CORPORATE GOVERNANCE

Corporate governance broadly refers to the mechanisms, processes and relations by which corporations
are controlled and directed. Governance structures and principles identify the distribution of rights and
responsibilities among different participants in the corporation (such as the board of directors,
managers, shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules
and procedures for making decisions in corporate affairs. Corporate governance includes the processes
through which corporations' objectives are set and pursued in the context of the social, regulatory and
market environment. Governance mechanisms include monitoring the actions, policies, practices, and
decisions of corporations, their agents, and affected stakeholders. Corporate governance practices are
affected by attempts to align the interests of stakeholders.
Corporate governance is based on three interrelated components: corporate governance principles,
functions and mechanisms.
Corporate Governance Principles
HONESTY. Corporate communications with both internal and external audiences, including
public financial reports, should be accurate, fair, transparent, and trustworthy.
RESIELNCE. A resilient corporate governance structure is sustainable and enduring in the
sense that it will easily recuperate from setbacks and abuses.
RESPONSIVENESS. Effective corporate governance is responsive to the interests and desires
of all stakeholders, as well as to emerging initiatives and changes in political, regulatory, social,
and environmental issues.
TRANSPARENCY. Transparency means that the company is not hiding relevant information,
and disclosures are fair, accurate, and reliable.
Principles upon which corporate governance structure should be developed are
Value-adding philosophy
Ethical conduct
Accountability
Shareholder democracy and fairness
Integrity of the financial reporting
Transparency
Independence
Corporate Governance Functions
OVERSIGHT FUNCTION. The board of directors should provide strategic advice to
management and oversee managerial performance, yet avoid micromanaging.
MANAGERIAL FUNCTION. The effectiveness of this function depends on the alignment of
managements interests with those of shareholders.
COMPLIANCE FUNCTION. The set of laws, regulations, rules, standards, and best practices
developed by state and federal legislators, regulators, standard-setting bodies, and professional
organizations to create a compliance framework for public companies in which to operate and
achieve their goals.
INTERNAL AUDIT FUNCTION. Assurance and consulting services to the company in the
areas of operational efficiency, risk management, internal controls, financial reporting, and
governance processes.
LEGAL AND FINANCIAL ADVISORY FUNCTIONS. Legal advice and assists the company,
its directors, officers, and employees in complying with applicable laws and other legal
obligations and fiduciary duties.

EXTERNAL AUDIT FUNCTION. External auditors lend credibility to the companys

financial reports and thus add value to its corporate governance through their integrated audit
of both internal control over financial reporting and financial statements.
MONITORING FUNCTION. Shareholders, particularly institutional shareholders, empowered
to elect and, if warranted, remove directors.

Corporate Governance Mechanisms

The corporate governance structure is shaped by internal and external governance mechanisms, as well
as policy interventions through regulations. Both internal and external corporate governance
mechanisms of the company have evolved over time to monitor, bond and control management.
Internal Mechanism: The foremost sets of controls for a corporation come from its internal
mechanisms. These controls monitor the progress and activities of the organization and take corrective
actions when the business goes off track. Internal mechanisms include oversight of management,
independent internal audits, structure of the board of directors into levels of responsibility, segregation
of control and policy development.
External Mechanism: External control mechanisms are controlled by those outside an organization and
serve the objectives of entities such as regulators, governments, trade unions and financial institutions.
These objectives include adequate debt management and legal compliance. External mechanisms are
often imposed on organizations by external stakeholders in the forms of union contracts or regulatory
guidelines.
Independent Audit: An independent external audit of a corporations financial statements is part of the
overall corporate governance structure. An audit of the company's financial statements serves internal
and external stakeholders at the same time. An audited financial statement and the accompanying
auditors report helps investors, employees, shareholders and regulators determine the financial
performance of the corporation. This exercise gives a broad, but limited, view of the organizations
internal working mechanisms and future outlook.
Q) Identify the corporate governance developments in the post-SOX era.
In the post-SOX era, corporate governance further evolved to the integrated aspects of meeting both
compliance requirements and promoting a strategic business imperative. There are three aspects:
shareholder aspect, stakeholder aspect, and an integrated aspect.
Shareholder Aspect: It owns corporations. This aspect is based on the premise that shareholders
provide capital to the corporations that exist for their benefit. The board of director is elected
and executives are hired to make decision on behalf of share holder.
Stakeholder Aspect: These are individuals or group who affect the strategic decision,
operations, performance and also affected by its activities. Stakeholders are now becoming
more engaged in a company performance on a variety of economic, governance, ethical, social
and environment issues. The model of corporate governance focuses on the broader view as the
nexus of contracts among all corporate governance participants with the common goal of
creating value. It concentrates on maximisation for all stake holders.
Integrated Aspect: Modern corporate governance emphasizes BOTH financial aspects of
increasing shareholders value AND an integrated approach that considers the rights and
interests of all stakeholders.
SARBANES-OXLEY ACT
The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high-profile corporate
scandals. It established a series of requirements that affect corporate governance in the U.S. and

