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Executive summary
"No one pretends that democracy is perfect or all-wise, indeed it has been said that
democracy is the worst form of government except all those other forms that have been
tried from time to time."
This is an interesting & thoroughly worthwhile project. Its basic messages are relevant
to any organization & any manager. This project is not encyclopedic (as Corporate
Governance itself is a very large issue), although it is hoped that answers to meet
question will be found, or that at least a pointer may be given as to where the answers are
to be found.
This project is prepared for those who are either involved in Corporate Governance or
interested in its principles & practice, & who are concerned with the human side of it.
This project is based on mechanism of corporate governance, dimensions of corporate
governance, and mastering corporate governance.
Corporate Governance brings power; and power corrupts. The antidotes to that power are
transparency, objectivity and accountability. All three requires a stead fort and clear
appreciation of oneself as seen by others. The pay -offs for conducting in the way this
project recommends can be enormous. This is more easily perceived by those who have
jumped in & learnt to swim after their own fashion than by those who have avoided the
plunge. There are always admirable reasons for avoiding the plunge, off course. But this
project is not one of them.
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Shareholders
Board
Management
Employees
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corporation (such as the best practice guidelines) as well as externally (national institutional
frameworks). In this "economic view", the corporate governance system should be designed
in such a way as to optimize results. Some argue that the firm should act not only in the
interest of shareholders, but also of all the other stakeholders.
Corporate Governance is a set of methods or practices by which business is carried
on, directed and controlled in a corporate form of business organization. Board of Directors
is primarily responsible for governance. Quality of governance determines the growth and
future of the business.
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In the first half of the 1990's, the issue of corporate governance in the U.S. received
considerable press attention due to the wave of (belated?) CEO dismissals (e.g.: IBM,
Kodak, Honeywell) by their boards. CALPERS led a wave of institutional shareholder
activism (something only very rarely seen before), as a way of ensuring that corporate value
would not be destroyed by the now traditionally cozy relationships between the CEO and the
board of directors. In the early 2000s, the massive bankruptcies (and criminal malfeasance)
of Enron and WorldCom, as well as lesser corporate debacles, such as Adelphia
Communications, AOL, Arthur Andersen, Global Crossing, Tyco, and, more recently,
Freddie Mac and Fannie Mae, led to increased shareholder and governmental interest in
corporate governance, culminating in the passage of the Sarbanes-Oxley Act in 2002. Since
then, the stock market has greatly recovered, and shareholder zeal has waned accordingly.
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“Corporate governance deals with the ways in which suppliers of finance to corporations
assure themselves of getting a return on their investment”,
The Journal of Finance, Shleifer and Vishny [1997, page 737].
“Some commentators take too narrow a view, and say it (corporate governance) is the fancy
term for the way in which directors and auditors handle their responsibilities towards
shareholders. Others use the expression as if it were synonymous with shareholder
democracy. Corporate governance is a topic recently conceived, as yet ill-defined, and
consequently blurred (unclear) at the edges…corporate governance as a subject, as an
objective, or as a regime to be followed for the good of shareholders, employees, customers,
bankers and indeed for the reputation and standing of our nation and its economy‖ Maw et al.
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(b) Ethical practice has contributed towards high productivity and strong team works:
Organisations being a collection of individuals, the values reflected will be different
from that of the organisation. Constant check and dialogue will ensure that the employee
matches to the values of the organisation which will in turn result in better co-operation
and increased productivity.
(e) Strong ethical practices act as insurance & strong ethical practices of the organisation
are an added advantage for the future function of the business. In the long run, it would
benefit if the organisation is equipped to withstand the competition.
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(b) Good corporate governance should look at all stakeholders and not just shareholders
alone. Otherwise, a chemical company, for example, can maximize the profit of
shareholders, but completely violate all environment laws and make it impossible for the
people around the area to lead a normal life. Ship-breaking in Valinokkam, near
Arantangi in Tamil Nadu, leather tanneries in South, Arco and hosiery units in Tirupur,
have brought about too much of environmental degradation that has unleashed untold
miseries to people in and around their locations.
(e) There are a number of grey areas where the law is silent or where regulatory framework
is weak, which are manipulated by unscrupulous persons like Ketan Parikh and Harshad
Mehta. In the US, for instance, the courts recognise that new forms of fraud may arise,
which may not be covered technically under any existing law and cannot be interpreted as
violating any of the existing laws. For example, a clever conman can try to sell a piece of
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the blue sky. In order to check such crooks, there is the concept of the "blue sky" law.
