Corporate Governance

MEANING
Corporate Governance refers to the way a corporation is governed. It is the technique by which
companies are directed and managed. It means carrying the business as per the stakeholders
desires. It is actually conducted by the board of Directors and the concerned committees for the
companys stakeholders benefit. It is all about balancing individual and societal goals, as well
as, economic and social goals.
Corporate Governance is the interaction between various participants (shareholders, board of
directors, and companys management) in shaping corporations performance and the way it is
proceeding towards. The relationship between the owners and the managers in an organization
must be healthy and there should be no conflict between the two. The owners must see that
individuals actual performance is according to the standard performance. These dimensions of
corporate governance should not be overlooked.
Corporate Governance has a broad scope. It includes both social and institutional aspects.
Corporate Governance encourages a trustworthy, moral, as well as ethical environment.

DEFINITION

Corporate governance is accountability to providers of capital. Bruce Weber, dean of the

Lerner College of Business at the University of Delaware, at the inaugural meeting in November
of the newly reconstituted advisory board for the John L. Weinberg Center for Corporate
Governance.
Corporate governance is about how investors get the managers to give them back their money
(Shleifer & Vishny, A Survey of Corporate Governance, Journal of Finance 52(2) 1997: 738)

Corporate governance is gathering together a group of smart, accomplished people around a

board table to make good decisions on behalf of the company and its stakeholders. As We
Start Anew, Jim Kristie, editor and associate publisher of Directors & Boards.

IMPORTANCE
The importance of corporate governance is listed below:
1.

Changing Ownership Structure : In recent years, the ownership structure of companies

has changed a lot. Public financial institutions, mutual funds, etc. are the single largest
shareholder in most of the large companies. So, they have effective control on the management
of the companies. They force the management to use corporate governance. That is, they put
pressure on the management to become more efficient, transparent, accountable, etc. The also
ask the management to make consumer-friendly policies, to protect all social groups and to
protect the environment. So, the changing ownership structure has resulted in corporate
governance.

2.

Importance of Social Responsibility : Today, social responsibility is given a lot of

importance. The Board of Directors have to protect the rights of the customers, employees,
shareholders, suppliers, local communities, etc. This is possible only if they use corporate
governance.

3.

Growing Number of Scams : In recent years, many scams, frauds and corrupt practices
have taken place. Misuse and misappropriation of public money are happening everyday in
India and worldwide. It is happening in the stock market, banks, financial institutions,
companies and government offices. In order to avoid these scams and financial irregularities,
many companies have started corporate governance.

4.

Indifference on the part of Shareholders : In general, shareholders are inactive in the

management of their companies. They only attend the Annual general meeting. Postal ballot is
still absent in India. Proxies are not allowed to speak in the meetings. Shareholders
associations are not strong. Therefore, directors misuse their power for their own benefits. So,
there is a need for corporate governance to protect all the stakeholders of the company.
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5.

Globalisation : Today most big companies are selling their goods in the global market .
So, they have to attract foreign investor and foreign customers. They also have to follow
foreign rules and regulations. All this requires corporate governance. Without Corporate
governance, it is impossible to enter, survive and succeed the global market.

6.

Takeovers and Mergers : Today, there are many takeovers and mergers in the business
world. Corporate governance is required to protect the interest of all the parties during
takeovers and mergers.

7.

SEBI : SEBI has made corporate governance compulsory for certain companies. This is
done to protect the interest of the investors and other stakeholders.

Principles of Corporate Governance

Shareholder recognition is key to maintaining a companys stock price. More often than
not, however, small shareholders with little impact on the stock price are brushed aside to make
way for the interests of majority shareholders and the executive board. Good corporate
governance seeks to make sure that all shareholders get a voice at general meetings and are
allowed to participate.

Stakeholder interests should also be recognized by corporate governance. In particular,

taking the time to address non-shareholder stakeholders can help your company establish a
positive relationship with the community and the press.

Board responsibilities must be clearly outlined to majority shareholders. All board

members must be on the same page and share a similar vision for the future of the company.

Ethical behavior violations in favor of higher profits can cause massive civil and legal
problems down the road. Underpaying and abusing outsourced employees or skirting around lax
environmental regulations can come back and bite the company hard if ignored. A code of
conduct regarding ethical decisions should be established for all members of the board.

Business transparency is the key to promoting shareholder trust. Financial records,

earnings reports and forward guidance should all be clearly stated without exaggeration or
creative accounting. Falsified financial records can cause your company to become a Ponzi
scheme, and will be dealt with accordingly.

Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.
2. Strong corporate governance maintains investors confidence, as a result of which,
company can raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve objectives
that are in interests of the shareholders and the organization.
6. Good corporate governance also minimizes

wastages, corruption, risks

mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.

Disadvantages of Corporate Governance

Corporate governance is the method by which a corporation is directed, its business practices
controlled, and its vision for success communicated to its shareholders. Disadvantages of this
method of leadership arise from a lack of oversight, sentimental business decisions by an
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and

entrenched board of directors, and the high cost of changing direction once a business path
proves to be ineffective.

Family-Owned Companies
Corporate governance works at its best when shareholders and board members are able to make
objective decisions that are in the best interest of the company. According to Ibis Associates, a
business planning firm, family-run corporations (founding family members own controlling
share of the company), such as Ford and Wal Mart, lose objectivity in business making decisions
due to the family's financial investment in the business' performance and the emotional ties
associated with building a worldwide corporation from the ground up.
Easily Corruptible
Corporate governance needs a certain level of government oversight to avoid increasing levels of
corruption. This is certainly true of areas in corporate finance and banking where deregulation of
the industry through 2001-2004 contributed to predatory lending practices and created a credit
crises for millions of Americans. According to Jonathan Brown, author of "The Separation of
Banking and Commerce," the lack of governmental oversight in corporate governance lead to a
misallocation of credit that actually worked against competition. Banks stopped competing with
one another.
Costs of Monitoring
To effectively govern a publicly traded corporation, shareholders must speak with one voice and
have enough votes to allow that voice to have any real weight. This requires individuals that have
a collective vision for the company to pour more money into that company to gain a controlling
share. This process can be highly political, since controlling shareholders that sense a hostile
takeover may attempt to buy up more shares to stay in power and keep the minority party silent.
Corporate governance at this level could grind to a halt, driving stock prices lower and hindering
a corporation's ability to make smart business decisions.

Securities Exchange Board of India

INTRODUCTION
Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of
securities market. SEBI promotes orderly and healthy development in the stock market but
initially SEBI was not able to exercise complete control over the stock market transactions. It
was left as a watch dog to observe the activities but was found ineffective in regulating and
controlling them. As a result in May 1992, SEBI was granted legal status. SEBI is a body
corporate having a separate legal existence and perpetual succession.

Reasons for Establishment of SEBI:

With the growth in the dealings of stock markets, lot of malpractices also started in stock markets
such as price rigging, unofficial premium on new issue, and delay in delivery of shares,
violation of rules and regulations of stock exchange and listing requirements. Due to these
malpractices the customers started losing confidence and faith in the stock exchange. So
government of India decided to set up an agency or regulatory body known as Securities
Exchange Board of India (SEBI).

