Corporate Governance

The term corporate governance refers to all the activities, policies, personnel, regulations and reporting which is related to the control of the companys actions. Corporate governance is done through all those individuals who have a controlling influence in a corporation such as creditors or stock holders. It focuses on reducing principal-agent problems and undermines stakeholders view in company operations. Corporate governance is at the centre of attention in todays business world. This is greatly due to the large number of stakeholders whose wealth and interests are at stake in the business. What has further highlighted corporate governance today has been the increasing influence and awareness of these stake holders. Without sound corporate governance a business cannot survive. Corporate governance is not just related to core business activities. Good corporate governance caters to various other issues present in the society. Corporations today have developed a concept of corporate social responsibility. The major components of corporate governance comprise of company policies, Board of Directors, the role of the CEO, creditors, Stockholders, regulators, reporting and maintaining overall transparency about the business operations. Corporate governance can be both good and bad. The Securities and Exchange Commission trys to ensure that sound corporate governance is maintained in all businesses by regulating corporations. Further business expansion is also dependent on sound corporate governance.

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Components of Corporate Governance

Corporate governance is not just related to human elements. As mentioned earlier, it comprises of all the policies, practices, activities, individuals and stakeholders of the business. The Major components of corporate governance could be stated as:

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The Board of Directors The Upper Management The Stock holders The Regulators and other Stakeholder institutions Reporting Company Policy Company Activity The CEO, Company Secretary, and CFO Meetings

1. The Board of Directors (BOD)

Good corporate governance is always trickled down from the top of the organization. Therefore the role of the board of directors plays a significant role in the overall corporate governance of any organization. The BOD is responsible for developing policies and communicating the company objectives to the operational levels. These objectives must be developed in line with the regulations and demands of the various stake holders. The BOD appoints a chief executive officer (CEO) to play an intermediary role between the principal (Owners) and the Agents (Management and Employees) in order to achieve company goals. The BOD must be of sufficient size and must be fully aware of shareholder and other stakeholder objectives apart from the business environment. The BOD primarily is consisting of individuals who have a significant share of ownership in the entity. However other directors maybe hired if felt necessary. Those members of the BOD who are also shareholders are termed Non-Executive Directors, whereas the directors who are specifically hired on the basis of need and are not shareholders to the business are called Executive directors. There is no specified mix of the number of executive and non-executive directors in the board. However the regulators have assigned the minimum number of directors to a specified number which varies from country to Page | 3

country. The selection of the Directors is done through elections at company meetings on defined time intervals. 2. The CEO, Company Secretary and CFO

Three of the most crucial executive offices are; Chief Executive, Chief Financial Officer (CFO), and the Company secretary. These offices are run through high ranked personalities who posses sound knowledge of running corporations. The regulators keep close checks on these officers and their selection process is the outcome of several scrutinizing procedures. The selection of these individuals is done through an election process and the final approval is given by the regulators after assessing the various eligibility requirements such as qualification and experience. All of these individuals have tremendous responsibility and are to be held accountable for approximately all of the company activities. They are also given the highest remunerations and authority. They must be well aware of all the rules and regulations defined in the countrys corporate law. The CEO plays the most significant role in managing the organisation and the principalagency relationship. The CEO is the highest paid individual and is responsible and accountable for all business activities and performance. A good CEO is pivotal for the prosperous functioning of the organisation. An effective CEO must possess sufficient qualification and skill to communicate Board objectives to the lower layers of the hierarchy and to execute them in to performance. The appointment of the CEO is done by the BOD, however once the BOD has selected a CEO he is finally approved by the relevant regulatory body. Much scrutiny is done on the character, skills and abilities, qualification and experience of the CEO before he is appointed. The CEO is accountable to the directors and should be held responsible for all performances of his subordinates. The Company Secretary is another key figure in the corporate governance structure of an organisation. The company secretary is primarily responsible for ensuring that Page | 4

