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DEPARTMENT OF MANAGEMENT STUDIES

PONDICHERRY UNIVERSITY

Assignment
ON
Corporate Governance

Submitted To:-Dr.B.Charumathi

Submitted by:-

Amresh Kumar Pandey

(1st yr.)MBA ‘A’, DMS

Pondicherry University

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CORPORATE GOVERNANCE
History of Corporate Governance :
History of Corporate Governance Kautilya’s governance, the concept of
governance cannot be completed without acknowledging the
contribution of the most celebrated scholar of ancient India, Kautilya.
One of the world’s most complete manuscripts on the science of
governance was penned by Kautilya in the third century BC. Kautilya’s
discussions on administration and management are strikingly modern
and scientific covering almost all facets of governance. In the 19th
century, state corporation laws enhanced the rights of corporate boards
to govern without unanimous consent of shareholders in exchange for
statutory benefits like appraisal rights, to make corporate governance
more efficient.

INTRODUCTION :-
Corporate governance is the set of processes, customs, policies, laws,
and institutions affecting the way a corporation (or company) is directed,
administered or controlled. Corporate governance also includes the
relationships among the many stakeholders involved and the goals for
which the corporation is governed.

A Professional body is a group of people in a learned occupation who

are entrusted with maintaining control or oversight of the legitimate
practice of the occupation. Professional involved in corporate
governance includes the regulatory body (e.g. the Chief Executive
Officer, the board of directors, management, shareholders and Auditors).

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Other stakeholders include employees, customers, creditors, suppliers,

regulators, and the community at large.
The term corporate governance has come to mean 2 things : The
processes by which all companies are directed and controlled. a field in
economics, which studies the many issues arising from the separation of
ownership and control.
Corporate governance is a field in economics that investigates how
to secure/motivate efficient management of corporations by the use of
incentive mechanisms, such as contracts, organizational designs and
legislation. This is often limited to the question of improving financial
performance, for example , how the corporate owners can
secure/motivate that the corporate managers will deliver a competitive
rate of return.
Corporate governance is the system by which business
corporations are directed and controlled. The corporate governance
structure specifies the distribution of rights and responsibilities among
different participants in the corporation, such as , the board, managers,
shareholders and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs. By doing this, it
also provides the structure through which the company objectives are
set, and the means of attaining those objectives and monitoring
performance.
FACTORS INFLUENCING
The ownership structure of a corporation Its financial structure.
The structure and funtioning of the company boards The legal, political
and regulatory environment within which the company operates
6 MECHANISMS :

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WHY DO WE NEED MECHANISMS AND CONTROLS :

Corporate governance mechanisms and controls are designed to reduce
the inefficiencies that arise from moral hazard and adverse selection .
For example , to monitor managers' behaviour, an independent third
party (the auditor ) attests the accuracy of information provided by
management to investors . An ideal control system should regulate both
motivation and ability.
INTERNAL GOVERNANCE :
Internal corporate governance controls monitor activities and then take
corrective action to accomplish organisational goals. Monitoring by the
board of directors : The board of directors, with its legal authority to
hire, fire and compensate top management, safeguards invested capital.
Regular board meetings allow potential problems to be identified,
discussed and avoided. Non-executive directors are thought to be more
independent , they may not always result in more effective corporate
governance and may not increase performance.
Remuneration :
Performance - based remuneration is designed to relate some proportion
of salary to Individual performance. It may be in the form of cash or non
- cash payments such as shares and share options , super annuation or
other benefits. Such as incentive schemes, however, are reactive in the
sense that they provide no mechanism for preventing mistakes or
opportunistic behaviour, and can elicit myopic behaviour.
EXTERNAL GOVERNANCE :
External corporate governance controls encompass the controls external
stakeholders exercise over the organisation. debt covenants Government
regulations Media pressure takeovers competition managerial labour

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market Telephone tapping

CORPORATE GOVERNANCE ENVIRONMENT AND

OUTCOMES :
PRINCIPLES :
Commonly accepted principles of corporate governance include: Rights
and equitable treatment of shareholders : Organizations should respect
the rights of shareholders and help shareholders to exercise those rights.
They can help shareholders exercise their rights by effectively
communicating information that is understandable and accessible and
encouraging shareholders to participate in general meetings. Interests of
other stakeholders : Organizations should recognize that they have legal
and other obligations to all legitimate stakeholders.

