Corporate Governance

What is CG
• Corporate Governance is the system by which
companies are directed and controlled.

• It is concerned with holding the balance

between economic and social goals and
between individual and communal goals.
 Corporate Governance
• The Corporate Governance framework is there
to encourage the efficient use of resources
and equally to require accountability for the
stewardship of those resources.

• The aim is to align as nearly as possible the

interests of individuals, corporations and
society.
 Corporate Governance
• Corporate Governance is about how suppliers
of capital get managers to return profits, make
sure managers do not
 Corporate Governance
• “Corporate Governance is nothing but a step
towards strengthening of the organization so
as to face the challenges”
• “It is stepping into the shoes of the
shareholders, stakeholders, vendors, suppliers
and employees by the Top Managers and CEO
of the company”
 Principles of Corporate Governance

• Sustainable Development of all Stakeholders

• Effective Management and Distribution of
Wealth
• Discharge of Social Responsibility
• Application of Best Management Practices
• Compliance of Law in letter and spirit
• Adherence to Ethical Standards 
 Corporate Governance
• Corporate Management • Corporate Governance
• Implements order • Gives the order
• More esoteric • More exoteric
• Power is delegated • Empowered
• Static • Dynamic
• Close ended system • Open ended system
• Job designer
• Job performer
• Decides where to go?
• Decides how to go?
• To be innovative
• Not innovative
• Challenging and exciting
• Stereotyped function function
• Do things right • Do the right things
 History of Corporate Governance
• Japan, UK and USA
• 1977- Foreign and corrupt practices
• 1980 – failures in the business world
• 1987-the Treadway Commission Report – through proper
auditing and control
• 1992 – the Committee of Sponsoring Organisations –
framework for ideal organisations
• Enron and Worldcom scam –
• 2002 – Sarbanes – Oxley Act –principles for strict
compliance of corporate sector
 History of Corporate Governance
• Japan experienced many downturns
• 1992 – Cadbury Committee – (Sir Adrian Cadbury)
• 1999 – Organisation for Economic cooperation
and Development
• India – 1997 – Confederation of Indian Industries
– code for Corporate Governance
• 1999 – Kumar Mangalam Birla Committee along
with SEBI – standard listing agreement to be
followed by all the listed companies – SEBI code
 Nature, characteristics and purpose of
Corporate Governance
• Four fold inter connected system
• Shareholders (owners), board of directors, corporate
management and employees
• The key elements of CG are
– Supervision and internal controls
– Transparency and accountability
– Disclosures
– Risk management
– Removal of asymmetric information system
– Maintenance of safety and product quality
• Environmental protection and social responsibility - special
importance in recent years
 Evidence of Corporate Governance from
Arthashastra
• MEANING OF ARTHA
•  Artha is wealth in absolute terms. It covers
everything from treasures to knowledge to
courage. Artha is everything that is valuable
for human beings.
 Evidence of Corporate Governance from
Arthashastra
• MEANING OF ARTHASASTHRA
• Arthashastra literally means “the science of
wealth” or “economics” in the modern
parlance.
• However, as one studies Arthashastra, one gets
a feeling that it is not meant to throw light just
on the topic of dealing with materialistic riches,
but also on the wealth that is intangible and
cannot be measured.
 Evidence of Corporate Governance from
Arthashastra
• The Arthashastra contains nearly 6000 sutras divided into 15 books,
150 chapters, and 180 sections.
• The 15 books contained in the Arthashastra can be classified in the
following manner:
– Book 1 on ‘Fundamentals of Management’,
– Book 2 dealing with ‘Economics’,
– Books 3, 4 and 5 on ‘Law’,
– Books 6, 7 and 8 on Foreign Policies and
– Books 9 to 14 dealing with ‘war’.
– Book 15 deals with the methodology and devices used in writing the
Arthashastra.

• Arthashastra is believed to have been written around 4th Century,

B.C.
 Evidence of Corporate Governance from
Arthashastra
• Arthashastra was written during the reign of
Emperor Chandragupta Maurya by
Vishnugupta, who was also known as
Chanakya and Kautilya
 Evidence of Corporate Governance from
Arthashastra
•  PUBLIC GOVERNANCE:
– implies structures and processes for determining use of
available resources for the public good.
– Good governance, according to experts, implies the following:
• Universal protection of human rights;
• laws that are implemented in a non- discriminatory manner;
• an efficient, impartial, and quick judicial system;
• transparent public agencies and official decision-making;
• accountability for decisions made about public issues and resources
by public officials;
• participation and inclusion of all citizens in debating public policies
and choices.
 Evidence of Corporate Governance from
Arthashastra
• Kautilya believed that the state had a role in the
market as a regulator.
• He advocated the principle of a mixed economy at
a time when India was ruled by autocrats.
• He was meticulous in outlining in detail, the
technique of controlling every activity in the state.
• He insisted on governance for the betterment of
public and equated the success of the king with
that of the public.
 Evidence of Corporate Governance from
Arthashastra
• Free trade - to comply with the authorities
appointed by the state. 
• Appointed superintendents for almost every
activity included in governance.
 Evidence of Corporate Governance from
Arthashastra
• They included superintendents for the State,
– for weights and measures, for trade and
commerce,
– for agriculture, for mining,
– for gems and jewels,
– for horses, for elephants, for cows,
– for tolls, for storehouses, for forest produce,
– for armoury, for weaving, for ships,
– for slaughter houses, for liquor, etc.
 Evidence of Corporate Governance from
Arthashastra
• However, it has to be noted that the State only
acted as a regulatory body and did not
interfere in the day to day affairs of the public.
• In theory, the State had absolute control over
economic activities; however in practice, it
encouraged all types of private professions
too. 
 Issues in Corporate Governance
1. Structural issue

