.

osl
.A

PROJECT
REPORT

On

CORPORATE
GOVERNANCE

Submitted
Shreya
Regn 120532037/08/2011

(Partner)
O.PJalan&Associates
andConsultants,
Memb.No.:32256
C.P.No.: 14775
 n
Acknowledqement

I wouldlike to take this opportunityto expressour heartfelt

9ratitudeto all the peoplewho have extendedtheir assistance
and providedme the informationduringthe tenure of the
project.We are greatlyindebtedto them for their guidanceand
supportthroughout the projectand for sparingtheir valuable
time with us.

I eamestfyexpressto Mr.Raieev Shama for their invaluable

guidance,keen interest,cooperation,
inspiration and moral
supportth16ughmy projectsession.

Shreya

I
I
1. Introdudion qovernance
to corporate

Theneedforcorporategovernance is not something

typicattoourcountry
or economy,Even in the countrieswhere regulatorymechanisms are
more demanding in thek content and more vigilant in thek
implementation,ilagrant violations under the veit of corporat€
havegenercteda skidentdemaridfor befterqovernance.
impenetrability
Theadventor tle ilformatio. agel.ascreatedan awakenedsharehotder,
vigilantpubliTand an almostpredatoryjournalisticfervour.Depending
upon the model of corporatedisclosurefollowed by different legal
rameworks,the ight to info.mationhasforcedcorporcteto divulgemore

Theiollowingdefinitionshouldhelp us to understand th€ conceptbetterl

"CorporateCovernance i5 notjust corporatemanagemen!it is something
muchbroaderto includea fair €fficientandtransparentadministrationto
meet cedain well defined obiectives.lt is a system of structuring,
operatingand controllinga companywith a view to achlevelong term
stEtegic aoalsto satlsfyshareholders, creditorsemployeescustomers
and suppliers,and €omplywith the legal and r€gulatoryrcquirements,
apartfrom m€etingenvironm€ntal and localcommLrnityneeds.Whenit is
pradicedunder a well laid out system,it leadsto buildingof a legal,
commercialand institLrtionalframeworkand democratsth€ boundari€g
withinwhichthes€functionsare pedormed.

/^-
 II
> WhvCoroorate
Governance?

tn the beginningofthe new millennium,

s€ve;alcompanres In the USAand
elsewherefaced collapsebecauseof non CorporateGovernanceand
unethcal p|actic€s they indulged n the then €xisting fequlatory
frameworkseemedto be inadequate to deal with the giganticbustness
conglomerates that com11ined deliberate
frauds.

In the year 2000, severalAmericanmegacorporations collapsedlike a

pa€kof cards.The federaladministration of PresidentBushwas quickto
slap punitivef€asures on erring corporations and initiatedpreventive
stepsto avoidcoryorat€fraudsin fut!re. TheSarban€s-Oxley Act madelt
mandatoryfor seniorexecutivesto certify reportsunder oath with the
painof severepenaltiesif provedwrong.

In India,the governance of most of the country'sindustrialand business

orqanlzations thrived on unethicalpracticesat the market place and
showedscant regardfor the timelesshumanand organi2ational values
whiledealinqwith thearshareholders, employees andotherstakeholders-

An overwhelmingly larg€ numberol Indiancorporationsused several

illegaltactics such as cornerin9of lndustriallicensei with a view to
keeplngawaycompetltors, usingimportlicensesto make a quickprofit,
illegallyholdingmoneyaboard,and indulginginto bribery,conuptionand
otherun€thicalpracticeawithimpu6ity.

The reasonsfor th€ non CorporateGovernancein India were manyrA

closedeconomy,a shelteredmarket,limit€dn€ed and accessto global
business,lack of competativespkit and an inefficient r€gulatory
fram€work. for poorgovemanceof compani€s
Thesewere responsible in
Indiaforwellover40 years,between1951and1991.
Whatis 'good"Corporate
Governance?

Bad qovernanceis being recogniz€dnow as one of the root causesof

corruptpracticesin our societies. lvlajordonors,institutionalinvestorsand
International finanaialinstitutlonsprovde their aid and loansin condition
that reformsthat ensure 'good governan.e"are put in place by the
recjpientnations.As with nations,corporationstoo are expectedto
provideqood governance to benefitall lheir stakeholders. At the same
time,goodcorporateare nol born,but are madeby the combinedefforts
of all stakehqjders,which include shareholders,board of directors,
employees, customers, dealers,government andthe socletyat large.Law
and regulationalonecannotbringaboutchangesin corporateto behave
b€tterto benefitall concerned. Directorsandmanagement, as goadedby
stakeholdersind lnspiredby societalvalues,havea very importantroleto
play.The companyand its ofiic€rs,who, inter alia, includethe boardor
directorsand the officiaLs,especiallythe senior management,should
strictlyfollowa codeofconduct.

tu(
2. rhe theoryard practiceof coeorat€governan€e

Theor€tical
basisof Corporate
Gove.nance

There are foLrr broad theores to explain and e ucidale corporate

governance.Theseare:

. Asencytheory
. stewardshiptheory
theory
' Srak€holder
. Sociological
theory

Rec€ntihinkingabout strategicmanagementand businesspolicy has

beeninfluenc€d by agencycosttheory,thouqhthe rootsof the theory€an
be lracedba'ckto AdamSmithwho identifiedan agencyproblemin the
ioint stock company.Th€ fundamentaltheoreticalbasis of €orporate
governanceis agencycosts.Shareholders are the ownersof any jolnt
stock,limitedliabiliiyCompany,and are the principalsof the same.By
vlrtue of their ownership,the principas define the obj€ctivesof the
company.The management,directly or indirectly selected by the
shareholdersto pursue such objectives,are the agents. While the
principaLs generallyassum€lhat lhe agentswould invariablycarry out
their objectives,it is oten not so. In many anstances,
the objectivesof
managers are at var ancefromthoseof the shareholders.suchmismatch
of objectivesis calledthe agencyproblem;the cost inflictedby such
dissonanceis the agency cost. The core of corporategov€rnanceis
desjgninqand putting in place disclosures, monitorin9,oversigh!and
correctivesyst€msthat can alignthe objectivesofthe two setsof players
as closelyas possibleandhenceminimizeagencycosts.