shareholder interaction with the regulator and company offices are in line with the rules and regulations laid out in the corporate law. The company secretary is also responsible for maintaining interaction with shareholders and regulators, the CS must communicate to the relevant members the schedules of meetings, elections, results and other announcements. The regulators have defined certain qualifications for a person to be legible as a candidate for Company secretary. The Chief Financial Officer is perhaps the most important post after the CEO. The CFO has a significant amount of power and say in the company and is in charge, accountable and in control of all the companys financial activities. The CFO must also be approved by the Securities and Exchange Commission, and is also required to possess suitable financial qualifications in order to hold the office of CFO. CFOs are usually the second highest ranked officers in organisations and receive a healthy remuneration. The Regulators The regulators are usually comprised of a number of government institutions which try to ensure that the best methods of corporate governance are being practiced in an organisation. The Regulators are of two types; 1) Primary Regulatory Bodies, 2) Secondary Regulatory Bodies. Primary Regulatory Bodies are those regulators that are the same for all businesses regardless of the industry. The securities and exchange commission of Pakistan (SECP) is one such example. The SECP is the primary regulator for limited liability companies. Each corporation must register itself with the SECP in Pakistan. The companies are also obliged to provide a number of documents and information to the SECP. Secondary regulators are those regulators which are industry specific. For example the State Bank of Pakistan for the Banking industry. These regulators are responsible for developing rules and regulations in order to maintain best practices in the respective industry. e.g. the Food and Drug administration is the regulator for the companies in Page | 5

the food and drug industry of the United States, or the Karachi Port Trust as a regulator for all shipping lines calling the Karachi Port. The primary task of all regulators is to monitor, generate and enforce laws, and to take suitable action for any deviations from the defined laws and codes of governance. 3. Other External Stake Holders Apart from the BOD, Executives, Regulators and upper Management there are various other elements which play a key role in a companys corporate governance. The extent of their role is defined by the influence or controlling interest they hold in the organization. Some of the major indirect corporate governors are: Creditors Customers Society Media The general public Other rights groups Many provisions are provided in the corporate law to increase in the influence of these stake holders in the corporate governance of the company. The provisions are based on the magnitude of the stake these parties possess. e.g. the creditors are given a right to assign their candidate on the BOD just to ensure that the money of the creditors is being utilized properly. Similarly, minority shareholders are also allowed to nominate their candidate for a Board Seat. 4. Reporting and Meetings Reporting company performance is an essential element for good corporate governance. The best corporate governance practices require a comprehensive and transparent reporting system.

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There are some conflicts in this regard occurring between the various components of the corporate governance. The cost of mailing reports to each and every shareholder is seen at times burdensome, especially when it is of reporting to a small shareholder. Reporting nonetheless is considered as a very important part of corporate governance. The companies have to report about company performance not only to shareholders, but to almost all the relevant stake holders. e.g. the Regulators, Creditors, general public and other rights groups. The regulators have made certain reports mandatory to be published and delivered to concerned individuals and institutions on specified time intervals. Some of the major reports that are published are: Annual Reports Quarterly reports Reports for the regulators Reports for the stock exchanges CSR Reports Marketing Reports Investment Reports Performance evaluation Reports The Annual report and quarterly reports are considered to be the most significant reports for all stake holders. They provide a thorough financial analysis, performance analysis and information that is vital for investors, regulators and the general public.

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Corporate Governance in the Financial Sector

Keeping in view the discussions on corporate governance scheduled at the seminar I intend to give a brief overview of the role and importance of corporate governance in the banking sector, initiatives undertaken by RBI and then a flag a few generic issues relating to corporate governance based on our experience with the banking sector. Though the deposit accepting feature of banks sets them apart from other financial intermediaries, the basic elements of governance in any public institution can be said to be sector independent. Moreover although objectives of banking sector regulators may be slightly different from those of insurance regulators there are a number of commonalities and in some countries banking and insurance regulation is in one institution. Corporate Governance and banks Although globalization of financial markets necessitates some basic international standards of corporate governance for financial institutions, it is also recognized that such uniform international standards may result in different levels of systemic risk for different jurisdictions because of differences in business customs and practices and institutional and legal structures of national markets. Each country will therefore need domestic regulations that prescribe specific rules and procedures for the governance of financial institutions that address national differences in political economic and legal systems while adopting international standards and principles. Banks are special as they not only accept and deploy large amount of uncollateralized public funds in fiduciary capacity, but they also leverage such funds through credit creation. The role of banks is integral to any economy. They provide financing for commercial enterprises access to payment systems and a variety of retail financial services for the economy at large. The integral role that banks play in the national economy is demonstrated by the almost universal practice of states Page | 8

