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NICMAR

MCM 111: Management theory- principle and practices

REPORT

ON
Corporate governance in construction industry
Submitted
by
Kiran patil (221122)
P.L.Vinayak(221115)
P.Shiva Shankar Reddy(221117)
P.V.N. Rajeev.(221128)

National institute of construction

Management and research

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 CONTENT
1.Introduction
2.History
3.Major players in corporate governance
4.Committees
5.Conclusion
6.Reference

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 INTRODUCTION
Corporate governance is the set of processes, customs, policies, laws and institutions
affecting the way a corporation 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. The principal stakeholders are the shareholders,
management and the board of directors.Other stakeholders include employees, suppliers,
customers, banks and other lenders, regulators, the environment and the community at large.
Corporate governance is a multi-faceted subject. An important theme of corporate
governance is to ensure the accountability of certain individuals in an organization through
mechanisms that try to reduce or eliminate the principal-agent problem. A related but
separate thread of discussions focus on the impact of a corporate governance system in
economic efficiency, with a strong emphasis on shareholders welfare. There are yet other
aspects to the corporate governance subject, such as the stakeholder view and the corporate
governance models around the world (see section 9 below).There has been renewed interest
in the corporate governance practices of modern corporations since 2001, particularly due to
the high-profile collapses of a number of large U.S. firms such as Enron Corporation and
WorldCom. In 2002, the US federal government passed the Sarbanes-Oxley Act, intending to
restore public confidence in corporate governance

corporate governance as 'an internal system encompassing policies, processes and people,
which serves the needs of shareholders and other stakeholders, by directing and controlling
management activities with good business savvy, objectivity and integrity. Sound corporate
governance is reliant on external marketplace commitment and legislation, plus a healthy
board culture which safeguards policies and processes'.

O'Donovan goes on to say that 'the perceived quality of a company's corporate governance
can influence its share price as well as the cost of raising capital. Quality is determined by the
financial markets, legislation and other external market forces plus the international
organizational environment; how policies and processes are implemented and how people are
led. External forces are, to a large extent, outside the circle of control of any board. The
internal environment is quite a different matter, and offers companies the opportunity to

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differentiate from competitors through their board culture. To date, too much of corporate
governance debate has centered on legislative policy, to deter fraudulent activities and
transparency policy which misleads executives to treat the symptoms and not the cause.'

It is a system of structuring, operating and controlling a company with a view to achieve long
term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers,
and complying with the legal and regulatory requirements, apart from meeting environmental
and local community needs.

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. It 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 ethics and a moral duty.

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HISTORY:

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. Since that time, and because most large
publicly traded corporations in the US are incorporated under corporate administration
friendly Delaware law, and because the US's wealth has been increasingly securitized into
various corporate entities and institutions, the rights of individual owners and shareholders
have become increasingly derivative and dissipated. The concerns of shareholders over
administration pay and stock losses periodically has led to more frequent calls for corporate
governance reforms.

Since the late 1970’s, corporate governance has been the subject of significant debate in the
U.S. and around the globe. Bold, broad efforts to reform corporate governance have been
driven, in part, by the needs and desires of shareowners to exercise their rights of corporate
ownership and to increase the value of their shares and, therefore, wealth. Over the past three
decades, corporate directors’ duties have expanded greatly beyond their traditional legal
responsibility of duty of loyalty to the corporation and its shareowners.

In the first half of the 1990s, the issue of corporate governance in the U.S. received
considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak,
Honeywell) by their boards. CALPERS led a wave of institutional shareholder activism
(something only very rarely seen before), as a way of ensuring that corporate value would not
be destroyed by the now traditionally cozy relationships between the CEO and the board of
directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated).

In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia, South
Korea, Malaysia and The Philippines severely affected by the exit of foreign capital after
property assets collapsed. The lack of corporate governance mechanisms in these countries
highlighted the weaknesses of the institutions in their economies.

