Corporate Governance
Corporate governance is the combination of rules,
processes or laws by which businesses are operated,
regulated or controlled. The term encompasses the
internal and external factors that affect the interests of
a company's stakeholders, including shareholders,
customers, suppliers, government regulators and
management.
Corporate Governance
Relationships among various participants in
determining the direction and performance of
a corporation.
Effective management of relationships among
Shareholders
Managers
Board of directors
employees
Customers
Suppliers
community
Why Corporate Governance?
Better access to external finance
Lower costs of capital – interest rates on
loans
Improved company performance –
sustainability
Higher firm valuation and share performance
Reduced risk of corporate crisis and
scandals
Corporate Governance Environment
and Outcomes
Principles of Corporate Governance
Sustainable development of all stake
holders- to ensure growth of all individuals
associated with or effected by the enterprise
on sustainable basis
Effective management and distribution of
wealth – to ensue that enterprise creates
maximum wealth and carefully uses the
wealth so created for providing maximum
benefits to all stake holders and enhancing its
wealth creation capabilities to maintain
sustainability
Discharge of social responsibility- to ensure that
enterprise is acceptable to the society in which it is
functioning
Application of best management practices- to
ensure excellence in functioning of enterprise and
optimum creation of wealth on sustainable basis
Compliance of law in letter & spirit- to ensure value
enhancement for all stakeholders guaranteed by the
law for maintaining socio-economic balance
Adherence to ethical standards- to ensure integrity,
transparency, independence and accountability in
dealings with all stakeholders
Elements of Corporate Governance
Good Board practices
Control Environment
Transparent disclosure
Well-defined shareholder
rights
Board commitment
Overseeing strategic development & planning
Management selection, supervision and upgrading.
Maintenance of good member relations.
Protecting and optimizing the organization’s assets.
Fulfilling legal requirements.
Corporate
Governanc
e
Accountability
Responsibility
Transparency
Fairness
Fundamental Pillars of Corporate
Governance
Accountability
Clarifying governance roles & responsibilities, and
supporting voluntary efforts to ensure the alignment of
managerial and shareholder interests and monitoring by
the board of directors capable of objectivity and sound
judgment.
Transparency
Requiring timely disclosure of adequate information
concerning corporate financial performance
Responsibility
Ensuring that corporations comply with relevant laws and
regulations that reflect the society’s values
Fairness
Ensuring the protection of shareholders’rights and the
enforceability of contracts with service/resource providers
Best Governed Companies
Board of Directors: information that must be supplied
Annual, quarter, half year operating plans, budgets and
updates.
Quarterly results of company and its business segments.
Minutes of the audit committee and other board
committees.
Recruitment and remuneration of senior officers.
Materially important legal notices and claims, as well as
any accidents, hazards, pollution issues and labor
problems.
Any actual or expected default in financial obligations.
Details of joint ventures and collaborations.
Transactions involving payment towards goodwill, brand
equity and intellectual property.
Any materially significantsale of business and
investments.
Foreign currency and other risks and risk management.
Corporate governance in India
The Indian corporate scenario was more or less
stagnant till the early 90s.
The position and goals of the Indian corporate
sector has changed a lot after the liberalisation
of 90s.
India’s economic reform programme made a
steady progress in 1994.
India with its 20 million shareholders, is one of
the largest emerging markets in terms of the
market capitalization.
Corporate governance of India has undergone a
paradigm shift
In 1996, Confederation of Indian Industry (CII),
took a special initiative on Corporate
Governance.
The objective was to develop and promote a
code for corporate governance to be adopted
and followed by Indian companies, be these in
the Private Sector, the Public Sector, Banks or
Financial Institutions, all of which are corporate
entities.
This initiative by CII flowed from public concerns
regarding the protection of investor
interest, especially the small investor, the
promotion of transparency within business and
industry
Securities and Exchange Board of India
The Government of India's securities watchdog, the
Securities Board of India, announced strict corporate
governance norms for publicly listed companies in
India.
The Indian Economy was liberalised in 1991. In
order to achieve the full potential of liberalisation and
enable the Indian Stock Market to attract huge
investments from foreign institutional investors (FIIs),
it was necessary to introduce a series of stock
market reforms.
SEBI, established in 1988 and became a fully
autonomous body by the year 1992 with defined
SEBI
On April 12, 1988, the Securities and Exchange
Board of India (SEBI)was established with a dual
objective of protecting the rights of small investors
and regulating and developing the stock markets in
India.
In 1992, the ‘BSE’ ,the leading stock exchange in
India, witnessed the first major scam masterminded
by Harshad Mehta.
Analysts felt that if more powers had been given to
SEBI,the scam would not have happened.
•As a result the ‘GoI’ brought in a separate legislation
by the name of ‘SEBI Act 1992’and conferred
statutory powers to it.
Since then, SEBI had introduced several stock
SEBI and Clause 49
SEBI asked Indian firms above a certain size
to implement Clause 49, a regulation that
strengthens the role of independent directors
serving on corporate boards.
On August 26, 2003, SEBI announced an
amended Clause 49 of the listing agreement
which every public company listed on an
Indian stock exchange is required to sign.
The amended clauses come into immediate
effect for companies seeking a new listing.
The major changes to Clause 49…
Independent Directors:- 1/3 to ½depending
whether the chairman of the board is a non-
executive.
Non-Executive Directors:- The total term of office
of non-executive directors is now limited to three
terms of three years each.
Board of Directors:- The board is required to
frame a code of conduct for all board members
and senior management and each of them have
to annually affirm compliance with the code.
Audit Committee:- Financial statements and the draft
audit report of management discussion and analysis of…
Financial condition
Result of operations of compliance with laws
Letters of weaknesses in internal controls issued by
statutory
Internal auditors
Removal and terms of remuneration of the chief
internal auditor
Conclusion
As Indian companies compete globally for access
to capital markets, many are finding that the
ability to benchmark against world-class
organizations is essential.
For a long time, India was a managed,
protected economy with the corporate sector
operating in an insular fashion.
But as restrictions have eased, Indian
corporations are emerging on the world stage and
discovering that the old ways of doing business
are no longer sufficient in such a fast-paced
global environment.