Problems
wlth agencytheory:

Total contfolof managementis neitherfeasiblenor requiredunderthis

th€ory.The underlyingassumplionin the kade-off that shareholders
makeon employingagentsls that they mustaccepta certainlevelof self-

6 l Pa Ee
interestedbehaviours responsibllity
in deLegating lo others.The objective
of aqencytheory js to checkthe abusein this trade-off,but lts limited
successraisesthe questionof its utilityas a theoreticalmodelto promot€
corporateqovernance, Besidesin agencytheorythe assumptions with
the .omplexitiesof investorboard relationshipin large organizations,
shareholdeEshould have corfect and adequateinformationto wield
efiectivecontrol.Equltyinv€storsrarelyget theseand besidesthey rarely
makecleartheir exacttarget returns,and yet delegatea'rthorityto meet
the targ€t, lt is also to be understoodthat in terms of controls,equity
investorshardlyhavesanctions overboards.Insteadthey haveto.ely on
self-requlation to ensurethat an ordenyhouseis maintained.

Thereare two broad mechanisms that help reduceagencycosts and

hencelmprovecorporateperformance fhroughbetter governance: (1)
and (2) €ffi€ientand independent
fair and accuratefinancialdisclosures,

The stewardship lheory of corporategovernance

dlscountsthe possible
conflictsbetween corporatemanagementand owners and shows a
prefer€ncefor boardof directoEmadeu pimarily of corporateinsiders,
Thistheoryassumesthat managersare basicallytrustworthyand attach
significantvalu€ to their own personalreputations.The market for
managerswith skong personalreputauonss€rves as the p.imary
mechanismto controlbehaviour,with more reputablemanagersbeing
otferedhighercompensation packages.

theorycanbe reducedto the followingbasics:

Stewardship

The lheory definessituationin whichmanagersare not motivated

by individualqoals,but ratherthey arc stewardswhosemotivesar€
alignedwith the objectivesoftheir principles.
 . Given a choice between selr-servingbehaviour and pro-
organizatlonaLbehaviour,a stewards behavioufwiLlnol departfrom
the interestsof hisorganization.
. Controlcanbe potentiaLly counterprod!ctive,becauseit undermines
the pro-organizationaL b€haviour of the steward,by loweringhis

The greatesibarrier to th€ adopton of stewardshipmechanismof

governance lies in the riskpropensityof principals.
Rasktakingowners
wilL assume lhat executivesafe pro organizaUonsand favour
stewardshiFgovernancenechanisms.Where €xecutives,investors
cannot afford lo extend board poweri agency costs are effective
ins!rancea9ainsttheself-interestbehaviours of agents.

Ihe stakeholdertheory is groundedin many normative,theoretica

perspectives includingethicsof care,lhe elhicsof fiduclaryr€lauonships,
socialcontracttheory,theory of prop€rtyriqhts,and so on. while it is
possibleto developstakehoLder analysisfrom a variety of theoretical
perspectives, in practicemuchof stakeholder analysisdoesnot firmly or
explictly root iiself in a giventheoreticaL
tradition,but ratheroperatesat
the level of individualprinciplesand normsfor u/hichit provideslittle
formaljustification. Stakeholder th€oryis oftencriticized,mainlyb€cause
it js not applicablein practiceby corporations

approachhasfocusedmostiyon boardcomposition
Th€ sociological and
for powerand w€althdlstributionin the society.Underthis
impLicatlons
theory,boardcomposition,
tinan€ialreponing,anddisclosure andauditinq
are of utmost importanceto realizethe socio-economic objeciivesof
 F

Corporute
Governance
systemi

The roleof the management is to run the enterp.isewhilethe roleof the

boafdis to see that it is beingrun well and in the right direction.
Corporategov€rnancesystemsvary aroundthe world.Scholarstend to
sugq€stthreebroadversionsi

The AngloAmericanmodel

Th e j a p a n e sm
e odel
t
TheAnglo-American
model
This is also known as unitary board model, in which all difectors
pafticipatelrla singleboardcomprising bothexecutiveand non-execLrtive
directorsin varyingproportions.Thisappmachto governance tendsto be
shareholder oriented.lt is also calledthe 'Anglo-Saxon'approach to
corporategovernancebeing the basis of corporateqovernancein
America, Eritain, canada, Australia and other commonwealthlaw
counlriesLncluding Indla.

Ihe majorfeaturesofthis modelareasfollowsi

Th€owne.shjpof companies is moreor lessequallydividedbetween

individualsharehdlders andinstitutionalshareholders.
Directorsare €rely independent of management.
Companiesare typicallyrun by prof€ssional managerswho have
negllglbleownershipsiake. There is a fairly clear separauonof
own€rship and management.
Most instiiutionalinvestorsar€ r€luctant activists.They view
themselves as portfolioinvestocinterestedin investingIn a broadly
diverslfiedportfolioof liquidsecurities.
lf they are not satisfiedwith
a company'sperformance, they simply sell th€ securiuesin the

il
f
I
 F

. The disclosurenormsare comprehenslve, th€ rulesagansr insider

tradingtight, and the penaltiesfor price manipulations
stiff, all of
which provide adequateprotectionto the smaLlinvestorsand
promote general market liq!idity. They also discouragelarge
iovestorsfromtakin9an activerolein corporateqovernance,

corporategovernanceIn the Germanmodel is exercisedthroughtwo

boards,in which the upper board supervisesthe executiv€board on
behalfof stalleholders
and astypicallysocietaloriented.In this model,
althoughshareholdersown the company,they do not entirelydictatethe
governance mechanism, Theyelect50 percentof membersofsupervisory
boardand the other half is appointedby labourunlons,ensuringthat
employees6nd labourersalso enjoy a share in govemance.The
supervisoryboardappointsand monitorsthe management board.

This is the business network model, which reflects the cultural

relationshipsseenln the lapanesekeiretsunetwork,in whichboardstend
to be large,predomjnantly executiveand often ritualistic.The realityof
powerin the enlerpriseliesin the relationships
betweentop management
in the companlesin the keiretsunetwork.In this modelthe financial
institutionhasaccrualrolein governance- Theshareholders andthe main
banktogetherappointboardof directorsandthe president.

