Abstract Corporate Governance in India Trends and Challenges Corporate governance infuses the democratic values of fairness, accountability,

, responsibility, and transparency into corporations. It maintains the integrity of business transactions and in so doing strengthens the rule of law and democratic governance. A powerful antidote to corruption, corporate governance clarifies private rights and public interests, preventing abuses of both. At its core, corporate governance structures the relationships among investors, boards of directors, managers, and other stakeholders. This involves establishing incentives and procedures that serve the interests of shareholders while respecting the interests of other stakeholders in the corporation. The policies are framed as per the existing frameworks & conclusions are drawn based on those policies, but how do internal auditors relate to those principles? And what is their role in governance especially in regard to the unprecedented financial crisis that brought the global economy to a standstill? During the global economic crisis of the last decade, much of the focus was on public financial reporting, external auditing and board of directors audit committees. In addition to these, the Internal Audit function represents another invaluable resource. An internal audit function could be viewed as a first line of defense against inadequate corporate governance and financial reporting. With appropriate support from the Board of Directors Audit Committee, the internal audit staff is in the best position to gather intelligence on inappropriate accounting practices, inadequate internal controls and ineffective corporate governance. During the emerging days of the internal audit profession, the scope of internal auditing and the reporting relationship was fairly simple. Internal auditing has been described as the eyes and ears of management. Internal auditors investigate operations to see that they were properly controlled and make recommendations to management based on their observations and analysis. It is presumed that the recommendations would be similar to what management would have done if management had the time to individually review all operations for adequate controls. Corporate Governance Definition According to the Report of the SEBI Committee on Corporate Governance dated February 08, 2003, corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. Meaning for stakeholders It is a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is about promoting corporate fairness, transparency and accountability. In other words, 'good corporate governance' is simply 'good business'.

Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action. Further, ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders. Importance Good corporate governance ensures:

y y y y y

Adequate disclosures and effective decision making to achieve corporate objectives; Transparency in business transactions; Statutory and legal compliances; Protection of shareholder interests and Commitment to values and ethical conduct of business.

The aim of "Good Corporate Governance" is to ensure commitment of the board in managing the company in a transparent manner for maximizing long-term value of the company for its shareholders and all other partners. It integrates all the participants involved in a process, which is economic, and at the same time social. Objectives The fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. Broadly, it seeks to achieve the following objectives:

y A properly structured board capable of taking independent and objective decisions is in place y y y y y y
at the helm of affairs; The board is balanced as regards the representation of adequate number of non-executive and independent directors who will take care of their interests and well-being of all the stakeholders; The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information; The board has an effective machinery to sub serve the concerns of stakeholders; The board keeps the shareholders informed of relevant developments impacting the company; The board effectively and regularly monitors the functioning of the management team; and The board remains in effective control of the affairs of the company at all times.

Amendments to Clause 49 of the Listing Agreement Based on the recommendations of the Narayana Murthy Committee on Corporate Governance and public comments received, certain amendments were made by the Securities and Exchange Board of India (SEBI) in Clause 49 of the Listing Agreement, vide circular dated August 26, 2003. The issues related to the role of the audit committee have been directly reproduced below, from the report. Issue 9 Role of the Audit Committee - Revised language Clause II.D (i) The role of the audit committee shall include the following: 1. Oversight of the companys financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. 2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the external auditor and the fixation of audit fees. 3. Approval of payment to external auditors for any other services rendered by the external auditors. 4. Reviewing, with the management, the annual financial statements before submission to the board for approval, with particular reference to: a. Matters required to be included in the Directors Responsibility Statement to be included in the Boards report in terms of clause 2AA of section 217 of the Companies Act, 1956 b. Changes, if any, in accounting policies and practices and reasons for the same c. Major accounting entries involving estimates based on the exercise of judgment by management d. Significant adjustments made in the financial statements arising out of audit findings e. Compliance with listing and other legal requirements relating to financial statements f. Disclosure of any related party transactions g. Qualifications in the draft audit report. 5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval 6. Reviewing, with the management, external and internal auditors, adequacy of the internal control systems. 7. Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. 8. Discussion with internal auditors any significant findings and follow up there on. 9. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.
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10. Discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern. 11. Reviewing the companys financial and risk management policies. 12. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors. Explanation (i): The term "related party transactions" shall have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered Accountants of India. Explanation (ii): If the company has set up an audit committee pursuant to provision of the Companies Act, the company agrees that the said audit committee shall have such additional functions/ features as is contained in the Listing Agreement. Issue 10 Review of information by Audit Committee - Revised language Clause II.E (E) Review of information by Audit Committee (i) The Audit Committee shall mandatorily review the following information: 1. Management discussion and analysis of financial condition and results of operations; 2. Statement of significant related party transactions (as defined by the audit committee), submitted by management; 3. Management letters / letters of internal control weaknesses issued by the external auditors; 4. Internal audit reports relating to internal control weaknesses; and 5. The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee.

