CORPORATE GOVERNANCE

A REPORT ON

CODE OF CONDUCT AND ITS IMPACT ON CORPORATE GOVERNANCE

SUBMITTED TO:

Mr. Resham Raj RegmiInstructor

Corporate Governance

SUBMITED BY:

Sandarva PalMBA FALL 2010

TERM VI

July 27, 2012

ACE INSTITUTE OF MANAGEMENT

Table of Contents

1. INTRODUCTION.......................................................................................................1

1.1 Background.............................................................................................................1

1.1.1 The philosophy of the Code..............................................................................1

1.1.2 The evolution of codes of conduct....................................................................2

2. INTERNATIONAL STANDARDS..............................................................................3

2.1 UK CG Code...........................................................................................................3

2.2 Federal Sentencing Guidelines for Organizations (FS GO)....................................3

2.3 Sarbanes-Oxley Act................................................................................................4

2.4 New York Stock Exchange and the NASDAQ........................................................4

2.5 Clause 49 of SEBI Listing Agreement.....................................................................4

3. NEPALESE PRACTICE............................................................................................5

3.1 Banking Sector........................................................................................................5

3.1.1 Nepal Investment Bank Limited (NIBL).............................................................6

3.2 Security Exchange Board of Nepal (SEBON).........................................................7

3.3 Nepal Medical Council............................................................................................7

4. INTERNATIONAL PRACTICES................................................................................8

4.1 The code of conduct on corporate governance (Bangladesh)................................8

4.2 Committee on Corporate Governance Code (Korea)..............................................8

5. STRENGTH/WEAKNESS.......................................................................................10

5.1 Strengths..............................................................................................................10

5.2 Weakness.............................................................................................................10

6. CONCLUSION........................................................................................................12

6.1 Nepalese Context.................................................................................................12

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6.1.1 Impact on Banking Sector...............................................................................12

6.1.2 Impact on Security Market..............................................................................12

6.2 International Context.............................................................................................13

6.2.1 Impact of UK CG Code...................................................................................13

6.2.2 Impact on Countries.......................................................................................13

BIBLIOGRAPHY............................................................................................................15

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1. INTRODUCTION

1.1 Background

Companies have been writing codes of business conduct for decades, but the role they

play in shaping corporate culture and governance is changing dramatically. The focus is

shifting from writing a comprehensive code of rules to regulate conduct to leveraging a

values-based code that inspires principled performance among employees,

management and executives. This shift is propelled by both internal and external

sources. Investors, customers and other stakeholders increasingly want to do business

with organizations that have high ethical standards and, as a result, top management

and boards of directors are becoming more attuned to the ethical climate. Additionally,

there is increased pressure from regulators that now require organizations to focus on

promoting ethical codes of conduct.

The Code is a guide to a number of key components of effective board practice. It is

based on the underlying principles of all good governance: accountability, transparency,

probity and focus on the sustainable success of an entity over the longer term. The

code of conduct influences core management and executives to discharge their duties

at the highest level honesty and integrity having regard to their position in the

organization. The codes provides authoritative guidance to officers in carrying out their

duties and responsibilities in accordance with legal and regulatory requirements and

observes the rule and spirit of law and comply with ethical and technical requirements of

regulatory body. Financial officers should maintain the principle of transparency in the

preparation and delivery of financial information to both internal and external users

1.1.1 The philosophy of the Code

The code of conduct in general envisages and expects –

Adherence to the highest standards of honest and ethical conduct, including proper and

ethical procedures in dealing with actual or apparent conflicts of interest between

personal and professional relationships. Full, fair, accurate, sensible, timely and

meaningful disclosures in the periodic reports required to be filed by the public and

listed companies with Government and regulatory agencies. Compliance with applicable

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laws, rules and regulations. To redress misuse or misapplication of the company’s

assets and resources. The highest level of confidentiality and fair dealings within and

outside the organization

1.1.2 The evolution of codes of conduct

Codes of conduct extend back to before World War II. One of the earliest company

codes was Johnson & Johnson’s Credo, published in 1943 after General Robert Wood

Johnson urged his fellow industrialists to embrace corporate responsibility to customers,

employees, the community and stockholders. Worldwide interest in business ethics and

codes of conduct took off in the 1980s. Among the first large corporations to adopt

codes of conduct were General Electric, General Dynamics, Martin Marietta (now

Lockheed Martin) and several other defense contractors who saw business ethics

programs as a way to self-regulate rather than submitting themselves to government

regulation. Many of the early corporate codes of conduct addressed a fairly limited list

of topics: conflicts of interest, use of company property, non-discrimination. Since that

time, the corporate world has evolved in its understanding of the topics that impact a

company’s integrity: customer and supplier relations, relations with consultants, fair

competition practices, substance misuse (including alcohol), community relations, to

name a few.

