Corporate Governance Write Up R N Zhasa

School of Management Studies, Nagaland University MGT 301 Strategic Management

1

CORPORATE GOVERNANCE

By Rokov N. Zhasa

NU/MN-22/11 NU reg. no. 111291 of 2011-2012

Keyword: Corporate Governance, Cadbury Committee, Governance, Birla Committee, CII, SEBI

Content

1.1 Introduction

1.2 Corporate Governance vs Corporate Management

1.3 Reasons for the Growing Demand for Corporate Governance

1.4 Importance of Corporate Governance

1.5 CORPORATE GOVERNANCE IN THE INDIAN CONTEXT

2.1 TOP MANAGEMENT AND CORPORATE GOVERNANCE

2.2 Role of Board of directors

2.3 Responsibilities of BoDs

2.4 Strategic Management: Role of the Board

2.5 Board Committees

2.6 The Role of a Chairman

2.7 Functions of the Chairman

2.8 The Role of CEO

2.9 Functions of the CEO

2.10 Non-Executive Directors

2.11 Creating an Effective Board

3.1 Code and Laws for Corporate Governance

3.2 Reports of Committees on Corporate governance

3.3 Kumara Mangalam Birla Committee Report

3.4 Recent developments in other markets

4.1 Conclusion

Reference

1.1 INTRODUCTION

Governance is the process whereby people in power make decisions that create,

destroy or maintain social systems, structures and processes. Corporate


2

governance is therefore the process whereby people in power direct, monitor and

lead corporations, and thereby either create, modify or destroy the structures and

systems under which they operate. Corporate governors are both potential agents

for change and also guardians of existing ways of working. As such, they are

therefore a significant part of the fabric of our society. 1

In the narrowest sense, the term may describe the formal system of

accountability of senior management to the shareholders. At its most expansive,

the term is stretched to include the entire network of formal and informal relations

involving the corporate sector and their consequences for the society in general.

Corporate governance, however, as generally understood, includes the structure,

process, cultures and systems that engender the successful operation of the

organisations.2

The concept of Corporate Governance is to some extent similar to the

quality practices adopted under the ISO Standard. The key question is to ensure

how effectively organizations are managed. This would also include defining of the

powers of Directors, particularly non-executive ones, making available information

on the Company’s current state of affairs to all the Directors, and systems control

to ensure the authencity, timeliness and effectiveness of the information.3

1.2 CORPORATE GOVERNANCE VS CORPORATE MANAGEMENT

Corporate governance is concerned with the values, vision and visibility. It is

about the value orientation of the organization, ethical norms for its performance,

the direction of development and social accomplishment of the organization and

the visibility of its performance and practices. Corporate management is

concerned with the efficiency of the resource use, value addition and wealth

creation within the broad parameters of the corporate philosophy established by

corporate governance.

In short, the concept of good corporate governance connotes that ethics is

as important as economics, fair play as crucial as financial success, morals as

vital as market share.

1.3 REASONS FOR THE GROWING DEMAND FOR CORPORATE

GOVERNANCE


3

Inadequacies and failures of an existing system often bring to the fore the need for

norms and codes, to remedy them. This is true for corporate governance too. The

demand for good corporate governance arose in response to loop holes and how

they were exploited by companies with disastrous consequences. These were:

a) Falling Standards of Financial Reporting and Accountability

In the UK, deficiencies in the Accounting Standards became more evident after

many companies, in their eagerness to increase earnings and accelerate growth,

exploited the weaknesses in the accounting standards to show inflated profits and

understate liabilities, While companies grew phenomenally, accounting standards

went haywire. The tendency to combine the roles of chairman and chief executive

in one person and Board structures that were not conductive tended to make

matters very undesirable. The resultant failure of several companies raised

serious concerns regarding corporate governance and this eventually led to the

appointment of the Sir Adrian Cadbury Committees on Corporate Governance by

the London Stock Exchange and the Financial Reporting Council in Britain in

1991.