influenced similar laws in many other countries. The law required, along with many other elements,
that:
The Public Company Accounting Oversight Board (PCAOB) be established to regulate the
auditing profession, which had been self-regulated prior to the law. Auditors are responsible for
reviewing the financial statements of corporations and issuing an opinion as to their reliability.
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial
statements. Prior to the law, CEO's had claimed in court they hadn't reviewed the information
as part of their defense.
Board audit committees have members that are independent and disclose whether or not at least
one is a financial expert, or reasons why no such expert is on the audit committee.
External audit firms cannot provide certain types of consulting services and must rotate their
lead partner every 5 years. Further, an audit firm cannot audit a company if those in specified
senior management roles worked for the auditor in the past year. Prior to the law, there was the
real or perceived conflict of interest between providing an independent opinion on the accuracy
and reliability of financial statements when the same firm was also providing lucrative
consulting services.
CORPORATE GOVERNANCE REPORTING
Corporate Governance Reporting (CGR) entails assessing the quality and effectiveness of the
organizations corporate governance and reporting findings to interested stakeholders, including the
board of directors, executives, auditors, regulatory agencies, and shareholders.
Corporate Governance Reporting:
(1) Disclose all relevant information about the effectiveness of the companys corporate governance.
(2) Focus on the companys sustainability performance.
(3) Provide transparent information about the companys performance and its impacts on all
stakeholders.
(4) Assess the companys responsiveness to the needs of its stakeholders.
BUSINESS ETHICS
Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that examines
ethical principles and moral or ethical problems that arise in a business environment. It applies to all
aspects of business conduct and is relevant to the conduct of individuals and entire organizations.
Business ethics is the study of proper business policies and practices regarding potentially
controversial issues, such as corporate governance, insider trading, bribery, discrimination, corporate
social responsibility and fiduciary responsibilities. Business ethics are often guided by law, while other
times provide a basic framework that businesses may choose to follow in order to gain public
acceptance. Business ethics are implemented in order to ensure that a certain required level of trust
exists between consumers and various forms of market participants with businesses. For example, a
portfolio manager must give the same consideration to the portfolios of family members and small
individual investors. Such practices ensure that the public is treated fairly.
CODE OF ETHICS
The Code of Ethics states the principles and expectations governing the behavior of individuals and
organizations in the conduct of internal auditing. It describes the minimum requirements for conduct,
and behavioral expectations rather than specific activities.
Principles:

Integrity: The integrity of internal auditors establishes trust and thus provides the basis for
reliance on their judgment.
Objectivity: Internal auditors exhibit the highest level of professional objectivity in gathering,
evaluating, and communicating information about the activity or process being examined.
Internal auditors make a balanced assessment of all the relevant circumstances and are not
unduly influenced by their own interests or by others in forming judgments.
Confidentiality: Internal auditors respect the value and ownership of information they receive
and do not disclose information without appropriate authority unless there is a legal or
professional obligation to do so.
Competency: Internal auditors apply the knowledge, skills, and experience needed in the
performance of internal audit services.