History
It was established by The Government of India on 12 April 1988 and given statutory powers in
1992 with SEBI Act 1992 being passed by the Indian Parliament. SEBI has its headquarters at
the business district of Bandra Kurla Complex in Mumbai, and has Northern, Eastern, Southern
and Western Regional Offices in New Delhi, Kolkata, Chennai and Ahmedabad respectively. It
has opened local offices at Jaipur and Bangalore and is planning to open offices at Guwahati,
Bhubaneshwar, Patna, Kochi and Chandigarh in Financial Year 2013 - 2014.
Controller of Capital Issues was the regulatory authority before SEBI came into existence; it
derived authority from the Capital Issues (Control) Act, 1947.

Initially SEBI was a non statutory body without any statutory power. However in 1995, the SEBI
was given additional statutory power by the Government of India through an amendment to the
Securities and Exchange Board of India Act, 1992. In April 1988 the SEBI was constituted as the
regulator of capital markets in India under a resolution of the Government of India.

Managament of SEBI
The SEBI is managed by its members, which consists of following:
1. The chairman who is nominated by Union Government of India.
2. Two members, i.e., Officers from Union Finance Ministry.
3. One member from the Reserve Bank of India.
4. The remaining five members are nominated by Union Government of India, out of them
at least three shall be whole-time members.

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on malpractices and protect
the interest of investors. It was set up to meet the needs of three groups.
1. Issuers:
For issuers it provides a market place in which they can raise finance fairly and easily.
2. Investors:
For investors it provides protection and supply of accurate and correct information.
3. Intermediaries:
For intermediaries it provides a competitive professional market.

Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The
objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of
business and its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers,
underwriters, etc.

Functions of SEBI:
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The SEBI performs functions to meet its objectives. To meet three objectives SEBI has
three important functions. These are:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.
1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and provide
safety of investment.
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging:
Price rigging refers to manipulating the prices of securities with the main objective of
inflating or depressing the market price of securities. SEBI prohibits such practice
because this can defraud and cheat the investors.
(ii) It Prohibits Insider trading:
Insider is any person connected with the company such as directors, promoters etc. These
insiders have sensitive information which affects the prices of the securities. This
information is not available to people at large but the insiders get this privileged
information by working inside the company and if they use this information to make
profit, then it is known as insider trading, e.g., the directors of a company may know that
company will issue Bonus shares to its shareholders at the end of year and they purchase
shares from market to make profit with bonus issue. This is known as insider trading.
SEBI keeps a strict check when insiders are buying securities of the company and takes
strict action on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI does not allow the companies to make misleading statements which are likely to
induce the sale or purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the
securities of various companies and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in security market by taking
following steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein
companies cannot change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff
fine and imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to
market prices.
2. Developmental Functions:
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These functions are performed by the SEBI to promote and develop activities in stock
exchange and increase the business in stock exchange. Under developmental categories
following functions are performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:
(a) SEBI has permitted internet trading through registered stock brokers.
5. (b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange. To
regulate the activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate the
intermediaries such as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private
placement has been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer
agents, trustees, merchant bankers and all those who are associated with stock exchange
in any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.

Powers of SEBI

The important powers of SEBI (Securities and Exchange Board of India) are:-

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Powers relating to stock exchanges & intermediaries

SEBI has wide powers regarding the stock exchanges and intermediaries dealing in securities. It
can ask information from the stock exchanges and intermediaries regarding their business
transactions for inspection or scrutiny and other purpose.

2. Power to impose monetary penalties

SEBI has been empowered to impose monetary penalties on capital market intermediaries and
other participants for a range of violations. It can even impose suspension of their registration for
a short period.

3. Power to initiate actions in functions assigned

SEBI has a power to initiate actions in regard to functions assigned. For example, it can issue
guidelines to different intermediaries or can introduce specific rules for the protection of interests
of investors.

4. Power to regulate insider trading

SEBI has power to regulate insider trading or can regulate the functions of merchant bankers.

6. Powers under Securities Contracts Act

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For effective regulation of stock exchange, the Ministry of Finance issued a Notification on 13
September, 1994 delegating several of its powers under the Securities Contracts (Regulations)
Act to SEBI.
SEBI is also empowered by the Finance Ministry to nominate three members on the Governing
Body of every stock exchange.

6. Power to regulate business of stock exchanges

SEBI is also empowered to regulate the business of stock exchanges, intermediaries associated
with the securities market as well as mutual funds, fraudulent and unfair trade practices relating
to securities and regulation of acquisition of shares and takeovers of companies.

Limitations of SEBI
The Central Government has authorized SEBI to frame its rules and regulation for actively
monitoring capital markets. These rules and regulations will have to be approved by the
government first.This will cause unnecessary delay and interference by the Finance
Minister.
SEBI will have to seek prior approval for filling criminal complaints for violations for the
regulations. This will again cause delay at government level.
SEBI has not been given autonomy. Its Board of Directors is dominated by government
nominees. Out of 5 directors only 2 can be from outside and these are to represent the
Ministries of Finance, Law and Reserve Bank of India.

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ROLE OF BOARD OF DIREECTORS

MEANING
A board of directors is a body of elected or appointed members who jointly oversee the
activities of a company or organization. Other names include board of governors, board of
managers, board of regents, board of trustees, and board of visitors. It is often simply
referred to as "the board".
A board's activities are determined by the powers, duties, and responsibilities delegated to it or
conferred on it by an authority outside itself. These matters are typically detailed in the
organization's bylaws. The bylaws commonly also specify the number of members of the board,
how they are to be chosen, and when they are to meet. However, these bylaws rarely address a
board's powers when faced with a corporate turnaround or restructuring, where board members
need to act as agents of change in addition to their traditional fiduciary responsibilities.
In an organization with voting members, the board acts on behalf of, and is subordinate to, the
organization's full group, which usually chooses the members of the board. In a stock
corporation, the board is elected by the shareholders and is the highest authority in the
management of the corporation. In a non-stock corporation with no general voting membership,
the board is the supreme governing body of the institution; its members are sometimes chosen by
the board itself.