There was an increasing concern about standards of financial reporting and

accountability, especially after losses suffered by investors which could have been

avoided, with better and more transparent reporting practices. Investors suffered

on account of unscrupulous management of the companies, which have raised

capital from market at high valuations and have performed much worse than the

past reported figures, leave alone the future projections at the time of raising

money.

There were also many companies, which are not paying adequate attention

to the basic procedures for shareholders’ service; for example, many of these

companies do not pay adequate attention to redress investors’ grievances such as

delay in transfer of shares, delay in dispatch of share certificates and dividend

warrants and non-receipt of dividend warrants; companies also pay sufficient

attention to timely dissemination of information to investors as also to the quality

of such information. While enough laws existed to take care of many of these

investor grievances, the implementation and inadequacy of penal provisions left a

lot to be desired.


4

Confronted with the above problems and enlightened by the developments

in the sphere of corporate governance in other countries, there has been an all

round eagerness in corporate India to adopt good Corporate Governance. Two

sets of factors have contributed to this trend. There is a necessitating set of

factors and a facilitating set of factors. One important necessaiting factor is the

mandatory requirement resulting from the recommendations of the Birla

Commission on Corporate Governance set up by the SEBI. Another necessaiting

factor has something to do with the liberalization. The foreign investors,

collaborators and buyers have been demanding more transparency in respect of

the functioning of the Indian Corporates. Thirdly, the Indian investors have

become more keen on good corporate governance. An important facilitating factor

is that there is a growing awareness and enthusiasm in the corporate India to

embrace good corporate governance. Many captains of industry, corporate

leaders and top executives are keen to usher in good corporate governance.

1.4 IMPORTANCE OF CORPORATE GOVERNANCE

Studies of firms in India and abroad have shown that markets and investors take

notice of well-managed companies, respond positively to them, and reward such

companies, with higher valuations. A common feature of such companies is that

they haves systems in place, which allow sufficient freedom to the boards and

management to take decisions towards the progress of their companies and to

innovate, while remaining within a framework of effective accountability. In other

words they have a system of good corporate governance.

Strong corporate governance is thus indispensable to resilient and vibrant

capital markets and is an important instrument of investor protection. It is the

blood that fills the veins of transparent corporate disclosure and high-quality

accounting practices. It is the muscle that moves a viable and accessible financial

reporting structure. Without financial reporting premised on sound, honest

numbers, capital markets will collapse upon themselves.

Another important aspect of corporate governance relates to issues of

insider trading. It is important that insiders do not use their position of knowledge

and access to inside information about the company, and take unfair advantage of


5

the resulting information asymmetry. To prevent this from happening, corporates

are expected to disseminate the material price senstitive information.

1.5 CORPORATE GOVERNANCE IN THE INDIAN CONTEXT

As it was briefly stated earlier, corporate governance has been much talked about

in India particularly after 1993. Liberalization brought mixed results for Indian

economy. Noticeably, it brought in its wake a spate of corporate scandals. Later

on scores of companies made public issues with large premium and then

disappeared; prospectus misled the public. The management of most of these

companies diverted funds and investors had no option but to repent their lost

money. Primary market literally collapsed in the after math of these failures.

Slowly, many a family owned businesses moved to become widely held limited

companies. The question, how to function in a corporate setup overriding family

interest and obligations called for a code of governance. Similarly, corporate

banks also came under strain due to scams; governance failure was total. The

story of UTI is also well known where millions of small investors lost their capital

due to inadequate management practices and weak supervision.

Auditors were following questionable accounting practices on behest of the

management and often advising on how doubtful accounting choices might be

made so as to remain on the right side of law and at the same time, escape

detection by users of financial information. All these factors put strong pressure on

many corporates to evolve a good governance practice.

Over the period of time in India companies like Tata Group, Infosys, Wipro

have evolved sound principles of governance, intertwining corporate governance

with social responsibility. These companies have become global and it is common

to find global norms of accounting and disclosure being followed in these

corporate houses. Rights of employees, stock options, independent directors,

meeting quality norms, price warranty and guarantee- all these have made room

for quality governance. Managers have indeed become trustees of shareholders.