Provisions of Companies Act 1956 with respect to Corporate Governance Disclosures on remuneration of Directors The specific disclosures on the remuneration of directors regarding all elements of remuneration package of all the directors should be made as a part of Corporate Governance. Section 299 of the Companies Act 1956 (herein referred to as Act) requires every director of a company to make disclosure, at the Board meeting, of the nature of his concern or interest in a contract or arrangement (present or proposed) entered by or on behalf of the company. The company is also required to record such transactions in the Register of Contract under section 301 of the Act. Requirements of the Audit Committee Audit Committee has a critical role to play in ensuring the integrity of financial management of the company. This Committee add assurance to the shareholders that the auditors, who act on their behalf, are in a position to safeguard their interests. Besides the requirements of Clause 49, section 292A of the Act requires every public having paid up capital of Rs. 5 crores or more shall constitute a committee of the board to be known as Audit Committee. As per the Act, the committee shall consist of at least three directors, two-third of the total strength shall be directors other than managing or whole time directors. The Annual Report of the company shall disclose the composition of the Audit Committee. The recommendations of the committee on any matter relating to financial management including Audit Report, shall be binding on the board. In case board does not accept the recommendations so made, the committee shall record the reasons thereof, which should be communicated to the shareholders, probably through the Corporate Governance Report. The committee shall act in accordance with the terms of reference to be specified in writing by the board. The committee should have periodic discussions with the auditors about the Internal Control Systems and the scope of audit including the observations of the auditors. If the default is made in complying with the said provision of the Act, then the company and every officer in default shall be punishable with imprisonment for a term extending to a year or with fine up to Rs. 50000 or both. Director s remuneration Section 309(1) of the Act requires that the remuneration payable both to the executive as well as non-executive directors is required to be determined by the board in accordance with and subject to the provisions of section 198 either by the articles of the company or by resolution or if the articles so require, by a special resolution, passed by the company in a general meeting. Further, Schedule VI of the Act requires disclosure of Directors remuneration and computation of net profits for that purpose. Corporate democracy Wider participation by the shareholders in the decision making process is a pre-condition for democratizing corporate bodies. Due to geographical distance or other practical problems, a substantially large number of shareholders cannot attend the general meetings. To overcome these obstacles and pave way for introduction of real corporate democracy, section 192A of the
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Act and the Companies (Passing of Resolution by Postal Ballot), Rules provides for certain resolutions to be approved and passed by the shareholders through postal ballots.

Role of Internal Audit in Corporate Governance Perspective of Institute of Internal Auditors The Institute of Internal Auditors (IIA) defines governance as the combination of processes and structures implemented by the board in order to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives. Corporate governance then implies relationships among an organizations management, the board, the stakeholders, and other bodies that have indirect involvement with the company. The key components of governance oversight have been identified as the board of directors, stakeholders, risk management (senior management and risk owners) and assurance (internal and external auditors). Regulatory agencies also serve as an indirect/ influencing stakeholder. The IIA defines internal auditing as an independent, objective assurance and consulting activity designed to add value and improve an organizations operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. This definition recognizes a significant role for internal auditing that is based on the activities in which it has a defined expertise. At the same time, it recognizes that there are many different constituencies (customers) for internal audit services. For example, the definition clearly envisions important customers as:

y Senior management; y Operational management; and y Audit committees and the board of directors.
The IIA also suggests that regardless of the reporting relationship the organisation chooses, there are key measures that will ensure that the reporting lines support and enable the effectiveness and independence of the internal audit function.1 These key measures are summarised below:

y The head of internal audit should meet privately with the board/audit committee without the
presence of management. This will reinforce the independence and direct nature of the reporting relationship; y The board/audit committee should have the final authority to review and approve the annual audit plan and all major changes to the plan; y The board/audit committee should review the performance of the head of internal audit and the overall internal audit function at least once a year, as well as approve the compensation levels for the head of internal audit; y The charter for the internal audit function should clearly articulate both the functional and administrative reporting lines for the function as well as its principal activities;

