Unit 5: Corporate Governance

What is Corporate Governance?

Corporate Governance is (1) the application of best management practices, (2) compliance of
law in true letter and spirit, (3) adherence to ethical standards for effective management and
distribution of wealth and (4) discharge of social responsibility for sustainable development
of all stakeholders. If management is about running the business, corporate governance is
about seeing that is running well. All companies need management and governance.
Conduct of business in accordance with shareholders desires (maximizing wealth) while
confirming to the basic rules of the society embodied in the Law and Local Customs.
Maintaining good relationships among Shareholders, Managers, Board of directors,
Employees, Customers, Creditors, Suppliers, and Community are the key to effective
Corporate Governance.

Why Corporate Governance? It is required to have

• Better access to external finance
• Lower costs of capital – interest rates on loans
• Improved company performance – sustainability
• Higher firm valuation and share performance
• Reduced risk of corporate crisis and scandals

Principles of Corporate Governance

1. Sustainable development of all stakeholders - to ensure growth of all individuals
associated with or effected by the enterprise on sustainable basis.
2. Effective management and distribution of wealth – to ensure that enterprise creates
maximum wealth and judiciously uses the wealth so created for providing maximum
benefits to all stake holders and enhancing its wealth creation capabilities to maintain
sustainability.
3. Discharge of social responsibility - to ensure that enterprise is acceptable to the
society in which it is functioning.
4. Application of best management practices - to ensure excellence in functioning of
enterprise and optimum creation of wealth on sustainable basis.
5. Compliance of law in letter & spirit - to ensure value enhancement for all stakeholders
guaranteed by the law for maintaining socio-economic balance.
6. Adherence to ethical standards - to ensure integrity, transparency, independence and
accountability in dealings with all stakeholders

The pillars of Corporate Governance are:

1. Accountability: a) Ensure that management is accountable to the Board. b) Ensure
that the Board is accountable to shareholders and other stakeholders.
2. Fairness: a) Protect shareholders and stakeholders’ rights. b) Treat all of them
including minority shareholders equitably. c) Provide effective redress for violations.
3. Transparency: Ensure timely, accurate disclosure on all matters, including the
financial situation, performance, ownership and governance.

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 4. Independence: a) Have procedures and structures in place so as to minimize, or
avoid all conflicts of interests. b) Have independent Directors and Advisors to be free
from outside influence.

Characteristics of Good Board of Governors

 Clearly defined roles for authorities
 Clearly defined duties and responsibilities of directors
 Well structure Board of Governors
 Appropriate composition and mix of skills among the Board members
 Follow appropriate board procedures
 Remuneration of the Director must be in line with the best practices
 Conduct self-evaluation and training of Board members
Control Environment
 Have internal control procedures
 Ensure risk management framework is present
 Ensure disaster recovery system is in place
 Confirm media management techniques are in use
 Make sure that business continuity procedure is in place
 Established independent audit committee
 Conduct internal audit at regular intervals
 Management information system is established
 Compliance function is established
 Independent external auditor conducts audit
Transparent Disclosure
 Financial information is disclosed

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  Non-financial information is disclosed
 Financial details is prepared according to international financial reporting standards
 Companies registry filings is up to date
 High quality annual report is published
 Web-based disclosure is carried out

Well-defined shareholder rights

 Formalise minority shareholder rights
 Shareholder meetings are conducted
 Policy on related party transactions is in place
 Policy on extraordinary transactions is made
 Clearly defined and explicit dividend policy exists
Commitment of the Board
 The board discusses corporate governance issues and creates a corporate governance
committee
 The company has a corporate governance champion
 A corporate governance improvement plan has been created
 Appropriate resources are made available to corporate governance initiative
 Policies and procedures have been formalised and distributed to relevant staff
 A corporate governance code has been developed
 A code of ethics has been developed
 The company is recognised as a corporate governance leader
Other Entities
• Corporate Governance applies to all types of organizations not just companies in the
private sector but also in the not for profit and public sectors

• Examples are NGOs, schools, hospitals, pension funds, state-owned enterprises

Corporate Governance in India
The Indian corporate scenario was more or less stagnant till the early 90s.

• The position and goals of the Indian corporate sector has changed a lot after the
liberalization of 90s.

• India’s economic reform programme made a steady progress in 1994.

• India with its 20 million shareholders is one of the largest emerging markets in terms
of the market capitalization.