It began in 1998 with the Desirable Code of Governance- a voluntary code

published by CII, and the first formal regulatory framework for listed companies,

established by the SEBI in February 2000, following the guidelines enunciated by

the Kumar Mangalam Birla Committee Report. On 21st

August, 2002, the


6

Department of Company Affairs under the Ministry of Finance appointed Naresh

Chandra Committee to examine issues pertinent to governance. The committee

looked into financial and non-financial disclosure and independent auditing and

board oversight of management.

Apart from financial compliance or disclosure, the independent oversight of

management is also important. Many companies have disappeared, vanished

either due to fraud or poor quality of board resulting in lack of independent

oversight. The Kumar Mangalam Birla Committee focused on the role of

independent and statutory auditors and also the role of the board of directors.

SEBI constituted a committee on corporate governance under the

chairmanship of Sri N. R. Narayana Murthy. The committee included

representatives from the stock exchange, chamber of commerce and industry,

investor associations and professional bodies, which debated on key issues

related to corporate governance. Findings and recommendations of these

committees are discussed in the later chapter.

Thus we find that the corporate India is going through a great churning

phase. New aggressive companies are doing business with global ambitions,

placing a lot of emphasis on governance and transparency. FIIs are very serious

about good governance and disclosures. Liberalization brought great challenges,

after initial jolts and pain of restructuring, companies are seeing profits more than

before.

2.1 TOP MANAGEMENT AND CORPORATE GOVERNANCE

“The major players in the area of corporate governance, within the corporation

are corporate board, shareholders and employees. Externally, the pace for

corporate governance is set by the government as the regulator, customer, and

lenders of finance and social ethos of our times. The scope and extent of

corporate governance are set by the legal, financial and business framework.

In essence, corporate governance is the system by which companies are

directed and controlled. Board of directors are responsible for the governance of

their enterprises.” -Corporate Governance: A Multi-faced Issue; The Chartered

Secretary, May’97.

2.2 Role of Board of directors


7

2.2.1 Law –Related Expectations

The Indian Companies Act does not define the Board of Directors (BoDs). Even

‘Director’ is simply defined as ‘it includes any person occupying the position of

Director, by whatever name called’ [sec.2 (13)]. With the help of this open

definition of Director, we may infer that a Board of Directors is a group of

individuals each of whom is labeled as ‘Director’ (or by any other title with identical

substantive intention). No person is to hold more than 20 directorships.

Section 269 says that, the commencement of the Companies (Amendment)

Act, 1988, certain specified public companies or private companies which are

subsidiaries of public companies, shall have a Managing or Wholetime Director, a

Manager, and each such appointment must be made with prior approval of the

central Government.

What is a BoDs suppose to do? This again we can know inferentially by

referring to a definition of ‘Manager’ and ‘Managing Director’ in section 2 of the

Act, and also Sections 291-93. Both these incumbents have to exercise their

powers of management’s ‘subject to the superintendence, control and direction of

the Board’. Thus, the BoDs, in broad terms, is expected to perform the role of

overseeing the running of the enterprise by its chief executive.

On whose behalf does the BoDs perform this role of overseeing? It is

expected to do this on behalf of the shareholder. It is they who elect the directors

on the board. And it is the BoDs, which, in turn, selects the Chief Executive.

The directors individually have no powers in the eyes of law. It is only the

collective body of directors, i.e., the board, which has a superior total power over

the Chief Executive. The intent of the Indian Companies Act appears to include

only outside non-employee directors on the board. Otherwise, if internal

Wholetime Executive, say the MD were to be the directors on the board, how

could they exercise ‘superintendence, control and direction’ over themselves?

Section 291 stipulates that the BoDs shall be entitled to exercise all such

powers, and to do all such acts and things as the company authorizes to exercise

and do, except those things which can be done in a general meeting of the

company. The powers exclusive to the BoDs (sec. 292) are:

• To make calls on shareholders in respect of money unpaid on their shares


8

• To issue debentures

• To borrow money otherwise than through debentures

• To invest the funds of the company

• To make loans

Correspondingly, section 293 restricts the powers of the BoDs, by making them

subject to the consent of general meeting of the company, in respect of selling,

leasing or disposing of the property of the company; remitting debt due by the

director; borrowing money to an extent which exceeds the net worth of the

company etc.