The distinctive features of th€ Japanese corporate govemance

mechanismsare as follows:

The presidentwho consultsboth th€ supervisoryboard and the

executivemanagement is included.
lmportanceofthe lendingbankis highlighted.

lndlanmodelof govemance
 I
I
lt

Indiancorporateis governedby th€ Company'sAct 1956 whi.h follows

moreor lessthe uK model.The patternof privatecompanaes is mostly
tha! of closelyheldor domjnatedby a founder,hisfamilyand associates.
Indiahasadoptedthe key tenetsof Anglo-American externaland internal
controlmechanisms aftereconomiciberalization.

to societyat large
Obligation

A corporationiE a creationof law as an association of personsforming

partof a societyin whichit operates.lts activltiesare boundto impac!the
socety as thssoclety'svaluewouldhave an impacton the corporatl0n.
Therefore,they have mutualrightsand obligationsto dischargeror the
benefitof eachother,

Nationalintercst A company(and its management)should be

committedin all its actionsto benefitthe economicdevelopment
of
the countriesin which it operatesand shouldnot engagein any
activitythal wouldmalitat€againstsuchan obje<live.

Politicalnon-allgnmeneA companyshouldbe committedto and

supporta functioningdemocraticconstitutionand systemwith a
transparentand fair electoralsystem and should not support
directlyor indirectlyany specificpoliticalparty or candidatetor

Legalcompliances: The management of a companyshouldcomply

with all applicablegovernmentlaws,rules and regulations.legal
compliance will alsomeanthat corporationsshouldabideby the tax
lawsof the nationsin whichthey operateand theseshouldbe paid
on ume andas perthe requiredamount.
RuleoI law: cood qovemancerequiresfair, legalframeworksthat
are enforcedimpartially.lt also requiresfull protectionof dghts,
 lr

particularly
thoseof minorityshareholders.
hpartial enforcemenl of
lawsrequiresah independent judiciaryandregulatoryauthorities.
Honestand ethicalcondud:Everyofficefof the companyincluding
Its directors,executivesand non executivedirectors,managing
director,CEO,CFOand CCOsho!ld deal on behalfof the company
with professionalism,
honesty.commitmentand sincentyas well as
highmoralandethicalstandards.

Corporare
'i cltlzenship:A coroorateshouldbe comm,ttedto be d good
corporateciti2ennot only in complancewith all relevantlawsand
r€gulations but also by activelyassistingin th€ improvement of the
qualityof lif€ of the p€oplein the communities in lvhichit operates
with ti!-. objectiveof makingthem seli reliantand enjoy a better
qualityof life.
Ethical behavjour:Corporationshave a responsibilityto se!
exemplarystandardsof ethicalbehaviour, both internallywithinth€
organizations, as wellas in theirexternalrelationships,
Socialconcern:The Companyshouldhave concernstowardsthe
society.lt can help the needypeople& show lts concernby not
pollltingth€ water,air & land.Thewastedisposalsho!ld not affect
anyhumanor otherlivin9c.eatures.
H€althyandsafeieorking€nvironmenL A companyshouldbe ableto
providea safe and healthyworkingenvironmentand €omplywith
the conductof its busin€ssaffairswith all regulations regardingth€
preservations of environment ofthe territoryit operatesin.
Competition: A companyshouldmarketits products& serviceson its
own meits & should not resort to unethicaladv€rtis€ments or
include unfajr & misleadingpronouncernents on competitors'
products& services.
'l_imelyresponsiveness: Goodgovernance requifesthat institutions &
processestry to serve all stakeholders within a reasonabletime
 uPhod the fair nameof the counLry.

Obligation
to investors

and providersof capitalare of paramount

The investorsas shareholders
importanceto a corporation.A companyhas followinqobligationsto

Towardsshareholders: a companyshouldbe commiftedto enhance

shareh4dervalue and complywith all regulationsand laws that
governshareholdefs fights.Theboa5rdof directorsof the company
shallandfairly iniormits shareholders aboutall relevantasBectsor
ihe companys business and disclos€ such iniormation in
accordtncewith the respectiveregulations and agreements. Every
employeeshaI skiveforthe implementation of andcompliance with
this in his professional
environment. Failureto adhereto the code
couldattract the rnostseverccons€quences includingfermination
ofemployrientor directorship as the c;se may be.

Measurespromoting kansparcncy and informed shar€hold€r

participationr A relatedissueof equal importanceis the need to
bringabout greaterlevelsof inrormedati:endance and meaningful
particlpation by shareholders in matt€rsrelatingto their companies
wlthoutsuchfreedombeingabus€dto interferewith management
decisjon.An idealcorporateshouLdaddressthis issueand relateit
to moremeaningful andtransparentaccounting andreporting-
Transparency meansthat information is freelyavailableanddirectly
accessibl€ to thosewho will b€ afiectedby suchdecisions andtheir
enforcement. lt alsorneansthat enoughinformationis providedand
that it is providedin €asilyunderstanda bleformsandmedia.
 Financialreportingand records:A companysholld prepareand
maintainaccountsof its businessaffairsfai.ly and accuratelyin
accordance w:th the financialand a€aountingreportingstandards,
laws and regulationsof the country in which it conductsthe

Wilful materialmisrepfesentationof and/ormisinformation on the

financialaccountsand reportsshallbe regardedas the violationof
the firm's ethicalconductand also will idvite appropriatecivil or
crimlnalactionunderthe relevantlaws.

obligation
to employees
In the contextof €nhancedawar€nessof bettergqvernancepractices,
managements shouldrealize
thattheyhavetheirobligations
towards
their

Fairemployment ptactices:An idealcorporateshouldprovideequal

accessandfairtreatmenttoallemployees on the basisof meritjthe
successof the companywill be improv€dwhile enhancingthe
progressof individualsand companies. The applicablelabourand
employTentlawsshouldbe followedwhereverit operates.
A companyshouldprovide€qualopportunityto
Equalopportunities:
all its employ€esand all qualifiedapplicantsfor employment
withoutregardto their race,caste,religion,colour,maritalstatos,
sex,age,nationalityanddisability.
 Humanetreatment:Companies shoLrld
treat employeesas theirfirst
customersand aboveall as humaf.Theyhaveto meetthe basic
needsof all empLoyees in the orqanization.
Ihere shouldbe a
frendly,healthyand competitiveenvironment for the workersro

