ETHICS

Ethics in Latin language is called “Ethicus” and in Greek, it is called “Ethicos”. In fact, this word has
originated from “ethos”, meaning character or manners.

Ethics is thus said to be the source of morals; a treatise on this; moral principles; recognized
rules of conduct.

Ethics is commonly defined as a “set of principles prescribing a behavior code, explains what
is good and right, or bad and wrong”.

Ethics are not simply professing about virtue or good behavior. Ethics are the expression and
exhibition of standards of moral conducts governing the members of a profession, business or society,
so that the interests of the people involved in the Organizations or associations are protected.

Definition of Business Ethics:

Business Ethics are moral principles that define right and wrong behavior in the world of
business. What constitutes right and wrong behavior in business is determined by the public interest
groups, and business organizations, as well as an individuals personal morals and values.

Business ethics are the applications of general ethical rules to business behavior.

Objectives of BUSINESS ETHICS :

➢ The primary objective is to define the highest good of man and set a standard for the same.
Here we have to consider ethics to deal with several interrelated and complex problems which
may be of psychological, legal, commercial, philosophical, sociological and political in
nature.
➢ The other objectives are many. These are
o Study of human behavior; making evaluative assessment about them as moral or
immoral (a diagnostic goal).
o Establishing moral standards and norms of behavior.
o Making judgement upon human behavior based on these standards/norms.
o Prescribing moral behavior and making recommendations about how to behave or
vice versa.
o Expressing an opinion or attitude about human conduct in general.

Nature of Ethics:

➢ The concept of ethics deals with human beings only. Only human beings are endorsed with
the freedom of choice.
➢ The study of ethics has become a set of systematic knowledge about moral behavior and
conduct; study is a science - a field of social science.
➢ The science of ethics is a normative science. Normative sciences judge the value of the facts
in terms of an idea concerned with judgments of “what ought to be”, but not with factual
judgment.
➢ Ethics deal with human conduct which is voluntary and not forced or coerced by persons who
has come to kill you is not considered a moral or legal offence, but a cold blooded murderer is
considered to be the highest kind of moral or legal crime.
➢ Business ethics is nothing, but the application of ethics in business.
➢ Business ethics can be, and has been ethical and can still make profits.
➢ Profit maximization and discharging of social responsibilities at the maximum limit cannot be
done simultaneously as they are at opposite ends. Still ethical business can make profits.

Nature of Personal Ethics Personal ethics refer to personal or self-created values and codes of
conduct of a person. These ethics are instilled in an individual from the childhood by their parents,
friends and family. Examples of personal ethics can be honesty, openness, commitment, unbiased
behaviour and sense of responsibility. It remains with him all through his life and is reflected by his
actions and words. A person’s personal ethics are also revealed in a professional situation through
his behaviour. Personal values are the conception of what an individual or a group regards as
desirable. Personal ethics refers to the application of these values in everything one does. Personal
ethics might also be called morality, since they reflect general expectations of any person in any
society, acting in any capacity. Personal ethics is a category of philosophy that determines what an
individual believes about morality and right and wrong.

The principles of personal ethics are:

(i) Concerns and respect for the autonomy of others (ii) Honest and the willingness to comply with
the law (iii) Fairness and the ability not to take undue advantage of others (iv) Benevolence and
preventing harm to any creature.

Nature of Professional Ethics A profession is a vocation or calling, especially one that involves a
specific branch of advanced learning or a branch of science, for example, the profession of a doctor,
advocate, professor, scientist for a business manager. A professional who is engaged in a specified
and is paid for services rendered based on specific skills. Professional ethics are those values and
principles that are introduced to an individual in a professional organisation. Each professional is
expected to strictly follow these principles. This approach is imperative in professional settings as it
brings a sense of discipline in people as well as helps to maintain office decorum. Professional ethics
are those values and principles that are introduced to an individual in a professional organisation.
Each employee is meant to strictly follow these principles of his profession in the organisation. They
do not have a choice.

There are some basic principles professionals are expected to follow in their professional career.
These are the following: (i) Impartial and objective (ii) Openness: full disclosure (iii) Confidentiality:
trust (iv) Due diligence (v) Duty of care (vi) Fidelity to professional responsibilities; and (vii) Avoid
potential or apparent conflict of interest.
DIFFERENCE BETWEEN ETHICS AND MORALITY

Ethics Morality
Meaning The rules of conduct recognized in Principles or habits with respect to
respect to a particular class of human right or wrong conduct. While
actions or a particular group or morals also prescribe dos and don'ts,
culture. morality is ultimately a personal
compass of right and wrong.
Where do Social system – External Individual – Internal
they come
from?
Why we do it? Because society says it is the right Because we believe in something
thing to do. being right or wrong.
Flexibility Ethics are dependent on others for Usually consistent, although can
definition. They tend to be consistent change if an individual’s beliefs
within a certain context, but can vary change.
between contexts.
Origin Greek word "ethos" Latin word "mos" meaning "custom"
meaning"character"
Acceptability Ethics are governed by professional Morality transcends cultural norms
and legal guidelines within a
particular time and place.

IMPORTANCE OF ETHICS
Ethics concern an individual’s moral judgements about right and wrong while she/he is in a system.
Decisions taken within an organisation may be made by individuals or groups, but whoever makes them
will be influenced:
1. Develops Trust: Ethics is closely related to trust. Most of the people would agree on the fact that to
develop trust, behaviour must be ethical.
2. Long-Term Survival of Business: Ethics are important not only in business, but also in all aspects of
life. The business of society which lacks ethics is likely to fail sooner or later. Appllying ethics in business
also makes good sense. The corporation that behaves ethically prompts other business associates, by its
good example, to behave ethically as well. If a management exercises particular care in meeting all
responsibilities to employees, customers and suppliers, it usually is rewarded with a high degree of loyalty,
quality and productivity.
3. Sustains employees and employability: A company if it pursues goals or uses methods that are not
acceptable to some of its employees will create ethical conflicts in business. “Whistle blowing” would be
the outcome if an employee ‘goes public’ with a complaint which results after he fails to convince the
company to correct the alleged abuse.
Managers may face situations where they are not sure, or are prelexed about the ethical side of
their actions. If a company believes that profits are more important than environmental protection, the
decision of its manger to halt a process on account of his concern about its impact on the environment
might not be appreciated by the company.
4. Improved brand image: Earlier it was said that ‘business of business is business’. Now there is a
sudden change in the slogan. In the contemporary scenario where ethics has got its due importance, the
slogan has taken the form: ‘the business of business is ethical business’. Applying ethics in business makes
good sense about the organization.
5. Business Operates within the society: It is a part of subsystem of the society. Business’s functioning
must contribute to the welfare of the society. In order to survive, develop and excel, business must earn
social sanction of the society where it exists and functions.
6. Competitive pressures: When companies compete for a similar product, they sometimes engage in
unethical activities in order to wipe out a competitor from the market. Rivalry between employees for
advancement can motivate some kind of unethical behavior.
7. Covers all aspects of Life: Ethics are important not only in business but also in all aspects of life
because it is an essential part of the foundation on which a civilized society is build.
8. Guiding Actions: Ethics primarily aim to guide the behaviour and actions of a person or society or a
business through adherence to certain moral principles, standards and values so that the others are not
harmed by one’s unfair, immoral or unjust actions.
9. Aids the Law: Ethics makes for a complementary logic that aids laws in balancing equity, fairness and
justice in those matters of disputes, and actions that touch or affect others.
10. Caters to Wider Issues: The aim of law and ethics may be similar, but ethics will examine wider
social issues involved with an action and may direct the individual or a company to act differently from
what law would do in normal course.
11. Balancing Instrument for Social Justice: Ethical considerations, along with legal provisions, act as
the ‘balancing instrument’ for social justice , which are essential for sustained growth of a society.
12. Developing Capability to Judge Right and Wrong: Ethics is a subject that deals with human beings.
Humans by nature are capable of judging between right and wrong, good and bad behaviour. Since human
beings are associated with values and morals, ethics is important.

Sources of ETHICS:

No one takes a course to learn business ethics. Ethics is a natural market consequence of business as
few ethics experts argue. Six primary sources of ethics have been identified.

1. Genetic Inheritance

In recent years, socio-biologists have lots of evidence and arguments to suggest that the
evolutionary forces of natural selection influence the development of traits such as cooperation and
alteration that lie at the core of our ethical systems.

2. Religion

The great world religions as we have seen are: Christianity, Hinduism, Islam, Judaism.

Religion binds people together. It enables the followers to experience a sense of belonging to
a tradition or a community. The business people in these religions believe that their religion provides
them with ethical principles/standards, which can be applied in business. Religion can also include
beliefs about God’s other actions which have ethical implications.

Many people throughout the ages, including some modern businessmen have built their ethics
upon religion. For the evangelical Christian, the ethical rule book is the Bible. For Muslim, it is
Koran. For Hindus, it is “Bhagavadgita”.

A religion can provide its followers with a distinctive means of achieving a desired end.
Many religions in fact deplore extremes of wealth and poverty and aim for an age where there will be
compassion and justice.
The golden rule is ‘Act in a way you would expect others to act towards you’.

‘Ten commandments’ which are believed to have been divinely revealed as the will of God.

The ethical commands in this are:

➢ You shall not kill

➢ You shall not commit adultery
➢ You shall not steal
➢ You shall not bear false witness against your neighbours.
➢ You shall not covet your neighbour’s house.

3. Philosophical Systems:- The quality of pleasure to be derived from an act was the essential
measure of its goodness as per the epicureans. Epicure means a follower of Epicures, a Greek
follower who taught that pleasure was the chief good.

The quality of pleasure to be derived from an act was the essential measure of its goodness
(Hardworking, honesty, etc.)

4. The Legal System: The law serves to educate us about the ethical course in life. The law does not,
and most would agree, should not be treated as a vehicle for expressing all of society’s ethical
preferences.

5. Codes of Conduct:

Following are the three primary categories:

➢ Company Codes: These are generally brief; highly generalized, expressed broad
expectations about fit conduct.
➢ Company Operating Policies: Contains an ethical dimension, express policies as to
gifts, customer complaints, hiring and other decision serve as a guide to conduct and
as a shield by which the employee can protect against unethical advances from those
outside the firm.
➢ Code of Ethics: (Professional and Industry Associations have developed code of
ethics, such as affirmative ethical principles of the American Institute of Certified
Public Accountants). It is a growing expression of the business community’s sincere
concern about ethics.

6. Cultural Experience:
John Steiner refers to the rules, customs and standards transmitted from generation to
generation a s guidelines for appropriate conduct. Individual values are shaped in large measure by
the norms of the society.

LEVELS OF BUSINESS ETHICS

The ethical standards of an organization have a major influence on how it conducts its business.
Business ethics are defined by the behavior standards of management and personnel, and the way in
which business is carried out at both a strategic and operational level. A positive approach to
maintaining ethical standards can lead to competitive market advantage and an enhanced reputation.
Ethical standards are classified at three levels.

Individual Level (Personal level)

Since businesses are run by people, the ethical standards of individuals in the business are an
important consideration. Individuals may well have a very different set of ethical standards from their
employer and this can lead to tensions. Factors such as peer pressure, personal financial position, and
socio-economic status all may influence individual ethical standards. Managers and business owners
should be aware of this to manage potential conflicts.
Company Level
At a company or corporate level, ethical standards are embedded in the policies and procedures of the
organization, and form an important foundation on which business strategy is built. These policies
derive from the influences felt at macro level and therefore help a business to respond to changing
pressures in the most effective way. There can be a gap between the company policy on ethical
standards and the conduct of those in charge of running the business, especially if they are not the
direct owners, which can present an ethical challenge for some employees.
Integrated Approach (Stakeholder level)
Ethical standards flow through the entire structure of a business organization, shaping how it plans its
strategy, deals with customers, and manages its workforce. The standards have a reach far beyond
day-to-day operations, and should be considered in all aspects of a business, from the boardroom to
the shop floor and across all functional areas. Supporting this effort, businesses that genuinely
understand the value and importance of ethics have appropriate metrics in place to measure
achievement and identify problems before they become major issues
Macro Level
At a macro level, sometimes called the systemic level, ethics are defined and influenced by the wider
operating environment in which the company exists. Factors such as political pressures, economic
conditions, societal attitudes to certain businesses, and even business regulation can influence a
company's operating standards and policies. Business owners and managers must be aware of how
these pressures affect operations and relationships, and how they may impact on markets locally,
nationally and internationally.
. Macro level
Stakeholder level
Company Level
Personal level
MYTHS OF BUSINESS ETHICS:

1. Myth: Business ethics is more a matter of religion than management.

Diane Kirrane, in “Managing Values: A Systematic Approach to Business Ethics,” (Training and
Development Journal, November 1990), asserts that “altering people’s values or souls isn’t the aim of
an organizational ethics program — managing values and conflict among them is …”
2. Myth: Our employees are ethical so we don’t need attention to business ethics.
Most of the ethical dilemmas faced by managers in the workplace are highly complex. Wallace
explains that one knows when they have a significant ethical conflict when there is presence of:
1. a) significant value conflicts among differing interests,
2. b) real alternatives that are equality justifiable, and
3. c) significant consequences on “stakeholders” in the situation. Kirrane mentions that when the
topic of business ethics comes up, people are quick to speak of the Golden Rule, honesty and
courtesy.
But when presented with complex ethical dilemmas, most people realize there’s a wide “gray area”
when trying to apply ethical principles.
3. Myth: Business ethics is a discipline best led by philosophers, academics and
theologians.
Lack of involvement of leaders and managers in business ethics literature and discussions has led
many to believe that business ethics is a fad or movement, having little to do with the day-to-day
realities of running an organization.
They believe business ethics is primarily a complex philosophical debate or a religion. However,
business ethics is a management discipline with a programmatic approach that includes several
practical tools.
Ethics management programs have practical applications in other areas of management areas, as well.
(These applications are listed later on in this document.)
4. Myth: Business ethics is superfluous — it only asserts the obvious: “do good!”
Many people react that codes of ethics, or lists of ethical values to which the organization aspires, are
rather superfluous because they represent values to which everyone should naturally aspire.
However, the value of a codes of ethics to an organization is its priority and focus regarding certain
ethical values in that workplace.
For example, it’s obvious that all people should be honest.
However, if an organization is struggling around continuing occasions of deceit in the workplace, a
priority on honesty is very timely — and honesty should be listed in that organization’s code of ethics.
Note that a code of ethics is an organic instrument that changes with the needs of society and the
organization.
5. Myth: Business ethics is a matter of the good guys preaching to the bad guys.
Some writers do seem to claim a moral high ground while lamenting the poor condition of business
and its leaders.
However, those people well versed in managing organizations realize that good people can take bad
actions, particularly when stressed or confused. (Stress or confusion are not excuses for unethical
actions — they are reasons.)
Managing ethics in the workplace includes all of us working together to help each other remain
ethical and to work through confusing and stressful ethical dilemmas.
6. Myth: Business ethics in the new policeperson on the block.
Many believe business ethics is a recent phenomenon because of increased attention to the topic in
popular and management literature.
However, business ethics was written about even 2,000 years ago — at least since Cicero wrote about
the topic in his On Duties.
Business ethics has gotten more attention recently because of the social responsibility movement that
started in the 1960s.
7. Myth: Ethics can’t be managed.
Actually, ethics is always “managed” — but, too often, indirectly. For example, the behavior of the
organization’s founder or current leader is a strong moral influence, or directive if you will, on
behavior or employees in the workplace.
Strategic priorities (profit maximization, expanding marketshare, cutting costs, etc.) can be very
strong influences on morality.
Laws, regulations and rules directly influence behaviors to be more ethical, usually in a manner that
improves the general good and/or minimizes harm to the community.
Some are still skeptical about business ethics, believing you can’t manage values in an organization.
Donaldson and Davis (Management Decision, V28, N6) note that management, after all, is a value
system.
Skeptics might consider the tremendous influence of several “codes of ethics,” such as the “10
Commandments” in Christian religions or the U.S. Constitution. Codes can be very powerful in
smaller “organizations” as well.
8. Myth: Business ethics and social responsibility are the same thing.
The social responsibility movement is one aspect of the overall discipline of business ethics. Madsen
and Shafritz refine the definition of business ethics to be:
1) An application of ethics to the corporate community,
2) A way to determine responsibility in business dealings,
3) The identification of important business and social issues, and
4) A critique of business. Items 3 and 4 are often matters of social responsibility. (There has
been a great deal of public discussion and writing about items 3 and 4. However, there needs
to be more written about items 1 and 2, about how business ethics can be managed.)
Writings about social responsibility often do not address practical matters of managing ethics in the
workplace, e.g., developing codes, updating polices and procedures, approaches to resolving ethical
dilemmas, etc.
9. Myth: Our organization is not in trouble with the law, so we’re ethical.
One can often be unethical, yet operate within the limits of the law, e.g., withhold information from
superiors, fudge on budgets, constantly complain about others, etc. However, breaking the law often
starts with unethical behavior that has gone unnoticed.
The “boil the frog” phenomena is a useful parable here: If you put a frog in hot water, it immediately
jumps out. If you put a frog in cool water and slowly heat up the water, you can eventually boil the
frog. The frog doesn’t seem to notice the adverse change in its environment.
10. Myth: Managing ethics in the workplace has little practical relevance.
Managing ethics in the workplace involves identifying and prioritizing values to guide behaviors in
the organization, and establishing associated policies and procedures to ensure those behaviors are
conducted.
One might call this “values management.” Values management is also highly important in other
management practices, e.g., managing diversity, Total Quality Management and strategic planning.

Business Ethics can be taught and trained?

Because laws and legal enforcement are not always sufficient to help guide or solve complex human
problems relating to business situations, some questions arise: Can ethics help? If so, how? And can
business ethics be taught? This ongoing debate has no final answer, and studies continue to address
the issue. One study, for example, that surveyed 125 graduate and undergraduate students in a
business ethics course at the beginning of a semester showed that students did not reorder their
priorities on the importance of ten social issues at the end of the semester, but they did change the
degree of importance they placed on the majority of the issues surveyed. What, if any, value can be
gained from teaching ethical principles and training people to use them in business?

Gulseren and Turner made six recommendations for business educators who are interested in
designing evidence-based business ethics training programs:

1. Design specialized programs. Field-specific ethics programs are more promising in

developing moral behaviours compared to general ethics programs. For example, ethics
programs for accountants are more effective than general business ethics programs
2. Do not make ethics training mandatory. Voluntary ethics programs result in better moral
outcomes than mandatory ethics training.
3. Be prepared to deliver your program in 4 to 9 hours. Business ethics training programs
that take between four and nine hours are more effective than longer or shorter programs.
4. Incorporate a debate component into your training. Although alternative forms such as
lectures or case discussions are very common in this field, evidence shows that debates are the
most effective technique for teaching ethics. Case competitions might or might not contain a
debate component.
5. Offer ethics training to advanced students. Findings demonstrate that professional students
benefit from ethics training more than undergraduate students.
6. Hire expert instructors. Business ethics trainers with above-average expertise are more
effective in teaching moral behaviours than trainers with average and below-average
expertise.

This discussion begins with “What business ethics courses cannot or should not, in my
judgment, do “ Ethics courses should not advocate a set of rules from a single perspective or offer
only one best solution to a specific ethical problem. Given the circumstances of situations, more
desirable and less desirable courses of action may exist. Decisions depend on facts, inferences, and
rigorous, ethical reasoning. Neither should ethics courses or training sessions promise superior or
absolute ways of thinking and behaving in situations. Informed and conscientious ethical is not the
only way to reason through moral problems.

Ethics courses and training can do the following.

➢ Provide people with rationales, ideas and vocabulary to help them participate effectively in
ethical decision making process.
➢ Help people “make sense” of their environments by abstracting and selecting ethical
priorities.
➢ Provide intellectual weapons to do battle with advocates of economic fundamentalism and
those who violate ethical standards.
➢ Enable employees to act as alarm systems for company practices that do not meet society’s
ethical standards.
➢ Enhance conscientiousness and sensitivity to moral issues, and commitment to finding moral
solutions.
➢ Enhance moral reflectiveness and strengthen moral courage.
➢ Increase people’s ability to become moral autonomous, ethical dissents and the conscience of
a group.
➢ Improve the moral climate of firms by providing ethical concepts and tools for creating
ethical concepts and tools for creating ethical codes and social auditing ‘her scholars argue
that ethical training can add value to the moral environment of a firm and to relationship in
the workplace in the following ways.
➢ Finding a match between an employee’s and employer’s values.
➢ Managing the push’back point, where an employee’s values are tested by peers, employees,
and supervisors.
➢ Handling an unethical directive from a boss.
➢ Coping with a performance system that encourages cutting ethical corners.

Teaching business ethics and training people to use them does not promise to provide answers
to complex moral dilemmas. However, thoughtful and resourceful business ethics educators can
facilitate the development of awareness of what is ethical, help individuals and groups realize that
their ethical tolerance and decision-making styles decrease unethical blind spots, and enhance
discussion of moral problems openly in the workplace.
MORAL REASONING FOR ETHICS

It is quite evident from the foregoing discussions that deciding what is ethically right or wrong will
depend on the ability of individuals to reason out what is fair and morally right. Our sense of judging
what is moral, or the development of our moral understanding, grows with our maturity. What is
moral at one stage of our life may not be so at another, because of change in our understanding of the
needs of oneself, the society, family, the surroundings, human rights, the nation, the institution we
work for, and also owing to further development of our sense of logic and reasoning to ide4ntify what
is rational and universal.

Kohlberg’s Theory of Moral Reasoning:

According to the famous psychologist Lawrence Kohlberg, there are three levels of our development
of moral understanding starting from childhood to maturity, which can be further divided into two
steps each, as follows:

Level-I : Childhood Stages: (1-6)

1. Punishment and obedience orientation as a child where physical consequences of an act

wholly determine the goodness or badness of an act.
2. Instrument and relativity orientation when right actions become those that can serve as
instruments to satisfy the child’s own needs or needs of those for whom the child as concern
and care, e.g. parent, friends, etc.

Level-II : Conventional Stages: (7-11)

1. Interpersonal concordance orientation where good behavior is living up to the expectations

of those for whom one feels loyalty, affection and trust. Here, the right action is what is
expected of an individual by the family, friends, teachers, society, etc.
2. Law and order orientation where the sense of right or wrong comes from loyalty to the
conventions of the society in particular and the laws of the nation at large.

Level-III : Principled Stages: (11-)

1. Social contract orientation when the person becomes aware that the people hold variety of
conflicting personal views and opinions, and the fair way to reach an agreement, contract and
path, or the process of doing so, is by consensus after reasoning. The person comes to believe
that all norms are relative, and that they should be tolerated (or adjusted with) as far as
possible.
2. Universal ethical principles orientation where the right actions come to be defined in terms
of moral principles which are chosen because of their logical comprehensiveness, universality
and consistency. These ethical (or moral) principles are not rigid like laws or religious
commandments; they are flexible, abstract principles dealing with; justice, social welfare,
equality of human rights, respect for the dignity of individual human beings, and rights to
fundamental necessity to live and protect lives. At this stage, a person’s reasons for doing
what is right are based on his or her understanding of these moral principles.

Kohlberg’s study implied that people’s skill of moral reasoning is better at later stages of maturity
because people gradually develop the ability to see things from a wider perspective, and have better
ways to justify their decisions to others. At this mature stage, people can justify their deeds on the
basis of moral principles that are relatively impartial and reasonable. It is not remain at the childhood
stages or in the conventional stages. However, as people grow, interact with each other, they develop
firmer and more mature moral perspectives, and thereby improve their moral reasoning skills. That is
why, moral reasoning may vary from person to person through all the people may belong to the upper
age group.
Universal ethical
principles orientation
PRINCIPLED STAGES
Social contract
orientation

Law and order

orientation
CONVENTIONAL STAGES
Interpersonal
concordance orientation

Instrument and relativity

orientation

Punishment and CHILDHOOD STAGES

obedience orientation

GILLIGAN’S THEORY:
Carol Gilligan is a psychologist. She is a research assistant for the great theorist of moral
development, Lawrence Kohlberg. She criticized Kohlberg’s theory of moral development. She
argues that Kohlberg correctly identifies the stages through which men pass as they develop, it fails to
adequately trace out how women’s morality develops. Because most of Kolberg’s subjects were
male. Gilligan has argued, his theory failed to take into account how women think about morality.