in regulating the banking industry and providing in many cases a government safety net to compensate depositors when banks fail. The large number of stakeholders whose economic well being depends on the health of the banking system depend on implementation of appropriate regulatory practices and supervision. Indeed in a healthy banking system the regulators and supervisors themselves are stakeholders acting on behalf of society at large. As regulators we do not act on behalf of shareholders or individual customers but on behalf of groups such as depositors policyholders or pension fund members who rely on the continued solvency of regulated institutions for their financial security but who are themselves not well placed to assess financial soundness. Banks unlike insurance companies are highly leveraged entities and asset liability mismatches are an inherent feature of their business. Consequently, they face a wide range of risks in their day-to-day operations. Any mismanagement of risks by these entities can have very serious and drastic consequences on a standalone basis which might pose a serious threat for financial stability. This dimension further strengthens our premise that effective risk management systems are essential for financial institutions and emphasises the need for these to be managed with great responsibility and maturity. Good corporate governance, therefore, is fundamental to achieve this objective. Governance Principal Agent problem The main characteristics of any governance problem are that the opportunity exists for some managers to improve their economic payoffs by engaging in unobserved socially costly behavior or abuse and the inferior information set of the outside monitors relative to the firm. There is a wide range of potential agency problems in financial institutions involving several major stakeholder groups including but not limited to depositors owners creditors management and supervisory bodies. Agency problems arise because responsibility for decision making is directly or indirectly delegated from one stakeholder group to another in situations where objectives between different stakeholder groups differ and where complete information which would allow for further control to be exerted over the decision maker is not readily available. Primarily Page | 9

there are three groups which can monitor the management of banks: owner, market and supervisors. The oversight by the Board is an important part of governance in banks. In addition oversight by non-executives who are not involved in day to day management is also important, direct line supervision in different areas and independent risk management and audit functions also form part of the organizational structure of any bank which ensures proper governance. Initiatives taken by RBI The importance attached to corporate governance in banks is reflected in the fact that the Reserve Bank had constituted at least three committees/ working groups to assess and make appropriate recommendations. These are: A Standing Committee on International Financial Standards and Codes was constituted to, inter alia, assess the status in India vis--vis the best global practices in regard to standards and codes. An Advisory Group on Corporate Governance (Chairman: Dr. R. H. Patil) made detailed assessment and gave recommendations of which those relating to PSBs is an important component. The Advisory Group on Banking Supervision (Chairman: Mr. M.S. Verma) has also made some recommendations on corporate governance. A Consultative Group of Directors of banks and financial institutions (Chairman Dr. A.S. Ganguly) was constituted to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis--vis compliance, transparency, disclosures, audit committees etc. and make recommendations for making the role of Board of Directors more effective. The Groups made their recommendations after a comprehensive review of the existing framework as well as of current practices and benchmarked the recommendations with international best practices as enunciated by the Basel Committee on Banking Supervision, as well as of other committees and advisory bodies, to the extent applicable Page | 10

in the Indian environment. The Groups made far reaching proposals to improve corporate governance and many, if not all, do require legislative processes and they are necessarily time consuming and often realizable only in medium-term. about within the existing legislative framework have been implemented. The issue of corporate governance in banks, like any organization, needs to be While proceeding with analysis and possible legislative actions, changes that could be brought

addressed in regard to (i) quality and concentration of ownership; (ii) quality of Management (iii) prudential framework and (ii) the mechanism for effective oversight of Board of Directors. I. Quality and concentration of ownership