The Board of Directors is expected to meet once in a quarter and the

quorum for a valid meeting of the board is one –third of the total strength or two

directors, which is higher. The power to declare dividends is exclusive to the

BoDs.

Section322 of the companies Act allows ‘ memorandum of association ‘ of

a limited company to provide for a director or directors with unlimited liability.

2.2.2 Managerially –Derived Expectations

The dimension relating to the managerially derived expectations of the Board of

Directors role seems to be of relatively recent origin. In more than two decades or

so, industrial development had been marked by far-reaching technological

changes, leading to equally fundamental competitive reorientation at the global

level. As a result, many erstwhile great names in the industry have been humbled.

With such rapidly mounting changes and uncertainties, the role of BoDs has

begun to be viewed from much wider and long –term perspective beyond the

minimum requirements of the law. Probably, upto 1970’s, the duty of BoDs to

superintend, control and direct had gone by defaults. Stable environment had

helped this key role to remain dormant. What is then the renewed ramifications of

this role at present? These are meant to ensure that.

• The enterprise continues to remain effective on the standpoint of

technology parameter.

• The enterprise continues to achieve healthy market growth in competitive

conditions.


9

• Divestments and diversification take place on sound lines.

• Long-term productivity and quality are never sacrificed at the alter of short

term profitability

• Judicious earnings retention policy is adopted for financing growth,

modernization, etc.

• Serious and sustained attention is adopted towards building a sound

system of human values and exalted corporate culture.

It is a common observation that BoDs function rather passively. Often the

members are selected not because of their knowledge and competence but

because of their compatibility, prestige or esteem in the community. Usually, the

Chief Executive Officer or the group of promoters has free reign in choosing the

directors and in having them elected by the shareholder. The directors thus

selected often feels that they should go along with any proposal made by the CEO

and his group. Interestingly, the board members find themselves accountable to

the very management they are expected to oversee.

Over the recent past, however, lending institutions, financial media and

corporate analysts have seriously questioned the role of BoDs. The investors and

government in general are better aware of the role of the BoDs. Though the

Companies Act throws some light on the powers of the BoDs and the restrictions

placed on those powers, it does not specify to whom they are responsible and

what for. However, there is a broad agreement that BoDs appointed or elected by

the shareholders are expected to:

• Oversee the management of the company’s assets

• Establish or approve the company’s mission, objective, strategy and

policies

• Review management actions and financial performance of the company

• Hire and fire the principal executive and operating officers of the company

An important issue in this context is: should BoDs merely direct or may

they manage also? Many experts and practicing top managers say that BoDs

should only oversee and direct, and never get involved with the detailed

management. There are others who feel that, for direction to be realistic and

sensible, some in-depth involvement with details is necessary. The majority view,


10

however, is in favour of directors directing the affairs of the company and not

managing them.

2.3 RESPONSIBILITIES OF BODs

The board is expected to act with “ due care”. That is, they “must act with that

degree of diligence, care, and skill which ordinarily prudent men would exercise

under similar circumstances in like positions”. If a director or the Board as a whole

fails to act with due care and, as a result, the company in some way, is harmed,

the careless director or directors may be held personally liable for the harm done.

Further, they may be held personally responsible not only for their own actions but

also for the actions of the company as a whole.

In addition, directors must make certain that the company is managed in

accordance with the laws and regulations of the land. They must also be aware of

the needs and demands of the constituent groups so that they can bring about a

judicious balance between the interest of these diverse groups, while ensuring at

the same time that the company continues to function.

2.4 STRATEGIC MANAGEMENT: ROLE OF THE BOARD

According to Bacon and Brown, BoDs, in terms of strategic management, have

three basic tasks.

• To initiate and determine: A board can delineate an organisation’s

mission and specify strategic options to its management.

• To evaluate and influence: A board can examine management proposals,

decisions and actions; agree or disagree with them; give advice and offer

suggestions; develop alternatives.

