Corporate Governance

Lec 2

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Last Class

Registering a
What is a Types of
company in
corporate? corporates
India

What is Relevance of Main Actors in

Corporate Corporate Corporate
Governance? Governance Governance
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MoA & AoA: Forms the Constitution of the
Company
The Articles of Association (AoA) outlines the rules and
regulations that stipulate a company’s internal affairs.

The articles of association are also considered a user’s

manual for an organization that states the purpose of
the organization and its strategies to accomplish its
short-term and long-term goals.

AoA includes a company’s legal name, address,

purpose, equity capital, organization of the company,
financial provisions, and provisions regarding the
shareholder meetings.

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 Duty of Care
Duty of Obedience
Duty of Loyalty

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 Principals of Corporate
Governance

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BASIC PRINCIPLES OF CORPORATE
GOVERNANCE

1. Fairness -Fairness refers to equal treatment, for example, all

shareholders should receive equal consideration for whatever
shareholdings they hold.
In addition to shareholders, there should also be fairness in the treatment
of all stakeholders including employees, communities and public officials.

The fairer the entity appears to stakeholders, the more likely it is that it can
survive the pressure of interested parties

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 BASIC PRINCIPLES OF CORPORATE
GOVERNANCE

2. Accountability - Corporate accountability refers to the obligation and responsibility to give

an explanation or reason for the company’s actions and conduct.

Responsibility - The Board of Directors are given authority to act on behalf of the company.
The Board of Directors are responsible for overseeing the management of the business,
affairs of the company, appointing the chief executive and monitoring the performance of
the company. In doing so, it is required to act in the best interests of the company.

Accountability goes hand in hand with responsibility. The Board of Directors should be made
accountable to the shareholders for the way in which the company has carried out its
responsibilities.

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BASIC PRINCIPLES OF CORPORATE
GOVERNANCE

3. Transparency - A principle of good governance is that stakeholders

should be informed about the company’s activities, what it plans to do
in the future and any risks involved in its business strategies.

Transparency means openness, a willingness by the company to provide

clear information to shareholders and other stakeholders. For example,
transparency refers to the openness and willingness to disclose financial
performance figures which are truthful and accurate.

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BASIC PRINCIPLES OF CORPORATE
GOVERNANCE
4. Disclosure of material matters concerning the organisation’s performance and activities should be
timely and accurate to ensure that all investors have access to clear, factual information which
accurately reflects the financial, social and environmental position of the organisation.

Organisations should clarify and make publicly known the roles and responsibilities of the board and
management to provide shareholders with a level of accountability

5.Leadership: Board members should actively provide guidance to the management and be ethical

6. Stakeholder Management: Take care of all its stakeholders

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Rational: Corporate Governance

The ways in which The economies of

companies are all countries to a
directed and large extent
controlled is of depends upon the
fundamental efficiency and drive
importance to of the corporate
society sector

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 Corporate Governance: UK

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 Scenario in UK in 1990s
In 1990s UK industry was reeling
from a string of corporate
collapses whose names still
resonate: Polly Peck Consortium,
wall paper Group-Coloroll, Bank
of Credit and Commerce
International and Maxwell Group
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Committee under Sir George
Adrian Cadbury ( Chairman of
Cadbury & Cadbury) was
appointed in May 1991 by the
Increasing lack of investor Financial Reporting Council of
confidence in the honesty and London Stock Exchange
accountability of listed
companies
Polly Peck Consortium of the most successful companies in UK. It collapsed owing
£550m in 1990. Asil Nadir, Founder was jailed for 10 years. He stole £29million from
company.
BCCI made phony loans, concealed deposits, hid huge losses, and was the bank for a
host of shady customers ranging from terrorists and spies to drug runners and
dictators.
Robert Maxwell looted millions from the pension fund of the Mirror Group, wiping
out shareholders and condemning pensioners to poverty.
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UK: Cadbury Committee Report 1992

