UNIT – 4 STRENGTHENING CORPORATE

GOVERNANCE

STRUCTURE

4.0 Learning Objectives

4.1 Introduction

4.2 Role and composition of the board

4.3 Remuneration of Directors and Senior Executives

4.4 Rights and responsibilities of shareholders

4.5 Introduction to CSR

4.5.1 Advantages and Scope

4.6 Indian Scenario CG and CSR

4.7 Corporate governance rating

4.8 Summary

4.9 Keywords

4.10 Learning Activity

4.11 Unit End Questions

4.12 References

4.0 LEARNING OBJECTIVES

After studying this unit, you will be able to:

 Explain how corporate social responsibility may contribute to the economic benefits
of a company
  Relate the principles of Corporate Responsibility of Business to current activities of
companies in this domain

 Know the Remuneration of Directors and Senior Executives

 Describe Indian Scenario CG and CSR

4.1 INTRODUCTION

With the globalization and the blurring of the borders, the demands on the board have
increased tremendously. The regulatory requirements are complex and the onus on the Board
is immense. In this scenario the need to delegate oversight of certain areas to a specialist
board committee has become imperative. However, it is to be remembered that even though
the board delegates some of the responsibilities to a committee, the ultimate responsibility
lies with the board. Board committees with formally established terms of reference, criteria
for appointment, life span, role and function constitute an important element of the
governance process and should be established with clearly agreed reporting procedures and a
written scope of authority. A committee enable better management of full board’s time and
allows in-depth scrutiny and focused attention. Since the Board of Directors is ultimately
responsible for the acts of the committees, the role and structure of the board committees
should be define with due care.

Committees are a sub-set of the board, deriving their authority from the powers delegated to
them by the board. Under section 177 of Companies Act, 2013, Board of Directors may
delegate certain matters to the committees set up for the purpose. These committees are
usually formed as a means of improving board effectiveness and efficiency in areas where
more focused, specialized and technically oriented discussions are required. These
committees prepare the groundwork for decision-making and report at the subsequent board
meeting.

In the present day, the regulatory requirement is such that the composition of the board
comprising executive directors and non-executive independent directors is relatively large in
number. In such a situation it becomes at times practically difficult to convene board
meetings which suit the convenience and other commitments of each director. By having
smaller committees this aspect also gets addressed effectively.
Committees allow the board to: – Handle a greater number of issues with greater efficiency
by having experts focus on specific areas. – Develop subject specific expertise on areas such
as compliance management, risk management and financial reporting. – Enhance the
objectivity and independence of the Board’s judgment.

Greater specialization and intricacies of modern board work is one of the reasons for
increased use of board committees. The reasons include: – Responsibilities are shared. –
More members become involved. – Specialized skills of members can be used to best
advantage. – Inexperienced members gain confidence while serving on the committee. –
Matters may be examined in more detail by a committee

The committees focus accountability to known groups. While the board as a legal unit always
retains responsibility for the work of its Committees, the committee because of its focus on
the mandate and the smaller size tend to be more effective. It is important that there is clarity
of delegation and it should be ensured that committees are not put between the Board and the
CEO, either by giving committees official instructional authority or by allowing them to
evaluate performance using their own criteria.

4.2 ROLE AND COMPOSITION OF THE BOARD

From a legal perspective, the board of a public corporation is charged with setting a
corporation’s policy and direction, electing and appointing officers and agents to act on
behalf of the corporation, and acting on other major matters affecting the corporation. In this
context, individual directors’ duties and responsibilities are described in the American Bar
Association’s Corporate Director’s Guidebook, Fourth Edition (2004) with language, such as
the following:

 IN GOOD FAITH - Acting honestly and dealing fairly. In contrast, a lack of good
faith would be evidenced by acting, or causing the corporation to act, for the
director’s personal benefit or for some purpose other than to advance the welfare of
the corporation and its economic interests and may also include acting on a corporate
matter without making a reasonable effort to be appropriately informed.
 REASONABLY BELIEVES - Although the director’s honest belief is subjective,
the qualification that it must be reasonable (i.e., based upon a rational analysis of the
situation understandable to others) makes the standard of conduct also objective, not
just subjective.

 BEST INTERESTS OF THE CORPORATION - Emphasizing the director’s

primary allegiance to the corporate entity.

 CARE - Expressing the need to pay attention, to ask questions, to act diligently to
become and remain generally informed, and, when appropriate, to bring relevant
information to the attention of the other directors. In particular, these activities include
reading materials and engaging in other preparation in advance of meetings, asking
questions of management until satisfied that all information significant to a decision is
available to the board and has been considered, and requesting legal or other expert
advice when appropriate to a board decision.

 PERSON IN A LIKE POSITION - Avoiding the implication of special

qualifications and incorporating the basic attributes of common sense, practical
wisdom, and informed judgment generally associated with the position of corporate
director.

 UNDER SIMILAR CIRCUMSTANCES - Recognizing that the nature and extent of

the preparation for and deliberations leading up to decision making and the level of
oversight will vary, depending on the corporation concerned, its particular situation,
and the nature of the decision to be made.

 DUTY OF CARE - The Duty of Care is the most important duty owed by a director
to a corporation. A typical (state) corporation statute defining a director’s Duty of
Care provides that a director’s duties must be performed “with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would use under
similar circumstances.” This Duty of Care is very broad and requires directors to
diligently perform their obligations.

 BUSINESS JUDGMENT RULE - The Business Judgment Rule works in

conjunction with the director’s Duty of Care. Under this rule, a director will not be
held liable for mere negligence if exercising his or her Duty of Care. The rule can be
stated as, “A director who exercises reasonable diligence and who, in good faith,
makes an honest, unbiased decision will not be held liable for mere mistakes and
 errors in business judgment.” The rule protects directors from decisions that turn out
badly for their corporation, even when the directors acted diligently and in good faith
in authorizing the decision.

 DUTY OF LOYALTY - The Duty of Loyalty exists as a result of the fiduciary

relationship between directors and the corporation. A fiduciary relationship is defined
as a relationship of trust and confidence, such as between a doctor and patient, or
attorney and client. The nature of the relationship includes the concepts that neither
party may take selfish advantage of the other’s trust and may not deal with the subject
of the relationship in a way that benefits one party to the disadvantage of the other. A
director must perform his or her duties in good faith and in a manner in which the
director believes is in the best interests of the corporation and its shareholders.
Essentially, this duty means that while serving a corporation, the director must give
the corporation the first opportunity to take advantage of any business opportunities
that he or she becomes aware of and that are within the scope of the corporation’s
business. If the board of directors chooses not to take advantage of a business
opportunity brought to its attention by a director, the director may then go forward
without violating his or her duty.

Liability can exist for officers and directors when they cause financial harm to the
corporation act solely on their own behalf and to the detriment of the corporation, or commit
a crime or wrongful act. Certain acts may subject an officer or director to personal liability,
and other acts, although they would otherwise subject them to liability, may be either
indemnified by or insured against by the corporation.Indemnification of officers and directors
means that the corporation will reimburse them for expenses incurred and amounts paid in
defending claims brought against them for actions taken on behalf of the corporation.
Insurance policies can cover matters that cannot be indemnified under state law or in
instances where the corporation does not have the financial resources to pay for the
indemnification. Most state corporation statutes allow corporations to purchase insurance to
cover matters resulting from acts taken by officers and directors.

The goal of directors and officer’s insurance is to protect directors and officers of a
corporation from liability in the event of a claim or lawsuit against them asserting
wrongdoing in connection with the company’s business.

A Board’s Role: A Governance Perspective

What does the phrase “direct the affairs of the company” really mean? To provide greater
clarity, numerous individuals and organizations have developed more specific descriptions in
recent years. One frequently cited description was developed by the Business Roundtable:

 First, the paramount duty of the board of directors of a public corporation is to select
the chief executive officer (CEO) and to oversee the CEO and senior management in
the competent and ethical operation of the corporation on a day-to-day basis

 Second, it is the responsibility of management to operate the corporation in an

effective and ethical manner to produce value for shareholders. Senior management is
expected to know how the corporation earns its income and what risks the corporation
is undertaking in the course of carrying out its business. The CEO and board of
directors should set a “tone at the top” that establishes a culture of legal compliance
and integrity. Management and directors should never put personal interests ahead of
or in conflict with the interests of the corporation

 Third, it is the responsibility of management, under the oversight of the audit

committee and the board, to produce financial statements that fairly present the
financial condition and results of operations of the corporation and to make the timely
disclosures investors need to assess the financial and business soundness and risks of
the corporation

 Fourth, it is the responsibility of the board, through its audit committee, to engage an
independent accounting firm to audit the financial statements prepared by
management, issue an opinion that those statements are fairly stated in accordance
with Generally Accepted Accounting Principles and oversee the corporation’s
relationship with the outside auditor

 Fifth, it is the responsibility of the board, through its corporate governance committee,
to play a leadership role in shaping the corporate governance of the corporation. The
corporate governance committee also should select and recommend to the board
qualified director candidates for election by the corporation’s shareholders

 Sixth, it is the responsibility of the board, through its compensation committee, to

adopt and oversee the implementation of compensation policies, establish goals for
performance-based compensation, and determine the compensation of the CEO and
senior management
  Seventh, it is the responsibility of the board to respond appropriately to shareholders’
concerns

 Eighth, it is the responsibility of the corporation to deal with its employees,

customers, suppliers and other constituencies in a fair and equitable manner. Business
Roundtable (2005), p. 2.

Milstein, Gregory, and Grapsas (2006) take a somewhat broader perspective. First, they note,
the board needs to take charge of its own focus, agenda, and information flow. This enables a
board to provide management with meaningful guidance and support. It also helps the board
focus its attention appropriately, determine its own agenda, and obtain the information it
needs to make objective judgments. Second, the board must ensure that management not only
performs but performs with integrity. Selecting, monitoring, and compensating management
and, when necessary, replacing management, therefore continue to lie at the heart of board
activity. Third, the board must set expectations about the tone and culture of the company.
The standards of ethics and business conduct that are followed—or not followed—throughout
a company impact the bottom line in many ways. “Tone at the top” should be a priority
throughout the company and not viewed simply as a compliance matter. Fourth, the board
should work with management to formulate corporate strategy. After agreeing to a strategic
course with management through an iterative process, the board should determine the
benchmarks that will evidence success or failure in achieving strategic objectives and then
regularly monitor performance against those objectives. Fifth, it is the board’s duty to ensure
that the corporate culture, the agreed strategy, management incentive compensation, and the
company’s approach to audit and accounting, internal controls, and disclosure are consistent
and aligned. And sixth, it is the board’s duty to help management understand the expectations
of shareholders and regulators. Boards can help management recognize that shareholders
have a legitimate interest in more meaningful input into the board selection process, in terms
of both nominating procedures and voting methods. Similarly, boards can help management
recognize and address the concerns that excessive compensation raises among shareholders,
regulators, rating agencies, and others.Milstein, Holly, and Grapsas (2006, January).