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Need of proper corporate governance in construction industry: Indian and world
construction industry is growing very fast .In future India will be 5th largest in the world in
construction and infrastructure. so that handle such big industry , proper corporate
governance is not need, it is essential because corporate governance include chairman,CEO,
Board of Directors, they only take decision regarding company business strategy, policy,
which converts in to profit if decision making is proper if decisions are right.

DEFINITION:

In A Board Culture of Corporate Governance business author Gabrielle O'Donovan

defines corporate governance as 'an internal system encompassing policies, processes and
people, which serves the needs of shareholders and other stakeholders, by directing and
controlling management activities with good business savvy, objectivity and integrity. Sound
corporate governance is reliant on external marketplace commitment and legislation, plus a
healthy board culture which safeguards policies and processes’. Corporate governance,
simply stated is therefore, a system by which corporate entities are directed and controlled.

MAJOR PLAYERS IN CORPORATE GOVERNANCE:

The three major players in the area of corporate governance, within the corporation, are the
corporate boards, shareholders and employees.

BOARD OF DIRECTORS (BOD):

BOD’s are responsible for the governance of their corporations. The

shareholders role in governance is to appoint the directors and auditors as also to satisfy
themselves that an appropriate governance structure is in position. The roles of BOD and
shareholders are interactive and therefore, the quality of governance depends upon the level
of interface established by them. The quality of board depends upon number of other factors
such as its size, its composition, the competency of the chairman of the board, power and

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position of CEO and competencies of individual directors, nominee directors and non
executive directors.
In India, the BOD generally comprises promoters, directors, professional directors
and institutionally nominated directors.

Sir Rober Brown well defined the functions of the directors of the board, when he
stated that Board was responsible for laying down matters of principle and of accounting,
statistical and management procedures. It was also responsible for the decision of what
products to make, which markets to penetrate and determination of manufacturing capacity
and its gainful utilization and investment decision. Directors are also concerned with
performance and they review the budget proposals as well as monitor performance.

Ideally the BOD should be the heart and soul of a corporate. Whether or not the
company grows or declines depends much upon the sense of purpose and direction, the
values, the will to generate customer satisfaction and the drive to achieve. BODs are also
accountable in a number of ways to the stake holders in a company. The directors are
required to achieve a balance between the competing interests of shareholders, customers,
lending, promoters and directors. Boards, all over vary greatly in the value they add. Some
boards are positive instigators and enablers of change, while others are bystanders or even
obstacles to progress.

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LEGAL ASPECTS AND LIABILITIES OF DIRECTORS:

Having discussed the position of BOD in corporate governance, the

next question we must clarify is the liabilities of Directors in law. Can the directors whole
time or part time, be held responsible in a court of law, for non-compliance of various laws,
procedures and regulations?

Directors are elected representatives of shareholders engaged in

directing the affairs of the company on its behalf. As such they are not employees or servents
of the company. Where a director accepts employment under the company under a contract of

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service, in addition to the directorship, he is also treated as an employee of the company.
Besides directors are also treated as officers of the company for certain matters and are
bracketed with the manager, secretary etc., as “Officer in Default”.

Notwithstanding the above the directors are described sometimes as

agent ,sometimes as trustees or commercial trustees and sometimes they have been called
managing partners. It does not matter much what we call them so long as we understand that
they, in fact are really commercial men managing a trading concern for the benefit of
themselves and of all the shareholders in it. They therefore stand in a fiduciary position
towards the company in respect of their power and capital under its control.

Directors are therefore, liable for negligence, breach of trust and

misfeasance in either of their capacities as agents or trustees or as both. Besides the common
law duties, provisions have been made in companies act to ensure that the position of director
is not abused. The directors, in their capacity as trustees and agents are required to ensure
that they act prudently and genuinely. There are also certain statutory liabilities like –
liabilities for not vacating office, liabilities for breach of trust, liability to pay expenses for
investigation, liability in contract, personal liability, liability to contempt by company. The
companies act also imposes both civil and criminal liabilities for misrepresentation in offer
documents and annual accounts, failure to refund subscription money to investors and also
generally or contravention of the law.

