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Landmarks in the Emergence of

Corporate Governance

Chapter Outline






on Corporate
Corporate Governance

Working Group
Group on
on Companies
Act -- 1996
Recent Phenomenon Change
in Change in
mindset objectives
of people of
Insistence of Emergence of
mutual funds
focus to
Shareholders focus
Developments in United States

Watergate Scandal(1970)
bugging the offices of political opponents

Ordered harassment of activist groups and political

figures, using the FBI, CIA, and the IRS.

Control failures
allowed illegal political contributions by
corporations and
To bribe government officials
Foreign and Corrupt practices Act of 1977
prohibits payments to foreign government officials
to assist in obtaining or retaining business.
Developments in United States

Foreign and Corrupt practices Act of 1977

contained specific provisions regarding:
Maintenance and
Review of system of internal control

This was followed by proposal of securities

and Exchange commission for mandatory
reporting and internal financial control
Developments in United States

After that there was series of high profile

business failures in US
Tread way Commission
Objective of commission was to identify
main cause misrepresentation of financial
And to recommend the ways of reducing
incidence thereof
Tread way Report published in 1987
Developments in UK

BCCI scandal
BCCI (Bank of Credit and Commerce
International), a global bank, 1972 founded by
Agha Hassan
7th largest private bank in the world by assets
Made up of multiplying layers of entities
RelatedTEXTto one another
through an
impenetrable series holding companies,
affiliate subsidiaries, banks-within-banks,
insider dealings, and shareholders
Developments in UK

BCCI scandal was comprised of

Shoddy record keeping
Massive money Laundering
Careless regulatory review and audits
Evasion of ordinary legal restrictions in the
movement of capital and goods
BCCI was a vehicle fundamentally free of
control TEXT

Ideal mechanism of facilitating illicit

activity by others
Development in U.K

Failure of Barings Bank (1762)

Had financed the Napoleonic wars, Louisiana
purchase and Erie Canal
Bank suffered a loss of $1.4 billion
Failure of bank caused by the single trader,
Nick Leeson
He was posted in the charge of back office
operations of Barings Bank in Singapore
Corporate Governance Committees

Cadbury committee 1992

The Paul Ruthman committee COSO

(Committee of
The Granbury committee 1995 Organizations)

The Hampel Committee

The Combined Code 1998

Corporate Governance Committees

The Turnbull Committee 1999

World Bank on Corporate Governance

OECD Principles

Mckinsey Survey on Corporate Governance

Sarbanes Oxley Act, 2002

The Cadbury Committee

Stated Objective :

to help raise the standards of corporate

governance and level of confidence in
financial reporting and auditing, by setting
out clearly what it sees as the respective
responsibilities of those involved and what
it believes is expected of them
The Cadbury Committee

Investigated the accountability of board of

directors to shareholders and society
The Cadbury code of Best Practices had 19
recommendations in the nature of guidelines the
board of directors, non-executive directors and
such other officials
Submitted Code of Best practices in1992
Companies listed on LSE (London stock
Exchange) were required to state that whether
or not they are following this Code
Code of Best Practices

Recommendations related to Board of

Regular meetings of Board
Clearly accepted division of responsibilities
Board must include non-executive directors of
sufficient caliber
Agreed procedure for directors in furtherance of
their duties
All directors should have access to advice and
services of company secretary
Code of Best Practices

Recommendations related to Non-

executive Directors
They should bring an independent judgment to
bear on different issues
The majority should be independent of the
management and free from any business or
other relationship
Should be appointed for specific term
Re-appointment should not be automatic
Should be selected through a formal process
Code of Best Practices

Recommendations related to executive Directors

Service contract should not exceed three years without

shareholders approval
Full and clear disclosure of total emoluments of directors
Separate figures should be given for salary and
performance related elements
Basis of performance measurement should be explained
executive directors pay should be recommended by
remuneration committee made up of non-executive
Code of Best Practices

Recommendations related to control and

Duty of board to present a balanced and
understandable assessment of companys
Board should ensure an objective and
professional relationship with auditors
Audit committee, consisting of at least three
non-executive directors
Audit committee must have written terms of
Code of Best Practices

Recommendations related to control and

The director should explain their responsibilities
for preparing accounts next to a statement by
auditors about their reporting responsibilities
Directors should report on effectiveness of
companys system of internal control, this was
most revolutionary and controversial reuirement
Directors should report that business is a going
concern with supporting assumptions as
Your Assessment of Cadbury
The Paul Ruthman Committee