The Institute of Internal Auditors, Practice Advisory 1110-2: Chief Audit Executive Reporting Lines, December 2002

y The reporting line should be to someone with sufficient authority to provide internal audit
with sufficient support to accomplish its day-to-day activities; y The reporting line should facilitate open and direct communications with the CEO, the senior executive group and line management; y The reporting line should enable adequate communications and information flows so that internal audit receives adequate and timely information concerning the activities, plans and business initiatives of the organisation; and y Budgetary controls and considerations imposed by the administrative reporting line should not impede internal audit in accomplishing its brief. Standard 21302 Governance states that the internal audit activity must assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives:

y Promoting appropriate ethics and values within the organization; y Ensuring effective organizational performance management and accountability; y Effectively communicating risk and control information to appropriate areas of the
organization; and y Effectively coordinating the activities of and communicating information among the board, external and internal auditors and management. Standard 2110 Nature of Work indicates that the internal audit activity must assess and make appropriate recommendations for improving the governance process. Performing audit work to assure corporate governance requires assessing, evaluating, and reporting on:

y y y y y y y y y

Governance structures, policies, charters; Organization culture, ethics, and values; Activities of audit committee; Risk management structures and policies; Internal audit processes and organization; Fraud control and policy; Compensation policies and processes; Strategic planning and decision-making; and Disclosure structure, process, and rigor.

As stated in Standard 2100, the internal auditors should evaluate and contribute to the improvement of risk management, control, and governance processes. By doing so, the internal audit activity can add value and improve the overall corporate governance structure. And by ensuring internal audit quality, acknowledging the potential impact of internal auditing, and
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Gazzaway Trent (2006), Corporate Governor, Grant Thornton, Vol. 3, No. 4, pp. 1.

empowering their internal auditors, financial institutions could head-off crises like this in the future. Independence guidelines for Internal Audit When considering the reporting lines for internal audit it is prudent to keep the following independence guidelines in mind:

y The internal audit function must be independent of the activities being audited and must also
be independent from everyday internal processes; y The internal audit department must be able to exercise its assignment on its own initiative in all departments, establishments and functions of the organisation; y Internal audit must be free to report its findings and appraisals and to disclose them internally; and y The head of the internal audit department should have clear authority to communicate directly and on his or her own initiative to the board, the chairman of the board, or the chairman and members of the audit committee. Assessment of Internal Controls Historically, the internal audit emphasis on controls has been at the transaction or operational level. However, the recent business failures indicate a serious break-down of controls at the control environment level (management example, code of conduct, board oversight, management override, and so forth). It could be that management and audit committees, while both rating internal control very high, might desire different levels of control reviews. We will examine these potential differences in a future research study. The IIA has long recommended that the boards of directors of all publicly held companies should be required to publicly disclose an assessment of the effectiveness of internal controls within their organizations. The IIA further recommended that such disclosures should address internal controls broadly, rather than being limited to accounting controls over the recording and reporting of financial information. The Board s responsibility for Internal Controls In a broad range of organizations, a number of best practices in relation to the role played by the board audit and/or risk management committees have been outlined below:

y Assessing the scope and effectiveness of the systems established by management to identify,
assess, manage and monitor the various risks arising from the organisations activities; y Ensuring senior management establishes and maintains adequate and effective internal controls; y Satisfaction that appropriate controls are in place for monitoring compliance with laws, regulations, supervisory requirements and relevant internal policies; y Monitoring and reviewing the effectiveness of the internal audit function;
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y Reviewing and assessing the internal audit plan and its progress; y Ensuring internal audit function is adequately resourced and enjoys appropriate standing
within the organisation; y Considering managements response to major internal audit recommendations and monitoring their implementation; and y Approving the appointment or dismissal of head of internal audit. How Internal Audit assists the board in Promoting Corporate Governance Corporate governance developments both locally and around the world have reaffirmed the boards responsibility for ensuring the effectiveness of their organisations internal control framework. These developments have highlighted the key role that internal audit can play in supporting the board in ensuring adequate oversight of internal controls and in doing so form an integral part of an organisations corporate governance framework. The key role of internal audit is to assist the board and/or its audit committee in discharging its governance responsibilities by delivering:

y y y y y y y y y y

An objective evaluation of the existing risk and internal control framework; A systematic analysis of business processes and associated controls; Reviews of the existence and value of assets; A source of information on major frauds and irregularities; Ad hoc reviews of other areas of concern, including unacceptable levels of risk; Reviews of the compliance framework and specific compliance issues; Reviews of operational and financial performance; Recommendations for more effective and efficient use of resources; Assessments of the accomplishment of corporate goals and objectives; and Feedback on adherence to the organisations values and code of conduct/ code of ethics.