• To monitor: By acting through its committees, a board can keep abreast of

developments, both inside and outside the organization. It can thus bring

new developments to the attention of the management, which it might have

overlooked.

While the BoDs are not expected to involve itself in day-to-day operating

decisions, they are nonetheless expected to consider and give their views on all

such matters that have long-term connotations. In fact, such matters by

convention are referred to the board. These relate to issues such as introduction


11

of new product, new technology, collaboration agreements, senior management

appointments and major decisions regarding industrial relations.

The directing function of the board has internal and external components.

Internal components relates to various actions taken by the executives and their

implications for the organization, including R&D, capital budgeting, new projects,

new competitive thrust, relationship with financial institutions and banks, foreign

collaborators, major customers and suppliers. External component relates to

identifying broad emerging opportunities and threats in the environment and

feeding them to the management so that “strategic mismatch do not occur”. The

board should see that the organization always remains in alignment with the

social, economic and political milieu.

2.5 BOARD COMMITTEES

The provision of section 292 of the Companies Act provides for delegation of

powers by the BoD to the Committee of Directors of the powers regarding (a)

borrowing money for the company otherwise than for debentures, (b) investing the

funds of the company, and (c) making loans by the company.

In practice, however, Boards do appoint –specific committees for in-depth

exploration of certain matters e.g., diversification project, shutting down a plant.

These committees work for a specified period and submit their views to the full

board. There are standing committees, which meet in the interval between the

board meetings, and are expected to devote greater attention to details in

important matters arising from those functions. It is the outside directors who

officially comprise such committees. Some important committees usually set up

by the board, comprising outside directors are as follows:

• Audit committee: It consists of independent directors who report to the

board. Usually the committee acts as a link between the board and the

external auditors. They look into the issues raised by the external auditors

in greater details. Some of the functions of the audit committee are:

To review the interim and final accounts in Toto.

To solve any problem they come across while completing the audit with

due consultation with the independent auditor.


12

To make recommendations regarding the audit fees, selection and

replacement of the auditors.

• Remuneration committee: This committee reviews the remuneration

packages of the executive directors and other top-level managers. It

consists of independent directors and drafts the remuneration policy of the

company, which checks the unreasonable increase in the executive

compensations.

• Nomination Committee: Nomination committee is usually set up to select

new non-executive directors. The chairman of the board heads the

committee.

2.6 THE ROLE OF A CHAIRMAN

The role of the Chairman is to manage the board and ensure that its policies are

put into practice by the management. He must have a good knowledge of

company’s financial position and closely monitor its performance. The chairman

has to work closely with the company secretary to address legal issues.

With the knowledge of the way in which the company is managed and its

financial standings, the chairman has to play a proactive role. He should be in a

position to identify the short comings and see that the board discusses these. By

being proactive the chairman can help the CEO take corrective action before

things get out of hand. Since the chairman leads the board, its for him to maintain

good relation between the board and the company’s shareholders. In the process

of maintaining such relationship he ensures that the board makes decision in

accordance with the interest of the shareholder and all other stakeholders of the

company. Primarily the chairman has to cater to the internal needs of the board

and its conduct. He also should maintain good relation with the CEO and

executive and non-executive directors.

2.7 FUNCTIONS OF THE CHAIRMAN

Some of the other important functions of the chairman include:

• To act as a representative of the company

• To ensure that policies and practices are in place

• To see to it that directors make good decision

• To act firmly in times of crisis


13

• To upgrade the competence of director so as to meet the current and future

needs of the company.

2.8 THE ROLE OF CEO

The role of a CEO is to achieve the organizational objective, by efficiently running

the organization. He also needs to maintain close working relation with chairman

and the directors. His relation with the chairman requires a high degree of trust,

respect and an ability to communicate openly. On the other hand he should

maintain cordial relationship with the executive directors to ensure that they act in

the interest of the whole organization. He needs to motivate the directors in

improving the performance of the organization.

2.9 FUNCTIONS OF THE CEO

Apart for the above roles, a CEO should;

• Present the company to major investors, media and the government

• Provide leadership and direction to all executive directors

• Assist the executive directors in formulating strategies proposals that have

to be endorsed by the board.