However, such wide-ranging processes are not available to courts in developing
countries.
(f) The Securities and Exchange Board of India (SEBI) has jurisdiction only in cases of
limited and listed companies and are concerned only with their protection. What about
the shareholders and others of other unlisted Limited companies?
(g) The Serious Fraud Investigation Office (SIFO) in the Department of Company Affairs
(DCA) has been investigating several "Vanishing Companies". By 2003, SEBI has
identified 229 as "vanishing companies"— which tapped the capital market, collected
more than Rs. 800 crores from the public and subsequently became untraceable.
However, thousands of investors have lost their hard-earned money and no agency has
come to their rescue so far.
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How can we change the present practice and improve the Corporate
Governance in India?
To bring the change in the present practice and improve the Corporate Governance in
India we have to follow the following points:
1. Number of non-executive directors should be increased.
2. They should be encouraged to assert their right. Today they are not passive and inactive,
nor they have time.
3. Non-executive directors should be made accountable for the decisions taken by board
and for the affairs of the company.
4. Board should meet at least once a month to be effective and Directors should attend
most of the meetings.
5. There should be structured performance appraisal of MD and other executive directors
by a committee of the board.
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6. In India shareholders never make the board accountable for the performance of the
company. Both executive and non-executive directors should pay for the failure to meet
the goals of the company.
7. No law can imbibe (absorb) ethics in unwilling board. Law cannot be sustained for code
of best practices, it can only supplement and support as it is sought to be done by
Companies Act.
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External environment
Government Corporate culture,
regulations, policies, structure, characteristics,
guidelines etc. influences
Internal environment
CORPORATE
GOVERNANCE
SYSTEM
Proper governance Shareholder value
Transparency
Available literature on corporate governance and the way companies structured and
run indicate that India shares many features of the German/ Japanese model, but recent
recommendations of various committees and consequent legislative measures are driving the
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Further experts point out that India has adopted the key-tenants of the Anglo-
American external and internal control mechanisms, in the wake of economic liberalization
and its integration into the global economy. ―This is evident especially in the realm
(kingdom, land) of the legislative framework where Indian policy-makers have taken their
cue from UK and US committees and their recommendations.”
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ACCOUNTING
QUALITY
FAIR
VALUE POLICY
CREATION &
ACTIONS
COMMUNICA-
RELIABILITY TION
EFFECTIVE
GOVERNING
BOARD
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For Accounting Quality the fund managers look at all or any of the following
variables: company accounting policies, disclosure standards, proactive adoption of
accounting policy improvements, internal audit and control mechanisms for addressing
auditor‘s queries. The top companies were ranked accordingly. Similarly, for “Value
Creation Focus” business strategy (driven by value creation focus), effective use of cash
surplus, capital structure, usage of IPO funds, shareholder friendliness are among the key
variables. For „Fair policies among actions”, the fund managers take the cue from fair
treatment of minority shareholders, transparency of trades by top management and ethical
behavior with customers, suppliers, tax authorities and government. Similar variables were
used for ranking companies based on other parameters.
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information submitted to the board, what is examined is whether it is told enough to know
what is going on and whether its quality is satisfactory, are important. Emphasis is laid on
matters such as inter-corporate loans, "related-party" transactions, large capital expenditure,
diversification, and of course, mergers and acquisitions.
3.) Board structure and process:
The board structure and process of decision making is all very important. The
bottom line is whether a company is board-managed or its board is a rubber stamping body
whose members hold their positions at the pleasure of the effective owner. For this, the size
of the board, selection criteria for directors, proportion of independent directors and the
expertise they can command, compensation policy for (directors, number and nature of board
committees, attendance record of the directors and frequency of board meetings are all taken
into consideration.
4.) Examine stakeholder relations:
ICRA's methodology on this matter relates almost wholly to the rights of shareholders
and the duty of the company to service them well. There is a passing reference to other
financial stakeholders such as banks, financial institutions and fixed-deposit holders. But the
whole idea of stakeholder is that it goes far beyond the shareholder and includes the workers,
a company's customers and the society at large.
5.) Transparency and disclosures:
It is found that better-run companies disclose more than they are required by the law.
But in assessing a company's performance in this regard, emphasis is laid on how
materialistic the disclosures are and whether they really shed any light or hide more than they
reveal.