Both descriptions are useful for developing a basic understanding of a board’s

responsibilities. In broad terms, they fall into three categories: (a) to make decisions, (b) to
monitor corporate activity, and (c) to advise management. The key issue here is deciding
which board posture is appropriate at what time. While the law, corporate bylaws, and other
documents frame many of the decisions a board must make, such as appointing a CEO or
approving the financials, they do not provide much guidance with respect to the most
important decision a board must make—when must board oversight become active
intervention? For example, when should a board step in and remove the current CEO? When
should directors veto a major capital appropriation or strategic move?

Lists never can fully capture the complexity and intricacies of the governance function
because they do not consider the specific challenges associated with different governance
scenarios. In particular, the precise role of a board will vary depending on the nature of the
company, industry, and competitive situation and the presence or absence of special
circumstances, such as a hostile takeover bid or a corporate crisis, among other factors.

The Nature of the Company, Industry, and Competitive Situation

It seems self-evident that a board’s role depends largely on the nature and the strategic
challenges of the company and the industry. The challenges faced by small, private, or
closely held companies are not the same as those of larger, public corporations. In addition to
their traditional fiduciary role, directors in small companies often are key advisers in strategic
planning, raising, and allocating capital, human resources planning, and sometimes even
performance appraisal. In large public corporations, directors are focused more on exercising
oversight than on planning, on capital allocation and control rather than on the raising of
capital, and on management development and succession activities rather than on broader
human resources responsibilities.

Public company ownership patterns are not homogeneous either, and different ownership
structures may call for different governance approaches. The first, and most common, board
situation is one in which a corporation has no controlling shareholder. In that case, directors
should behave as if there is a single absentee owner whose long-term interests they serve. A
primary responsibility for the board in this scenario is to appoint and, if necessary, change
management, just as an intelligent owner would do if he were present. Commenting on
individual director’s responsibilities in these circumstances, Buffett (1993) writes,

In this plain-vanilla case, a director who sees something he doesn’t like should attempt to
persuade the other directors of his views. If he is successful, the board will have the muscle to
make the appropriate change. Suppose, though, that the unhappy director can’t get other
directors to agree with him. He should then feel free to make his views known to the absentee
owners. Directors seldom do that, of course. The temperament of many directors would in
fact be incompatible with critical behavior of that sort. But I see nothing improper in such
actions, assuming the issues are serious. Naturally, the complaining director can expect a
vigorous rebuttal from the unpersuaded directors, a prospect that should discourage the
dissenter from pursuing trivial or non-rational causes. Buffett, annual letter to Berkshire
Hathaway shareholders (1993).

The second situation occurs when the controlling owner is also the manager. At some
companies, such as Google, this arrangement is facilitated by the existence of two classes of
stock endowed with disproportionate voting power. In these situations, the board does not act
as an agent between owners and management, and directors cannot affect change except
through persuasion. Therefore, if the owner or manager is mediocre—or worse, is
overreaching—there is little a director can do about it except object. And if there is no change
and the matter is sufficiently serious, the outside directors should resign. Their resignation
will signal their doubts about management, and it will emphasize that no outsider is in a
position to correct the owner or manager’s shortcomings.Buffett (1993).

The third public corporation governance situation occurs when there is a controlling owner
who is not involved in management. This case, examples of which are Hershey Foods and
Dow Jones, puts the outside directors in a potentially value-creating position. If they become
unhappy with either the competence or integrity of the manager, they can go directly to the
owner (who may also be on the board) and make their views known. This situation helps an
outside director, since he need make his case only to a single, presumably interested owner
who can immediately make a change if the argument is persuasive. Even so, the dissatisfied
director has only that single course of action. If he remains unsatisfied about a critical matter,
he has no choice but to resign. Buffett (1993).

It will also be readily apparent that the role of the board will vary depending on the size of
the company, the industries it serves, and the competitive challenges it faces. Global
corporations face different challenges from domestic ones; the issues in regulated industries
are different from those in technology or service industries, and high growth scenarios make
different demands on boards than more mature ones. Finally, in times of turbulence or rapid
change in the industry, boards often are called on to play a more active, strategic role than in
calmer times. Special events or opportunities, such as takeovers, mergers, and acquisitions,
fall into this category.

The Presence or Absence of Special Circumstances, Such as a Hostile Takeover Bid or a

Corporate Crisis
Company crises can take on many different forms—defective products, hostile takeovers,
executive misconduct, natural disasters that threaten operations, and many more. But, as
boards know very well, they all have one thing in common: They threaten the stock price and
sometimes the continued existence of the company. Some examples follow:

 In June 2008, with encouragement from federal regulators, JP Morgan executed a

takeover bid for Wall Street giant Bear Stearns to prevent the bank’s collapse as a
consequence of the U.S. mortgage debt crisis. The $240 million acquisition price
represented a substantial discount on its share price at the end of trading the week
before, which valued the bank at around $3.5 billion.

 In 2002, when allegations of insider trading against Martha Stewart were reported, the
stock price of Martha Stewart Omnimedia fell some 40% in just 3 weeks.

 In 1993, an allegation of E. coli contamination in the beef served by the Jack in the
Box hamburger chain caused the company’s share price to plummet from $14 to
about $3 in a matter of hours.

 In 1985, A. H. Robins, the maker of the Dalkon Shield, an intrauterine device, was
forced to declare bankruptcy, after collapsing under a wave of personal injury
lawsuits.

As these examples attest, there are few situations in which directors’ fiduciary duties to
shareholders are so clearly on view as in times of crisis.Jones (2007).

The Board’s Role: Governance, Not Management

Beyond implementing reforms and best practices, boards are being counseled to become
more involved. See, for example, Felton and Pamela Fritz (2005); and The State of the
Corporate Board, 2007—A McKinsey Global Survey (2007, April). Rubber-stamping
decisions, populating boards with friends of the CEO, and convening board meetings on the
golf course are out; engagement, transparency, independence, knowing the company inside
and out, and adding value are in. This all sounds good. There is a real danger, however, that
the rise in shareholder activism, the new regulatory environment, and related social factors
are pushing boards toward micromanagement and meddling.

This issue is troubling, and clear evidence that the important differences that
separate governance from management—critical to effective governance—are still not
sufficiently well understood by directors, executives, regulators, and the popular press alike.
And regrettably, faced with the need to be more involved, the most obvious opportunity (and
danger) is for boards to expand their involvement into—or, more accurately, intrude into—
management’s territory.

The key issues are how and to whom boards add value. Carver (2007, November), pp. 1030–
1037. Specifically, the potential of directors to add value is all too often framed in terms of
their ability to add value to management by giving advice on issues such as strategy, choice
of markets, and other factors of corporate success. While this may be valuable, it obscures the
primary role of the board to govern, the purpose of which is to add value to shareholders and
other stakeholders. John Carver, well-known governance consultant and author, does not
mince words:

Governance is an extension of ownership, not of operations. Directors must be more allied

with shareholders than with managers. Their mentality, their language, their concerns, their
skills, their choice of interactions are subsets of ownership, not of management. As long as
we view governance as übermanagement—focusing on management methods, strategies and
planning—finding a new balance between micromanagement and detachment… will be hard
to come by.Carver (2007, November), p. 1035.

A greater arms-length relationship between management and the board, therefore, is both
desirable and unavoidable. Recent governance reforms focused on creating greater
independence and minimizing managerial excess while enhancing executive accountability
have already created greater tension in the relationship between management and the board.
The Sarbanes-Oxley Act, for example, effectively asks boards to substitute verification for
trust. Section 404 of the act requires management at all levels to “sign off” on key financial
statements.

This is not necessarily bad because trust and verification are not necessarily incompatible. In
fact, we need both. But we should also realize that effective governance is about striking a
reasonable accommodation between verification and trust—not about elevating one over the
other. The history of human nature shows that adversarial relationships can create their own
pathologies of miscommunication and mismanaged expectations with respect to risk and
reward. This makes defining the trade-offs that shape effective governance so difficult. Is
better governance defined primarily by the active prevention of abuse? Or by the active
promotion of risk taking and profitability? The quick and easy answer is that it should mean
all of those things. However, as recurrent crises in corporate governance around the world
have shown, it is hard to do even one of those things consistently well. What is more, a board
trying to do all of these things well is not merely an active board; it is a board actively
running the company. This is not overseeing management or holding management
accountable—it is management. Therefore, the corporate governance reform agenda risks
becoming an initiative that effectively dissolves most of the critical, traditional distinctions
between the chief executive and the board. Macavoy and Milstein (2003).

Governance Guidelines

As part of the recent wave of governance reforms, the NYSE adopted new rules that require
companies to adopt and publicly disclose their corporate governance policies. Specifically,
the following subjects must be addressed in the guidelines:

 Director qualification standards - These standards, in addition to requiring

independence, may also address other substantive qualification requirements,
including policies limiting the number of boards on which a director may sit and
director tenure, retirement, and succession.

 Director responsibilities - These responsibilities should clearly articulate what is

expected from a director, including basic duties and responsibilities with respect to
attendance at board meetings and advance review of meeting materials.

 Director access to management and, as necessary and appropriate, to an

independent advisor - Clear policies should be adopted that define protocols for
director access to corporate managers and identify situations when the board should
retain external advisors.

 Director compensation - Director Compensation guidelines should include general

principles for determining the form and amount of director compensation (and for
reviewing those principles, as appropriate).

 Director orientation and continuing education - Director Orientation and

continuing education should be the responsibility of the governance committee, if one
exists. If the board does not have a separate governance committee, the full board, the
nominating committee, or both, should have this responsibility.
  Management succession - Succession planning should include policies and
principles for CEO selection and performance review, as well as policies regarding
succession in the event of an emergency or the retirement of the CEO.

 Annual performance evaluation of the board - The board should conduct a self-
evaluation at least annually to determine whether it and its committees and their
individual directors are functioning effectively.

Best practice suggests that the board should review the guidelines at least annually. By
elaborating on the board’s and directors’ basic duties, a carefully constructed set of
governance guidelines will help both the board and individual directors understand
their obligations and the general boundaries within which they will operate.

Recent Board Trends

Board Size

The optimal size of a board has been the subject of much debate in recent years. As a general
proposition, smaller boards have a number of advantages over larger ones: They are easier to
convene, require less effort to lead, and often have a more relaxed, informal culture. Research
on group decision making supports the contention that smaller groups typically are more
effective. The statistics in this chapter are taken from the Spencer Stuart Board Index 2007.