• Be a source of inspiration , leadership and direction to all the employees,

customers and suppliers

• Take firm decision when situation demands.

2.10 NON-EXECUTIVE DIRECTORS

These are the directors, who do not hold an executive position in the organization.

They are also known as outside directors. These directors play a very important

role in the governance of the company. As these directors do not have any other

(than remuneration) material pecuniary relation or transaction with the company,

its promoters, its management or its subsidiary, they will have unbiased judgment

on the workings of the board and the company.

2.11 CREATING AN EFFECTIVE BOARD

The function of a board is very comprehensive. In practice, it could be said that

the board is responsible for laying down matters of principle and of accounting,

statistical and management procedures. It is also responsible for the decision of


14

what product to make, which market to penetrate, determination of manufacturing

capacity, investment decision, cash flow, liquidity etc. In summary, the directors

are responsible for ensuring that the top management functions effectively and

that through the information system, proper reports are generated and information

is made available for both control and planning purposes.

Ideally, the board of directors should be the heart and soul of a company.

Whether a company grows or declines depends very much upon the sense of

purpose and direction, the values, the will to generate customer satisfaction, and

the desire to achieve, develop and learn, that emanates from the board and the

extent to which it is visibly committed to them.

The efficient board should be the one which is willing to identify, discuss

and tackle barriers to its own contribution. The board can be constrained or

enhanced by the limitations or strengths of its individual members.

While effectiveness may be influenced by a number of factors, the following

provide a model checklist:

• Do the board members share a common, clear and compelling vision? Are

they committed to an agreed and realistic strategy to the achievement of

the vision?

• Have the necessary resources, processes, role, competencies, enabling

technology and learning capabilities for successful implementation been

assembled?

• Whether special responsibilities for projects that stretch beyond a financial

year, such as strategic business developments, entrusted to select

directors?

• When the company expands into a international network, whether the

governance needs of the new style entity are given a fresh look?

• When the role of chairman and the CEO are separated, whether there is

mutual trust and respect to supplement and complement each other’s

responsibilities and contributions?

3.1 CODE AND LAWS FOR CORPORATE GOVERNANCE

For any concept or idea to form a part of our existence or business needs to be

put in papers in distinct terms, so that they are understood and followed by all in a


15

similar fashion. These are called rules or codes of conduct. These are principles

and standards that are intended to control, guide or manage behaviour or the

conduct of individuals. However, codes are self-imposed and regulations are

imposed by the states.

There are many corporate governance codes developed by non-governmental

organizations, stock exchanges, investor groups and professional associations.

3.2 REPORTS OF COMMITTEES ON CORPORATE GOVERNANCE

In recent years, governments and corporates have made sincere efforts in

designing and implementing codes for good corporate governance. Some of the

reports on corporate governance published abroad and in India are:

• Cadbury Committee Report

• CII Committee Report

• Kumara Mangalam Birla Report

• Narayana Murthy Committee Report

In our context we shall be discussing the KM Birla Report.

3.3 KUMARA MANGALAM BIRLA COMMITTEE REPORT

Over the years some Indian companies have voluntarily established high

standards of corporate governance, but there are many more, whose practices

are a matter of concern. There is also an increasing concern about standards of

financial reporting and accountability, especially after losses suffered by investors

and lenders in the recent past, which could have been avoided, with better and

more transparent reporting practices. Investors have suffered on account of

unscrupulous management of the companies, which have raised capital from the

market at high valuations and have performed much worse than the reported

figures leave alone the financial projections at the time of raising money. Another

example of bad governance has been the allotment of promoter’s shares, on

preferential basis at preferential prices, disproportionate to market valuation of

shares, leading to further dilution of wealth of minority shareholders. This practice

however was later contained.

There are also many companies, which are not paying adequate attention

to the basic procedures for shareholders’ service; for example, many of these


16

companies do not pay adequate attention to redress investors’ grievances such

as delay in transfer of shares, delay in dispatch of share certificates and dividend

warrants and non-receipt of dividend warrants. SEBI has been daily receiving

large number of investor complaints on these matters. While enough laws exist to

take care of many of these investor grievances, the implementation and

inadequacy of penal provisions.

