8.

Corporate Governance

 Corporate

Governance deals with problems that result from the separation of ownership and control this perspective, Corporate Governance focuses on the internal structure and the rules of the Board of Directors of independent audit Committee

From

Creation

Rules

for disclosure to shareholders and creditors and Control Management

OECD has defined Corporate Governance as the system by which business corporations are directed and controlled
The

structure of CG specifies the distribution of rights and responsibilities among different participants in the corporations out the rules and procedures for making decisions in corporate affairs

Spells

According to the Cadbury Committee, Corporate Governance is defined as holding the balance between economic and social goals and between individual and community goals

It ensures the interests of stakeholders It enables corporations to realize their aims and attract investments It enables state to strengthen their economies and discourage frauds and mismanagement

Evolution of Corporate Governance

To prevent the business failure, the Cadbury Committee under the chairmanship of Sir Adrian Cadbury was set up in 1991 It submitted its report on Code of Best Practices in December 1992, laying down the methods of Governance needed to achieve a balance between the essential powers of the BOD and their proper accountability They provide guidelines to the BOD, Non-Exec Directors and those on Reporting and Control

Guidelines
1. 2.

3.
4. 5.

6.
7. 8.

9.
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Management Accountability Providing adequate investments to management Disciplining and replacement of bad management Enhancing corporate performance Transparency Shareholders activism Investor protection Improving access to capital markets Promoting long-term investments Encouraging innovations

Came into limelight in 1991 when a committee known as Cadbury committee founded by financial reporting council, London stock exchange and accountancy profession To overcome the huge problem of scam and failure occurring in corporate sector worldwide To boost confidence of investors both in financial reporting and the ability of auditors to provide the safeguards

To review structure, rights and roles of board of directors, shareholders and auditors making them more effective and accountable Board of Directors meet regularly, retain full and effective control over the company & monitor the executive management Non Executive Directors bring in independent judgment on issues of strategy, performance and resources

Financial reporting and control: Project true and fair picture of the financial position Dealing with the right and responsibilities of Shareholders Elect directors Appoint auditors to provide external check, fair and Accurate reporting

Role of CEO, Board and Senior Executives

The main task of a Board, CEO and Senior Executives is To monitor the performance of managers To ensure that returns to share- holders are maximized

The Board should be independent and should ensure that all shareholders are treated equally

CEO and Board

CEO and Board should provide timely disclosure relating to financial position, ownership pattern and shareholding pattern It infuses a sense of discipline and accountability among managers It lowers risk perception

It reduces information gap between management and shareholders

Investors and Shareholders

Registration to the right of ownership

Conveyance and transfer of shares

Obtaining relevant information from the company on a timely and regular basis Participate and play a role in general shareholder meetings, elect members of the board Get a fair share of the profits of the company

Company secretary
All directors should have the advice and services of the Company Secretary He is responsible to ensure that Board procedures are followed and that applicable rules and regulations are compiled with Any removal of Company Secretary should be only approval of the Board

Non Executive directors

Non-Executive directors should give independent decisions on strategy, performance, resources, including key appointments & standards of conduct The majority should be independent of the management and free from business or any other relationship, which could interfere with their exercise of their Independent Judgment

Non-Executive Directors should be appointed for specific terms and reappointment shouldnt be automatic selected through a formal process

Board of Directors
Board should meet regularly, retain full and effective control over the company and monitor the executive Management Board should include sufficient number of nonExecutive Directors so that their views carry sufficient weight There should be an agreed procedure to take professional advice and services at the companys expense

Executive Directors Directors Service Contracts should not exceed three years without shareholders approval There should be full clear disclosure of their total emoluments, those if the Chairman, including pension contributions and stock opinions E.Ds pay should be subject to recommendations of a Remuneration Committee

Reporting and Control Code of Best Practices It is the boards duty to present a balanced and understandable assessment of companys position Objective & Professional relationship is maintained with the Auditors The Board should establish an Audit Committee of at least three Non-Executive Directors with written terms of reference, clearly defining authority & duties

Reform Measures in India

Companies are required to make disclosures on a continuous basis The decisions pertaining to dividend bonus, right announcements, or any other financial information are required to be made within 15 minutes of the conclusion of the Board Meeting Accounting procedures have been streamlines with norms introduced for segment reporting, related party transactions, and consolidated Balance Sheet

Governance - Key issue today Essential requirement for socio- economic development Matter of paramount importance for Govt. corporate and civil society at large

Corporate Governance rests on 4 Fundamental Corner stones

Corporate Governance
F A I R N E S S

T R A N P A R C Y

A C C O U N T AB ILI TY

R E S P O N SI BI LI T Y

Fairness: right judgment , right decision, fair accounting principles, honesty and integrity, and safeguarding the interest of all stakeholders Transparency: Open and clear policies, open communication, transparency in decision making and no hidden agenda or ambiguity Accountability: Responsibilities can be fixed easily for action taken and not taken and protecting the interest of the shareholders and investors

No market has divine right to investors capital

Responsibilities of corporates Shareholders wealth maximization Adherence to Law Ethical practices Employee-employer relationship Customer satisfaction Corporate Social Responsibility

Companies having good corporate Governance are seen as highly regarded companies by its shareholders and competitors There is no one single model of Corporate Governance Different countries are adapting different models CG and rightly so cultures, traditions, legal structures vary from country to country

CG came with the introduction of economic reforms and liberalization in 1991 and the need for capital market regulation This liberty instead of being used for good purpose was exploited by unscrupulous players which gave birth to series of scandals Formation of a code of CG commenced institutionally in 1999 when SEBI appointed a committee under the chairmanship of Kumar Mangalam Birla

Kumar Mangalam Birla committee(by SEBI in 1996)

Objectives: View corporate Governance from the perspective of the investors and shareholders and prepare a Code to suit the Indian corporate environment
Identified 3 key constituents of C. Governance Shareholders Board of directors Management

The best practices on corporate governance would universally ensure

Enlightened customers Satisfied suppliers Willing investors Trusted employees Happy creditors Assured Government Unified community Protected environment

PSEs play a significant role in acceleration of economic growth PSEs - guardian or trustee of precious public money They deal with Tax payers money and are therefore accountable to parliament Also accountable for other authorities like comptroller and auditor general of India and control vigilance committee