As a practical matter, however, board size should be governed by the skills needed to do the
job. Larger corporations with more complex structures, substantial global interests, or multi
business operations will require larger boards than smaller, mainly domestic, single-business
firms. Today, the average Standard & Poor’s 500 board has 11 directors, compared to 18
directors about 25 years ago.

It is unlikely boards will shrink further, however, as a result of new rules and proposals
requiring that the audit, nominating or governance, and compensation committees of boards
in publicly held companies be composed of independent directors only, in some cases, with
specialized expertise (audit committee).

Board Membership

Fewer CEOs are accepting directorships, for two reasons. First, many boards—in the wake of
the recent scandals and the Sarbanes-Oxley legislation—now insist that the chief executive
concentrate fully on his or her job and restrict the number of outside boards the CEO can
serve or, in some cases, prohibit it altogether. Second, as boards expand their role to areas,
such as company strategy, they look for directors who have risen through specific functional
areas in which the company must excel in order to compete effectively—sales and marketing,
global operations, manufacturing, and others. And, in the aftermath of Sarbanes-Oxley,
directors with a background in finance, especially chief financial officers (CFOs), are in
strong demand. Heidrick and Struggles (2006).

For a while, it looked as though the reduced availability of CEOs and the growing demand
for specialized directors would significantly reduce the talent pool of qualified directors and
make it even more difficult for companies to attract new board members. Fortunately, this has
not proven to be the case. If anything, the talent pool has become larger as boards are
changing the definition of what constitutes a qualified candidate and widening their search.
Instead of focusing almost exclusively on CEOs as candidates for the board, companies are
increasingly tapping division presidents and other executives who have experience running
large operations or bring specialist expertise. The redefinition of director qualifications has
also expanded the talent pool of diversity candidates who may not have risen to chief
executive but excel in a critical, functional area.

These changes do not mean that attracting qualified directors has become easier. Although
the pool of qualified candidates is larger, many candidates are far more reluctant to serve.
More than ever, candidates perform extensive due diligence about the companies recruiting
them and look for ways to mitigate as much as possible the risk of associating themselves
with a disaster or incurring personal liability. They are also far more critical and objective
about their ability to add value, particularly in complex organizations, such as conglomerates,
or industries like financial services and insurance.

The overwhelming reason why candidates decline to serve, however, remains a lack of time.
Given their already enormous responsibilities, many qualified and desirable director
candidates feel that they will be unable to devote adequate attention to the job.

Director Independence

The proposition that boards should “act independently of management, through a thoughtful
and diligent decision-making process,” has been a major focus of corporate governance
reform in recent years. Macavoy and Milstein (2003), pp. 22–23. In the United States, the
Sarbanes-Oxley Act of 2002, as well as the revised NYSE and NASDAQ listing rules, as
affirmed by the SEC, are premised on a belief that director independence is essential to
effective corporate governance. In the United Kingdom, the Cadbury Commission’s report of
1990—The Code of Best Practice—included a recommendation for having at least three
nonexecutive directors on the board. Currently, reflecting this broad consensus, about 10 out
of the average 12 directors of a major U.S. public company board are nonexecutives; in the
United Kingdom, the corresponding number is a little less than half.

The idea of an independent board is intuitively appealing. Director independence, defined as

the absence of any conflicts of interest through personal or professional ties with the
corporation or its management, suggests objectivity and a capacity to be impartial and
decisive and therefore a stronger fiduciary. At times a board needs to discuss issues that
involve some or all of the company’s senior executives; this is difficult to do with senior
executives on the board. The independence requirement also stops destructive practices, such
as “rewarding” former CEOs for their accomplishments by giving them a role on the board.
Having the former CEO on the board almost always limits the ability of the new CEO to
develop his or her own relationship with the board and put his or her imprint on the
organization. There is also limited evidence that outsider-dominated boards are more
proactive in firing underperforming CEOs and less willing to go along with outsized
compensation proposals or vote for poison pills.

Director independence should not be viewed as a proxy for good governance, however. At
times, not having more insiders on the board actually can reduce a board’s effectiveness as an
oversight body or as counsel to the CEO. Independent, nonexecutive directors can never be as
knowledgeable about a company’s business as executive directors or senior managers. CEOs
say that some of their most valuable directors are those with experience in the same industry,
counter to current independence tests.

The higher the proportion of outside directors, therefore, the more difficult it is to foster high-
quality, deep board deliberations. Moreover, it is less likely that a CEO can mislead a board,
intentionally or otherwise, when some of the directors are insiders who also have intimate
knowledge of the company.Carter and Lorsch (2004), p. 93. Boards mostly comprised of
independent directors must, at a minimum, therefore, create regular opportunities to interact
with senior executives other than the CEO. The more complex a company’s business is, the
more important such communications are.

The bottom line is that effective corporate governance does not depend on the independence
of some particular subset of directors but on the independent behavior of the board as a
whole. The focus should be on fostering board independence as a behavioral norm, a
psychological quality, rather than on quasi-legal definitions of director independence.
Director independence can contribute to but is no guarantee for better governance.

4.3 REMUNERATION OF DIRECTORS AND SENIOR EXECUTIVES

A company, being an artificial person, acts through human agency. Accordingly, under the
Act, it is necessary for every company to have a Board of directors. In addition to this, the
following categories of managerial personnel may be appointed (s.197-A): 1. Managing
Director; or 2. Manager. Section 197A does not prohibit the employment of other managerial
personnel, such as executive or whole-time directors, which do not come within the term
“managing director” or “manager”. Thus, it is possible for a company to make
simultaneously the appointment of (i) managing director and whole time director; or (ii)
manager and whole time director. Section 197A prohibits the simultaneous appointment of
managing director and manager in the same company.

a Director as including “any person occupying the position of director, by whatever name
called.” This is a definition based purely on function; a person is a director if he does
whatever a director normally does. But the Act gives no further guidance on the function,
duties and position of a director. In reality, directors are the persons who direct, conduct,
manage or superintend a company’s affairs. Section 291 has entrusted the management of the
affairs of the company in their hands. They chalk out the general policy of the company
within the framework of the memorandum of the company. They appoint the company’s
officers and recommend the rate of dividend.

The directors of company are collectively referred to as the ‘Board of Directors’ [s. 2(6)].
Thus, it is not the name by which a person is called but the position he occupies and the
functions and duties which he performs that determine whether he is a director of a company
or not. In Forest of Dean Coal Mining Co. Re (1878) 10 Ch D 450, it was stated that function
is everything; name matters nothing. So long as a person is duly appointed by the company to
control its business and authorised by its articles to contract in its name and on its behalf, he
is a director, whether named as such or not. The articles of a company, sometimes, designate
its directors as governors, members of the governing council or the board of management or
may give them any other title, but so far as the law is concerned they are simply directors. For
example, in the case of associations registered as companies under s. 25, the members of the
executive committee or governing council or management board are directors for purpose of
the Act, even when they are not designated as directors.

For certain purposes, a person even when he is not a director may be deemed to be a director
of a company. The Act treats as director a person in accordance with whose directions or
instructions the Board of directors of a company is accustomed to act. This provision has the
effect of widening the definition of the term ‘director’. However, this provision merely
operates to impose liabilities or prohibition on such a person who is deemed to be a director.
However, a deemed director does not acquire any right or power in connection with the
management of the company. He may be made liable but he cannot demand to participate in
the meetings of the Board of directors or to manage the affairs of the company in any way.
But for the purpose of treating a person as a deemed director and invoking his liability, it is
necessary to establish that the Board of directors is accustomed to act according to his
directions and instructions. Acting casually or once in a while on certain instructions by a
person would not be a ‘deemed director’. A deemed director need not necessarily be an
individual. The person may even be a body corporate say, a holding company. It must be
noted that the expression ‘deemed director’ does not include persons advising the Board of
directors of a company in their professional capacity. Thus, a lawyer, accountant or other
professional advisor will not come within the expression ‘deemed director’ when he gives
professional advice or instructions and the Board is accustomed to act according to his advice
or instructions, then he will not be a ‘deemed director’. Section 303(1) provides that any
person with whose directions or instructions the Board of directors of a company is
accustomed to act is also deemed to be a director.

A manager or any other managerial personnel is, however, not a director [Deen Dayalu v. Sri
B. P. Reddy A.P. (1984) 2 Comp LJ 396].

A ‘deemed director’ is called as ‘shadow director’ under English Law.

Small Shareholders’ Director A public company having (a) a paid up capital of five crore
rupees or more, and (b) one thousand or more small shareholders may have a director elected
by such small shareholders in the manner as may be prescribed. For this purpose, “small
shareholder” means a shareholder holding shares of nominal value of twenty thousand rupees
or less (i.e. up to 20,000) in a public company to which this section applies. The Department
of Company Affairs, has prescribed the Companies (Appointment of the Small Shareholders’
Director) Rules, 2001. Such a director will be elected by the majority of the small
shareholders. The tenure of such director shall be a maximum of three years and he need not
retire by rotation. However, he can be re-elected for a period of three years on the expiry of
his tenure. Such a director can be removed in pursuance of s. 284. A person cannot hold
office as small shareholders’ director in more than 2 companies. Further, the person proposed
to be elected must be a small shareholder of the company. Furthermore, such a director is not
eligible for appointment as whole time or managing director of the company. If he ceases to
be a small shareholder, he is deemed to have vacated his office as ‘small shareholders
director’. Example: The Board of directors of ABC Ltd., an unlisted company, having a paid
up share capital of 6 crores consisting of equity share capital of 5 crores and preference share
capital of 1 crore and also having 11,000 small shareholders holding equity shares propose to
appoint a director to represent the small shareholders. Under s. 252, a public company, if it
has a paid up capital of 5 crores or more, and one thousand or more small shareholders may
have a director elected by such small shareholders. It is obvious, that the appointment of such
a director is not mandatory; it is discretionary for the company. Example: In a company, there
are more than one thousand small shareholders, and it has a paid up capital of more than five
crore rupees. The small shareholders have exercised their right to appoint a director on the
board of the company. The company wants to remove him before the expiry of his period of
appointment. The company can do so under s. 284 without the consent of the small
shareholders.

Director Remuneration Section 198 provides that the total managerial remuneration payable
by a public company or a private company which to its directors or manager in respect of any
financial year must not exceed 11 per cent of the net profit of that company for that financial
year, in computing the above ceiling of 11 per cent computed in the manner laid down in
section 349 and 359. The fees payable to directors for attending Board meetings is not
included.

What is included in Remuneration?