In Nepal the codes of conduct was first framed by public (government) organizations in

part to bring transparency, accountability and prompt delivery of service to general

public recently even private sectors and its associations has been slowly but steadily

drafting codes of conduct for its top level executives in terms of Performance-related

pay that should be aligned to the long-term interests of the company and its risk policy

and systems. And outline responsibility of the non-executive directors to provide

constructive challenge, and the time commitment is expected of all directors

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2. INTERNATIONAL STANDARDS

2.1 UK CG CodeThe UK Corporate Governance Code (formerly known as the Combined Code) sets out

standards of good practice for listed companies on board composition and

development, remuneration, shareholder relations, accountability and audit

The code is published by the Financial Reporting Council (FRC) which is regulator for

financial reporting and CG. All companies with a Premium Listing of equity shares in the

UK are required under the Listing Rules to report on how they have applied the

Combined Code in their annual report and accounts. The first version of the UK Code

on Corporate Governance (the Code) was produced in 1992 by the Cadbury

Committee.

The FRC traces the roots of the UK Corporate Governance Code to the Cadbury

Committee Report and its successor reports. The UK Corporate Governance Code

continues to have ‘comply or explain’ approach which was introduced in the Cadbury

Committee Report. This approach is a great strength and has been adopted in many

countries.

The Code has five sections: (1) Section A: Leadership, (2) Section B: Effectiveness, (3)

Section C: Accountability, (4) Section D: Remuneration, and (5) Section E: Relations

with Shareholders.

2.2 Federal Sentencing Guidelines for Organizations (FS GO)

In 1991, the U.S. Sentencing Commission issued the Federal Sentencing Guidelines for

Organizations (FS GO), outlining the elements of an effective ethics and compliance

program. As one component of this, the FS GO recognized that simply having a code

was not enough. In this view, the “3P” approach – in which you “Print a code of conduct,

Post it on the wall and Pray people actually read it” – simply did not form the basis for

an effective program. As a result, the FS GO required code education for employees

and other mechanisms for communicating and reinforcing organizational values

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2.3 Sarbanes-Oxley Act

In U.S. in 2002, Sarbanes-Oxley Act the further bolstered the importance of codes of

conduct by requiring public companies to have a code of conduct for top executives

(and, if they didn’t have one, to explain why). This Code of Conduct attempts to set forth

the guiding principles on which the public companies such as banks shall operate and

conduct its daily business with its multitudinous stakeholders, government and

regulatory agencies, media, and anyone else with whom it is connected. It recognizes

that the companies should fulfill its fiduciary obligations and responsibilities, it has to

maintain and continue to enjoy the trust and confidence of public at large

2.4 New York Stock Exchange and the NASDAQ

In 2003, both the New York Stock Exchange and the NASDAQ required listed

companies to adopt and disclose a “code of business conduct and ethics” that applies to

all employees and directors. Together with these regulatory developments, having a

code became practically a mandate for public companies.

2.5 Clause 49 of SEBI Listing Agreement

Based on SEBI circular dated Oct, 2004, clause 49 of the listing agreements revised by

stock exchanges, to be implemented on or before 31st march 2004, came to effect from

31st December, 2005, formulated for the improvement of corporate governance in all

listed companies.

Need and objective of Clause 49 Code

Clause 49 of the Listing Agreement entered into with the Stock Exchanges, requires, as

part of Corporate Governance, the listed entities to lay down a Code of Conduct for

Directors on the Board of an entity and its Senior Management, Senior Management

has been defined to include personnel who are members of its Core Management and

functional heads excluding the Board of Directors. Board members/ senior management

to affirm compliance of the code and the annual report should contain such a

declaration signed by chairman.