ETHICAL DECISION PROCESS

1. Gather the facts: Dont jump to conclusions without the facts. Assemble as many facts as possible
before proceeding. Clarify what assumptions you are making.
2. Define the ethical issues : Dont jump to solutions without first identifying the ethical issue(s) in the
situation. There may be multiple ethical issues focus on one major one at a time.
3. Identify the affected parties (stakeholders): Identify all of the stakeholders i.e. Who are the primary
or direct stakeholders? Or Who are the secondary or indirect stakeholders?
4. Identify the consequences: Think about potential positive and negative consequences for affected
parties by the decision. Short term vs. Long term consequences will decision be valid over time.
5. Identify the obligations (principles, rights, justice): Formulate the appropriate decision or action
based solely on the above analysis of these obligations.
6. Consider your character and integrity: Consider what your relevant community members would
consider to be the kind of decision that an individual of integrity would make in this situation.
7. Think creatively about potential actions: Be sure you have not been unnecessarily forced into a
corner. You may have some choices or alternatives that have not been considered. If you have come up
with solutions a and b, try to brainstorm and come up with a c solution that might satisfy the
interests of the primary parties involved in the situation.
8. Check your gut: Even though the prior steps have argued for a highly rational process, it is always
good to check your gut. Intuition is gaining credibility as a source for good decision making
knowing something is not right.
9. Decide on the proper ethical action and be prepared to deal with opposing arguments: Consider
potential actions based on the consequences, obligations, and character approaches.
CODE OF PROFESSIONAL CONDUCT
The Code of Ethics and Standards of Professional Conduct ("Code and Standards") are the ethical
benchmark for investment professionals around the globe, regardless of job title, cultural differences,
or local laws. The Code of Ethics maintains that you must:
Place the integrity of the profession and the interests of clients above your own interests
Act with integrity, competence, and respect
Maintain and develop your professional competence
The Standards of Professional Conduct cover:
Professionalism and integrity of the capital markets
Duties to clients and employers
Investment analysis and recommendations.

PRINCIPLES OF BUSINESS ETHICS

ResponsibilitiesExercise sensitive professional and moral judgment.
Public interestHonor the public trust.
IntegrityPerform responsibilities with the highest sense of integrity.
ObjectivityImpartial, unbiased, and independent. Free of conflicts of interest and
independent in fact and appearance.
Due careDiligent, competent, thorough, prompt.
Scope and nature of servicesObserve the principles when considering the scope and nature of
services provided.
CODE OF ETHICS BY SEC
It is defined as written standards designed to deter wrongdoing and to promote:
Full, fair, accurate, timely, and transparent disclosures in reports and documents filed or
submitted to the SEC and in other public communications.
Honest and ethical conduct throughout the company including the ethical handling of apparent
or actual conflicts of interest between personal and professional activities and relationships.
Accountability for compliance with the established code of ethics.
Compliance with applicable regulations and professional standards.
The timely and effective internal reporting of noncompliance and any violations of the
established code of ethics to an appropriate person or persons designated in the code.
The established codes of conduct and ethics programs address the following:
Avoidance and resolution of conflicts of interest between the company and employee.
Compliance with all applicable regulations.
Emphasis on customer relations to enhance the companys reputation.
Avoidance of improper use of the companys confidential information.
Encouragement of whistleblowers to reveal dishonesty, wrongdoings, and improper behavior.
BUSINESS ETHICS
Four different levels of business ethics have been identified based on what type of business and how
their actions are evaluated.
1. The society level, which defines ethical behavior and assesses the effect of business on society
2. The industry level, which suggests that different industries have their own set of ethical standards
(e.g., chemical industry vs. pharmaceutical industry)
3. The company level, under which different companies have their own set of ethical standards
4. The individual manager level, at which each manager and other corporate participants are
responsible for their own ethical behavior
CONSEQUENTLY, one feasible way to judge ethical behavior is to focus on determinants of business
ethics and behavior
Corporate Culture: Companies should promote a spirit of integrity that goes beyond
compliance.
Incentive: Individuals within the company tend to act according to incentives provided to them
in terms of rewards and the performance evaluation process.
Opportunities: Effective corporate governance, internal controls, and enterprise risk
management can reduce the opportunity for unethical conduct.

Choices: Individuals, in general, are given the freedom to make choices and usually choose
those that will maximize their well-being.

Q) WHAT IS AN ETHICAL BEHAVIOR?