Explanation to s.198 describes the term ‘remuneration’. According to it, for the purposes of
Ss. 309, 310, 311, 381 and 387, ‘remuneration’ includes the following: 1. Any expenditure
incurred by the company in providing rent-free accommodation, or any other benefit or
amenity in respect of accommodation free of charge, to any of its directors or manager; 2.
Any expenditure incurred by the company in providing any other benefit or amenity free of
charge or at a concessional rate to any of the persons aforesaid; 3. Any expenditure incurred
by the company in respect of any obligation or service, which, but for such expenditure by
the company, would have been incurred by any of the persons aforesaid; and 4. Any
expenditure incurred by the company to effect any insurance on the life of, or to provide any
pension, annuity or gratuity for, any of the persons aforesaid or his spouse or child.

Section 309 contemplates three kinds of directors, i.e., (i) Managing Director; (ii) Whole-time
director; (iii) Director pure and simple. Further, s.309 provides that subject to the general
provisions of s.198, dealing with the total managerial remuneration, the remuneration be
determined by the articles, or by a resolution or, if the articles so require, by a special
resolution, passed by the company in general meeting. Any remuneration paid for services in
any other capacity shall not be included if: (a) the services rendered are of a professional
nature; and (b) in the opinion of the Central Government, the director possesses the requisite
qualifications for the practice of the profession. A director who is neither in the whole-time
employment of the company nor a managing director may be paid remuneration. (a) by way
of a monthly, quarterly or annual payment with the approval of the Central Government; or
(b) by way of commission, if the company by special resolution authorises such payment; or
(c) by both.

However, in either of the above cases, the remuneration paid to such director, or where there
is more than one such director, shall not exceed: (i) one per cent of the net profit of the
company, if the company has managing or whole-time director or manager; (ii) three per cent
of the net profits of the company in any other case. The company in general meeting may,
however, with the approval of the Central Government, authorise the payment of a
commission at a rate higher than one per cent, or as the case may be, three per cent of its net
profits. Each director is entitled to receive a sitting fee for each meeting of the Board or a
committee thereof, provided the same is authorised by the articles. A whole-time director or a
managing director may be paid remuneration either by way of a monthly payment or at a
specified percentage of the net profits of the company or partly by one way and partly by the
other; provided that except with the approval of the Central Government such remuneration
shall not exceed 5 per cent of the net profits for one such director and if there is more than
one such director, 10 per cent for all of them together. Furthermore, a managing or whole-
time director who is in receipt of any commission from the company cannot receive any
remuneration from any subsidiary of the company. If any director draws or receives, directly
or indirectly, by way of remuneration any sum in excess of the limits stated above, without
the sanction of the Central Government, where it is required, he shall have to refund such
sums to the company and until the refund is made the money will be held by him in trust for
the company. The company cannot waive the recovery of any sum refundable to it, unless
permitted by the Central Government. The provisions of s.309 will not apply to a private
company unless it is a subsidiary of a public company.

Increase in Remuneration Notes Section 310 provides that every increase in the remuneration
of any director including a managing or whole-time director granted or provided by any
amendment in his term of appointment which has the effect of increasing, whether directly or
indirectly, the amount payable to him would not be operative unless the same has been
approved by the Central Government. But no approval of the Central Government would be
required if the increase in remuneration made is in accordance with the conditions specified
in Schedule XIII. Also no approval of the Central Government is necessary, if the increase in
the remuneration is only by way of fee for each meeting of the Board or a committee of the
Board attended by any such director and the amount of the fee after such increase does not
exceed such sum as may be prescribed. The Central Government has laid down differential
scale of sitting fee according to the paid-up capital of the companies.

Remuneration Payable to a Manager Section 387 provides that he may receive remuneration
either by way of a monthly payment or by way of a specified percentage of the ‘net profits’ of
the company, or partly by one way and partly by the other. Such remuneration, however,
must not exceed in the aggregate 5 per cent of the net profits except with the approval of the
Central Government.

Managerial Remuneration vis-à-vis Schedule XIII

A public company is entitled to appoint its managerial personnel and fix their remuneration
so long as the same is in accordance with the conditions laid down in Schedule XIII without
seeking the prior approval of the Central Government. Schedule XIII, provides as follows:

1. Remuneration Payable by Companies Having Profits: Subject to the provisions of s.198

and s.309, a company having profits in a financial year may pay any remuneration, by way of
salary, dearness allowance, perquisites, commission and other allowances, which shall not
exceed 5 per cent of its net profits for one such managerial person and if there are more than
one such managerial persons, 10 per cent for all of them together.
2. Remuneration payable by companies having no profits or inadequate profits: Where in any
financial year during the currency of tenure of the managerial person, a company has no
profits or its profits are inadequate, it may pay remuneration to a managerial person, by way
of salary, dearness allowance, perquisites and other allowance, not exceeding ceiling limit of
24,00,000 per annum or 2,00,000 per month calculated on the following scale:

Where the effective capital of the company is Monthly remuneration payable shall not exceed
()

Less than 1 crore 75,000

1 crore or more but less than 5 crores 1,00,000

5 crore or more but less than 25 crores 1,25,000

25 crore or more but less than 50 crores 1,50,000

50 crore or more but less than 100 crores 1,70,000

100 crores or more 2,00,000

In addition to the above, certain perquisites like contribution to provident fund, gratuity, and
leave encashment may be paid. Non-resident Indians may also be paid children education
allowance, holiday passage for children studying outside India or family staying abroad,
leave travel concession. These additional benefits shall be subject to the limits laid down in
Schedule XIII. The expression ‘effective capital’ shall mean the aggregate of the paid-up
share capital (excluding share application money or advances against shares); amount, if any,
for the time being standing to the credit of share premium account, reserves and surplus
(excluding revaluation reserve); long term loans and deposits repayable after one year
(excluding working capital loans, overdrafts, interest due on loans unless funded, bank
guarantee, etc. and other short term arrangements) as reduced by the aggregate of any
investments (except in case of investments by an investment company whose principal
business is acquisition of shares, stock, debentures or other securities), accumulated losses
and preliminary expenses not written off. Sitting Fee (s.310) The sitting fee payable to a
director for each meeting of the Board of Directors or a committee thereof shall not exceed
ceiling prescribed by the Central Government (presently, 5,000). Any increase in the sitting
fee payable to a director shall not require the prior approval of the Central Govt. if it falls
within the prescribed limits.
4.4 RIGHTS AND RESPONSIBILITIES OF SHAREHOLDERS

Protection of shareholder rights is sacrosanct for good corporate governance. It is one of the
pillars of corporate governance. For the efficient functioning of the capital market, the
fundamental requirement is that the investor rights are well protected. The Preamble to
Securities and Exchange Board of India Act, 1992 reads as under: “An Act to provide for the
establishment of a Board to protect the interests of investors in securities and to promote the
development of, and to regulate the securities market and for matters connected there with or
incidental thereto.” The central element in corporate governance is the challenges arising out
of separation of ownership and control. The shareholders are the true owners of a corporate
and the governance function controls the operations of the corporate. There is a strong
likelihood that there is a mismatch between the expectations of the shareholders and the
actions of the management.

Therefore there is a need to lay down clearly the rights of the shareholders and that of the
management. In the Indian context, the SEBI Act, 1992, the various SEBI Regulations and
Guidelines and the Companies Act, 2013 enables the empowerment of shareholder rights. In
the international context, the OECD Principles on Corporate Governance which serves as an
international benchmark for policy makers, investors, corporations and other stakeholders
worldwide also has made extensive recommendations as to the shareholder rights.

Rights of Shareholders

Shareholders generally enjoy the following types of rights: – Voting rights on issues that
affect the corporation as a whole

– Rights related to the assets of the corporation

– Rights related to the transfer of stock – Rights to receive dividends as declared by the board
of directors of the corporation

– Right to receive financial statements – Rights to inspect the records and books of the
corporation

– Rights to bring suit against the corporation for wrongful acts by the directors and officers of
the corporation

– Rights to share in the proceeds recovered when the corporation liquidates its assets
The OECD Principles on Corporate Governance, which broadly recommends six principles.
Recommends the following two principles with regard to shareholders: – The corporate
governance framework should protect and facilitate the exercise of shareholders’ rights.

(Principle II). – The corporate governance framework should ensure the equitable treatment
of all shareholders, including minority and foreign shareholders. All shareholders should
have the opportunity to obtain effective redress for violation of their rights (Principle III).

The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights. (Principle II)

This Principles propound basic shareholder rights should include the right to:

(i) Secure methods of ownership registration: that is mechanism whereby the names of the
shareholders and their shareholdings are properly registered. Section 88 of the Companies
Act, 2013 which requires companies to maintain a Register of members ensures this right.

(ii) Convey or transfer shares: similarly the laws should be in place for free transferability of
shares. Section 56 of the Companies Act, 2013 with regard to transfer of shares ensures this
right

(iii) Shareholders should obtain relevant and material information on the corporation on a
timely and regular basis. This right is enabled under the companies Act as well as the Listing
Agreement, in case of listed companies.

(iv) Shareholders should be empowered to participate and vote in general shareholder

meetings.

(iv) Shareholders should be empowered to elect and remove members of the board; and

(v) Shareholders will have a right to a share in the profits of the corporation.

It further provides that shareholders should have the right to participate in, and to be
sufficiently informed on, decisions concerning fundamental corporate changes such as:

(1) Amendments to the statutes, or articles of incorporation or similar governing documents

of the company;

(2) The authorisation of additional shares; and

(3) Extraordinary transactions, including the transfer of all or substantially all assets that in
effect result in the sale of the company.
The Companies Act, 2013 requires that such businesses be approved by shareholders by
special resolution. Further, Section 117 of the Companies Act, 2013 requires a listed public
company that resolutions relating to certain businesses should be got passed only by postal
ballot. This is to allow all the shareholders to have their say on important matters. The Postal
Ballot Rules list out the businesses which may be passed by postal ballot. The principles also
recommend that shareholders should have the opportunity to participate effectively and vote
in general shareholder meetings and be furnished with 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 decided at the meeting.

Shareholders should have the opportunity to ask questions to the board. Effective shareholder
participation in key corporate governance decisions, such as the nomination and election of
board members, should be facilitated. Shareholders should be able to make their views
known on the remuneration policy for board members and key executives. Shareholders
should be able to vote in person or in absentia, and equal effect should be given to votes
whether cast in person or in absentia.