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3. NEPALESE PRACTICE

3.1 Banking Sector

Nepal Bankers’ Association has formulated a voluntary Code of conduct, which sets standards of fair banking practices for member banks of Nepal Bankers' Association to follow when they are dealing with individual customers. It provides valuable guidance to banks for its day-to-day operations. The Code applies to:

Current, savings and all other deposit accounts

Collection and remittance services offered by the banks

Loans and overdrafts

Foreign-exchange services

Card products

Third party products offered through our network.

As a voluntary Code, it promotes competition and encourages market forces to achieve

higher operating standards for the benefit of customers. In the Code, 'you' denotes the

customer and 'we' the bank, the customer deals with.

The standards of the Code are covered by the four key commitments:

a.) Act fairly and reasonably in all our dealings with you by:

Meeting the commitments and standards in this Code, for the products and

services we offer, and in the procedures and practices our staff follow

Making sure our products and services meet relevant laws and regulations, and

compliance driven

Our dealings with you will rest on ethical principles of transparency, unless it is

restricted by law or competent authority and integrity.

b.) Help you to understand how our financial products and services work by:

Giving you information about them in Nepali and/or English.

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Explaining their financial implications and

Helping you choose the one that meets your needs.

c.) Deal quickly and empathetically with things that require:

Correcting mistakes quickly

Handling your complaints quickly

Telling you how to take your complaint forward if you are still not satisfied and

Reversing any bank charges that is debited erroneously

d.) Publicize this Code, put it on our website and have copies available for you on

request.

Unless it says otherwise, all parts of this Code apply to all the products and services

listed above, whether they are provided by branches across the counter, over the

phone, by post, through interactive electronic devices, on the internet or by any other

method. Commitments outlined in this Code are applicable under normal operating

environment. This code came into effect from 27th Bhadra 2063 (September 12, 2006)

unless otherwise indicated.

3.1.1 Nepal Investment Bank Limited (NIBL)

Nepal Investment Bank Limited (NIBL) is firmly committed to the highest standards of

governance. The Board of Directors ensures that the activities of the Bank are always

conducted with the highest standards and in the best interests of its stakeholders. The

Board of Directors continues to ensure that the Bank conducts itself as a model

corporate citizen by specifying corporate values for the Bank and stipulating a code of

Conduct and Ethics for the employees to ensure that the employees maintain their

dignity and integrity and build customer confidence

The bank has adopted good corporate governance practices prescribed by the Nepal

Rastra Bank as well as other relevant statues such as Companies Act 2006 and Bank

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and Financial Institution Act 2006. We believe that the trust, confidence and goodwill

reposed on the Bank by the stakeholders and clients is, inter alia, an acknowledgment

of good corporate governance practices adopted by the Bank.

3.2 Security Exchange Board of Nepal (SEBON)

A detail legislative code has been adopted by the Government to protect the investors'

interests The Securities Exchange Regulation, 1993, provides for reforms in stock

exchange trading methods and practices. The Regulation has added further functions,

powers and duties of the Securities Board, Nepal (SEBO).

In order to manage sales and promotion of securities and make the sales and issue

manager accountable for their services, SEBO has issued the Securities Issue

Management Guidelines, 1998. This guideline has been made as per the provision of

Section 35 of the Securities Exchange Act, 1983 (Second Amendment). The guideline

further specified various provisions regarding disclosure, application for registration of

securities, agreement between issue managers and issuing companies, execution

procedures of the sales management and code of conduct to be specified etc.

3.3 Nepal Medical Council

The Medical Council has passed a Code of conduct which all doctors who register are

required to sign and then subsequently keep as guidance for behavior in their future

practices. Proposal for further amendments to the Act in view of the increased number

of medical schools and also because of the starting of postgraduate education is in

process. Guidelines regarding the establishment of medical and dental colleges, forms if

internship, have been laid down.

It encompasses the roles, duties and responsibilities of the directors and executives in

the Board of Hospitals and its affiliated colleges. It underlines the quality of service to be

delivered, behavior of doctors and nurses and other medical staffs. The codes guide

medical practitioners and institutions on strengthening the practice of good corporate

governance.