What set her off in thinking this was the fact that in some of Kohlberg's investigations, women turned
out to score lower - less developed - than did men. Were women really moral midgets? Gilligan did
not think so. In taking this stand, she was going against the current of a great deal of psychological
opinion. Our friend Freud thought women's moral sense was stunted because they stayed attached to
their mothers. Another great developmental theorist, Erik Erickson, thought the tasks of development
were separation from mother and the family. If women did not succeed in this scale, then they were
obviously deficient.

Gilligan claimed that there are “male” and “female” approaches to morality. Males, she argued, tend
to deal with moral issues in terms of impersonal, impartial, and abstract moral principles – exactly the
kind of approach that Kohlberg says is characteristic of post conventional thinking. However,
Gilligan claimed, there is a second “female”, approach to moral issues that Kohlberg’s theory does not
take into account.
She argues that women are concerned with nurturing the relationships, avoiding hurt to others in these
relationships, and caring for their well-being. For women, morality is primarily a matter of “caring”
and “being responsible” for those with whom we have personal relationships. Moral development for
women is marked by progress towards better caring and being responsible for oneself and others with
whom we are in relationship.

Thus Gilligan produces her own stage theory of moral development for women. Like Kohlberg's, it
has three major divisions: preconvention, conventional, and post conventional. But for Gilligan, the
transitions between the stages are fueled by changes in the sense of self rather than in changes in
cognitive capability

In her theory, the earliest or preconventional level of moral development for women is one marked by
caring only for oneself.

Women move to a second or conventional level when they internalize conventional norms about
caring for others and in doing so come to neglect themselves.

As women move to the post conventional or mature level, when they become critical of the
conventional norms they had earlier accepted, and they come to achieve a abalance between caring for
others and caring for oneself.

Pre Conventional
-Person only cares for themselves in order to ensure survival
-This is how everyone is as children
In this transitional phase, the person 's attitude is considered selfish, and the person sees the
connection between themselves and others.

Conventional
-Responsibility
-More care shown for other people.
-Gilligan says this is shown in the role of Mother & Wife
-Situation sometimes carries on to ignoring needs of self.
In this transitional phase, tensions between responsibility of caring for others and caring for self are
faced.

Post Conventional
-Aceeptance of the principle of care for self and others is shown.
-Some people never reach this level.

It is important to notice that both Kohlberg and Gilligan agree that there are stages of growth in our
moral development. Both also agree that moral development moves from a preconventional stage
focused on the self, though conventional stage in which we uncritically accept the conventional moral
standards of society, and on to mature stage in which we learn to critically and reflectively examine
how reasonasble the conventional moral standards we earlier accepted are.

PRINCIPLES OF BUSINESS ETHICS

Ethical values, translated into active language establishing standards or rules describing the kind of
behavior an ethical person should and should not engage in, are ethical principles. The following list
of principles incorporate the characteristics and values that most people associate with ethical
behavior.
1. Honesty. Ethical executives are honest and truthful in all their dealings and they do not deliberately
mislead or deceive others by misrepresentations, overstatements, partial truths, selective omissions, or
any other means.
2. Integrity. Ethical executives demonstrate personal integrity and the courage of their convictions by
doing what they think is right even when there is great pressure to do otherwise; they are principled,
honorable and upright; they will fight for their beliefs. They will not sacrifice principle for
expediency, be hypocritical, or unscrupulous.
3. Promise-keeping & trustworthiness. Ethical executives are worthy of trust. They are candid and
forthcoming in supplying relevant information and correcting misapprehensions of fact, and they
make every reasonable effort to fulfill the letter and spirit of their promises and commitments. They
do not interpret agreements in an unreasonably technical or legalistic manner in order to rationalize
non-compliance or create justifications for escaping their commitments.
4. Loyalty. Ethical executives are worthy of trust, demonstrate fidelity and loyalty to persons and
institutions by friendship in adversity, support and devotion to duty; they do not use or disclose
information learned in confidence for personal advantage. They safeguard the ability to make
independent professional judgments by scrupulously avoiding undue influences and conflicts of
interest. They are loyal to their companies and colleagues and if they decide to accept other
employment, they provide reasonable notice, respect the proprietary information of their former
employer, and refuse to engage in any activities that take undue advantage of their previous positions.
5. Fairness. Ethical executives and fair and just in all dealings; they do not exercise power arbitrarily,
and do not use overreaching nor indecent means to gain or maintain any advantage nor take undue
advantage of another’s mistakes or difficulties. Fair persons manifest a commitment to justice, the
equal treatment of individuals, tolerance for and acceptance of diversity, the they are open-minded;
they are willing to admit they are wrong and, where appropriate, change their positions and beliefs.
6. Concern for others. Ethical executives are caring, compassionate, benevolent and kind; they like
the Golden Rule, help those in need, and seek to accomplish their business objectives in a manner that
causes the least harm and the greatest positive good.
7. Respect for others. Ethical executives demonstrate respect for the human dignity, autonomy,
privacy, rights, and interests of all those who have a stake in their decisions; they are courteous and
treat all people with equal respect and dignity regardless of sex, race or national origin.
8. Law abiding. Ethical executives abide by laws, rules and regulations relating to their business
activities.
9. Commitment to excellence. Ethical executives pursue excellence in performing their duties, are
well informed and prepared, and constantly endeavor to increase their proficiency in all areas of
responsibility.
10. Leadership. Ethical executives are conscious of the responsibilities and opportunities of their
position of leadership and seek to be positive ethical role models by their own conduct and by helping
to create an environment in which principled reasoning and ethical decision making are highly prized.
11. Reputation and morale. Ethical executives seek to protect and build the company’s good
reputation and the morale of its employees by engaging in no conduct that might undermine respect
and by taking whatever actions are necessary to correct or prevent inappropriate conduct of others.
12. Accountability. Ethical executives acknowledge and accept personal accountability for the ethical
quality of their decisions and omissions to themselves, their colleagues, their companies, and their
communities.
13. Beneficence. -- Persons are treated in an ethical manner not only by respecting their decisions and
protecting them from harm, but also by making efforts to secure their well-being. Such treatment falls
under the principle of beneficence. Two general rules have been formulated as complementary
expressions of beneficent actions in this sense: (1) do not harm and (2) maximize possible benefits
and minimize possible harms. As with all hard cases, the different claims covered by the principle of
beneficence may come into conflict and force difficult choices.
14. Justice. -- Who ought to receive the benefits of research and bear its burdens? This is a question
of justice, in the sense of “fairness in distribution” or “what is deserved.” An injustice occurs when
some benefit to which a person is entitled is denied without good reason or when some burden is
imposed unduly. Another way of conceiving the principle of justice is that equals ought to be treated
equally.
UNIT-II
PROFESSIONAL ETHICS
Professional ethics refer to the moral standards demonstrated by the professionals at the work place.
There are many recognized professions in the society – Doctors, Actors, Advocates, etc. Wherever
they may work, whatever, the capacity, the morality of their actions and behavior has a profound
impact on the well-being of the society – business being a part of it.

To safeguard the society against the possibility of harm, the society and the law are to be careful to
regulate ad modulate the behavior of the professionals to promise fair practices.

The professionals are backbone of the business. They formulate the strategies and lead the ways. If
the business professionals are honest, moral, respectful to human values, standing against
wrongdoing, business automatically become ethical.

There are two directions to remedy the damage. (1) The Government and the regulatory authorities
(SEBI, RBI, TRAI, etc.) enacting the new laws, reinforcing existing laws (2) The professional
establishment and Institutions (IMA – Institute of Management Accounting, ICAI – Institute of
Chartered Accountants of India, etc.) which formulate principles for conduct of their respective
professions.

Many feel that, Acts do not push someone for ethical practices. There has to be a change of heart and
attitude in individuals. Self checking, Self regulation with consciousness of what is right and wrong
leads to ethical practices. However, this is difficult because of bias nature and political influence.

In business also, the Organization sometimes forces individuals to do what is unethical or immoral.
So, managing professional ethics not only the individual’s concern but also the Organization,
represented by it’s top management.

Modern society expects its professionals to stand up to the odd pressures – perhaps of different kinds
– and hold on to high moral standards in their professional discharge of duties.

ETHICS IN PRODUCT AND PRODUCTION MANAGEMENT:

Production Management comprises supervising and managing a set of predetermined

processes and activities, being carried out by people with the help of certain tools and
equipments, for the outcome of some marketable products. In such a set-up, there are the
following ethical issues:

(i) Ethics relating to the conduct of the process where people are involved in working
with machines or equipment in a given environment; and
(ii) Ethics about the uses and utility of the products concerned.
(iii) Pollution, emission and dust generation in the production processes;
(iv) Ethical problems arising from new technology

(1) Ethics relating to the conduct of the process where people are involved in working with
machines or equipment in a given environment.
Health and Safety : Health is the condition of being physically and emotionally able to
perform vital functions normally or properly. It includes general physical and mental well being.
Safety is freedom from danger.

Health hazards are factors sin the work place that cause illness and other conditions that
develop over a life time of exposure. The diseases associated with specific occupations are:

➢ Caisson disease (among drivers) – due to release of nitrogen gas

➢ Skin cancer (among chimney sweeps)
➢ Mercury poisoning (common among felt workers)
➢ Silicosis or the white plague (associated with stone cutters)

Safety is often used to encompass all work place hazards. Safety hazards generally involve:

➢ Loss of limbs
➢ Electrical shocks
➢ Bruises (discoloured skin)
➢ Cuts
➢ Broken bones, etc.

(2) About the uses of the products:

(a) Product Safety & Quality : The use of virtually any product involves certain degree of
risk. Questions of safety are essentially questions of acceptable and known levels of risk.

(b) Product Reliability: If the product incorporates a number of interdependent components,

then the probability that it will function properly is equal to the result of multiplying together each
component’s probability of proper functioning.

(c) Service Life: The consumer implicitly studies the service life. It depends on the amount
of wear and tear to which one subjects the product, further, consumers also base some of their
expectations of service life on the explicit guarantees the manufacturer attaches to the product.

(d) Maintainability : Claims are quite often made as an express warranty. Sellers often also
imply that a product may be easily repaired even after the expiration date of an express warranty.

(3) Pollution, emission and dust generation in the production process.

(4) Ethical problems arising from new technology.

Ethics in production management, therefore, include care about safety, health hazard,
reliability, pollution, contamination, adulteration, waste generation, etc., while the latter
ethical issue implies that management is ethically duty-bound to ensure that the
production process and the product does not cause any harm to the employees, consumers
or the locality (in the way of environmental pollution, health hazards, danger in handling
safety, consumptions, utility, etc.)
Therefore, it is necessary that professional engaged in managing product
development, product design, process planning and environment control are (made) aware
of the shortcomings of their processes and products with regard to safety in use and
practice.

There is always the possibility of some danger of defect or deficiency in any product
or production process and it may be difficult to define the degree of permissibility in all
such cases- but the principle of ethics demands that it is should not be intentional.

It is unethical business if a manufacturer is intentionally producing harmful products

and marketing them despite public outcry. Ethics of production would require making
such products least harmful—even if selling the otherwise harmful products might be
legally permitted.

(Production) Professionals should forbid one to act in way detriment to the interests,
health, safety and welfare of employees and consumers alike.

Understanding the role of ethics, and regulating oneself in the profession, has gained
importance with the growth of service industries like hospitality, health care, tourism,
facility management, etc. In the service sector, products are designed or produced by
experts and professionals like chefs, doctors and nurses, tour-operators, tour planners, etc.
for the facility, utility or consumption of consumers. These professional must be aware of
the rules of ethics in their operations and in the delivery of products and services;

With the technological advancement, duties and responsibilities of professionals

engaged in different fields of consumer production are becoming increasingly important.

Ethics are not against technology; they are fact, concerned whether that technology
brings more misery than good to the society. In a similar analogy, the production of mass
destruction weapons could be ethically denounced as the technology employed is
designed to do more damage to the society than good

ETHICS IN MARKETING:

All marketing transactions with customers are carried out through the interface of marketing
professionals. These professionals not only have the responsibility of their own ethical
behavior, but also of building a good name and goodwill for the organization.

One may argue that a marketing professional is only an employee, and that his or her
activities are controlled and regulated by the employer. Rules of ethical behavior demand
that, as a professional, a marketing person also has his or her own professional discipline
and commitment to ethics. These ethical standards should apply to the customers and people
they serve, as much as to their professional behavior within the organization.

It should be noted that marketing professionals may be directly accountable to their

companies, but they are equally responsible for the morality of their actions and ethics in the
marketplace. Marketing professionals have the responsibility to be ethical to their customers
and society in order to make for better business environment and growth.

Ethics of marketing professionals like a service transaction with a ‘customer-supplier

relationship’ between the company and the marketing person on the one hand, and the
marketing person and the customer on the other; this relationship aims to fulfil each others
needs and expectations.

Marketing is not merely campaigning or selling products and services; it is about marketing
the ‘value of product’.

Misleading product advertisements, price fixing, operating a cartel, price discrimination,

black marketing, etc. are ethical offences. They should follow the ethical code of conduct of
the company management they serve.

The advent and advancement of Internet marketing and E-Commerce has lend even
greater importance to the role of marketing professionals and their ethical behaviour.
Moreover, as more and more people partake of these new channels of marketing, there should
be stricter laws to prevent cyber fraud along with effective regulation to control unethical
conduct of business by professionals.

Furthermore, with the growth of telecommunication and electronic marketing, the role and
responsibility of marketing professionals are becoming even more significant to the good
health of business.

Ethical aspects in Marketing Mix: - Product, Price, Place and Promotion

1) PRODUCT: Marketers have the responsibility to ensure product safety to disclose all
product risks, and to identify any factor that might change product performance.

Ethical issues in Product Packaging and Labelling

Consumers need a certain amount of information to make rational choices. This information is not
easily obtained.

The consumers should be disclosed all the information about the product like it’s safety, warranty,
reliability, liability, etc.

There are acts like:

Fair Packing and Labeling Act, 1966: to enable consumers to make meaningful value comparisions.

Nutrition Labeling and Education Act, 1990: states that the labels on packaged food products
contain information about certain ingredients expressed by weight and as a percentage of the
recommended daily diet in a standard serving size.

2) PRICING: Marketers must not engage in price fixing or predatory pricing and must disclose
all prices associated with the purchase including service, installation and delivery.
Unethical Aspects in Pricing:
1) Deceptive Pricing:
Baist and switch pricing is one type of deceptive price - a low price offer intended to lure customers
into a store, where a sales person tries to influence intended to lure customers into store. Thereafter, a
sales person tries to influence them to buy higher-priced item.
Inflated Pricing: To offer a discount off an inflated discount. The consumer is not actually getting a
discount.
2) Unfair Pricing: When competitors are driven out by low prices (less than cost) the company raises
price back to their former level.
3) Price Discrimination: Though theoretically, price discrimination maximizes profits by enabling
sellers to charge price inelastic customers high prices than elastic customers are charged.

3) PLACE: (Distribution): Suppliers should not coerce their intermediaries into taking
unwanted products they should not create false shortages to drive up prices of their products.
Ethical issues in Distribution:
Fraudulent Sales : Phony markdowns based on “Kited” retail prices.
Bait and Switch tactics: Living consumers with ads for low priced merchandise for the purpose of
switching them to high priced models.
Direct Marketing: Deceptive, misleading product size and performance claims.

4) PROMOTION: Marketers must avoid deceptive and misleading communications must

repeat high pressure sales tactics, and must avoid manipulating consumers to buy.

UNETHICAL IN ADVERTISING:

Deceptive advertising: Advertising that gives false information or that willfully misleads consumers
about the benefits of the brand.

Corrective Advertising: The company must publicly correct a false impression created by past
advertising. So, a second remedy is sometimes applied known as corrective advertising.

Advertising to the Children: Advertisers have a responsibility to avoid manipulating younger

children, who tend to be more gullible than the rest of the population.

REASONS FOR UNETHICAL PRACTICES

➢ The span within which decisions are made

➢ Mitigating against the various pressures towards unethical behavior.
➢ Government agencies, by no means insulated from the pressures of public opinion.
➢ The attempts by various business leaders, companies, associations and professional bodies.

ETHICS IN INTERNATIONAL MARKETING:

➢ International marketers have less control over price because of tariffs and trade regulations.
The international firm must price its products higher than anticipated.
➢ Data on international markets are often incomplete, unreliable, and not comparable across
countries: hence much harder to use for planning purposes.
➢ Firms with foreign subsidiaries often find it difficult to control them from their home office
because of the differences in business customs and environment. Hence international firms
must overcome these difficulties by establishing a system to control their foreign operations.
International Marketing information systems are to be established.

ETHICS IN HUMAN RESOURCE MANAGEMENT:

HR professionals are entrusted not only with the recruitment of the right type of people, buyt
also with the task of motivating, training and empowering them – with a broader view to
create an organizational environment of honesty, equality and fairness.

Traditionally, ethical issues concerning HR professionals pertain to interactions between the

company and its employees.

Commonly observed unethical practices in the areas of human resource are:

➢ Discrimination by Gender
➢ Discrimination by creed and religion.
➢ Unfair employment contract
➢ Pressure to tactics in the workplace
➢ Favouritism.
➢ Promoting occupational health hazard
➢ Biased performance assessment
➢ Disinformation by the Managers to serve special interests.

Even today, Industries suffer huge losses due to unethical HR practices such as strikes, low
productivity and damage to assets.

More often than not, the HR personnel act as a tool in the hands of management to perpetuate
the exploitation of workers. The frequent notices of shut-down and re-opening in many jute
and textile mills, affecting the livelihoods of thousands of employees, are proof of this
observation.

The most commonly cited source of pressure to compromise ethical standards was the “need
to follow boss’s directive”, followed by “meeting overly aggressive business objectives” and
“helping the organization survive”.

Employees are the customers or clients of HR professionals, and it is the responsibility of HR

professionals to satisfy them with fair and just actions.

SHRM recommends the following principles to guide the code of professional conduct and
ethics amongst HR professionals.

➢ Adhrere to the highest standards of ethical and professional behavior.

➢ Measure the effectiveness of HR in contributing to or achieving organizational goals.
➢ Comply with the Lw.
➢ Work consistent with the values of the profession.
➢ Strive to achieve the highest levels of service, performance and social responsibility.
➢ Advocate for the appropriate use and appreciation of human beings as employees.
➢ Advocate openly and within the established forums for debate in order to influence
decision-making and results.

SHRM also expressed that

(i) HR professionals are expected to exhibit individual leadership as a role model for
maintaining the highest standards of ethical conduct in the company.
(ii) They must be ethical and act ethically in every professional iteration
(iii) They should be ethically responsible for promoting and fostering fairness and
justice for all employees in the organization.
(iv) Should refrain from using their position for personal, material or financial gain or
the appearance of such;
(v) Should refrain from giving or seeking preferential treatment in the HR processes
and
(vi) Adhere to and advocate the use of published policies on conflicts of interest, and
conflict resolution, within the organization.

Ethics related to working condition of employees:

Health and Safety : Health is the condition of being physically and emotionally able to
perform vital functions normally or properly. It includes general physical and mental well being.
Safety is freedom from danger.

Health hazards are factors sin the work place that cause illness and other conditions that
develop over a life time of exposure. The diseases associated with specific occupations are:

➢ Caisson disease (among drivers)

➢ Skin cancer (among chimney sweeps)
➢ Mercury poisoning (common among felt workers)
➢ Silicosis or the white plague (associated with stone cutters)

Safety is often used to encompass all work place hazards. Safety hazards generally involve:

➢ Loss of limbs
➢ Electrical shocks
➢ Bruises
➢ Cuts
➢ Broken bones, etc.

Ethical aspects about Wages:

Wages are the principal means (and perhaps the only means) for satisfying the basic economic needs
of the worker and worker’s family.

Although MNCs and foreign contractors pay the legal minimum wage in the countries where they
operate, this amount often provides only a basic subsistence for one person. The standards should be
a “living wage” for a worker to live with dignity and support a family according to the critics.
Other Ethical Aspects in HRM:

Fair Employment contract:

A legally binding contract must also satisfy the following factors.

First, the contents of the contract, to which the parties have agreed, must be reasonable. Second, the
contract in itself must be legal, in terms of the prevailing law. For example, a contract to assassinate a
person may contain offer, acceptance and consideration and an intention to create a legally binding
relationship between the parties. However, conspiracy to murder is a criminal offence, thus any
contractual relationship is void – the legal term for invalid.

Third, there must be genuine consent between the parties, and the parties themselves must have the
capacity to consent to the agreement. For example, minors and bankrupts have only limited capacities
in contract. From this brief introduction we can now proceed to look at employment contracts, which
are a very specialised form of contract. A contract of employment is a contract of service, where an
employee – the subject of the contract – is in the personal service of their employer.

Job Satisfaction:

Jobs can be specialized in two dimensions:

Horizontal: Restricting the range of different tasks contained in the job and increasing the repetition
of the narrow range of tasks.

Vertical : Restricting range of control and decision making over the activity that the job involves.

Sexual Harassment:

Sexual harassment is defined as an unwatned conduct of a sexual nature or other behaviors based on
sex that affects the dignity of men and women at work. This includes uninvited and unwelcome
physical, verbal and non verbal conduct. This may include:

Touching Jokes Use of Sexually explicit

language
Looks References to a person’s private Attitudes
work
Comments on dress or figure Persistent leering at a person

Discrimination:

Discrimination describes a large number of wrongful acts in employment, housing, education, medical
care and other important areas of public life. Discrimination is not solely a matter of intention but
also of consequences. The various forms of discrimination are

➢ Age discrimination
➢ Natural Origin discrimination
➢ Gender discrimination
➢ Religious discrimination
➢ Determination against the handicapped (due to less salary)

A policy for non discrimination:

• Job analysis
• Assessing the applicants for suitability
• Recruiting applicants in a non-discriminatory manner.

Whistle Blowing;

The term was first used for the government employees who go to public with complaints of corruption
or mismanagement in government agencies. This was later used even in the private sector when
similar activities were noticed. Whistle blowing is an attempt by a member or an ex-member of an
organization to disclose wrong doing in or by the organization.

Whistle blowers often pay a high price for their acts of dissent. Retaliation is common and can take
many forms.

Employment Contract;

An employment contract is all the rights, responsibilities, duties and employment conditions that
make up the legal relationship between an employer and employee. It includes a number of terms
which, whether written down or not, are legally binding – the employer’s duty to pay the employee
wages.

ETHICS IN FINANCE & ACCOUNTING:

Many a company have indulged in misrepresentation of facts by doctoring its accounts in
some unconventional way – while staying within the bounds of the prevalent accounting
system – such as inflating the earnings, providing misleading financial statements, etc.

The impact of financial frauds can be very severe and can cause loss of benefits to many
individual stakeholders of the company, ethics of business accounts are important issues.

As these areas call for high levels of skill and competency, the compliance to ethical rules
and obligations lies mostly in the hands of certified professionals like chartered accountants,
auditors, etc.

Accounts in accounting has become even more important with the growth of international
trade, as a result of which countries engaged in mutual business are seeking adherence to
globally accepted accounting norms in order to check and prevent fraudulent and unethical
accounting practices. ICAI (Institute of Chartered Accountants of India) has now mandated
that Indian Accounting norms must converge with the International Financial Reporting
Standards (IFTS) by 2011, to ensure better disclosure norms and prevent profit book frauds.
However, it is no guarantee that all accounting frauds will not occur after the adoption of
IFRS norms. Hence, the need for the change in professional attitude and ethical conduct in
this coveted profession still remains uppermost for the safety of investors, employees and
society.