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Over the years the following duties have been evolved by the court of directors under the
common law:

Duties of care and skills in the discharge of function as directors.

Duty to attend Board meetings and devote sufficient time and attention to affairs of the
company.

Duty not to be negligent and not to commit or let others commit tort-liable acts.

Duty not to exceed powers.

Duty to have regard to and act in the best interest of the company and its stake holders and
consumers.

Duty to creditors if business is conducted with intent to defraud them

Duty of confidentiality

Duty not to secret profit and make good losses, if occurred due to breach of duty, negligence
etc.

Duty not to exceed power for collateral purposes.

Duty not to misapply company assets.

Duty not to compete with the company.

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 FUNCTIONS OF THE BOARD
Good governance is the primary duty of the board. It is
responsible for setting standards and ensuring that the company achieves
them. The organization, the composition, the quality and motivation of its
directors will considerably influence its effectiveness. More than anything
else, the chairman will have major impact.

DUTIES OF BOARD OF DIRETORS:

The board is, of course, accountable to the

shareholders. The directors, both executive and non executive are
appointed to act in interest of share holders. In the past the share holders
may well have rubber stamp appointments, given little attention to
directors performance and paid still lesser interest to the functioning of
the company. However, the business environment is changing fast. A
growing number of small, individual shareholders are showing increased
interest in board appointments and performance of the company. They
have, often noisily now question and voted against the directors and the
management.

THE MAJOR FUNCTIONS OF BOARD ARE:

(a) It is the representative of share holders to insure the company has clear
goals and to measure progress against these goals.

(b)The board will agree the strategy and resources to achieve it.

(c) The chief executive is appointed by the board which monitors his or her
performance

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(d)Because of the absolute importance of human resource to achieve the
agreed strategy the board must annual review succession and
management development plans.

(e) The board will need to set down and monitor the operating climate in the
company through a statement of values that describes the character of
the company and policies that reflect these values.

All above function need to perform whilst compiling with

legal obligation and social responsibilities of good citizenship. Even
corporate ought to appreciate that it disregards other stakeholders-
employees, customers, suppliers, government and local communities at
its own peril. There are also diverse expectations of various stakeholders.
While the shareholders expect the board to provide acceptable total share
holders return, the government expects greater participation by the
corporate in welfare services as good citizenship. The employees ask for
better pay and perks, the customers and suppliers have increasingly
moved towards partnership relationship. The community at large has an
economic interest in a company’s operation through the employment
created services used and greater involvement in local affairs such as
charities, mandirs, schools and local government.

The public at large has a wild variety of items to hold the

board accountable for. These are usually well published by the media and
include:

(a) Limiting senior executive’s compensation.

(b)Full environmental protection.

(c) Avoidance of fraud within the company.

(d)Hiring and firing the key executives.

(e) Caring for employees

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(f) Insuring active participation in local community welfare schemes.

THE CHAIRMAN:

While each company will have its own need and criteria for
selection of chairman, it is generally vied that it is proper to separate the
role of chairman from chief executive in the interest of providing checks
and balances. While the board will be finally responsible for setting up of
strategy, the initiator will normally be the chief executive. The chairman
however, is the leader of the group and therefore must set the standards
requires from the board colleagues. For these he is accountable publically.
As the chairman, is also the link between board and shareholders, he or
she needs to satisfy with the corporate reporting to them. These will
include the interim and annual results, annual reports, AGM and the
periodic reports on special occasions’ such as during take over’s.
Reporting of results to analysts and institution is also an important event
where the chairman presents an involvement is expected.