This committee was constituted later to deal with

said controversial point of Cadbury Report

Reporting requirements restricted to internal

financial control only against the effectiveness
of companys system of internal control

Final report of committee provided extension to

responsibilities of directors to all relevant control
objectives including business risk assessment
and minimizing the risk of fraud
The Greenbury Committee, 1995

Established by Confederation of British


Focus was on determining directors

remuneration and

To prepare a code of such practices for

use by limited companies of United
The Greenbury Committee, 1995

The Committee:
Aimed to provide an answer to the general
concerns about accountability and level of
directors pay

Argued against statutory control for

strengthening accountability by proper allocation
of responsibility for determining directors
remuneration, proper reporting to shareholders
and greater transparency in process
Code of Best Practices

It was divided into the following sections:

Remuneration committee
Remunerations policy
Service Contracts and Compensation
The Hampel Committee-1995

Established to protect investors an preserve and

enhance the standing of companies listed on
Developed further the Cadbury Report
Recommended that:
Auditors should not report on internal control privately to
the directors
The directors remain and review all(not just financial)
Companies that do not already have an internal audit
function, should from time to time, review their need for
The Combined Code-1998

It subsequently was derived from:

Hampel Committees final report

Greenbury Report
The combined code was appended to the
listing rules of the LSE
Compliance of code is mandatory for all
listed companies in United Kingdom
The Combined Code-1998

This code also require the Board to

maintain a sound system of internal
control to safeguard shareholders
investment and company assets
Directors should review effectiveness of
groups system of internal control,
including financial, operational,
compliance and risk management
Risk management was of great concern in
this code
The Turnbull Committee-1999

Set up institute of Chartered Accountants in

England and Wales
Provided guidance to assist companies in
implementing the requirements of Combined
Code on internal control
recommended that where companies do not
have internal audit function, the board should
consider the need for carrying out an internal
audit internally
Recommended that board of directors confirm
the existence of procedures for evaluating key
World Bank on Corporate Governance

One of earliest international organizations

to study this issue
Focuses on principles such as:
fairness and
The OECD principles

One of the earlier non-government organization

to work on and spell out principles and practices
that should govern corporate
OECD principles include the following elements:
1. The rights of shareholders
2. Equitable treatment of shareholder
3. Role of shareholders in corporate governance
4. Disclosure and transparency
5. The responsibilities of Board
The OECD principles

Guidelines provided are somewhat

general in nature

Anglo-American and Continental

European System would be quite
consistent with them
The Mckinsey Survey on Corporate Governance

Mckinsey, the international management

consultant organization
Conducted a survey with sample size of
188 companies
Companies were taken from six emerging
markets, India, Malaysia, South Korea,
Taiwan, Mexico an Turkey
The aim was to determine correlation
between good Corporate Governance and
market valuation of Company
The Mckinsey Survey on Corporate Governance

The results of survey pointed positive

relationship between the two variables

Good corporate governance increases

market value of company by:
Increasing financial performance
Transparency of dealings
Increasing investors confidence
The Mckinsey Survey on Corporate Governance

The survey rated the performance on

corporate governance of each company
on the basis of following parameters:

1. Accountability
2. Disclosure and Transparency
3. Shareholders equality
Sarbanes Oxley Act- 2002

Codifies certain standards of good

corporate governance
The Act calls for protection of those who
have the courage to bring frauds to the
attention of those who have to handle the
It is a sincere attempt to address all the
issues related to corporate failures to
achieve quality governance and restore
investors confidence
Sarbanes Oxley Act- 2002

Important Provisions of SOX Act include:

Establishment of Public Company
Accounting Oversight Board
Audit Committee
Conflict of interest
CEO/CFO or CAO must not be employed in
that accounting firm
Audit partner rotation
Improper influence/coerce on conduct of
audits is prohibited.
Prohibition of non-audit services
Financial information system designs and
Internal audit outsourcing servicing
Management functions or human resources
Broker or dealer investment
CEOs and CFOs required to affirm
Loans to directors are prohibited
Attorneys have to report material violation
of securities law
Securities Analysts should not be
threatened for adverse report on securit
Your Task!!!!!!!

Open the website of PICG

Watch the following videos
Introduction to CG part I
Introduction to CG part II
Present in form of summary what
information revealed to you by these
videos about Corporate Governance