Topic- Corporate Governance

What is Corporate Governance?

Meaning-

Corporate governance is a system by which corporates are directed and controlled. The Board of
Directors have a fiduciary duty to the shareholders, and thereby are responsible for overseeing
the operations and activities of the company. Corporate governance also provides the framework
for the attainment of a company’s objectives. The main focus is to make the business function in
a highly effective manner so as to achieve positive results and thereby maximize the returns of
the stakeholders.

Definition-

 “The purpose of corporate governance is to help build an environment of trust,

transparency and accountability necessary for fostering long-term investment, financial
stability and business integrity, thereby supporting stronger growth and more inclusive
societies.”- OECD
 Report of SEBI committee (India) on Corporate Governance defines corporate
governance as “the acceptance by management of the inalienable rights of shareholders
as the true owners of the corporation and of their own role as trustees on behalf of the
shareholders. It is about commitment to values, about ethical business conduct and about
making a distinction between personal & corporate funds in the management of a
company.”
 “Corporate governance is the system by which companies are directed and controlled.” –
The Cadbury Committee (U.K.)

Importance of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.

 2. Strong corporate governance maintains investors’ confidence, as a result of which,
company can raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve objectives
that are in interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.

The fundamental or key principles of corporate governance are described below:

(i) Transparency:
Transparency means the quality of something which enables one to understand the truth easily.
In the context of corporate governance, it implies an accurate, adequate and timely disclosure of
relevant information about the operating results etc. of the corporate enterprise to the
stakeholders.

In fact, transparency is the foundation of corporate governance; which helps to develop a high
level of public confidence in the corporate sector. For ensuring transparency in corporate
administration, a company should publish relevant information about corporate affairs in leading
newspapers, e.g., on a quarterly or half yearly or annual basis.

(ii) Accountability:
Accountability is a liability to explain the results of one’s decisions taken in the interest of
others. In the context of corporate governance, accountability implies the responsibility of the
Chairman, the Board of Directors and the chief executive for the use of company’s resources
(over which they have authority) in the best interest of company and its stakeholders.

(iii) Independence:
Good corporate governance requires independence on the part of the top management of the
corporation i.e. the Board of Directors must be strong non-partisan body; so that it can take all
corporate decisions based on business prudence. Without the top management of the company
being independent; good corporate governance is only a mere dream.

SEBI Code of Corporate Governance:

To promote good corporate governance, SEBI (Securities and Exchange Board of India)
constituted a committee on corporate governance under the chairmanship of Kumar Mangalam
Birla. On the basis of the recommendations of this committee, SEBI issued certain guidelines on
corporate governance; which are required to be incorporated in the listing agreement between the
company and the stock exchange.
An overview of SEBI guidelines on corporate governance is given below, under appropriate
heads:
1. Board of Directors:
Some points in this regard are as follows:
(i) The Board of Directors of the company shall have an optimum combination of executive and
non-executive directors.

(ii) The number of independent directors would depend on whether the chairman is executive or
non-executive.

In case of non-executive chairman, at least, one third of the Board should comprise of
independent directors; and in case of executive chairman, at least, half of the Board should
comprise of independent directors.

The expression ‘independent directors’ means directors, who apart from receiving director’s
remuneration, do not have any other material pecuniary relationship with the company.

2. Audit Committee:
The company shall form an independent audit committee whose constitution would be as
follows:
i. It shall have minimum three members, all being non-executive directors, with the
majority of them being independent, and at least one director having financial and
accounting knowledge.
 ii. The Chairman of the committee will be an independent director.
iii. The Chairman shall be present at the Annual General Meeting to answer shareholders’
queries.
The audit committee shall have powers which should include the following:
i. To investigate any activity within its terms of reference
ii. To seek information from any employee
iii. To obtain outside legal or other professional advice
iv. To secure attendance of outsiders with relevant expertise, if considered necessary.

3. Remuneration of Directors:
(i) All elements of remuneration package of all the directors i.e. salary, benefits, bonus, stock
options, pension etc.

(ii) Details of fixed component and performance linked incentives, along with performance
criteria.

4. Board Procedure Some Points in this Regards are:

(i) Board meetings shall be held at least, four times a year, with a maximum gap of 4 months
between any two meetings.

(ii) A director shall not be a member of more than 10 committees or act as chairman of more
than five committees, across all companies, in which he is a director.