Role and responsibilities of the board :

The board needs a range of skills and understanding to be able to deal
with various business issues and have the ability to review and challenge
management performance. It needs to be of sufficient size and have an
appropriate level of commitment to fulfill its responsibilities and duties.
There are issues about the appropriate mix of executive and non-
executive directors. The key roles of chairperson and CEO should not be
held by the same person.

Integrity and ethical behaviour :

Organizations should develop a code of conduct for their directors and
executives that promotes ethical and responsible decision making. It is

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important to understand, though, that systemic reliance on integrity and

ethics is bound to eventual failure. Because of this, many organizations
establish Compliance and Ethics Programs to minimize the risk that the
firm steps outside of ethical and legal boundaries.

Disclosure and transparency :

Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide shareholders with a
level of accountability. They should also implement procedures to
independently verify and safeguard the integrity of the company's
financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors
have access to clear, factual information.
ISSUES INVOLVING CORPORATE GOVERNANCE INCLUDES :
Oversight of the preparation of the entity's financial statements Internal
controls and the independence of the entity's auditors review of the
compensation arrangements for the chief executive officer and other
senior executives the way in which individuals are nominated for
positions on the board the resources made available to directors in
carrying out their duties oversight and management of risk Dividend
policy
SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE :
Supply of accounting information: Financial accounts form a crucial link
in enabling providers of finance to monitor directors. Imperfections in
the financial reporting process will cause imperfections in the
effectiveness of corporate governance. This should, ideally, be corrected
by the working of the external auditing process. Monitoring costs: In

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order to influence the directors, the shareholders must combine with

others to form a significant voting group which can pose a real threat of
carrying resolutions or appointing directors at a general meeting.

Demand for information:

A barrier to shareholders using good information is the cost of
processing it, especially to a small shareholder. The traditional answer to
this problem is the efficient market hypothesis (in finance, the efficient
market hypothesis (EMH) asserts that financial markets are efficient),
which suggests that the shareholder will free ride on the judgements of
larger professional investors.
Recommendations of the birla committee :
The birla committee report is 1 st formal and comprehensive attempt to
evolve a code of conduct of corporate governance. The committee felt
that recommendations should be divided into mandatory and non –
mandatory categories .

PRE – REQUISITES OF A GOOD CORPORATE GOVERNANCE :

A proper system consisting of clearly defined and adequate structure of
roles, authority and responsibility. Vision, principles and norms which
indicate development path, normative considerations and guidelines and
norms of performance. A proper system for guiding, monitoring,
reporting and control.
Corporate governance - Performance and Measurement :

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Corporate Governance :
Corporate Governance A system of checks and balances between the
board, management and investors to produce an efficiently functioning
corporation, ideally geared to produce long-term value

Issues in Corporate Governance :

Issues in Corporate Governance Asymmetry of power Asymmetry of
information Interests of shareholders as residual owners Role of owner
management Theory of separation of powers Division of corporate pie
among stakeholders

Current status on corporate governance :

Current status on corporate governance Insistence on forms and
structures Overarching regulations Regulatory overkill Lack of adequate
number of strong, independent directors Large liabilities for companies
and officers Has the pendulum swung too far? For the first time in the
decade-long history of the Index of Economic Freedom, the U.S. is no
longer among the top ten “most free” countries Wall Street Journal and
the Heritage Foundation “Index of Economic Freedom”

Governance and performance :

Governance and performance Good governance leads to good
performance It creates an open and transparent system It improves
communication and breaks down systematic barriers to flow of
information Good governance allows decision making based on data. It

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reduces risk Good governance helps in creating a brand and creates

comfort for all stakeholders and society

Does performance depend on governance :

Short term performance does not necessarily depend on governance
Market asymmetries are responsible for this. However, this increases
risk. This also creates barrier to long term growth We all know what
happened to Enron?