Ethical behavior is merely making good business decisions based on an established "code of ethics".
Entrepreneurs should establish a written code of ethics that can serve as a framework for decisions to
be made by the entrepreneur as well as the employees. In developing this code of ethics you should
consider the following items:
1. Identify your general principles that would lead to fair business practices.
2. Check with your industry association for basic standards to review
3. Allow for the fact that ethical questions do not always have a unique, faultless answer.
4. Write out specific statements that will assist you and others in making day-to-day ethical decisions.
5. Apply your code of ethics to a written policy and procedure manual identifying the major rules for
operating your business.
6. Train your employees (and family members) to make ethical decisions about the business.
CORPORATE GOVERNANCE : PURPOSE, ROLE AND OBJECTIVES
Corporate governance broadly refers to the rules, processes or laws by which businesses are operated,
regulated and controlled. Todays corporate governance places a strong emphasis on both, economic
efficiency and safeguarding the welfare of shareholders. Presence of an effective corporate governance
system, within a company and across an economy as a whole, helps to strengthen the economy, create
investor confidence, and contribute to social wellbeing.
The role of good corporate governance is to:
set right objectives;
chart the right processes of operations and process of governance;
ensure ethics in the corporate objectives and practice;
develop right kind of people and talent in the organisation;
inculcate the culture of ethics amongst people;
obey the rules, laws and regulations concerning the business;
adopt methods of measures and means to control and regulate within the rules and regulations.
adhere to the environmental laws and regulatory principles.
Principles of corporate governance
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.
Interests of other stakeholders: Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities, customers, and policy makers.
Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.
Integrity and ethical behaviour: 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.

Disclosure and transparency: Organizations should clarify and make publicly known the roles
and responsibilities of board and management to provide stakeholders with a level of
accountability. They should also implement procedures to independently verify and safeguard
the integrity of the company's financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors have access to clear,
factual information.

THE OECD PRINCIPLES OF CORPORATE GOVERNANCE

As per some important highlights of the OECD principles, the corporate governance framework
should:
Promote transparent and efficient markets, be consistent with the rule of law and clearly
articulate the division of responsibilities among different supervisory, regulatory and
enforcement authorities.
Protect and facilitate the exercise of shareholders rights.
Ensure the equitable treatment of all shareholders.
Recognize the rights of stakeholders established by law or through mutual agreements and
encourage active co-operation between corporations and stakeholders in creating wealth, jobs,
and the sustainability of financially sound enterprises.
Ensure that timely and accurate disclosure is made on all material matters regarding the
corporation, including the financial situation, performance, ownership, and governance of the
company.
Ensure the strategic guidance of the company, the effective monitoring of management by the
board, and the boards accountability to the company and the shareholders.
THE COMBINED CODE OF CORPORATE GOVERNANCE
Here, the recommendations, codes or principles have mainly focused on
the companys structure;
its financial and non-financial disclosures;
compliance with codes of corporate governance;
competitive remuneration policy;
shareholders rights and responsibilities; and
financial reporting and internal controls.
PROVISIONS IN THE CLAUSE 49 OF THE SEBI GUIDELINES
The board will lay down a code of conduct for all board members and senior management of
the company to compulsorily follow.
The CEO and CFO will certify the companys financial statements and cash flow statements.
At least one independent director of the holding company will be a member of the board of a
material non-listed subsidiary.
The audit committee of the listed company shall review the financial statements of the unlisted
subsidiary, in particular its investments.
If while preparing financial statements, the company follows a treatment that is different from
that prescribed in the accounting standards, it must disclose this in the financial statements and
the management should also provide an explanation for doing so in the corporate governance
report of the annual report.

The company will have to lay down procedures for informing the board members about the risk
management and minimization procedures.
Where money is raised through public issues, rights issues etc., the company will have to
disclose the uses/applications of funds according to major categories as part of quarterly
disclosures of financial statements.
The company will have to publish its criteria for making its payments to non-executive
directors in its annual report.