The ownership issue in banks straddles a few crucial issues that have been engaging our attention and a policy environment is being sought to be created that would confirm to the best principles of governance. Unique corporate governance challenges are posed where the ownership structure lacks transparency or where there insufficient checks and balances on inappropriate influences of controlling shareholders. While there can be different views on the issue of concentrated ownership there is clearly a recognition that significant shareholders should pass the fitness and propriety tests. The current legal and policy framework with respect to ownership in banks, at a sectoral level, entails the following : (i) Voting rights restriction as per banking laws

In terms of the statutory provisions under the various banking acts, the voting rights, when exercised, have been stipulated as under: Private Sector Banks [Section 12(2) of Banking Regulation Act,1949] No person holding shares, in respect of any share held by him, shall exercise voting rights on poll in excess of ten percent of the total voting rights of all the shareholders.

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Nationalised Banks [Section 3(2E) of Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970/80]

No shareholder, other than the Central Government, shall be entitled to exercise voting rights in respect of any shares held by him in excess of one percent of the total voting rights of all the shareholders of the nationalised bank.

State Bank of India (SBI) (Section 11 of State Bank of India Act,1955)

No shareholder, other than RBI, shall be entitled to exercise voting rights in excess of ten percent of the issued capital, (Government, in consultation with RBI can raise the above voting right to more than ten percent).

SBI Associates - [Section 19(1) and (2) of SBI (Subsidiary Bank) Act, 1959]

No person shall be registered as a shareholder in respect of any shares held by him in excess of two hundred shares. No shareholder, other than SBI, shall be entitled to exercise voting rights in excess of one percent of the issued capital of the subsidiary bank concerned.

(ii)

Acknowledgement of RBI for transfer of shares more than 5%

In respect of private sector banks, RBI had issued guidelines in September 1999, revised in February 2004, on the grant of acknowledgement for acquisition and transfer of shares. In terms of these, acknowledgement from RBI for acquisition/transfer of shares is required for all cases of acquisition of shares which will take the aggregate holding (direct and indirect, beneficial or otherwise) of an individual or group to equivalent of 5 percent or more of the paid-up capital of the bank. For higher thresholds, 10% and 30%, increasingly stricter criteria would be adopted for considering granting of acknowledgements.

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(iii) Restrictions on cross holdings: a bank's aggregate investment in the following instruments issued by other banks and financial institutions is permitted up to 10 per cent of the investing bank's capital funds (Tier I plus Tier II capital a. b. c. d. e. Equity shares; Preference shares eligible for capital status; Subordinated debt instruments; Hybrid debt capital instruments; and Any other instrument approved as in the nature of capital.

Further, banks / FIs investments in the equity capital of subsidiaries are at present deducted from their Tier I capital for capital adequacy purposes. II. Board of Directors

The framework in respect of ensuring effective oversight by the Board of Directors incorporates the following: (i) (ii) (iii) (iv) Statutory requirement regarding composition of Board of Directors BOD establishes strategic objectives and a set of corporate values that are communicated throughout the banking organisation. BOD have an obligation to understand the risk profile of the institution and ensure adequate capital to cover the risk Unique challenge when the institutions have complex corporate structures. Where a bank is part of a wider group either as parent or subsidiary a number of of issues arise from the corporate governance perspective in that it is likely to affect to a certain extent structure and activities of both parent and subsidiary boards. Need for effective control of subsidiaries by the parent board. (v) (vi) Excessive outsourcing of intragroup activities also causes concerns from the supervisors point of view. Group dimension also creates conflict of interest within the Group which have to be managed.

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(vii) (viii)

Guidelines regarding criteria for appointment of directors, role and responsibilities of directors and the Board Covenants & undertaking: A declaration and undertaking is required to be obtained from the proposed / existing directors. The directors are required to execute a covenant binding them to discharge their responsibilities to the best of their abilities, individually and collectively. Further, the issue related to the broader issue of fit and proper status of directors and signing of the covenants should be one of the criteria to be eligible to be a director of a bank. The board of the bank must ensure in public interest that the nominated / elected directors execute the deeds of covenants as recommended by Dr. Ganguly Group.