Financial fraud involving Accountants and Auditors is not uncommon in any country.

ICAI also prohibits its members from pursing another profession, soliciting clients, taking
financial interests other than fees, and writing of books of accounts of the auditee to remind
him that he is morally responsible for preventing or minimizing damage to the society, clients
and government.

Another example of financial fraud and violation of ethics is the sudden closure of many
NBFCs (Non-Banking Financial Companies) in India, which affected thousands of depositors
and resulted in the loss of millions of Rupees of public money.

Ethics in accounting are critical for a country’s economic progress, because money and
money management is the key to all economic development and business enterprises.

We are bound to say that finance would be impossible without ethics. We are placing our
assets in the hands of the others, most of the times with unknown people which requires immense
trust.

Unethical things in Financial Services:

(1) Deception(Misleading, not to be trust): Deception is the act of deceiving. Sales people have to
explain all the relevant information truthfully in an understandable, non-misleading way. This should
be the ethical treatment provided to clients.

Deception is often a matter of interpretation e.g., promotional material for a mutual fund may
be accurate but misleading of it emphasizes only the strengths of a fund and minimizing the weakness.

(2) Churning: Churning is the act of making butter in dictionary. Churning is defined here as
excessive or inappropriate trading for a clients account by a broker who has control over the account
with the intent to generate commissions rather than to benefit the client.

➢ Broker controls the account.

➢ Trading is excessive for the character of the account.
➢ Broker acted with intent.

(3) Unsuitability: Brokers, Insurance Agents and other sales people have to recommend only suitable
securities and financial products.

➢ Unsuitable types of securities (recommending stocks, eg. When bonds would better fit the
investors objectives)
➢ Unsuitable grades of securities (Selecting lower-rated bonds when higher rated one are more
appropriate)
➢ Unsuitable diversification (including the use of margin or options which can leverage an
account and create greater volatility and risk)
➢ Unsuitable trading techniques (includes the use of margin or options. This can leverage an
account and create greater volatility and risk.
➢ Unsuitable liquidity (is limited perhaps, eg. Not very marketable and hence unsuitable for
customers who would like to liquidate the investment)

(4) Fraud and Manipulation: The main purpose of security regulation is to prevent fraud and
manipulation practices in the sale of securities.

The company that fails to report proper information may be committing fraud, even though the buyer
of that company’s stock buys it from a previous owner who may or may not be aware of the news.

Manipulation involves the buying or selling of securities in order to create a false or misleading
impression ‘about the direction of their place so as to induce other investors to buy or sell the
securities.

(5) Unequal Bargaining Power: The fairness of bargained agreements assumes that the parties have
relatively equal bargaining power. Unequal bargaining power can result from many sources. Some of
the following are:

Resources: Wealth has an advantage in all transactions. Wealthier customers have more options.
Large investors have plenty of opportunities because they are better diversified, bear greater risk and
obtain higher leverage, volume trading benefit to them.

Processing Availability: Unsophisticated ill-advised to play the stock market and invest in markets
that only professionals understand. Even with equal access to information, people vary in their ability
to process information and to make informed judgments.

Vulnerabilities: Investors are human and they have many weaknesses which can be exploited.
Regulation is designed to protect people from the exploitation of vulnerabilities.

(6) Inefficient pricing: Fairness in financial markets includes efrficient prices that reasonably reflect
all available information. Volatility results from mismatch of buyers and sellers in eventually self
correcting. Mean time, great harm may result by inefficient pricing. Individual investors are harmed
by buying at too high a price during periods of mispricing.

(7) Cyber Crime: Cybercrime in finance is the act of obtaining financial gain through profit-driven
criminal activity, including identity fraud, ransom ware attacks, email and internet fraud, and attempts
to steal financial account, credit card, or other payment card information.

In other words: Financial cybercrime includes activities such as stealing payment card information,
gaining access to financial accounts in order to initiate unauthorized transactions, extortion, identity
fraud in order to apply for financial products, and so on.

(8) Micro Finance: Giving loans the needy people and collecting huge amounts as an interest and
making them to pay immediately is the recent unethical practice observed by some registered as well
as some unregistered micro finance companies.
ETHICS IN ADVERTISING:

(i) Advertising is a big business in this age of promotion and marketing companies
are making huge investments in their annual advertising budgets. Advertising is
very expensive; it does not come free to consumers as generally appears to be.
(ii) Companies claim that basic function of advertising is to provide consumers with
“information” about the products and services available to them, which is
beneficial to both the suppliers and the consumers of goods.
(iii) Ethics of advertising are not only about the gain or loss from advertising ; they
are also about the correctness, appropriateness, openness and fairness of the
content of an advertisement in relation to its recipients, customers or the society at
large.
(iv) Dishonest and misleading advertisements have become so common that consumer
protection councils are now flooded with complaints regarding their deceptive
nature.
(v) Why should the large majority of consumers be subjected to pay for the cost of
advertising if it is not adding any value to their purchase?
(vi) Golden Rules of Advertising Ethics, which have considerable influence on the
society and consumers.
(vii) If the task of advertising is viewed in terms of a ‘buyer-seller’ relationship, then it
can be defined as a kind of commercial communication between a seller and
potential buyers (customers). Hence, ads can be looked at as: (a) a publicly
addressed communication to masses; and
(viii) (b) created with the intent to induce several members of its audience to buy the
seller’s products.
(ix) The social effects of ads have many ramifications; often people find the visual in
ads as being tasteless, disgusting and even vulgar at times. Can cause
psychological effects on simple-minded advertisement-believing public and
society, especially children. Another aspect of advertising in general is that they
are made to propagate or promote materialistic values and ideas about how to be
happy or different or distinguished in the society. Critics also claim that
advertising leads to wastage, because a large number of consumers still depend on
the ‘word of mouth’ mode of buying.

Advertising encourage expenditure on creating a socio-psychological desire in the minds of

the masses. John Kenneth Galbraith in this book- The New Industrial State- had implied that
advertising is a means to shift the focus of decision, in the purchase of goods, from the
control of consumers to the control of firms. If this is correct, then advertising is an
instrument to manipulate consumers

Advertising is a means to provide information about products and services to consumers. It

comprises two parts:
(i) designing information

(ii) delivering or advertising that information for public utilization.

Advertising is a big business in this age of promotion and marketing; companies are making huge
investments in their annual advertising budgets.

Advertising is very expensive; it does not come free to consumers as generally appears to be. Why
should the large majority of consumers be subjected to pay for the cost of advertising if it is not
adding any value to the purchase?

The ‘Golden rules for advertising Ethics’, which have considerable influence on the society and
consumers are:

➢ Ensure truthfulness and honesty of representation

➢ Safeguard against misleading advertisement
➢ Ensure that advertisements are not offensive to caste, religion, color and creed
➢ Avoid promotion of product hazardous or harmful to society, particulary to children and
minors.
➢ Ensure fairness of competition and adherence to social welfare.
❖ Ads can cause psychological effects on public and society, especially children.
❖ Advertisements are made to propagate materialistic values and ideas about how to be happy.
❖ Critics also claim that advertising leads to wastage, begause a large number of consumers still
depend on the ‘word of mouth’.
❖ According to John Kenneth Galbraith, Advertising is a means to shift the focus of decision,
“from the control of consumers to the control of firms”. Then it is manipulating consumers.

Common deceptive practices in advertising are:

➢ False and misleading presentation of facts.

➢ Deliberate omitting of required information.
➢ Implying a benefit that hardly exists.
➢ Trade puffing and exaggerations.
➢ Using unnecessary, unwanted technical jargons
➢ Creating cultural degeneration
➢ Creating ambiguities in the minds of consumers.
➢ Creating fear in consumers
➢ Plagiarism
➢ Open Criticism of competitor
➢ Portrayal of Women and Children.

Common Criticisms on Advertising are:

➢ Barriers for new entrants.

➢ Creates psychological effects
➢ Advertisement is manipulative
➢ Advertisement is wasteful cost.
ETHICS OF MEDIA REPORTING:
Ethics of media reporting is, perhaps, best reflected in the statement of a senior journalist who said;

“Journalism occupies a special position in the society because their role and function influences the
masses, but he cautioned that they need to subscribe to a code of ethics in the course of their
professional duties. Truth, objectivity and privacy are some of the issues that must be carefully
pursued”. In today’s world of mass communication, there could not be anything more important than
ethics of the media reporting professionals.

Media reporting has primarily two parts in its functioning: (1) one is journalistic in nature - reporting
(and sometimes analyzing) the happenings and trend of happenings in various fields of interests like
Social, Political, Economical, Environmental, Educational, Historical, Cultural, Sports., etc. (2) the
other part is to carry advertisements or personal information as communication to public.

Media should not knowingly lend support or cooperate with the advertisers for advertisements that are
intended for misleading the public or society.

The media is placed in a responsible position by the society to project truth and facts for general
consumptions.

Media has the ethical responsibility to stop or minimize the damage that an advertisement can cause
to the interests of public or viewers or the society.

The journalistic codes insist for adherence to some basic moral and legal duties in order to bring more
credibility, honesty, truthfulness and fairness in reporting and contents of communication.

Need for code of ethics in media was first recognized in USA when they formulated a code of practice
for American Society of Newspaper Editors in 1926. It had undergone number of revisions in
subsequent years.

The highlights of the codes for journalism are:

1. Seek truth and report

Journalists should:

➢ Test the accuracy of information from all sources and exercise care to avoid inadvertent error.
Deliberate distortion is never permissible.
➢ Diligently seek out subjects of news stories to give them the opportunity to respond to
allegations of wrongdoing.
➢ Identify sources whenever feasible. The public is entitled to as much information as possible
on sources’ reliability.
➢ Always question sources’ motives before promising anonymity. Clarify conditions attached
to any promise made in exchange for information. Keep promises.
➢ Make certain that headlines, news, teases and promotional material, photos, video, audio,
graphics, sound bites and quotations do not misrepresent. They should
➢ Never distort the content of news photos or video. Image enhanacement for technical clarity
is always permissible. Label montages and photo illustrations.
➢ Avoid misleading re-enactments or staged news events. If re-enactment is necessary to tell a
story, label it.
➢ Avoid undercover or other surreptitious methods of gathering information except when
traditional open methods will not yield information vital to the public. Use of such methods
should be explained as part of the story. Never plagiarise.
➢ Tell the story of the diversity and magnitude of the human experience boldly, even when it is
unpopular to do so.
➢ Exaine their own cultural values and avoid imposing those values on others.
➢ Avoid stereotyping by race, gender, age, religion, social status, etc.
➢ Support the open exchange of views, even views they find repugnant.
➢ Give voice to the voiceless; official and unofficial sources of information can be equally
valid.
➢ Distinguish between advocacy and news reporting. Analysis and commentary should be
labeled and not misrepresent fact or context.
➢ Distinguish news from advertising and shun hybrids that blur the lines between the two.
➢ Recognize a special obligation to ensure that the public’s business is conducted in the open
and that government records are open to inspection.

2. Minimize harm: Journalists should:

➢ Show compassion for those who may be affected adversely by news coverage. Use special
sensitivity when dealing with children and inexperienced sources or subjects.
➢ Be sensitive when seeking or using interviews or photographs of those affected by tragedy or
grief.
➢ Recognise that gathering and reporting information may cause harm or discomfort. Pursuit of
the news is not a licence for arrogance (superiority).
➢ Recognize that private people have a greater right to control information about themselves
than do public officials and others who seek power, influence or attention.
➢ Show good taste. Avoid pandering to lurid curiosity.
➢ Be cautious about identifying juvenile suspects or victims of sex crimes.
➢ Be judicious about naming criminal suspects before the formal filing of charges.
➢ Balance a criminal suspect’s fair trial rights with the public’s right to be informed.

3. Act independently: Journalists should be free of obligations to any interest other than the public’s
right to know and right to information. Journalists should:

➢ Avoid conflicts of interest, real or perceived.

➢ Remain free of associations and activities that may compromise integrity or damage
credibility.
➢ Refuse gifts, favours, fees, free travel and special treatment, and shun secondary employment,
political involvement, public office and service in community organizations if they
compromise journalistic integrity.
➢ Disclose unavoidable conflicts.
➢ Be vigilant and courageous about holding those with power accountable.
➢ Deny favoured treatment to advertisers and special interests and resist their pressure to
influence news coverage.
➢ Be wary of sources offering information for favours or money; avoid bidding for news.
4. Be accountable: Journalists are accountable to their readers, listeners, viewers and each other.
Journalists should:

➢ Clarify and explain news coverage and invite dialogue with the public over journalist conduct.
➢ Encourage the public to voice grievances against the news media.
➢ Admit mistakes and correct them promptly.
➢ Expose unethical practices of journalists and the news media.
➢ Abide by the same high standards to which they hold others.

Unfortunately, there are violations of ethical standards and instances of siding with parties of
influence, power and politics to promote some direct or indirect gain. The situation is equally
disturbing in both national and international coverage of information and communication.

Evolving society like India, biased and distorted media coverage of political, legal and economic
issues are increasingly creating more of divide than unity in terms of public opinion and views. This
type of journalism has harmed the greater interest of the society and precipitated many conflicting and
complex issues rather than bringing about a solution.

With the increasing penetration of media - both print and electronic - into our lives and living,
responsibility, accountability and ethical conduct have assumed much greater importance than what
appears.

ETHICS OF HEALTH CARE SERVICES

Health, is indeed, wealth. Health of people is the primary indicator of good governance of the country
and well-being of its society. As per Article 25 of the Universal Declaration of Human Rights,
everyone has the right to a standard of living adequate for the health and well-being of oneself and
one’s family, including food, clothing, housing and medical care and necessary social services. In the
modern world, health care is regarded as a basic necessity of the people, and every State has the
responsibility to work towards that goal.

He, who practices not for money nor for a price but out of compassion for living beings, is the best
among all physicians.

The implied principles of health care services include the ethical principle of care, and making
available an acceptable and affordable service to all at right time and in the right manner that assures
safety, care and dignity of people receiving the service.

The organization providing healthcare services should be appropriately regulated and controlled by
the State.

The medical profession has formed a ‘body of ethical statements’ primarily for the benefit of the
patients; yet there are regular reports of medical negligence and patient suffering due to inadequate or
careless medical services.

Especially in India, people repose great trust in a doctor, who is considered second only to the God.
However, more and more people are new questioning the practice. The problem is that in India not all
the people are in a position to take an educated view of the situation.
The American Medical Association (AMA), the leading professional body to recognize the
responsibility of medical profession had enacted a code of ethical practices long ago. It states that as
a member of this profession, a physician must recognize the responsibility to the patients first and
foremost, as well as to society, to other health professionals, and to self.

The following principles are adopted by the AMA:

➢ A physician shall be dedicated to providing competent medical care, with compassion and
respect for human dignity and rights.
➢ A physician shall uphold the standards of professionalism, be honest in all professional
interactions, and strive to report physicians deficient in character or competence, or engaging
in fraud or deception, to appropriate entities.
➢ A physician shall respect the law and also recognize the responsibility to seek changes in
those requirements which are contrary to the best interests of the patient.
➢ A physician shall respect the rights of patients, colleagues, and other health professionals, and
shall safeguard patient confidences and privacy within the constraints of the law.
➢ A physician shall continue to study, apply and advance scientific knowledge, maintain a a
commitment to medical education, make relevant information available to patients,
colleagues, and the public, obtain consultation, and use the talents of other health
professionals when indicated.
➢ A physician shall, in the provision of appropriate patient care, except in emergencies, be free
to choose whom to serve, with whom to associate, and the environment in which to provide
medical care.
➢ A physician shall recognize a responsibility to participate in activities contributing to the
improvement of the community and the betterment of public health.
➢ A physician shall, while caring for a patient, regard responsibility to the patient as supreme.
➢ A physician shall support access to medical care for all people.

The World Medical Association’s Geneva declaration also calls for the medical professionals
pledging to: “service to the humanity, serving the profession with conscience and dignity, committing
to the principle of patients’ health first and above all other considerations, respect for those secrets
confided in doctors by patients, and maintaining the honour and noble tradition of the medical
profession”.

The misconduct of some medical professionals reported in Idnia is not due to the lack of ethical codes
or governing principles but due to the lack of care, concern and violation of professional conduct.

Like all ethical issues, the failure of ethics in health care is also driven by greed and opportunity to
make money. Furthermore, drugs and equipment supplying companies are forging unusual alliance
with interested parties to promote products that are not optimum – all this, leading to the continued
sufferings of millions in every country.

The Medical Council of India (MCI) forbids advertising of medical doctors and rules of advertising
by doctors as unethical. Yet, there are plenty of cases where doctors somehow advertise themselves,
in a way that cannot be acted against by the MCI for some ‘technical reason’.
ETHICAL DILEMMAS
Introduction to Ethical Dilemma:

The organizational dilemmas consideration takes us into the ‘gray zone’ of business and professional
life, where things are no longer black or white and where ethics has its vital role today. A dilemma is
a situation that requires a choice between equally balanced arguments or a predicament that seemingly
defies a satisfactory solution.

Organizational decisions generally evolve from issues, which are more abstract or general than
concrete dilemmas. Issues are fairly easy to identify.

Example:

➢ Accounting procedures
➢ Customer service
➢ Crisis management
➢ Government regulations
➢ Targeted advertising
➢ Sexual harassment
➢ Affirmative action
➢ Community spirit
➢ Fair hiring
➢ Treatment of grievances

Issues stand outside of specific circumstances and often assume that individuals or groups can do the
right thing if they so intend. It may also be about things like:

➢ Materials
➢ Buildings
➢ Plans
➢ Locations.

Dilemma and Ethical Dilemma

Once you become deeply involved in a particular issue or a situation, you begin to come
across actual dilemmas. Two factors you will be facing are

➢ A dilemma
➢ An ethical dilemma

The alternatives or options seem equally balanced - a predicament (varied stake holders with equally
strong conflicting positions, which is a dilemma).

Second, the decision for action when it is made, will have an important impacta on the welfare of the
people - that is the ethical factor (Number of valid stake holders ‘plus’ significant effects of an action
on the welfare of people ‘equals’, an ethical dilemma).
A dilemma is a situation in which two or more options for action, representing varied interests, seem
equally arguable, and where the decision is important but neither clear nor simple.

Mounting Scandals:

As we are seeing in our everyday life, the scandals are increasing. In the face of mounting scandals,
many of the corporations adopt codes of ethics, business schools are developing ethics courses and
consultants are hired to put ‘integrity’ into corporate cultures. Many authors like Kenneth Blanchard
and Norman Vincent Peale have responded with practical books aimed to demonstrate that ethical
decision making is practical and effective.

What relevance does business ethics have for corporate managers? Laws and regulations underlie
many matters that derive from the variety of relationships, managers have with employees, staff and
customers. Many of the diverse groups need to be satisfied and this calls for mutual trust. A breach
of ethics breaks down the mutual trust required to maintain individual and organizational moral
behavior.

Ethical Issues:

Most of the ethical issues presented to managers involve human resources treatment of employee
problems involving customers and suppliers and then conflict between values and company loyalty.
Most of these issues will involve ethical dilemmas.

The diverse ethical issues are to be managed effectively and efficiently by the managers. These issues
may arise from various constituencies. Some common sense ethical principles can serve as the basis
of fair and just administrative decisions. What is needed at the hour is mutual trust, effective
communication and consistency in application. However, they do not guarantee success, but if
implemented, may facilitate the management of diverse ethical issues.

Preparatory Ethics: Proactive steps:

The aim of preparatory ethics is to prevent or control crisis management of ethical dilemmas. This
may lead to the avoidance of conflict and concealment of unethical practices and thereby prevention
of a situation to punitive legal measures.

➢ Be a moral role model (Act morally - consistently do what is good, correct and just). Mark
Twain puts it as “Always do the right thing, this will surprise some people and astonish the
rest”.
➢ Hire, associate and consult with moral people.
➢ Stress standards and the spirit of the law (have some well accepted normal procedures and
policies in the place to review and promote standards, values and mission to prevent ehical
problems. These can be used as norms of ethical behavior).
➢ Be committed (the wide range of commitment is understood and acted upon by a growing
knowledge of and concern for, those with whom one comes in contact without losing sight of
the mission and the needs of the changing times).
Following commonsense, preparatory steps may limit the number and intensity of ethical dilemmas
which may be adopted by corporate managers.

What are:
1. Determine the
- The salient facts?
salient facts and ethical - Ethical norms?
norms - The experience of individual or group?

(i) Who is involved

2. Look at the facts - Directly?
- Indirectly?
objectively
(ii) What are:
- The causes and consequences?
- Interrelationships among the factors?
3. Identify the problem Can the problem be distinguished as economic, social or
legal? ethical norms
(Laiden with an ethical dilemma)

(i) How does the problem stand up against personal and

4. Reflect on the ethical professional codes.
problem (ii) What alternative solutions are there?
(iii) Who will:
- receive the benefits?
- bear the financial social costs?
(iv) Which alternative solution will lessen the costs or
redistribute the benefits more justly.

5. Take action
(i) Action is taken based on the information gathered.

(i) Are the diverse groups satisfied?

6. Evaluate the (ii) Are the individuals, organizational performance more
effective?
outcomes and the
(iii) Did the process work?
process. (iv) If not, at what step, was there breakdown?

Ethical Challenges in Software:

The software challenge, then, has many facets:

1. In high-risk, life critical systems, a clear delineation of ethical responsibility is necessary.
2. The issue of defining minimum skill levels and enforcing proficiency in new technologies
among software professionals has not yet been resolved.
3. The issue of personal privacy for all system users, including those whose lives are touched by
systems without their full comprehension of the ramifications (think of the supermarket
scanner or the video store rental), is scarcely addressed beyond some tentative forays into
encryption.
4. Another major challenge is the integration of systems. The technological issues of component
based development and the creation of platforms to provide the infrastructure needed to
develop applications must be addressed. Project managers needed to be aware of the tools
available for estimating the resources required to design and develop large systems.
5. The last great challenge, without whose solution all other discussion is moot, is reliability.
How can large, integrated systems be tested sufficiently to warrant trust? Schemes such as
software rejuvenation acknowledge that it is impossible to catch every bug. Testing methods
that can guarantee a secure window of operation need to be linked with human factors
analysis to determine what to do when those windows are breached. (For example, it does no
good to have the auto pilot of an airplane compensate for tilting due to ice buildup on the
wings of it then disengages without warning and hands the pilots a plane that is out of control
and irretrievable). These problems must be resolved before computer technology can become
sufficiently mature and trustworthy to be transparent, allowing focus on the task rather than
the tool.
Corporate Governance Defined

Philip Cochran and Steven Wartick defined Corporate Governance as “an umbrella term that
includes specific issues arising from interactions among senior management, shareholders, boards of
directors, and other corporate stakeholders”.
Bob Garatt has defined as “Corporate Governance deals with the appropriate board structures,
processes, and values to cope with the rapidly changing demands of both shareholders and
stakeholders in around their enterprises.

Principles of Corporate Governance:

The fundamental or key principles of corporate governance are described below:
(i) Transparency:
Transparency means the quality of something which enables one to understand
the truth easily. In the context of corporate governance, it implies an accurate,
adequate and timely disclosure of relevant information about the operating
results etc. of the corporate enterprise to the stakeholders.
In fact, transparency is the foundation of corporate governance; which helps to
develop a high level of public confidence in the corporate sector. For ensuring
transparency in corporate administration, a company should publish relevant
information about corporate affairs in leading newspapers, e.g., on a quarterly or
half yearly or annual basis.
(ii) Accountability:
Accountability is a liability to explain the results of one’s decisions taken in the
interest of others. In the context of corporate governance, accountability implies
the responsibility of the Chairman, the Board of Directors and the chief executive
for the use of company’s resources (over which they have authority) in the best
interest of company and its stakeholders.
(iii) Independence:
Good corporate governance requires independence on the part of the top
management of the corporation i.e. the Board of Directors must be strong non-
partisan body; so that it can take all corporate decisions based on business
prudence. Without the top management of the company being independent; good
corporate governance is only a mere dream.
(iv) Fairness
The board of directors should treat all stakeholders fairly and equitably.
(v) Honesty
The directors must protect the shareholders interests in the organisation, and
should give confidence to the shareholders that their interests are being
protected.
(vi). Integrity
Moral and ethical issues should be considered when making decisions relevant to
the organisation.
(vii) Objectivity
The objectives of the corporation must be clearly recognized in a long-term corporate strategy
including an annual business plan along with achievable and measurable performance targets and
milestones.
Agency Theory:
Agency theory is a principle that is used to explain and resolve issues in the relationship between
business Principals and their Agents.

