Acknowledgement: One of the pleasant aspects of preparing a Thesis is the opportunity to thank to those who have contributed to make

the project completion Advocate possible. Supreme I am extremely thankful to Professor Mr. NADIRSHAW K. DHONDY,

Court, whose active interest in the project and insights helped me formulate, redefine and implement my approach to the project. Last but not certainly the least, I would like to extend my gratitude to the faculty of SASMIRAs Institute of Management Studies and Research (SIMSR), Mumbai and the Library staff for equipping me with the basics that helped me throughout the making of this project. I am also thankful to Vidya my friend and my sister and all those seen and unseen hands & heads, which have been of direct or indirect, help in the completion of this project.

PROLOGUE Corporate Governance (CG) has emerged as one of the key elements of public policy reforms individuals. It is still in its infancy; it has been around only for the last three to four years. It is however not a foolproof concept as it relies heavily on data available from insiders. But it has specific and special role to play to enhance the strength of a particular unit and of the entire corporate sector. CorporateGovernance is to be maintained or observed as effective tool to assure thestakeholder s of their long-term interests without prejudice to public interest. Corporate Governance is the term given to the management practices followed by the business organizations. We believe that good business practices, transparency in corporate financial reporting and the highest levels of corporate governance must be maintained. These channels in turn are activated through several structural and institutional factors pertaining to the corporation. They are as follows: The ownership structure of the organization. The financial structure of the corporation. The structure and functioning of the company boards and the associated internal control systems. The legal, political and regulatory environment within which the Corporate functions. Thus Corporate Governance (CG) is the way the firm ought to be run, managed and controlled. It is related with supervision and holding the responsibility of those who direct and control the management.

CASE STUDY INDEX Corporate Governance Practices in INFOSYS TECHNOLOGIES Ltd. Corporate Governance Practices in ITC Ltd.

PRIME TIME MATTER INTRODUCTION Corporate governance has succeeded in attracting a good deal of public interest because of its apparent importance for the economic health of corporations and society in general. However, the concept of corporate governance is poorly defined because it potentially covers a large number of distinct economic phenomenons. As a result different people have come up with different definitions that basically reflect their special interest in the field. It is hard to see that this 'disorder' will be any different in the future so the best way to define the concept is perhaps to list a few of the different definitions rather than just mentioning one definition. OBJECTIVE To attain highest standard of procedures and practices followed by the corporate world so as to have transparency in its functioning with an ultimate aim to maximise the value of various stakeholders. What is Corporate Governance? Joanna Sheiton, (OCED) described corporate governance as a set of relationships between a companys management, its Board of directors, shareholders and other stakeholders. In a broader sense, he defined good corporate governance as important for overall market confidence, the efficiency of international capital allocations, the renewal of countries industrial bases, and ultimately nations overall wealth and welfare. The framework for corporate governance is not only an important component affecting the long-term prosperity of companies, it is a leading species of large genus namely, National Governance, Humane Governance, societal governance, economic governance and political governance. Government provides necessary conditions or environment to Corporates to operate. However, value can be added by achievements of technological achievement, enhancement of productivity and optimal use of available resources by corporate sector. It is to be noted that new technologies are on the anvil e.g. Information Technology thereby improving the speed of communication and dearth of distance.

It is known fact that vital needs of success of any organization lingers on its ability to mobilize and utilize all kinds of resources to meet the objectives clearly set as part of the planning process. Managing well depends on internal and externalfactors, the latt er include availability, cost effectiveness; technological advancement. Increasingly, revelations of deterioration in quality and transparency, have called for adoption of internationally accepted Best Practices. Theacceptance of the conc ept gave rise to Corporate Governance. CorporateGovernance encompasses commitment to values and to ethical business conduct to maximize shareholder values on a sustainable basis, while ensuring fairness Government and toall stakeholders including customers, employees, and investors, vendors,

society at large. Corporate Governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed and how performance is optimized. Sound Corporate Governance is therefore critical to enhance and retain investors trust. 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 organisation. Ethical leadership is good of for business as the organization is seen to conduct its business in line with theexpectations

all stakeholders. What constitutes good Corporate Governance will evolve with the changing circumstances of a company and must be tailored to meet these circumstances. The very definition of corporate governance stems from its organic link with the entire gamut of activities having a direct or indirect influence on the financialhealth of corporate entities. The Cadbury Report (1992) simply describesCorporate Go vernance as the system by which companies are directed andcontrolled. So far as corporate governance is concerned, it is financial integrity that assumes tremendous importance. This would interest involved mean in financial decision that making. the When it comes to directors of the even andallconcerned should be open and straight/forthright about issues where there isconflict

purchase/procurement procedures, there is need for greater transparency. Prof. Kenneth Scott of Stanford Law School described, corporate governance as to include every force that bears on the decision-making of the firm, that would Encompass not only the control rights of stockholders, but also the contractual covenants and insolvency powers of the debt holders, the

commitments

towards

employees, customers andsuppliers, the regulations and the statutes.In addition,the firms decisi ons are powerfully affected by competitive conditions in thevarious markets in which it operate s. Despite the various attempts to definecorporate governance and its elements, there is no single model of good corporate governance. Although the general principles are widely accepted, they are not set-in concrete and must be adjusted to reflect the specific circumstances and needs of individual organizations. The Business Roundtable states: Good corporate governance is not a one size fits all proposition, and a wide diversity of approaches to corporate governance should be expected and entirelyappropriate. Moreover, a corporations practices will evolve as it adapts tochanging situations.The one size fits all approach has also been rejected by the OECD, which, instead, has advocated the need for pluralism, flexibility and adaptability incorporate governance. The OECD has recently reinforced this view and stated that to remain competitivein a changing world, corporations must innovate and adapt their corporategovernan ce practices so that they can meet new demands and grasp newopportunities.The Corporate sy stem and diverse ownership did contribute in a substantialmeasure to prosperity, employment potential and living standards of the subjects across the globe. Not withstanding the contributions, the failures too caused concerns among the regulators. Existing laws, rules and controls did not adequately address the issues related to the failures caused by deficient or intentional fraudulent managements. In USA, the Sarbanes-Oxley Act 2002 was passed to address the issues associated with corporate failures, achieve quality governance and restoring investor confidence. The Securities and Exchange Commission of USA initiated action against multinational accounting firms for failure to detect blatant violation of accounting standards, and penalties running to several million dollars were recovered, from certain multinational consultancy firms Why Corporate Governance? a) The liberalization and de-regulation world over gave greater freedom inmanagement. This