Participation:Pariicipaiionof both men and women is a key

cornerstone of corporalegovernance. Participation
couldbe eilher
direct or through representauves. lt needsto be informedand
orqanized. This meansfreedomof association and expresson on
onehandandan organlzed civllsocietyon the othef.
Empowerment: Empowerment unleashescrealivityand lnnovation
throughoutthe organization by truLyvestng decsionmakng
powe.s at the most approprale levels in the organizationa

Equityand inclusiveness:A corpofationis a miniatureof a socety

whosewell beingdependson ensuringthat all its enrployees ieel
ihat they havea slakein t anddo not feel excludedirom the man
stream.This requiresa I qroups,partcularlythe most vulnerable,
haveopportuniiiesto improveor mantaintheirwell bei.g.

and€ollaborative
Participative environment:
Thereshouldnot be ariy
form of humanexFloitationn lhe company.Thereshouldbe equal
for all evelsof management
opportunities in any decision
making.
The managementshould cullivatethe culture where empoyees
shouldfeel they are secureand are being weil taken care of.
Collaborative
environment wouldbrlngpeaceandharmonybetween
ihe workingcornmunity andthe management, whichin turn,bdngs
hiqherproiilsandhighermarketshare.
higherproductivity,

to customers
Obligation
 -------__-
A company's existenc€cannotbejustifi€dwithoutits cateringto h€ needs
of its customers.The companieshave an obligationto its €mployees,
wiihoutwhoseassistance they cafnot fealizetheirobjeclives.

Qualityof productsandservices:The Companyshouldbe committed

to supply goods and servlcesof the highest quality standards,
backed by efficient alter sales service consistentwith the
r€quirements ofthe customerg to €nsuretheirtotalsatisfaction.
The
qualatystandardsof companys goodsand servicesshouldme€tnot
only therequirednalionalstandardsbut also shouldendeavour to
achieveiiternationalstandards.
Productsat affordablepdces:Companies shoutdensurethat they
makeavailableto their custlmersqualitygoodsat affordableprices
whllemrking normalprofit ls justifiable,profiteeringand fattening
on the mise.iesof th€ poorconsum€rs is unacceptable,
Companies
must constantlyend€avourto updatetheir expertise,technology
andskillsof manpow€rto cut downcostsand passon suchbenefits
to customers. Theyshouldnot creat€a scarein the midstof scarcity
or by themselves createan artincialscarcityto makeundoeprofits.
Unwavering commitment to customer satisfaction:
Cbmpaniesshould
be fully committedto satisfytheircustomers andearntheir goodwill
to stay long ln the business,
Theyshouldencouraqe the warranlies
and guaranteesgivenon thek productsand in caseof harmfulor
sub-standard productssho!ldreplacethem with goodones.
Managerial
obligations

Protectingcompany'sassetsrThe assetsot the .ompanyshouldnot

be dissipated or misusedbut investedior the purposeof conducting
the businessfor which they are duly authorized-These include
tangiblea5wellas intangibleassets.
gehaviourtoward govemmentagenciesrA company'semployees
shouldnot off€r or give any of the firm's lunds or propertyas
donationto any governmentagenciesor their representatives
directlylorthroughintermediaries in orderto obtainany favourable
performance of otfirialduties,
control: control is a n€cessaryprincipalof qovernancethat the
freedomof management shouldbe exercisedwithina frameworkof
approFiatech€cksand balances. Controlshouldpreventmisuseof
power, facilitate timely rnanagem€ntaesponseto change and
ensure that businessrisks are pre-€mptivelyand effectively

Consensus oriented:Good govemancerequnesmedlationof the

differentinterestsin societyto reacha broadconsensus
on what is
in the best interestof the wholecommunityaird how lhis can b€

Gifts and donations:The Company'iemployeesshould neither

receive nor mai<€directly or indkectly any illegal payments,
remuneration, gifts, donationsor comparabl€benefitswhich are
intendedto or perceivedto obtain businessor uncompetitive
favoursforthe <onductoflts business.
3, Landmarks of corpoGtegovernance
in €mergence

OECD
Principles

The Organization for EconomicCo-operation and Oevetopment {OECD)

was one of the earli€stnon-governmental organizations to work on and
spelout principles and practlcesthat shoLrldgoverncorporate in their
goalto afta1nlong-termshareholder value.TheOECoPrinclples wereoft,
quotedand have won universalacclaim,especlallyof the authoritieson
the subjectof corporategovemance, Be€ause of the ubiquitousapp.ovat,
the OECDPBncipl€sare as much trendsettersas the Codesof Best
Practcesassociated to the CadburyReport.A usefuliirst step in creating
or reforminqthe corporate9overnance systemis to look .t the principtes
laid out by the OECDand adoptedby its memberqov€rnments. They
includethe f6llowingelements:

The rightsof shareholders:The rightsof shareholders

incl!de a set
of rights to secu.e ownershipof their shares,the right to full
disclosure votingnghts,participation
of information, in decisionson
salesor modiflcationof corporateass€ts,mergerand new share
issues.The guidelln€sqo on to specifya host of oih€r ssles
connectedto the basic concernof protectingthe value of the

Equitablekeatmentof shareholders: The OECDis concernedwith

protectingmlnorityshareholdersriqhtsby settingup systemsthat
keep insiders,including managersand directors,from taking
advantageof their roles.Insidertrading,for example,is explicitly
prohibitedand directorsshould discloseany material interest
regarding transactions.
The role of stakeholdersln corporategov€rnance:the OECD
recogniz€sthat there are olher stakeholdersin companies'ion
addition to shareholders,Banks,bondholdersand workers,for
example,are lmportantstakeholders in the way in whichcompanies
performand make declsion.The OECDguidelineslay ou! several
genefalprovisionsfor protecting
stakeholdels interests.
 Disclosur€and transpar€ncyi The OECOlays down a numberof
provisionsfor the dasclosureand communicationof key factsabout
th€ companyrangingfromfinancialdetailsto governance struclures
includinqthe board of directorsand their remuneration.The
guidelinesalsospecifythat independent audators
in accordancewith
highqualitystandards shouldpe.form ann!alaudits.
of the boardiThe OECDquidelineprovidesa
Th€ responsibilitie5
greatdealof detailsaboutthe functionsof the boardin protecting
the companyand its shareholders. Theseincludeconcernsabout
corporaGstrategy,risk, executivecompensation and performance
as wellas accountingandreportanq systems.