MODELS OF CORPORATE GOVERNANCE

The Anglo-American Model: his model is also called an Anglo-Saxon model and is used as basis of
corporate governance in U.S.A, U.K, Canada, Australia, and some common wealth countries. The
shareholders appoint directors who in turn appoint the managers to manage the business. Thus there is
separation of ownership and control. The board usually consist of executive directors and few
independent directors. The board often has limited ownership stakes in the company. Moreover, a
single individual holds both the position of CEO and chairman of the board. This system (model) relies
on effective communication between shareholders, board and management with all important decisions
taken after getting approval of shareholders (by voting).
The Coordinated Model: This model is also called as the business network model, usually
shareholders are banks/financial institutions, large family shareholders, corporate with crossshareholding. There is supervisory board which is made up of board of directors and a president, who
are jointly appointed by shareholder and banks/financial institutions. This is rejection of the Japanese
keiretsu- a form of cultural relationship among family controlled corporate and groups of complex
interlocking business relationship, where cross shareholding is common most of the directors are heads
of different divisions of the company. Outside director or independent directors are rarely found of the
board.
The Family-Owned Company Model: The model of corporate governances found in India is a mix of
the Anglo-American and German models. This is because in India, there are three types of Corporation
viz. private companies, public companies and public sectors undertakings (which includes statutory
companies, government companies, banks and other kinds of financial institutions). Each of these
corporation have a distinct pattern of shareholding. For e.g. In case of companies, the promoter and his
family have almost complete control over the company. They depend less on outside equity capital.
Hence in private companies the German model of corporate governance is followed.
BEST PRACTICES IN CORPORATE GOVERNANCE
Adherence to a code of conduct and the practice of whistle-blowing is important; but how they
are communicated and practised across the organisation is even more important. It is vital for
board members and senior managers to lead by example.
Following trusteeship in order to protect shareholders including minority shareholders is
essential.
An independent and transparent process is needed to evaluate the functioning of the board.
Integrity and ethical values should be emphasized as being fundamental to the governance
system.
Focus on sustainability.
Increased responsibility and empowerment of independent directors.
Skills to listen to and understand stakeholders their needs and interests.
Concern for purposeful corporate social responsibility.
THE GLOBALIZATION PROCESS

Examine how businesses can be owned, and how this impacts the separation between ownership and
management the agency problem
Evaluate the distinctions between the two major forms of management goals stockholder wealth
maximization versus stakeholder capitalism
Distinguish between the actual operational goals which maybe pursued by management depending on
whether the company is operated by owners or professional management
Analyze the goals and forms of corporate governance in use in the global marketplace today, and
whether that attracts or deters cross-border investment
Examine how trends in corporate governance are altering the competitive landscape for multinational
enterprises
GOAL OF MANAGEMENT
As Trident becomes more deeply committed to multinational operations, a new constraint develops
one that springs from divergent worldwide opinions and practices as to just what the firms overall goal
should be
Shareholder Wealth Maximization: The shareholder wealth maximization (SWM) principle
states that the immediate operating goal and the ultimate purpose of a public corporation is and
should be to maximize return on equity capital. The SWM specification of what is often termed
the corporate objective makes operating goal and ultimate purpose the same. Managers and
investors should focus narrowly on SWM. The question of whether the corporate objective can
be a strict emphasis on SWM or must recognize significant differences between the operating
goal for managers and investors and the ultimate social purpose of the public corporation lies at
the intersection of three literatures. In economics and finance literature, SWM is a standard
assumption. This SWM operating goal is expected to yield the most socially efficient allocation
of capital. SWM focuses on the motives and behaviors of financial stakeholders.
Stakeholder Capitalism Model: A view that all a corporations stakeholders (employees,
management, suppliers, local community, local/national government and creditors) need to be
considered in addition to the equity holders. The goal is to earn as much as possible in the long
run, but to retain enough to increase the corporate wealth for the benefit of all. The definition of
corporate wealth is much broader than just financial wealth, it includes technical, market and
human resources as well Doesnt make an issue of market efficiency because long-term loyal
SH should be more influential than transient SH.
STRUCTURE OF CORPORATE GOVERNANCE
The established Corporate Governance Structure comprising the following parties, provides a
comprehensive framework to
(i) enhance accountability to shareholders and other stakeholders
(ii) ensure timely and accurate disclosures of all material matters
(iii) deal fairly with shareholders and other stakeholder interests
(iv) maintain high standards of business ethics and integrity.
In an attempt to create a corporation where stockholders' interests are looked after, many firms have
implemented a two-tier corporate hierarchy. On the first tier is the board of governors or directors:
these individuals are elected by the shareholders of the corporation. On the second tier is the upper
management: these individuals are hired by the board of directors.
Board of Directors: Elected by the shareholders, the board of directors is made up of two types
of representatives. The first type involves individuals chosen from within the company. This

