CORPORATE GOVERNANCE

Definitions:
Corporate governance is to conduct business in accordance with
shareholders desire while confirming to local laws and customs. - Milton
Friedman

Corporate governance is all about promoting corporate fairness,

transparency and accountability. – J.Wolfensohn.

Meaning
Corporate governance is the system by which the company is directed and
controlled by the management in the best interest of the stakeholders
(shareholders, investors, employees, customers, suppliers and others).
The board of directors of the company is responsible for the corporate
governance by ensuring transparency in business operations and
accountability on their part to protect the interests of the stakeholders.

Major players in area of Corporate governance:

1) Within the corporation:

a) The board of directors
b) The shareholders
c) The employees

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 2) Outside the corporation are:
a) Regulatory agencies such as SEBI, RBI
b) Lenders of finance such as banks.
c) Customers, suppliers and society.

 Corporate governance depends upon the 2 factors:

1) The first is the commitment of the board of director and management

for the principle of integrity and transparency in business operation.

2) The second is the legal and administrative framework and the

administrative framework created by the government. If public
governance is weak, then we cannot have good Corporate
Governance.

 Corporate governance objectives:

The main objectives of the Corporate governance is the “enhancement of

shareholders value, keeping in view the interest of other stakeholders”.
Therefore a company needs to strike a balance at all times between the needs
to enhance shareholders wealth and the need to protect the interests of other
stakeholders.

 The important aspects of Corporate governance are:

• There is no unique structure of Corporate governance in the developed

world. The Corporate governance code of each country has to
designed keeping in view the peculiarities of the country. Mr. Adrian
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 Cadbury who had framed the Cadbury Committee Report on basis of
this idea.

• Indian companies, Banks and Financial institution can no longer

afford better corporate practices. With integration of India into the
world market, companies will be required to give greater disclosure,
more transparent explanation for major decisions and better corporate
value.

FACTOR INFLUENCING CORPORATE GOVERNANCE

1) INTEGRITY OF MANAGEMENT: A board of director with a low

level of integrity is tempted to misuse the trust reposed by
shareholders and other stakeholders to take decision that benefit a few
at the cost of other.

2) ABILITY OF THE BOARD: The collective ability, in term of

knowledge and skill, determines the effectiveness of the board.

3) ADEQUACY OF THE PROCESS: Board of directors cannot

effectively supervise the executive management if the process fails to
provide sufficient and timely information to the board, necessary for
reviewing plan and the performance of the enterprise.

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4) COMMITMENT LEVEL OF INDIVIDUAL BOARD
MEMBER: The quality of a board depends on the commitment of
individual member to tasks, which they are expected to perform as
board members.

5) FINANCIAL REPORTING: Accuracy and transparency in financial

statement and disclosure, internal controls and independence of
auditors.

6) PARTICIPATION OF STAKEHOLDER IN THE

MANAGEMENT: The level of participation of stakeholders
determines the number of new ideas being generated in optimum
utilization of resources and for improving the administrative structure
and the process.

7) QUALITY OF CORPORATE REPORTING: The quality of

corporate reporting depends on the transparency and timeliness of
corporate communication with shareholder.

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 IMPORTANCE OF THE CORPORATE GOVERANCE

1 TO PROTECT INTEREST:-
Corporate governance helps the company or business to protect the interest
of the all stake holders such as shareholders, customers, employees and the
governments, society and suppliers, competitors.

2 PROVIDED INFORMATION:-
it provided the information about the company financial position and also
value of share in the market should be put on the company web site that help the
company to make issues of their share i.e. collect the capital by public issues.

3. GOOD PUBLIC IMAGE:-

A business which responds favorably to social needs enjoys a good
reputation and consequently good public’s supports. A company that cares and has
a concern for its employees, shareholders, consumers, and society, will be
respected by them and will enjoy a good public image.

4. OPTIMUM UTILISATION OF RESOURCES:-

It helps the company to make optimum utilization of the available
resources. It means that at by putting minimum cost and gets the maximum output
that will also give good quality product to consumer who is our stakeholder.

5. CODE OF CONDUCT:-

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 There are certain code of conduct is given that has to be followed by
company. When they preparing the reports. It should be according to the company
act 1956 and also the with accounting standard which lay down in the
memorandum of the company.

6 FOREIGN INVESTORS:-
There is various foreign financial investors’ available or present market
they like to invest in the company. But they have to follow the good corporate
governance. Because they expect the about the quality of managements.

7 OPPORTUNITIES:-
It also helps to company to take advantages of the opportunities such as the
joint venture, licensed facilities and acquiring companies abroad. Also expand the
company or diversification take place.