Ihe OECog.idelinesare somewhatgeneral,however.there is growing

pressure
to put moreenforcement mechanisms intothoseguidelines.The
challengewill be to do thls in a way consistentwith marketoriented
proceduresby creatingselfenforcingprccedufesthat do not imposelarg€
new costs on firms- The followingare some ways to iotroducemore

. countnes should be requrr€dto establish independenlshare

AIItoo often,newlyprivatizedor partiallyprivatizedfirms
reqistries.
dilute stock or simply fail to registersharespurchasedthrough
foreigndkectinvestment.
. standardsfor kansparencyand reportingof the sal€sof underlying
assetsn€edto be spelledout alongwith enforc€ment mechanisms
andpro€edures by whichinveslo6canseekto recove.damages,
. The discussion of stakeholderparticipation in the OECDguidelines
needsto be balancedby discussion of conflictof interestandinsider
tradingissues.Standards orguidelinesare neededin bothareas.
. Propertyr thts andlheir prot€ction.
. Internationalyacc€ptedaccountingstandardsshouldbe expliritly
requ'redand nationalstandardsshouldbe b.oughtinto alignment
with international
standards.
 Internalrompany audit functionsand the inclusionof outside
d rectorson audit committeesneedto be made€xpLicit.
The best
practice would be to fequre thal only outside, independent
dlrectorsbeallowedto serveon auditcommittees,

SEBlGuadelines

All companiesare requiredto submita quarterlycompliancereportto the

stockexchangeswithin 15 days from the end of a financialreporting
Cuarter.The r€porthasto b€ submittedeitherby the Compliance Officer
or by the Chief ExecutiveOfficerof the companyafter obtainingdue
approvals,SEBlhas prescribed a formatin whichthe informationshallbe
obtalnedby the Stock Exchanges from ihe companies. The companies
haveto subnit compliance statuson eightsubclausesnamelyl

. Boardof Directors;
. AuditCommatteei
. Shareholders/ InvestorsGrievance
Committee;
. Remunerationof directors;
' Boardprocedu'es:

. Shareho dersjand
. Reporton Corporate Gov€rnance,
Stockexchangesare requiredto set up a sepaGtemonitoringcell with
identfied personnel,to monitorcompliancewith th€ provisionsof the
recommendations. Stock exchangesare also required to submit a
quarteiy compliancereportfrom the €ompanies as per the Scheduleof
lmplementation,The stock excnanqesare r€quired to submit a
consolidatedcomplianc€ r€portwithin30 daysofthe endot the quarterto
5EBI,
4. Rightsandprivileges
ofsharehold€G

Rightsof shareholderg

The membersof the companyenjoy variols rights in relatlonto the

company.Theserjghts are .onferredon the membersof the company
either by the lndianCompaniesAct 1956 or by the Memorandum and
of the companyor by the generallaw, especially
articlesof Association
thoserelaungto contractsunderthelndianContractAct,1872.

Someof the more importantrightsof the shareholdeEas stressedby

theseactsarAth€follo$/ln9:

Hehasthe riohtto obtaincopi€softhe Memorandum ofAssocration,

Articleof Assoclationand certainresolutlonsand agreem€ntson
request,on paymentof prescribedfees,
He hasthe rjghtto havethe certificateof sharesheldby him within
3 monlhsof the allotment,
He has the righl to transferhis share or other interestsin the
companysubjectto the mannerprovidedby.th€ articlesof the

He hasa rightto appealto the companyLawBoardif the company

refuses ortailsto regist€rthetran5fe'ot shares.
He has the right to apply to the CompanyLaw Boardfor the I
of the registerofmembers-
rectification
He has the right to apply to the court to have any variationor
abrogation to his rightss€tasldeby the court,
He has a right to inspectthe registefand the indexof members,
annualretums,reqisterof chargesand registerof investments not
h€ldbythe companyin its ownnamewithoutany charqe,
He is entitledto receivenoticesol gen€ralme€tingsand to attend
meetingsandvote eitherin personor by proxy.
sL.rch
Heis entitledto receivea copyofthe statutoryreport.
 tn
ii
. He is entitledto receivecopiesof the annualreport of directors,
annualaccountsandauditors'report.
. He hasthe right to padicipatein the appointmentof auditorsand
the eLectjonof directorsat the annualgeneralmeeting of the

. He hasthe rightsto makean application to CompanyLawboardfor

callingannualgeneralmeeting,if the companyfails to call sucha
m€eting withinthe prescribed
timelimits.
. l-le is entited to obtain and inspectth€ copies of minutesof
proceed'hgs of generalmeetings.
. He has the .ight to participatein the declarationof divid€ndsand
receive hisdividendsduly.
. Hehasa rightto demandpoll.
. He has a riqht to spply for investiqationof lhe affatrsof the

. He hasa rightto r€movethe directorberor€the expiryof the term

. He has a right to makean applicationto companyLaw Boardfor

andmismanagement..
fellefin caseofoppression
. He can makea petitionto the HighCourtfor the windingup of the
companyundercenaincircumstances.
 for investors/shareholders
Guidelines

The Securitiesand ExchangeBoardof India (SEBI),the Indiancapital

marketregulatorin its guidelines
to nvestors/shareholders,
iitled "Quick
referenceGuidefor Investors'publishedrecentlymakesit knownthat a
of a companyenjoysthe followingrlghts:
shafeholder

Rightsofshareholder,as an individual:

. ro rec+,e the shareceruiicateson allotmentor transfer,as th€

casemaybe,in duetime.
. To receivecopiesof abridgedannualreport,the balancesheetand
the Profit& Lossaccountandthe auditorsreport.
. To participateand vote in generalmeetingseiiher personallyor

. To receivedividendsin duetime onceapprov€din generalmeeting.