would imply greater responsibilities. b) The players in the field are many. Competition brings in its wake weakness in standards of reporting and accountabilitys) Market conditions are increasingly becoming complex in the light of global developments like WTO, removal of barriers/reduction in duties.d) The failure of corporates due to lack of transparency and disclosures andinstances of falsification of accounts/embezzlement and the effect of suchundesi

rable practices in other companies. It is the increasing role of foreign institutional investors in emerging economies that has made the concept of corporate governance a relevant issue today. In fact, the expression was hardly in the public domain. In the increasingly closeinteraction of the economies of different countries lies the process of globalisation. This involves the rapid migration of four elements across national borders. These are (I) Physical capital in terms of plant and machinery; (ii) Financial capital; (iii)Technology; and (iv) Labour The increasing concern of the foreign investors is that the enterprise in which of theyinvest should not only be effectively managed but should also observe the principles

corporate governance. In other words, the enterprises will not do anything illegal or unethical. This need for re-assurance is felt by the FIIs due to the fact that there have been cases of dramatic collapse of enterprises which were apparently doing well but which were not observing the principles of corporate governance. In India corruption is an all embracing phenomenon. In this, if the respective players in the field were to adopt healthy principles of good corporate governance and avoid corruption in their transactions, India could really take a step to becoming a less corrupt country and improving its rank in the CorruptionPerception forward Index

listed by the Transparency International. Studies in India and abroad show that markets and investors take notice of well managed companies respond positively to them and reward such companies with higher valuations. Clause 49 Stock Exchange Listing Agreements (ListingAgreements), SEBI ACT Page 10

Securities

and

Exchange

Board

of

India

constituted

Committee

on

CorporateGovernance under the Chairmanship of Mr. Kumar Mangalam Birla. Thecommittee observed that there are companies, which have set high standards of governance while there are many more whose practices are matters of concern.There is increasing concern about standards of financial reporting andaccountability especially after losses are suffered by investors and leaders in the recent past, which could have been avoided with better and more transparent reporting practices. Companies raise capital from market and investors suffered due to unscrupulous managements that performed much worse than past reported figures. Bad governance was also exemplified by allotment of

promoters share at preferential prices disproportionate to market value, affecting minority holders interests. Many corporate did not pay heed to investors grievances. While there were enough rules and regulations to take care of grievances, yet the inadequate implementation and the absence of severe penalty left much to be desired.The Kumar Mangalam Committee made mandatory and nonmandatoryrecommendations. Based on the recommendations of this Committee, a new clause49 was incorporated in the Stock Exchange Listing Agreements (ListingAgreements).T he important aspects, in brief, are: (i) Boards of Directors are accountable to shareholders. (ii) Board controls are laid down code of conduct and accountable to shareholders for creating, protecting and enhancing wealth and resources 5 of the Company reporting promptly in transparent manner while not involving inday to day management.(iii) Classification of nonexecutive directors into those who are independentand those who are not.(iv) Independent directors not to have material or pecuniary relations with the Company / subsidiaries and if had, to disclose in Annual Report.(v) Laying emphasis on calibre of non-executive directors especially independent directors.(vi) Sufficient compensation package to attract talented nonexecutive directors. Page 11

(vii) Optimum combination of not less than 50% of non-executive directors and of which companies with non-executive Chairman to have at least one third of independent directors and under executive Chairman at least one half of independent directors.(viii) Nominee directors to be treated on par with any other director,(ix) Qualified independent Audit committee to be setup with minimum of three all being non-executive

directors with one having financial and accounting knowledge.(x) Corporate governance report to be part of Annual Report and disclosure on directors remuneration etc., to be included. Subsequent recommendations by Naresh Chadra Committee Naresh Chandra Committee recommendations relate to the Auditor-Companyrelationship and the role of Auditors. Report of the SEBI Committee on Corporate Governance recommended that the mandatory recommendations on matters of disclosure of contingent liabilities, CEO/CFO Certification, definition of Independent Director, independence of Audit Committee and independent director exemptions in the report of the Naresh Chandra Committee, relating to corporate governance, be implemented by SEBI. Subsequent recommendations by Narayan Murthy Committee Narayana Murthy Committee recommendations include role of Audit Committee, Related party transactions, Risk management, compensation to NonExecutiveDirectors, Whistle Blower Policy, Affairs of Subsidiary Companies, AnalystReports and other non-mandatory recommendations. Page 12 DIRECTORS RESPONSIBILITY The following major responsibilities of the board of directors reflect the broad purposes of governance: Define and uphold the mission and purpose of the MFI. Develop and approve strategic directions (with management); monitor achievement of strategic goals. Oversee management performance, including selection, support andevaluation of CEO.

 Ensure that the MFI manages risks effectively; assume fiduciaryresponsibility. Foster effective organizational planning, including succession planning. Ensure adequate resources to achieve the mission, including assisting in raising of equity and debt. Represent the MFI to the community and the public; ensure thatorganization responsibilities to the larger community. Ensure that the organization changes to meet emerging conditions; particularly in times of distr ess, temporarily assume managementresponsibilities.The further responsibilities address board and board member conduct: Uphold the ethical standards of the organization, with transparency and avoidance of conflicts of interest. Represent the interests of the MFI as a whole and not those of oneshareholder shareholders. Evaluation and commitment for improving their performance. Page 13 or group of fulfils its