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Purpose of a Board of Directors

General Purpose
Nonprofits endeavor to represent the public's best interests, and whether they focus on issues
such as health, education, social welfare or global humanitarian outreach, the primary purposes
of the board of directors is to ensure the organization is on track with regard to meeting its goals,
as well as to craft policies in support of those goals. Nonprofit organizations are operated by two
distinct groups: the board of directors, which determines policies and plans, and the organization
staff, which carries out plans and implements policies.
Hiring the Top Executive
As most boards are focused on big-picture issues with an eye toward the future, and the staff is
more closely focused on day-to-day operations, a liaison is necessary to serve as a
communication bridge between the two groups. Therefore, one of the board's key responsibilities
is to hire a top executive to serve as organization president, director or chairperson.
The top executive assists the board in developing and then disseminating plans and policies to
the organization's staff, ensures the staff understands and carries out planning directives and
brings staff ideas or concerns to the board's attention. Also, the top executive handles duties such
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as interacting with the public to promote the organization, reporting on its progress, conducting
interviews and participating in fund-raising activities.
Strategic Planning
Tasked with determining and promoting the organization's public-service goals, the board of
directors also engages in active strategic planning to achieve those goals. This function is so
crucial that many boards actively seek to recruit board members with a variety of planning
expertise who not only can bring their know-how to the table, but also share it with other board
members. To move the organization forward, every member must participate in planning for its
current and future success, as well as be in agreement when it comes to strategic organizational
planning.
Since the staff must carry out the plans set forth by the board of directors, the top executive
usually is also present at all planning meetings. His more "ground floor" insights can be
invaluable when creating organizational plans, and he can then instruct his staff on the
implementation of any plans determined by the board.
Policy Development, Oversight and Management
Another purpose of the board of directors is to develop the organization's policies, as well as to
provide oversight and management of the organization, typically in conjunction with the top
executive. Some common policies the board will need to decide on and implement include terms
of service, the approval process and chains of command.
Among the most important policies the board of directors for any company, organization or
group must set forth is the frequency and scheduling of their meetings, followed by what the
board's degree of involvement with the organization will be. Since the board members for
nonprofit organizations perform their duties on a voluntary basis, these considerations are
especially important to govern and maintain the organization effectively.
Budgeting

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Financial matters are of utmost concern to a nonprofit, which primarily relies on voluntary
donations to fund its efforts. The board of directors must determine how to budget and disperse
these funds in such a manner that supports their overarching missions. Amnesty International, for
example, focuses on eliminating human rights abuses across the globe. The board must,
therefore, include such tasks as advertising and public relations to elevate global awareness of
Amnesty International's goals and raise funds -- as well as more basic needs like staff payment
and administrative costs, when crafting the budget. These expenditures are necessary for almost
every nonprofit, so budget oversight is crucial.
Fund-Raising
Fund-raising is crucial to the survival of all nonprofit organizations, as charitable gifts are their
lifeblood. Therefore, everyone serving on the board must be involved in raising monies in some
fashion. Organizations like the International Red Cross and Red Crescent, which seeks to provide
international humanitarian outreach and health assistance, uses marketing and advertising, oneon-one engagement, publicity and their volunteer workforce to raise funds.

POWERS OF BOD
The Board of Directors of a company shall be entitled to exercise all such
powers, and to do all such acts and things, as the company is authorised to exercise and
do:
Provided that in exercising such power or doing such act or thing, the Board shall be
subject to the provisions contained in that behalf in this Act, or in the memorandum or
articles, or in any regulations not inconsistent therewith and duly made thereunder,
including
regulations made by the company in general meeting:
Provided further that the Board shall not exercise any power or do any act or thing
which is directed or required, whether under this Act or by the memorandum or articles of
the
company or otherwise, to be exercised or done by the company in general meeting.
(2) No regulation made by the company in general meeting shall invalidate any prior
act of the Board which would have been valid if that regulation had not been made.
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(3) The Board of Directors of a company shall exercise the following powers on behalf
of the company by means of resolutions passed at meetings of the Board, namely:
(a) To make calls on shareholders in respect of money unpaid on their shares;
(b) To authorise buy-back of securities under section 68;
(c) To issue securities, including debentures, whether in or outside India;
(d) To borrow monies;
(e) To invest the funds of the company;
(f) To grant loans or give guarantee or provide security in respect of loans;
(g) To approve financial statement and the Boards report;
(h) To diversify the business of the company;
(i) To approve amalgamation, merger or reconstruction;
(j) To take over a company or acquire a controlling or substantial stake in another
company;
(k) Any other matter which may be prescribed:
Provided that the Board may, by a resolution passed at a meeting, delegate to any
committee of directors, the managing director, the manager or any other principal officer
of the company or in the case of a branch office of the company, the principal officer of
the branch office, the powers specified in clauses (d) to (f) on such conditions as it may
specify:
Provided further that the acceptance by a banking company in the ordinary course of
its business of deposits of money from the public repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise, or the placing of monies on deposit by
a banking company with another banking company on such conditions as the Board may
prescribe, shall not be deemed to be a borrowing of monies or, as the case may be, a
making of loans by a banking company within the meaning of this section.
Explanation I.Nothing in clause (d) shall apply to borrowings by a banking company
from other banking companies or from the Reserve Bank of India, the State Bank of India
or any other banks established by or under any Act.
Explanation II.In respect of dealings between a company and its bankers, the exercise
by the company of the power specified in clause (d) shall mean the arrangement made by
the company with its bankers for the borrowing of money by way of overdraft or cash
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credit or otherwise and not the actual day-to-day operation on overdraft, cash credit or
other accounts
by means of which the arrangement so made is actually availed of.
(4) Nothing in this section shall be deemed to affect the right of the company in general
meeting to impose restrictions and conditions on the exercise by the Board of any of the
powers specified in this section.

Duties and Responsibilities

Under the Company Law, the Board of Directors is under obligation to, among other things:
a. Deliver an annual report (that includes the financial statement of the Company) after it
has been examined by the Board of Commissioners to the General Meeting of
Shareholders within 6 months the end of the Company's financial year;
b. Prepare a business plan (that includes an annual budget plan) for the next financial year
prior to the commencement of the next financial year and submit the business plan to the
Board of Commissioners or General Meeting of Shareholders of the Company as
regulated in the Articles of Association of the Company;
c. Prepare and maintain a Register of Shareholders of the Company and a Special Register
containing information on the share ownership in the company and/or other companies of
members of the Board of Directors and the Board of Commissioners and their immediate
family members;
d. Archive the resolutions of the Shareholders and Board of Directors of the Company and
all other corporate documents;
e. Obtain approval from the General Meeting of Shareholders for the transfer or the
encumbrance of more than 50% of the total assets of the Company in one or more
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transactions, whether related or not, in one or more financial years as regulated in the
Articles of Association of the Company;
f. Hold a General Meeting of Shareholders (including to send invitations or summons to the
shareholders) either annually or extraordinary as necessary or requested by certain
Shareholders, Commissioners or Directors of the Company as regulated in the Articles of
Association of the Company;
g. Notify the Minister of Law and Human Rights (the "MLHR") of any change to the
composition of the Boards of Directors or Commissioners of the Company within 30
days as of the date of the resolution of the General Meeting of Shareholders with regard
to the change;
h. Record any transfer of shares (or encumbrance of shares) in the Company in the
Company Register and notify the MLHR regarding the change of the shareholders within
30 days as of the date of the transfer of shares;
i. Notify the creditors of the Company if there is a reduction in the capital of the Company
in at least one newspaper within 7 days of the resolution of the General Meeting of
Shareholders regarding the reduction.
Also, in certain transactions such as the merger, acquisition, consolidation, segregation or
dissolution of the Company, the Board of Directors also has a number of obligations regarding
the transaction, such as to prepare the transaction plan, announce the proposed transaction in the
newspapers, or act as the liquidator in the dissolution of the Company.

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CORPORATE SOCIAL RESPONSIBILITY

MEANING
A companys sense of responsibility towards the community and environment (both ecological
and social) in which it operates. Companies express this citizenship through their waste and
pollution reduction processes, by contributing educational and social programs, and by earning
adequate returns on the employed resources...