Other Recommendations

– Capital structures and arrangements that enable certain shareholders to obtain a degree of
control disproportionate to their equity ownership should be disclosed. – Markets for
corporate control should be allowed to function in an efficient and transparent manner. – The
rules and procedures governing the acquisition of corporate control in the capital markets,
and extraordinary transactions such as mergers, and sales of substantial portions of corporate
assets, should be clearly articulated and disclosed so that investors understand their rights and
recourse. Transactions should occur at transparent prices and under fair conditions that
protect the rights of all shareholders according to their class. – Anti-take-over devices should
not be used to shield management and the board from accountability.

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 cover these
aspects.

1. The exercise of ownership rights by all shareholders, including institutional investors,

should be facilitated.

2. Institutional investors acting in a fiduciary capacity should disclose their overall

corporate governance and voting policies with respect to their investments, including
the procedures that they have in place for deciding on the use of their voting rights.
 3. Institutional investors acting in a fiduciary capacity should disclose how they manage
material conflicts of interest that may affect the exercise of key ownership rights
regarding their investments.

4. Shareholders, including institutional shareholders, should be allowed to consult with

each other on issues concerning their basic shareholder rights as defined in the
Principles, subject to exceptions to prevent abuse.

Shareholder rights enshrined in the Companies Act, 2013

These rights can be categorised as under:

(1) Right to receive copies of the following documents from the company:

(i) Copies of Audited Financial statements (Section 136).

(ii) Report of the Cost Auditor, if so directed by the Government.

(iii) Contract for the appointment of the managing or whole time director (Section 190).

(iv) Notices of the general meetings of the company (Sections 101).

(2) Right to inspect statutory registers/returns and get copies thereof on payment of
prescribed fee.

The members have been given right to inspect the following registers etc.:

(i) Debenture trust deed (Section 71);

(ii) Register of Charges (Section 87);

(iii) Register of Members, Debenture holders and Index Registers, Annual Returns (Section
94);

(iv) Minutes Book of General Meetings (Section 119);

(v) Register of Contracts (Section 189);

(vi) Register of Directors’ (Section 171);

(vii) Register of Directors’ and Key Managerial Personnel and their Shareholdings (Section
170);

(viii) Copy of agreement of appointment of the managing or whole time director (Section
190).
The members can also get the copies of the aforesaid registers/returns on payment of
prescribed fee except those of Register of Directors and Register of Directors’ Shareholdings.
Members can also get copies of memorandum and articles of association on payment of a fee
of Re. One (Section 17).

(3) Right to attend meetings of the shareholders and exercise voting rights at these meetings
either personally or through proxy (Sections 96,100,105 and 107).

(4) Other rights.

Over and above the rights enumerated at Item Nos. 1 to 3 above, the members have the
following rights:

(a) To receive share certificates as title of their holdings [Section 46 read with the Companies
(Issue of Share Certificates) Rules, 1960).

(b) To transfer shares (Sections 44 and 56 and Articles).

(c) To resist and safeguard against increase in his liability without his written consent.

(d) To receive dividend when declared.

(e) To have rights shares (Section 62).

(f) To appoint directors (Section 152).

(g) To share the surplus assets on winding up (Section 320).

(h) Right of dissentient shareholders to apply to court (Section 48).

(i) Right to make application collectively to the Tribunal for oppression and mismanagement
(Sections 241 and 242).Right of Nomination.

(j) Section 47 of the Act provides that every member of a public company limited by shares,
holding equity shares, shall have votes in proportion to his share of the paid-up equity share
capital of the company.

(k) Preference shareholders ordinarily vote only on matters directly relating to rights attached
to preference share capital. A resolution for winding up of the company or for the reduction
of the share capital, will be deemed to affect directly the rights attached to preference share
and so they can vote on such resolutions.

(l) Section 48 of the Companies Act, 2013 lays down that the rights attached to the shares of
any class can be varied with the consent in writing of the holders of not less than three-
fourths of the issued shares of that class or with the sanction of a special resolution passed at
a separate meeting of the holders of the issued shares of the class. Further, the variation of
rights of shareholders can be effected only:

(i) If provision with respect to such variation is contained in the Memorandum or Articles of
association of the company; or

(ii) In the absence of any such provision in a Memorandum or Articles of association of the
company, if such variation is not prohibited by the terms of issue of the shares of that class.

(m) Section 48 of the Companies Act, 2013 confers certain rights upon the dissentient
shareholders.

According to this section, where the rights of any class of shares are varied, the holders of not
less than ten per cent of the shares of that class, being persons who did not consent to or vote
in favour of the resolution for the variation, can apply to the Tribunal to have the variation
cancelled. Where any such application is made to the Tribunal, the variation will not be
effective unless and until it is confirmed by the Tribunal.

4.5 INTRODUCTION TO CORPORATE SOCIAL RESPONSIBILITY

What Is Corporate Social Responsibility?

The term is often used interchangeably for other terms such as Corporate Citizenship and is
also linked to the concept of Triple Bottom Line Reporting (TBL), which is used as a
framework for measuring an organisation’s performance against economic, social and
environmental parameters. The rationale for CSR has been articulated in a number of ways.
In essence it is about building sustainable businesses, which need healthy economies, markets
and communities

The Key Drivers For Csr

The following are the key drivers for Corporate Social Responsibility (CSR)

 Enlightened self-interest - creating a synergy of ethics, a cohesive society and a

sustainable global economy where markets, labour and communities are able to
function well together.

 Social investment - contributing to physical infrastructure and social capital is

increasingly seen as a necessary part of doing business.
  Transparency and trust - business has low ratings of trust in public perception.
There is increasing expectation that companies will be more open, more accountable
and be prepared to report publicly on their performance in social and environmental
arenas.

 Increased public expectations of business - globally companies are expected to do

more than merely provide jobs and contribute to the economy through taxes.

COMPONENTS OF CSR

Attempts to counteract any negative effects that corporations have on society and replace
them with constructive influence. The four stakeholders who are a part of this process
include:

Employees

The treatment of employees by large corporations has often come under scrutiny by political
organizations and human rights groups. Particularly in developing countries, where many
resource extraction industries have extensive operations, there are on-going questions about
how equitable working conditions and pay levels are. CSR seeks to assist corporations in
treating both domestic and foreign employees equitably by providing safe and comfortable
working conditions and a fair wage. This approach continues the on-going transformation of
a corporate mentality that was common in the nineteenth century, in which the rights of
employees barely registered among the concerns of company owners.

Customers

Corporations have an obligation to provide safe, effective and good-quality products and
services to their customers. A purely free-market analysis of this responsibility would state
that these requirements will be met by the dictates of the market. The philosophy of CSR
questions the truth of this belief, and advocates more proactive intervention into the
relationship between corporations and their customers. Consumer protection initiatives, such
as those advocated by Ralph Nader, help to provide the legal backing under which consumers
can challenge what they see as questionable practices on the part of corporations.
Environment

Growing public awareness of environmental challenges involving toxins, resource depletion

and climate change is forcing corporations to reconsider the traditional corporate view of the
natural world as an unending cornucopia of resources. Environmental aspects of CSR
encourage corporations to consider the finite nature of the natural world, and to take much
more stringent measures to reduce waste, address polluting or destructive practices and
integrate alternative energy systems and innovative waste-reduction programs. This shift in
attitude is particularly critical in areas of South America and Africa, where corporations have
extensive operations but are not subject to strict oversight and regulation.

Society

In addition to their responsibilities to employees, customers and the natural world,

corporations are responsible for their impact on human society. Many millions of people who
are not employed by a corporation and who do not purchase its products are nevertheless
affected by its activities. CSR recognizes the interrelated nature of society, and acknowledges
that no individual or company can exist totally isolated from the rest of society. Therefore,
corporations need to critically analyze what impact their activities have, for good or ill, on
surrounding communities, and take steps to maximize the good and minimize the ill.

4.5.1 Advantages and Scope of CSR

Historically, the main responsibility of corporations has been the generation of profits, or
what could be called corporate financial responsibility. However, as the public, the
government and the corporations themselves become more aware of the power wielded by
major business organizations, the concept of corporate social responsibility became more
prevalent. For some, CSR is sheer idealism, but for others it is not just the right thing to do,
but also a smart business move.

Scope

Just as there is no single definition of CSR, there is not a specific set of rules or concerns to
be followed by socially responsible corporations. The social responsibilities of a financial
organization, a food company and a health provider are likely to have significant differences.
There are, however, some core concerns that tend to be present in one way or another in all
socially responsible organizations: respect for human rights, a preoccupation with
environmental sustainability, and a concern for the interest of all the stakeholders (including
employees, customers, and members of the surrounding community) as opposed to a single-
minded pursuit of the interests of the shareholders.

Benefits
The case for corporate social responsibility can be framed from multiple perspectives: moral,
ethical, religious and environmental, among others. The World Business Council for
Sustainable Development has decided to emphasize the business case, however, as
corporations are more likely to adopt socially responsible practices if they make business
sense. Thus, CSR can be seen as a mechanism to gain support from non-financial yet
important stakeholders like workers, customers, suppliers and local community organizations
that can influence firm outcomes. It also has been highlighted that, all other things being
equal, consumers, suppliers and employers prefer to deal with companies they trust and that
in becoming a differentiating factor, CSR can become a strategic component of reputation
building.

Criticisms

The movement towards increased corporate social responsibility has not been except of
criticisms. The influential economist Milton Friedman argued that CSR was a misuse of
corporate resources; since businesses are owned by their shareholders, money invested on
projects beyond the core business that do not add to the bottom line can be seen as money
stolen from its rightful owners. Likewise, CSR has been seen as an attempt by corporations to
take roles better suited for governments. These criticisms can be ameliorated by making the
CSR strategy an integral part of the brand identity, and by making it work in synergy to the
core business operations. Corporate governance and social responsibility are strongly
correlated in the 21st century business environment. Business Dictionary points out that the
traditional meaning of corporate governance is the methods used by companies to protect its
financiers (e.g., investors and creditors). However, new expectations from other stakeholders
have forced companies to broaden the focus of corporate governance to include
accountability to customers, suppliers, employees, the government and community. This
ethical accountability to stakeholder groups is the essence of corporate social responsibility
(CSR).

4.6 INDIAN SCENARIO CG AND CSR

The term corporate is basically taken from the Latin term corpus which means body, and the
term governance implies the meaning of instructing the frameworks and procedures to fulfil
the desire of a partner. In today's business and corporate world the term 'corporate
governance' is a system by which a company is administrated , controlled and directed by a
set of corporate process, law , customs and policies. India's corporate governance structure
contains a scope of measures that generates or advances the responsibility of governance and
straight forwardness of money related and other data. Moreover , the concept of corporate
social responsibility has greatly focused on the concept of corporate governance for
incorporating social and environmental concerns for the decision making process of the
business, which will benefit not only investors (financial investors) but also to the
communities , employees and consumers. In the current scenario, the corporate governance is
being mostly connected with business practices and public policies that are stakeholders and
shareholders friendly.