INSIDER TRADING Another important aspect of corporate governance relates to issues of insider trading. It is

important that insiders do not use their position of knowledge and access to inside information about the company, and take unfair advantage of the resulting information asymmetry. To prevent this from happening, Corporate are expected to disseminate the material price sensitive information in a timely and proper manner and also ensure that till such information is made public, insiders abstain from transacting in the securities of the company. The principle should bedisclose or desist. This therefore calls for companies to devise an internal procedure for ade quate and timely disclosures, reporting requirements, confidentiality norms, code of conduct and specific rules for the conduct of its directors and employees and other insiders. For example, in many countries, there are rules for reporting of transactions by directors and other senior executives of companies, as well as for a report on their holdings, activity in their own shares and net year to year changes to these in the annual report. The rules also cover the dealing in the securities of their companies by the insiders, especially directors and other senior executives, during sensitive reporting seasons. However, the need for such procedures, reporting requirements and rules also goes beyond Corporates to other entities in the financial markets such as Stock Exchanges, Intermediaries, Financial institutions, Mutual Funds and concerned professionals who may have access to inside information. This is being dealt with in a comprehensive manner, by a separate group appointed by SEBI, under the Chairmanship of Shri Kumar Mangalam Birla. SHAREHOLDERS The shareholders are the owners of the company and as such they have

certainrights and responsibilities. But in reality companies cannot be managed byshareholder re ferendum. The shareholders are not expected to assumeresponsibility for the management of corporate affairs. A companys management must be able to take business decisions rapidly. The shareholders have therefore to necessarily delegate many of their responsibilities as owners of the company to the directors who then become responsible for corporate strategy and operations. The implementation of this strategy is done by a management team. This

relationship therefore brings in the accountability of the boards and the management to the shareholders of the company. A good corporate framework is one that provides adequate avenues to the shareholders for effective contribution in the governance Page 14 Of the company while insisting on a high standard of corporate behaviour without getting involved in the day to day functioning of the company. Rights and Responsibilities of shareholders The basic rights of the shareholders include right to transfer and registration of shares, obtaining relevant information on the company on a timely and regular basis, participating and voting in shareholder meetings, electing members of the board and sharing in the residual profits of the corporation.The Committee therefore recommends that as shareholders have a right to participa te in, and be sufficiently informed on decisions concerning fundamental corporate changes, they should not only be provided information as under the Companies Act, but also in respect of other decisions relating to material changes such as takeovers, sale of assets or divisions of the company and changes in capital structure which will lead to change in control or may result in certain shareholders obtaining control disproportionate to the equity ownership. The Committee recommends that information like quarterly results, presentation made by companies to analysts may be put on companys web-site or may be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own website. The Committee recommends that the half-yearlydeclaration household of financial performance of including summary of the significant events in last six-months, should be sent to each shareholders.A company must have appropriate systems in place which will enable thesharehol ders to participate effectively and vote in the shareholders meetings. The company should also keep the shareholders informed of the rules and voting procedures, which govern the general shareholder meetings. The annual general meetings of the company should not be deliberately held at venues or the timing should not be such which makes it difficult for most of the shareholders to Attend.The Company must also ensure that it is not inconvenient or expensive for shareholders to cast their vote. Currently, although the formality of holding the general meeting is gone through, in

actual

practice

only

a small

fraction

of the

shareholders

of

that company

do or can really participate therein. This virtually makes the concept of corporatedemocracy illusory. It is imperative that this situation which has lasted too long needs an early correction. In this context, for shareholders who are unable to attend the meetings, there should be a requirement which will enable them to vote by Page 15

Postal ballot for key decisions. This would require changes in the Companies Act. The Committee was informed that SEBI has already made recommendations in this regard to the Department of Company Affairs. The Committee believes that the General Body Meetings provide an opportunity to the shareholders to address their concerns to the board of directors and comment on and demand any explanation on the annual report or on the overall functioning of the company. It is important that the shareholders use the forum of general body meetings for ensuring that This thecompany is being properly stewarded for maximising the interests of theshareholders.

is important especially in the Indian context. It follows from the above that for effective participation shareholders must maintain decorum during the General Body Meetings. The effectiveness of the board is determined by the quality of the directors and the quality of the financial information is dependent to an extent on the efficiency with which the auditors carry on their duties. The shareholders must therefore show a greater degree of interest and involvement in the appointment of the directors and the auditors. Indeed, they should demand complete information about the directors before approving their directorship. The Committee recommends that in case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following information: A brief resume of the director; Nature of his expertise in specific functional areas; and

 Names of companies in which the person also holds the directorship and the membership of Committees of the board. Essential Governance Principles Page 16

A company should: 1. Lay solid foundations for management and oversight recognise and publish the respective roles and responsibilities of board and management.2. Structure the board to add value - Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.3. Promote ethical and responsible decisionmaking- Actively promote ethical and responsible decision-making.4. Safeguard integrity in financial reporting- Have a structure to independently verify and safeguard the integrity of the companys financial reporting.5. Make timely and balanced disclosure- Promote timely and balanced disclosure of all material matters concerning thecompany.6. Respect the rights of shareholders- Respect the rights of shareholders and facilitate the effective exercise of thoserights.7. Recognise and manage risk - Establish a sound system of risk oversight and management and internal control.8. Encourage enhanced performance9. Remunerate fairly and responsibly10. Recognise the legitimate interests of stakeholders11. Corporate Governance Rating is made mandatory for listed companies. Corporate Governance at Universal Level: Page 17

Traditionally the matters with corporate sector were involved with esoteric branch of commercial law. Limited generally to a narrow view of how to ensure

themanagers follow the interests of shareholders. Basic standards of CorporateGovernance stru cture and processes have been slowly evolving over last twodecades. Traditionally it was observed only in respect of the operation of market pressure. Looking beyond India the scenario in general is different. In the country like U.S. and U.K. there is an active market for corporate control to discipline managers, if they fail to maximize shareholders wealth. They largely adopted three maininstruments they are- "Proxy Contests". Friendly mergers and Hostile takeover. The first among the above said there is considered more effective Friendly mergershave hardly succeeded to solve the "agency problem". While takeover is notappealing strongly on the ground of heavy cost incurred in it and also for want of political will conducive to the policy. In Germany and Japan the system that prevails in U.K. and U.S. is absent. Unlike that system there is "BankingSupervision". The main bank financing the corporate unit acts as an external control mechanism. In such case very least intervention is found and that only when financial problem arises. It is in light of these experiences that innovative approach to the concept is formed. Several credit rating agencies have stepped in the market and they are offering services of the kind, which meets with the Quality of Governance in corporate entities. Institutional investors in companies based in emerging markets claim to be willing to pay as much as 30 percent more for shares in companies that are well-governed. Do these investors mean what they say? The authors examined 188 companies from India, Korea, Malaysia, Mexico, Taiwan and Turkey to test the link between market valuation and corporate governance practices. They found that companies with better corporate governance has higher price-to-book ratios, indicating that investors do indeed reward good governance, and with quite a large premium: companies can expect a 10 to 12 percent boost to their market valuations by going from worst to best on any single element of governance(MC Kinsey survey). Onecan relatively easily develop financial market, through a determined effort toimprove corporate governance practices. CORPORATE GOVERNANCE SCORES Page 18