Medium to long term performance requires governance Most companies

which have grown in the last 25 years have outstanding performance and
have good governance structure A good governance structure treats all
stakeholders fairly Governance alone cannot ensure performance

Governance and Performance - issues :

Governance and Performance - issues Is governance a luxury that can be
afforded only by the performing companies? Do strategies and tactics
need to change to accommodate governance with performance? Is there
a time-lag between governance and performance? Are stakeholders
concerned about “performance” or “promised performance” ?

Governance and Performance measurement - issues :

Governance and Performance measurement - issues Is governance
behavior motivated by legislation? Do standards vary with jurisdictions
or do you adopt the best option? Do you choose the right thing to do

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irrespective of whether it’s mandatory or not? Is performance evaluation

limited to valuation metrics? Is it only ROE, Net margin, growth,
shareholder wealth creation? Do performance measures need to be
holistic? We need to encompass all stakeholders Governance is an
enabler for holistic performance How do managers better understand
governance requirements? Do we need market research for governance
requirements?

Investing in Corporate Governance :

Investing in Corporate Governance Companies need to invest in good
governance Corporate governance has a direct bearing on business
performance and thereby ROI Leverage the power of IT On average,
businesses with superior governance practices generate 20 percent
greater profits than other companies A study based on 256 companies
conducted at the MIT Sloan School of Management
Efficiency, effectiveness and is sustainable in performance at large
Accountability Integrity, probity and transparency Recognition and
protection of stakeholder rights An inclusive approach based on
democratic ideals, legitimate representation and participation Normal
and ethical corporate social behaviour The crux of the good corporate
governance seeks to promote
Impact & Principles of Corporate Governance :
Impact & Principles of Corporate Governance The positive effect of
corporate governance on different stakeholders ultimately is a
strengthened economy, and hence good corporate governance is a tool
for socio-economic development. Key elements of good corporate
governance principles include Honesty, Trust And Integrity, Openness,
Performance Orientation, Responsibility And Accountability, Mutual
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Respect, And Commitment to the organization. Commonly accepted

principles of corporate governance include;
Rights and equitable treatment of shareholders Interests of other
stakeholders Role and responsibilities of the board Integrity and ethical
behaviour

Mechanisms and Controls :

Mechanisms and Controls Corporate governance mechanisms and
controls are designed to reduce the inefficiencies that arise from moral
hazard and adverse selection. For example, to monitor managers'
behaviour, an independent third party (the external auditor) attests the
accuracy of information provided by management to investors. An ideal
control system should regulate both motivation and ability.

Internal Corporate Governance controls :

Internal Corporate Governance controls Monitoring by the board of
directors Internal control procedures and internal auditors Balance of
power Remuneration

External Corporate Governance Controls :

External Corporate Governance Controls Competition Debt covenants
Government regulations Managerial labour market Media pressure
Takeovers

Role of professionals :
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Role of professionals A company secretary is often call the conscience

of the company so professional bodies must be the conscience of the
regulators and to a certain extent society in their areas of expertise –
whether these are financial, construction, environmental fields or other
areas. Only professional bodies acting with their greatest asset
“integrity” as their foundation stone can perform such a role. In
Corporate Governance, Role of professionals is as follows, Normally,
Role of professionals can be two types; (1) Direct involvement in
corporate governance as a member of the board of directors / various
committees of the board / Holding the position of a CFO / CEO /
Compliance Officer of the company. (2) As a reviewer of the
functioning of the company, its board and committees as a part of the
certification relating to corporate governance.

ROLE OF PROFESSIONAL

EXAMPLE :
Satyam scandal: Showed corporate governance can be Skin-deep It was
dubbed “India’s Enron.” The Rs7,000 crore fraud (it is now over
Rs10000crore and rising), the biggest in India’s history, wiped off $2
billion worth shareholders wealth in the week that followed Ramaling
Raju’s “riding a tiger not knowing how to get off without being eaten”.
It exposed glaring shortcomings of corporate governance, threatening
India’s appeal to foreign investors. “This is a lesson for corporate
houses. In the new companies Act, we propose to give more powers to
independent directors.