In the above-mentioned context, the Committee on Corporate Governance

was set up on May 7,1999, by the Securities and Exchange Board of India (SEBI)

under the Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to

promote and raise the standards of corporate governance. The purpose of the

committee was;

1. To suggest suitable amendments to the listing agreement executed by the

stock exchanges with the companies and any other measures to improve the

standards of corporate governance in the listed companies, in areas such as

continuous disclosure of material information, both financial and non-financial,

manner and frequency of such disclosures, responsibilities of independent and

outside directors;

2. To draft a code of corporate best practices; and

3. To suggest safeguards to be instituted within the companies to deal with

insider information and insider trading.

Major recommendations of the committee are as follows.

• The board should have an optimum combination of executive and non-

executive directors and at least 50% of the board should comprise of non-

executive directors.

• No director should be a member in more than 10 committees or act as

chairman of more than five committees in which he is a Director.

• The board of the company should set up a qualified and independent “Audit

Committee”.

• Board should set up a remuneration committee to determine the

remuneration packages for the executives.

• The corporate governance section of the Annual Report should make

disclosures on remuneration paid to directors in all forms including salary,


17

benefits, bonuses, stock options, pensions and other fixed as well as

performance linked incentives .

• Management should assist the board in its decision-making process in

respect of company’s strategy, policy, code of conduct and performance

targets.

• The management should implement the policies and code of conduct of the

board

• It should provide timely, accurate, substantive and material information,

including financial matters and exceptions to the board, board committees

and the shareholders.

• As a part of the disclosure related to management, in addition to the

Director’s report, Management Discussion and Analysis Report should form

part of the Annual Report to the shareholder.

• The committees also took note of various steps taken by SEBI for

strengthening corporate governance, some of which are:

• Stringent disclosure norms for Initial Public Offers

• Providing information in director’s reports for utilization of funds and

variation between projected and actual use of funds as per the

requirements of the Companies Act,

Declaration of quarterly results

• Mandatory appointment of compliance office for monitoring share transfer

process

• Timely disclosure of material and price sensitive information having a

bearing on the performance of the company

• Dispatching one copy of complete balance sheet to every household and

abridged balance sheet to all shareholders

• Issue of guidelines for preferential allotment at market related process

• Issue of regulations providing for a fair and transparent framework for

takeovers and substantial acquisitions.

The recommendations made by Shri Kumar Mangalam Birla Committee were

accepted by SEBI in December 1999, and are now enshrined in Clause 49 of the

Listing Agreement of every Indian stock exchange.


18

3.4 RECENT DEVELOPMENTS IN OTHER MARKETS

Implementation of Sabarnes-Oxley Act, 2002 in the U.S. A. In response to the

public outcry against the recent corporate scandals like, Enron, World Com, etc.,

a new legislation viz., the Sarbanes-Oxley Act has been enacted on July30, 2003

in the U.S.A. in order to protect investors by improving the accuracy and reliability

of corporate disclosures made pursuant to the securities laws. The legislation

initiated major reforms in the following areas.

1. Public Company Accounting Oversight Board

2. Auditor’s independence

3. Conflict of interest

4. Corporate responsibility

5. Enhanced financial disclosures

6. Analyst conflict of interest

7. Corporate and criminal fraud accountability

8. White-collar crime penalty enhancements

9. Corporate fraud and accountability

10. Studies and reports

European Union

The European Commission recently completed a study of 43 different corporate

governance codes and proposed to merge all of them to create a single,

consistent code.

Germany

The German government had announced details of comprehensive new voluntary

guidelines to improve their corporate governance practices. The code aims at

strengthening the rules concerning auditor and supervisory board independence,

gives shareholders a limited role in takeovers, recommends that companies

disclose board remuneration individually, and requires a company to disclose

whether or not they comply with the code.

