BUSINESS ENVIRONMENT

CORPORATE GOVERNANCE

The Aim And Purpose Of Corporate Governance

Chapter 11 Corporate Governance

Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society. The incentive to corporations and to those who own and manage them to adopt internationally accepted governance standards is that these standards will help them to achieve their corporate aims and to attract investment. The incentive for their adoption by states is that these standards will strengthen the economy and discourage fraud and mismanagement. The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system, and funds will flow to the centers of economic activity that inspire trust.
Himalaya Publishing House Business Environment Francis Cherunilam

Chapter 11 Corporate Governance

Reasons for the Growing Demand for Corporate Governance

Inadequacies and failures of an existing system often bring to the fore the need for norms and codes to remedy them. This is true of corporate governance too. Deficiencies in the Accounting Standards became more evident after many companies, in their eagerness to increase earnings and accelerate growth, exploited the weaknesses in the accounting standards to show inflated profits and understate liabilities.
Business Environment Francis Cherunilam

Himalaya Publishing House

Chapter 11 Corporate Governance

Corporate Governance Environment and Outcomes

Himalaya Publishing House

Business Environment Francis Cherunilam

Chapter 11 Corporate Governance

Recommendations of Birla Committee

The Birla Committee Report is the first formal and comprehensive attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets. The Committee, felt that the recommendations should be divided into mandatory and non-mandatory categories.

Himalaya Publishing House

Business Environment Francis Cherunilam

Chapter 11 Corporate Governance

Applicability: The recommendations will apply to all the listed private and public sector companies, in accordance with the schedule of implementation. This is a mandatory recommendation. Board of Directors: Board of Directors should have an optimum combination of executive and non-executive directors. The CII Code has also laid down that no individual should be a director on the boards of more than 10 companies at any given time; non-executive directors should be active, have defined responsibilities, and be conversant with P & L accounts; directors who have not been present for at least 50 per cent of board meetings should not be re-appointed.

Himalaya Publishing House

Business Environment Francis Cherunilam

Chapter 11 Corporate Governance

Audit Committee and Remuneration Committee: One of the items of the CII Code is that there should be an Audit Committee, which shall have access to all financial information. The Birla Committee has recommended an Audit Committee to act as a catalyst for effective financial reporting, with powers to investigate any activity within its terms of reference and to seek information from any employee.

Himalaya Publishing House

Business Environment Francis Cherunilam

Chapter 11 Corporate Governance

Accounting Standards and Financial Reporting: companies are required to give consolidated accounts in respect of all its subsidiaries in which they hold 51% or more of the share capital. Management: While the Board is responsible for ensuring that the principles of corporate governance are adhered to and enforced, the real onus of implementation lies with the management which is responsible for translating into action the policies and strategies of the Board and implementing its directives to achieve corporate objectives of the company framed by the Board. It is, therefore, essential that the board should clearly define the role of the management.

Himalaya Publishing House

Business Environment Francis Cherunilam

Chapter 11 Corporate Governance

These are mandatory recommendations. Shareholders: The shareholders are the owners of the company and as such they have certain rights and responsibilities. The Committee believes that the General Body Meetings provide an opportunity to the shareholders to address their concerns to the board of directors and comment on and demand any explanation on the annual report or on the overall functioning of the company. The Committee has also recommended that the institutional shareholders take an active interest in the composition of the Board of Directors and evaluate the corporate governance performance of the company.

Himalaya Publishing House

Business Environment Francis Cherunilam