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BOARD OF DIRECTORS :
BOARD OF DIRECTORS The members on the board should posses
adequate experience, expertise and skills necessary to manage the affairs
of the company in a efficient manner. The decisions taken by the board
of directors should be transparent to the Government, Shareholder,
Creditor, etc.

PARTIES IN CG :
PARTIES IN CG Parties involved in corporate governance include the
regulatory body (e.g. the Chief Executive Officer, the board of directors,
management, shareholders and Auditors). Other stakeholders who take
part include suppliers, employees, creditors, customers and the
community at large.

EVOLUTION OF CG IN INDIA :
EVOLUTION OF CG IN INDIA Corporate governance in India has
evolved over last 10 years. During this period, the Indian economy
opened up, mergers and acquisitions took place and foreign investors
started evincing interest in Indian companies. The first formal corporate
governance in India came in 1998, when CII came out with a “Desirable
Code of Corporate Governance”
SEBI appointed a committee under the Chairmanship of Kumar
Mangalam Birla, noted industrialist, to study international practices and
recommend appropriate CG regulations for Indian companies. Based on
this committee the SEBI framed the corporate governance provisions

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SEBI COMMITTEE :
SEBI COMMITTEE Report of SEBI committee (India) on Corporate
Governance defines corporate governance as the acceptance by
management of the inalienable rights of shareholders as the true owners
of the corporation and of their own role as trustees on behalf of the
shareholders.
CG is about commitment to values, about ethical business conduct and
about making a distinction between personal & corporate funds in the
management of a company.” The definition is drawn from the Gandhian
principle of trusteeship and the Directive Principles of the Indian
Constitution Corporate Governance is viewed as business ethics and a
moral duty.

CHANGES IN GOVERNANCE REFIME DISCERNIBLE :

CHANGES IN GOVERNANCE REFIME DISCERNIBLE Good CG
practices results in Improved brand image and reputation Better social
acceptance Better impact on customers Government support Ability to
attract more investors Better valuation

KEY ELEMENTS OF CG :
KEY ELEMENTS OF CG Key elements of good corporate governance
principles include Honesty Trust Integrity Openness Performance
orientation Responsibility Accountability Mutual respect Commitment
to the organization.

Corporate Governance in India

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Introduction:-

One of the major economic developments of this decade has been the
recent take-off of India,with growth rates averaging in excess of 8% for
the past four years, a stock market that has risen over three-fold in as
many years and a steady inflow of foreign investment. In 2006, total
equity issuance reached $19.2 billion in India, up 22%, while merger
and acquisition volume was a record $27.8 billion,up 38%, driven by a
371% increase in outbound acquisition--exceeding for the first time
inbound deal volumes. Debt issuance reached an all-time high of $13.7
billion, up 28% from a year earlier. Indian companies were also among
the world's most active issuers of depositary receipts in the first half of
2006, accounting for one in three new issues globally, according to the
Bank of New York. And, in each of the years 2005 and 2006, the number
of trades on the National Stock Exchange of India, one of the two major
Indian Stock Exchanges, was third highest in the world, just behind
NASDAQ and the New York Stock Exchange, and several times greater
than the number of trades on the London Stock Exchange or Euronext.

Corporate Governance in India – A Historical Background

The historical development of Indian corporate laws has been marked by

many interesting contrasts. At independence, India inherited one of the
world’s poorest economies but one which had a
factory sector accounting for a tenth of the national product. The country
also inherited four functioning stock markets (predating the Tokyo Stock
Exchange) with clearly defined rules governing listing, trading and
settlements, a well-developed equity culture (if only among the urban
rich), and a banking system replete with well-developed lending norms
and recovery procedures. In terms of corporate laws and financial
system, therefore, India emerged far better endowed than most other
colonies. The 1956 Companies Act built on this foundation, as did other

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laws governing the functioning of joint-stock companies and protection

of investors’ rights.

Early corporate developments in India were marked by the managing

agency system. This contributed to the birth of dispersed equity
ownership but also gave rise to the practice of management enjoying
control rights disproportionately greater than their stock ownership. The
turn towards socialism in the decades after independence, marked by the
1951 Industries (Development and Regulation) Act and the 1956
Industrial Policy Resolution, put in place a regime and a culture of
licensing, protection, and widespread red-tape that bred corruption and
stilted the growth of the corporate sector.