Critical success factors for an Internal Audit function

y Is internal audit strategically positioned to contribute to business performance? y The mission and role of internal audit are defined within a wider governance
framework and are effectively communicated. y The structure of internal audit promotes objectivity, consistency and business understanding. y Internal audit is funded in a way that promotes objectivity and consistency in the quality of services it provides across the organisation. y Internal audit contributes value to the business as defined by appropriate success criteria.

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y Are internal audits processes enabling and dynamic in meeting business needs? y Internal audit has strong risk identification and planning methodology and delivers a
high quality service. y Technology is used appropriately to enhance the provision of internal audit services. y An appropriate framework is in place to measure internal audits performance. y Internal audit develops and manages appropriate relationships with its key stakeholders.

y Does internal audit have the right people strategy to deliver its mission/objectives? y Internal audits core competencies are directly related to its mission, role and scope
of work. y Internal audits staffing strategy reflects its mission, role and required competencies. y The strategy is sufficiently flexible to respond to changes in demand.

Benefits and challenges of reporting directly to Board Audit Committee

Benefits

Challenges

Ability to transcend all departments without Internal audit may not be privy to all fear of limitation of scope by being tied to, for sources of information throughout the example, the finance department. company if seen as outside the management structure. The board and audit committee know that the information they are receiving on the internal controls and risk management systems reflects a true description and has not been watereddown or filtered by management beforehand. The chairman of the audit committee may not have allocated sufficient time, or have adequate resources/capacity to deal with the oversight of the internal audit function.

The independence of the internal audit function It would be necessary to set up a specific charter outlining the roles and is absolute. responsibilities of the board in relation to internal audit, as separate from management. The funding of the internal audit function is outside the normal process of budgeting thereby allowing resources to be allocated by the assurance needs of the organisation as assessed by the board/audit committee. The audit committee would be assuming more responsibility and therefore, perhaps, more liability in relation to the adequacy of the internal control and risk systems of the organisation.

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Benefits

Challenges

Enables the board/audit committee to directly Potentially restricts the ability of the CEO and critically analyse and evaluate the internal to use internal audit as a tool to reinforce audit function in its contribution to the control principles, or in special projects. fulfillment of the boards responsibility for internal controls. Reinforces the board/audit committees knowledge of the business and its risk profile when dealing with management and stakeholders. Table 1: Benefits and challenges of reporting directly to Board Audit Committee

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South Asian Federation of Accountants (SAFA) Best Practices on Corporate Governance Internal Control and Internal Audit The board should maintain a sound system of internal control to safeguard shareholders investment and the companys assets. The directors should, at least annually, conduct a review of the effectiveness of the companys system of internal control and should report to shareholders that they have done so. The review should cover all controls, including financial, operational and compliance controls and risk management. There shall be an internal audit function in every company. The head of internal audit shall have access to the chair of the Audit Committee. The head of internal audit should functionally report to the audit committee and administratively to the Chief Executive. The scope of internal audit, including its powers and responsibilities should form part of Internal Audit Charter, which should be approved by the Audit Committee. The Audit Committee should ensure that there is appropriate coordination between the external and internal auditors to ensure their efficiency and contribution to the companys objectives, including reliable financial reporting and compliance with laws and regulations. Internal audit reports are to be provided for the review of external auditors. Statement of Corporate Governance The Directors should include in the Companys Annual Report a Corporate Governance Report, setting out the manner and extent to which the Company has complied with the principles and provisions applicable in the jurisdiction in which it operates. As part of the Board report of Corporate Governance the company shall annually affirm that it has not denied personnel access of any employee to the audit committee of the company (in respect of matters involving alleged misconduct) and that it has provided protection to whistleblowers from unfair termination and other unfair or prejudicial employment practices.