Types of Committees on Corporate Governance

 CII- Confederation of Indian Industry

The CII is an organization of the business sector that attempts to establish a climate helpful for
the development of the industrial sector in the nation. It is a non-government organization, is also
not driven towards revenue, it is purely an industry-oversaw association, which plays a proactive
function to contribute to India’s advancement process or towards the country’s development.
This non-profit organisation was founded in 1895, with more than 7200 individuals as part of the
organisation, all these people were from both private and public sector, imbibes Small Medium
Enterprises and Multinational Corporations, and a roundabout enrolment of more than 1,00,000
people. Without any kind of precedent for the historical backdrop of corporate governance in
India, this organisation outlined a wilful code of corporate administration.
This organisation intimately uses to work with the Government authorities on
strategy concerning points, interfacing with thought leaders, along with upgrading
proficiency, seriousness, and open pathway for the industrial sector through a path
of specific administrations and international linkages. The organisation has 64
workplaces, which also includes 9 workplaces, in India, and 7 abroad workplaces
in Australia, China, Egypt, France, Singapore, UK, and the USA , just as
associations with two twenty-four partner associations in 90 nations. The
organisation fills in as a source of perspective for Indian industry and the
international business network.

 Kumar Mangalam Birla Committee (2000)

The committee was set up by SEBI in the year 2000. The idea of the formation of
the committee was proposed in the draft of Clause 49 of the Listing Agreement
which is needed to be confirmed by the listed organizations/companies. Essentially
the majority of the proposals were acknowledged and included by SEBI in its new
Clause 49 of the Listing Agreement in 2000. The main reason for the formation of
the committee is to advance and increase the expectations of good corporate
governance.

First report presented by is the main formal endeavor taken to formulate the “Code
of Corporate Governance,” with regards to states winning of administration in
organizations of Indian origin, just as the condition of capital business sectors.
The committee provided the suggestions into two classes, specifically, obligatory
and non-obligatory also known as mandatory and non-mandatory. The proposals
set-forth stood significant for corporate administration subjected to accuracy and
which can be upheld through the correction of the posting arrangement is named
required. However, which are either attractive or which may require change of
legislative framework be non-mandatory.
  Advisory Group on Corporate Governance (2000)

This committee on corporate administration under the guidance of Dr. Patil, at that
point MD’s, NSE was established by a council of Reserve Bank of India in 2000
which presented their report in March 2001, which contained a few suggestions on
governance of the corporate sector. This group which was formed by the Reserve
Bank of India has endeavoured to think about the regulations of corporate
administration in India versus the globally perceived best norms and has proposed
a strategy to improve corporate administration principles in India which will also
result in economic growth of the country.

This committee on corporate administration under the guidance of Dr. Patil, at that
point MD’s, NSE was established by a council of Reserve Bank of India in 2000
which presented their report in March 2001, which contained a few suggestions on
governance of the corporate sector. This group which was formed by the Reserve
Bank of India has endeavoured to think about the regulations of corporate
administration in India versus the globally perceived best norms and has proposed
a strategy to improve corporate administration principles in India which will also
result in economic growth of the country.

 Naresh Chandra Committee (2002)

The Committee presented its report to the MCA on December 8, 2003,

recommending changes to rejuvenate the common flight of India area zeroing in on
privatization, empowering unfamiliar speculation, reasonableness, feasibility, and
security. After few businesses in the USA in 2001, along with severe institutions
of Sarbanes Oxley Act, the Government of India designated this committee in the
year 2002 to analyze and prescribe radical alterations to the law relating to
evaluator customer connections and the part of free chiefs. The sole purpose was
set up to investigate the issues tormenting the aviation domain.

 Narayana Murthy Committee (2003)

This committee was constituted by SEBI under the chairmanship of N.R. Narayana
Murthy, executive and coach of Infosys, and commanded the Committee to audit
the presentation of corporate governance in India and make fitting suggestions.
The Committee presented its report in February 2003.

 J. J. Irani Committee (2005)

The committee was established by the Government of India in December 2004 with
a plan to assess the remarks and proposals on ‘concept paper’ and also to give
suggestions to the Government in making more effective and beneficial modern
law which can meet the needs of the society. The Committee presented its first
report to the Government in May 2005, which is being looked at to date.