There are many changes done from the past and the present scenario regarding the concept of
corporate governance by Indian government. The changes done were because of the reason of
lack of management's responsibility. They lack not only towards shareholders, but also
towards the public society at a large. At present the scenario, corporations are examined to be
a social platform or we can say institution, which communicates with the society in many
ways and affects the individuals of that society at a large. The system of corporate
governance also includes the entire matrix of informal and formal interactions and relations
between the member of board, shareholders, management, auditors, and other major
interested parties. These kind of relations and interactions determine that how a company is
governed and how risk factors return from the corporate sector activities are determined. The
present research paper will go for checking the concept of regulatory laws of corporate
governance which is not given in a comprehensive manner and the rules, regulations etc. do
not provide basic or standard norms or codes for the establishment and development of good
corporate governance. We will basically study various kinds of research papers and books
provided in the library to right this research paper. Mainly we will refer to the companies act
2013 and 1956 in the context of corporate governance structure. Which will helps us to
mainly improve the understanding of laws and legal regulations regarding corporate
governance in India at a glance.

Corporate governance is basically a creation which reinforces the long term supportable value
for the stakeholders through socially driven business process. Corporate governance covers a
wide range of disciplines and it is also known as multidisciplinary field of study.

Law, management, finance, ethics, consulting, economics and accounting. The main function
to be performed by it is to provide the description of the advantages and duty of the
shareholders and organizations. In case if failure (disagreements) occurs due to conflict
among members, it is the authority of corporate governance to bring everyone again together.
It also contains the basic purpose of setting the standards against which the work can be
administrated. Good corporate governance provides the maximization of the value of
shareholders ethically, legally and on a sustainable basis.

In ancient times the theory was given in two contexts, the Anglo American and the
continental European context. Anglo American was known to be as dispersed ownership,
short term equity finance, strong shareholders rights, flexible labour markets and active
markets for capital control. Second is continental European which is known to be as
concentrated block holder ownership, inactive markets for capital control, weak shareholders
rights, long term debt financing and rigid labor markets. No country around the whole world
can adopt either fully Anglo American policies or purely continental European system.

To follow the policies of any one of the ancient system of corporate governance, we should
go through from the various factors such as world presence, globalization, deregulation,
competition etc. Which basically decides to what extent any country should adopt any of the
two systems.

The TATA group and Infosys limited were the best illustration of corporate governance in
past, which had ill-famed its reputation in society due to recent issues. The board room issues
of high profile of two large corporate companies in India have evaluated the desire for
transparency and ensuring that the interest of minority of the shareholders should be
safeguard. In the case of Infosys Company limited, the so called founders of that company
fall for the values which were already established and were not considered and followed in a
certain remarkable decisions. The case of TATA company is of basically interrogating or we
can say change the decisions of the erstwhile chairman of the company who carry’s on to be
as the controller of the shareholding trusts, and seems to have a lack of clear board processes
to the issues reasonably and addressment of situations that will consider the reversal of
decisions or even criteria of changing decisions between its economic and social part.

Legal Framework and Regulatory Laws Of Corporate Governance In India

The concept of corporate governance in India, mainly arrived from the time period of
economic liberalization and also from the de-regularization of business and industries. The
development of corporate laws in India had been marked by the interesting contracts. The
securities and exchange board of India and the ministry of corporate affairs laid on emphasis
on each and every subject of importance by setting up various committees by the industry and
by the examination of the reports and recommendations to the corporate governance.
The years since the time period of liberalization, it had proved the wide ranging of changes in
rules, regulations and laws of driving corporate governance. It is noticeable from the various
regulatory and legal frameworks and also from the committees which were set up for the
corporate performance. Such regulatory frameworks, laws and guidance of the committees
are as provided below:-

1. The corporate affair in India is basically regulated through the companies’ act 1956
and the companies’ act 2013 and even other allied acts, rules and bill. It also provides
or we can say renders many important services to shareholders and stakeholders. It
also plays a crucial role in protecting the investors. The MCA (ministry of corporate
affairs), government of India performs this crucial task. It also prohibits the adverse
competition through competition act, 2002 and also elevates and sustains competition.

2. The company's law board is a quasi-judicial body which was established under
company’s act 1956. It regulates its own procedures and it also has power to do that.

3. The fraud investigation department: - it is an interdisciplinary organization which

investigates financial serious frauds. It also investigates mainly those investigations,
which involves public interest, and are multidisciplinary in nature and consists many
other factors too.

4. The securities contract regulation act 1956:- it basically refers all types of government
documents (tradable papers), stocks, bonds, shares, debentures and other marketable
instruments or we can say securities issued by the companies. The code and conduct
of stock exchange including its powers and parameters is defined by the securities
contract regulation act 1956.

5. The securities exchange and board of India: - it encourages to the expansion of the
securities in the market. It also even exhibits the unfair and fraudulent trade practices
relating to the securities of market and even also manages the securities market and
related conflicts with it. The main and basic function of securities and exchange board
of India is to secure the interest of investors in securities.

6. The registrar of companies: - it basically serves with the primary objective of

registration of companies and it also ensures that such kind of companies should
comply with the statutory specifications under the act. It basically formed or we can
 say comes under the company’s act 1956nsparently. There doesn’t seems to have
been an agreed formula at the top board level for the

7. Enforcement directorate: - It basically falls under the ministry of finance. It is very

specialized investigating agency which helps in the implementation of foreign
exchange and management act (FEMA) and also helps in the elimination of money
laundering act (PMCA). The PMCA is a criminal law, where the empowerments of
offices are done in order to conduct queries to find out the location of attach assets.

SIGNIFICANCE

 The objectives are set through the enhancement of structures which is done when
there is better corporate governance or by the help of a good corporate governance
structure. The means of achieving such objectives are checked properly and the
production is basically monitored.

 The corporate governance also maintains a link between the company's financial
reporting systems with the company’s management.

 It also helps in shaping the future and the growth of capital markets of the economy.

 It makes management creative in order to take innovative and creative decisions

which help in the efficient functioning of the corporation within its legal frame work.

 Safe and sound governance practices also used to make a contribution to the investor's
self confidence in corporations and motivate them to stimulate long term capital.

 Good governance also improves the international reputation of the corporate sector
and also helps to raise the global capital with the help of home companies.

 It also adds to the wealth of the economy and also enhances the effectiveness and the
efficiency of the company .Thus, corporate governance is also known as the
instrument of economic growth.

 Good corporate governance also supplies sufficient and timely disclosure of reporting
requisites, and code of conduct to the companies. Along with this it also helps to
avoid the insider trading. Insider trading refers to when companies used to present
material and price sensitive details to outsiders and also ensures that till this detail is
made social, the insiders and the employees present in the organization abstains from
dealing in corporate securities.
  It also provides good support system to investors by allowing all the corporate
accounting practices clear to them. A corporate enterprise also reveals the financial
reporting structures in order to do that.

PRIME FUNDAMENTALS OF CORPORATE GOVERNANCE

After the major discussions held on the topic of corporate governance, it tends to refer the
three principles raised in the important documents published since 1990:-

 The principles of corporate governance (OECD, 1998 and 2004)

 The Cadbury report (UK, 1992)

 The sarbanes-oxley act (2002)

The Sarbanes - Oxley act is attempts by the legislative asembly of United States in order to
regulate several principles provided in the Cadbury and OECD reports. The OECD and
Cadbury report basically represents the general principles through which the business
operates to guarantee proper good corporate governance. Some of the principles are laid
down below

1. The proper role and authority of the board: - The board requires appropriate level and
adequate size of commitment and independence. It also needs applicable skills and
sufficient comprehension to challenge the management performances.

2. Ethical behavior and integrity: - institutions should establish a basic code of conduct
for their executive and director employees those who promotes in the responsible and
ethical decision making And there should always be one factor present in mind to
appointing the board members and corporate officers that is ' integrity ‘.

3. Equitable and right treatment of the shareholders: - Organizations can provide help to
the shareholders in order to use their indemnity by openly communicating information
and also by the encouragement of shareholders so that they can involve in the general
convocations.

4. The interest of other stakeholders :- institutions should understand and acknowledge

that they do contains legitimate , social , legal , and market driven accountability to
non - shareholder and stakeholders which also includes investors , employees , local
communities , benificiary , suppliers , policy makers and clients.
 5. Transparency and disclosure: - There should be proper disclosure of matters to
concerning the organization and should also be balanced and timely in order to ensure
that each and every investor has an access to clear, factual information.

THE NEED AND THE REQUIRMENT OF CORPORATE GOVERNENCE IN INDIA

In this era the rapid pace of globalization had made more need for the emergence of corporate
governance in India. Due to this the national governments and firms requires some
fundamental changes because corporate governance is clearly very effective and beneficiary
for the firms and countries .corporations must have to change the scenario and the way in
which they operate . Even the national government must also maintain and establish the
proper institutional code and conduct for it. Even there are no longer restrictions are made to
the activities that are public listed in the organizations present in advanced industrial
economies.

Through the means of high profile corporate scandals and public attention, the board of
corporations and regulatory framework has forced governments to strictly consider the
fundamental issues regarding the corporate governance as an essential element for the public
monetary interest. Eventually the violate and instable experience of the emergence of markets
in recent times have made an observation to the corrupt maladministration and practices in
the international and national systems on public expenditure.

It has been clearly seen that inefficient management practices can leads to various business
collapses and financial crisis around the world .these financial crisis and business collapses
have made the business world to basically think and even to make a pressure upon the
importance of safe and sound perspective of corporate governance practices. It has also been
seen that the investors who invests in the organization are even ready to pay the higher
amount of premiums for those companies who have safe and sound corporate governance
structure and practices. Recently it could be seen that the international or global lenders have
understand the importance of corporate governance practices as on the economic production
of the companies and even also felt that the issues regarding corporate governance bears more
significance and Importance while regarding taking the investment decisions into the account
. A safe and sound and an effective corporate governance practice also provides an edge to
the companies to raise funds at low level cost of capital , prevents any financial collapses and
potential to overcome from it , enhances the standing position in the market and also helps in
improving the liquidity position and financial soundness of a company .
A good corporate governance practice also improves the country’s reputation and image by
preventing the outflow of funds and by increasing the foreign capital flow.