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4. INTERNATIONAL PRACTICES

4.1 The code of conduct on corporate governance (Bangladesh)

In August 2003, Bangladesh Enterprise Institute (BEI) invited a number of prominent

individuals from the private sector, the government, NGOs and other relevant bodies to

begin the process of formulating a Code of conduct on Corporate Governance for

Bangladesh

Code of Conduct

Principle:

A. Boards should create a Code of Conduct for Directors detailing directors’ roles,

responsibilities, and duties.

Guidelines:

B. Every year, directors should review and agree to abide by this Code of Conduct.

Code of Corporate Governance for Bangladesh

C. The Code of Conduct should be included in the orientation for all new directors.

D. The board should also create Codes of Conduct for Management and Employees,

which should be signed and agreed as a condition of the contract of employment.

E. Codes appropriate to the industry (e.g. consumer rights, passing quality

control/safety standards) should be created.

4.2 Committee on Corporate Governance Code (Korea)

The Committee on Corporate Governance was founded as a non-government body in

March 1999 to develop a code of best practices, a source to guide corporations in

establishing proper corporate governance structure. This Code applies to listed

companies and other public companies. But it is strongly advisable for non-public

enterprises to also follow the Code to the extent applicable.

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Purpose

The purpose of the Code is to maximize corporate value by enhancing the transparency

and efficiency of corporations for the future

Contents and Structure of the Code

The Committee has tried, at the same time, to take into consideration of the special

managerial circumstances that Korean corporations face, while also trying to include in

the Code the principles and standards that are internationally accepted. Also, the

Committee respects the demands of the present laws and decrees while simultaneously

providing a direction for exemplary corporate governance systems from a forward

looking perspective.

The contents of the Code consist of five sections and recommendations: Preamble,

Shareholders, Board of Directors, Audit Systems, Stakeholders, and Management

Monitoring by the Market. For each section, the code is presented, along with appended

notes to aid understanding.

Application of the Code

This Code applies to listed companies and other public companies. But it is strongly

advisable for non-public enterprises to also follow the Code to the extent applicable.

The circumstances surrounding each corporation are different from others and are also

continuously changing; therefore, corporate governance system should be flexible and

elastic. Corporations should, with the Code as its basis, voluntarily plan and operate

their own corporate governance system and continuously upgrade it with ongoing

evaluations. This Code should also be reviewed regularly according to changing

circumstances of the time.

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5. STRENGTH/WEAKNESS

5.1 Strengths

Current researches show that codes of conduct are having a positive impact on

employee behavior and perceptions and on organization at large worldwide. A research

conducted by LRN entitled “The impact of codes of conduct on corporate governance”

has following findings benefits:

Management genuinely wants to promote ethics and integrity in the organization.

Managements try to comply with the law.

Organization frame code of conduct or ethics so management can protect itself.

Employees whose organizations have a written code of conduct or ethics say it

makes the organization a better place to work.

Code has helped alter behavior or direct decisions.

Management team and BOD apply their understanding of the code on the job and at

meetings.

Codes have helped organizations to strengthen the practice and implementation of

good corporate governance.

5.2 Weakness

A survey conducted by University of Toronto showed that many of the Board of

Directors and Audit Committee suggest that there were weaknesses in many of the

organizations’ formulation and implementation of code of conduct on corporate

governance practices that contributed to senior executives benefiting personally from

various related party transactions and negatively impacting shareholders and the

company. In many instances members of board were involved in transactions that were

associated with benefits to board members at the expense of shareholders. Code of

conduct was manipulated according to their need.

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Although written codes of conduct and code education are core elements of an effective

ethics and compliance program, simply adopting and distributing a code and offering

education is not enough. Whether a program will have a positive impact on an

organization’s practice of corporate governance depends on how an organization uses

these tools. “[A] world-class code is no guarantee of world-class conduct,” cautions a

Harvard Business School study. “A code is only a tool, and like any tool, it can be used

well or poorly – or left on the shelf to be admired or to rust.” Each organization is

different, with unique goals, strategies and risk profiles. In addition, organizations are at

different stages in the evolution of their codes of conduct and their ethics and

compliance programs. Codes of conduct often fail to meet its particular objectives due

to lack of alignment with organization’s overall business strategy as well as the goals.