. To receive corporatebenefitssuch as rights, bonus etc. once

. To apply to CompanyLaw board (CLB)to cqll or direct the

conveningthe annualgeneralme€ting.
. To inspectth€minutebooksofthe generalm€etingsandto r€ceive
copi€sthereof.
. To proceedagainst the companyby way of civil or criminal r

. To applyfof the windingup ofthe company.

. To demanda pollon anyresolution.
. To requisitionandexkaordinary qenerglme€ting.

Rightsof a Deb€nture
holder:

. To receiveinLeresvredemption in duetime
. To receivea copyof the trustdeedon r€quest.

j
 To apply for winding up of the (ompanyif the companyrailsto

Sharehold€r's
responsibilities:

Whilea shareholdermay be happyto notethat onehasso nranyrightsas

a stakeholderin the company,it shouldnot lead one lo complacency
because onealsohascertainresponsibilities
to

. To remaininformed

. To participate
andvote in generalmeetings
. To exerciseone'srightson ones ownor as a group
a
5. CoQorategovemance
andoth€rstakeholders

Corporategovemanceand employees

An organization needscapitaland labourto createwealth.Eartier.the

mostimpotant needfor an organization to be a successwas€apital.But
today the growing recognitiontna! hLmar capital is a source of
competitlveadvantagehas led to the understandingthat labouris more
impodantthan capital.Th€ interestof the employeescan be protected
throughthe following:

Trade unions:Trdde unions alon€ can reDresentthe coll€cuve

interestsofemployeesandfightfor whatis rightlydueto th€mfrom
the organization. They could lse this as a platformto negotiate
agreements betweenthe organization andlabo!r,
Co-determination: lt a sltuation where there is emllovee
representation on the boardof directorsofthe organization,
Profitsharing:Profitsharingmotivat€sthe individualworkerto put
in his best as his efforts are dkectly related to the profits of the
organization,in e,hichhe getsa share.Profitshadngcouldbe done
in manyways,suchas
 - cashbasedsharingof annualprotitswherelhe annu6lcash
proiitsofthe organization
aresharedamongthe employees,
- Oeferredprofit sharingwhere the defe(ed protits of the
organi:ationare sharedamongthe employees.
The objectiveof su€h profi! sharing is to encourageemployee
involvementin the organization and improvetheir motivationand
ofwealthamongall the factorsof productjon-
dlstribLrtion

. Equlty sharing:Under equity sharing.employeesare given an

optionto byy the companies'shares,identifythemselveswilh, and
thusbecometh€ ownersofthe organization, Ther€are variouswaysin
whichequitysharingcouldbe done:employees shar€
1) Ownershlp plans,2) stockbonusplans,3) stockoptionplans,4)
employaebuyout,and5) work€rcooperaliv€s.
.Team productionsolution:Team productionsolutionis a situation
wherethe boardsof dlrecto.smust balancecompetinginterestsof
variousstakeholders andthen arriveat decisions
that are in the best
interestof the organization,

Govemance
Corporate andCustome6

On 15'hMarch1962, Presidentiohn F. Kennedydeclaredfour rightsof

consumers, of basicneeds,the rightto safety,the
tie rightto satisfaction
rightto be informed,andthe rightlo choose.In 1983,the UnitedNations
recommendedthat world governmentsdevelop, strengthen and
implementa coherentconsumerprotectionpolacy. In India,the consumer
ProtectionAct 1986 was pass€d and the country embark€d on
strengtheningth€ consumerprotection regime,

The explosionof interest in consum€rmatters is a very recent

phenomenon. The reasonis twofold a combination of new business
methodsandchangingattitudes.Th€all pervasiveexaggeratedandoft€n
falseclains,madefor servicesandqoods,emphasizethe imperativeneed
for ConsumerProtectionLegislation
and cfeauonof awareness
abolt it
among thegeneralpublic.

are asfollows:
Therightsofthe consumer

. Therishtto safety:The rightsto be protectedagainstthe marketing

of goodsandserviceswhichare hazardous to life andproperty.
. Therightto be informed:Theconsumerhasthe rightto be informed
aboutthe quality,quantity,potency,purity,standardand pdce of
goods or servicesso as to protect them against unfair trade

r The rlght to choose:The right to be assured,whereverposslble,

accessto vadetyofgoodsandseruices at compeLitiveprices.
. The dsht to be heard:The ight to be assuredthat consumer's
interestswill received!e considerationat appropriate
forums.
. The rightto seekredressed: the right againstunfairtrade practjces
or restrictive trade pfaciices or unscrupulousexpoitation of

CorpoEteGovemance lnvestors
andInstitutional

Mosiof the reportson cofporategov€rnance have emphasjzedthe role

whichinstitutionalinvestorsplayin corporategovernance.
In India,there
arebroadlytourtypesof institutionalinvestors:

. The nnancial instit'rtions,such as lFCl, lclcl, lDBl, the State

Financial
Corporation, etc.
r lnsurance
companies suchas LlC,GlC,andth€ir subsidiaries.

. AlMutualfunds (lv1F) UTl.

including
the key factorsto be
Whilean investordecisionis underconsideration,
are
takenintoconsideration