DEFINITION
[Carroll, 1979; 2008, 500]: "The social responsibility of business encompasses the economic,
legal, ethical and discretionary expectations that a society has of organizations at a given point in
time."
EU Definition of CSR: "A concept whereby companies integrate social and environmental
concerns in their business operations and in their interaction with their stakeholders on a
voluntary basis."
Mallenbaker Definition: "CSR is about how companies manage the business processes to
produce an overall positive impact on society"
The World Business Council for Sustainable Development (WBCSD): "Corporate Social
Responsibility is the continuing commitment by business to behave ethically and contribute to
economic development while improving the quality of life of the workforce and their families as
well as of the local community and society at large".

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FEATURES OF CSR
Corporate Social Responsibility shows these basic features :

Intentional, proactive and voluntary activities

All beyond the duties defined by law

Suitable for all types of companies / organizations

Win-win princip ( beneficial effect for all involved parties )

Complexity and transparency

Continuity

Ability to start whenever and quite quickly even without vast budgets

Long-term

Profitable investment ( not vasting money )

Credibility

Dialogue with identifies stakeholders and much more.

Principle 10 - Businesses should work against corruption in all its forms, including extortion and
bribery.

Types of Corporate Social Responsibility

The idea behind corporate social responsibility is that companies have multiple responsibilities to
maintain. These responsibilities can be arranged in a pyramid, with basic responsibilities closer
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to the bottom. As a business meets lower-level responsibilities that obligate it to shareholders and
the law, it can move on to the higher level responsibilities that benefit society.
Economic Responsibilities
A company's first responsibility is its economic responsibility -- that is to say, a company needs
to be primarily concerned with turning a profit. This is for the simple fact that if a company does
not make money, it won't last, employees will lose jobs and the company won't even be able to
think about taking care of its social responsibilities. Before a company thinks about being a good
corporate citizen, it first needs to make sure that it can be profitable.
Legal Responsibilities
A company's legal responsibilities are the requirements that are placed on it by the law. Next to
ensuring that company is profitable, ensuring that it obeys all laws is the most important
responsibility, according to the theory of corporate social responsibility. Legal responsibilities
can range from securities regulations to labor law, environmental law and even criminal law.
Ethical Responsibilities
Economic and legal responsibilities are the two big obligations of a company. After a company
has met these basic requirements, a company can concern itself with ethical responsibilities.
Ethical responsibilities are responsibilities that a company puts on itself because its owners
believe it's the right thing to do -- not because they have an obligation to do so. Ethical
responsibilities could include being environmentally friendly, paying fair wages or refusing to do
business with oppressive countries, for example.
Philanthropic Responsibilities
If a company is able to meet all of its other responsibilities, it can begin meeting philanthropic
responsibilities. Philanthropic responsibilities are responsibilities that go above and beyond what
is simply required or what the company believes is right. They involve making an effort to
benefit society -- for example, by donating services to community organizations, engaging in
projects to aid the environment or donating money to charitable causes.
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Envirinmental issues
Environmental issues are harmful effects of human activity on the biophysical environment.
Environmentalism, a social and environmental movement, addresses environmental issues
through advocacy, education and activism.

Environmental Problems
Our environment is constantly changing. There is no denying that. However, as our environment
changes, so does the need to become increasingly aware of the problems that surround it. With a
massive influx of natural disasters, warming and cooling periods, different types of weather
patterns and much more, people need to be aware of what types of environmental problems our
planet is facing.
Global warming has become an undisputed fact about our current livelihoods; our planet is
warming up and we are definitely part of the problem. However, this isnt the only
environmental problem that we should be concerned about. All across the world, people are
facing a wealth of new and challenging environmental problems every day. Some of them are
small and only affect a few ecosystems, but others are drastically changing the landscape of what
we already know.
Our planet is poised at the brink of a severe environmental crisis. Current environmental
problems make us vulnerable to disasters and tragedies, now and in the future. We are in a state
of planetary emergency, with environmental problems piling up high around us. Unless we
address the various issues prudently and seriously we are surely doomed for disaster. Current
environmental problems require urgent attention.

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Major Current Environmental Problems

1. Pollution: Pollution of air, water and soil require millions of years to recoup. Industry and
motor vehicle exhaust are the number one pollutants. Heavy metals, nitrates and plastic are
toxins responsible for pollution. While water pollution is caused by oil spill, acid rain, urban
runoff; air pollution is caused by various gases and toxins released by industries and factories
and combustion of fossil fuels; soil pollution is majorly caused by industrial waste that deprives
soil from essential nutrients.
2. Global Warming: Climate changes like global warming is the result of human practices like
emission of Greenhouse gases. Global warming leads to rising temperatures of the oceans and
the earth surface causing melting of polar ice caps, rise in sea levels and also unnatural patterns
of precipitation such as flash floods, excessive snow or desertification.
3. Overpopulation: The population of the planet is reaching unsustainable levels as it faces
shortage of resources like water, fuel and food. Population explosion in less developed and
developing countries is straining the already scarce resources. Intensive agriculture practiced to
produce food damages the environment through use of chemical fertilizer, pesticides and
insecticides. Overpopulation is one of the crucial current environmental problem.
4. Natural Resource Depletion: Natural resource depletion is another crucial current
environmental problems. Fossil fuel consumption results in emission of Greenhouse gases,
which is responsible for global warming and climate change. Globally, people are taking efforts
to shift to renewable sources of energy like solar, wind, biogas and geothermal energy. The cost
of installing the infrastructure and maintaining these sources has plummeted in the recent years.
24

5. Waste Disposal: The over consumption of resources and creation of plastics are creating a
global crisis of waste disposal. Developed countries are notorious for producing an excessive
amount of waste or garbage and dumping their waste in the oceans and, less developed countries.
Nuclear waste disposal has tremendous health hazards associated with it. Plastic, fast food,
packaging and cheap electronic wastes threaten the well being of humans. Waste disposal is one
of urgent current environmental problem.
6. Climate Change: Climate change is yet another environmental problem that has surfaced in
last couple of decades. It occurs due to rise in global warming which occurs due to increase in
temperature of atmosphere by burning of fossil fuels and release of harmful gases by industries.
Climate change has various harmful effects but not limited to melting of polar ice, change in
seasons, occurrence of new diseases, frequent occurrence of floods and change in overall
weather scenario.
7. Loss of Biodiversity: Human activity is leading to the extinction of species and habitats and
and loss of bio-diversity. Eco systems, which took millions of years to perfect, are in danger
when any species population is decimating. Balance of natural processes like pollination is
crucial to the survival of the eco-system and human activity threatens the same. Another example
is the destruction of coral reefs in the various oceans, which support the rich marine life.
8. Deforestation: Our forests are natural sinks of carbon dioxide and produce fresh oxygen as
well as helps in regulating temperature and rainfall. At present forests cover 30% of the land but
every year tree cover is lost amounting to the country of Panama due to growing population
demand for more food, shelter and cloth. Deforestation simply means clearing of green cover and
make that land available for residential, industrial or commercial purpose.
issues and health issues. The ever growing demand of land displaces natural environment
consisting of flora and fauna instead of being replaced.

