Corporate governance is about

how companies are directed, ruled and controlled.

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•Corporate governance is the system of rules, practices and processes
by which a firm is directed and controlled.
• Governance refers specifically to the set of rules, controls, policies
and resolutions put in place to dictate corporate behavior.

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•Corporate governance system is the combination of system which
ensure that the management runs the firm for the benefit of one or
several stakeholders.
• Such stakeholders may cover shareholders, creditors, suppliers, clients,
employees and other parties with whom the firm conducts its
business. — Goergen and Renneboog, 2006

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• ON A PRACTICAL LEVEL
•Is gathering together a group of smart people around a board table
to make good decisions on behalf of the company and its
stakeholders. — Jim Kristie, editor and associate publisher of Directors
& Boards.

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• …. is about how suppliers of capital make sure managers do not
misuse the capital by investing in bad projects, and how shareholders
and creditors monitor managers.
– American Management Association

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Results of bad Corporate Governance

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 Oliver Schmidt
Volkswagen Schmidt originally faced
Tolerance or support of illegal up to 169 years in prison -

activities can create

scandals like the one that
•
rocked Volkswagen AG in
2015, when it was revealed
that the firm had rigged
engine emissions tests in
America and Europe.
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 Satyam’s auditors
Companies that do not
cooperate sufficiently with
auditors or do not select
• auditors with the appropriate
scale can publish FALSE
FINANCIAL RESULTS –
SATYAM COMPUTERS –
Satyam’s auditors:
PricewaterhouseCoopers
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 Dhanlaxmi Bank:
• Fixed Deposit Scam –
hundreds of Crores of money
– 6 people arrested in 2014

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 Sahara
Sahara Group was accused of
failing to refund over Rs.
• 20,000 crore to its more
than 30 million small
investors which it collected
through two unlisted
companies of Sahara.

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• Pfizer
Drug testing in Nigeria

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 Corporate Governance
Why is it important?
• Proliferation of financial scandals and crisis
• Loss of trust of investors
• Globalization lead to increasing cross-border
investment opportunities but investors may not
have knowledge about the regulatory
framework of overseas investees

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 Corporate Governance
• Investors are not willing to invest in
countries/companies that are corrupt, prone to fraud,
poorly managed and lacking sufficient protection for
investors’ rights
• Securities and company law protection may help, but
not enough
• Corporate Governance supplements the legal
framework

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 The OECD Principles of
Corporate Governance
1. Ensuring the basis for an effective corporate governance framework
2. The rights of shareholders and key ownership functions
3. The equitable treatment of shareholders
4. The role of stakeholders in corporate governance
5. Disclosure and transparency
6. The responsibilities of the board
- The corporate governance framework should ensure the
strategic guidance of the company, the effective monitoring
of management by the board, and the board’s accountability
to the company and the shareholders.

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1. Accountability.
The Code provides for accountability of the Company's Board of Directors to all
shareholders in accordance with applicable law and provides guidance to the
Board of Directors in making decisions and monitoring the activities of the
executive bodies.
obligation and responsibility to give an explanation or reason for the company’s
actions and conduct.
In brief:
The board should present a balanced and understandable assessment of the
company’s position and prospects;
The board is responsible for determining the nature and extent of the significant
risks it is willing to take;
The board should maintain sound risk management and internal control systems;
The board should establish formal and transparent arrangements for corporate
reporting and risk management and for maintaining an appropriate relationship
with the company’s auditor, and
The board should communicate with stakeholders at regular intervals, a fair,
balanced and understandable assessment of how the company is achieving its
business purpose.
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2. FAIRNESS
In addition to shareholders, there should also be fairness in the treatment of all
stakeholders including employees, communities and public officials.

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3. TRANSPARENCE
The Company shall provide timely, accurate disclosure of information
about all material facts relating to its activities, including its financial
situation, social and environmental indicators, performance,
ownership structure and governance of the Company, as well as free
access to such information for all stakeholders.

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4. RESPONSIBILITY
The Board of Directors are given authority to act on behalf of the
company. They should therefore accept full responsibility for the
powers that it is given and the authority that it exercises. The Board of
Directors are responsible for overseeing the management of the business,
affairs of the company, appointing the chief executive and monitoring the
performance of the company. In doing so, it is required to act in the best
interests of the company.

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5.
The board approves corporate strategies that are intended to build
sustainable long-term value; selects a chief executive officer (CEO);
oversees the CEO and senior management in operating the company’s
business, including allocating capital for long-term growth and assessing
and managing risks; and sets the “tone at the top” for ethical conduct.

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6.
Management, under the oversight of the board and its audit committee,
produces financial statements that fairly present the company’s
financial condition

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7.
Boards should have a strong, independent leadership structure.

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 Organisation for Economic Co-operation and Development (OECD)
reports present general principles around which businesses are
expected to operate to assure proper governance.

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1 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 openly and
effectively communicating information and by encouraging shareholders to participate
in general meetings.