Confederation of Indian Industry (CII)

Corporate governance of India has undergone a paradigm shift
• In 1996, Confederation of Indian Industry (CII) took a special initiative on Corporate
Governance.

• The objective was to develop and promote a code for corporate governance to be
adopted and followed by Indian companies, be these in the Private Sector, the Public
Sector, Banks or Financial Institutions, all of which are corporate entities.

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 • This initiative by CII flowed from public concerns regarding the protection of investor
interest, especially the small investor, the promotion of transparency within business
and industry.

Special initiatives in Corporate Governance include:

(1) Green Initiatives in the Corporate Governance:
It means allowing service of documents including Balance Sheets and Auditors report
etc. through e-mail addresses; Participation by Directors and shareholders in meetings
through video conferencing; Voting in General Meeting of Companies through
electronic mode; Issue of Digital Certificates by Registrar of Companies.

(2) Simplification in Procedures and Process under Companies Act, 1956:

It involves incorporation of new Company within 24 hours by end of July, 2011;
Issue of License under section 25 (non-profit companies) of the Companies Act,
1956; The Director’s Relatives (Office or Place of Profit) Amendment Rules, 2011;
Marking a company as having management dispute by Registrar of Companies under
MCA-21 system; Various E-forms are approved online; Registration of place of
business by a foreign company; Appointment of LLPs of chartered accountants as
auditor.
(3) e-Payments in the Ministry
1. E-payment system is the means of making payment and/or transaction for goods
and services on an e-commerce website or electronic environment without any need to
use cash or check. E-payment system is also known as online payment system. It has
many forms such as credit card, virtual card, mail order, e-wallet, mobile payment,
cryptocurrency, etc.
2. A system that establishes how to pay for goods or services electronically during the
execution of a financial transaction.
3. A means of making payments over an electronic network such as the Internet.
Types of e-payment system
1. Internet banking – In this case, the payment is done by digitally transferring the
funds over the internet from one bank account to another. Some popular modes of net
banking are, NEFT, RTGS, IMPS.
2. Card payments – Card payments are done via cards e.g. credit cards, debit cards,
smart cards, stored valued cards, etc. In this mode, an electronic payment accepting
device initiates the online payment transfer via card Credit/ Debit card – An e
payment method where the card is required for making payments through an
electronic device.
3. Smart card – Also known as a chip card, a smart card, a card with a microprocessor
chip is needed to transfer payments.
4. Stored value card – These types of cards have some amount of money stored
beforehand and are needed to make funds transfer. These are prepaid cards like gift
cards, etc.
5. Direct debit – Direct debit transfers funds from a customer’s account with the help of
a third party
6. E-cash – It is a form where the money is stored in the customer’s device which is
used for making transfers.
7. E-check – This is a digital version of a paper check used to transfer funds within
accounts.
8. E-wallet – Very popular among customers, an E-wallet is a form of prepaid account,
where customer’s account information like credit/ debit card information is stored
allowing quick, seamless, and smooth flow of the transaction.

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 9. Mobile wallet – An evolved form of e-wallet, mobile wallet is extensively used by
lots of customers. It is a virtual wallet, in the form of an app that sits on a mobile
device. Mobile wallet stores card information on a mobile device. The user-friendly
nature of mobile wallets makes them easier to use. It offers a seamless payment
experience making customers less dependent on cash.
10. QR payments – QR code-enabled payments have become immensely popular. QR
code stands for ‘Quick Response’ code, a code that contains a pixel pattern of
barcodes or squares arranged in a square grid.
11. UPI payments – NPCI (National Payment Corporation of India) has developed an
instant real-time payment system to facilitate interbank transactions.
12. Biometric payments – Biometric payments are done via using/scanning various parts
of the body, e.g. fingerprint scanning, eye scanning, facial recognition, etc.

(4) International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) are a set of accounting rules for
the financial statements of public companies that are intended to make them
consistent, transparent, and easily comparable around the world. The IFRS are issued
by the International Accounting Standards Board (IASB).

International Financial Reporting Standards (IFRS) were created to bring consistency

and integrity to accounting standards and practices, regardless of the company or the
country. They were issued by the London-based Accounting Standards Board (IASB)
and address record keeping, account reporting, and other aspects of financial
reporting. IFRS fosters greater corporate transparency.

(5) Investor awareness programmes

Investor Awareness Programmes (IAP) are organized through various partners.
Through the project rural, semi-urban and urban citizens are able to know about
various concepts of savings and investments.