It also helps in increasing the strengthens and competitive power of the capital markets and
finally increasing the chances of more prosperity by reducing and preventing the occurrence
of any kind of financial crisis’ and along with that it also helps in leading of the efficient
allocation of resources . Various professors and by studying at an large extent have
recommended that there is no single model of the corporate governance which could be
compatible to each and every country in the world has constructed on the principles of
equality , responsibility , transparency, and accountability which may be accepted widely and
internationally for the corporate governance structure .The term know as equality could be
defined as the equal treatment of stakeholders and shareholders by the management of a
company to prevent the conflicts regarding their interests . similarly the word transparency
can be defined as or can be expressed as providing all the non-financial information and
financial material within a durable time and at low rate cost so that it could be reliable ,
accurate and should be valid for the decision making process of a company. Responsibility
word can be related with the compliance of all the rules and regulations which were drafted
under the articles and are in the audit process and operations. On the other hand we can
define the word accountability as laying down the powers of boards so that the board of
directors could answer to the shareholders and stakeholders as regarding a corporate entity
.Hence, to establish the corporate governance framework, various corporations such as
organization for economic cooperation and development and global corporate governance
forum, world bank had been assigned the task to discuss the issue regarding corporate
governance. Thus, a huge number of countries in the developing and developed economy are
still in the process for the reconstruction of their legislation and also reviewing them and even
some of them came out of whole new law, rules and regulations.

A corporation is basically known to be various combinations of stakeholders and

shareholders named as employees, customers, directors, vendor partners, society, government
and investors. In such kind of situation and in the changing scenario, a corporation should be
just and equitable to its shareholders in all the transactions. This is becoming very important
in today's pace of globalization where organizations need to capture and preserve the best
human capital and even to access the global pools of capital market. Unless and until any
organization demonstrates and embraces such kind of ethical conduct, it will not be able to
get success in future. Corporations also needs to acknowledge the its growth, and such
cooperation will be enhanced by the adherence of the best governance practices.

Thus, management is required to act as trustees of the shareholders and prevent the
asymmetry assistance between various sections, especially between the owner - managers and
the rest of the shareholders. Effective corporate governance structure needs to be flexible
according to market dynamics, so that it responds and yet it should be unwavering regarding
its values and ethics.

FACTORS AFFECTING THE QUALITY OF CORPORATE GOVERNENCE

Corporate governance is an essential factor which influences the long term economic health
of the companies and it resides only in the part of larger economic context in which
organizations operates. The structure depends upon the regulatory and intuitional
environment, legal, awareness and business ethics of the environmental and societal interests
of the constituents in which they operates. The quality of corporate governance mainly
depends upon the factors mentioned below:-

1. Ability of the Board

2. Adequacy of the process

3. Integrity of the management

4. Standard of corporate reporting

5. Involvement of shareholders in the management

6. Commitment level of individual board members

If organizations requires full benefits of the global capital market , benefit by the economies
of scale , capture efficiency gains and attract long term capital the assumption of the
corporate governance standards must be consistent , credible , inspiring and coherent . The
amount to which organizations should observe the basic proposition of a good corporate
governance is very important factor for taking the major investment decisions. The global
flow of capital helps to enable companies in seeking financial help from the larger and bigger
pool of investors.

RELATIONSHIP BETWEEN INDIA AND THE SCENARIO OF CORPORATE

GOVERNANCE
In 1991, India eventually established its progress in the direction of welcoming and open
economy. Presently the role of corporate governance has very essential significance towards
the economic condition of our country. From the time of 1991 onwards it was seen that there
was a great trend in the dimension of the stock exchange i.e., aggregate of registered firms
was intensifying consistently. It tends to emphasize more focus on transparency and
shareholders’ value expansion because if India draws more nations for foreign direct
investment, then they have to pay more focus towards it.

The concept of corporate governance in India established until 1991, only after the period
when liberalization takes place. India was lagging behind. The most important start-up was
taken by India to improve the securities and exchange board of India in 1992. Earlier the
main motive of the SEBI was to oversee and systematize stock exchange, but slowly and
slowly many regulations was formed by it. The next big change happened in India was the
creation of confederation of Indian industry (CII) in 1996 .which helps initially to evolve the
set of certain laws rules and regulations towards corporate governance as to begin the act
towards it for the Indian companies . Then afterwards clause 49 came into existence as a part
of agreement for the companies listed on Indian stock exchange because of the two main
leading groups Kumar mangalam Birla and Narayan murthy. As these two committees starts
putting the best work practices on corporate governance. However clause 49 was forced to be
amended due to some scandals done by the companies like Enron, Satyam, and World com
etc. And to overcome the issues that was happened to these organizations to fall down and
shatter the economies of their nation.

Clause 49 of the Indian stock exchange agreement came into existence from 2000 to 2003 .it
accommodates all the set of laws , rules and regulations and even the requirements of
minimum and maximum numbers of liberated directors , different necessary committees ,
audit committee rules , board members , and limits etc. . Those firms who were not adapting
these principles mentioned in clause 49 were given financial penalties and were removed
from the list.

We can differentiate here the clause 49 and sarbens –oxley act of 2002. The sarbens – oxley
act of 2002 was came into existence for the corporations or companies that are listed in the
US stock exchange. Clause 49 was primarily based on the concept of sarbens- oxley act of
2002. When it comes to the point of number of directors and responsibilities of management
they both are similar to each other. They even also depict the same rule for the refusal of loan
to directors, regarding insider trading and etc. The main and the basic difference between the
two is mainly in the sarbens –oxeyl law. If fraud or any such kind of activity takes place then
the person could be charges up to 20 years of imprisonment, but when it comes to clause 49 it
basically lacks in the matter. There is no such legislation and condition for it but in case of
clause 49 the SEBI has a right to file a criminal proceeding or punishment for not following
the rules and not agreeing with clause 49 exhibits the company with the list.

Corporate governance paid emphasis not only on corporations but also to the countries in
various ways as well. Unemployment can also be reduced by this as it attracts more and more
firms and also directs to growth. Wealth can be generated by adapting good management
practices and by much better distribution of resources. This is because of the better
operational performances. By the adaption of better corporate governance it also helps in the
reduction of financial crisis. As these financial crises would have been very adverse effects
on the company’s economy. If the corporate governance practices are performed properly,
then this will also help to create better links with the respective stakeholders and
shareholders.
Corporate governance has become a major problem for all the countries around the world due
to the fraudulent behavior of the corporations that had caused countries to go through the
financial crisis. The pattern of following this structure is more or less the same. As we can
compare also starting from the Satyam computers limited of India to Enron of the US. Failure
in the performance of companies in a big amount has created a havoc in the corporate
industry and also have cause the economic meltdown in ours. The Indian government felt to
promote good corporate governance practices amongst the country as an intermediate action
to reveal the scandals. Else for the executives of foreign multinational companies
understanding corporate governance issues was also very important to execute their business
and trading with India.

4.7 CORPORATE GOVERNANCE RATING

A credit rating agency (CRA) is a company that rates debtors on the basis of their ability to
pay back their interests and loan amount on time and the probability of them defaulting.
These agencies may also analyse the creditworthiness of debt issuers and provide credit
ratings to only organisations and not individuals consumers. The assessed entities may be
companies, special purpose entities, state governments, local governmental bodies, non-profit
organisations and even countries. Individual customers are rated by specialised agencies
known as credit bureaus that provide a credit score to every customer based on his/her
financial history. Credit rating agencies in India do not have a distant past. They came into
existence in the second half of the 1980s. As of now, there are six credit rating agencies
registered under SEBI namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork
Ratings. Ratings provided by these agencies determine the nature and integrals of the loan.
Higher the credit rating, lower is the rate of interest offered to the organisation. Some of the
credit rating agencies in India are discussed below:

CRISIL CRISIL stands for Credit Rating Information Services of India Limited and it was
the first credit rating agency set up in India in 1987. Today, CRISIL has become a global
analytical company that rates companies, researches the markets and provides risk and policy
advisory services to its clients. At the time of incorporation, the agency was promoted by
ICICI Limited, UTI and many such financial institutions. The agency started operations in
1988.CRISIL is headquartered in Mumbai. CRISIL provides independent opinion and
efficient solutions by performing data analysis and research. It has a strong track record of
growth and innovation. CRISIL has expanded its business operation to USA, UK, Poland,
Argentina, Hong Kong, China and Singapore apart from India. The majority shareholder of
CRISIL is Standard & Poor’s, one of the biggest credit rating agencies of the world. CRISIL
works with various governments and policy-makers in India and other developing nations to
enhance and improve the infrastructure and meet the demands of the region.

CARE Credit Analysis and Research limited was established in 1993 and since then it has
gone on to become India’s second largest credit rating agency. It was promoted by Industrial
Development Bank of India (IDBI), Unit Trust of India (UTI) Bank, Canara Bank and other
financial institutions. CARE has its headquarters in Mumbai and regional offices in New
Delhi, Bangalore, Chennai, Hyderabad, Ahmedabad and Kolkata. CARE has the primary
function to perform rating of debt instruments, credit analysis rating, loan rating, corporate
governance rating, claims-paying ability of insurance companies, etc. It also grades
construction entities and courses undertaken by maritime training institutions. Ratings
provided by CARE include financial institutions, state governments and municipal bodies,
public utilities and special. The Information and Advisory Service Department of CARE
prepares credit rating and reports on requests from business partners, banks and other
financial entities. It also conducts sector-based studies and provides necessary advisories for
valuation, financial restructuring and credit appraisal systems. CARE conducts an extensive
research and rates SMEs based on their financial health. These ratings are provided under 8
levels where CARE SME 1 signifies excellent financial health with negligible risks and
CARE SME 8 rank signifies lowest credit quality with highest credit risk. ICRA ICRA was
set up in 1991 and originally named as Investment Information and Credit Rating Agency. It
was a joint venture of Moody’s and Indian financial and banking service organisations. It was
renamed to ICRA Limited and was listed in the Bombay Stock Exchange and National Stock
Exchange in April 2007. ICRA is an independent professional corporate investment
information and credit rating and advisory agency and is headquartered in Gurugram,
Haryana. ICRA assigns corporate governance rating, performance ratings, grading and
provides ranking to mutual funds, hospitals and construction and real estate companies. ICRA
has a major focus on the MSME sector. To cater to its clients, the dedicated team of
professionals have developed a linear scale for the concerned sector. It helps the agency to
benchmark peers quite easily. ICRA ratings are used to analyse the credit risk in India. It does
not cater to the international companies and organisations.