According to the Agency theory, developed by Michael Jensen and William Meckling, in the typical
corporate form, the owners are content with the ownership and control over the assets and the
resources of the company are in the hands of Managers who by convention need not hold any stake
in the company.

Hires and delegates

Self Self
Principal Agent
interest performs
interest

Principals: These are the shareholders, owner of the company delegates work/responsibility to the
Managers.

Agents: These are the Managers appointed by the shareholders, to run the company on behalf of the
shareholders.

Agency Problem: The objectives of Manager (Agent) are different from the shareholders (Principal).
This conflict in objective is agency problem.

A standard Principal-Agent theory is governed by contracts. Such contracts spell out the terms of
performance of the contracting parties. It includes terms of timing, scope and redress of grievances
arising of non-performance by the parties. But Agency theory is applied when such a contract or any
term is missing.

Demsetz and Lehn (1985) say that contracts between the shareholders and the Managers are very
costly to write and enforce because (1) the information asymmetry between Managers and Owners
(2) Monitoring is difficult as shareholders are not in a position to observe everything a Manager
does, (3) redress of problems even when detected is difficult because of widely disbursed nature of
shareholders and coordinating their action is costly.

Phan (2000) says that “Even when it becomes apparent that the management is not doing its job, all
a shareholders can do is, to vote with his feet by selling the stock. Further, selling stock is not
effective way of changing management unless there is a run on the stock of the company, which is
unlikely in most situations”.

The Agents do not manage the firm and risks associate with it, had become Agent conflict.
According to many experts, these conflicts were anticipated and authorities had been implementing.
Even media has been very active in bringing out such conflicts.
According to Phan (2000), there are two categories of solutions to overcome the agency
related problems. “one the Agency related problems, one is the board of directors represents the
shareholders when the ownership of capital is separated from the control of capital, as in the case of
large, public corporations with dispersed ownership of shares. It is internal mechanism of control. It
relies on the enterprise and goodwill of corporate watchdogs to ensure that Managers abide by the
principles of maximizing efficiency.

The other category of solution is the external mechanism of control. The behavior of the Managers
is indirectly constrained by the working of a series of competitive markets that systematically punish
the company for deviating from efficiency maximization.

Companies owned and managed by same

people

Expansion required investors

(Shareholders – Limited Liability)

Delegated running of company to Managers

(Agents)

Separation of Goods

Criticisms of Agency Theory: Agency Problems

➢ It has been erected on a single, questionable abstraction that governance involves a contract
between two parties.
➢ It is based on dubious conjectural morality that people maximize their personal utility.
➢ The theoretical research has remained the mainstay of published papers in corporate
governance.

Stewardship theory

This is also called as shareholder theory. According to this, the boards have a stewardship role for
the resources entrusted to them by the shareholders. The power over the corporation is exercised
by directors who are nominated and appointed by shareholders and hence accountable to them for
the stewardship over the company’s resources.

Empower & Trust

Profit
Intrinsic,
Principal Agent
& returns
extrinsic
Protect & maximize motives
wealth

The theory is based on the belief that the directors can be trusted. This is also the theoretical
foundation for most of the legislations and regulations in almost all the countries and for good
governance. The roles, duties, and tasks of directors are essentially based on this.

According to Peter Block(1996), “Stewardship begins with the willingness to be accountable, for
some larger body than ourselves – an organization, a community. Stewardship springs from a set of
beliefs about reforming an organization that affirms our choice of service over the pursuit of self-
interest. Whe we choose service over self-interest, we say we are willing to be deeply accountable
choosing to control the world around us. It requires a level of trust that we are not used to holding”.

As Block (196) says, “Stewardship is to hold something in trust for another”. Block defines
stewardship as “the choice to preside over the orderly distribution of power”. This means giving
people at the bottom and the boundaries of the organization choice over how to serve a customer, a
citizen, a community. It is the willingness to be accountable for the well-being of the larger
organization by operating in service rather than in control of those around us.

Thus, the heart of the stewardship theory is the commitment to service. The directors on the boards
acting on the principle of stewardship will hold the company in trust on behalf of the different
stakeholders.

While conventional agency theory attributed that agents have their own self-interest in the way they
managed, led, and governed, Stewardship theory begins with the willingness to be accountable for
some larger body than ourselves.

Stakeholder Theory

Jensen (2005) evolved this stakeholder theory which says that “Corporations should attempt to
maximize not value of their shares (or financial claims), but distributed among all corporate
‘stakeholders’ include employees, customers, suppliers, local communities and tax collectors”.

While corporations have been concentrating on value maximization for more than 200 years,
starting with Adam Smith who thought that social wealth and welfare are likely to be greatest when
corporations seek to maximize the stream of profits that can be divided among their shareholders,
over a period of time the goal has got transformed to one of ‘maximization of the long-run market
value of the firm, where the value of the firm is mainly but not necessarily entirely defined by the
company’s stock price.

Stakeholder theory has been getting wide acceptance among organizations, politicians and even
governance conscious organizations and governments because the theory has a perspective of long-
term rather than short-term in the ‘value-maximization proposition’ of the earlier years.

The widespread use of the tool ‘Balance Score Card(BSC) which is a multidimensional performance
measurement process, where not only the financial performance, which is historical in nature, but
also the internal business processes, the customers, and the learning and growth aspects which will
consider the sustainability of the business are also taken into consideration.

According to Jensen, “Stakeholder theory is completely consistent with value-maximization or value-

seeking behavior, which implies that managers must pay attention to all constituencies that can
affect the value of the firm’. But with multiple constituencies competing with conflicting interests,
the decision-making process for the boards and managers becomes difficult.

It allows Managers and Directors to devote the firm’s resources to their own favourite causes – the
environment, art, cities, medical research – without being held accountable for the effect of the
expenditure on firm value. By expanding this power of managers in unproductive way, stakeholder
theory increases the agency costs in the economic system. And since it expands the power of
Managers, it is not surprising that stakeholder theory receives substantial support from them.

Emergence of Corporate Governance in India and the landmarks:

➢ India had been British Colonial State till 1947.

➢ Formal Control and regulation over the financial dealings of Indian Companies started with
the enactment of the RBI Act, 1934. It is the beginning of the Indian Corporate Governance history.
➢ The Country had already 6 fully operational stock exchanges before 1947 (independence).
(Ahmedabad, Calcutta, Madras, Punja, Uttar Pradesh, Nagpur and Hyderabad).
➢ Indian Corporate Governance got further boost by the enactment of post-independence
laws, consolidating the rights of investors.
➢ The Companies Act, 1956 provided some basic features of business operations, especially
with reference to Board formation, issue of shares and management of share capital.
➢ Because of the Industrial Policy in Mid 1950s, the Government attention focused more on
creating public sector companies that regulating governance of the existing companies.
➢ The public sector companies worked under the Government protection with minimal
responsibility for governance, leading to heights of inefficiency.
➢ The private sector struggled under license-raj and red-tapism (rise to corruption), adopted
short cuts to run the businesses.
➢ The Indian equity market was large controlled by dominant private sector players and stock
market manipulators until private sector players and stock market manipulators until the enactment
of Economic Policy in 1991.
➢ The Indian business scenario changed completely with the liberal economic policy in 1991 by
allowing investments, reduction in taxes, import tariffs.
➢ The Developing economy, and development of strong financial system (both bank-based and
market-based) was felt necessary. The SEBI Act of 1992 filled this gap.
➢ SEBI established in 1988 became an empowered and fully functional watchdog of the Indian
Stock Market in 1992 with the enact of SEBI Act, 1992. This Act was amended two times in 1995 and
1999 to clarify the “disclosure” norms and empowers SEBI Act.
➢ SEBI Act along with various financial regulations enforced by the RBI, Finance Ministry,
Government of India, acted as affective corporate governance in the Indian Economy.
➢ Encouraged by the Private sector efforts for code based governances, SEBI formulated a
Committee under the chairmanship of Kumar Mangalam Birla to work out the corporate governance
codes.
➢ The Codes formulated by the Birla Committee, were introduced through Clause 49 of the
SEBI in 2000. It was further re-enforced by SEBI in 2003, by appointing Narayana Murthy Committee
to make additional recommendations to enhance effectiveness and incorporated the
recommendations by revising the Clause 49 from Jan’2006.
➢ The Companies Act, 2008, which has replaced the earlier Companies Act, 1956, is the latest
milestone for Corporate Governance in India. It has incorporated the social view of business in the
form of “Corporate Social Responsibility(CSR).
➢ Thus Indian Corporate Governance moving towards for fulfilling the global accepted
objectives of Corporate Governance.
➢ “Corporate Governance Guidelines 2009” and “Corporate Social Responsibility voluntary
Guidelines 2009” by the Ministry of Company Affairs (MCA) were issued for strengthening corporate
governance framework in India.
➢

NEED FOR CORPORATE GOVERNANCE:

1) Need to live in harmony with the community
A corporation is a congregation of various stakeholders, namely customers, employees,
investors, vendor partners, government, and society. A corporation should be fair and
transparent to its stakeholders in all its transactions. This has become imperative in today’s
globalized business world where corporations need to access global pools of capital, need to
attract and retain the best human capital from various parts of the world, need to partner
with vendors on mega collaborations, and need to live in harmony with the community. Or
else, it will not be able to succeed.
2) Ethical Leadership:
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.
3) Beyond the realm of law
It stems from the culture and mindset of management, and cannot be regulated by
legislation alone. Corporate governance deals with conducting the affairs of a company,
such that there is fairness to all stakeholders and that its actions benefit the greatest
number of stakeholders. It is about openness, integrity, and accountability. What legislation
can and should do, is to lay down a common framework – the ‘form’ to ensure standards.
The substance will ultimately determine the credibility and integrity of the process.
4) Requires the cooperation of all the stakeholders:
Corporations need to recognize that their growth requires the cooperation of all the
stakeholders; and such cooperation is enhanced by the corporation adhering to the best
corporate governance practices. In this regard, the management needs to act as trustees of
the shareholders at large and prevent asymmetry of benefits between various sections of
shareholders, especially between the owner-managers and the rest of the shareholders.
5) Improving the economic efficiency of a firm
Corporate Governance is a key element in improving the economic efficiency of a firm.
Good corporate governance also helps ensure that corporations take into account the
interests of a wide range of constituencies, as well as of the communities within which they
operate. Further, it ensures that their Boards are accountable to the shareholders. This, in
turn, helps assure that corporations operate for the benefit of society as a whole. While
large profits can be made taking advantage of the asymmetry between stakeholders in the
short run, balancing the interests of all stakeholders alone will ensure survival and growth in
the long run.
6) Avoid heavy cost beyond regulatory problems.
The failure to implement good governance can have a heavy cost beyond regulatory
problems. Evidence suggests that companies that do not employ meaningful governance
procedures can pay a significant risk premium when competing for scarce capital in the
public markets. In fact, recently, stock market analysts have acquired an increased
appreciation for the correlation between governance and returns. In this regard, an
increasing number of reports not only discuss governance in general terms, but also have
explicitly altered investment recommendations based on the strength or weakness of a
company’s corporate governance infrastructure.
7) For the Credibility
The credibility offered by good corporate governance procedures also helps maintain the
confidence of investors – both foreign and domestic – to attract more ‘patient’, long-term
capital, and will reduce the cost of capital. This will ultimately induce more stable sources of
financing.
8) Result of Financial Crisis:
Often, increased attention on corporate governance is a result of financial crisis. For
instance, the Asian financial crisis brought the subject of corporate governance to the
surface in Asia. The many instances of corporate misdemeanors have also shifted the
emphasis on compliance with substance, rather than form, and brought 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. By
this very principle only those industrialists whose corporations are governed properly should
be allowed to be a part of committees. This includes the Prime Minister and Finance
Minister’s advisory councils, committees set up by the Confederation of Indian Industry (CII),
the Security Exchange Board of India (SEBI), the Department of Company Affairs, ministries,
and the boards of large banks and financial institutions.
9) Provides the structure
The definition in the preamble of the OECD principles is also all encompassing: ‘Corporate
governance… involves a set of relationships between a company’s management, its board,
its shareholders, and other stakeholders. Corporate governance also provides the structure
through which the objectives of that company are set, and the means of attaining those
objectives and monitoring performance are determined.
10) To ensure that it is run properly.
The most common school of thought would have us believe that if management is about
running business, governance is about ensuring that it is run properly. All companies need
governing as well as managing. The aim of “Good Corporate Governance” is to enhance the
long-term value of the company for its shareholders and all other partners. The enormous
significance of corporate governance is clearly evident in this definition, which encompasses
all stakeholders. Corporate governance integrates all the participants involved in a process,
which is economic, and at the same time social.
OECD Principles (Organization for Economic Cooperation and Development)

The OECD (Organization for Economic Cooperation and Development) came into full force on
September 30, 1961. The key function of the OECD was to provide management consulting to
member governments. OECD is an international organisation that works to build better policies
for better lives. It’s goal is to shape policies that foster prosperity, equality, opportunity and well-
being for all.
The OECD seeks to promote governance reforms in a close cooperation with other international
organization. This is normally done in joint collaboration with the World Bank and International
Monetary Fund (IMF). Roundtables, summoning senior policymakers, regulators and market
participants are organized to enhance the comprehension of governance and to support
regional reform efforts.
The OECD principles of corporate governance become part of the core 12 standards of global
financial stability. Currently, it has become a benchmark used by international financial
institutions. The OECD principles were designed to flexible and can be adopted in different cultures,
circumstances and traditions in different countries. Most countries’ corporate governance codes
are based on the principles of the OECD, and Ghana’s corporate governance code has this element.
Right from the beginning, OECD recognized that there cannot be a formula for corporate governance
that can be followed by all countries or as Mallin (2007) says, ‘One size does not fit all’. The
principles are of such nature that they represent certain common characteristics that are
fundamental to good corporate governance. The taskforce published its report in 1999.
Subsequently, the principles were reviewed and revised in 2004. These principles approached the
subject from five major aspects.

The OECD has five main corporate governance principles and these are discussed below:

1 Rights of Shareholders and Key Ownership Functions

The broad term of references included establishing the shareholder rights with reference to
ownership, being informed of fundamental corporate changes, opportunity to participate effectively
and vote in shareholder meetings, adequate disclosure of special rights to certain shareholders like
control disproportionate to their equity ownership, ensuring transparent and efficient functioning of
the market for corporate control while stating that shareholders should consider the costs and
benefits of extending their voting rights.

2 Equitable Treatment of Shareholders

There should not be any discrimination among big and small, domestic and foreign shareholders. All
shareholders within the same class should be members and managers should be required to disclose
any material interests in transactions or matters affecting the corporation.

3. Stakeholder perspective
Care should be exercised to see that the rights of stakeholders that are protected by law are
respected. IN case of violation of their rights, stakeholders should have the opportunity to get
redressal for their grievances. Adequate mechanisms shall be provided in the corporate governance
framework to improve shareholder participation in enhancing performance. The shareholders
should have access to relevant information wherever stakeholder participate in the governance
process.

4. Disclosure and transparency:

The corporate governance framework should ensure that timely and accurate disclosure is made on
all matters regarding the corporation including the financial situation, performance ownership, and
governance of the company. Disclosures must be available on aspects like the financial and
operating results, company objectives, share ownership and voting rights, board members and other
key executives and also their remunerations, foreseeable risk factors, material issues regarding
employees and other stakeholders, governance structures and policies, etc. Information should be
prepared, audited and disclosed in accordance with high quality standards of accounting, disclosure
and audit. Independent auditor should conduct an annual audit to provide an external and objective
assurance about the preparation and presentation of financial statements. These should be fair,
timely and cost efficient methods of disseminating information for access by users.

5. Responsibilities of the board:

The governance framework should ensure the strategic guidance of the company, effective
monitoring of management by the board, and the board’s accountability to the company and the
stakeholders. Towards achieving this, the board members should exercise due diligence and care
and act in the best interests of the company and the shareholders. Board should treat all
shareholders fairly especially when board decisions may affect different shareholder groups
differently. Compliance with all applicable laws must be ensured while taking into account the
interests of stakeholders. Board should also take necessary steps into review and guide corporate
strategy, risk policy, budgets, business plans, setting of performance objectives, selection of key
executives – monitor and replace them where necessary and also plan for succession. IT should also
monitor the implementation of corporate performance, oversee major capital expenditures,
acquisitions, and divestitures, review executive remuneration, ensure a formal and transparent
board nomination process, monitor and manage conflicts of interest of stakeholders like board
members, executives, and shareholders, ensure integrity of the company’s accounting and financial
reporting systems and independent audit, constitute the board with sufficient number of non-
executive board members who can exercise independent judgement, etc.

GRI (Global Reporting Initiative)

The Global Reporting Initiative (GRI) is an international, multi-stakeholder and independent non-
profit organization that promotes economic, environmental and social sustainability. The GRI was
established in 1997 in partnership with the United Nations’ Environment Programme (UNEP). The
organization has developed Sustainability Reporting Guidelines that strive to increase the
transparency and accountability of economic, environmental, and social performance and provides
all companies and organizations with a comprehensive sustainability reporting framework that is
widely used around the world.

The GRI sustainability reporting guidelines are the most widely used comprehensive sustainability
reporting standard in the world – provide organizations with the tools to meet the sustainability
challenges. A sustainability report conveys disclosures on an organization’s most critical impacts –
be they positive or negative on environment, society, and the economy.

Sustainability is a broad term considered synonymous with others used to describe reporting on
economic, environmental, and social impacts (e.g. triple bottom line, corporate responsibility
reporting, etc.) Sustainability reporting is the practice of measuring, disclosing and being
accountable to internal and external stakeholders for organizational performance towards the goal
of sustainable development. A sustainability report should provide balanced and reasonable
representation of the sustainability performance of a reporting organization – including both
positive and negative contribution.

Importance of GRI Guidelines:

By using the Guidelines, reporting organizations can generate reliable, relevant and standardized
information with which to:
➢ Access opportunities and risks, and
➢ Enable more informed decision making – both within the business and among its
stakeholders.
By developing and communicating their understanding about the connections between sustainability
and business, companies can:
➢ Enhance their value
➢ Measure and manage change, and
➢ Drive improvement and innovation

An ever-greater number of companies and other organizations are recognizing the need to make
their operations more sustainable. At the same time, governments, stock exchanges, markets,
investors, and society at large are calling on companies to be transparent about their sustainability
goals, performance and impacts. The GRI Sustainability Reporting Guidelines – the most widely used
comprehensive

G4 REPORT :
In May 2013, the Global Reporting Initiative (GRI) launched the fourth generation of its sustainability
reporting guidelines: the GRI G4 Sustainability Guidelines (the Guidelines). This latest round of
Guidelines took more than two-and-a-half years to develop. A broad range of stakeholders were
consulted, from expert Working Groups to public comment.
SIX ESSENTIAL ELEMENTS TO INCLUDE IN THE REPORT:
➢ Choose the ‘in accordance’ option that is right for your organization, and meet the
requirements
➢ Explain how you have defined the organization’s material Aspects, based on impacts and the
expectations of stakeholders
➢ Indicate clearly where impacts occur (Boundaries)
➢ Describe the organization’s approach to managing each of its material Aspects (DMA)
➢ Report Indicators for each material Aspect according to the chosen ‘in accordance’ option
➢ Help your stakeholders find relevant content by providing a GRI Content Index sustainability
reporting standard in the world – provide organizations with the tools to meet these
challenges.
PRINCIPLES FOR DEFINING REPORT CONTENT
These Principles are designed to be used in combination to define the report content. The
implementation of all these Principles together is described under the Guidance of G4-18 on pp. 31-
40 of the Implementation Manual.
Stakeholder Inclusiveness Principle: The organization should identify its stakeholders, and explain
how it has responded to their reasonable expectations and interests. Stakeholders can include those
who are invested in the organization as well as those who have other relationships to the
organization. The reasonable expectations and interests of stakeholders are a key reference point
for many decisions in the preparation of the report.
Sustainability Context Principle: The report should present the organization’s performance in the
wider context of sustainability. Information on performance should be placed in context. The
underlying question of sustainability reporting is how an organization contributes, or aims to
contribute in the future, to the improvement or deterioration of economic, environmental and social
conditions, developments, and trends at the local, regional or global level. Reporting only on trends
in individual performance (or the efficiency of the organization) fails to respond to this underlying
question. Reports should therefore seek to present performance in relation to broader concepts of
sustainability. This involves discussing the performance of the organization in the context of the
limits and demands placed on environmental or social resources at the sector, local, regional, or
global level.
Materiality Principle: The report should cover Aspects that: Reflect the organization’s significant
economic, environmental and social impacts; or Substantively influence the assessments and
decisions of stakeholders Organizations are faced with a wide range of topics on which they could
report. Relevant topics are those that may reasonably be considered important for reflecting the
organization’s economic, environmental and social impacts, or influencing the decisions of
stakeholders, and, therefore, potentially merit inclusion in the report. Materiality is the threshold at
which Aspects become sufficiently important that they should be reported.

Completeness Principle: The report should include coverage of material Aspects and their
Boundaries, sufficient to reflect significant economic, environmental and social impacts, and to
enable stakeholders to assess the organization’s performance in the reporting period. Completeness
primarily encompasses the dimensions of scope, boundary, and time. The concept of completeness
may also be used to refer to practices in information collection and whether the presentation of
information is reasonable and appropriate.

PRINCIPLES FOR DEFINING REPORT QUALITY

Balance: The report should reflect positive and negative aspects of the organization’s performance
to enable a reasoned assessment of overall performance
Comparability: The organization should select, compile and report information consistently. The
reported information should be presented in a manner that enables stakeholders to analyze changes
in the organization’s performance over time, and that could support analysis relative to other
organizations.
Accuracy : The reported information should be sufficiently accurate and detailed for stakeholders to
assess the organization’s performance.
Timeliness : The organization should report on a regular schedule so that information is available in
time for stakeholders to make informed decisions
Clarity : The organization should make information available in a manner that is understandable and
accessible to stakeholders using the report.
Reliability: The organization should gather, record, compile, analyze and disclose information and
processes used in the preparation of a report in a way that they can be subject to examination and
that establishes the quality and materiality of the information.

Clause 49 Guidelines
SEBI in January 2000 considered the recommendations of the Kumar Mangalam Birla Committee to
promote and raise the standard of corporate governance of listed companies. It decided to
incorporate a new clause in the listing agreement between companies and stock exchanges to
include the recommendations of the committee. The following guidelines were incorporated.

