Corporate governance

What?
set of processes, principles, institutions governing functioning of a corporate; aim
transparency and accountability for all stakeholders

laws: companies act 2013, SEBI act, CCI act, FEMA, industries act etc

Importance of ethics in corporate governance

profitability → wealth creation, job creation, economic growth

timely disclosure of information (annual shareholder meetings, annual statements)

protection of interests of minority shareholders

responsibility to society: social welfare, environmental ethics

strong and positive work culture: individual employeee feels included and valued,
connects to organization values

independent board of directors, auditing → ensure transparency and accountability

in functioning

compliance of laws and rules, including regulatory compliance

prevent misuse of public money (Sharda, Satyam)

Stakeholders
shareholders: owners of company, provided capital for creation and growth of
company

should secure fair, sustainable and competitive returns for shareholder capital

should receive relevant information on timely basis (profitability, future goals

etc)

special care to protect interests of minority shareholders (from majority

shareholder domination)

board of directors: to ensure company is run in accordance with ethical corporate

governance practices

Corporate governance 1
 management,

managers: work-load management, build culture of productivity and positivity in

team, steer team towards right direction

should receive adequate autonomy to take and implement their decisions, while
being accountable to management

must be informed of decisions taken by management along with justifications

should be consulted in decision-making by management

employees: production of goods and services within company

must be paid adequately to enjoy a good life standard; must be provided a safe
workplace

transparency: informed of management decisions along with values influencing

the decision

work culture: inclusive, feel valued and alignment to organizational values

adequate internal forums for complaints, grievances and issues of employees

addressed

consumers: provide cashflow to business, and make it commercially viable

must receive high quality goods and services; any side-effects/harms should be
clearly communicated (eg: allergy mentioned on food items)

advertisements must not be misleading or deceitful

sensitivity to culture and traditions while offering and marketing products and
services

auditor,

regulator,

govt,

society

Challenges
independent auditing (appointed by majority shareholders)

Corporate governance 2
 disclosure of timely reports

conflict of interest among board members

balance between executive and non-executive directors in board

board of directors - inefficient, drawing hefty salaries?

ethics ignored? (eg: faulty cars not recalled)

fiduciary responsibility: data security

Solutions
auditing: mandatory rotation, auditor must not avail any services from the audited
firm

board of directors: avoid conflict of interest, non-executive directors for

independence and integrity, diversity in board

timely information disclosure to all shareholders

expert recommendations

Naresh Chandra panel: company-auditor relationship

Uday Kotak panel: aftermath of Infosys (independent director), Tata scandals

board: 6+ directors, 1 women; directors must attend 50% meetings/y; 50%

independent directors, 1 ID must for meeting

chairman non-executive director → independent of company management

independent director can hold this post in 8 companies only

CSR
2% of net profits of all companies must go to CSR (S135, companies act 2013)

eg: Tata, Google (Bolo, foldable microscopes), Goldman Sachs (schools,

skilling); PPEs, oxygen, sanitisers, drugs, ventilator production

legal provisions: need to hire consultant to evaluate impact for >₹1cr projects

can adjust for over/under expenditure in coming years

under-spending no more criminalised

Corporate governance 3
 benefits for company:

positive brand awareness for people (eg: Tata)

popular goodwill → higher sales, word of mouth publicity

skilling local population → skilled labour-force, loyal

infrastructure creation: roads, digital infra

higher morale of employees, identify with company's values

responsibility for societal development (Gandhiji's trusteeship doctrine)

giving back to society, environment

concerns:

regional and sectoral imbalance (65% to health and education; rural

development, sanitation ignored),

limited experience in handling social development complexities → inefficiencies

passive CSR: donation to Namami Gange, PM Cares

increases cost of running business → could discourage investments

fraud and money laundering: donated to NGO which returns after taking
commission

50% companies under-spending

mandatory → against philanthropy

case for a pooled CSR fund to undertake social activities (confederate of

companies, NGOs, govt, social activists etc)

enable pooling of expertise and experience

sharing of best practices

leverage economies of scale

Corporate scandals
consequences:

huge amount of public money invested directly/indirectly in banks lost

Corporate governance 4
 managerial class accused to be self-serving

impetus for reforms

major scandals recently:

Sahara chit fund scam: bypass SEBI regulation

Satyam computers: wrong information disclosure

Yes bank: undue influence by founder → non-disclosure of exposure

Tata-Mistry: minority shareholder rights

Nirav Modi, Harshad Mehta: regulatory failure (to ensure CBS-SWIFT linkage)

Vedanta: environmental ethics

ICICI bank: conflict of interest

Air India: poor work culture, undue political interference (68 aircrafts procured
unnecessarily in 2009)

Infosys: lack of trust in internal processes → repeated whistle-blowing

Volkswagen emissions scandal

Corporate governance 5