(ix)

Training / Seminars: The banks have been advised to ensure that the directors are exposed to the latest managerial techniques, technological developments in banks, and financial markets, risk management systems etc. so as to discharge their duties to the best of their abilities. While RBI can offer certain training programmes/seminars in this regard at its training establishments, large banks may conduct such programmes in their own training centres.

(x)

Audit committee of the Board In 1995, the RBI directed banks to set up Audit Committees of their Boards, with the responsibility of ensuring efficacy of the internal control and audit functions in the bank besides compliance with the inspection report of the RBI, internal and concurrent auditors. To ensure both professionalism and independence, the Chartered Accountant Directors on the boards of banks are mandatory members, but the Chairman would not be part of the Audit Committee. Apart from the above, Board level committees that are required to be set up are Risk Management committee, Asset Liability Management committee (ALCO), etc. The Boards have also been given the freedom to constitute any other committees, to render advice to it.

(xi)

Sound practices for CR, MR and OR management emphasizing role of Board & Senior management: As the primary responsibility of laying down risk parameters and establishing an integrated risk management and control system rests with the Board of Directors, the banks were advised that all assessments of the risk management systems should be placed before the Board. On the basis of such evaluation banks should initiate appropriate steps, Page | 14

with the approval of their Board, to eliminate the gaps in compliance with the risk management guidelines issued by RBI and ensure that they have efficient and robust risk management systems in place. (xii) Fit and proper assessment in respect of all persons to be appointed on the Boards of private sector banks, (xiii) The earlier practice of RBI nominating directors on the Boards of all private sector banks has yielded place to such nomination in select private sector banks. III. Quality of management

1. Senior management consists of a core group of individuals responsible for the day to day management of the bank should have necessary skills and oversee line managers in specific business areas and activities consist with policies and procedures laid down by the Board. 2. Senior Management establishes effective system of internal controls 3. Fit and proper norms for CEO and directors were laid down in terms of circular dated June 25, 2004. It was mandated that On appointment of Directors, due diligence of the directors of all banks be they in public or private sector, should be done in regard to their suitability for the post by way of qualifications and technical expertise. Involvement of Nomination Committee of the Board in such an exercise should be seriously considered as a formal process. 4. Prior approval of Reserve Bank of India for appointment of CEO as well as terms and conditions thereof. 5. Powers for removal of managerial personnel, CEO and directors, etc. in the interest of depositors. IV Prudential standards

The whole principle of capital regulation is that the owners will monitor if they have much at stake either in the form of capital or future profits. Hence the emphasis on capital adequacy. Similarly the need for prudential norms on income recognition and asset classification and provisioning is required because of the nature of bank balance Page | 15

sheets-loan assets do not lend themselves to proper valuation. Appropriate accounting standards, connected and related party transaction regulations, risk based supervision enforcement of corporate governance rules are essential for promoting sound corporate governance. In fact the importance of corporate governance permeates the Core Principles for banking Supervision against which we assess our practices. Other monitors include PCA framework or structured early intervention approach. However, regulation cannot be a substitute for corporate governance. Transparency as a tool to promote corporate governance To accurately evaluate a banks disclosures about its financial position and financial performance and its risks and risk management strategies, market participants and supervisors need fundamental information about the banks business, management and corporate governance. Such information can help provide the appropriate perspective and context to understand a banks activities and help in the effective operation of market discipline which would indirectly address any weaknesses in corporate governance and also encourage enhanced role of corporate governance on the level and quality of disclosures. Thus transparency and good corporate governance can be seen as complementary issues like two sides of the same coin. Certain disclosures mandated from corporate governance angle are: Related party transactions: The banks are required to disclose the name and nature of related party relationship, irrespective of whether there have been transactions, where control exists within the meaning of AS 18. Related parties for a bank are its parent, subsidiary(ies), associates/ joint ventures, Key Management Personnel (KMP) and relatives of KMP. KMP are the whole time directors for an Indian bank and the chief executive officer for a foreign bank having branches in India. Relatives of KMP would be on the lines indicated in Section 45 S of the R.B.I. Act, 1934. Segment reporting: For reporting of business information under geographical and business segments in terms of AS 17, banks are required to disclose their