SEBI in January 2000 considered the recommendations of the Kumar Mangalam Birla
Committee to promoite and raise the standard of corporate governance of llisted companies.
It dercided to incorporate a new clause in the listing agreement between companies and stock
exchanges to include the recommendation of the committee. The following guidelines were
incorporated.
I. The board of directors
(a) The board shall have optimum combination of excutive and non-executive directors.
In case the company has an executive chairman, at least half of the board shall be
independent and case of a non-executive chairman, at least one-third of the board shall be
independent.
(b) All pecuniary relationships or transactions of the non-executive directors and the
company should be disclosed in the annual report.
II. Audit committee
(a) A qualified and independent committee shall be set up. The committee shall have
minimum three members, all non-executive directors, with the majority beiung
independent, and the chairman must attend the AGM to answer shareholder queries. The
committee can invite executives to be present at the meetings. The CFO/finance director,
the head of internal audit, and a representative of the secretary of the committee.
(b) The committee shall meet at least thrice a ylear, once before the finalization of annual
accounts and others in a gap of 6 months. The quorum shall be either two members or
one third of the members whichever is higher with a minimum of two independent
directors.
(c) The powers of the audit committee shall include
➢ To investigate any activity within its terms of reference
➢ To seek information from any employee
➢ To obtain outside advice
➢ To secure attendance of outside experts if necessary
(d) The committee’s role will include
➢ Oversight of the company’s financial reporting with adequate disclosure
➢ Recommending the appointment or removal of external lauditor, fixation of audit
fee, and approval of fees for any other services
➢ Discuss with management the annual financial statements before submission to
the board with focus on
o Any changes in accounting policies and practice
o Qualifications in draft audit report
o Significant adjustments arising out of audit
o The going concern assumption
o Compliance with accounting standards
o Compliance with requirements by stock exchanges and other legal aspects
o Any related party transactions that may have potential conflict with the interests of
the company at large.
➢ Review of internal control systems with management, internal, and external auditors
➢ Review of internal audit functions including structure, staff, leadership, reporting structure,
frequency of internal audit, etc.
➢ Discussion with internal auditors on any significant findings and follow up there on.
➢ Review of any internal investigations by internal auditors.
➢ Discussion and finalization of nature and scope of audit with external auditors.
➢ Review of the company’s financial risk management policies.
➢ To look into the reasons of substantial defaults in the payments to depositors, debenture
holders, shareholders (non-payment of declared dividends), and creditors.

III. Remuneration of Directors:

➢ The remuneration of non-executive directors shall be decided by the board.
➢ All details regarding remuneration shall be disclosed in the report on corporate governance
in the annual report. Details like salary, benefits, bonuses, stock options, perquisites, etc., as
well as details of fixed components and performance linked incentives along with
performance criteria and service contracts, notice periods, severance pays and stock option
details.
IV. Board Procedure
➢ Board should meet at least four times a year with a maximum gap of 4 months between two
meetings.
➢ No Director can be a member of more than 10 committees or act as chairman of more than
five committees across all companies in which one is a director. It is mandatory for every
director to declare the committee positions he occupies to the company and notify the
changes as and when they take place.
V. Management
➢ In addition to the director’s report, MDA is added.
➢ Report is added as a part of the annual report, MDA should discuss:
o The industry and developments
o Opportunities and threats
o Segment-wise or product-wise performance
o Outlook
o Risks and concerns
o Internal control systems and adequacy
o Financial performance with respect to operational performance.
o Material developments in HR/industrial relations including number of people
employed
o All financial and commercial transactions made by Managements, where they have a
personal interest that may have a potential conflict with the interests of the
company at large.
VI. Share holders
o When a new director is to be appointed, the shareholders must be provided with a
brief resume of the director, nature of his expertise in specific functional areas,
and names of companies where the person holds directorship and membershlips of
committees of the board.
o Information like quarterly results and presentation to analysts on its website be
forwarded to the stock exchanges who may disply them on their website.
o There must be a committee (shareholders/investors’ grievance committee) to look
into the grievances of the shareholders regarding transfer of shares, non-receipt of
balance sheet non-receipt of declared devidends, etc.
o The company must expedite the process of share transfe5rs and for this it should
delegate the power to either an officer, a committee, or to the registrar and transfer
agents with the delegated authority attending to the transfer formalities at least
once a fortnight.
VII. Report on Corporate Governance
There shall be a separate section on corporate governance in the annual reports with a
detailed compliance report ---compliance with any mandatory requirement and the extent to
which non-mandatory requirement have been adopted along with the annual returns.
VIII. Compliance
The company shall obtain a certificate of compliance with regard to corporate governance
requirements from the external auditors which shall be annexed to the corporate governance
report and sent to the stock exchanges along with the annual returns.
IX. Schedule of implementation
o By all entities seeking listing for the first time, at the time of listing.
o By 31 March 2001 by all entities in group of BSE A or in S&P Nifty Index as on 1
January 2000.
o By 31 March 2002 by all entities which are listed with paid-up capital Rs 10 crores
and above or net worth of Rs 25 crores or more any time in the history of the
company.
o By 31 March 2003 by all entities which are listed with paid capital of Rs 3 crores and
above.
o The non-mandatory requirements shall be implemented at the discretion of the
company. Disclosures regarding adoption /non-adopti0nj of the non-mandatory
requirements shall be made in the corporate governance report.

Amendments to Clause 49
1. Institutional directors will be considered as independent directors.
2. For the purpose of the number of memberships of committees, only public limited
companies (listed and unlisted) shall be included and private limited companies,
foreign companies, and companies of Sections 25 of the Companies Act shall be
excluded. Also, only audit committee, shareholders grievance committee and
remuneration committee shall be considered for this purpose.
3. Institutional directors will be considered as independent in the case of government
companies also.
4. Those companies which were required to comply with the provision in the first phase will be
required to submit a quarterly compliance report to stock exchanges within 15 days from
the end of quarter.
5. The date compliance by all companies with a share capital of Rs. 3 crores and above or net
worth of Rs. 25 crores or more at any time in the history of the company was extended to 31
March, 2004. The submission of the quarterly reports also will start after 15 days from the
quarter ending 31 March, 2004.
6. Stock exchanges shall ensure that all provisions of corporate governance have been
complied with before granting any new listing.
7. Stock exchanges shall set up a cell to monitor the compliance with the provision of corporate
governance. The cell has to submit a consolidated compliance report to SEBI within 30 days
of each quarter.
8. The compliance date for companies with share capital of Rs. 3 crorres and above or net
worth of Rs. 25 crores or more will be 31 March, 2005. The submission of the quarterly
compliance reports also will start from 15 days from 31 March, 2005.
9. Those companies which apply for listing must necessarily have audit committees and
investor / shareholder grievance committee before they are granted permission for listing.
10. The definition of independent director has been detailed. An independent director shall be
a non-executive director (1) who apart from receiving the director’s remuneration does not
have any material pecuniary relationships or transactions with the company, its promoters,
its directors, its senior management or its holding company, its subsidiaries and associates
which may affect the independence of the director; (2) has not been executive of the
company in the immediately preceding three financial years; and (3) is not partner or
executive or was not a partner or an executive during the preceding three years of any of
the following: (a) statutory audit firm or the internal audit firm that is associated with the
company; (b) the material supplier, or a service provider, or a customer, or a lessor, or a
lessee of the company which may affect the independence of the company; and (d) a
substantial shareholder of the company owing 2 percent or more of voting shares.
11. Minimum number of board meetings shall be four with the maximum time gap of three
months between any two meetings.
12. The board shall periodically review compliance reports of all laws applicable to the company;
prepared by the company as well as steps taken by the company to rectify instances of non-
compliance.
13. The board shall lay down a code of conduct for all board members and senior management
of the company. It shall be posted on the website of the company. All board members and
COMMITTEES ON CORPORATE GOVERNANCE
With the formation of corporate form of organizations, the frame work of corporate governance got
wide recognition and quite peculiarly it was prevalent in various manifestations throughout the
world. The theme of Corporate Governance has got recognition due to the constitution and
formation of various committees and formulation of various laws throughout the world.
With respect to India, after the economic initiatives in 1991, the Govt. of India thought it fit to
respond to the developments taking placing the world over and accordingly the initiatives
recommended by Cadbury Committee Report got prominence. In order to give due prominence
Confederation of Indian Industry (CII), the Associated Chambers of Commerce and Industry
(ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted committees to
recommend initiatives in Corporate Governance.
The report of various committees helped a lot to streamline the corporate throughout the world.
Some of the Committees with its formation is given under the following table 3.1.
COMMITTEES ON CORPORATE GOVERNANCE
Sl.No. Committee Country Date of Submission
1. Cadbury England 1992
2. King Committee South Africa 1994 & 2002
3. CII India 1996
4. Hampel England 1998
5. Kumar Mangalam Birla India 2000
6. Narayana Murthy India 2003
Committee
7. Naresh Chandra India 2009
Committee

Naresh Chandra Committee Report

For over a decade, the Confederation of Indian Industry (CII) has been at the forefront of the
corporate governance movement in India. In April 1998, it released a Task Force report entitled
“Desirable Corporate Governance: A Code”, which outlined a series of voluntary recommendations
regarding best-in-class practices of corporate governance for listed companies. It is worth noting
that most of the CII Code was subsequently incorporated in SEBI’s Kumar Mangalam Birla Committee
Report and thereafter in Clause 49 of the Listing Agreement. Moreover, the CII Code was the first
and probably a unique instance where an industry association took the lead in prescribing corporate
governance standards for listed companies. Corporate governance guidelines - both mandated and
voluntary - have evolved since 1998, thanks to the efforts of several committees appointed by the
Ministry of Corporate Affairs (MCA) and the SEBI. Indeed, it is fair to say that in terms of norms,
guidelines and standards set for the board of directors, financial and non-financial disclosures and
information to be shared by the management to stakeholders and the wider public, Indian corporate
governance standards rank among the best in the world. And CII is privileged to be a part of this
movement. Unfortunately, history tells us that even the best standards cannot prevent instances of
major corporate misconduct. This has been true in the US - Enron, Worldcom, Tyco and, more
recently gross miss-selling of collateralised debt obligations; in the UK; in France; in Germany; in
Italy; in Japan; in South Korea; and many other OECD nations. The Satyam-Maytas Infra-Maytas
Properties scandal that has rocked India since 16th December 2008 is another example of a massive
fraud. Satyam is a one-off incident - especially considering the size of the malfeasance. The
overwhelming majority of corporate India is well run, well regulated and does business in a sound
and legal manner. However, the Satyam episode has prompted a relook at our corporate governance
norms and how industry can go a step further through some voluntary measures. With this in mind,
the CII set up a Task Force under Mr Naresh Chandra in February 2009 to recommend ways of
further improving corporate governance standards and practices both in letter and spirit. The
recommendations of the Naresh Chandra Task Force evolved over a series of meetings. The leitmotif
of the report is to enunciate additional principles that can improve corporate governance in spirit
and in practice. The report enumerates a set of voluntary recommendations with an objective to
establish higher standards of probity and corporate governance in the country. The
recommendations outlined in this report are aimed at listed companies and wholly owned
subsidiaries of listed companies.
About the Audit Committee:

1. Prohibition fo any direct financial interest in the client by the audit firm, its partners, or
members of the engagement team as well as their direct relatives and also any relative who
has more than 2 percent of the share capital of the audit client or of the share of the profits.
2. Prohibition of any loans or guarantees by the audit firm, or partners, or other members of
the engagement team from the audit client.
3. Prohibition of any business relationship with the audit client by the audit firm, its partners or
members of engagement, and their direct relatives.
4. Prohibition of personal relationships which would result in the exclusion of the audit firm or
partners or members of engagement like with key executives or senior managers belonging
to the top two managerial level of the company.
5. Prohibition of any partner or member of the engagement team from joining client before 2
years not being engaged in the audit of the client.
6. Prohibition of undue dependence on an audit client. The fee received from any one client
should not exceed 25 percent of the total revenues of the audit firm. Firms in the initial five
years from the commencement of their activities and those whose total revenues are less
than Rs. 15 lakhs per year exempted.
7. Prohibition of non-audit services like accounting and book keeping services, internal audit
services, design and implementation of financial information systems actuarial services,
services of broker, dealer, investment advisory or investment banking, other financial
services which are sometimes outsourced by the client, or management services which are
outsourced, recruitment services, valuation and fairness opinion services, etc.
8. Fifty percent audit partners and members of the engagement team be rotated every five
years in the case of clients whose net worth exceeds Rs. 10 crores or whose turnover
exceeds Rs. 50 crores. Those who are compulsorily rotated could return after a gap of 3
years.
9. The management should provide a clear description of each material liability and its risks
followed by auditor’s comments on the management view.
10. Qualifications of accounts, if any, by auditors must be adequately highlighted in order to
attract shareholders attention.
11. The qualification, if any, in the report shall be explained to the shareholders at the
company’s annual general meeting.
12. The audit firm should separately send a copy of the qualified report to the ROC (Registrar of
Companies), SEBI and the principal stock exchanges with a copy of the letter marked to the
management of the company.
13. The Section 225 of the Companies Act needs to be amended to require a special resolution
of shareholders in case an auditor, who is otherwise eligible for reappointment, is sought to
be replaced. Also, the reasons for such replacement shall be explained, about which the
outgoing auditor has right to comment.
14. The audit committee should review the independence of the audit firm, discuss and prepare
the annual work programmes with the auditor and also recommend to the board with
reasons about the appointment/reappointment or removal of the auditors along with the
annual remuneration.
15. The audit firm should submit annually a certificate of independence to the audit committee
and/or the board of directors.
16. The CEO/CFO should certify the balance sheet and profit and loss account and all the
schedules and notes on accounts and cash flows in the case of companies whose net worth
exceeds Rs. 10 crores or whose turnover exceeds Rs 50 crores, Very clearly stating any
deficiencies in the design and operation of internal controls and any significant changes in
the accounting policies during the year under review.
17. Three independent quality review boards (QRB) should be set up, one each for ICAI, ICSI,
and ICWAI to periodically examine and review the quality of audit, secretarial and cost
accounting firms, to judge and comment on the quality and sufficiency of systems,
infrastructure and practice. The QRBs should review the audit quality reviews of the audit
firms for the top 150 listed companies accounting to market capitalization, with the freedom
for DCA to alter few samples after the period. The funding of the QRB’s will be done by the
respective institutes.
18. An independent prosecution directorate be created within ICAI to exclusively deal with all
disciplinary cases.
19. Complaints received should be registered by the prosecution directorate and sent to the
member or firm within 15 days of receipt and the prosecution directorate should ask for
required documents from the complainants and the respondent within 60 days. On receipt
of documents they will be placed before the disciplinary committee within 20 days of
receiving the documents. The disciplinary committee shal hear the cases and decisions
recorded in a report and should d etail lthe punishment to be awarded. The ICAI council
should consider the report within 45 days from the date of the report and act upon them.
Appeal if any shall be placed before the appellate body headquartered in New Delhi,
composed of a presiding officer and four other members. The presiding officer shall be a
retired judge of the Supreme Court or a retilred chief justilce of a hligh court. Two members
shall be past president of ICAI and the remaining two nominated by the DCA. The quorum
shall be three.
20. The disciplinary committee’s awards of the punishment, if any, shall be publicized through
suitable media.
21. The findings of the appellate body shall be made by the central government in order to
ensure independence. The expenses incurred by the disciplinary committee shall be borne
by ICAI’s council including the emoluments of the members, sitting fees, other allowances
and expenses. All expenses of the prosecution directorate will be borne by the council of
ICAI. Every complaint (other than those made by the central or state government) shall be
accompanied by a fee of Rs. 5000, which will be returned in case the complaint holds some
ground. Fees in the case of frivolous complaints are not refunded and will go towards
funding.
22. Independent disciplinary mechanism may be designed by ICSI and ICWAI along similar lines.
23. While appointing independent directors, care must be taken to see that they have no
material pecuniary relationships or transactions with the company, its promoters, senior
management, or lits holding company, or subsidiaries, or associate companies; are not
related to promoters or management at the board level and one level below; have not been
executives of the company in the last three years; are not partners or executives of a
statutory audit firm, internal audit firm or legal firm or consulting firm associated with rthe
company for the last three years; are not significant suppliers, vendors or customers of the
company; do not hold more than 2 percent of the voting shares; and have not been directors
of the company for more than three terms of three years each (maximum of nine years).
However, nominee directors of a financial institution will be excluded in the determination
of the number of independent directors and cross non-executive directorships of executives
will not be treated as independent. The committee also recommended that the above
criteria for independent directors shall be made applicable for all listed companies and also
unlisted companies with a net worth of Rs. 10 Crores and above or a turnover of Rs. 50
crores and above.
24. In the case of companies as detailed above, not less than 50 percent of the board of
directors should be independent. However, unlisted public companies with a maximum of
50 shareholders and without debt of any kind from the public, banks, or other financial
institutions as long as they do not change their character and also those unlisted subsidiaries
of listed companies. Nominee directors again will be excluded both from the number and
denominator.
25. Since corporate governance norms require companies to have a number of committees, the
boards should have a minimum size. The minimum size should be seven with at least four
independent directors in the case of all listed companies as well as unlisted public
companies with a net worth of Rs. 10 crores and above or turnover of Rs. 50 crores and
above. Again, this will not be applicable to companies with no more than 50 shareholders or
those without any debt till they change their character and for unlisted subsidiaries of listed
companies.
26. The minutes of meetings of the board as well as audit committees shall disclose the timings
and duration of each meeting, dates of meetings, and the attendance record of members in
the case of companies detailed above.
27. Those directors who find it difficult to attend the meetings physically must participate in the
proceedings through tele-conference or video-conference duly minuted.
28. All information given to the press or analysts, in the case of all listed companies and unlisted
companies meeting the above-mentioned criteria, should be transmitted to all board
members.
29. Audit committees shall be constituted of only independent directors if the committees are
indeed to be independent excepting those public companies with not more than 50
shareholders and without debt of any kind and also unlisted subsidiaries of listed companies.
30. The chairman of the audit committee must annually certify whether and to what extent each
of the functions listed in the audit committee charter were discharged during the year in
addition to dates and frequency of meetings. It should also provide its views on the
adequacy of the internal control systems, perceptions of risks and in the event of any
qualifications, why the committee accepted and recommended the financial statements
with qualifications.
31. The statutory limit (of Rs. 5000) on sitting fee should be revised as it is considered too small
to attract talent. The present statutory limits of 1 percent commission of net profit to
independent directors and also provisions relating to the stock options are adequate and do
not need any revision. The vesting of the stock options shall be staggered over at least three
years.
32. The non-executive and independent directors must be granted protection from certain
criminal and civil liabilities because they are not expected to be in the know of every
technical infringement committed by the management.
33. DCA should encourage institutions and their proposed centres for corporate excellence to
have regular training programme for independent directors. The funding could come from
the Investor Education and Protection Fund (IEPF). Every independent director should
undergo at least one such training course before assuming his/her responsibilities. An
untrained independent director should be disqualified under Section 274(1)(g) of the
Companies Act 1956, giving reasonable notice. Of course, this requirement might be
introduced in a phased manner as there is paucity of the availability of such training
programmes.
34. SEBI should refrain from introducing subordinate legislation in areas where specific
legislations exist under Companies Act, 1956. In case any additional requirements in the
existing provisions are found necessary by SEBI, such requirements must be done through
suitable amendments of the Companies Act 1956. DCA should respond to such requirements
quickly.
35. The government should strengthen the DCA by increasing the number of DCA offices and
quality and quantity of physical infrastructure. They should outsource expertise when
needed. The inspection capacity needs to be strengthened and it should become a regular
administrative function. It is very essential that the DCA functionaries continuously upgrade
themselves through training.
36. A corporate serious fraud office (CSFO) should be set up to investigate into any instances of
corporate frauds. This should be multifunctional team which can detect frauds and also
direct and supervise prosecutions. The appointments to and the functioning of this office
shall be by different committees headed by the cabinet secretary.
37. The penalties in the case of offences need to be rationalized and must be related to the
sums involved in the offences. The criteria for disqualification under Section 274(1)(g) of the
Companies Act, 1956 shall be extended beyond non-payment of debt. Independent
directors must be treated differently as is done in the case of nominee directors
representing financial institutions. Stricter norms should be prescribed for the companies
registered as brokers with SEBI. Also, greater accountability should be provided for with
respect to transfers of money. Companies Act must suitably be amended to give DCA the
powers of attachment of bank accounts, etc., on the same lines as SEBI.
38. Consolidated financial statements should be mandatory for companies having subsidiaries.
CADBURY COMMITTEE REPORT

The first-ever organized attempt at establishing a set of guidelines was in the U.K. The Finance
Reporting Council, the London Stock Exchange, and the British Accounting Profession sponsored to
set up a committee under the chairmanship of Sir Adrian Cadbury in May 1991. This was set up
essentially to address the concerns about eh low level of investor confidence in fiscal reporting and
in the ability of the auditors to carry out their jobs, consequent to the financial scandals and
collapses like those of Coloroll, Polly Peck, etc. But as could be seen from the preface of the report,
the scandals at companies like Bank of Credit and Commerce International (BCCI), Maxwell, etc., the
committee looked at how governance could be improved by including independent directors,
separating the roles of chairman and CEO, and establishing audit committees of the boards for all
companies listed on the London Stock Exchange. The Committee submitted its report in December,
1992.

The Cadbury Report must be lauded as it was one of the pioneering initiatives by any country and
has also been path breaking in its recommendations and also has been used ever since as a
reference point for many other corporate governance guidelines initiated by many other countries.
The Committee explains the rationale behind setting up of the committee by the sponsors as
addressing the concerns which were basically ‘the perceived low level of confidence, both in
financial reporting and in the ability of auditors to provide the safeguards which the users of
company reports sought and expected’ and unexpected failures of major companies and by
criticisms of the lack of effective board accountability for such matters as directors’ pay’. And in
order to address these concerns, the committee had recommended ‘that the board needs to state
order to address these concerns, the committee had recommended ‘that the board needs to state
that financial controls of the business are reviewed and in order.

Within very short span, the Cadbury Committee made its impact in the UK. Garratt wrote that ‘the
pressure for change which the original Cadbury report has unleashed now looks unstoppable and it
is not just the small shareholders and outraged members of the pulic who of directors’ service
contracts shortened from the present 3 years to a maximum of one, and a retirement age of 70
years for listed companies.’ In about 2 years, most of the recommendations were getting
implemented despite the fact that it was voluntary in nature and there was no effort or pressure to
enforce the guidelines. One of the important recommendations of the committee was to create a
procedure through the use of which the independent directors could seek independent professional
advice if they had lack of clarity or felt uncertain about the executives’ decisions.

Summary of recommendations:

Compliance with the code of best practice:

1. The boards of all listed companies registered in the UK should comply with the Code of Best
Practice set out on pages 58 to 60. As many other companies as possible should aim at
meeting its requirements.
2. Listed companies reporting in respect of years ending after 30 June 1993 should make a
statement about their compliance with the Code in the report and accounts and give
reasons for any areas of non-compliance.
3. Companies’ statements of compliance should be reviewed by the auditors before
publication. The review should cover only those parts of the compliance statement which
relate to provisions of the Code where compliance can be objectively verified. The Auditing
Practices Board should consider guidance for auditors accordingly.
4. All parties concerned with corporate governance should use their influence to encourage
compliance with the Code. Institutional shareholders in particular, with the backing of the
Institutional Shareholders’ Committee, should use their influence as owners to ensure that
the companies in which they have invested comply with the Code.

Keeping the Code up to date:

5. The Committee’s sponsors, convened by the Financial Reporting Council, should appoint a
new Committee by the end of June 1995 to examine how far compliance with the Code has
progressed, how far our other recommendations have been implemented, and whether the
Code needs updating our sponsors should also determine whether the sponsorship of the
new Committee should be broadened and whether wider matters of corporate governance
should be included in its brief. In the mean time the present committee will remain
responsible for reviewing the implementation of its proposals.

Directors’ service contracts

6. The Companies Act should be amended to come inline with the requirement of the Code
that directors’ service contracts should not exceed three years without shareholders’
approval.
Interim reporting:
7. Companies should expand their interim reports to include balance sheet information. The
London Stock Exchange should consider amending the continuing obligations accordingly.
There should not be a requirement for a full audit, but interim reports should be reviewed
by the auditors and the Auditing Practices Board should develop appropriate guidance. The
Accounting Standards Board in conjunction with the London Stock Exchange should clarify
the accounting rules which companies should follow in preparing interim reports. The
inclusion of cash flow information should be considered by the Committee’s successor body.
Enhancing the perceived objectivity of the audit
8. Fees paid to audit firms for non-audit work should be fully disclosed. The essential principle
is that disclosure should enable the relative significance of the company’s audit and non-
audit fees to the audit firm to be assessed, both in a UK context and, where appropriate, a
worldwide context. The 1991 Regulations under the Companies Act should be reviewed and
amended as necessary.
9. The accountancy profession should draw up guideliens on the rotation of audit partners.

