibilities. (13) In order to fulfil their responsibilities, members of
the board of directors shall have access to accurate, relevant and timely information. (14) The
board of directors and senior management shall facilitate the independent directors to perform
their role effectively as a member of the board of directors and also a member of a committee
of board of directors.

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