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domestic and international operations as geographical and Treasury, Other banking operations and Residual operations as business segments. RBI also puts in public domain details of the levy of penalty on a bank for contraventions of any of the provisions of the Act or non-compliance with any other requirements of the Banking Regulation Act, 1949; order, rule or condition specified by Reserve Bank under the Act. While there is no accounting standard in India for disclosure of derivatives business by incorporated entities, RBI has prescribed a minimum framework for disclosures by banks on their risk exposures in derivatives. The disclosure format includes both qualitative and quantitative aspects and has been devised to provide a clear picture of the exposure to risks in derivatives, risk management systems, objectives and policies. It broadly included the notional as well as mark to market value of outstanding derivative contracts along with the credit equivalents for the same. The banks are also required discuss their risk management policies pertaining to derivatives with particular reference to the extent to which derivatives are used, the associated risks and business purposes served. The discussion is expected to include: o the structure and organization for management of risk in derivatives trading, o the scope and nature of risk measurement , risk reporting and risk monitoring systems, o policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants, and o accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation. Apart from the above, in case of listed banks there is added market oversight which subjects them to additional post-listing disclosures. Does compliance with accounting and auditing standards promote better corporate governance?

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The role of sound accounting and adequate disclosure in the creation of useful information for markets and investors is obvious. Sound auditing standards applied properly by auditors who also maintain high standards of professional conduct also contribute to market and investor confidence. In turn, these disciplines are also responsive to the changing needs of market, investors and other external stakeholders. Compliance with accounting standards also contributes to transparency with regard to certain aspects which are relevant to corporate governance. Role of rating agencies in CG: The role of rating agencies in influencing corporate governance has started being appreciated. By providing independent analyses of the strengths and weaknesses of banks, rating agencies play a critical role in the capital market. To managements and boards, their comments can be early warning signals which can impel bank strengthening measures. Going forward, rating agencies should focus more on governance risks and develop a methodology that explicitly assesses the quality of governance.

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Corporate Governance Case Studies

The Lubrizol Corporation
The Lubrizol Corporation has a history of maintaining good corporate governance practices. Some examples of Lubrizol history of good practices include: For more than 20 years, Lubrizols Board has consisted of at least 75% non-employee directors and only non-employee directors have been members of the key Board Committees .For more than 10 years, Lubrizols outside Board members have met regularly without management present and the Chair of the Organization and Compensation Committee has acted as the lead director . For more than 15 years, Lubrizol has had written Board of Directors Governance Guidelines, and in 2000 the company first published them verbatim in Lubrizol proxy statement, long before the law required their publication. Since the founding of the Company, ethics has been a cornerstone for Lubrizol success. Lubrizol current Ethics program has been in existence since 1994 and Lubrizol Chief Ethics Officer regularly has provided reports to the Audit Committee. In recent days, the company has been asked to make presentations to numerous entities including public companies and educational and governmental institutions on Lubrizol Ethics program . The company is proud of its history of good corporate governance practices and considers these practices not only good for Lubrizol shareholders, but also for Lubrizol employees, customers and suppliers .