For calculation of corporate governance score the author has used the six major variables, which are then divided into sub components. Weights are assigned to each of these components. (As shown in Table 1). The variables and weights by have been taken after careful study of existing literature. The CG Score has beencalculated assigning to each variable component points on a 5 to 1 Linkers Point scale. Table 1:

Section II : Analysis of Variables Used. 1) Structure and Composition of Board: Board members owe a duty to make decisions based on what ultimately is best for the long term interest of shareholders. In order to do this effectively, the board members need a combination of three things: Independence: A board should be composed of at least a majority of Independent Members with the autonomy to act independently from management. Experience: Board members who have appropriate experience and expertise relevant to the companys business are capable to evaluate what is in the best interest of shareholders. Depending on the nature of the business, this may require specialized expertise by at least some board members. Resources: There needs to be internal mechanisms to support theindependent work of the board, including the authority to Board

hire outsideconsultants without managements intervention or approval. Thismechanism alone preserves the integrity of the boards independent oversight function. a) Independence: Independence, as it relates to board members, refers to the degree to which they are not biased or otherwise controlled be company management or other groups who exert control over management. Case I Page 20 CORPORATE GOVERNANCE PRACTICES IN INFOSYSTECHNOLOGIES LTD. Infosys was incorporated in 1981 with the vision of building a globally respected corporation a vision that has translated into a strong organization commitment towards discipline, fair play and good corporate governance. Infosys was the first Indian company to emphasise on strong corporate governance practices in India. The company expanded its corporate governance practices significantly beyond what was required by the letter of the law. It voluntarily complied with the USGAAP accounting requirements, and was the first company to prepare financial statements in compliance with the GAAP requirements of eight countries. The company was also among the first in the country to incorporate a number of innovative disclosures in its financial reporting, including human resourcesvaluation, brand valuation, value-added statement and EVAR report Integrity, fairness and transparency across its operations has been the main mantra for Infosys.Infosys emphasizes its commitment to a strong value system and corporategovernan ce practices, by making this and integral part of the training of every employee. Infosys was a pioneer in inducting independent directors to its Board, thus greatly strengthening Board oversight of senior management in the company. Over the years, the management emphasized continuous dialogue with its investors and placed a high priority on investor relations and feedback. For example, Infosys early investments in stock markets ended as soon as it was apparent that investors felt that these added no value. Infosys focus on corporate governance not only brought global visibility to the company but also created pressure on other Indian firms to raise their governance standards. This led to an encouragement trend of companies

across industries scaling up their corporate governance standards and going beyond mandatory requirements. Infosys believes that good corporate governance must also translate into being a responsible corporate citizen. The senior executives of Infosys have also served onvarious task forces set up by the Indian government to develop meaningfulcorporate governance codes and ethical industry practices. Over the last 25 years, Infosys has remained committed to being ethical, sincere and open in its dealings with all its stakeholders. It has enabled the company to build an organization that is trusted and admired not just in India but also by companies across the world. Itsdisclosure standards, detailed segmental data, presentation of accounts as per Page 21

GAAP of eight countries, detailed cost break-ups are among the best in the industry. Infosys also provides the most detailed manpower datavery important in inits space. Age profiles, experience, education levels and gender mix are allelaborated

detail. Infosys is one of the very few companies in India to have a nomination committee, which provides training to its non-executive directors and appraises their performance. Where Infosys loses out is on the issue of stock options, high cash levels impacting return ratios and a relatively large board with about 15 board members. Corporate governance has emerged as the foundation of successful companies both in India and globally. Today shareholders, institutionalinvestors, lenders and other stakeholders demand more information on thecapabilit y and integrity of boards and management of companies they deal with and the processes these companies follow. They believe that sound corporate governance is critical to enhance and retain stakeholders' trust. Accordingly, they always seek to ensure that they attain their performance rules with integrity. Their Board exercises its fiduciaryresponsibilities in the widest sense of the term. Their disclosures always seek to attain best practices in international corporate governance. They also endeavour to enhance long-term shareholder value and respect minority rights in all our business decisions. Their corporate governance philosophy is based on the following principles: 1.Satisfy the spirit of the law and not just the letter of the law. Corporate governance standards should go beyond the law.

2. Be transparent and maintain a high degree of disclosure levels. When in doubt, Disclose. 3. Make a clear distinction between personal conveniences and

corporateresources.4.Communicate externally, in a truthful manner, about how the Company is run internally.5.Comply with the laws in all the countries in which we operate.6.Have a simple and transparent corporate structure driven solely by businessneeds.7.Management is the trustee of the shareholders' capital and not the owner. Page 22

Corporate Governance Ratings. CRISIL : CRISIL assigned CRISIL GVC Level 1 rating to Infosys. This Governance and Value Creation (GVC) rating indicates capability to create wealth for all our stakeholders while adopting sound corporate governance practices. ICRA: ICRA assigned CGR 1 rating to corporate governance practices of Infosys. The rating of CGR 1 is the highest on ICRAs Corporate Governance Rating (CGR) scale of CGR 1 to CGR 6. Infosys is the first company to be assigned the highest CGR by ICRA. TNS Survey: Ranked 1 in the category of Good reputation index The financial transparency and disclosure standards of Infosys are the worlds best.