. Financialresultsand solvency:This is the most importantfactor

amongthe factorssuchas an upwardtrend in earningsper share
and prorits,a healthycashflow and a reaEonable levelof divldend
payment.All theseare consid€r€d majorindicatorsor a company's
financialhealthandare indicatedin the financialresults.How€ver, a
consistent dividendpolicyis lesssignificant.
Fanancial statementsand annualreports:Thereare two amportant
aspects underthis head.
o Extentof disclosure: The qLralityof fte nnancialstatementsis
the next most influentiaL factorwhen it comesto investment
decisions. tnstitutional investors consider the level or
dl5closure of th€ company's strategies, andqualty
initiatives
of management's dlscussion andanalysisof the year'sresuts.
FinanciaL posiuon in theannual raportis equally important.
o comparabiity with international GAAP: a slgnificant5
troportion of institutionalinvestors do not invest in a
companyif the financialstatementsar€ non-comparable to
Intemational Generally Accepted Accounting Principles.
lmplicitly,this could mean that comparabilityof financial
statementsof companies with Int€rnational GAAPis important
in the eyesof the Investor,
tnvestor communications:Institutronal inveslors value the
willingnessof companiesto provide additionallnformationto
investors, analystsand othercommentators, their promptr€leaseof
informationabouttransactions affectingminorityshareholde|s and
the existenceof othertransparency mechanisms that help ensure
fairtreatmentto all shareholders,
Composition and qualityof the board:The most inrportantaspect
within this factor is the quality and experienceof the executive
directorson the board, In contrast, investorswould consider
investingeven though they are dissatisfiedwith the quality,
qualification and experience of independent non-executive dir€ctoB
andtheir rolein boardmeetings.In addition,manyinvestorsare not
too concernedif there are insufficientind€pendentnon-executive
directorson the board.
 T

. Corporategovernan€epractlces:Investors consider corporate

qovernancepracticeswhen they make investmentdecisions.The
companyshould follow the principlesfor corporategovernance
beinq-auditingand comp!iance,disclosureand transparency
and

. corporateimage:The imageof the companyin the communityis

investo.is calledon to takean
alsoronsideredwhenan institutional
investmentdecislon.The imageof the organization shouldno! b€

Share ftice: This is the last factor that is consideredby an

institutionalinvestorwhen an nvestmentdecisionis made.lf the
shar€sor lne conpanyen:oyconti,]uor.isly risingpncesil the
bourses,investorscouldb€ encouraged to investin them.
Corporateqotemanceand creoitors

Banksand other creditorshave an extremelylmportantrole to play in

iosteringefficlencyin mediumand largeprivatefirms.cr€djtors,in turn,
r€ly for their survivalon debt repaymentby their bonowers.Withoul
dependable debt collecUon,no amo!nr of supervision
or competition can
makebanksrun efiiciently,Strongcreditorsare as criticalto the efficient
functioningof enterprisesas arestrongowners.

andcontrol
creditormonltoring

Thereare three crucialelementsin cr€ditormonitoringand controlin

Adequate information: Lenders need information on the

or otherwiseof potentialborroweE,and depositors
creditworthiness
andbanksupervisors on bankportfolios,
neediniormation
Credltorincentivesr The secondrequirementfor debt to serv€ a
control functjon is the exastenceof appropriatemarket based
incentivesfor creditors, b€ they banks, trade <reditors or
government. Theseincentivesmay be in the form of highermargln
of profit,hlghlnterestcharg€sfromcustomersandsometimes even
.eductionanthe quantumof Non-Performing Assets.
Debt collectloniwithout .n effectivesystem of debt cottection,
debtorsloserepaym€ntdiscipline, the flow of creditis constrained,
and creditorsmay be forcedto cometo the state to covertheir
lossesif they are to survive,Welldesignedand imptemented rules
facilitaterapid and low cost debt recoveryin casesot default,
therebyloweringthe riskof l€ndingand increasing the avaitabitity
of
credit to polentialborrowers.Poorlydesignedand imptemented
ruLesmtk€ lendlngmorecostlyandstiftethe ftowof€r€dit.

M-
 governance
Corpomte andthe Govemment

The governmentplaysthe key role in corporategovernance by defining

the leqalenvironmentand sometimesby directlyinfluencingmanagerial
decisions. B€yonddefinlnqthe rulesoi the game,the governmentmay
directy influencecorporategovernance.At oneextreme,the govefnment
owns the flrm, so that the govefnmentis charqed with monitoring
manaqerialdecisionsand limiting'theability of managersto maximize
privatebenefitsatthe costof so€iety.

governance:The
6. Corporate Indianscenario

In Indiathe real historyof corporategovernaace dat€sbackto the year

1992,follo$lngeffortsmad€in manycountriesofth€ worldto put in place
a systemsuggestedby the cadburycommittee.The coniederationof
IndlanIndustryframeda voluntarycodeof cofporategovernance for listed
companiesin 1998.This was followedby the recommendations of the
Kumarl4angalamBkla eommitteeset in 1999 by SEBIculminatingin
']p
the introductionoi clause 49 of the standardListing.Agreementto be
compliedwith all the listedcompanlesin stipulatedphases.The Kumar
l\4angalam Birlacommitteedividedits recodrmendations into mandatory
andnon-mandatory. [4andatory recommendations includedsuchissuesas
the composition of board,appointment andstrLrctureof auditcommittees, .
remuneration of directors,boad proc€dur€s, and additionalinformation
reqardingmanagement,discussionand analysisas a part of annual
report,lts non-mandatory r€commendations Includedissuesconceming
the chairmanof the board,settingup of remuneration committee,half
yearlyinformatlon to sharehol{ers9ndappointment of nomineedirectors.
 govemance
> Effo.tsto initiate€o.porate in country

AmendmentAct,2000
TheComDani€€

Many provisionsrcbting to corporategovernancesuch as additional

groundof disqualification
of directorsin certaincases,settingup of audit
committees,dlrectors'r€sponsibility
statementin dire.tors reports,etc.
were inkoducedby the Companies(Amendment) Act, 2000. Corporate
governancewas also intfospectedin 2001 by the advisory gro!p
€onsututed bylthestandingcommitteeof Internation6l Financestandards
and Codesof the ReserveBankof Indiaunderchairmanship of Dr. Y.V.
Reddy,the thendeputygovernor.