can be a CEO, CFO, manager or any other person who works for the company daily. The other
type of representative is chosen externally and is considered to be independent from the
company. The role of the board is to monitor a corporation's managers, acting as an advocate
for stockholders. In essence, the board of directors tries to make sure that shareholders' interests
are well served. Board members can be divided into three categories: Chairman, Inside
Directors, Outside directors.
Management Team: As the other tier of the company, the management team is directly
responsible for the company's day-to-day operations and profitability. It includes CEO, COO,
CFO.
The Bottom Line: Together, management and the board of directors have the ultimate goal of
maximizing shareholder value. In theory, management looks after the day-to-day operations,
and the board ensures that shareholders are adequately represented. But the reality is that many
boards consist of management.

CORPORATE GOVERNANCE REFORM

Sarbanes Oxley (SOX) has four major requirements:
o Signature Clause CEOs and CFOs must vouch for accuracy of the published financial
statements
o Firm audit and compensation committees must be comprised of independent/outside
directors
o Loans by the firm to corporate officers and directors are prohibited
o Internal controls must be tested for protection against financial fraud
Board Structure and Compensation
o Some suggest that U.S. corporate boards should be more like European boards
o Research suggests that compensation for board members is not a significant problem
Transparency, Accounting and Auditing
o U.S accounting practices are rule-based and can be abused by smart accountants
o European accounting practices are conceptually-based
Minority Shareholder Rights are still as issue
COMPANIES ACT 2013
Companies Act 2013 is an Act of the Parliament of India which regulates incorporation of a company,
responsibilities of a company, directors, dissolution of a company. The 2013 Act is divided into 29
chapters containing 470 sections as against 658 Sections in the Companies Act, 1956 and has 7
schedules. The Act has made several significant changes, which seek to redefine the board governance
in India. New concepts have been introduced such as women directors on the boards to bring in gender
diversity, small shareholder director, performance evaluation, corporate social responsibility and class
actions; the internal financial controls and risk management oversight of the boards have been strongly
emphasised; disclosures have been enhanced in boards report to shareholders, additional rigour has
been added to strengthen the Directors Responsibility Statement; and the Independent Directors have
been entrusted with new responsibilities to make their role more objective and purposeful.
CURRENT GLOBAL TRENDS IN CORPORATE GOVERNANCE
Increase in boards oversight role: This trend notwithstanding, what was the nature of the
positive impact of the changes in some countries? The first, and most obvious, was the increase
in the boards oversight and through the audit committee, of financial reporting and conformity
to financial principles.

The job of the boards and their members becomes difficult: The job of the boards and their
members has become difficult. The boards have realised that pressures from shareholder
activism, regulatory changes and competitive pressure on performance from globalisation are
placing higher demands on them and that this demand are bound to increase. The impact of this
is two fold on one hand directors often feel inadequate and ill equipped to live up to these
expectations.
Role of independent directors and the need to build boards that deliver: Two significant themes,
which had remained somewhat latent, but have now come into sharper focus are independent
directors and the importance of building boards that deliver. The assumption is that the
presence of independent directors brings in a fresh and independent perspective, contributes to
companys strategy, and certainly enrich the board room discussions.
Boards oversight over strategy: In an ideal scenario, there would be an open discussion
between the directors, the CEO and management about what the respective roles in strategy
and work with the management for strategy formulation. But there appears to be the growing
trend among boards to review and approve such major strategic decisions. Though formulating
and proposing the strategic initiatives is the responsibility of the management, increasingly
boards are making efforts to approve and monitor strategic initiatives proposed by the
managements.
Succession planning: Another trend which is becoming more and more prominent is the
proactiveness of the boards in evaluating the performance of the of the companys chief
executive and succession planning. Succession planning which earlier fell in the domain of the
retiring chief executive who would select his successor and for the board would agree to the
decision, moved to the nomination committee and the board. Succession planning failures
could be damaging and may result in corporate governance failures.
Performance evaluation of boards and the directors: In India, the Companies Act 2013 has
made the evaluation of the performance of boards, its committees, non independent directors
and independent directors mandatory.
Responsibility of Directors: Public companies with share capital of INR 100 million or more,
turnover, of INR 1 billion or more, or with loans/debenture/deposits of more than INR 500
million are required to have at least two independent directors. Listed companies are required
one-third of the Board of Directors as independent directors. The Act requires independent
directors to be a person who possess relevant expertise and experience and the directors or their
relatives should have no pecuniary relationship with the company. The Companies Act 2013
contains restriction on reappointment of independent directors. The tenure of independent
directors is limited to maximum of two conservative tenures of 5 years with a cooling off
period of three years thereafter.
Board room diversity and women on boards: In India, Section 149 (1) of the Companies Act
2013, requires the board of a company to have a minimum of three directors for a public
company and two for a private company and a maximum of 15 directors and that it should have
at least one woman director. Listed companies are required to appoint such director within one
year of commencement of the Act.
Independent chairs and leadership structure of boards: At some companies, an independent
chairman can provide a necessary balance to the CEO. At others, the chair/ CEO provides
continuity of discussion and more in-depth knowledge of the companys operations. But often
the structures have depended upon on the applicable laws and regulations, as well as on the
company's culture itself and differs from country to country.