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2 Interests of other stakeholders :
Organizations should recognize that they obligations to non-shareholder stakeholders,
including employees, investors, creditors, suppliers, local
communities, customers

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4 Integrity and ethical behavior :

Integrity should be a fundamental requirement in choosing

corporate officers and board members. Organizations should develop a code of
conduct for their directors and executives that promotes ethical and responsible
decision making

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5 Disclosure and transparency :

Organizations should clarify and make publicly known the roles and
responsibilities of board and management.
Integrity of the company's financial reporting.
Ensure that all investors have access to clear, factual information.

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1. UK & American Model

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 1. UK & American Model

Composition of the Board of Directors:

Insiders (executive director)

Outsiders (non-executive director or independent

director) Is a person who is either employed by the corporation
who has significant business relationship with corporate
management.
Is a person/institution which has no direct relationship with the
corporation or management

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 1. UK & American Model

Power

Concentration of power in a small group of persons.

Management and/or the board of directors’ attempts to retain
power over long period of time

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 1. UK & American Model

Disclosure Requirements

1) Disclosure of Financial Data

2) Background information on each nominee to the Board of
Directors
3) Breakdown of power structure
4) Compensation to top 5 executive officers
5) All shareholders holding more than 5% of company’s shares
6) Information on proposed mergers and acquisitions
7) Names of proposed auditors

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 1. UK & American Model

Actions that require Shareholders’ Approval

1) Election of Directors
2) Appointment of Auditors
3) Mergers and Takeover

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 1. UK & American Model

Entities that monitor company’s work

1) Investment Funds
2) Rating Agencies
3) Auditors

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 1. UK & American Model

•In July 2002, the U.S. Congress passed the Sarbanes Oxley Act (SOX), particularly
designed to make US corporations more transparent and accountable to their
stakeholders.
•The Act seeks to re-establish investor confidence by providing good corporate
governance practice to prevent corporate scams and frauds in business corporations,
to improve accuracy and transparency in financial reporting, accounting service of
listed companies, enhance corporate responsibility and independent auditing.

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2. The German Model

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 2. The German Model

•Germany is considering proper steps towards corporate governance

since second half of 19thcentury.
•The company law in Germany of 1870 created dual board structure to
care of small investors and the public.
•The company law in 1884 made information and openness as the key
theme.
•The law also mandated minimum attendance at the first
shareholders meeting of any company

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 2. The German Model

•UNIQUE ELEMENT of the GERMAN MODEL

1) Two layers of Board structure
2) Disclosure Requirements ❶ Corporate financial data, requires on a semi-
annual basis. ❷ Data on capital structure ❸ Limited information on each
supervisory board nominee, including name, hometown and
occupation/affiliation. ❹ Aggregate data for compensation of management
and supervisory board. ❺ Any substantial shareholder holding more than 5%
of the corporation’s total share capital. ❻ Information on proposed mergers
and restructurings. ❼ Proposed amendments to the articles of association. ❽
Names of individuals and/or companies proposed as auditors
3) Corporate Actions Requiring Shareholder Approval ❶ Allocation of net Income
(payment of dividends and reserves. ❷ Ratification of the acts of the
management board for the previous fiscal year. ❸ Ratification of the acts of
the supervisory board for the previous fiscal year. ❹ Election of the
supervisory board. ❺Appointment of auditors.
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 2. The Japanese Model

•The Japanese model involves a high level of ownership by banks

and other affiliated companies.
• The key players in the Japanese system are
1) the bank,
2) the keiretsu (both major inside shareholders),
3) management and the government.
Outside shareholders have little or no voice and there are few truly
independent or outside directors. The board of directors is usually
made up entirely of insiders, often the heads of the different
divisions of the company.

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 3. The Japanese Model

1. The Bank: 2. KEIRETSU

The bank provides its
Many Japanese corporation
corporate clients with
also have a strong
loans as well as financial relationships
services related to with a network of
equity issues, settlement affiliated companies.
accounts and related These networks,
consulting services. characterized by
The main bank is crossholding of a debt and
equity, trading of goods and
generally a major
services, and informal
shareholder in the business contacts, are
corporation known as Keiretsu
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 3. The Japanese Model

•1) The Bank: The bank provides its corporate clients with loans as
well as services related to equity issues, settlement accounts and
related consulting services.
• The main bank is generally a major shareholder in the
corporation

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 4. The Indian Model

The Securities and Exchange Board of India (SEBI):

•Established SEBI Act in Jan. 1992 gave statutory powers and

introduced had 2 issues.
•(a) Investor protection and
•(b) Market Development.
•SEBI is part of department of Company Affairs Govt. of India.

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 4. The Indian Model

Different committees formed to improve corporate governance

•In April 2002 Ganguly Committee report was made for improving
corporate governance in Banks and Financial Institutions.
•The Central Government (Ministry of Finance and Company Affairs)
appointed a Committee under the Chairmanship of Mr. Naresh Chandra
on Corporate Audit and Governance. This committee submitted its
report on 23 December 2002.
•Finally SEBI appointed another committee on Corporate Governance
under the Chairmanship of N.R. Narayan Murthy. The committee
submitted its report to SEBI on 8 Feb. 2003.