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 Cairo and Alexandria stock exchange (CASE)

In 2004 and 2005, the Cairo and Alexandria Stock Exchange (CASE) was the worlds best performing emerging markets exchange, driven by Egypts impressive economic growth. Newsweek magazine named it one of the worlds ten best stock markets for 2005. Booming capitalization and good liquidity were the reward for the exchanges tough decision to demand more disclosure from listed companies and to weed out those companies not considered investor grade. Tellingly, after the CASE instituted new disclosure rules, about one third of companies de-listed from the exchange. But the first to gain from increased transparency are the companies themselves, stresses CASE management. This is for the benefit of the company, not of the exchange. We tell our members that if you do this, investors will reward you. They will hold your shares even in the bad moments. This rang a bell with them, says Shahira Abdel Shahid, advisor to the CASE chairman. Ms Abdel Shahid points to Orascom Telecom, Commercial International Bank and Orascom Construction Industries as examples of companies that have gained from better disclosure. In mid-2002, the CASE implemented new rules that set the minimum standard of transparency, focused mainly on reporting requirements. Before this, there was no emphasis on disclosure in exchange rules, she explains. There is more understanding by the new regulator that transparency is important the case was different in the past. We inherited a lot of companies that were listed simply for tax benefits. So we set about to weed these companies out, says Ms Abdel Shahid. The exchange backed up the new rules with aggressive fines and suspensions from trading, encouraging many illiquid companies to de-list. New rules this year will set the corporate tax rate at 20 per

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cent for all companies, eliminating any tax breaks for listed companies. We expect a lot of voluntary delisting as a result. But we are happy with this. We will have fewer but better capitalized companies, she says. At the end of September 2005, there were 765 CASE-listed companies, down from 1,151 at the end of 2002. But during the same period, market capitalization more than tripled to US$ 67 billion, from US$ 21 billion. Most of the exchanges efforts to promote transparency have been aimed at the top companies that make up the CASE 50, which account for 80 per cent of trading volume. Some of these initiatives have subsequently been extended to the CASE 100 companies, which account for nearly all of the exchanges trading. Some of the steps taken have made disclosure easier for companies. For instance, a webbased filing system for CASE 30 companies has replaced paper forms and faxes. But most of the CASEs efforts are focused on Education and training. In 2003, the exchange appointed a head of disclosure. To encourage compliance, the CASE designated an analyst for each industry sector to meet with listed companies and explain the new rules and their benefits. Our main message is that investors seek information, says Ms Abdel Shahid. Today, nearly all CASE 50 companies have an investor relations officer (IRO). Perhaps the most important initiative has been the exchanges Investor Relations and Corporate Governance Committee, which is made up of representatives from ten CASElisted companies. These are the companies best in disclosure. They act as the blue chip companies to their peers, says Ms Abdel Shahid. The committee plays a communications and advisory role, and also sponsors events and publications. Membership involves both company chairmen and their IROs, and Ms Abdel Shahid characterizes participation as very active. Separately, the CASE audit committee has met with all of the CASE 50 companies to explain the role of audit committees in good corporate governance. Page | 21

Besides contributing to good market performance, the CASEs push to increase member quality has recently earned it full membership in the World Federation of Exchanges, alongside markets such as NYSE, Nasdaq and LSE. This is an upgrade for us, and we are the only Arab stock market to be a member, says Ms Abdel Shahid. It has also encouraged a broader investor culture in Egypt There is now more space dedicated in local newspapers to the stock exchange, and a class of financial journalists has emerged, she says. Alongside the CASEs efforts to improve transparency; other Egyptian initiatives are also focused on promoting good corporate governance. The Egyptian Institute of Directors, with support from the World Bank and the International Finance Corporation, has created a voluntary code of corporate governance and runs training courses for directors of listed and unlisted companies. This shows that Egypt is on the right track, says Ms Abdel Shahid. Future CASE initiatives will likely include an annual disclosure award, similar to one given by the Malaysian stock exchange. The exchange would also like to dedicate more attention to fighting insider trading through changes in trading rules and courses for company directors