Benefits Of CSR
Win new business
25

 Increase customer retention

Develop and enhance relationships with customers, suppliers and networks
Attract, retain and maintain a happy workforce and be an Employer of Choice
Save money on energy and operating costs and manage risk
Differentiate yourself from your competitors
Generate innovation and learning and enhance your influence
Improve your business reputation and standing
Provide access to investment and funding opportunities
Generate positive publicity and media opportunities due to media interest in ethical
business activities.

Disadvantages Of CSR
Corporate Social Responsibility calls for organizations to consider the companys impact on
society and the environment as they conduct business. Though noble in principle and profitable
in some industries, CSR has a number of detractors who point out the disadvantages of
implementing socially responsible practices.
Shareholder Interests
Corporate social responsibility often requires changes to a number of processes, as well as
increased reporting. In many cases, businesses hire additional personnel to manage CSR
initiatives. These actions come at a cost, and opponents point out that the money spent on CSR
comes directly from shareholders pockets. Former investment banker and current Tulane
University professor Elaine Sternberg, one of the most vocal opponents of the effects of CSR on
shareholder profits, points out that CSR initiatives incur great cost with little measurable return.
Corporate Reputation
26

While many businesses undertake CSR initiatives with the intent of bolstering their public
images, these initiatives can sometimes require a company to release information that has an
opposite effect. In 2003, for example, Coca-Cola released a damaging report about chemicals
found in its products as part of its CSR initiative. This report had an immediate short-term
negative effects on the company's revenue, according to a peer-reviewed article published in the
Utrecht Law Review, with sales dropping 40 percent in the two-week period following the
report.
Customer Cynicism
Some businesses recognize that socially responsible behavior has a positive effect on their
customers opinions of the organization. After years of hearing how their favorite businesses care
about society and the environment, but seeing little obvious involvement from these
organizations, many customers have grown cynical of CSR reports. According to business
watchdog agency CorporateWatch.org, consumers often see CSR announcements as little more
than PR initiatives. For this reason, businesses often face a considerable obstacle convincing
their customers that their actions match their stated intentions.
Competitive Disadvantages
Corporate social responsibility projects and initiatives require a shift in thinking for many
businesses, and some CSR processes can make the some CSR processes can make the business
more cumbersome to operate. Wal-Mart subjects its suppliers to strict regulations on product
quality and employee working conditions, for example, which add production time and increase
overhead for the suppliers.

27

Teachings from scripture and Tradition!

INTRODUCTION
India is a country of high values and ethics. It is a land where people of all religion and
culture ,with difference in language, beliefs, social background stay together. We see that various
scripture written by great men of ancient time, of all the religious backgrounds, speak more or
less of the same concept. All scriptures are inspired by God and are useful for teaching, for
refutation, for correction, and for training in righteousness, so that one who belongs to God may
be competent , equipped for every work.
WHAT THE BIBLE REALLY MEANS

Bible from Greek biblia meaning book(s)

Has a lot to contribute to the teaching in management.

Enables people to live according to Gods will.

Over 40 human authors.

Not a history book or scientific book.

TEACHINGS OF THE BIBLE ON MANAGEMENT

28

Teaching of the bible on management are as follows :

STRESS MANAGEMENT

TIME MANAGEMEMT

Stress Management:
It teaches and tries to bring tension down to a controllable size. It focuses on the following
areas to manage stress at work :

ENVIRONMEN
T

IMAGINE
D
THREAT

MENTAL
OUTLOOK

WRONG

PERCEPTIONS

The following areas to manage stress at work:

a) Environment: when people interact with environment variables in the social, physical
and spiritual world, they may get stressed up.
29

b) Mental Outlook: People develop attitude, beliefs and values over a period of time which
they use to interpret events in their social and spiritual environment.
c) Wrong Perceptions: sometimes employees develop notions about what their superiors think
of them.
d)

Imagined Threat: Many workers have threats of insecurity in their minds.

This threats can be overcome in the following ways:

People should write down the imaginary threats on paper and save it for three to four
months.

For every what if situation, there is a so what solution. People should ask themselves
what if the boss scold me and look for answer like so what.

Change towards outlook on life and faith in God help to make people happy and patient.

TIME MANAGEMENT:
The Bible is an important source for teaching techniques for time management. Some of the
issues involved in time management are:
M
P
F
D
R
a
r
o
e
lik
c
li
e
o
n
o
g
r
d
ig
w
a
t
a
is
s
c
o
il
h
n
i
n
e
s
g
d
u
t
lt
o
h
e
f
e
s

a
t
&
c
a
t
s
i
k
a
v
s
r
i
g
t
e
i
t
e
d
s
a
t
e
s

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RAMAYANA

INTRODUCTION
There are number of books, Journals and articles available, which talks about various
management theories. They focused management as a Science and an Art of life.
But the way before modern days management gurus gave their theories, principles and
concepts of management the great writers like Tulsidas, Valmiki had explained them in the
ancient Hindu epic Ramayana.
CONCEPT
Ramayana, the great epics of India, have captivated the hearts of its people for several
millennia.
Is an ancient Sanskrit epic attributed to the poet Valmiki and is an important part of the
Hindu canon.
The name Ramayana is a tatpurusa compound of Rama and Yana going, advancing
,translating to the ravels of Rama.
The Ramayana consist of 24000 verses in seven cantos and tell the story of a Prince,
Rama Of Ayodhya, whose wife Sita was abducted by the demon king of Lanka, Ravana.

31

PROBLEMS

At the time when Rama, Lakshman and Sita banished to forest unfortunately Sita was
kidnapped by Ravana.

OBJECTIVE
The challenge for Lord Rama how he defeats
Ravana and gets back his wife Sita with the help of Vanar sena
Teaching from Ramayana

Is a Hindu epic which was set in the Tretayug.

Is a tale of good vs. evil.

Is concerned with right actions and their consequences.

The duties and responsibility of each others relationships.

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RAMAYANA lessons
I
C
T
L
E
O
N
M
A
Y
N
D
M
A
O
E
U
L
V
R
N
W
T
A
S
I
O
Y
T
H
C
R
I
I
A
K
O
P
T
N
I
O
&
N
M
P
O
O
T
W
I
E
V
A
R
T
I
O
N

CONCLUSION
Never make promise, once you make promise never break it.
Leadership, Communication power, Team work, Innovation, Devotion & Loyalty.
33

 Never step back to avoid risk because you cant avoid them. But take them as challenges
they make you strong.
Appreciate people for their work whether it is small or large. You need not pay anything
to talk good to somebody.

VALUE AND VALUE SYSTEM

A personal value is an individual's absolute or relative and ethical value, the assumption of
which can be the basis for ethical action. A value system is a set of consistent values and
measures. A principle value is a foundation upon which other values and measures of integrity
are based.
Some values are physiologically determined and are normally considered objective, such as a
desire to avoid physical pain or to seek pleasure. Other values are considered subjective, vary
across individuals and cultures, and are in many ways aligned with belief and belief systems.
Types of values include ethical/moral values, doctrinal/ideological (religious, political) values,
social values, and aesthetic values. It is debated whether some values that are not clearly
physiologically determined, such as altruism, are intrinsic, and whether some, such as
acquisitiveness, should be classified as vices or virtues. Values have been studied in various
disciplines: anthropology, behavioral economics, business ethics, corporate governance, moral
philosophy, political sciences, social psychology, sociology and theology to name a few.