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 4. The Indian Model

Different committees formed to improve corporate governance

•Corporate governance has once again become the focus of media/public attention in India
following the debacles of Enron, Xerox and WorldCom abroad, and Tata Finance/Ferguson,
Satyam, telecom scams by few companies and black money laundering, employed by few at
home.
•The question that comes to the minds of Indian investors now is, whether our institutions and
procedures are strong enough to ensure that such incidents will not happen again, or has the
Indian corporate sector matured enough to practice effective self-regulation? These
developments tempt us to re-evaluate the effectiveness of corporate governance structures and
systems in India.
•Companies now have to deal with newer and more demanding Indian and global shareholders
and stakeholder groups who seek greater disclosure, more transparent explanation for
major decisions, and, above all, a better return for their stake. There is, thus, an
increased need for Indian boards to ensure that the corporations are run in the best interests of
these highly demanding international stakeholders.
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 Committee # 1. CII Code of Desirable Corporate Governance (1998)

1) 1998 - For the first time in the history of corporate governance in India, the Confederation of
Indian Industry (CII) framed a voluntary code of corporate governance for the listed
companies, which is known as CII Code of desirable corporate governance.
2) Main Recommendations
(a) Any listed company with a turnover of Rs. 1000 million and above
should have professionally competent and acclaimed non-
executive directors,
who should constitute:
(i) at least 30% of the board, if the chairman of the company is a non-
executive director, or
(ii) at least 50% of the board if the chairman and managing director is
the same person.

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 Committee # 1. CII Code of Desirable Corporate Governance (1998)

1) 1998 - For the first time in the history of corporate governance in India, the Confederation of
Indian Industry (CII) framed a voluntary code of corporate governance for the listed
companies, which is known as CII Code of desirable corporate governance.
2) Main Recommendations
(b) For the non-executive directors to play an important role in
corporate decision-making and maximising long-term shareholder
value,
They need to:
(i) become active participants in boards, not passive advisors,
(ii) have clearly defined responsibilities within the board, and
(iii) know how to read a balance sheet, profit and loss account, cash
flow statements and financial ratios, and have some knowledge of
various company laws.
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 Committee # 1. CII Code of Desirable Corporate Governance (1998)

(c) No single person should hold directorships in more than 10 listed

companies.
(d) The full board should meet a minimum of six times a year,
preferably at an interval of two months, and each meeting should
have agenda items that require at least half-a-days discussion.
(e) As a general rule, one should not re-appoint any non-executive
director who has not had the time to attend even half of the
meetings.

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 Committee # 1. CII Code of Desirable Corporate Governance (1998)

(g) Listed companies with either a turnover of over Rs. 1000 million or a
paid up capital of Rs. 200 million, whichever is less, should set up
audit committees within 2 years. The committee should consist
of a least three members, who should have adequate knowledge of
finance, accounts, and basic elements of company law. The
committees should provide effective supervision of the financial
reporting process. The audit committees should periodically interact
with statutory auditors and internal auditors to ascertain the quality
and veracity of the company’s accounts as well as the capability of
the auditors themselves.

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 Committee # 2. Kumar Mangalam Birla Committee (2000)

Another Committee named as K.M. Birla Committee was set up by SEBI

in the year 2000. In fact, this Committee’s recommendation
culminated in the introduction of Clause 49 of the Listing
Agreement to be complied with by all listed companies. Practically
most of the recommendations were accepted and included by SEBI in
its new Clause 49.

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MAIN RECOMMENDATIONS OF THIS COMMITTEE
Committee # 2. Kumar Mangalam Birla Committee (2000)

(a) The board of a company should have a good combination of

executive and nonexecutive directors with not less than 50% of the
board comprising the non-executive directors.
(b) A director should not be a member in more than ten committees
or act as chairman of more than five committees across all
companies in which he is a director. It should be a mandatory annual
requirement for every director to inform the company about the
committee positions he occupies in other companies and notify
changes as and when they take place.

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 Committee # 2. Kumar Mangalam Birla Committee (2000)
MAIN RECOMMENDATIONS OF THIS COMMITTEE

(d) The disclosures to be made:

(i) All elements of remuneration package of all the directors, i.e.,
salary, benefits, bonus, stock options, pension etc.
(ii) Details of fixed component and performance linked
incentives along with the performance criteria
(iii) Service contracts, notice and period, severance fees

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MAIN RECOMMENDATIONS OF THIS COMMITTEE
Committee # 2. Kumar Mangalam Birla Committee (2000)

(e) In case of appointment of a new director

(i) (i) a brief resume of the director,
(ii) (ii) nature of his experience in specific functional areas, and
(iii) (iii) names of companies in which the person also holds the
directorship and the membership of committees of the board.

(f) Board meetings should be held at least four times in a year, with a
maximum times gap of 4 months between any two meetings.

(g) Remuneration Committee: The board should set up a remuneration

committee to determine on their behalf and on behalf of the
shareholders with agreed terms of reference, the company’s policy
on specific remuneration package for executive directors including
pension rights and any compensation payment. 50