Ireland

Irish Association of Investment managers revealed a high level of compliance

amongst Irish corporates with the Combined Code on governance implemented

by LSE. 97% of firms allow shareholders to vote on re-election of directors every


19

three years. 85% and 79% of them have remuneration and audit committees

respectively comprised fully of non-executive directors. 79% of them have

separate role for the chairman and the chief executive officer.

Asian and Latin American markets

S&P carried out a survey of 350 Asian and Latin American companies on 10

points based on 98 information attributes grouped into 3 categories: financial

transparency and information is closures; investors relation, and ownership

structure; and board and management structure and practices. 19 out of 43 Indian

companies managed to get score of 4; Infosys scores 7.

Kenya

Kenya’s Capital Market Authority has introduced new guidelines to improve

corporate governance practices. The guidelines include: appointment of

independent directors, constitution of nomination committee, the role of CEO and

Chairman to be separated; limiting the term of director on the board subject to

shareholders’ approval and frequent appraisal of the board.

Thailand

Stock exchange of Thailand is set to introduce a new committee to strengthen

corporate governance and make best corporate practice a national priority. Of the

580000 companies, nearly half do not report balances-sheet and a quarter of

them do not pay even taxes. Thailand’s SEC has drafted a framework for

corporate governance ratings aimed at protecting shareholders’ rights, the quality

of directors and the efficiency of internal controls. The Thai SEC will offer highly

rated firms bunch of incentives, including a fast-track review of their corporate

filings to issue new shares.

Russia

Russia’s Federal Commission for Securities Markets introduced new code of

corporate governance which includes a number of tax incentives and investor

friendly regulations.

Hong Kong


20

Hong Kong’s SFC proposed a rule that executives who intentionally or recklessly,

provide false or misleading information in public disclosures, shall face up to two

years in prison and a HKD 1 million fine.

Philippines

Philippines SEC has requested that all listed firms establish an evaluation system

to track performance of their boards and executive management. The recently

approved code of corporate governance recommends that all public entities and

fund raising entities shall

adopt the same. Philippines’ SEC is likely to extend new corporate governance

code to require even non-listed firms to place at least one independent director on

the board.

4.1 CONCLUSIONS

1. Corporate Governance as a culture: Good corporate governance is good

business because it inspires investors confidence, which is very essential

to attract capital. A few unscrupulous businessmen can, largely undo all the

confidence built through the good work by the good companies over time.

They need to be handled with iron hands. However, corporate governance

goes beyond the realm of law. It comes from the culture, mindset of

management and cannot be regulated by legislation. The watchwords are

openness, integrity and accountability.

Companies need not be myopic with short-term goals, caring only

about quarterly results or immediate stock prices in the bourses, or that

cherished P/E ratio. Good governance maximizes long-term shareholder

value, which in turn takes care of short-term goals too.

2. Corporate Governance and Tope Management: A group of outstanding

individuals do not necessarily make an effective board. Directional

competence and contribution depends upon the interaction of a particular

combination of people and personalities in the boardroom. This sense of

direction and purpose of the board will lead to good governance and that

will determine the growth of the enterprise.

3. Code and Legislations: It would have been very clear by now as to the

importance that has been laid in good corporate governance. Government,


21

corporates and the civic societies have been doing their bit to improve upon

the existing level of governance. Corporate governance goes beyond the

realms of law. It comes from the culture, ethos and the mindset of

management. However due emphasis must be given to the role of

legislation also. Need of the hour is to build an atmosphere of mutual trust,

responsibility and accountability that makes the governing team

enthusiastic and makes them aspire for excellence. Procedural refinements

and innovation are no substitute for ‘good’ men, while good men are never

short of capacity to innovate. Thus, it is men more than measures that

make good corporate governance for that matter ‘the governance’ give its

true result.

REFERENCE

1. Rao, P. S., Business Policy and Strategic Management (Text and Cases),

Himalayan Publishing House, p 489-500

2. Cherunilam. F, Strategic Management, Himalayan Publishing House

3. MS 91 Advanced Strategic Management, Block 02 Corporate Governance,

IGNOU Study Material

Documents

Corporate Governance Write Up R N Zhasa