Enhancing the effectiveness of the audit.

10. Directors should report on the effectiveness of their system of internal control, and the
auditors should report on their statement. The accountancy profession together with
representatives of preparers of accounts should draw up criteria for assessing effective
system of internal control and guidance for companies and auditors.
11. Directors should state in the report and accountants that the business is going concern, with
supporting assumptions or qualifications as necessary, and the auditors should report on this
statement. The accountancy profession together with representatives of preparers of
accounts should develop guidelines for companies and auditors.
12. The question of legislation to back the recommendations on additional reports on internal
control systems and going concern should be decided in the light of experience.
13. The government should consider introducing legilslation to extend to the auditors of all
companies the statutory protection already available to auditors in the regulated sector
(banks, building societies, insurance, and investment business) so that they can report
reasonable suspicion of fraud freely to the appropriate investigatory authorities.s
14. The accountancy profession together with the legal professions and representatives of
preparers of accounts should consider further the question of illegal acts other than fraud.
15. The accounting profession should continue its efforts to improve its standards and
procedures so as to strengthen the standing and independence of auditors.

Voting by Institutional Investors

16. Institutional Investors should disclose their policies on the use of their voting rights.

Endorsement of work by others:

17. The Committee gives its full support to the objectives of the Financial Reporting Council and
the Accounting Standards Board. It welcomes the action by the Financial Reporting Review
Panel over companies whose accounts fall below accepted reporting standards.
18. The Committee supports the initiative of the Auditing Practices Board on the development
of an expanded audit report. It also gives its full support to the lead which it is taking on the
development of auditing practice generally.
19. The Committee welcomes the statement by the Institutional Shareholders’ Committee on
the Responsibilities of Institutional Shareholders in the UK.
Issues for the Committee’s Successor Body:
20. Issues which the Committee has identified that its successor body may wish to review or
consider in greater depth include: the application of the Code to smaller listed companies;
directors’ training; the rules for disclosure of directors’ remuneration, and the role which
shareholders could pay; a recruitment for inclusion of a cash flow information in interim
reports; and the procedures for putting forward resolutions at general meetings. The
Committee and its successor will also keep watch on developments regarding the nature and
extent of auditors’ liabi
21.
22.
23.
24.
25.
26. lity.
Report of K.M. Birla Committee on Corporate Governance:

SEBI, having taken up the role of capital regulator, tried to create and regulate a realm for Corporate
Governance for the Indian Companies. While a number of governance guidelines were available
abroad, SEBI felt that such governance guidelines have to be in consideration with the corporate
environment that exists in the country and so, import of any guidelines from abroad did not make
sense. SEBI has already initiated a number of steps in the direction of improving governance by
strengthening the disclosure norms for IPOs, reporting utilization of funds in the annual reports,
quarterly results, insisting on appointment of a compliance officer, and for issues on a preferential
basis, and also about takeovers and acquisitions. SEBI wanted to further strengthen the Corporate
Governance system in the country.

Hence, it appointed a Committee on Corporate Governance on 7 May 1999 under the chairmanship
of Shri Kumar Mangalam Birla, a member of the SEBI board to prepare a set of corporate governance
guidelines for the Indian companies in the Indian context. The major recommendations of the
committee, which would form the essence of the Clause 49 guidelines of the listing agreement
between companies and the stock exchanges which forms the basis of corporate governance in India
today.

The committee divided the recommendations into two categories, namely, mandatory and non-
mandatory. The recommendations which are absolutely essential for corporate governance can be
defined with precision and which can be enforced through the amendment of the listing agreement
could be classified as mandatory. Others, which are either desirable or which may require change of
laws, may, for the time being, be classified as non-mandatory.

A. MANDATORY
1. Not less than 50 percent of the boad shall be non-executive directors. In the case of non-
executive chairman, at least one-third of the board should comprise independence directors
and in the case of an executive chairman, at least half of the board should be independent.
2. Financial Institutions will appoint nominees on the boards only on selective basis and where
it is essential. And such nominees, if present, will act in the same manner as any other
director.
3. A qualified and independent audit committee with a minimum of three members and
majority of indpenedent members with the chairman of the committee being an
independent member and at least one member having financial and accounting knowledge
be a set up by the board, which would go a long way in enhancing the creditability of the
financial disclosures and promoting transparency. The committee can get advice from the
executives if necessary and the company secretary will be the secretary of the committee.
4. The audit committee must meet at least thrice a year, one necessarily every six months and
for finalization of annual accounts and functions.
5. The quorum should be either two members or one-third of the audit committee, whichever
is higher.
6. The Committee can secure the help of outside expertise, if necessary.
7. The Committee must look into the reasons for substantial defaults in the payments to
depositors, debenture hoders, shareholders (non-payment of declared dividends), and
creditors.
8. The board should meet at least four times a year with maximum time gaps between
meetings being 4 months.
9. A director should not be a member in more than 10 committees or act as a Chairman of
more than five committees across all companies in which he is director. Every director
should inform the company about committee positions he occupies in other companies.
10. The board of directors should decide the remuneration of non-executive directors.
11. Management must disclose to the board all material, financial, and commercial transactions
where they have personal interest or where there are potential conflicts with the interests
of the company.
12. While appointing new directors or re-appointing of a director, the shareholders must be
provided with a brief resume of the director, details of his expertise in specific functional
areas, and details of other directorships of committee of the boards.
13. A Committee to redress grievances of the shareholders be set up under the chairmanship of
non-executive director.
14. The power of share transfer should be transferred to an officer, or a committee, or to the
registrar and transfer agents.
15. A separate section on corporate governance be included in the annual reports.
16. The company should obtain a certificate from the auditors of the company regarding the
compliance of all the mandatory recommendations.
B. NON-MANDATORY
1. The Chairman has a distinctive role from that of the chief executive and hence even if the
Chairman is non-executive, he should be entitled to maintain an office at the company’s
expense and be reimbursed all the expenses in connection with the performance of his
duties.
2. The board should set up a remuneration committee to set the company’s remuneration
packages for executive directors. The committee shall be constituted of at least three
directors, all non-executive with the chairman being independent director. The Chairman
should be present at the AGM.
3. All the details of remuneration package, such as components, service contracts, notice
periods, severance fees, etc, shall be provided.
4. The half-yearly declaration of financial performance including summary of the significant
events in last six months should be sent to each household of shareholders.

NARAYANA MURTHY COMMITTEE REPORT

While SEBI adopted most of the recommendations of the Kumar Mangalam Birla Committee, it was
felt that since the governance standards have been evolving, it was necessary to evaluate the
adequacy of existing governance practices and further improving them. Hence, a Committee was
constituted under the chairmanship of Sri N.R. Narayana Murthy, Chairman of Infosys Technologies
Ltd, to recommend ways of improving governance further.

The recommendations were:

C. MANDATORY
1. Audit Committee will review the following information mandatorily:
• Financial statements and draft audit report, including quarterly/half yearly financial
information
• Management Discussion and Analysis (MDA) of financial condition and results of the
operation
• Reports relating to compliance with laws and risk management.
• Record of related party transactions.
2. All audit committee members should be ‘financially literate’ and at least one of the member
should have accounting or related financial management expertise.
3. If the company has followed a treatment different from the prescribed accounting
standards, management should justify why such a treatment would be more representative
of the reality.
4. A statement of all transactions with related parties including their bases should be placed
before the audit committee for ratification/approval. And the definition of a ‘related party’
will be as per Accounting Standard 18 issued by ICAI.
5. The board shall be informed about the risk assessment and minimization procedures. A
quarterly report on risks, mitigation plans and any limitations to the risk taking capacity of
the company shall be placed before the board by the management.
6. Companies raising money through IPO should disclose the use/application of funds to the
audit committee on a quarterly basis. Any diversion of funds other than those stated in the
documents shall be consolidated into a statement and be certified by the auditors.
7. A code of conduct for all board members and senior management be laid down and posted
on the company’s website. All board members and senior management personnel shall
affirm compliance with the code on annual basis. A declaration by the CEO and COO to this
effect shall be provided in the annual report.
8. There shall be no nominee directrors. All director appointments shall be made by the
Shareholders.
9. Compensation to NEDs (Non-Executive Directors) may be fixed by the board and approved
by the shareholders. Companies should publish their compensation philosophy and the
compensation paid to the NEDs. The details of shares held by NEDs should be disclosed on
an annual basis. NEDs before joining a company should disclose their holding of the
company’s shares to the company.
10. Employees who observe any unethical practices should have direct access to audit
committee.
11. Companies have to make an annual declaration that they have not denied any personnel
access to the audit committee and that they have provided protection to ‘whistle-blowers’.
12. The provisions relating to the composition of the board of directors of the holding company
should be made applicable to the composition of the board of directors of the subsidiary
companies. At least one independent director on the BOD of the parent company shall be a
director on the BOD of subsidiary company. The audit committee of the parent comp-any
shall also review the financial statements of the subsidiary company. The board of the
parent company has to declare that it has reviewed the affairs of the subsidiary company
also.
13. SEBI should make compulsory the disclosures in the report issued by the security analysts if
the company about which they write is a client of the analyst’s employer or associate of the
analyst’s employer and also the nature of services offered to the company, if any, and also
whether the analyst, or the analyst’s employer, or an associate of the analyst’s employer
holds or held, or intends to hold and security in the company.
D. NON-MANDATORY
1. Companies should be encouraged to move towards a regime of unqualified financial
statements.
2. Companies should train the board members in the business model of the company as well as
the risk profile of the business parameters of the company, their responsibilities as directors
and the best ways to discharge them.
3. Performance evaluation of NEDs should be conducted by a peer group and shall form the
basis for reappointments for further term.

Problems of Governance in Companies:

While routine governance regulations become applicable for public sector companies formed under
the Companies Act, 1956 and come under the purview of SEBI regulations the moment they mobilize
funds from the public, the typical organizational structure of PSUs makes it difficult for the
implementation of corporate governance practices as applicable to other publicly-listed private
enterprises. The typical difficulties faced are:

1) INVOLVEMENT OF NOMINEE DIRECTORS

The board of directors will comprise essentially of bureaucrats drawn from various ministries which
are interested in the PSUs (Public Sector Undertaking). In addition, there may be nominee directors
from banks or financial institutions who have loan or equity exposures to the unit. The effect will be
to have a board much bey0nd the required size, rendering decision-making a difficult process.

2) LACK OF PROCIFICIENCY:

The chief executive of managing director (or chairman and managing director) and other functional
directors are likely to be bureaucrats and not necessarily professionals with the required expertise.
This can affect the efficient running of the enterprise.

Difficult to attract expert professionals as independent directors. The laws and regulations may
necessitate a percentage of independent component on the board; but many professionals may not
be enthused as there are serious limitations on the impact they can make.

3) VARIATIONS IN PAY SCALES

The lower pay levels applicable to public sector executives also act as a deterrent to professional
executives taking up public sector executive positions. For example, the CEO of SBI, the country’s
largest commercial bank, is paid only Rs. 29 Lakhs , while his private sector counterparts in HDFC
Bank earns Rs. 10 Crores, and ICICI Bank CEO earns 2.66 Crore. The highest compensation received
by a non-executive independent director at SBI is Rs. 1,65,000 for board meetings, whereas his
counterparts in ICICI and HDFC bank are paid upto Rs. 8,40,000 and Rs. 6,20,000, respectively for
attending board / committee meetings. While ICICI pays Rs. 20,000 per board as well as committee
meetings and HDFC Bank pays Rs. 20,000 per board and committee meeting, except for investor
grievance committee for which only Rs. 10,000 is paid, SBI can pay only upto Rs. 5,000 for
attendance at a central board meetings and Rs. 2,5000 for attending a board level committee.
4) POLITICAL INFLUENCE:

Due to their very nature, there are difficulties in implementing better governance practices. Many
public sector corporations are managed and governed according to the whilms and fancies of
politicians and bureaucrats. Many of them view PSUs as a means to their ends. A lot of them have
turned sick due to overdoses of political interference, even when their areas of operations offered
enormous opportunities for advancement and growth. And when the economy was opened up,
many of them lacked the competitiveness to fight it out with their counterparts.

5) CONFLICTS OF INTEREST

Avoiding conflicts of interest is vital. A conflict of interest within the framework

of corporate governance occurs when an officer or other controlling member of a
corporation has other financial interests that directly conflict with the objectives
of the corporation. For example, a board member of a solar company who owns a
significant amount of stock in an oil company has a conflict of interest because,
while the board he or she serves on represents the development of clean energy,
they have a personal financial stake in the success of the oil industry. When
conflicts of interest are present, they deteriorate the trust of shareholders and the
public while making the corporation vulnerable to litigation.

6) OVERSIGHT ISSUES

Effective corporate governance requires the board of directors to have substantial

oversight of the company’s procedures and practices. Oversight is a broad term
that encompasses the executive staff reporting to the board and the board’s
awareness of the daily operations of the company and the way in which its
objectives are being achieved. The board protects the interests of the
shareholders, acting as a check and balance against the executive staff. Without
this oversight, corporate staff might violate state or federal law, facing substantial
fines from regulatory agencies, and suffering reputational damage with the
public.

7) ACCOUNTABILITY ISSUES

Accountability is necessary for effective corporate governance. From the top-level

executives to lower-tier employees, each level and division of the corporation
should report and be accountable to another as a system of checks and balances.
Above all else, the actions of each level of the corporation is accountable to the
shareholders and the public. Without accountability, one division of the
corporation might endanger the success of the entire company or cause
stockholders to lose the desire to continue their investment.

8) TRANSPARENCY

To be transparent, a corporation must accurately report their profits and losses

and make those figures available to those who invest in their company.
Overinflating profits or minimizing losses can seriously damage the company’s
relationship with stockholders in that they are enticed to invest under false
pretenses. A lack of transparency can also expose the company to fines from
regulatory agencies.

9) ETHICS VIOLATIONS

Members of the executive board have an ethical duty to make decisions based on
the best interests of the stockholders. Further, a corporation has an ethical duty
to protect the social welfare of others, including the greater community in which
they operate. Minimizing pollution and eschewing manufacturing in countries
that don’t adhere to similar labor standards as the U.S. are both examples of a
way in which corporate governance, ethics, and social welfare intertwine.

The Role of Capital Market Governance:

Capital Market is an organized market mechanism for effective and efficient transfer of money
capital or financial resources from the investing class to the entrepreneur class in the private and
public sectors of the economy.

Simply, it is the market for all financial instruments, short-term and long-term as also commercial,
industrial and government papers. It provides reasonable measure of safety and fair dealings in the
buying & selling of securities.

Governance of companies is taken care by the boards of directors, who represent and are
responsible to the shareholders through their fiduciary duties. In companies that are listed, the
shares get exchanged or transacted between investors through a process facilitated by institutions
that constitute the capital market.

In addition to institutional investors, capital markets include intermediaries and even experts, who
continually acquire and disseminate into on a timely basis, enabling fair and efficient execution of
financial transactions.
Capital market institutions, such as stock exchange brokers, investment bankers, financial
institutions, etc. play a vital role in the Corporate Governance of listed companies. Along with these
institutions, Foreign Institutional Investors (FIIs), audit firms, regulatory agencies such as RBI, SEBI,
IRDA, etc., State Government and Central Government play an important role in bringing a platform
for transactions in capital and the way capital market function and establish norms for Corporate
Governance.

1) Institutional Investors:

Institutional investors have become major shareholders in the corporations. Every shareholder has
access to the same information and hence can act upon it. Thus, information advantages are rather
limited. So, institutions with their power and clout, aided with the kind of funds available with them,
usually, engage exclusive personnel to study, monitor, and make judgements on companies and
their future. This, in fact, enables them to avoid making wrong investments and make only good
investments. These institutions are supposed to follow the concept of a ‘prudent man rule’ as a test
of satisfactory fiduciary concept. A prudent man will manage the money of others just as he would
manage his own, that is, carefully and wisely.

The principal idea is that Managers of other people’s money must always put the interests of their
clients first – ahead of their own interest. But this does not always happen. Investment Managers
act in their own interests, when they increase the assets under management in order to earn better
fees, or ignore the interests of the investors who may be looking for the best risk-adjusted return
from their investments.

Institutional investors have been applying pressure on corporate to improve board structure and
achieve board independence. Many observers see such activism as ultimately improving investor
returns.

2) Investment Bankers (Ex: Axis Capital Ltd., HSBC, etc.)

Their ploy with companies usually starts with Initial Public Offers (IPOs) of companies. In order to
‘gain mandate for IPOs, the banks had to promise the new companies that they would
wholeheartedly sponsor the IPO, by making an extra effort to distribute the shares to investors all
over the world, by following the company in research after the issue, and by making a secondary
market in the stock for institutional investors’.

Investment Bankers and Institutional Investors offering a variety of financial and other services often
acted in connivance with the companies, not acting in the best interests of their clients and/or
investors. Most of the investment banks who employed analysts to ascertain the future prospects of
a potential client, advised on possible mergers and acquisitions, and also in identifying potential IPO
candidates. Such analysts, however, to get the jump on other analysts and on the company’s own
announcements, had to be plugged in to the company’s CEO and CFO (Chief Financial Officer)
closely, so as to receive information that not everyone was getting.
3) Asset Management Companies (Mutual Funds)

Trillions of dollars have been under the management of different types of asset management
companies all over the world. In the beginning, many of the local industrial houses joined hands
with foreign asset management companies to start mutual funds. Stringent regulations and capital
adequacy requirements restricted the entry and growth. But as time passed by, the asset
management industry (restricted to mutual funds as India was yet to open the doors to pension
funds) gained growth and became attractive.

While mutual fund business has grown considerably over the years, it has also added many other
banking and non-banking services such as commercial banking, credit cards, broking, etc. Also, pure
commercial banks, sensing that mutual funds could be a threat to their deposit mobilization efforts,
have also started their own mutual fund schemes. The fund managers try to maximize the assets
under management since their rewards essentially are decided by the size of assets under their
management while investors want the best risk-adjusted returns on their investments. These two
aims need not go together.

These asset management companies are powerful players in exercising (or failing to exercise) control
rights. As an industry, they can make the difference between governance success and failures. But
many of the agency conflicts among professional fund managers have become embedded in the
system itself, and appear to have weakened the overall ability of the market to defend against value-
destroying behavior on the part of the corporations. Some of the funds, however, are governance
conscious.

4) Insurance Companies

Insurance companies also invest heavily in equity assets. Some schemes such as ULIPs (Unit Linked
Insurance Plans) are more like mutual funds rather than insurance products. Most of the insurance
companies have also floated mutual funds. Many of these are issues that were earlier applicable to
the two other types, namely investment bankers and asset management companies, but most
insurance companies have also entered into many other areas of financial services.

5) Venture Capitalists/Private Equipty

Venture Capitalists (VCs) usually enter a company at the time of start up. Since they invest in or
acquire a reasonable holding in equity, they are usually given a seat on the board. While the
presence of a dominant shareholder is desirable for better governance, they are mostly concerned
about the financial success of the company, and their commitment to any company is only as long as
they get the right price to exit. Hence one cannot expect any long-term commitment for the better
governance of the company. The company also may have to compromise when it comes to the
choice of director. They have no choice but to be content with the choice offered by the venture
capital. When more than one VC invests in a company, the choice may be further limited.
6) Banks

Banks play a very important role in the development of entrepreneurship and the economy. They
help mobilize savings of the people of a country and lend it to entrepreneurs to meet their capital
investment needs, as well as working capital needs.

Banks play a very important role in the early stages of development of an economy since the capital
markets are likely to be less active and entrepreneurs have to resort to borrowing resources to meet
their capital needs. Less developed countries have less developed capital markets and hence, have
to resort to borrowings from banks in order to meet their fund requirements. Even when the capital
markets are developed, banks can play a major role as borrowing enables a company to avail of tax
benefits on interest payable, reducing the cost of capital as cost of capital on debt compared to that
of equity is low. Thus, while there is no doubt about the role played by banks in the development,
growth, and sustainability of the corporate sector.

In India, through the economic policy initiatives taken by the then Government under P.V.
NarasimhaRao, investment requirements of companies were mostly met by the development
financial institutions and banks. Given thrust of active involvement in the control firms, banks and
financial institutions included nomination of directors by them on the boards of companies to which
they lent funds.

7) Stock Exchanges:

Stock Exchanges also play a vital role in the capital market of any country. The joint stock company
concept needs an exchange mechanism enabling investors to transact their holdings. In addition to
this, stock exchanges try to bring in a discipline in the firms by insisting on many disclosure
requirements keeping the investors in mind.

Many countries have incorporated the governance mechanism for companies by incorporating
necessary guidelines through listing agreements between the company and stock exchange/s. In
India also, SEBI regulators corporate governance through a clause (Clause 49) forming part of the
listing agreements.

Regulator’s Role in Good Corporate Governance:

Corporate Governance, as of now, encompasses only companies or corporate entities have chosen
to raise money from the public. Even though the stakeholder theory or approach has been
considered as good for the running of an enterprise, the underlying premise of corporate
governance continues to be the shareholder theory or approach, as the assumption that continues
to pervade even today is that corporate governance is required because (or only because) there is a
possibility for agency conflict to exist between owners and managers.

The companies also depend on a number of stakeholders for their success – other service providers,
customers, government, and of course, the shareholders. They are accountable for all these
stakeholders. While it is expected that the corporate entity takes care of the interests of the
interests of the different stakeholders voluntarily, there may arise situations which may affect the
stakeholders, since the corporate entity may act in ways that will try to achieve one of its objectives
– making more money for the business and increasing the wealth of the providers of capital (the
shareholders). This is where some kind of external regulation makes sense.

In India, till eighties, productivity was not encouraged and the freedom of entrepreneurs restricted.
Regulators were, to a very large extent, anti-entrepreneurship and anti-development. At the other
extreme, the regulatory regime was gradually relaxed to such an extent that it resulted in a situation
of chaos, as was the case in the U.S. Relaxations of regulations led to exploitation by market players
leading to conflicts of interest situations culminating in crises such as Enron, WorldCom, etc. U.S.
Government gives a response - Act to discipline the corporate.

To make corporate governance more effective the SEBI since its setup in 1992 has taken up number
of initiatives, appointed various committees and has brought amendments to the Clause 35B and the
Clause 49 of listing agreement. Here the SEBI’s role in corporate governance is illustrated through
norms and provisions as stated these two clauses; the Clause 35B and the Clause 49 of listing
agreement. SEBI norms and guidelines under Clause 35B and 49 of the listing agreement for effective
Corporate Governance: Since its establishment, SEBI has taken initiatives to align Indian corporate
governance practices with the global standards adopted in advanced economies. The recent
amendments to Clause 35B and 49 of the listing agreement make Governance more effective and
rigorous in protecting the interest of all stakeholders. The amended Clause 49 of listing agreement is
in alignment with the new Companies Act, 2013. This clause is applicable to listed companies but as
per SEBI clarification, in future this clause will be applicable to non-listing companies also.

Can Regulators make a few people sit around a table in the boardroom, behind closed doors, and
behave in the right manner? Should they make the regulations even more stringent or should they
encourage and take steps to develop more activism among institutions such as institutional
investors, auditors, banks, etc., and within boards? Some of the regulations themselves have to be
seriously looked into.