34

Values can be defined as broad preferences concerning appropriate courses of action or

outcomes. As such, values reflect a person's sense of right and wrong or what "ought" to be.
"Equal rights for all", "Excellence deserves admiration", and "People should be treated with
respect and dignity" are representative of values. Values tend to influence attitudes and behavior.

Characteristics:
Values may be specific, such as honouring ones parents or owning a home or they may be more
general, such as health, love and democracy. Truth prevails, love thy neighbour as yourself,
learning is good as ends itself are a few examples of general values. Individual achievement,
individual happiness and materialism are major values of modern industrial society.
Value systems can be different from culture to culture. One may value aggressiveness and
deplores passivity, another the reverse, and a third gives little attention to this dimension
altogether, emphasising instead the virtue of sobriety over emotionality, which may be quite
unimportant in either of the other cultures. This point has very aptly been explored and explained
by Florence Kluchkhon (1949) in her studies of five small communities (tribes) of the American
south-west. One society may value individual achievement (as in USA), another may emphasise
family unity and kin support (as in India). The values of hard work and individual achievement
are often associated with industrial capitalist societies.
The values of a culture may change, but most remain stable during one persons lifetime.
Socially shared, intensely felt values are a fundamental part of our lives. Values are often
emotionally charged because they stand for things we believe to be worth defending. Often, this
characteristic of values brings conflict between different communities or societies or sometimes
between different persons.
Most of our basic values are learnt early in life from family, friends, neighbourhood, school, the
mass print and visual media and other sources within society. These values become part of our
personalities. They are generally shared and reinforced by those with whom we interact.

Types:
Values can be classified into two broad categories:
35

(1) Individual values:

These are the values which are related with the development of human personality or individual
norms of recognition and protection of the human personality such as honesty, loyalty, veracity
and honour.
(2) Collective values:
Values connected with the solidarity of the community or collective norms of equality, justice,
solidarity and sociableness are known as collective values.
Values can also be categorised from the point of view their hierarchical arrangement:
(1) Intrinsic values:
These are the values which are related with goals of life. They are sometimes known as ultimate
and transcendent values. They determine the schemata of human rights and duties and of human
virtues. In the hierarchy of values, they occupy the highest place and superior to all other values
of life.
(2) Instrumental values:
These values come after the intrinsic values in the scheme of gradation of values. These values
are means to achieve goals (intrinsic values) of life. They are also known as incidental or
proximate values.

Importance and functions of values:

Values are general principles to regulate our day-to-day behaviour. They not only give direction
to our behaviour but are also ideals and objectives in themselves. Values deal not so much with
what is, but with what ought to be; in other words, they express moral imperatives. They are the
expression of the ultimate ends, goals or purposes of social action. Our values are the basis of
our judgments about what is desirable, beautiful, proper, correct, important, worthwhile and good
as well as what is undesirable, ugly, incorrect, improper and bad. Pioneer sociologist Durkheim
emphasised the importance of values (though he used the term morals) in controlling disruptive
individual passions.
36

He also stressed that values enable individuals to feel that they are part of something bigger than
themselves. Modem sociologist E. Shils (1972) also makes the same point and calls the central
value system (the main values of society) are seen as essential in creating conformity and order.
Indian sociologist R.K. Mukerjee (1949) writes: By their nature, all human relations and
behaviour are imbedded in values.

The main functions of values are as follows:

1. Values play an important role in the integration and fulfillment of mans basic impulses and
desires in a stable and consistent manner appropriate for his living.
2. They are generic experiences in social action made up of both individual and social responses
and attitudes.
3. They build up societies, integrate social relations.
4. They mould the ideal dimensions of personality and range and depth of culture.
5. They influence peoples behaviour and serve as criteria for evaluating the actions of others.
6. They have a great role to play in the conduct of social life.
7. They help in creating norms to guide day-to-day behaviour.

Factor Affecting Values

1. Instituions : There are various institutions in the society which inculcate values in an
individual like :
Family
Religious institution, schools, state, cultural, and social institutions.

37

These institutions inculcate values in an individual and influence his life in taking decisions
of what is right or wrong : whom to be rewarded for good behaviour and whom to be punished
for bad behaviour .
2. Personal Factors : Personal attributes such as ability, intelligence, education level and
other aspects also determine an individuals values. For example, if one is intelligent. It
may result in faster understanding of values
3. Situational Factors : Situations are unforeseen and an individual changes his values as the
situation demands. For Example, A person who faces the threat of loosing a job many
commit unethical acts to save his job.
Developing Value System In An Organisation
A value system is a protocol for behaviour that enhances trust, confidence, and
commitment of members of the community. It goes beyond the domain of legality. It
is about decent and desirable behaviour.
However, this value system is eroding in the contemporary business. It can be seen
from the following observations :
1. Accountability : Indian managers are less accountable as compared to managers
of the west. In west, managers are held accountable for whatever they do but in
india, they are less accountable even if they are in a good position.
2. Trend towards individualism : There is a trend individualism and comparatively
less sensitive and less socially responsible attitude of people. Corruption ,
cheating and bribery have eaten of system. For Example, contractors bribe
officials and construct low-quality roads and bridges.

38

CREDIT RATING AGENCIES

MEANING
Credit rating agency is also called rating service. It is a company that assigns
credit rating , which rate a debtors ability to pay back debt by making timely
interest payments and the likelihood of default . An agency may rate
creditworthiness of issuer of debt obligations, of debt instruments and in some cases,
of the services of underlying debt, but not of individual consumers. A credit rating
facilitate the trading of securities on a secondary market. It effects the interest rate
that are securities pays out ,with higher rating leading to lower interest rates.

ROLE IN CAPITAL MARKETS

Credit rating agencies access the relative credit risk of specific debt securities are
structured finance instruments and borrowing entities, and in some cases the
creditworthiness of the governments and their securities. By serving as information
intermediaries, CRAs theoretically reduce information costs, increase the pool of
potential borrowers, and promote liquid markets. These functions may increase the
supply of available risk capital in the market and promote its economic growth .

Big Credit Rating Agencies .

1. Standard & Poor
2. Moodys
3. Fitch Group
STANDARD & POORS
Standard poors financial services is an American financial services
company. It is a division of McGraw Hill Financial that publishes financial
research and analysis stocks and bonds. It was founded in 1860 by Henry
Varnum poor. Its headquarters are new York city & US. The revenue of the
company was $2.61 billion us$ in 2009.

Key Attributes Of Standard & Poor's Credit Ratings

Rank ordering of creditworthiness :Standard & Poor's credit ratings express

forward-looking opinions about the creditworthiness of issuers and obligations

Primary factor -- likelihood of default: In our view, likelihood of default is the
centerpiece of creditworthiness. That means likelihood of default--encompassing

39

both capacity and willingness to pay--is the single most important factor in our
assessment of the creditworthiness of an issuer or an obligation.