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Need for Corporate Governance Adoption of good Corporate Governance practices has emerged as an integral element for doing business today. It is not only a pre-requisite for facing intense competition for sustainable growth in the emerging global market scenario but is also an embodiment of the parameters of fairness, accountability, disclosures and transparency to maximize value for the stakeholders. So long as companies have sought to borrow or raise capital to finance their growth, creditors and investors have sought assurances that they will receive a decent return on their investment. Governance issues rose in importance in the 1990s as competition for finance among businesses increased following the deregulation of markets and the liberalization of international trade and investment. A wave of privatization, especially in newly formed democratic countries, magnified attention to governance issues. In too many cases, poorly managed, corrupt privatization processes harmed new investors and undercut the value of privatized companies. The world also witnessed a number of spectacular failures in the governance of individual companies and entire financial markets. For companies to grow and economies to develop, the efficient use of resources must be encouraged. Investors must be given the confidence to commit their funds to private enterprises, and, in turn, must spur managers to deliver higher performance. Managers and company insiders must be supervised to ensure that they do not abuse power for private reasons, do not strip company assets, and seek the long-term best interest of the company and its shareholders. Companies must operate as responsible market participants that deliver value to communities. The Organization for Economic Cooperation and Development (OECD) Code recognizes that different legal systems, institutional frameworks and traditions across countries have led to the development of a range of different approaches to corporate governance. However, a high degree of priority has been placed on the interests of shareholders, who place their trust in corporations to use their investment funds wisely and effectively is common to all good corporate governance regimes. Forms of Corporate Responsibilities

y Political Responsibilities: The basic political obligations are abiding by legitimate law;
respect for the system of rights and the principles of constitutional state. y Social Responsibilities: The corporate ethical responsibilities, which the company understands and promotes either as a community with shared values or as a part of larger community with shared values. y Economic Responsibilities: Acting in accordance with the logic of competitive markets to earn profits on the basis of innovation and respect for the rights/democracy of the shareholders which can be expressed in terms of managements' obligation as 'maximizing shareholders value'.

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Parties involved in Corporate Governance The three key constituents of corporate governance are the Board of Directors, the Shareholders and the Management. The pivotal role in any system of corporate governance is performed by the board of directors. It is accountable to the stakeholders and directs and controls the management. It stewards the company, sets its strategic aim and financial goals and oversees their implementation, puts in place adequate internal controls and periodically reports the activities and progress of the company in the company in a transparent manner to all the stakeholders. The shareholders' role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information in a transparent fashion, of the activities and progress of the company. The responsibility of the management is to undertake the management of the company in terms of the direction provided by the board, to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the board to monitor the accountability of management to it. Apart from these, other parties involved directly or indirectly in corporate governance are:

y y y y y

Regulators; Workers; Customers; Suppliers; and Community (people affected by the actions of the organization).

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Elements of Good Corporate Governance Role and powers of Board: the foremost requirement of good corporate governance is the clear identification of powers, roles, responsibilities and accountability of the Board, CEO and the Chairman of the board. Legislation: a clear and unambiguous legislative and regulatory framework is fundamental to effective corporate governance. Code of Conduct: it is essential that an organization's explicitly prescribed code of conduct is communicated to all stakeholders and is clearly understood by them. There should be some system in place to periodically measure and evaluate the adherence to such code of conduct by each member of the organization. Board Independence: an independent board is essential for sound corporate governance. It means that the board is capable of assessing the performance of managers with an objective perspective. Hence, the majority of board members should be independent of both the management team and any commercial dealings with the company. Such independence ensures the effectiveness of the board in supervising the activities of management as well as make sure that there are no actual or perceived conflicts of interests. Board Skills: in order to be able to undertake its functions effectively, the board must possess the necessary blend of qualities, skills, knowledge and experience so as to make quality contribution. It includes operational or technical expertise, financial skills, legal skills as well as knowledge of government and regulatory requirements. Management Environment: includes setting up of clear objectives and appropriate ethical framework, establishing due processes, providing for transparency and clear enunciation of responsibility and accountability, implementing sound business planning, encouraging business risk assessment, having right people and right skill for jobs, establishing clear boundaries for acceptable behavior, establishing performance evaluation measures and evaluating performance and sufficiently recognizing individual and group contribution. Board Appointments: to ensure that the most competent people are appointed in the board, the board positions must be filled through the process of extensive search. A well defined and open procedure must be in place for reappointments as well as for appointment of new directors. Board Induction and Training: is essential to ensure that directors remain abreast of all development, which are or may impact corporate governance and other related issues. Board Meetings: are the forums for board decision making. These meetings enable directors to discharge their responsibilities. The effectiveness of board meetings is dependent on carefully planned agendas and providing relevant papers and materials to directors sufficiently prior to board meetings.