Absence of a clear framework for ensuring that

directors actions were controlled
• Looseness of accounting standards and competitive pressures, both
on companies and on auditors, which made it difficult for auditors to
stand up to demanding boards.
• Lack of effective board accountability for such matters as directors'
pay.
• Institutional Investors need more dialogue with the company they
invest in
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UK Cadbury Committee Report 1992
Governance Issue
Separate CEO and Chairperson
Nomination of Directors
Outside Directors
Independence of Directors
Rotation of Directors
Pay and Bonuses
Independence of the Auditor
Flow of information to the Board
Greater Scope of Auditing
In December
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Cadbury Code Recommendation
Recommended but not compulsory
Formal Board process via nomination committee dominated by outside directors.
Minimum of 3 non-executive directors
Majority of Non-executives to be independent
Directors to be appointed for specified terms with non-automation reappointment
Annual Report to reveal disaggregated director’s pay; remuneration committee of
board to be dominated by outside directors
Audit committee of the board to be formed, comprised exclusively of outside
directors.
Board to have a formal schedule of decisions, directors to have paid access to
outside advice.
Auditors to review compliance to the Code, including directors’ statements on
going-concern and on internal audit effectiveness.
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Implications of Cadbury Report 1992
• Corporate failures: UK on a path in corporate law and governance
that proved novel and revolutionary, having an impact far beyond the
UK equity market.
• Cadbury committee became popular across the globe.
• Many countries adopted it as a model code for developing corporate
governance roles at their places.
• India’s Kumar Mangalam Birla Committee Report was aligned on the
findings of the Cadbury Committee

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Greenbury Report 1995
• Sir Richard Greenbury, Chairman and
Chief Executive, Marks and Spencer
• The Greenbury Committee was
established in 1994 by the
Confederation of British Industry in
response to growing concern at the
level of salaries and bonuses being
paid to senior executives.
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Key findings
• Remuneration Committees made up of non-
executive directors should be responsible for
determining the level of executive directors'
compensation packages
• There should be full disclosure of each executive's
pay package and that shareholders be required to
approve them.
• Remuneration should be linked more explicitly to
performance, and set at a level necessary to 'attract,
retain and motivate' the top talent without being
excessive.
• More restraint be shown in awarding compensation
to outgoing Chief Executives, especially that their
performance and reasons for departing be taken into
account.
• This code of conduct was voluntary in the hope that
self-regulation would be sufficient to correct things. 
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 The Hampel Report 1998
The Committee on Corporate Governance (the Hampel Committee-Chaired by Sir
Ronald Hampel was established in November 1995 by the Financial Reporting
Council (and sponsored in part by the London Stock Exchange, Confederation of
British Industry, and Institute of Directors) to review matters arising from the
Cadbury and Greenbury Committees and evaluate implementation of their
recommendations.

To promote high standards both to protect the investors & preserve & enhance the
standing of company’s listed on the stock exchange.

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 The Hampel Report 1998
The Committee felt that corporate governance was
ultimately a matter for the board.

Recommendations
If boards felt it was in the interests of enhancing
'prosperity over time' to have a unitary CEO and Chair, or
not to put remuneration policy before the AGM for
• Different individuals as
approval then that was their concern. Chairman and CEO
• Directors’ contracts not to
Transparency was more important than adhering to exceed one year
any particular set of guidelines,
• Non-executives on
remuneration committee
If any shareholders unhappy with the board's
management had the option of using their votes
• Training of directors
accordingly.
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Combined Code of Corporate Governance
1998
The Cabury Report (1992), Greenbury Report( 1995) & Hampel Report (1998)
were merged to form Combined Code of Corporate Governance in 1998

Principles outlined in the Code include the presence of non-executive directors

on remuneration and audit committees, performance-related pay and the
varying degrees of liability between executive and non-executive directors.