➢ Most of the capital market regulators require corporate to announce quarterly performance.
This essentially puts pressure on corporate to show better performance every quarter.
Prices of company stocks are very much liked to such announcements.
➢ When executive compensation is linked to the company’s stock performance, there could be
incentives for executives to do some dressing of the financial performance or cut a few
corners here and there.
➢ Notwithstanding the limitations of regulation on corporate governance and firm behavior,
regulations are necessary even in the most market oriented economies.
➢ The involvement of the political process on the economic policies may result in, and at times
even significant, deviations from total free market conditions.
➢ Laws and regulations influence both structures and processes, which in turn can influence
behavior, but only to a degree. Regulations fail to deal effectively with the aberrant
behavior of some CEOs and other executives.
➢ Regulators constantly face the possibility that inadequate regulation will result in costly
failures, as against the possibility that over-regulation will result in opportunity costs in the
form of economic efficiencies which are not achieved. There are no definitive answers with
respect to optimum regulatory structures with respect to corporate governance.
➢ It has also been the experience of many countries that when laws and regulations are too
stringent, the prosperity to break them, or at least find loo holes in them, becomes higher.
Hence, it is better to adopt a ‘normative’ approach of development rather than a ‘coercive’
approach.
➢ While SEBI constituted a number of committees to study the corporate governance practices
and make their recommendations (K.M. Birla, Narayana Murthy Committees, etc.,) the
Deparmrtment of Company Affairs has also set up a number of committees (Naresh Candhra
Committee, Irani Committee, etc.) not to step on each other’s brief.

Pillars of Effective Corporate Governance The important elements of good Corporate Governance
are: Transparency • Accountability • Disclosure • Equity • Fairness • Rule of Law • Participatory
The SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India Act, 1992 was enacted by the Indian Parliament ‘to
provide for the establishment of a Board to protect the interests of the investors in securities and to
promote the development of, and to regulate the securities market and for matters connected
therewith or incidental thereto’.

Objectives of SEBI:-

Section 11(1) of the SEBI Act, 1992 explains the powers and functions of SEBI. As per the Act, it shall
be the duty of the board to protect interests of the investors in securities and to promote the
development of, and regulate the secutieis market by such measures as it thinks fit.

The statutory objectives are:

1. Protection of investors’ interests in securities.

2. Promotion of the development of the securities market.
3. Regulation of the securities market.
4. Matters connected therewith and incidental thereto.

Functions of SEBI:
To realize the above core objectives and to carry out its tasks, the Act spells out the functions of SEBI
in a greater details, as under:
1. Regulating the business in stock exchanges and any other securities markets.
2. Registering and regulating the working of stock brokers, sub-brokers, share transfer agents,
bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other intermediaries who
may be associated with securities markets in any manner.
3. Registering and regulating the working of the depositories, participants, custodians of
securities, foreign institutional investors, credit rating agencies, and such other
intermediaries as the board may, by notification, specify in this behalf.
4. Registering and regulating the working of venture capital funds and collective investment
funds and collective investment schemes including mutual funds.
5. Promoting and regulating self-regulatory organizations.
6. Pr0hibiting and regulating self-regulatory organizations.
7. Prohibiting fraudulent and unfair trade practices relating to securities markets.
8. Prohibiting insider trading in securities.
9. Regulating substantial acquisition of shares and takeover of companies.
10. Calling for information from, undertaking inspection, conducting inquiries and audits of the
stock exchanges, mutual funds and other persons associated with the securities markets and
intermediaries and self-regulatory organizations in the securities market.
11. Performing such functions and exercising such powers under the provisions of the Securities
Contracts (Regulation) Act 1956 as may be delegated to it by the central government.
12. Levying fees or other charges.
13. Conducting research.
14. Calling from or furnishing to any such agencies, as may be specified by the board, such
information as may be considered necessary by it for the efficient discharge of its functions.
15. Performing such other functions as may be prescribed.

Powers of the Board:

To carry out its responsibilities under the Act, the board is entrusted with the same powers as are
vested in a civil court in respect of the following matters, namely:
1. The discovery and production of books of account and other documents at such place and
such time as may be specified by the board.
2. Inspection of any books, registers and other documents of stockbrokers, sub-brokers, and
share transfer agents.

Powers to issue directions:

The SEBI is empowered to issue directions to the following intermediaries:
➢ stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who may be associated with securities
market.
➢ Depository, depository participant, custodian of securities, foreign institutional investor,
credit rating agencies, or any other intermediary associated with the securities market.
➢ Sponsors of venture capital funds, or collective investment schemes including mutual funds.
➢ And to any company with regard to matters to be disclosed by the companies as specified in
Section 11A.

Registration of Intermediaries:

➢ No stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who may be associated with securities
market shall buy, sell or deal in securities except under and in accordance with the
conditions of a certificate of regulations made under this Act.
➢ No depository (participant) custodian of securities, foreign institutional investor, credit
rating agencies, or any other intermediary associated with the securities market as the
board may, by notification in this behalf specify, shall buy or sell or deal in securities except
under and in accordance with the conditions of a certificate of registration obtained from
the Board in accordance with the regulations made under this Act.
➢ No person shall sponsor or cause to be sponsored or carry on or cause to be carried on may
venture capital funds or collective investment schemes including mutual funds unless he
obtains a certificate of registration from the board in accordance with all regulations.

Establishment of Securities Appellate Tribunals:

The SEBI Act also contained a provision for the establishment of an appellate authority to arbiter and
exercise power in matters of disputes over SEBI’s decisions as a regulator.

Civil Court not to have jurisdiction:

It is stipulated in the SEBI Act that under Section 15(Y) that no civil court shall have jurisdiction to
entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed
under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or
under this Act to determine and no injunction taken or to be taken in pursuance of any power
conferred by or under this Act.

SEBI (Amendment) Bill, 2002:

The major changes made under this Act were:
1. Search and seizure powers: Earlier, a SEBI officer could only ask market players for specific
documents, which allowed the latter to conceal incriminating documents. In the new Act,
SEBI officers, armed with a search warrant from judicial magistrate, can search the entity’s
premises and even size documents.
2. Freeze bank accounts: With an authorization from the judicial magistrate, freeze bank
accounts of any person or entity involved in any market violation.
3. Greater monetary penalties: Earlier, the maximum fine that SEBI could impose on a violator
was only upto INR 5 lakhs. This limit has now been increased manifold in market
manipulation or insider trading violations, the find could go upto INR 25 crore or three times
the profits made bny the entity concerned.
4. More board strength: The strength of the SEBI’s board has been increased from six to nine of
which three (excluding the Chairman) will have to be full-time directors. The Securities
Appellate Tribunal. The SEBI body that decides on appeals made by market intermediaries
and companies against orders passed by the SEBI Chairman, has also been strengthened
with an increase in number of members from one to three.

SEBI’s role in promoting C.G.:

The SEBI has been focusing on the following areas:
➢ Ensuring timely disclosure of relevant information.
➢ Providing an efficient and effective market system.
➢ Demonstrating reliable and effective enforcement.
➢ Enabling the highest standards of governance.

SEBI’S Role in the new Era:

The SEBI has made progress in number of areas:
➢ Abolition of capital issues control and retaining the sole authority for new capital issues.
➢ Regulation and reform of the capital market by arming itself with necessary authority and
powers.
➢ Regulating stock exchanges under Securities Contracts Regulation Act.
➢ Bringing all primary and secondary market intermediaries under the regulatory framework.
➢ Enforcing the companies to disclose all material facts and specific risk factors associated with
projects while going in for public issues.
Government’s Role in Corporate Governance

The Government has a role in the establishment and overseeing the running of such corporate
bodies. In India, the law under which body corporate are formed is the company law. The Company
Law in Idia made its first appearance in 1857 as Joint Stock Companies Act. Thereafter the
Companies Act 1866 was passed which was changed in 1882. Then it was replaced by the Indian
Companies Act 1913, which was later replaced by the Companies Act, 1956. It is seen that, even
today, though a number of amendments have been incorporated from time to time.

A company can empower any person to execute deeds under the common seal and it becomes
binding on the company. While there are a large number of provisions in the company law relating
to governance, we will limit our discussion to those with direct impact on the governance of a
company.

Memorandum of Association (MOA): It is the constitution of the company and hence its foundation.
A Memorandum of Association (MOA) is a legal document prepared in the formation and
registration process of a limited liability company to define its relationship with shareholders. The
MOA is accessible to the public and describes the company’s name, physical address of registered
office, names of shareholders and the distribution of shares. It is the constitution of the company
and hence its foundation. Thus, this is considered as a supreme document and comprises of
following important clauses:

1. Name Clause: The name of the company that must end with the term “limited”. Also, it must be
ensured that the name selected for the company should not resemble with the name of any existing
company.
2. Registered Office Clause: This clause requires to mention the registered office address of the
company.
3. Objective Clause: The objective clause requires to mention clearly the objective behind the
incorporation of the company, i.e. the purpose for which the company is being established.
4. Liability Clause: This clause requires to mention the extent to which the shareholders are liable to
pay off the debt obligations in the event of the dissolution of the company.
5. Capital Clause: Company’s authorized capital along with the nominal value of all kinds of shares
need to be disclosed here. Also, the company is required to state the list of its assets over here.
6. Association Clause: As per this clause, the willingness of shareholders is required with respect to
their association with the company. For a public limited company minimum, seven members are
required to sign the memorandum, whereas in a case of a private limited company minimum two
members are required to do the same

Articles of Association (AOA) This prescribes rules regarding internal management of the company.
It describes the authorities and responsibilities of members (shareholders), directors, managing
director, manager, etc. It also contains provisions regarding raising funds through issue of shares,
borrowing, etc.

Body of members: They are real owners of the company but have no authority to look after the day-
to-day affairs of the company, or enter into contracts on behalf of the company. They must meet
atleast once a year at the AGM. They have powers to (1) adopt directors’ report (2) adopt auditors’
report (3) elect directors (4) appoint auditors and fix their remuneration (5) declare dividend. They
can also exercise powers to approve the proposed actions of the company at the AGM or specially
called meeting of members, namely the EGM.

Board of Directors: Directors elected by members from the board of directors, who has the
authority to supervise and regulate the activities of the company. It has the overall control over the
affairs of the company. The board must meet at least once every quarter and as often as necessary
for the purpose of business.

Managing Director/Manger/Director: Since the board cannot look after the day-to-day affairs of the
company, they appoint a manager, managing director, or a whole-time director, who work under the
overall supervision and control of the board.

Different roles of Government in the Economy:

There are four important roles played by the government in an economy, namely:

➢ The regulatory role

➢ The promotional role
➢ The entrepreneurial role
➢ The planning role

Regulatory Role:

➢ Government may determine the conditions under which persons or corporations may enter
certain lines of business as in the granting of charter, a franchise, a licence, or permitting any
‘person’ to use public facilities.
➢ Government may regulate or assist the conduct of economic ventures of various types once
they are under way.
➢ Govt. may control the relationship between various segments of the economy, the purpose
being to settle conflicts of interests or of legal rights and to prevent concentration of
economic power in the hands of few monopolicies.
➢ Government may put in place legally constituted regulatory bodies to protect investors,
consumers and the general public by ensuring best corporate practices.

Promotional role:

The promotional role played by government is very important in developed as well as developing
countries. Thus, considering the whole of its activities, a government does more to assist and to
help develop industrial, labour, agricultural and consumer interests than it does to regulate them.

The government have to assume direct responsibility to build up and strengthen the necessary
development of infrastructure such as power, transport, finance, marketing, institutions – for
training and guidance and other promotional activities.

Entrepreneurial role:

➢ In a democracy, the national emergency of war inevitably causes an expansion of state

activities, including public ownership because modern requirements of total war cause
people to forsake their convictions concerning private responsibilities and to concentrate on
massed power in the state apparatus.
➢ Major economic dislocations, such as the great depression of the 1930s, also tend to
stimulate state activities, again leaving a residue of public ownership that takes time to
efforts to dissipate, if it is ever finally accomplished.
➢ When a private undertakings become unprofitable but the need for their services continues,
government may be prevailed upon to acquire and manage such non-profitable business
concerns even at a loss.
➢ Governments are also required to extend the owner-manager relationship when there is a
pronounced wastage of national resources, or when the threat to them is great, thus
diminishing the nation’s ability to defend itself or to preserve the bases of a sound economy.

Forms of Government regulation:

The more important forms of regulation of private enterprises by the government especially in
developing countries like India are as follows:

➢ General direction and regulation of investment activity in private enterprises. This is

achieved through economic planning and industrial licensing policy.
➢ Regulation of investment, location, size and expansion of individual enterprises and specific
industries through a well-defined policy of industrialization.
➢ Regulation of prices of commodities and industrial products through legislative authority and
systematic investigation into cost structures and mark-ups.
➢ Regulation of monopolies and unfair trade practices or restrictive practices through
legislation.
➢ Regulation of wages and bonus for employees in a private sector to minimize exploitation,
ensure reasonable standards of living and maintain peace and harmony in industry.
➢ Regulation of corporate management.
➢ Regulation of specific norms of business activity such as speculation in shares and
commodities or imports/exports etc.

The Governments have to be proactive in the following areas:

➢ Government should ensure that stakeholders’ interests are protected by continuous
monitoring of companies, to see that they do not cheat their stakeholders.
➢ Government should make laws to govern companies, to undertake all the activities within
the rules of the game. It should also make sure that all companies adhere to rules, as for
example – MRTP (Monopolies and Restrictive Trade Practices) Act.
➢ If companies do not adhere to rules and regulations the government should penalize such
companies and make sure that they do not repeat it again.
➢ Government has appointed regulators to regulate several sectors, to monitor the activities
of companies, to allow them to a have fair competition in the market and also to save them
from disputes when problems arise – RBI, TRAI, SEBI, IRDA (Insurance Regulatory
Development Authority)

Enactment of Laws:
Different laws have been enacted by the government to fulfill the needs of different people in
society like employees, employers, customers and the society at large. To protect employees,
government has brought in legislations such as Factory Acts, Minimum Wages Act, Labour Laws and
Trade Union Act to make sure that they are well protected and their problems are solved.

As a Role Model:
Government should portray itself corrupt-free so that companies can follow its worthy example.
Removal of the licence system for several industries, greater transparency in administration,
granting of autonomy to public sector enterprises, reducing the role of the Inspector Raj in the
economy, allowing greater degree of competition in industries which were hitherto protected, will
all go a long way to reduce corruption.

Areas that need special attention:

The government should ensure that the quality of audit, which is required for effective corporate
governance, should be considerably improved. Government should ensure with assistance from
industry, the accountability of the CEOs and CFOs. It should try to maintain the quality and
effectiveness of the legal regulatory framework as well as the administrative framework.

Corporate Governance Defined

Philip Cochran and Steven Wartick defined Corporate Governance as “an umbrella term that
includes specific issues arising from interactions among senior management, shareholders, boards of
directors, and other corporate stakeholders”.
Bob Garatt has defined as “Corporate Governance deals with the appropriate board structures,
processes, and values to cope with the rapidly changing demands of both shareholders and
stakeholders in around their enterprises.

Principles of Corporate Governance:

The fundamental or key principles of corporate governance are described below:
(i) Transparency:
Transparency means the quality of something which enables one to understand
the truth easily. In the context of corporate governance, it implies an accurate,
adequate and timely disclosure of relevant information about the operating
results etc. of the corporate enterprise to the stakeholders.
In fact, transparency is the foundation of corporate governance; which helps to
develop a high level of public confidence in the corporate sector. For ensuring
transparency in corporate administration, a company should publish relevant
information about corporate affairs in leading newspapers, e.g., on a quarterly or
half yearly or annual basis.
(ii) Accountability:
Accountability is a liability to explain the results of one’s decisions taken in the
interest of others. In the context of corporate governance, accountability implies
the responsibility of the Chairman, the Board of Directors and the chief executive
for the use of company’s resources (over which they have authority) in the best
interest of company and its stakeholders.
(iii) Independence:
Good corporate governance requires independence on the part of the top
management of the corporation i.e. the Board of Directors must be strong non-
partisan body; so that it can take all corporate decisions based on business
prudence. Without the top management of the company being independent; good
corporate governance is only a mere dream.
(iv) Fairness
The board of directors should treat all stakeholders fairly and equitably.
(v) Honesty
The directors must protect the shareholders interests in the organisation, and
should give confidence to the shareholders that their interests are being
protected.
(vi). Integrity
Moral and ethical issues should be considered when making decisions relevant to
the organisation.
(vii) Objectivity

The objectives of the corporation must be clearly recognized in a long-term corporate strategy
including an annual business plan along with achievable and measurable performance targets and
milestones.
Agency Theory:
Agency theory is a principle that is used to explain and resolve issues in the relationship between
business Principals and their Agents.

According to the Agency theory, developed by Michael Jensen and William Meckling, in the typical
corporate form, the owners are content with the ownership and control over the assets and the
resources of the company are in the hands of Managers who by convention need not hold any stake
in the company.

Hires and delegates

Self Self
Principal Agent
interest performs
interest

Principals: These are the shareholders, owner of the company delegates work/responsibility to the
Managers.

Agents: These are the Managers appointed by the shareholders, to run the company on behalf of the
shareholders.

Agency Problem: The objectives of Manager (Agent) are different from the shareholders (Principal).
This conflict in objective is agency problem.

A standard Principal-Agent theory is governed by contracts. Such contracts spell out the terms of
performance of the contracting parties. It includes terms of timing, scope and redress of grievances
arising of non-performance by the parties. But Agency theory is applied when such a contract or any
term is missing.

Demsetz and Lehn (1985) say that contracts between the shareholders and the Managers are very
costly to write and enforce because (1) the information asymmetry between Managers and Owners
(2) Monitoring is difficult as shareholders are not in a position to observe everything a Manager
does, (3) redress of problems even when detected is difficult because of widely disbursed nature of
shareholders and coordinating their action is costly.

Phan (2000) says that “Even when it becomes apparent that the management is not doing its job, all
a shareholders can do is, to vote with his feet by selling the stock. Further, selling stock is not
effective way of changing management unless there is a run on the stock of the company, which is
unlikely in most situations”.

The Agents do not manage the firm and risks associate with it, had become Agent conflict.
According to many experts, these conflicts were anticipated and authorities had been implementing.
Even media has been very active in bringing out such conflicts.
According to Phan (2000), there are two categories of solutions to overcome the agency
related problems. “one the Agency related problems, one is the board of directors represents the
shareholders when the ownership of capital is separated from the control of capital, as in the case of
large, public corporations with dispersed ownership of shares. It is internal mechanism of control. It
relies on the enterprise and goodwill of corporate watchdogs to ensure that Managers abide by the
principles of maximizing efficiency.

The other category of solution is the external mechanism of control. The behavior of the Managers
is indirectly constrained by the working of a series of competitive markets that systematically punish
the company for deviating from efficiency maximization.

Companies owned and managed by same

people

Expansion required investors

(Shareholders – Limited Liability)

Delegated running of company to Managers

(Agents)

Separation of Goods

Criticisms of Agency Theory: Agency Problems

➢ It has been erected on a single, questionable abstraction that governance involves a contract
between two parties.
➢ It is based on dubious conjectural morality that people maximize their personal utility.
➢ The theoretical research has remained the mainstay of published papers in corporate
governance.

Stewardship theory

This is also called as shareholder theory. According to this, the boards have a stewardship role for
the resources entrusted to them by the shareholders. The power over the corporation is exercised
by directors who are nominated and appointed by shareholders and hence accountable to them for
the stewardship over the company’s resources.

Empower & Trust

Profit
Intrinsic,
Principal Agent
& returns
extrinsic
Protect & maximize motives
wealth

The theory is based on the belief that the directors can be trusted. This is also the theoretical
foundation for most of the legislations and regulations in almost all the countries and for good
governance. The roles, duties, and tasks of directors are essentially based on this.

According to Peter Block(1996), “Stewardship begins with the willingness to be accountable, for
some larger body than ourselves – an organization, a community. Stewardship springs from a set of
beliefs about reforming an organization that affirms our choice of service over the pursuit of self-
interest. Whe we choose service over self-interest, we say we are willing to be deeply accountable
choosing to control the world around us. It requires a level of trust that we are not used to holding”.

As Block (196) says, “Stewardship is to hold something in trust for another”. Block defines
stewardship as “the choice to preside over the orderly distribution of power”. This means giving
people at the bottom and the boundaries of the organization choice over how to serve a customer, a
citizen, a community. It is the willingness to be accountable for the well-being of the larger
organization by operating in service rather than in control of those around us.

Thus, the heart of the stewardship theory is the commitment to service. The directors on the boards
acting on the principle of stewardship will hold the company in trust on behalf of the different
stakeholders.

While conventional agency theory attributed that agents have their own self-interest in the way they
managed, led, and governed, Stewardship theory begins with the willingness to be accountable for
some larger body than ourselves.

Stakeholder Theory

Jensen (2005) evolved this stakeholder theory which says that “Corporations should attempt to
maximize not value of their shares (or financial claims), but distributed among all corporate
‘stakeholders’ include employees, customers, suppliers, local communities and tax collectors”.

While corporations have been concentrating on value maximization for more than 200 years,
starting with Adam Smith who thought that social wealth and welfare are likely to be greatest when
corporations seek to maximize the stream of profits that can be divided among their shareholders,
over a period of time the goal has got transformed to one of ‘maximization of the long-run market
value of the firm, where the value of the firm is mainly but not necessarily entirely defined by the
company’s stock price.

Stakeholder theory has been getting wide acceptance among organizations, politicians and even
governance conscious organizations and governments because the theory has a perspective of long-
term rather than short-term in the ‘value-maximization proposition’ of the earlier years.

The widespread use of the tool ‘Balance Score Card(BSC) which is a multidimensional performance
measurement process, where not only the financial performance, which is historical in nature, but
also the internal business processes, the customers, and the learning and growth aspects which will
consider the sustainability of the business are also taken into consideration.

According to Jensen, “Stakeholder theory is completely consistent with value-maximization or value-

seeking behavior, which implies that managers must pay attention to all constituencies that can
affect the value of the firm’. But with multiple constituencies competing with conflicting interests,
the decision-making process for the boards and managers becomes difficult.

It allows Managers and Directors to devote the firm’s resources to their own favourite causes – the
environment, art, cities, medical research – without being held accountable for the effect of the
expenditure on firm value. By expanding this power of managers in unproductive way, stakeholder
theory increases the agency costs in the economic system. And since it expands the power of
Managers, it is not surprising that stakeholder theory receives substantial support from them.

Emergence of Corporate Governance in India and the landmarks:

➢ India had been British Colonial State till 1947.