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Strategy Setting: the objective of the company must be clearly documented in a long term corporate strategy including an annual business plan together with achievable and measurable performance targets and milestones. Business and Community Obligations: though the basic activity of a business entity is inherently commercial yet it must also take care of community's obligations. The stakeholders must be informed about the approval by the proposed and ongoing initiatives taken to meet the community obligations. Financial and Operational Reporting: the board requires comprehensive, regular, reliable, timely, correct and relevant information in a form and of a quality that is appropriate to discharge its function of monitoring corporate performance. Monitoring the Board Performance: the board must monitor and evaluate its combined performance and also that of individual directors at periodic intervals, using key performance indicators besides peer review. Audit Committee: is inter alia responsible for liaison with management, internal and statutory auditors, reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting to the board on the key issues. Risk Management: risk is an important element of corporate functioning and governance. There should be a clearly established process of identifying, analysing and treating risks, which could prevent the company from effectively achieving its objectives. The board has the ultimate responsibility for identifying major risks to the organization, setting acceptable levels of risks and ensuring that senior management takes steps to detect, monitor and control these risks.

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Framework for Effective Corporate Governance Adoption of good Corporate Governance practices has emerged as an integral element for doing business today. It is not only a pre-requisite for facing intense competition for sustainable growth in the emerging global market scenario but is also an embodiment of the parameters of fairness, accountability, disclosures and transparency to maximize value for the stakeholders. The Organization for Economic Cooperation and Development (OECD) Code recognizes that different legal systems, institutional frameworks and traditions across countries have led to the development of a range of different approaches to corporate governance. However, a high degree of priority has been placed on the interests of shareholders, who place their trust in corporations to use their investment funds wisely and effectively is common to all good corporate governance regimes. Organizational Framework The organizational framework for corporate governance initiatives in India consists of the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). The first formal regulatory framework for listed companies specifically for corporate governance was established by the SEBI in February 2000, following the recommendations of Kumarmangalam Birla Committee Report. It was enshrined as Clause 49 of the Listing Agreement. Thereafter SEBI had set up another committee under the chairmanship of Mr. N. R. Narayana Murthy, to review Clause 49, and suggest measures to improve corporate governance standards. Some of the major recommendations of the committee primarily related to audit committees, audit reports, independent directors, related party transactions, risk management, directorships and director compensation, codes of conduct and financial disclosures. The Ministry of Corporate Affairs had also appointed a Naresh Chandra Committee on Corporate Audit and Governance in 2002 in order to examine various corporate governance issues. It made recommendations in two key aspects of corporate governance: financial and nonfinancial disclosures: and independent auditing and board oversight of management. Legal Framework An effective regulatory and legal framework is indispensable for the proper and sustained growth of the company. There is a need for the law to take into account the requirements of different kinds of companies that may exist and seek to provide common principles to which all kinds of companies may refer while devising their corporate governance structure. The important legislations for regulating the entire corporate structure and for dealing with various aspects of governance in companies are Companies Act, 1956 and Companies Bill, 2004. These laws have been introduced and amended, from time to time, to bring more transparency and accountability in the provisions of corporate governance. That is, corporate laws have been

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simplified so that they are amenable to clear interpretation and provide a framework that would facilitate faster economic growth. The Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of India Act, 1992 and Depositories Act, 1996 have been introduced by Securities and Exchange Board of India (SEBI), with a view to protect the interests of investors in the securities markets as well as to maintain the standards of corporate governance in the country.