It is awarded First position in SAFA (South Asian Federation of Accountants.) Best Presented Accounts Award 2004 in the Communication andInformation Technology Secto r based on the evaluation of the AnnualReport of the company. Best Annual report award from the Institute of Chartered Accountants of India for the 10 th Successive year. Infosys topped the regional rankings for best Corporate Governance in Asia Moneys Corporate Governance Poll. It has also received National award for Excellence in Corporate Governance from the Institute of Company Secretaries of India As a part of their commitment to follow global best practices, they comply with theEuro shareholders Corporate Governance Guidelines, 2000, and therecommendations of The Conference Board Commission on Public Trusts and Private Enterprises in the U.S. They also adhere to the UN Global Compact Programme. CG Score & Company Valuation. Page 23 Taking into account the above variables and studying the corporate governance of the company in detail we got the following scores for Infosys Technologies Ltd. (The details of the scores are given in the table below) Corporate Governance Score of Infosys Technologies (2002-2007)

Period Corporate Governance Score

2007 85%

2006 85%

2005 83%

2004 81%

2003 79%

2002 75%

Corporate Governance and Company Valuation: To determine the relationship between Corporate Governance and Market Valuation following three indicators have been considered.1.Company Valuation2.Dividend Payout Ratio3.Operating Performance. (Turnover and Profit after Tax)Market capitalization (the current stock price multiplied by the number of sharesoutstanding) also serves as a companys price tag. But market capitalizationignores debt, and with some companies, debt is substantial enough to change the picture significantly. To overcome this shortcoming the latest concept is Enterprise Value, which is a modification of market capitalisation that incorporates debt. It represents a companys economic value the minimum amount someone would have to pay to buy it outright. Its an important number to consider when market value of a company is calculated. To calculate enterprise value, companys market capitalization value is taken, total debt added and cash and investments subtracted. Market Capitalisation = Current share price times total shares outstanding. Debt = long term debt + short term debt Enterprise value = Market Capitalisation Cash and Equivalents + Debt Following table shows the CG score, Market Capitalization and Enterprise Value of Infosys Technologies Ltd. Page 24 Period Market Capitalisation (in Rs. Cr) Enterprise Value(in Rs. Cr) Corporate Governance Score 2007 115307 109657 85% 2006 82154 78375 85% 2005 61073 59390 83% 2004 32909 31070 81% 2003 26847 25208 79% 2002 24654 23627 75%

Result of correlation: Between Market Capitalisation and CG Score is + 0.83 and between Enterprise value and CG Score is + 0.82It is very interesting to note from the above table that with the rise in CG score the Market Capitalisation and Enterprise Value is also on the rise. Both of these clearly suggest a very high positive correlation between the variables.

Corporate Governance and Payout Policy The major objective of adequate corporate governance practices value is the and

satisfactory payback to company shareholders. Under the assumptions of the originalModiglian i Miller irrelevant theorems, dividend policies are irrelevant for company shareholders Large andcontrolling shareholders have the incentives and the power to extract private benefits of con trol at the expense of the minority shareholders, because theyreceive the full benefits but only bear a fraction of the cost. In that context, a dividend payment guarantees equal treatment to all shareholders. In this section, we correlate the dividend per share and corporate governance score of the company for the period FY 2002 2007. CG Score and Dividend Payout Ration of Infosys Technologies (2002-2007) wealth. Among the various theories, the rent seeking theory

of the effect of agency problems on payout policies seems to be especially relevant in India.

Period Dividend payout ratio Corporate Governance Score Result of Correlation: + 0.62

2007 11.5 85%

2006 15 85%

2005 11.5 83%

2004 29.5 81%

2003 27 79%

2002 20 75%

A moderate positive correlation has been established between CG and dividend payout. It signifies that better CG though leads to better operating performance but does not necessarily mean high payout to shareholders. Corporate Governance and Operating Performance. Indeed reputation harm and financial damage that can be caused by conflicts of interest and poor oversight are undeniable Bob Stein Improving the performance is related with profitability, which in turn is return of brand image. Therefore, the brand is the practica l reason for Improving the governance. Improved governance also protects the viability of business byregaining the

customer

confidence

and

market

trust.In this section, we correlate the profit after tax and turnover with corporategovernance score of the company for the period FY 2002-2007. CG Score, Turnover and PAT of Infosys Technologies Limited (2002-2007)

Period Profit after tax in Rs. (Cr) Income (Turnover in Rs. Cr) Corporate Governance Score

2007 3777 13149 85%

2006 2421 9028 85%

2005 1859 6860 83%

2004 1243 4761 81%

2003 958 3623 79%

2002 808 2654 75%

Results of Correlation: Correlation with profit practices. determination High after tax is +0.83 and positive the correlation inferences with between drawn PAT from turnover also the is suggests coefficient

+0.86.Turnover proxy of Firm size is positively correlated with good corporategovernance that better corporate governance practices result in better operating performance.Coefficient of confirms of correlation. One can argue that even with the highest estimates of financialfundamentals one can achieve the same growth in value by more than twice sales growth or 35% increase in financial results demands more efforts compared to corporate governance practices improvement leading to the same value growth. But again improving the performance is related with governance. Page 26 Summary and Conclusions The relation between corporate governance and organizational performance is and profitability, which in turn the isthe return of brand image. Therefore, the brand is the practical reason for improving

of fundamental importance to practitioners, academics and policy makers.Assumptions

strongly held beliefs about the importance of governance are shaping the current regulatory climate for the design of governance structures. In this study, we have developed through a

comprehensive analysis a very high positive relationship between level of Corporate Governance and market valuationsof the company which indicates that superior governance results in better valuations. Companies with high governance rankings enjoy superior market premiums.To sum up:1.We find that better corporate governance is associated with higher operating performance and higher valuations.2.Firms could improve investors wealth and protection rights by increasingdisclosure, selecting well-functioning and independent boards, imposingdis ciplinary mechanisms.3.These results are consistent with results found in Gompers et al. (2001),which find that firms with stronger corporate governance have relatively higher wealth creation in the US.4.Better Corporate Governance leads to value creation for all the stakeholders. Good governance requires a mindset within the corporation, which integrates the corporate code of ethics into the day-to-day activities of its managers and workers. As the sociologists Rossouw and van Vuuren note, companies must move where from the thereactive and compliance mode of corporate ethics, to the integrity mode, functions of the entire organization are completely aligned with its value system.