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Corporate Governance at ITC

Preamble Over the years, ITC has evolved from a single product company to a multi-business corporation. Its businesses are spread over a wide spectrum, ranging from cigarettes and tobacco to hotels, packaging, paper and paperboards and international commodities trading. Each of these businesses is vastly different from the others in its type, the state of its evolution and the basic nature of its activity, all of which influence the choice of the form of governance. The challenge of governance for ITC therefore lies in fashioning a model that addresses the uniqueness of each of its businesses and yet strengthens the unity of purpose of the Company as a whole. Since the commencement of the liberalisation process, India's economic scenario has begun to alter radically. Globalisation will not only significantly heighten business risks, but will also compel Indian companies to adopt international norms of transparency and good governance. Equally, in the resultant competitive context, freedom of executive management and its ability to respond to the dynamics of a fast changing business environment will be the new success factors. ITC's governance policy recognises the challenge of this new business reality in India. Definition and Purpose ITC defines Corporate Governance as a systemic process by which companies are directed and controlled to enhance their wealth generating capacity. Since large corporations employ vast quantum of societal resources, we believe that the governance process should ensure that these companies are managed in a manner that meets stakeholders aspirations and societal expectations. Core Principles ITC's Corporate Governance initiative is based on two core principles. These are : i. Management must have the executive freedom to drive the enterprise forward without undue restraints; and Page | 23

ii.

This freedom of management should be exercised within a framework of effective accountability. ITC believes that any meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations.

Cornerstones: From the above definition and core principles of Corporate Governance emerge the cornerstones of ITC's governance philosophy, namely trusteeship, transparency, empowerment and accountability, control and ethical corporate citizenship. ITC believes that the practice of each of these leads to the creation of the right corporate culture in which the company is managed in a manner that fulfils the purpose of Corporate Governance. Trusteeship: ITC believes that large corporations like itself have both a social and economic purpose. They represent a coalition of interests, namely those of the shareholders, other providers of capital, business associates and employees. This belief therefore casts a responsibility of trusteeship on the Company's Board of Directors. They are to act as trustees to protect and enhance shareholder value, as well as to ensure that the Company fulfils its obligations and responsibilities to its other stakeholders. Inherent in the concept of trusteeship is the responsibility to ensure equity, namely, that the rights of all shareholders, large or small, are protected.

Transparency: Page | 24

ITC believes that transparency means explaining Company's policies and actions to those to whom it has responsibilities. Therefore transparency must lead to maximum appropriate disclosures without jeopardising the Company's strategic interests. Internally, transparency means openness in Company's relationship with its employees, as well as the conduct of its business in a manner that will bear scrutiny. We believe transparency enhances accountability. Empowerment and Accountability: Empowerment is an essential concomitant of ITC's first core principle of governance that management must have the freedom to drive the enterprise forward. ITC believes that empowerment is a process of actualising the potential of its employees. Empowerment unleashes creativity and innovation throughout the organisation by truly vesting decision-making powers at the most appropriate levels in the organisational hierarchy. ITC believes that the Board of Directors are accountable to the shareholders, and the management is accountable to the Board of Directors. We believe that empowerment, combined with accountability, provides an impetus to performance and improves effectiveness, thereby enhancing shareholder value. Control: ITC believes that control is a necessary concomitant of its second core principle of governance that the freedom of management should be exercised within a framework of appropriate checks and balances. Control should prevent misuse of power, facilitate timely management response to change, and ensure that business risks are pre-emptively and effectively managed.

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Ethical Corporate Citizenship: ITC believes that corporations like itself have a responsibility to set exemplary standards of ethical behaviour, both internally within the organisation, as well as in their external relationships. We believe that unethical behaviour corrupts organisational culture and undermines stakeholder value.

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Conclusion
Corporate governance is an inevitable phenomenon of corporate businesses. Whether it is good or bad is determined by the performance of the components. Good corporate governance is being promoted in almost all parts of the world. The benefits sound corporate governance brings are:

o Increase in investor confidence o Economic prosperity o Transparency in business activities o Better management of investment of the masses

Corporate governance is at the evolutionary stage in developing countries. However that does not mean that poor corporate governance is not present in the developed world. With cases such as the Enron bankruptcy, it is quite evident that corporate governance mal-practices are presents everywhere. Major issues in corporate governance are Ethical dilemmas, Window Dressing, Board Composition, and interaction with minority shareholders.

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