(6) The Companies Bill, 2011

The Act prohibits forward dealings in securities of company by any director or key
managerial personnel. It also prohibits insider trading in the company. At least one-
third of the total number of directors of a listed public company should be
independent directors. Existing companies to get a transition period of one year to
comply.

(7) Reorganisation of field offices

The State Reorganisation (SR) Division in the Department of Personnel & Training is
entrusted with the responsibility of allocation of the State Government employees of
State cadre, who have all state transfer liability, other than All India Services, between
the successor states in accordance with State Reorganisation Scheme. Employees
serving in villages, tehsil, districts, divisions and regions - who are normally
transferred within such areas and part of such territorial cadres and employees
appointed for Projects or Undertakings, etc. are not covered by the scheme of State
Reorganisation. Allocation of All India services between the successor States are done
by their cadre controlling authorities i.e. M/O of personnel (AIS Division) for Indian
Administrative Service (IAS), M/O Home Affairs for Indian Police service (IPS) and
M/O Environment and Forests for Indian Forest Service (IFS).
(8) Easy Exit Scheme, 2011

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 The purpose of the Scheme is to allow eligible companies to avail of this opportunity
to exit from the Register of Companies after fulfilling the requirements laid down
herewith and the decision of the Registrar of Companies in respect of striking off the
name of company shall be final.

(9) Indian Institute of Corporate Affairs (IICA)

Indian Institute of Corporate Affairs. IICA was registered as a society on September
12, 2008 under the Societies Registration Act, 1860. An autonomous institute, IICA
works under the aegis of the Ministry of Corporate Affairs to deliver opportunities for
research, education, and advocacy.

Securities and Exchange Board of India (SEBI)

• Government of India's securities watchdog, the Securities Board of India, announced
strict corporate governance norms for publicly listed companies in India.

• Indian Economy was liberalized in 1991. In order to achieve the full potential of
liberalization and enable the Indian Stock Market to attract huge investments from foreign
institutional investors (FIIs), it was necessary to introduce a series of stock market
reforms.

• SEBI, established in 1988 and became a fully autonomous body by the year 1992 with
defined responsibilities to cover both development and regulation of the market.

• On April 12, 1988, SEBI was established with a dual objective of protecting the rights of
small investors and regulating and developing the stock markets in India.

• In 1992, BSE, the leading stock exchange in India, witnessed the first major scam
masterminded by Harshad Mehta.

• Analysts felt that if more powers had been given to SEBI, the scam would not have
happened.

• As a result GOI brought in a separate legislation by the name of SEBI Act 1992 and
conferred statutory powers to it.
• Since then, SEBI had introduced several stock market reforms. These reforms
significantly transformed the face of Indian Stock Markets
SEBI and Clause 49
• SEBI asked Indian firms above a certain size to implement Clause 49, a regulation
that strengthens the role of independent directors serving on corporate boards.

• On August 26, 2003, SEBI announced an amended Clause 49 of the listing agreement
which every public company listed on an Indian stock exchange is required to sign.
The amended clauses come into immediate effect for companies seeking a new
listing.

• Independent Directors: 1/3 to ½ depending whether the chairman of the board is a

non-executive or executive position.

• Non-Executive Directors: Non-executive directors’ term of office of is now limited to

three terms of three years each.

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 • Board of Directors: The board is required to frame a code of conduct for all board
members and senior management and each of them have to annually affirm
compliance with the code.

Conclusion
• As Indian companies compete globally for access to capital markets, many are finding
that the ability to benchmark against world-class organizations is essential.

• For a long time, India was a managed, protected economy with the corporate sector
operating in an insular fashion.

• But as restrictions have eased, Indian corporations are emerging on the world stage
and discovering that the old ways of doing business are no longer sufficient in such a
fast-paced global environment.

• If a country does not have a reputation for strong corporate governance practice,
capital will flow elsewhere. If investors are not confident with the level of disclosure,
capital will flow elsewhere. If a country opts for lax accounting and reporting
standards, capital will flow elsewhere. All enterprises in that country regardless of
how steadfast a particular company’s practices may be- suffer the consequences.
Markets exist by the grace of investors. And it is today’s more empowered investors
that will determine which companies and markets will stand the test of time and
endure the weight of greater competition. It serves us well to remember that no
market has a divine right to investors’ capital.
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Sample Questions
1. What is corporate governance? What are its basic ingredients?
2. What is the role of CII, SEBI in promoting value based Governance in
organizations post Covid-19?