Say on Pay/remuneration: In India, Section 178 of the Companies Act 2013, requires the
Nomination and Remuneration Committee to formulate a remuneration policy for directors,
key management personnel and other employees and while doing so to ensure that the level and
composition of remuneration is sufficient to attract, motivate and retain directors of quality
required to run a company successfully, and that remuneration has a clear relationship with
performance and there is a balance between fixed and incentive pay reflecting the short and
long term performance.
Impact of auditors: As per the Rule, an individual or a firm would be appointed as an auditor
for a five-year term with ratification at an annual general meeting by ordinary resolution.
Mandatory rotation of auditors: Certain specified companies cannot reappoint an audit firm as
auditor for more than two conservative terms of five years each (in case of individual there
would be one term of five years). There is a cooling period of five years for both individual
and auditors and audit firms within which the auditor cannot be reappointed.
Protection of Whistle blowers: Section 177 (9) of the Companies Act 2013 requires every listed
company or such class or classes of companies as may be prescribed to establish vigil
mechanism for directors and employees to report genuine concerns in such manner as may be
prescribed under the Rules which are to be notified by the central government. The whistle
blowers would have direct access to the chairperson of the Audit Committee in appropriate and
exceptional cases. The details of establishment of the vigil mechanism would have to be
disclosed in the web site of the company and in the Boards report.
Enhanced shareholder engagement: Shareholder engagement remains area of increased focus of
companies. Boards that have strategically increased shareholder engagement and have found it
provides a good source of communication from shareholders directly.
Addressing grievances of investors: Companies having more than 1000 shareholders,
debentures holders, deposits holders or other security holders at any time, during the financial
year are required to constitute a Stakeholder Relationship Committee to resolve the grievances
of security holder.
Social Media Governance: Social media and the Internet have led to rapid disclosure of
corporate malfeasance, exposing unethical or improper behaviour. Today, companies are
weaving the social media tools into their communication strategy and using these to address
legal requirements.
CSR: India is the first country to make corporate social responsibility a legislation. Under
Section 135 of the Companies Act 2013, every company having net worth of rupees 500 crore
or more, or turnover of rupees 1000 crore or more or a net profit of rupees 5 crore or more
during any financial year is required to constitute a Corporate Social Responsibility (CSR)
Committee of the board. The board to approve the CSR policy of the company and ensure that
in every financial year, the company spends at least two per cent of the average net profits of
the company made during the three immediately preceding financial years, in pursuance of its
CSR policy. The CSR committee is required to formulate the CSR policy and the board to
approve the policy and place it in the companys web site.

Q) Whether There Is A Global Divergence Or Convergence With Regard To The Ethics Of