Nar€shChandraCommittee,
2002

In the year2002,the committeewasaskedto examinevariouscorporate

govemance issuesandto recommendchangesin diverseareassuchas:

the statutory auditor company relationshipso as to further

strengthenthe professional natureofthe interface
the ne€dfor rotationof statutoryauditfirmsor partners
the procedurefor appointmentof auditorsand determinationof

if any,on non-audlt
restrictions, functions
independ€nce of auditing
functlons
the needto considefmeasur€s suchas certiiicationof accountsand
financialstatementsby managementsand dir€ctors
the necessityof havingtransparentsystemof randomscrutinyof

. Narayani{urthyCommittee, 2003
The Companytaw AmendmentBill, 2003 envisagedmanyamendments
on the basis of reports of the NareshChandraCommitteeand the

&r-
sr.tbsequentlyappo nted N R Narayan Mu.thy committee. Both the
committeeshave done an excellentjob to promoie corporaiegovernance

> lmplementation of BirlaCommitteeReport

of the recommendations

Clause49

C ause49 of the ListingAgreemen!!o the Indianslock exchangecomes

into efiect from 31 Decer.ber2005. ! has been forr.u ated for fhe
irprovemellor' orporate oove"ancen al isledcomoaries

n corporatehierarchytwo types oi managementsare envisaqed:i)

companies managed by Iboardof directors];
andii) thoseby a lmanaqnq
directod,whole-timedirectoror manasersubtectto the control and
guidanceoi tt€ boardof directors.

A s per C l a u s e4 9 , f o r a c o m pa n ywith a n Exe cu live Ch a ir m a na, t le a st50

per c ento i t h e b o a f ds h o u l dco m p r isejn d e p e n d e ndtir e cto r s.
In th e case
of a c om p a n yw i t h a n o n ' e xe cu tveCh a ir m a na, t L e a sto n e th r d o f t he
boardshoud be independentdirectors.

It wouldbe necessary for chief executivesand chiei financal oificersto

establlshandmainialninternalconlrolsand implementremediation and
riskmitigaiiontowardsdeficenciesin nte.nalcontrols, amongothers.

clausevr (ii) of clause49 requiresall companlesio submita quaderly

compiancereportto stockexchangeln the prescribed form.The clause
alsorequlresthat therebe a separatesectionon corporategovernancern
the annualreDortwith a detailedcompliancereport.

A companyis also requlredto obtaina certificateeitheffrom auditors0r

practicnq companysecrelariesregardin9complian.eof conditionsas
st pulated,andannexthe sameto the dlrector'srepoft.
 E
The clausemandates compostolrof an aldlt committee: one of the
is requiredto be finan€ialyliterate".
directors lt is mandalory for al
to complywith lhe cla!seby Decernber
listedcompanies 31, 2005,

Corporatecovernancemay be defned as "A set of systems,processes

and principleswhich ensurethat a companyis governedin th€ best
lt ensurescommitmentto valuesandethical
intefestof all stakeholders.'
conductor businessj Transparencyin business
kansactionsjStatutoryand
legalcompliance; adequatedisclosuresand Effectivedecision-making
to
achievecorporct€obje€tives.In other words,CorporateGov€rnance is
abo!t promoungcorporatefairness,transparencyand accountability,
GoodCorporate Governan(e s srrolyGoodBusress.

Clalse49 ofthe SEB|guidellnes on Corporate Governance as amendedon

29 October,? 2004 has made major changes in the definilion of
ndependentdifectors, strenqthen ng the responsibilitiesol audit
committees,improvingquality of financialdi5€losures, includingthos€
relatingto relatedparty transactionsand proceedsfrom public/rights/
pret€rentialissues,requiringBoardsto adopt formal code of conduct,
requring CEO/CFO cetiflcationof financialstatementsand for improving
disclosuresto shareholders. ce(ain non-mandatory clauseslike whistle
blowerpolicyand restrictlonof th€ term of independentdlreclorshave

Theterm 'clause49' refersto c ausenumber49 of the LislingAgreement

betweena companyand the stockexchanges on v'rhichit is list€d(the
ListingAgreementis identicalfor all Indianstockexchanqes, includingthe
NSEand BSE).This clauseis a recentadditionto the ListingAgreement
andwasinseftedas late as 2000consequent to the recomm€ndalions ol
the KumarmangalamBirla Commifte€ on Corporate Governance
conslitured Exchange
by the Secorities Boardof India(SEBI)in 1999.

Clause49, whenit wasfirst added,wasintendedto intfoducesomebasic

corporategovernancepfactces in Indiancompaniesand brough!in a
numberof key changesin governance anddisclosures(manyof whlchwe
takefor qrantedtoday).lt specifiedthe mioimum numberof independeit
directorsrequiredon the boardof a company.The settingup ot an Audt
committ€e,and a shareholders'Grevancecommittee,among others,
were made mandatoryas were the lr,lanagem€nt s D scussionand
Analysis{l'4D&A)sectionand the Reporton CorporateGovernance in the
AnnualRepoi..and disclosures of iees paidto non.executive directors.A
imit wasolacedon the nurnb€rof comrnittees that a director€ouldserve

In late 2002,SEBIconstitutedthe NarayanaMurthyCommttee to assess

the adequacyof currentcorporategovernance practicesand to sirqgest
improvements. aasedon the recommendations of this committee,SEB|
issued a modifiedclause49 on october29,2004(the'revisedclause49')
whichcameintooperation ooJanuary 1, 2006.

The revisedCtause49 has suatably pushedioMard the oraginalintentor

protectingthe interests of investorsthrough enhancedgovernance
practices and disclosures.Fave broad themes pr€dominate.The
independence criteriafof directorshave been clarined.The roles and
responsibilitiesof the board have been enhanced.The q'rality and
qlantity of disclosures have improved.The roles and responsibilities
ot
the audit committe€in all matters relatingto internal controlsand
financialreportinghave beenconsolldated, and the accountability
of top
management-specifically the CEOand CFO-hasbeenenhanced.Within
eachoftheseareas,the fevisedClause49 mov€sfurtherintoth€ realmof
globalbestpractices(andsometimes, evenbeyond.

Si:" "' r:
 I

Bibliography
. Wettsites

'/ Oetailsaboutcorporategovernance norms.

htto:tfwww.sebi.oro
/ DataregardinS ASE-30 Companies.
htto://www.bseindia,com
"/ All BSE-30
companies'w€bsitesfor thelrAnnuaI reports,
!99t5
'/ Corporategovernance
AryaP.P, TandonB. B. VashintA.K,

r' CorporateGovemance-New
paradigm
Gopalsamy N

/ corporate GovdinancePuttingInvestorsfirst
MaxB. Russell
scottc. Newquist,

3ll
 r

ThankYou

3 slPas e