MATTERS RESERVE FOR THE BOARD:

The Cadbury comity has recommended that the board should have the
formal schedule of matters reserve for his decision, thus ensuring that the
direction and control of the company remain firmly in its hands. The
committee investigated that the schedule would include at least:

(a) Acquisition and disposal of assets of the company or its subsidies that are
material to the company.

(b)Investments, capital projects, authority levels, treasury policies and risk

management policies

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 COMMITIES OF THE BOARD

ROLE:

In order to ensure greater depth of understanding committees of the

board are an effective way to raise standards provide the required level of
reassurance and obtain greater coverage by directors. The most
important three committees which are normally constituted are:

Audit committee

Remuneration committee

Nomination committee

THE AUDIT COMMITTE:

This is the most important committee for providing checks against the
executive with the ability to review systems and internal control and
control or system have been agreed. Some of the other functions it could
perform are:

(a) Review fully the interim and final account.

(b)Keep the board fully informed of the quality of the financial reporting and
many areas of disagreements with the auditors.

(c) If required, to decide impartially over any dispute between management

and external auditor. In this role these act like a court of arbitration to
reinforce the independence of the auditors.

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(d)Establish that the audit fee is appropriate and that the auditors work plan
is adequate.

THE REMUNIORATION COMMITTEE:

The most important rule of remuneration

committee, therefore, is to have an appropriate reward policy that can
attract retain and motivate directors to achieve the long term goals of the
company. Many companies operate in worldwide theater and reward
policies must policies must keep these in mind. Committee members will
of course need to be sensitive to wider community concerns. It is,
therefore, important that:

(a) The committee is and seen to be, independent with access to its In the
recent time there has been considerable debate on putting a cap on total
income of directors and senior executives. The lack of transparency in
these regard has added another dimension to these concern. On the other
hand there is a section of the committee who believe that main job of the
committee members is to keep the lid on executive remuneration. On the
other hand, institution and some other section of society feel that
remuneration policy must be more closely aligned with the interest of
shareholders and that the company’s remuneration policies must be set in
the board environment which prohibits unjustified increases or excessive
total remuneration. The debate, of Corse, centers around the
reasonableness. In a view of different perceptive, various stake holders
will different expectation from these committee and hence the importance
of the remuneration committee. own external advice.

(b)It has a clear policy of remuneration that is well understood and has the
support of shareholders.

(c) Performance packages are aligned with long term shareholder interest
and have challenging targets.

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(d)Reporting is clear, concise and gives the reader of the annual report a
birds eye view of policy payments and the rationale behind them.

THE NOMINATION COMMITTEE:

This committee is third important committee of the board of director. It

is usually chaired by companies chairmen and is the vehicle by which new
non-executive directors are brought for selection. Usually they will discuss
and agree the brief, choose the search firms, agree the short list and
interview the final candidates. It is also fact that often appointments are
made from within the circle of chairman to offer him or her support,
especially if time turn difficult. However, these practice is changing and
financial institution and more active shareholders are beginning to exert
their views rather than just rubber stamping the new appointment in the
AGM(Annual General Meeting).

CODE OF CORPORTE GOVERNANCE

In the resent years, there have been

considerable concerns in India and other countries above standard of
corporate governance. While the company law and in common law
directors are obliged to act in a best interest of shareholders, there have
been many instances of board room behavior difficult to reconcile with
these ideal. There have been many cases of excessive debate financing
laced with fraud, generosity with which they reward leading executive,
dis-proportionating pay increases for executive and procedures which
have been less transparent. In the train of these and many scandals there
has been increasing and violent demand for greater transparency and
good corporate governance.

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 But legislation alone is not enough. The end note of
the report of Kumar Mangalam Birla committee report on corporate
governance sums up the issue well. It states corporate governance
extends beyond corporate law. Its fundamental objective is not the mere
fulfillment of requirement of law but ensuring the board’s commitment to
managing the company in a transparent manner for maximizing long term
shareholders value. The effectiveness of corporate governance is still
cannot nearly be legislative bylaw, neither can any system of corporate
governance be static.