Corporate Governance.
Ans) There are four factors that potentially may have an impact on the ethics of corporate governance,
namely, patterns of ownership, the prevailing view of the role of the firm in a society, cultural and
societal norms, and socio-political priorities. The influence of these factors makes a global

convergence on the ethics of corporate governance neither likely nor desirable. The main finding,
namely, that a global convergence on the ethics of corporate governance is neither likely nor desirable,
should be taken into consideration by promoters of global corporate governance standards. The
divergence that prevails should, however, not be regarded as a sign of immaturity of the field of
corporate governance, nor as an indication that confusion prevails in international corporate
governance. The divergence should rather be appreciated as an indication that corporate governance
and the underpinning ethics thereof are influenced by a variety of factors that are context-specific such
as patterns of ownership, the prevailing view of the role of the firm in a society, cultural and societal
norms, and socio-economic priorities.
THE PRINCIPLE OF CONDUCT AND BEHAVIOR
NAT IONAL INTEREST: All practices and business conduct of the Company should have the
foremost objective of serving the national interest. This is to be achieved by following the right
path of following the laws and regulations of the country.
ETHICS & INTEGRITY: Employees should follow total integrity and ethical practices in their
operations. Highest standards of integrity and impartiality are to be observed in all activities.
While doing business, respect and conform to the local culture, customs and traditions of the
region in which we operate. Follow the proper trade procedures including licensing,
documentation and other necessary legal formalities.
ADHERENCE TO VALUES: Adherence to the concerns, values and interests of the
organization are important. Follow the right path to achieve ones goals.
TRANSPARENCY & OPENNESS: Transparency and openness in regard to the decision
making process and use of resources is important. Agreements with suppliers should be
complete, unambiguous and adequately documented, including any subsequent changes and
additions. Suppliers are to be selected solely on merit.
AVOIDING CORRUPT PRACTICES: Prohibit money laundering and report unaccounted cash
or suspicious transactions. Do not use your official position to influence any person or body for
any personal gains or favours. Do not give, solicit or receive, directly or indirectly any gift or
other favour that may influence exercise of your function, performance or judgement. Avoid
any conflict between personal interests and the interests of the organization.
ENCOURAGING COMPETITON & COMPETITORS: With the expansion of business
worldwide and new unknown markets, employees should learn to manage risks in the new
environment. Do not engage in any illegal action to obtain information about competitors.
Support and Create an environment for fair competition.
WHISTLEBLOWERS: Encourage whistleblowers through a suitable policy. Necessary
arrangements are being made for reporting any actual or possible violation of the Code of
Conduct. All efforts would be made for protection of whistleblowers from any harm or
intimidation. It is necessary to determine the credibility of the information passed on by the
whistleblower before taking action against the offender. It is hoped that all employees of the
Company would welcome this initiative which would further add value to the reputation of the
Company.
FACTORS SHAPING CORPORATE GOVERNANCE
Cultural and historical factors
Control and shareholding structures Highly dispersed / fairly concentrated role of
shareholders
Economic model Consensus driven or market driven role of financial and markets forces.

Legal model Role and influence of various stakeholders

o Primacy of shareholders interest
o Primacy of the companys interest
External or exceptional factors
o European integration and convergence
o Recent scandals ( Enron, WorldCom etc.)

INFLUENCE OF ECONOMIC AND LEGAL MODELS ONCORPORATE GOVERNANCE

Anglo-Saxon (US UK)
Continental
Market oriented
Bank, network oriented
Competition driven winner take all
Consensus driven
More developed Financial Markets
Less developed Financial markets
Shorter term strategy
Long term strategy
Greater reliance on equity
Greater reliance on debt
Shareholder primacy
Stakeholder primacy
No employee involvement
Worker councils
Dispersed shareholding structure
Concentrated ownership
Strong managers weak owners
Strong block holders weak dispered owners

ROLE OF THE GOVERNING BODY

Promotes and safeguards the interests of the shareholders /the company and balances the
various interests
Oversees and monitors of all critical functions and exerts full control over the companys
affairs
Interacts with shareholders and senior management
Organizes the functioning of said governing body Information flow meetings agendas &
schedules\
It appoints, removes management and sets its compensation
It determines the strategic direction of the company capital allocation, lines of business, long
range financial goals
SOURCES OF CHAIRMAN/CEOS POWER
Knowledge of companys affairs
Presiding over board meeting and Setting the agenda. Deciding what information directors
receive. Leading board discussions
Selecting other board members
Acting as spokesman for the company
Interacting with shareholders
Control of the purse
KEY DIFFERENCES IN THE GOVERNANCE MODELS
European model(s)
American model
Greater emphasis on check and balances
Greater emphasis on unfettered leadership
Sharper distinction between oversight and Watered down distinction and emphasis on
management functions.
managing the corporation.
body
manages
the
Governing body as a check and counterweight to Governing
corporation.
executive power.