SMERA Small and Medium Enterprises Rating Agency of India is the agency that functions
exclusively for the sector Micro, Small and Medium Enterprises. This agency was founded in
2005 by Small Industries Development Bank of India (SIDBI), Dun and Bradstreet
Information Services India Private Limited (D&B) and various public, private sector and
other MNC banks of India. The agency has its headquarters in Mumbai. SMERA has been
registered with SEBI as a credit rating agency and accredited by Reserve Bank of India in
2012. It is an external credit assessment institution (ECAI). SMERA rates bank loans under
Base II guidelines. Grading of various instruments like IPO, bonds, commercial papers,
NCDs, fixed deposits, security receipts, etc. is done by SMERA which can be used by all
banks for capital adequacy requirements calculation as authorised by the RBI. Financial
institutions highly consider SMERA ratings before approving or lending funds. ONICRA
ONICRA Credit Rating Agency is the private rating agency established by Sonu Mirchandani
under ONIDA Finance. It is headquartered in Gurugram, Haryana. The agency provides
credit ratings, conducts risk assessment and provides analytical solutions to individuals,
corporates and MSMEs. The solutions offered by the agency helps organisations take
informed decisions about lending funds to individuals, MSMEs and other organisations. After
its establishment in 1993, the agency has gained expertise in assessing micro, small and
medium enterprises. It is one of the seven agencies licensed by the National Small Industries
Corporation (NSIC) for the rating of SMEs. ONICRA provides grading services as well. Its
grading services include education grading, healthcare grading, solar energy grading and
APMC grading. It has signed MoUs with 16 banks and NBFCs in India to provide interest
rate concession to up to 1 per cent to top MSME units. It performs a wide range of tasks such
as accounting, finance, analytics, customer relations and back-end management. FITCH India
India Ratings and Research (Ind-Ra) is a credit rating agency that provides time-bound,
accurate and prompt credit opinions. It is 100 per cent owned subsidiary of the Fitch Group.
Ind-Ra covers corporate issuers, financial institutions, banks, insurance companies, urban
local bodies, structured finance and project finance. Fitch‘s Ind-Ra is headquartered in
Mumbai and has branch offices in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and
Kolkata. Ind-Ra is recognised by Securities and Exchange Board of India, National Housing
Bank and the Reserve Bank of India. Fitch is a major financial information service provider
and rating agency having its operations in more than 30 countries across the globe. It checks
credit capacity of global leaders in all industries. Corporate Governance Rating Corporate
Governance Rating (CGR) is an opinion on relative standing of an entity with regard to
adoption of corporate governance practices. It provides information to stakeholders about the
level of corporate governance practices of the entity. It enables corporate entities to obtain an
independent and credible assessment of the quality and extent of their corporate governance.
The rating process would also determine the relative standing of the entity vis-à-vis the best
practices followed in the domestic as well as international arena. Companies can also use
these ratings as reference and set benchmarks for further improvements. Investors and other
stakeholders get benefited as they are able to differentiate companies based on degree of
corporate governance. Corporate Governance Rating (CGR) is an opinion on the relative
position of an organisation in respect of adoption of corporate governance practices. It
indicates to the stakeholders about the level of corporate governance practices prevailing in
the organisation. CGR is not a certificate on statutory compliance and is not a
recommendation to buy or sell securities issued by the entity. CGR should not be construed
as implying any direct correlation with the rating of debt instruments of the organisation.
Benefits of Corporate Governance Ratings Corporate Governance Rating enables corporate
entities to obtain an independent and credible assessment of the quality and extent of their
corporate governance. The rating process also determines the relative position of the entity
vis-à-vis the best practices followed. Organisations can also use these ratings as reference and
set bench marks for further improvements. Investors and other stakeholders benefit as they
are able to differentiate companies with varying degree of corporate governance.
CGR Process The CGR process involves perusal of various documents like agenda papers
and minutes of Board and Board committees, Annual return and other documents filed by the
bank with ROC, SEBI, stock exchanges (domestic and international) and all other regulatory
bodies, prospectus (if applicable), offer documents, minutes of the Annual General Meeting
and Extraordinary general meeting. It also involves meeting with top management including
CEO, independent directors and whole-time directors, bankers, Statutory Auditors, Internal
Auditors etc. The following key points are considered for corporate governance rating:

 Board composition and functioning;

 Ownership structure;

 Quality of Management Information System;

 Shareholders’ profile;

 Disclosure and transparency;

 Financial prudence;

 Statutory and regulatory compliance.

Good Corporate governance also helps ensuring that corporations take into consideration the
interests of a wide range of constituencies, as well as of the communities within which they
operate. Good corporate governance aims at value creation for its stake holders. Evaluation of
the extent of value creation and balanced distribution of wealth is ascertained in this exercise
which involves assessment of wealth creation and distribution parameters in addition to the
parameters evaluated under CGR. Wealth creation by a company based on sound business
strategy and practices adopted by its management as also maintaining financial and
operational discipline would promote enhancing stakeholder value.

4.8 SUMMARY

 Section 2 (13) defines a Director as including “any person occupying the position of
director, by whatever name called.” The articles of a company, sometimes, designate
its directors as governors, members of the governing council or the board of
management or may give them any other title, but so far as the law is concerned, they
are simply directors. A deemed director need not necessarily be an individual. The
 person may even be a body corporate say, a holding company. The directors act as
agents of the company and the ordinary rules of agency apply. The directors are also
sometimes described as managing partners. Directors are treated as officers of the
company [s. 2(30)].

 In today’s era where uncertainty has crept in to such an extent, that running a business
is not as simple as it was when the demand for the commodity was easily identifiable,
consumer was not much educated, competitors were not playing, social
responsibilities was not weighed and technology not ever changing. Today, it has
become imperative to have a board which through its strong ethics, values,
independence, wisdom, acumen, perception and insight is able to direct the company
towards the road to success. The board functions on the principle of majority or
unanimity. A decision is taken on record if it is accepted by the majority or all of the
directors. A single director cannot take a decision. However, every director should
provide a creative contribution to the Board by providing objective criticism.

 Shareholders are one of the most important stakeholders of a corporate. Upholding the
legitimate rights of the shareholders, equitable treatment amongst all shareholders,
meaningful engagement with them, etc. are all paramount in ensuring good corporate
governance. Protection of shareholder rights is the fundamental expectation from any
corporate.

 In this unit we have seen what is meant by Corporate Social Responsibility and the
role it plays in today’s corporate world. We have also understood the role of CSR in
creating a healthy atmosphere for ethical business practices and also its role as a tool
of promotion and public realtions for the corporates.

4.9 KEYWORDS

 Social investment: Investing into social action for the betterment of the society and
also for raising the profile of the company.

 Ethical consumerism: The realisation that our resources are limited and becoming
more aware of the environmental and social implications of our day-to-day consumer
decisions.
  Deemed Director: For certain purposes, a person even when he is not a director may
be deemed to be a director of a company.

 Director: Any person occupying the position of director, by whatever name called
director.

 Legal Position of Director: The exact position of ‘Director’ is hard to define, as no

formal definition, either statutory or judicial, of the term has been given. However,
judicial pronouncements have described them as (i) agents, (ii) trustees, or (iii)
managing partners.

 Statutory Duties: The statutory duties are the duties and obligations imposed by the
Companies Act.

4.10 LEARNING ACTIVITY

1. What is the connection between CSR and Ethical consumerism?

___________________________________________________________________________
___________________________________________________________________________

2. How has CSR influenced behavior and culture of corporations?

___________________________________________________________________________
___________________________________________________________________________

4.11 UNIT END QUESTIONS

A. Descriptive Questions

Short Question

1. What is Corporate Social Responsibility and why is it imporant in today’s business?

2. What are the different elements that influence CSR and what are the benefits of CSR?

3. Why is CSR criticised by some people?

4. How is CSR related to ethical consumerism?

 5. Discuss about the challenges in exercising shareholder rights?

6. What are the tools that an institutional investor can use to assess the health of a
company?

Long Questions

1. Discuss the major principles of UK Stewardship code?

2. Who is insider? What is meant by insider trading?

3. What do you understand by shareholder activism?

4. Define ‘Director’. What is his legal position in a company?

5. Who can be a director? What qualifications, if any, must a person possess in order to
become a director of a company?

6. State the powers of the Board of directors which can be exercised only with the
approval of the members in a general meeting of the company.

B. Multiple Choice Questions

1. The responsibility that considers fair business practice is _____________

a. Philanthropic

b. Environmental

c. Ethical

d. Economic

2. Which of the following is not a benefit of CSR?

a. Increases customer loyalty

b. Improves research and development

c. Ease in Employee recruitment

d. Improved relations with government

3. A Free Enterprise is all about, except ___________

a. Government regulations

b. Innovation and economic growth

c. Market place decides who fails or succeeds

d. Political freedom

4. In the __________________ CSR strategy model, the business balances the conflicting
objectives of the stakeholders.

a. Shareholder strategy

b. Altruistic strategy

c. Reciprocal strategy

d. Citizenship strategy

5. Which one is not a condition for a company mandatorily spends for CSR as per the
amendment to Companies Act 2013?

a. A net worth of rs. 5 billion (500 crores)

b. Net assets of rs.10 billion (1,000 cores)

c. Annual turnover of rs. 10 billion (1,000 crores)

d. Net profit of rs. 50 million (5 crores)

Answers

1-c, 2-b, 3-a, 4-d, 5-b

4.12 REFERENCES

Reference
  Feltus, C.; Petit, M.; Dubois, E, Strengthening employee's responsibility to enhance
governance of IT: COBIT RACI chart case study, Proceedings of the first ACM
workshop on

 Information security governance (WISG'09), Chicago, Il, USA, 2009.

 powerupcapitalreview.blogspot.com

 www.asocio.org/policy

 Utting, P., “Corporate responsibility and the movement of business” Development in

 Practice, 14(3&4), 2005, Pp: 375–388.

 www.businessinromania.eu/static/en/en-csr/index.html

 www.ehow.com › Business

 Tebo, P. V., “Building business value through sustainable growth”, Research

Technology Management, 48(5), 2005, Pp: 28–32.

 www.superverde.com.br/social_responsibility.php

 www.norwayemb.org.in

 Griffin, J.; Mahon, J., "The Corporate Social Performance and Corporate Financial

 Performance Debate", Business and Society 36, 1997.

Textbooks

 Aggarwal, Rohini (2003), “Student’s Guide to Mercantile and Commercial Laws,”

 Taxmann’s, New Delhi.

 Avtar Singh, Company Law, Eastern Publishers.

 Begrail, Ashok K, Company Law, Vikas Publishing House, Delhi.

 Kapoor, N.D, Company Law, Sultan Chand & Sons, New Delhi.

 M.C. Kucchal ( 2002), Business Law, Vikas Publishing House Pvt. Ltd, Delhi.

 P.C. Tulsian (2002), Business Law, Tata Mc. Graw Hill Pvt. Ltd, Delhi.

 S S. Gulshan, Business Law, Excel Books, New Delhi, 2006.