2. Ethical issue
1. Structural issue
– Composition of Board of Directors
» Proportion of independent directors
» J J Irani committee- one third
» But SEBI – 50 percent
» Not quantity but quality
» Role of CEO
» Remuneration of directors
• High v/s. low
 Issues in Corporate Governance
Structural issue
– Share holders
• Anglo American model V/s. Europe Japanese models
• Share holders V/s. workers,suppliers,customers
– Gender
– Degree of government control
• Minimal control in India after liberalisation
 Issues in Corporate Governance
Ethical issues
1. Overly unethical corporations
2. Half-heartedly ethical corporations
3. Ethically indifferent corporations
4. Ethically constrained corporations
 Issues in Corporate Governance
Ethical issues
1. Overly unethical corporations
– least bothered on ethical core values
– Only on papers – do not follow
– Making fraudulent investment, falsification of
accounts, insider trading, corruption and bribery
– Showing inflated profits to attract investers
– Breach of companies trust
– Refer page #340
 Issues in Corporate Governance
Ethical issues
2. Half-heartedly ethical corporations
– Hindustan Unilever Pvt. Ltd., Reliance Industries,
Ranbaxy Ltd., etc
– They do some good work – some questionable
also
 Issues in Corporate Governance
Ethical issues
3. Ethically indifferent corporations
– Even if they have ethical code of conduct, they
behave indifferent
– No ethical motivation or culture
 Issues in Corporate Governance
Ethical issues
4. Ethically constrained corporations
– Have the mind to do something good
– But they have practical constraints and limitations
– These limitations arise out of financial constraints,
lack of proper ethical guidance and lack of
experience, unresolved ethical dilemmas,
organisational conflicts and family feuds.
(Example : Reliance – stock value crash in 2005)
 Structure and Process of Corporate
Governance
• The role of Board of Directors
1. The board will consist of executive and non-
executive directors
2. Executive directors will hold management
positions
3. Some are independent, some are outsiders,
some are insiders
 Structure and Process of Corporate
Governance
• Duties and responsibilities of Board of Directors
– Appoints CEO
– Board works as a friend, philosopher and guide for the
whole company
– Board gives direction, defines the company’s strategy
and ensures management translates those into action
– Ensures shareholders interest is given top priority
– Approval of annual budgets
– Ensures availability of financial resources
– Refer pager # 335 and 336
 Governance Committees
• Three committees which are helpful to carry
out the functions of the Board of Directors:

1. Audit Committee
2. Remuneration Committee
3. Nomination Committee
 TYPES OF DIRECTORS
• According to “Section 2(34) of Companies Act
2013 ” a director is appointed to the Board of
a Company. 
• There are many types of directors which have
a different role to play accordingly.
 TYPES OF DIRECTORS
1. Residential Director:
 According to Section 149(3) of Companies
Act,2013, Every company should appoint a
director who has stayed in India for a total
Period of not less than 182 days in the
previous calendar year.
 TYPES OF DIRECTORS
2. Independent Director:
According to Section 149(6) an independent director is an
alternate director other than a Managing Director which is
known as Whole Time Director Or Nominee Director.
According to Rule 4 of Companies (Appointment and
Qualification of Directors) Rules,2013 these are the
following type of companies which have to appoint
minimum 2 independent directors:-

i. Public Companies which have Paid-up Share Capital-Rs.10 Crores

or More;
ii. Public Companies which have Turnover- Rs.100 Crores or More:-
iii. Public Companies which have total outstanding loans,
debenture, and deposits of Rs. 50 Crores or More.
 TYPES OF DIRECTORS
3. Small Shareholders Directors:
Small shareholders can appoint a single
director in a listed company. But this action
needs a proper procedure like handing over a
notice to at least 1000 Shareholders or
1/10th of the total shareholders.
 TYPES OF DIRECTORS
4. Women Director: –
As per Section 149 (1) (a), there are certain categories according to
which there should be at least one woman as a director on the Board.
Such companies are any listed company or any public company. There
are types of directors in women director also:
• Additional Directors:-
Any Individual can be appointed as Additional Directors by a company
under section 161(1) of the New Act.
• Alternate Directors:-
As per Section 161(2), a company may appoint, if the articles confer such
power on the company or a resolution is passed (if a Director is absent
from India for at least three months).
• Shadow Director:–
A person who is not the member of Board but has some power to run
it can be appointed as the director but according to his/her wish.