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REASONS FOR RECENT AWARENESS IN CORPORATE
GOVERNANCE

Following are some reasons for recent awareness of corporate governance:

• Directors of the company must realize that their job is to represent the
shareholders and other stakeholders and not offer themselves as the
rubber stamp of the managing director.
• There is rise of institutional investors and safeguard their interest.

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 • In the wake of globalization, there are numerous takeover moves in
corporate world.
• Advent of investigating reporting in business journalism.
• Activism of regulatory bodies such as SEBI.
• Corporate governance has to do with power and accountability.

Numerous companies have now laid elaborate systems, structures and

procedures as part of corporate governance. Companies now highlight their
practices of corporate governance in their annual reports.

The corporate government movement in India picked up momentum after

the debacle of big companies such as Enron, WorldCom and BCCI bank.
Those where times when the confidence of the financial community,
shareholders and investors took a beating the world over. It was around that
time that the foreign financial institutions started investing money in Indian
companies, which also triggered the need for greater accountability. Today,
fund managers view firms such as Tata Motors, ITC, Ranbaxy, Infosys and
Hero Honda Motors as having higher governing standards.
The economic times did a survey of Indian Corporate Governance and
published its findings in its issue dated August 19, 2005. The criteria used
by the economic time survey to identify the winners are as follows;
 Accounting Quality.
 Value creation focus.
 Fair policies and actions.
 Communication.
 Effective governing board.
 Reliability.
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Rankings given to the companies are as follows:

1. INFOSYS TECHNOLOGIES.
2. TATA STEEL
3. WIPRO
4. HDFC BANK
5. HDFC
6. TATA MOTORS
7. RELIANCE INDUSTRIES
8. ITC
9. RANBAXY LABORATORIES
10.HINDUSTAN LEVER
11.HERO HONDA MOTORS
12.LARSEN & TOUBRO
13.STATE BANK OF INDIA
14.BAJAJ AUTO
15.ONGC
16.GUJARAT AMBUJA CEMENT
17.HINDLCO INDUSTRIES
18.GRASIM INDUSTRIES

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 19.CIPLA
20.BPCL.

(Source: The Economic Times August 19, 2005)

REASONS FOR INCREASING DEMAND FOR

CORPORATE GOVERNANCE

 The need for a corporate governance has been described by SEBI

The need for a system of corporate governance has been described by
SEBI by pointing out the background of the appointment of the Kumar
Mangalam Birla Committee on Corporate Governance.

 Inadequacies and failures of an existing system often brings forth

the need for Corporate Governance
Inadequacies and failures of an existing system often bring to the fore
the need for norms and codes to remedy them. This is true of corporate
governance too. In the U.K, 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

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executive in one person and Board structures that were not conducive
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 Committee on Corporate Governance by the London
Stock Exchange and the Financial Reporting Council in Britain in 1991.
Several other notable reports and codes on the subject were also published
internationally, like the Report of the Greenbury Committee, the Combined
Code of the London Stock Exchange, the OECD Code on Corporate
Governance and The Blue Ribbon Committee on Corporate Governance in
the US. In India, the CII has published a Code of Corporate Governance.

 There was an increasing concern about standards of financial

reporting and accountability, with better reporting practices
There was an increasing concern about standards of financial
reporting and accountability, especially after losses suffered by investors and
lenders 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 the 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.
Another example of bad governance had 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 has, however, since been contained.

 Companies did not pay attention to the basic procedures for

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shareholders’ service
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 warrant;
companies also do not pay sufficient attention to timely dissemination of
information too 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.

 Corporate Governance is considered an important instrument of

Investor Protection
Corporate governance is considered an important instrument of
investor protection, and it is, therefore, a priority on SEBI’s agenda. To
further improve the level of corporate governance, need was felt for a
comprehensive approach at this stage of development of the capital market,
to accelerate the adoption of globally acceptable practices of corporate
governance. This would ensure that the Indian investors are in no way less
informed and protected as compared to their counterparts in the best-
developed capital markets and economies of the world.

 The financial crisis in the Asian markets in the recent past have
highlighted the need for improved level of corporate governance
Securities market regulators in almost all developed an emerging
markets have for sometime been concerned about the importance of the
subject and the need to raise the standards of corporate governance. The

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financial crisis in the Asian markets in the recent past have highlighted the
need for improved level of corporate governance and the lack of it in certain
countries have been mentioned as one of the causes of the crisis.

Indeed corporate governance has been a widely discussed topic at the recent
meetings of the International Organization of Securities Commissions
(IOSCO). Besides in an environment in which emerging markets
increasingly compete for global capital, it is evident that global capital will
flow to markets which are better regulated and observe higher standards of
transparency, efficiency and integrity.

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