The situation worsened in subsequent decades and corruption, nepotism,

and inefficiency became the hallmarks of the Indian corporate sector.
Exorbitant tax rates encouraged creative accounting practices and gave
firms incentives to develop complicated emolument structures with large
“under-the-table” compensation at senior levels. In the absence of a
stock market capable of raising equity capital efficiently, three central
(federal) government development finance institutions (the Industrial
Finance Corporation of India, the Industrial Development Bank of India
and the Industrial Credit and Investment Corporation of India),together
with about thirty other state-government owned development finance
institutions, became the main providers of long-term credit to
companies. Along with the central government owned and managed
mutual fund, the Unit Trust of India, these institutions also held (and still
hold) large blocks of shares in the companies to which they lent, and
invariably had representations on their boards in the form of nominee
directors, though they traditionally played very passive roles in the
boardroom.

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Recent Developments in Corporate Governance in India

Liberalization of the Indian economy began in 1991. Since then, we

have witnessed wide-ranging changes in both laws and regulations, and
a major positive transformation of the corporate sector and the corporate
governance landscape. Perhaps the single most important development
in the field of corporate governance and investor protection in India has
been the establishment of the Securities and Exchange Board of India in
1992 and its gradual and growing empowerment since then. Established
primarily to regulate and monitor stock trading, it has played a crucial
role in establishing the basic minimum ground rules of corporate
conduct in the country. Concerns about corporate governance in India
were, however, largely triggered by a spate of crises in the early 1990’s
—particularly the Harshad Mehta stock market scam of 1992--followed
by incidents of companies allotting preferential shares to their promoters
at deeply discounted prices, as well as those of companies simply
disappearing with investors’ money.

These concerns about corporate governance stemming from the

corporate scandals, coupled with a perceived need of opening up the
corporate sector to the forces of competition and globalization, gave rise
to several investigations into ways to fix the corporate governance
situation in India. One of the first such endeavors was the Confederation
of Indian Industry Code for Desirable Corporate Governance,
developed by a committee chaired by Rahul Bajaj, a leading industrial
magnate. The committee was formed in 1996 and submitted its code in
April 1998. Later the SEBI constituted two committees to look into the
issue of corporate governance--the first chaired by Kumar Mangalam
Birla, another leading industrial magnate, and the second by Narayana
Murthy, one of the major architects of the Indian IT outsourcing success
story. The first Committee submitted its report in early 2000, and the
second three years later. These two committees have been instrumental
in bringing about far reaching changes in corporate governance in India
through the formulation of Clause 49 of Listing Agreements .

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Concurrent with these initiatives by the SEBI, the Department of

Company Affairs and the Ministry of Finance of the Government of
India also began contemplating improvements in corporate governance.
These efforts included the establishment of a study group to
operationalize the Birla Committee recommendations in 2000, the
Naresh Chandra Committee on Corporate Audit and Governance in
2002, and the Expert Committee on Corporate Law (J.J. Irani
Committee) in late 2004. All of these efforts were aimed at reforming the
existing Companies Act of 1956 that still forms the backbone of
corporate law in India.

Corporate Governance of Banks

The reforms adopted since 1991 have marked a shift from hands-on
government control to market
forces as the dominant instrument of corporate governance in Indian
banks.19 Competition has been
encouraged with the issuance of licenses to new private banks and by
giving more power and flexibility to bank managers, both in directing
credit and in setting prices. The Reserve Bank of India (RBI), India’s
central bank, has moved to a model of governance by “prudential
norms” rather from that of direct interference, even allowing debate
about the appropriateness of specific regulations among banks. Along
with these changes, market institutions have been strengthened by
government actions attempting to infuse greater transparency and
liquidity into markets for government securities and other asset markets.