Secondary factors :

Standard & Poor's credit ratings are forward-looking. That is, they express opinions
about the future. Indeed, the issue that they address -- credit quality -- is at its core
future-oriented. Ratings at the lower end of the rating scale reflect our view as to the
rated entity's vulnerability to cyclical fluctuations and, accordingly, generally
address shorter time horizons and may reflect specific economic forecasts and
projections. Conversely, ratings at the higher end of the rating scale generally
address longer time horizons and are usually less reflective of forecasts or
projections of what is likely to occur in the near term. Instead, they reflect greater
emphasis of our view as to what might occur in unlikely future scenarios.

HOW S&P MANAGES POTENTIAL CONFLICTS OF

INTEREST

A clear separation of function between those who negotiate the business terms for
rating assignment and the analysts who conduct the credit rating analysis and
provide the rating opinion.
Another safeguards is the committee process that limits the influence any
single person can have on S&P rating opinion. The role of committee is to
review and assess the analysts recommendation for a new rating as well as
to provide additional perspectives and checks .

PROCESS OF S&P RATINGS

Contract : The issuer requests a rating and signs an engagement letter.

Pre-evaluation: S&P assembles a team of analyst to review pertinent information.
Management meeting: analysts meet with management team to review and

Analysis: analysts evaluate information and propose the rating to rating committee.
Rating committee: the committee meets to review and discuss including the full

analysis and rating rationale, and then vote on credit rating.

Notification: S&P may allow an appeal only if the issuer can provide new and

significant information to support a potentially default rating conclusion.

Publication: S&P typically publish a press release announcing the rating and posts .

Role and Function of Credit Rating Agencies

Standard & Poor's credit ratings are based principally on public information about
an issuer and additional information that may be provided by the issuer, as well as
40

other economic, financial and industry information that rating analysts deem
relevant and reliable. Standard & Poor's credit ratings necessarily embody
assessments of future potential performance. However, since events occur that are
unforeseeable or simply unknowable, Standard & Poor's regularly reviews its
analyses. Once assigned, a credit rating is subject to ongoing review, or surveillance,
and could be changed at any time based on newly available information. Credit
ratings may also be suspended or withdrawn because of changes in the
completeness, availability or reliability of information

MODELS OF CORPORATEGOVERNANCE
1. ANGLO AMERICAN MODEL
2. GERMAN MODEL

INTRODUCTION TO ANGLO AMERICAN

This is also known as unitary board model, in which all directors participate in a
single board comprising both executive and non-executive directors in varying
proportions. This approach to governance tends to be shareholder-oriented. It is
also called the AngloSaxon approach to corporate governance, being the basis of
corporate governance in America, Britain, Canada, Australia and other
commonwealth countries including India.

FEATURES OF ANGLO AMERICAN

Ownership is equally divided between individual and institutional shareholders.

Directors are rarely independent of management.
41

Run by professional managers who have negligible ownership stake.

Most institutional investors are reluctant activists
Disclosure norms.

SEPARATION OF OWNERSHIP AND CONTROL

SOEs and widely held publicly traded companies typically separate management and
ownership.

The professional managers and the shareholders have conflicts of interest.

This raises the possibility that ownership and management may not be perfectly aligned
in their business and financial objectives, the so called agency problem arises .
The Goal of Management

Maximization of shareholders wealth is the dominant goal of management in the

Anglo-American world.

There are basic differences in corporate and investor philosophies globally.

Cultural influence has a bearing on MNEs behavior .

42

Shareholder Wealth Maximization

In a Shareholder Wealth Maximization model (SWM), a firm should strive to maximize

the return to shareholders

Max (market capitalization + dividend

payment)

Alternatively, the firm should minimize the level of risk to shareholders for a given rate
of return.

Good Corporate Governance

The objective of corporate governance is the optimization over time of the returns to
shareholders.

The board of directors of the corporation should focus their on developing and
implementing a strategy that ensures corporate growth and improvement in the
value of the corporations equity.
43

Good corporate governance practices should: (the so called OECD rule)

protect shareholders rights.

ensure the equitable treatment of all shareholders.

Stakeholders should be involved in corporate governance. Local government,

labor union, etc

Disclosure and transparency is critical.

The board of directors should be monitored and held accountable

Key Players in the Anglo-US Model.

Players in the Anglo-US model include management, directors, shareholders (especially

institutional

investors),

government

agencies,

stock

exchanges,

self-regulatory

organizations and consulting firms which advise corporations and/or shareholders on

corporate governance and proxy voting. Of these, the three major players are
management, directors and shareholders. They form what is commonly referred to as the
"corporate governance triangle."
Composition of the Board of Directors in the Anglo-US Model

The board of directors of most corporations that follow the Anglo-US model includes
both insiders and outsiders. An insider is as a person who is either employed
by the corporation (an executive, manager or employee) or who has significant personal
or business relationships with corporate management. An outsider is a person or
institution which has no direct relationship with the corporation or corporate
management .A synonym for insider is executive director; a synonym for outsider is
non-executive director or independent director.

44

GERMAN MODEL OF CORPORATE GOVERNANCE

Two tier board model

Upper board supervises the executive board on behalf of stakeholders and its typically
social oriented.

Shareholder do not dictate the governance mechanism.

Shareholder elect 50% members of the supervisory board and rest is by labor unions,
ensuring they enjoy share in governance.

Supervisory board appoints and monitors the management board.

Key Players in the German Model

German banks, and to a lesser extent, corporate shareholders, are the key players in
the German corporate governance system. Banks usually play a multi-faceted role as
shareholder, lender, issuer of both equity and debt, depository (custodian bank) and
voting agent at AGMs. In 1990, the three largest German banks (Deutsche Bank AG
Dresdner Bank AG and Commerce bank AG) held seats on the supervisory boards of 85
of the 100 largest German corporations. In Germany, corporations are also shareholders,
sometimes holding long-term stakes in other corporations, even where there is no
industrial or commercial affiliation between the two. This is somewhat similar, but not
parallel, to the Japanese model, yet very different from the Anglo-US model where
neither banks nor corporations are key institutional investors .
TWO TIER BOARD

45

Share Ownership Pattern in the German Model

German banks and corporations are the dominant shareholders in Germany. In 1990,
corporations held 41 percent of the German equity market, and institutional owners
(primarily banks) held 27 percent. Neither institutional agents, such as pension funds
(three percent) or individual owners (four percent) are significant in Germany. Foreign
investors held 19 percent in 1990, and their impact on the German corporate governance
system is increasing.
Composition of the Management Board

German corporations are governed by a supervisory board and a management board. The
supervisory board appoints and dismisses the management board, approves major
management decisions; and advises the management board. The supervisory board
usually meets once a month. The management board is responsible for daily management
of the company. The management board is composed solely of insiders, or executives.
The supervisory board contains no insiders, it is composed of labor/employee
representatives and shareholder

representatives.