In such an environment it would be naïve to

assume that company would voluntarily adopt the best corporate
practices. The Kumar Mangalam Birla committee on corporate governance
assumes under Indian conditions a statutory rather than a voluntary code
would be for more purposive and meaningful. There other
recommendation flows from this premise. Raguveer Srinivasan in his
comments on the committee report (October 1991, investment word)
points out that these recommendation certainly run the risk of being
branded as a micro managing team but it needs to be pointed out that
there is a no other way of introducing the concept in the country. A start
has to be made from somewhere to push Indian companies into adopting
best governance practices and these recommendations serve that
purpose.

India too had its share of scams and scandals and

there was all round disquiet, and public concern and demand for a best
corporate governance. Expected improvement after liberalization, due to
international competition, also did not come about. In reorganization of
the key importance of corporate governance and public concern, at that
time when Indian economy is integrating with global economy and Indian
economy is striving for international competitiveness, the confederation
of Indian industry (CII) took a special initiative. A national task for

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 corporate governance was set up in mid 1996 under the leadership of
Rahul Bajaj, past president, CII and CMD, Bajaj auto limited.

On the board of directors, CII has made the following recommendation:

(a) A simple board structure can maximize shareholders as well as to tier

board.

(b)The full board must meet six times a year, preferably at a interval of two
months and meeting must have an agenda of at least half days meeting.

(c) Listed companies with a turnover in a excess of rupees two hundred

crores and above should have professionally competent and acclaim non
executive directors.

(d)Non-executive directors should account for at least thirty percent of

board, if the chairman is a non-executive director.

(e) No single director should hold directorship in more than ten companies.

(f) Non[-executive directors to play an important role in maximizing long

term shareholders value, should become active participants and not be
passive advisors.

(g)Pay a commission over and above sitting fees and offer stock option as
incentives.

(h)Director who doesn’t attend fifty percent or more of meetings must not be
considered for reappointment, generally.

(i) All key permission players must be placed before the board of directors.

(j) Audit committee must be appointment to assist the BOD of the company
and must have full access to all financial information.

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 THE FOLLOWING RULES OF CONDUCT FOR GOVERNANCE OF COMPANIES
HAVE BEEN RECOMMENDED BY CII:

(a) Companies with paid up capital of more than rupees 20crs should provide
the same information towards domestic investors which they provide to
GDR investor.

(b)Companies with a turnover of rupees 100crs or a paid up capital of rupees

20crs should set up audit committees with in 2years.

(c) The member of board should have clear responsibilities.

(d)The board should not be boll dozed by the nominees of management.

(e) FIs should divest there stake in companies where they have less than 10%
stake: or progressively smaller role for the FIs expect in the case of
habitual defaulters.

(f) Creditors should desist from appointing a nominee on a company board if

its loan interests are being paid in time.

(g)Companies should not accept for the deposits if they have defaulted on
fixed deposits.

(h)The key information such as annual operating plans and budgets,

quarterly results, internal audit reports etc must be regularly reported to
the board.

(i) The takeover board should be modified to reflect international norms.

(j) The triggers should increase to 30% and the minimum bid should reflect
at least 50% takeover.

CONCLUSION:

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For construction industry it is essential to have good, effective,
efficient, corporate governance. Today construction industry is
biggest industry in world, so run such industry; the higher level
management must be capable to take appropriate decision
regarding company on behalf of shareholders. Corporate
governance can only decide future of company by managing,
decision making, and controlling.

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REFERENCE:
BOOK REFERENCE

1) Business ethics and corporate governance BY ICFAI.

2) Corporate governance and restructuring of industries –Dr

M.K. Sehgal.

3) Corporate governance, concepts and dimension.

E-Reference

1) www.mytasinfra.com

2) www.relianceinfra.com

3) www.hcc.com

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