CASE II CORPORATE GOVERNANCE PRACTICES IN ITC LTD. Page 27

ITC is one of India's foremost private sector companies with a marketcapitalisation of nearly US $ 18 billion and a turnover of over US $ 5.1 Billion.ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' and the Worlds Most Reputable Companies by Forbes magazine, among India's MostRespected Companies by Business World and among India's Most ValuableCompanies by Business Today. ITC ranks among India's `10 Most Valuable (Company) Brands', in a study

conducted by Brand Finance and published by the Economic Times. ITC also ranks among Asia's 50 best performing companies compiled by Business Week. ITC's Core Values are aimed at developing a customer-focused, high-performance organisation which creates value for all its stakeholders. Over the years, ITC has evolved from a single product company to a multi- business corporation. Its businesses are spread over a wide spectrum, ranging fromcigarettes and tobacco to hotels, packaging, paper and paperboards andinternational commodities trading. Each of these businesses is vastly different from the others in its type, the state of its evolution and the basic nature of its activity, all of which influence the choice of the form of governance. The challenge of governance for ITC therefore lies in fashioning a model that addresses theuniqueness of each of its businesses and yet strengthens the unity of purpose of the Company as a whole. Since the commencement of the liberalisation process, India's economic scenario has begun to alter radically. Globalisation will not only significantly heighten business risks, but will also compel Indian companies to adopt international normsof transparency and good governance. Equally, in the resultant competitivecontext, freed om of executive management and its ability to respond to thedynamics of a fast changing business environment will be the new success factors. ITC's governance policy recognises the challenge of this new business reality in India. ITC has won the Golden Peacock Awards for 'Corporate Social Responsibility

(Asia)' in 2007, the Award for CSR in Emerging Economies2005 and Excellence in Corporat e Governance' in the same year. TheseAwards have been instituted by the Institute of Directors, New Delhi, in Page 28

Association with the World Council for Corporate Governance and Centre for Corporate Governance DEFINITION AND PURPOSE

ITC defines Corporate Governance as a systemic process by which companies are directed and controlled to enhance their wealth generating capacity. Since largecorporations employ vast quantum of societal resources, we believe that thegovernance process should ensure that these companies are managed in a manner that meets stakeholders aspirations and societal expectations. CORE PRINCIPLES ITC's Corporate Governance initiative is based on two core principles. These are :i.Management must have the executive freedom to drive the enterpriseforward without undue restraints; andii.This freedom of management should be exercised within a framework of effective accountability.ITC believes that any meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is usedwith care and responsibility to meet stakeholder aspirations and societalexpectations. Cornerstones From the above definition and core principles of Corporate Governance emerge the cornerstones of ITC's governance philosophy, namely trusteeship, transparency, empowerment and accountability, control and ethical corporate citizenship. ITC believes that the practice of each of these leads to the creation of the rightcorporate culture in which the company is managed in a manner that fulfils the purpose of Corporate Governance. Trusteeship: Page 29

ITC believes that large corporations like itself have both a social and economic purpose. They represent a coalition of interests, namely those of the shareholders, other providers of capital,

business associates and employees. This belief there forecasts a responsibility of trusteeship on the Company's Board of Directors. They are to act as trustees to protect and enhance shareholder value, as well as to ensure that the Company fulfil its obligations and responsibilities to its other stakeholders. Inherent in the concept of trusteeship is the responsibility to ensure equity, namely, that the rights of all shareholders, large or small, are protected. Transparency: ITC believes that transparency means explaining Company's policies and actions tothose to whom it has responsibilities. Therefore transparency must lead tomaximum appropriate disclosures without jeopardising the Company's strategic interests. Internally, transparency means openness in Company's relationship with its employees, as well as the conduct of its business in a manner that will bear scrutiny. We believe transparency enhances accountability. Empowerment and Accountability: Empowerment is an essential concomitant of ITC's first core principle of governance that mana gement must have the freedom to drive the enterpriseforward. ITC believes that empowerment is a process of actualising the potential of its employees. Empowerment unleashes creativity and the Board of innovation throughout Directors theorganisation by truly vesting decisionare accountable to the making powers at the most appropriatelevels in the organisational hierarchy.ITC believes that shareholders, andthe management is accountable to the Board of Directors. We believe thatemp owerment, combined with accountability, provides an impetus to performance and improves effectiveness, thereby enhancing shareholder value. Control: ITC believes that control is a necessary concomitant of its second core principle of governance that the freedom of management should be exercised within aframework of appropriate checks and balances. Control should prevent misuse of power, facilitate timely management response to change, and ensure that business risks are pre-emptively and effectively managed.

Ethical Corporate Citizenship: Page 30 ITC believes that corporations like itself have a responsibility to set exemplary standards of ethical behaviour, both internally within the organisation, as well as intheir external relationships. We believe that unethical behaviour corruptsorganisational culture and undermine stakeholder value. The Governance Structure Flowing from the philosophy and core principles, Corporate Governance in ITCshall take place at three interlinked levels, namely Strategic supervision by the Board of Directors Strategic management by the Corporate Management Committee Executive management by the Divisional Chief Executive assisted by the Divisional Management Committee Roles The core roles of the various entities at the three levels of Corporate Governance will be as follows: Board of Directors (Board): The primary role of the Board of Directors is that of trusteeship to protect and enhance shareholder value through strategic supervision of ITC, its wholly owned subsidiaries and their wholly owned subsidiaries. As trustees they will ensure that the Company has clear goals relating to shareholder value and its growth. They should set strategic goals and seek

accountability for their fulfilment. They will provide direction, and exercise appropriate control to ensure that the Company is managed in a manner that fulfils stakeholder aspirations and societal expectations.The Board must periodically review its own functioning to ensure that it i sfulfilling its role. The ITC Board will be a balanced Board, consisting of Executive and NonExecutive Directors, the latter including independent professionals. Executivedirectors, including the Executive Chairman, shall not generally exceed 1/3rd of the total strength of the Board. The Non-Executive Directors shall compriseeminent professionals, drawn from amongst persons with experience in business /finance / law / public enterprises. Directors shall be appointed / re-appointed for a Page 31 period of three to five years, and in the case of Executive Directors up to the date of their retirement, whichever is earlier. The Board shall determine from time to time the retirement age for both Executive and Non-Executive Directors. The Board shall specify the maximum number of company Directorships which can be held by members of the ITC Board. NonExecutive Directors are expected to play a critical role in imparting balance to the Board processes by bringing an independent judgement to bear on issues of strategy, performance, resources, standards of Company conduct, etc. The Board shall meet at least six times a year and as far as possible meetings will be held once in two months. The annual calendar of meetings shall be agreed upon at the beginning of each year. As laid down in the Articles of Association of the Company, the quorum for meetings shall be one third of members and decisions shall be taken by simple majority, unless statutorily required otherwise. Meetings shall be governed by a structured agenda. All major issues included in the agenda shall be backed by comprehensive background information to enable the Board to take informed decisions. Agenda papers, as far as practicable, shall be circulated atleast three working days prior to the meeting. Normally items for the BoardAgenda, except th ose emanating from Board Committees, shall have beenexamined by the CMC. Minutes shall be circulated within 15 working days of the meeting and confirmed at the next meeting. Board decisions shall record the related logic as far as practicable. The Board shall have the following Committees whose terms of reference shall be determined by the Board from time to time: Audit Committee:

To provide assurance to the Board on the adequacy of internal control systems and financial disclosures. The Head of Internal Audit will act as coordinator to the Audit Committee, but will be administratively under the control of the Director accountable to the Board for the Finance function. Compensation Committee: To recommend to the Board compensation terms for Executive Directors and the senior most level of management below the Executive Directors. Nominations Committee: To recommend to the Board nominations for membership of the CMC and the Board, and oversee succession for the senior most level of management below the Executive Directors. Page 32

Investor Services Committee: To look into redressal of shareholder and investors grievances, approval of transmissions, subdivision of shares, issue of duplicate shares, etc. Terms of Reference of the Board Committees shall include: Objectives, Role, Responsibilities Authority / Powers Membership & Quorum

 Chairmanship Tenure Frequency of Meetings The composition of these Committees will be as follows: Committee Members Audit committee Directors of the Company, as m with not less than Chairman One of the Independent Directors, to be

ay be decided by the Board, determined by the Board. 3members, all being NonExecutiveDirectors with majorit y of them beingindependent; an d with at least oneDirector having financial and accounting knowledge. Finance The function, Director Head accountable to the Board for the of Internal Audit and representat ive of External Auditors shall be the Permanent Invitees with the Company Secretary to act as the Compensation Committee Secretary. Non-Executive Directors, as ma the Director accountable to the Boar d for the HR Function as the One of the Independent Directors, to be

y be decided by the Board, with determined by the Board

Nominations Committee Investor Services Committee

Secretary The Executive Chairman and all Executive Chairman the Non-Executive Directors. Directors of the Company, as m with the Company Secretary as the Secretary One of the non-Executive Directors, to

ay be decided by the Board, be determined by the Board.

Normally meetings of the Board Committees shall be convened by their respective Chairmen. However, any member of the Committee may, with the consent of the concerned Chairman, convene a meeting of the Committee. The Chairmanship of Board Committees shall be for two years at a time. Signed minutes of Board Committee meetings shall be tabled for the Boards information as soon as possible. However, issues requiring Board's attention /approval should be tabled in the form of a note to the Board from the Committee Chairman. In the event there are no issues to be brought before the Board by the Audit Committee, the Committee Chairman shall submit a 'NIL' report to the Board. Corporate Management Committee (CMC): The primary role of the CMC is strategic management of the Company's businesses control of the Board. The composition of within the

Board approved direction / framework. The CMC will operate under the superintendence and CMCwill be determined by the Board (based on the recommendation of the Nominations Committee), and will consist of all the Executive Directors and three or four key senior members of management. Membership of the CMC shall be reviewed by the Nominations Committee annually. The CMC shall be convened and chaired by the Executive Chairman of the Company. The Company Secretary shall be the Secretary of the CMC. The quorum for meetings will be 50% of the members, subject to a minimum of three members. Decisions will be taken by simple majority. Minutes of CMC meetings shall be tabled before the Board for its information. However, issues arising from CMC Meetings and requiring Boards approval / attention should be tabled in the form of a note from the relevant Executive Director. Agenda items shall be backed by comprehensive notes from the concerned member / invitee, along with DMC approval where applicable.

Page 34

Agenda papers, as far as practicable, shall be circulated at least three days prior to the meeting. The CMC shall normally meet once a month. Executive Chairman of ITC: The Executive Chairman of ITC shall operate as the Chief Executive for ITC as a whole. He shall the be the Chairman approved of by the the Board and the He CMC. shall His be primary role is with for to provide leadership to the Board and CMC for realising Company goals inaccordance charter Board. responsible theworking of the Board, for its balance of membership (subject to Board andShareholder approvals), for ensuring that all relevant issues are on the agenda, for ensuring that all directors are enabled and encouraged to play a full part in theactivities of the Board. He shall keep the Board informed on all matters of importance. He s hall preside over the General Meetings of shareholders. AsChairman of the CMC he will be responsible for its working, for ensuring that all relevant issues are on the agenda, for ensuring that all CMC members are enabled and encouraged to play a full part in its activities. Executive Director: a) As a member of the CMC, contribute to the strategic management of the Companys businesses within Board approved direction / framework. b) As Director accountable to the Board for a business (Line Director), assumeoverall responsibility for its strategic management, including its governance processes and top management effectiveness. c) As Director accountable to the Board for a wholly owned subsidiary, or its wholly owned subsidiary (Line Director), act as the custodian of ITC's interest and be responsible for their governance in accordance with the charter approved by the Board. d) As Director accountable to the Board for a particular corporate function (Line Director), assume overall strategic responsibility for its performance. Divisional Management Committee (DMC):

Executive management of the divisional business to realise tactical and strategic objectives in accordance with CMC / Board approved plan. Composition of the Page 35