The Financial Services and Markets Act (2000) required listed companies to
"comply or explain"

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The Turnbull Report in 1999 & 2005
( updated version)
Set up by the ICAEW (Institute of Chartered
Accountants in England & Wales) in 1999.
Chaired by Sir Nigel Turnbull, a British politician
and civil servant.
Assigned strategic importance to control and risk
in context of CG
Showed directors how Control & Risks are to be
integrated into CG model
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Recommendations
• Internal audit annually
• Focus on principles rather than rules
Emphasis on:
• successful risk management adding value
• internal control only possible if embedded in internal
processes
• role of board in reviewing and implementing
• key risks to be identified and managed
• Sets out how directors of listed companies should comply
with the UK’s Combined Code requirements in respect of
internal controls.
• The guidance was supported and endorsed by the London
Stock Exchange.
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The Higgs Report 2003
In the Enron case it was found that non-
executive directors were ineffective in
performing their roles in corporate
governance, so their was a necessity to
substantial improvement of their role.
Sir Derek Higgs was appointed by the
Secretary of State for Trade and Industry in
April 2002 to chair a committee to review
the role of the non-executive director (NED)
in the corporate governance framework.
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Focus on role and effectiveness of
Non-Executive Directors.
NEDs to comprise at least 50% of
board
Separation of CEO and Chairman
roles
Ideally NEDs might serve two three-
year terms
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 Other Guidelines

In 1999, the OECD came up with its

principles on corporate governance, In 1999, Basel Committee guidelines
which was prepared in consultation were launched that talked about
with World Bank, member countries, establishing corporate governance in
and other private sector organizations. banking institutions across the globe.

It emphasized on internal checks, the

It stressed on the protection of the role of internal and external auditors,
shareholder’s rights, timely disclosures compensation for directors, and the
to be done to promote transparency, compliance role of senior
and the roles of the board of directors. management.

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 Corporate Governance in
USA

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CG Development in USA
In 1974 the Securities and Exchange Commission
(S.E.C.)  interrogated three directors of Penn
Central for misconduct accusations.
The S.E.C. found out that senior officials were
aware of bribes being paid and corporate
records were being falsified.
The S.E.C. found several other bigwigs that had
closed down abruptly.
• In 1976, the S.E.C. amended the
listing requirements of the New
York Stock Exchange by
mentioning that every company
is required to maintain an audit
committee consisting of
qualified independent directors.

The agency solved several such cases by doing

board-level changes, creating audit committees,
and appointing external directors. 

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 Two Big Scams of USA:
Rocked the World

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 Genesis of Sarbanes Oxley Act 2002
As USA witnessed scandals such as World.Com and Enron, where external auditors and directors shared a close
relationship causing corporate malpractices and subsequently the companies collapsed. In 2002, U.S.A. came up with
the Sarbanes-Oxley Act.

The 2002 Act established New York Stock Exchange (NYSE) listing requirements and reforms in the corporate management
sector. 

The Act emphasized on C.F.O. (Chief Financial Officer) and C.E.O. (Chief Executive Officer) accurate responsibilities,
preparedness of annual reports

It made external auditors more independent and increased their powers,

The appointment of financial experts in audit committees was mandatory.  

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Key Points

The ways in which companies The economies of all countries

are directed and controlled is of
fundamental importance to
society
There is a established link
to a large extent depends upon
between good governance and
the efficiency and drive of the
performance of the company
corporate sector

Companies are increasingly

required to take care of the well
being of the society over and
beyond economic contribution.
Companies have to take care of
all of the stakeholders
Disclosure is the key to raising
standards of governance and
Openess is the basis of public
trust

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 Global Governance Trends:
Implications for India

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Indian Scenario
In the early 80s and 90s, as world institutions looked forward to establishing branches in India, the need for
good corporate administration arose. Government came up with the establishment of SEBI in 1988 as a non-
statutory body and in 1992 it was declared an autonomous body with statutory powers .

In 1996, the CII proposed a corporate administration code- Designing corporate governance framework for
company management.

With an aim to develop code for companies, investors’ concerns, transparency in businesses, disclosure of
information by entities, the code tried to introduce clarity in the Indian corporate sector. 

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Framework for CG in India

Legal Framework
Organizational
• Standard Listing Agreement of
Framework Stock Exchanges
• The Companies Acts (CA) 2013, 
• Ministry of Corporate • SEBI Guidelines
Affairs • Accounting Standards by ICAI
• Secretarial Standards that
• Securities Exchange ICSI (Institute of Company
Board of India Secretaries of India)

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