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6. CONCLUSION

6.1 Nepalese Context

6.1.1 Impact on Banking Sector

The banking sector is probably the most prominent sector when it comes to formulating

and implementing the codes of conduct that promote healthy competition, build public

image and serve the customers in align with the organizations achievement of goals

and objectives. Nepal Bankers’ Association (NBA) has been successful in ensuring

every bank follows detailed code of conduct framed by NBA that have positive impact

on the corporate governance practices. The code of conduct has promoted

accountability, transparency, probity and focus on the sustainable success of an entity

over the longer term. Many of the organizations have even articulated its own codes to

have affirmative impact on the practice of good corporate governance as shown by

example of Nepal Investment Bank Limited. However, there are instances of banks

involved in using the code of conduct in the favour of its directors and executives and

seriously hampering the future growth of the banks. Examples of financial institutions

like Nepal Development Bank, Royal Merchant fiancé company and Nepal Bangladesh

Bank shows the need to monitor the use of codes of conduct by financial institutions by

concerned regulators and bodies.

6.1.2 Impact on Security MarketSEBON has been, to much extent, unable to govern the security market and ensure the

proper devising of codes of conduct for the Board members, affiliates i.e. NEPSE and

other market participants like brokers. It has the reputation of ineffective governance

practices that has directly or indirectly affected the share traders trading on NEPSE

platform. Unclear codes, poor implementation and regulation of policy and guidelines

and unprofessional conduct by management at SEBON and NEPSE are not uncommon

Code of Corporate Governance for Public Companies in Nepal and developing a

mechanism for its enforceability is a major problem in Nepal. Identification of

weaknesses in, and constraints to, good corporate governance, and the role of code of

conduct and ethical standards is lacking at both Public and non-public enterprises. A

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greater compliance is relevant to promoting good corporate governance practices by

public companies. In Nepal it is at its initial phase in most of the sectors, and for aligning

Nepalese practices with international best practices seems to take quite a long times.

6.2 International Context

6.2.1 Impact of UK CG Code

The UK Corporate Governance Code has been a key standard of good practice for

listed companies on board composition and development, remuneration, shareholder

relations, accountability and audit.

It has been a milestone for all companies with a Premium Listing of equity shares in the

UK which has helped listed companies to practice codes of conduct which is a

benchmark for other countries. It required under the Listing Rules to report on how they

have applied the Combined Code in their annual report and accounts. This approach is

a great strength and has been adopted in many countries where many regulators and

bodies have made it a base to initiate writing codes of conduct for sector and

enterprises.

6.2.2 Impact on Countries

Many of the developing countries like Bangladesh, India and China have now detailed

codes of conduct for its corporations. Private sector participation is high while drafting

conduct and many committees have been formed to study the need and importance of

codes of conduct and its impact on corporate governance. As seen above Korea is in a

good position in identifying and implementing Code of Best Practice for Corporate

Governance. Similarly corporate governance in emerging economy and their impact on

enterprise performance is becoming more vigilant than ever before with synchronization

of international laws and practices related to the conduct of MNCs operating in

developing countries.

To conclude, we can say that organizations have started to realize the importance of

good codes of conduct for it to better position itself in the eyes of shareholders and

customers and control over the reckless Board Of Directors at large corporations. The

trend is towards better integration of international codes of conduct for each sector and

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develop mechanism to monitor and inspect on how adoption and implementation of

codes of conduct is going on to create favorable conditions for practice of good

corporate governance. Increasing evidence, both quantitative and qualitative, now show

that corporate codes of conduct along with education improve employee morale and job

satisfaction, aid the company’s recruiting efforts and help strengthen relationships with

business partners. There is a direct relationship between good corporate governance,

codes of conduct and compliance practices and the strength of numerous business

success indicators. Codes of conduct and code education are slowly permeating many

corporate cultures and improving corporate governance.

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BIBLIOGRAPHY

Websites:

www.frc.org.uk/Our-Work/Codes.../Corporate-governance.aspx

en.wikipedia.org/wiki/Code_of_conduct

www.newforestnpa.gov.uk/__.../code_of_practice_for_corporate

www.syndicatebank.in/.../MODEL-CODE-CONDUCT-WEB.doc

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