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Benefits of Effective Corporate Governance The concept of corporate governance has been finding wide acceptance for its relevance and importance to the industry and economy. It contributes not only to the efficiency of a business enterprise, but also, to the growth and progress of a country's economy. Several studies in India and abroad have indicated that markets and investors take notice of well managed companies and respond positively to them. Such companies have a system of good corporate governance in place, which allows sufficient freedom to the board and management to take decisions towards the progress of their companies and to innovate, while remaining within the framework of effective accountability. In today's globalised world, corporations need to access global pools of capital as well as attract and retain the best human capital from various parts of the world. Under such a scenario, unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed. The credibility offered by good corporate governance procedures also helps maintain the confidence of investors both foreign and domestic to attract more long-term capital. This will ultimately induce more stable sources of financing. A corporation is a congregation of various stakeholders, like customers, employees, investors, vendor partners, government and society. Its growth requires the cooperation of all the stakeholders. Hence, it is imperative for a corporation to be fair and transparent to all its stakeholders in all its transactions by adhering to the best corporate governance practices. Good Corporate Governance standards add considerable value to the operational performance of a company by: 1. improving strategic thinking at the top through induction of independent directors who bring in experience and new ideas; 2. rationalizing the management and constant monitoring of risk that a firm faces globally; 3. limiting the liability of top management and directors by carefully articulating the decision making process; 4. assuring the integrity of financial reports, etc. It also has a long term reputational effects among key stakeholders, both internally and externally. Also, the instances of financial crisis have brought the subject of corporate governance to the surface. They have shifted the emphasis on compliance with substance, rather than form, and brought to sharper focus the need for intellectual honesty and integrity. This is because financial and non-financial disclosures made by any firm are only as good and honest as the people behind them. Good governance system, demonstrated by adoption of good corporate governance practices, builds confidence amongst stakeholders as well as prospective stakeholders. Investors are willing
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to pay higher prices to the corporate demonstrating strict adherence to internally accepted norms of corporate governance. Effective governance reduces perceived risks, consequently reduces cost of capital and enables board of directors to take quick and better decisions which ultimately improves bottom line of the corporate. Adoption of good corporate governance practices provides long term sustenance and strengthens stakeholders' relationship. A good corporate citizen becomes an icon and enjoys a position of respects. Potential stakeholders aspire to enter into relationships with enterprises whose governance credentials are exemplary. Adoption of good corporate governance practices provides stability and growth to the enterprise. The benefits of promoting effective corporate governance can be summarised in the following table: Benefits to Society Benefits to Companies & Investors

Encourages investment and sustainable growth. Enhances company performance. Fights corruption. Promotes competitiveness. Stimulates productivity and innovation. Promotes efficiency and reduces waste. Stabilizes financial markets. Develops capital markets. Lowers cost of capital. Strengthens company reputation. Improves strategy. Builds stakeholder relationships. Grows and preserves shareholder value. Protects investors rights.

Fosters transparent relations between business Mitigates risk. and the state. Supports public confidence in the market Increases liquidity. system. Table 2: Benefits of promoting effective corporate governance

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Conclusion There is a growing consensus among policymakers, business leaders, and the public that corporate governance is an essential tool for improving corporate performance and advancing the overall development of market-oriented democracies. Corporate governance functions as a complete system, requiring an institutional foundation (rule of law, market institutions, and property rights), sound practices within firms, and external elements such as market pressures and appropriate regulatory supervision. The potential benefits from governance reforms in emerging markets like India are enormous.

Development of norms and guidelines are an important first step in a serious effort to improve corporate governance. The bigger challenge in India, however, lies in the proper implementation of those rules at the ground level. Establishing trusted markets with sound institutional foundations and introducing governance principles to all types of businesses will stimulate commerce, investment, and entrepreneurship.

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Bibliography Grant Thornton "Corporate Governor", Vol. 3, No. 4, pp. 1, 2006.

KPMG "Internal audits role in modern corporate governance, Thought Leadership Series", 2003.

KPMG "The state of corporate governance in India", 2009.

Ernst & Young "Effective Corporate Governance - An operating framework", 2009.

PricewaterhouseCoopers LLP "Corporate Governance - Best practice reporting", 2010.

The Institute of Internal Auditors "Internal Audit Independence and Corporate Governance - A Research Study", April 2003.

The Institute of Internal Auditors Research Foundation Internal Audit Reporting Relationships: Serving Two Masters", 2003.

Harvard Business School "M&A Legal Context: Basic Framework for Corporate Governance", October 2003.

Indiana University, Kelley School of Business "CLASS: Five elements of corporate governance to manage strategic risk", 2006.

SAFA Best Practices on Corporate Governance.

Center for International Private Enterprise "REFORM Toolkit", August 2008.

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