DMC shall be determined by the Line Director with the approval of the CMC. The Divisional CEO shall convene and chair the DMC meetings. If the Divisional CEO, for any reason, is not in a position to convene a required DMC meeting, he shall in writing delegate the power to convene and chair the required meeting to one of the DMC members identified by name. Such delegation should be either for a specific meeting or for meetings to be held during a specific period of time. It cannot be a general, open-ended delegation. The key functions of the Division shall be represented on the DMC. Normally the Divisional Financial Controller, in addition to being a member, shall act as the Secretary to the DMC and will be responsible for circulation and custody of agenda notes and minutes. The DMC shall generally meet at least once a month to review Divisional performance and related issues. Quorum for meetings shall be 50% of the members subject to a minimum of three members. Decisions will be taken by simple majority. Minutes of meetings shall be tabled before the CMC for its information. Agenda items shall be backed by comprehensive notes from the relevant member / invitee. Agenda papers, as far as practicable, shall be circulated at least three days prior to the meeting. Divisional CEO: The Divisional CEO shall function as the Chief Operating Officer with

executiveresponsibility for day-to-day operation of the Divisional business, and shall provide le adership to the Divisional Management Committee in its task of executive management of the Divisional business. CONCLUSION It is ITC's belief that the right balance between freedom of management and accountability to shareholders can be achieved by segregating strategic supervisionfrom strategic and executive management. The Board of Directors (Board) astrustee s of the shareholders will exercise strategic supervision through strategic

Page 36 Direction and control, and seek accountability for effective strategic management from the Corporate Management Committee (CMC). The CMC will have the freedom, within Board approved direction and framework, to focus its attention and energies on the strategic management of the Company. The Divisional Chief Executive, assisted by the Divisional Management Committee, will have thefr eedom to focus on the executive management of the divisional business. The 3-tier governance structure thus ensures that: a. Strategic supervision (on behalf of the shareholders), being free frominvolvement in the task of strategic management of the Company, can beconducted by the Board with objectivity, thereby sharpening accountability of management. b. Strategic management of the Company, uncluttered by the day-to-day tasks of executive management, remains focused and energised; andc.Executive management of the divisional business, free from collectivestrategic responsibilities for ITC as a whole, gets focused on enhancing the quality, efficiency and effectiveness of its business. BIBLIOGRAPHY http://en.wikipedia.org/wiki/Corporate_governance Journal of the Institute of Chartered Accountants of India. Jul -2008, Aug-2008. www.indianmba.com www.managementparadise.com Page 38 EPILOGUE

When it comes to corporate governance, I think we will have to look at the hardware as well as the software aspect. So far as the software aspect is concerned, I would suggest, it depends on the values cherished and practiced by the members of the Board of Directors as well as the management of an organisation. It is always possible to mouth very high principles but act in a very lowly manner. If there is going to be divergence between practice and precept, then we are not going to achieve good corporate governance. This is the first point to be realised.The most important aspect for observing corporate governance is the topmanagement, particularly the board of directors and the senior level management of an enterprise - walking their talk. It is by walking their talk that the top management can earn credibility. This also has a direct bearing on the morale of an organisation. When it comes to the hardware aspect of corporate governance, we go into the issue of a code, which becomes a reference point for behaviour. But the sad fact in our country is that even though there is a lot of talk about corporate governance, when it comes to reality, nothing much happens. With the SEBI trying to bring some discipline in the stock market especially in terms of greater transparency and disclosure norms, corporate governance in theIndian context at least seems to focus primarily and rightly on the issue of transparency. It is lack of transparency that leads to corrupt or illegal behaviour. If corporate governance is concerned with better ethics and principles, it is only natural that the focus should be on transparency. But how is this transparency to be achieved? One method of course is the code. Another would be the regulatory authorities like SEBI, RBI etc. laying down guidelines so that a certain degree of transparency is automatically ensured. Another legal approach to achieve better corporate governance may be to look at the whole issue of bringing the corporatesector under the discipline of debt and equity. Perhaps amendment of theCompanies Act and bringing in this discipline will also help in automatically ensuring better ethics and corporate governance. Page 39

Perhaps the most important challenge we face towards better corporate governanceis the mindset of the people and the organisational culture. This change will have to come from within. The government or the regulatory agencies at best can provide certain environment, which will be conducive for such a mindset taking place, but the primary responsibility, is of the people especially the members of the board of directors and the top

management.Another important aspect is to realise that ultimately the spirit of corporategovern ance is more important than the form. Substance is more important than style. Values are the essence of corporate governance and these will have to be clearly articulated and systems and procedures devised, so that these values are practiced. We then come to a common moral problem in running enterprises. One can have practices which are legal but which are unethical. In fact, many a time, tax planning exercises may border on the fine razors edge between the strictly legal and the patently unethical. A clear understanding of the fundamental values which govern corporate governance and their explicit articulation in a proper code backed by well established structures and traditions like the ethics committee and audit committee may be the best insurance for good corporate governance under the circumstances. Corporate governance and ethical behaviour have a number of advantages. Firstly, they help to build good brand image for the company. Once there is a brand image, there is greater loyalty, once there is greater loyalty, there is greater commitment to the employees, and when there is a commitment to employees, the employees will become more creative. In the current competitive environment, creativity is vital to get a competitive edge. Corporate governance extends beyond corporate law. Its objective is not merefulfillment of legal requirements but ensuring commitment on managingtransparently for maximising shareholder values. As competition increases, technology pronounces the deal of distance and speeds up communication, environment also changes. In this dynamic environment the systems of CorporateGovernance also need to evolve, upgrade in time with the rapidly changingeconomic and industrial climate of the country. Page 40

Finally the key lessons for us to learn are that Regulations and Policies are only one part of improving governance. Existence of a comprehensive system alone cannotguarantee ethical pursuit of shareholders interest by Directors, officers andemployees. Quality of governance depends upon competence and integrity of Directors, who have to dilige ntly oversee the management while adhering tounpeachable ethical standards. Strengthened systems and enhanced transparency can only further the ability. Transparency about a

companys the right culture work culture is Most Essential.

governance

processis critical. Implementing Corporate Governance structures are important butinstilling

Corporate Governance in the Public Sector cannot be avoided and for this reason it must be embraced. But Corporate Governance should Governance, beembraced because it has much to offer to the Public Sector. GoodCorporate Good Government and Good Business go hand in hand. Page 41

Cross Reference Index

Certificate 2, Acknowledgement 3 Prologue 5 Case study index 6 Introduction 7,7,8,9 Clause 49 10, 11 Directory Responsibility13 Insider Trading14 Shareholders14, 14, 15 Governance Principles16, 17 Corporate Governance Scores18

Structure and Composition of Board20 Case Study on Infosys Technologies Ltd.21, 21, 22, 23,24,25,26 Case Study on ITC Ltd27, 28, 29,30,31,32,34,35,36 Bibliography37 Epilogue39, 39, 40

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