46

The numbers of members of the

supervisory board is set by law. In small corporations shareholders elect the entire
supervisory board. In medium-size corporations employees elect one-third of a nine
member supervisory board. In larger corporations, employees elect one-half of a 20member supervisory board.

JAPANESE MODEL

The Japanese model is characterized by a high level of stock ownership by affiliated

banks and companies
a banking system characterized by strong, long-term links between banks and
corporation A legal, public policy and industrial policy framework designed to support
and promote "keiretsu"
BOD composed of solely insiders and comparatively low(in some corp., nonexistent)level of input of outside shareholders

47

 Equity Financing is important for Japanese Corporations

Insiders and their affiliates are the major shareholders in most Japanese corporations.

KEY PLAYERS
The Japanese system of Corporate Governance is many-sided, centering around a main
bank and a financial/industrial network or keiretsu
The bank provides its corporate clients with loans as well as services related to bond
issues, equity issues, settlement accounts and related consulting services.
The main bank is generally a major shareholder in the corporation.
In the US, Anti-monopoly prohibits one bank from providing this multiplicity of
services
Many Japanese corporation also have a strong financial relationships with a network of
affiliated companies. These networks, characterized by crossholding of a debt and equity,
trading of goods and services, and informal business contacts, are known as Keiretsu
Government-directed industrial policy plays a key role in Japanese Governance, this
includes official and unofficial representation on corporate boards, when a corporation
faces financial difficulty

In the Japanese model, the four key players are:

1.

Main Bank(a major inside shareholder)

2. Affiliated company or keiretsu(a major inside shareholder)

48

3. Management and the

4. Government

Interaction among these players serves to link relationship rather balance power, as in the
case of Anglo-US Model - non-affiliated shareholders have little or no voice in japanese
Governance -As a result, there are few truly independent directors(representing outside
shareholders)
Share Ownership Pattern
In Japan, Financial institutions and corporations firmly hold ownership of the equity
market.
Insurance companies Banks 43 % Corporations 25 % Foreign 3 %

Composition of the board of directors

Executive managers the heads of major divisions of the company and its central
administrative body.
COMMON PRACTICE:
If a companys profit fall over an extended period, the main bank and member of the
keiretsu may remove directors and appoint their own candidates to the companys board.
Appointment of retiring government bureaucrats to corporate boards
The average japanese board contains 50 members

49

HARSHAD MEHTA SCAM

Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His early
childhood was spent in Mumbai where his father was a small-time businessman. Later, the
family moved to Raipur in Madhya Pradesh after doctors advised his father to move to a drier
place on account of his indifferent health. But Raipur could not hold back Mehta for long and he
was back in the city after completing his schooling, much against his fathers wishes.

Mehta first started working as a dispatch clerk in the New India Assurance Company. Over the
years, he got interested in the stock markets and along with brother Ashwin, who by then had left
his job with the Industrial Credit and Investment Corporation of India, started investing heavily
in the stock market.
50

Mehta gradually rose to become a stock broker on the Bombay Stock Exchange, who did very
well for himself. At his peak, he lived almost like a movie star in a 15,000 square feet house,
which had a swimming pool as well as a golf patch. He also had a taste for flashy cars, which
ultimately led to his downfall.

RISE OF MEHTA

The year was 1990. Years had gone by and the driving ambitions of a young man in the faceless
crowd had been realised. Harshad Mehta was making waves in the stock market. He had been
buying shares heavily since the beginning of 1990. The shares which attracted attention were
those of Associated Cement Company (ACC), write the authors. The price of ACC was bid up
to Rs 10,000. For those who asked, Mehta had the replacement cost theory as an explanation.
The theory basically argues that old companies should be valued on the basis of the amount of
money which would be required to create another such company.
Mehta was the darling of the business media and earned the sobriquet of the Big Bull, who was
said to have started the bull run. But, where was Mehta getting his endless supply of money
from? Nobody had a clue.

FRAUD COMMITTED

The crucial mechanism through which the scam was effected was the ready forward (RF) deal.
The RF is in essence a secured short-term (typically 15-day) loan from one bank to another.
Crudely put, the bank lends against government securities just as a pawnbroker lends against
jewellery.The borrowing bank actually sells the securities to the lending bank and buys them
back at the end of the period of the loan, typically at a slightly higher price.
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It was this ready forward deal that Harshad Mehta and his cronies used with great success to
channel money from the banking system.

A typical ready forward deal involved two banks brought together by a broker in lieu of a
commission. The broker handles neither the cash nor the securities, though that wasnt the case
in the lead-up to the scam.

In this settlement process, deliveries of securities and payments were made through the broker.
That is, the seller handed over the securities to the broker, who passed them to the buyer, while
the buyer gave the cheque to the broker, who then made the payment to the seller.
In this settlement process, the buyer and the seller might not even know whom they had traded
with, either being know only to the broker.

This the brokers could manage primarily because by now they had become market makers and
had started trading on their account. To keep up a semblance of legality, they pretended to be
undertaking the transactions on behalf of a bank.

Another instrument used in a big way was the bank receipt (BR). In a ready forward deal,
securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of
securities, gave the buyer of the securities a BR.

a BR confirms the sale of securities. It acts as a receipt for the money received by the selling
bank. Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also
states that in the mean time, the seller holds the securities in trust of the buyer.

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Having figured this out, Metha needed banks, which could issue fake BRs, or BRs not backed by
any government securities. Two small and little known banks - the Bank of Karad (BOK) and the
Metorpolitan Co-operative Bank (MCB) - came in handy for this purpose.

Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave
money to Mehta, obviously assuming that they were lending against government securities when
this was not really the case. This money was used to drive up the prices of stocks in the stock
market. When time came to return the money, the shares were sold for a profit and the BR was
retired. The money due to the bank was returned.
The game went on as long as the stock prices kept going up, and no one had a clue about Mehtas
modus operandi. Once the scam was exposed, though, a lot of banks were left holding BRs
which did not have any value - the banking system had been swindled of a whopping Rs 4,000
crore. Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His early
childhood was spent in Mumbai where his father was a small-time businessman. Later, the
family moved to Raipur in Madhya Pradesh after doctors advised his father to move to a drier
place on account of his indifferent health. But Raipur could not hold back Mehta for long and he
was back in the city after completing his schooling, much against his fathers wishes.

Mehta first started working as a dispatch clerk in the New India Assurance Company. Over the
years, he got interested in the stock markets and along with brother Ashwin, who by then had left
his job with the Industrial Credit and Investment Corporation of India, started investing heavily
in the stock market.

Mehta gradually rose to become a stock broker on the Bombay Stock Exchange, who did very
well for himself. At his peak, he lived almost like a movie star in a 15,000 square feet house,
which had a swimming pool as well as a golf patch. He also had a taste for flashy cars, which
ultimately led to his downfall.

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MEHTA DIED

Mr Mehta was under judicial custody in the Thane prison after a special court remanded him and
his two brothers, Mr Ashwin Mehta and Mr Sudhir Mehta, in a fresh case of misappropriation.
According to sources, Mr Mehta complained of chest pain late night and was admitted to the
civil hospital where he breathed his last around 12.40 a.m.(jan. 1, 2002).

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