This market orientation of governance in banking has been accompanied

by stronger disclosure norms and greater stress on periodic RBI
surveillance. From 1994, the Board for Financial Supervision (BFS)
inspects and monitors banks using the “CAMELS” (Capital adequacy,
Asset quality, Management, Earnings, Liquidity and Systems and
controls) approach. Audit committees in banks have been stipulated
since 1995. Greater independence of public sector banks has also been a
key feature of the reforms. Nominee directors from government and the
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RBI are being gradually phased out, with a stress on boards being
elected rather than “appointed from above.” There is increasing
emphasis on greater professional representation on bank boards, with the
expectation that the boards will have the authority and competence to
properly manage the banks within broad prudential norms set by the
RBI. Rules like nonlending to companies that have one or more of a
bank’s directors on their boards are being softened or removed
altogether, thus allowing for “related party” transactions for banks. The
need for professional advice in the election of executive directors is
increasingly being realized.
As for the old private banks, concentrated ownership remains a
widespread characteristic, limiting the possibilities for professional
excellence and opening the possibility of misdirecting credit. Corporate
governance in co-operative banks and non-bank financial companies
perhaps needs the greatest attention from regulators. Rural co operative
banks are frequently run by politically powerful families as their
personal fiefdoms, with little professional involvement and considerable
channeling of credit to family businesses. It is generally believed that the
“new” private banks (those established after the reforms process started
in the 90’s) have better and more professional corporate governance
systems in place.20 In recent years, the collapse of the private Global
Trust Bank and its subsequent acquisition by a public sector bank has,
however, strengthened beliefs that the government will ultimately bail
out failing banks. It is noteworthy that India has one of the best banking
sectors in Asia in terms of the ratio of nonperforming assets. The India
NPL ratios of around 4% of total banking assets are far below those of
China (or Japan) and most other Asian and emerging markets.

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Public Sector Governance in India

Public sector Enterprises (PSEs) have played a major role in India’s

mixed economy and
industrialization program. The Industrial Policy Resolution of 1956
reserved the “commanding heights” of the economy for the public
sector, and during the second half of the twentieth century the number of
central (federal) PSEs in India climbed steadily, from 5 to 242. In
addition, there are also many more smaller PSEs promoted and owned
by different state governments. Between 1996-97 and 2005-06 PSEs
registered a 70% increase in investments to over US$87 billion. Over the
same period their return on investment improved from barely 13% to
over 18%. The public sector still accounts for over 11% of India’s GDP,
over 27% of industrial output and over a third of central government
receipts. They account for over 20% of the market capitalization of firms
listed on the Bombay Stock Exchange, and five of the six Indian
Fortune 500 firms are Central PSEs.

Though the cumulative profits of the PSEs have risen over time their
performance has always been a concern, with close of half of the PSEs
incurring losses. As these enterprises came under the purview of the
government, they have often been subjected to political interference and
governance by rigid bureaucratic norms rather than on the basis of
performance and profitability. A break with this tradition happened in
1987 with the adoption of a Memorandum of Understanding (MoU)
between the enterprises and the government that gave greater functional
autonomy to the PSEs, with a stipulation of targets against which the
government would hold its performance. MoUs specified various targets
with different weights, with the most important being gross profit
margin and net profit as a proportion of capital employed (30% each).
By the end of 2000, 107 PSEs had signed MoUs with the government.
With the adoption of MoUs, PSEs have increasingly gained operational
autonomy and moved to a “board managed corporation” model rather
than reporting to government ministry officials directly. In 1997, nine
large and profitable central PSEs, now referred to as the “Navratnas”
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(Nine jewels), were granted even greater autonomy than others,

including the right to form joint ventures and engage in mergers and
acquisitions.

Recent findings about corporate governance in India:-

Jayati Sarkar and Subrata Sarkar show that corporate boards of large
companies in India in 2003 were slightly smaller than those in the
United States (in 1991), with 9.46 members on average in India
compared to 11.45 in America.21 While the percentage of inside
directors was roughly comparable (25.38% compared to 26% in the
U.S.), Indian boards had relatively fewer independent directors,
(justover 54% compared to 60% in the U.S.) and relatively more
affiliated outside directors (over 20% versus14% in the U.S.). 41% of
Indian companies had a promoter on the board, and in over 30% of cases
a promoter served as an Executive Director. There is evidence that larger
boards lead to poorer performance (market-based as well as in
accounting terms), both in India and in the United States

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