6.) Financial discipline:
Considerations under this criterion would broadly overlap with the determinants
governing financial rating. But it is emphasized that a financial rating says nothing about
the nature of corporate governance prevailing in a company and similarly, a governance
rating says nothing about the financial position of a company. The risk of governance
failure will not be apparent from the financial rating of a company, but from its corporate
governance rating. Here again, the conceptual scope of corporate governance and the way
ICRA sees the idea may be a little divergent. While discussing financial discipline, it says
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that the ultimate objective of corporate governance is to maximize shareholder value to the
extent that if the company goes down in its governance record, no matter how excellent
otherwise, will mean nothing. But what if a company's shareholders are happy with it but its
workers or society at large are not, then the conflict of interest needs to be dealt with and a
mutually beneficial situation needs to be arrived at, but one should remember that
shareholders are also members of the society.
Credit ratings for debt paper, which did not start off very well, later picked up thanks
to the pressures of the market which forced issuers of debt to get them rated in order to raise
money. Similarly, market pressures will force more and more corporates in India to go in for
corporate governance ratings. Eventually, SEBI, which can legitimately take credit for
spearheading the movement for corporate governance ratings in India, must make such
ratings mandatory for issuers of equity, so that investors have a comprehensive
understanding of the companies where they are putting their money.
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Accountability Customer
Disclosures service and
satisfaction
Board of Director‘s
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Risk taking and management in a less regulated competitive market will have to be done
in such a way that investors' confidence is not eroded,
(II) Even in a regulated set-up, as it was in India prior to 1991, some big banks in the
public sector and a few in the private sector had incurred substantial losses. This, along
with the massive failures of non-banking financial Companies (NBFCs), had adversely
impacted investors' confidence.
Moreover, protecting the interests of depositors becomes a matter of paramount
importance to banks. In other corporates, this is not and need not be so for two reasons:
1. The depositors collectively entrust a very large sum of their hard-earned money to the
care of banks. It is found that in India, the depositor's Contribution was well over 15.5
times the shareholders' stake in banks as early as in March 2001. This is bound to be
much more now.
2. The depositors are very large in number and are scattered and have little say in the
administration of banks. In other corporates, big lenders do exercise the right to direct the
management. In any case, the lenders' stake in them might not exceed 2 or 3 times the
owners' stake.
Banks deal in people's funds and should, therefore, act as trustees of the depositors.
Regulators the world over has recognised the vulnerability of depositors to the whims of
managerial misadventures in banks and, therefore, has been regulating banks more tightly
than other corporates.
To sum up, the objective of governance in banks should first be protection of
depositors' interests and then be to "optimise" the shareholders' interests. All other
considerations would fall in place once these two are achieved.
Banking supervision cannot function effectively if sound corporate governance is
not in place and, consequently, banking supervisors have a strong interest in ensuring that
there is effective corporate governance at every banking organisation. Supervisory
experience underscores the necessity of having the appropriate levels of accountability and
checks and balances within each bank. Put plainly, sound, corporate governance makes the
work of supervisors infinitely easier. Sound corporate governance can contribute to a
collaborative working relationship between bank management and bank supervisors.
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The World Bank report points the way to the establishment of trust and the encouragement
of enterprise. It marks an important milestone in the development of corporate governances.
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corruption has graduated to such an extent that companies have to bribe bureaucrats to
make them do things they are supposed to do. Examples of this sort of corruption include
"gifts" to the Factory Inspector, Boiler Inspector, Pollution Control Board Inspectors, and
assessors for customs, excise, income tax, sales tax and Octroi. It is the administrative
corruption, which most companies find unavoidable most of the times.
A study on the ethical attitudes of Indian managers conducted by Arun Monappa
(1977) reported that business executives listed three major obstacles to ethical behaviour,
namely:
(i) Company policies,
(ii) Unethical industry climate and
(iv) Corruption in government. Company policies tend to be unethical due to socio-cultural
environment, and get reinforced because of the sense of frustration and helplessness that
comes from the prevalent and all pervading unethical environment.
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Corporations will be expected in future to “build a better future” – not only for their
shareholders but also for their customers, workers, business partners, community, nation and
the wider world. Those with effective corporate governance based on this core value will
have an added competitive advantage: attracting and retaining talent and generating positive
reactions in the marketplace.
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