➢ Formal Control and regulation over the financial dealings of Indian Companies started with
the enactment of the RBI Act, 1934. It is the beginning of the Indian Corporate Governance history.
➢ The Country had already 6 fully operational stock exchanges before 1947 (independence).
(Ahmedabad, Calcutta, Madras, Punja, Uttar Pradesh, Nagpur and Hyderabad).
➢ Indian Corporate Governance got further boost by the enactment of post-independence
laws, consolidating the rights of investors.
➢ The Companies Act, 1956 provided some basic features of business operations, especially
with reference to Board formation, issue of shares and management of share capital.
➢ Because of the Industrial Policy in Mid 1950s, the Government attention focused more on
creating public sector companies that regulating governance of the existing companies.
➢ The public sector companies worked under the Government protection with minimal
responsibility for governance, leading to heights of inefficiency.
➢ The private sector struggled under license-raj and red-tapism (rise to corruption), adopted
short cuts to run the businesses.
➢ The Indian equity market was large controlled by dominant private sector players and stock
market manipulators until private sector players and stock market manipulators until the enactment
of Economic Policy in 1991.
➢ The Indian business scenario changed completely with the liberal economic policy in 1991 by
allowing investments, reduction in taxes, import tariffs.
➢ The Developing economy, and development of strong financial system (both bank-based and
market-based) was felt necessary. The SEBI Act of 1992 filled this gap.
➢ SEBI established in 1988 became an empowered and fully functional watchdog of the Indian
Stock Market in 1992 with the enact of SEBI Act, 1992. This Act was amended two times in 1995 and
1999 to clarify the “disclosure” norms and empowers SEBI Act.
➢ SEBI Act along with various financial regulations enforced by the RBI, Finance Ministry,
Government of India, acted as affective corporate governance in the Indian Economy.
➢ Encouraged by the Private sector efforts for code based governances, SEBI formulated a
Committee under the chairmanship of Kumar Mangalam Birla to work out the corporate governance
codes.
➢ The Codes formulated by the Birla Committee, were introduced through Clause 49 of the
SEBI in 2000. It was further re-enforced by SEBI in 2003, by appointing Narayana Murthy Committee
to make additional recommendations to enhance effectiveness and incorporated the
recommendations by revising the Clause 49 from Jan’2006.
➢ The Companies Act, 2008, which has replaced the earlier Companies Act, 1956, is the latest
milestone for Corporate Governance in India. It has incorporated the social view of business in the
form of “Corporate Social Responsibility(CSR).
➢ Thus Indian Corporate Governance moving towards for fulfilling the global accepted
objectives of Corporate Governance.
➢ “Corporate Governance Guidelines 2009” and “Corporate Social Responsibility voluntary
Guidelines 2009” by the Ministry of Company Affairs (MCA) were issued for strengthening corporate
governance framework in India.
➢

NEED FOR CORPORATE GOVERNANCE:

11) Need to live in harmony with the community
A corporation is a congregation of various stakeholders, namely customers, employees,
investors, vendor partners, government, and society. A corporation should be fair and
transparent to its stakeholders in all its transactions. This has become imperative in today’s
globalized business world where corporations need to access global pools of capital, need to
attract and retain the best human capital from various parts of the world, need to partner
with vendors on mega collaborations, and need to live in harmony with the community. Or
else, it will not be able to succeed.
12) Ethical Leadership:
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.
13) Beyond the realm of law
It stems from the culture and mindset of management, and cannot be regulated by
legislation alone. Corporate governance deals with conducting the affairs of a company,
such that there is fairness to all stakeholders and that its actions benefit the greatest
number of stakeholders. It is about openness, integrity, and accountability. What legislation
can and should do, is to lay down a common framework – the ‘form’ to ensure standards.
The substance will ultimately determine the credibility and integrity of the process.
14) Requires the cooperation of all the stakeholders:
Corporations need to recognize that their growth requires the cooperation of all the
stakeholders; and such cooperation is enhanced by the corporation adhering to the best
corporate governance practices. In this regard, the management needs to act as trustees of
the shareholders at large and prevent asymmetry of benefits between various sections of
shareholders, especially between the owner-managers and the rest of the shareholders.
15) Improving the economic efficiency of a firm
Corporate Governance is a key element in improving the economic efficiency of a firm.
Good corporate governance also helps ensure that corporations take into account the
interests of a wide range of constituencies, as well as of the communities within which they
operate. Further, it ensures that their Boards are accountable to the shareholders. This, in
turn, helps assure that corporations operate for the benefit of society as a whole. While
large profits can be made taking advantage of the asymmetry between stakeholders in the
short run, balancing the interests of all stakeholders alone will ensure survival and growth in
the long run.
16) Avoid heavy cost beyond regulatory problems.
The failure to implement good governance can have a heavy cost beyond regulatory
problems. Evidence suggests that companies that do not employ meaningful governance
procedures can pay a significant risk premium when competing for scarce capital in the
public markets. In fact, recently, stock market analysts have acquired an increased
appreciation for the correlation between governance and returns. In this regard, an
increasing number of reports not only discuss governance in general terms, but also have
explicitly altered investment recommendations based on the strength or weakness of a
company’s corporate governance infrastructure.
17) For the Credibility
The credibility offered by good corporate governance procedures also helps maintain the
confidence of investors – both foreign and domestic – to attract more ‘patient’, long-term
capital, and will reduce the cost of capital. This will ultimately induce more stable sources of
financing.
18) Result of Financial Crisis:
Often, increased attention on corporate governance is a result of financial crisis. For
instance, the Asian financial crisis brought the subject of corporate governance to the
surface in Asia. The many instances of corporate misdemeanors have also shifted the
emphasis on compliance with substance, rather than form, and brought 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. By
this very principle only those industrialists whose corporations are governed properly should
be allowed to be a part of committees. This includes the Prime Minister and Finance
Minister’s advisory councils, committees set up by the Confederation of Indian Industry (CII),
the Security Exchange Board of India (SEBI), the Department of Company Affairs, ministries,
and the boards of large banks and financial institutions.
19) Provides the structure
The definition in the preamble of the OECD principles is also all encompassing: ‘Corporate
governance… involves a set of relationships between a company’s management, its board,
its shareholders, and other stakeholders. Corporate governance also provides the structure
through which the objectives of that company are set, and the means of attaining those
objectives and monitoring performance are determined.
20) To ensure that it is run properly.
The most common school of thought would have us believe that if management is about
running business, governance is about ensuring that it is run properly. All companies need
governing as well as managing. The aim of “Good Corporate Governance” is to enhance the
long-term value of the company for its shareholders and all other partners. The enormous
significance of corporate governance is clearly evident in this definition, which encompasses
all stakeholders. Corporate governance integrates all the participants involved in a process,
which is economic, and at the same time social.
OECD Principles (Organization for Economic Cooperation and Development)

The OECD (Organization for Economic Cooperation and Development) came into full force on
September 30, 1961. The key function of the OECD was to provide management consulting to
member governments. OECD is an international organisation that works to build better policies
for better lives. It’s goal is to shape policies that foster prosperity, equality, opportunity and well-
being for all.
The OECD seeks to promote governance reforms in a close cooperation with other international
organization. This is normally done in joint collaboration with the World Bank and International
Monetary Fund (IMF). Roundtables, summoning senior policymakers, regulators and market
participants are organized to enhance the comprehension of governance and to support
regional reform efforts.
The OECD principles of corporate governance become part of the core 12 standards of global
financial stability. Currently, it has become a benchmark used by international financial
institutions. The OECD principles were designed to flexible and can be adopted in different cultures,
circumstances and traditions in different countries. Most countries’ corporate governance codes
are based on the principles of the OECD, and Ghana’s corporate governance code has this element.
Right from the beginning, OECD recognized that there cannot be a formula for corporate governance
that can be followed by all countries or as Mallin (2007) says, ‘One size does not fit all’. The
principles are of such nature that they represent certain common characteristics that are
fundamental to good corporate governance. The taskforce published its report in 1999.
Subsequently, the principles were reviewed and revised in 2004. These principles approached the
subject from five major aspects.

The OECD has five main corporate governance principles and these are discussed below:

1 Rights of Shareholders and Key Ownership Functions

The broad term of references included establishing the shareholder rights with reference to
ownership, being informed of fundamental corporate changes, opportunity to participate effectively
and vote in shareholder meetings, adequate disclosure of special rights to certain shareholders like
control disproportionate to their equity ownership, ensuring transparent and efficient functioning of
the market for corporate control while stating that shareholders should consider the costs and
benefits of extending their voting rights.

2 Equitable Treatment of Shareholders

There should not be any discrimination among big and small, domestic and foreign shareholders. All
shareholders within the same class should be members and managers should be required to disclose
any material interests in transactions or matters affecting the corporation.

3. Stakeholder perspective
Care should be exercised to see that the rights of stakeholders that are protected by law are
respected. IN case of violation of their rights, stakeholders should have the opportunity to get
redressal for their grievances. Adequate mechanisms shall be provided in the corporate governance
framework to improve shareholder participation in enhancing performance. The shareholders
should have access to relevant information wherever stakeholder participate in the governance
process.

4. Disclosure and transparency:

The corporate governance framework should ensure that timely and accurate disclosure is made on
all matters regarding the corporation including the financial situation, performance ownership, and
governance of the company. Disclosures must be available on aspects like the financial and
operating results, company objectives, share ownership and voting rights, board members and other
key executives and also their remunerations, foreseeable risk factors, material issues regarding
employees and other stakeholders, governance structures and policies, etc. Information should be
prepared, audited and disclosed in accordance with high quality standards of accounting, disclosure
and audit. Independent auditor should conduct an annual audit to provide an external and objective
assurance about the preparation and presentation of financial statements. These should be fair,
timely and cost efficient methods of disseminating information for access by users.

5. Responsibilities of the board:

The governance framework should ensure the strategic guidance of the company, effective
monitoring of management by the board, and the board’s accountability to the company and the
stakeholders. Towards achieving this, the board members should exercise due diligence and care
and act in the best interests of the company and the shareholders. Board should treat all
shareholders fairly especially when board decisions may affect different shareholder groups
differently. Compliance with all applicable laws must be ensured while taking into account the
interests of stakeholders. Board should also take necessary steps into review and guide corporate
strategy, risk policy, budgets, business plans, setting of performance objectives, selection of key
executives – monitor and replace them where necessary and also plan for succession. IT should also
monitor the implementation of corporate performance, oversee major capital expenditures,
acquisitions, and divestitures, review executive remuneration, ensure a formal and transparent
board nomination process, monitor and manage conflicts of interest of stakeholders like board
members, executives, and shareholders, ensure integrity of the company’s accounting and financial
reporting systems and independent audit, constitute the board with sufficient number of non-
executive board members who can exercise independent judgement, etc.

GRI (Global Reporting Initiative)

The Global Reporting Initiative (GRI) is an international, multi-stakeholder and independent non-
profit organization that promotes economic, environmental and social sustainability. The GRI was
established in 1997 in partnership with the United Nations’ Environment Programme (UNEP). The
organization has developed Sustainability Reporting Guidelines that strive to increase the
transparency and accountability of economic, environmental, and social performance and provides
all companies and organizations with a comprehensive sustainability reporting framework that is
widely used around the world.

The GRI sustainability reporting guidelines are the most widely used comprehensive sustainability
reporting standard in the world – provide organizations with the tools to meet the sustainability
challenges. A sustainability report conveys disclosures on an organization’s most critical impacts –
be they positive or negative on environment, society, and the economy.

Sustainability is a broad term considered synonymous with others used to describe reporting on
economic, environmental, and social impacts (e.g. triple bottom line, corporate responsibility
reporting, etc.) Sustainability reporting is the practice of measuring, disclosing and being
accountable to internal and external stakeholders for organizational performance towards the goal
of sustainable development. A sustainability report should provide balanced and reasonable
representation of the sustainability performance of a reporting organization – including both
positive and negative contribution.

Importance of GRI Guidelines:

By using the Guidelines, reporting organizations can generate reliable, relevant and standardized
information with which to:
➢ Access opportunities and risks, and
➢ Enable more informed decision making – both within the business and among its
stakeholders.
By developing and communicating their understanding about the connections between sustainability
and business, companies can:
➢ Enhance their value
➢ Measure and manage change, and
➢ Drive improvement and innovation

An ever-greater number of companies and other organizations are recognizing the need to make
their operations more sustainable. At the same time, governments, stock exchanges, markets,
investors, and society at large are calling on companies to be transparent about their sustainability
goals, performance and impacts. The GRI Sustainability Reporting Guidelines – the most widely used
comprehensive

G4 REPORT :
In May 2013, the Global Reporting Initiative (GRI) launched the fourth generation of its sustainability
reporting guidelines: the GRI G4 Sustainability Guidelines (the Guidelines). This latest round of
Guidelines took more than two-and-a-half years to develop. A broad range of stakeholders were
consulted, from expert Working Groups to public comment.
SIX ESSENTIAL ELEMENTS TO INCLUDE IN THE REPORT:
➢ Choose the ‘in accordance’ option that is right for your organization, and meet the
requirements
➢ Explain how you have defined the organization’s material Aspects, based on impacts and the
expectations of stakeholders
➢ Indicate clearly where impacts occur (Boundaries)
➢ Describe the organization’s approach to managing each of its material Aspects (DMA)
➢ Report Indicators for each material Aspect according to the chosen ‘in accordance’ option
➢ Help your stakeholders find relevant content by providing a GRI Content Index sustainability
reporting standard in the world – provide organizations with the tools to meet these
challenges.
PRINCIPLES FOR DEFINING REPORT CONTENT
These Principles are designed to be used in combination to define the report content. The
implementation of all these Principles together is described under the Guidance of G4-18 on pp. 31-
40 of the Implementation Manual.
Stakeholder Inclusiveness Principle: The organization should identify its stakeholders, and explain
how it has responded to their reasonable expectations and interests. Stakeholders can include those
who are invested in the organization as well as those who have other relationships to the
organization. The reasonable expectations and interests of stakeholders are a key reference point
for many decisions in the preparation of the report.
Sustainability Context Principle: The report should present the organization’s performance in the
wider context of sustainability. Information on performance should be placed in context. The
underlying question of sustainability reporting is how an organization contributes, or aims to
contribute in the future, to the improvement or deterioration of economic, environmental and social
conditions, developments, and trends at the local, regional or global level. Reporting only on trends
in individual performance (or the efficiency of the organization) fails to respond to this underlying
question. Reports should therefore seek to present performance in relation to broader concepts of
sustainability. This involves discussing the performance of the organization in the context of the
limits and demands placed on environmental or social resources at the sector, local, regional, or
global level.
Materiality Principle: The report should cover Aspects that: Reflect the organization’s significant
economic, environmental and social impacts; or Substantively influence the assessments and
decisions of stakeholders Organizations are faced with a wide range of topics on which they could
report. Relevant topics are those that may reasonably be considered important for reflecting the
organization’s economic, environmental and social impacts, or influencing the decisions of
stakeholders, and, therefore, potentially merit inclusion in the report. Materiality is the threshold at
which Aspects become sufficiently important that they should be reported.

Completeness Principle: The report should include coverage of material Aspects and their
Boundaries, sufficient to reflect significant economic, environmental and social impacts, and to
enable stakeholders to assess the organization’s performance in the reporting period. Completeness
primarily encompasses the dimensions of scope, boundary, and time. The concept of completeness
may also be used to refer to practices in information collection and whether the presentation of
information is reasonable and appropriate.

PRINCIPLES FOR DEFINING REPORT QUALITY

Balance: The report should reflect positive and negative aspects of the organization’s performance
to enable a reasoned assessment of overall performance
Comparability: The organization should select, compile and report information consistently. The
reported information should be presented in a manner that enables stakeholders to analyze changes
in the organization’s performance over time, and that could support analysis relative to other
organizations.
Accuracy : The reported information should be sufficiently accurate and detailed for stakeholders to
assess the organization’s performance.
Timeliness : The organization should report on a regular schedule so that information is available in
time for stakeholders to make informed decisions
Clarity : The organization should make information available in a manner that is understandable and
accessible to stakeholders using the report.
Reliability: The organization should gather, record, compile, analyze and disclose information and
processes used in the preparation of a report in a way that they can be subject to examination and
that establishes the quality and materiality of the information.

Clause 49 Guidelines
SEBI in January 2000 considered the recommendations of the Kumar Mangalam Birla Committee to
promote and raise the standard of corporate governance of listed companies. It decided to
incorporate a new clause in the listing agreement between companies and stock exchanges to
include the recommendations of the committee. The following guidelines were incorporated.

SEBI in January 2000 considered the recommendations of the Kumar Mangalam Birla
Committee to promoite and raise the standard of corporate governance of llisted companies.
It dercided to incorporate a new clause in the listing agreement between companies and stock
exchanges to include the recommendation of the committee. The following guidelines were
incorporated.
I. The board of directors
(a) The board shall have optimum combination of excutive and non-executive directors.
In case the company has an executive chairman, at least half of the board shall be
independent and case of a non-executive chairman, at least one-third of the board shall be
independent.
(b) All pecuniary relationships or transactions of the non-executive directors and the
company should be disclosed in the annual report.
II. Audit committee
(a) A qualified and independent committee shall be set up. The committee shall have
minimum three members, all non-executive directors, with the majority beiung
independent, and the chairman must attend the AGM to answer shareholder queries. The
committee can invite executives to be present at the meetings. The CFO/finance director,
the head of internal audit, and a representative of the secretary of the committee.
(b) The committee shall meet at least thrice a ylear, once before the finalization of annual
accounts and others in a gap of 6 months. The quorum shall be either two members or
one third of the members whichever is higher with a minimum of two independent
directors.
(c) The powers of the audit committee shall include
➢ To investigate any activity within its terms of reference
➢ To seek information from any employee
➢ To obtain outside advice
➢ To secure attendance of outside experts if necessary
(d) The committee’s role will include
➢ Oversight of the company’s financial reporting with adequate disclosure
➢ Recommending the appointment or removal of external lauditor, fixation of audit
fee, and approval of fees for any other services
➢ Discuss with management the annual financial statements before submission to
the board with focus on
o Any changes in accounting policies and practice
o Qualifications in draft audit report
o Significant adjustments arising out of audit
o The going concern assumption
o Compliance with accounting standards
o Compliance with requirements by stock exchanges and other legal aspects
o Any related party transactions that may have potential conflict with the interests of
the company at large.
➢ Review of internal control systems with management, internal, and external auditors
➢ Review of internal audit functions including structure, staff, leadership, reporting structure,
frequency of internal audit, etc.
➢ Discussion with internal auditors on any significant findings and follow up there on.
➢ Review of any internal investigations by internal auditors.
➢ Discussion and finalization of nature and scope of audit with external auditors.
➢ Review of the company’s financial risk management policies.
➢ To look into the reasons of substantial defaults in the payments to depositors, debenture
holders, shareholders (non-payment of declared dividends), and creditors.

III. Remuneration of Directors:

➢ The remuneration of non-executive directors shall be decided by the board.
➢ All details regarding remuneration shall be disclosed in the report on corporate governance
in the annual report. Details like salary, benefits, bonuses, stock options, perquisites, etc., as
well as details of fixed components and performance linked incentives along with
performance criteria and service contracts, notice periods, severance pays and stock option
details.
IV. Board Procedure
➢ Board should meet at least four times a year with a maximum gap of 4 months between two
meetings.
➢ No Director can be a member of more than 10 committees or act as chairman of more than
five committees across all companies in which one is a director. It is mandatory for every
director to declare the committee positions he occupies to the company and notify the
changes as and when they take place.
V. Management
➢ In addition to the director’s report, MDA is added.
➢ Report is added as a part of the annual report, MDA should discuss:
o The industry and developments
o Opportunities and threats
o Segment-wise or product-wise performance
o Outlook
o Risks and concerns
o Internal control systems and adequacy
o Financial performance with respect to operational performance.
o Material developments in HR/industrial relations including number of people
employed
o All financial and commercial transactions made by Managements, where they have a
personal interest that may have a potential conflict with the interests of the
company at large.
VI. Share holders
o When a new director is to be appointed, the shareholders must be provided with a
brief resume of the director, nature of his expertise in specific functional areas,
and names of companies where the person holds directorship and membershlips of
committees of the board.
o Information like quarterly results and presentation to analysts on its website be
forwarded to the stock exchanges who may disply them on their website.
o There must be a committee (shareholders/investors’ grievance committee) to look
into the grievances of the shareholders regarding transfer of shares, non-receipt of
balance sheet non-receipt of declared devidends, etc.
o The company must expedite the process of share transfe5rs and for this it should
delegate the power to either an officer, a committee, or to the registrar and transfer
agents with the delegated authority attending to the transfer formalities at least
once a fortnight.
VII. Report on Corporate Governance
There shall be a separate section on corporate governance in the annual reports with a
detailed compliance report ---compliance with any mandatory requirement and the extent to
which non-mandatory requirement have been adopted along with the annual returns.
VIII. Compliance
The company shall obtain a certificate of compliance with regard to corporate governance
requirements from the external auditors which shall be annexed to the corporate governance
report and sent to the stock exchanges along with the annual returns.
IX. Schedule of implementation
o By all entities seeking listing for the first time, at the time of listing.
o By 31 March 2001 by all entities in group of BSE A or in S&P Nifty Index as on 1
January 2000.
o By 31 March 2002 by all entities which are listed with paid-up capital Rs 10 crores
and above or net worth of Rs 25 crores or more any time in the history of the
company.
o By 31 March 2003 by all entities which are listed with paid capital of Rs 3 crores and
above.
o The non-mandatory requirements shall be implemented at the discretion of the
company. Disclosures regarding adoption /non-adopti0nj of the non-mandatory
requirements shall be made in the corporate governance report.

Amendments to Clause 49
14. Institutional directors will be considered as independent directors.
15. For the purpose of the number of memberships of committees, only public limited
companies (listed and unlisted) shall be included and private limited companies,
foreign companies, and companies of Sections 25 of the Companies Act shall be
excluded. Also, only audit committee, shareholders grievance committee and
remuneration committee shall be considered for this purpose.
16. Institutional directors will be considered as independent in the case of government
companies also.
17. Those companies which were required to comply with the provision in the first phase will be
required to submit a quarterly compliance report to stock exchanges within 15 days from
the end of quarter.
18. The date compliance by all companies with a share capital of Rs. 3 crores and above or net
worth of Rs. 25 crores or more at any time in the history of the company was extended to 31
March, 2004. The submission of the quarterly reports also will start after 15 days from the
quarter ending 31 March, 2004.
19. Stock exchanges shall ensure that all provisions of corporate governance have been
complied with before granting any new listing.
20. Stock exchanges shall set up a cell to monitor the compliance with the provision of corporate
governance. The cell has to submit a consolidated compliance report to SEBI within 30 days
of each quarter.
21. The compliance date for companies with share capital of Rs. 3 crorres and above or net
worth of Rs. 25 crores or more will be 31 March, 2005. The submission of the quarterly
compliance reports also will start from 15 days from 31 March, 2005.
22. Those companies which apply for listing must necessarily have audit committees and
investor / shareholder grievance committee before they are granted permission for listing.
23. The definition of independent director has been detailed. An independent director shall be
a non-executive director (1) who apart from receiving the director’s remuneration does not
have any material pecuniary relationships or transactions with the company, its promoters,
its directors, its senior management or its holding company, its subsidiaries and associates
which may affect the independence of the director; (2) has not been executive of the
company in the immediately preceding three financial years; and (3) is not partner or
executive or was not a partner or an executive during the preceding three years of any of
the following: (a) statutory audit firm or the internal audit firm that is associated with the
company; (b) the material supplier, or a service provider, or a customer, or a lessor, or a
lessee of the company which may affect the independence of the company; and (d) a
substantial shareholder of the company owing 2 percent or more of voting shares.
24. Minimum number of board meetings shall be four with the maximum time gap of three
months between any two meetings.
25. The board shall periodically review compliance reports of all laws applicable to the company;
prepared by the company as well as steps taken by the company to rectify instances of non-
compliance.
26. The board shall lay down a code of conduct for all board members and senior management
of the company. It shall be posted on the website of the company. All board members and
COMMITTEES ON CORPORATE GOVERNANCE
With the formation of corporate form of organizations, the frame work of corporate governance got
wide recognition and quite peculiarly it was prevalent in various manifestations throughout the
world. The theme of Corporate Governance has got recognition due to the constitution and
formation of various committees and formulation of various laws throughout the world.
With respect to India, after the economic initiatives in 1991, the Govt. of India thought it fit to
respond to the developments taking placing the world over and accordingly the initiatives
recommended by Cadbury Committee Report got prominence. In order to give due prominence
Confederation of Indian Industry (CII), the Associated Chambers of Commerce and Industry
(ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted committees to
recommend initiatives in Corporate Governance.
The report of various committees helped a lot to streamline the corporate throughout the world.
Some of the Committees with its formation is given under the following table 3.1.
COMMITTEES ON CORPORATE GOVERNANCE
Sl.No. Committee Country Date of Submission
1. Cadbury England 1992
2. King Committee South Africa 1994 & 2002
3. CII India 1996
4. Hampel England 1998
5. Kumar Mangalam Birla India 2000
6. Narayana Murthy India 2003
Committee
7. Naresh Chandra India 2009
Committee

Naresh Chandra Committee Report

For over a decade, the Confederation of Indian Industry (CII) has been at the forefront of the
corporate governance movement in India. In April 1998, it released a Task Force report entitled
“Desirable Corporate Governance: A Code”, which outlined a series of voluntary recommendations
regarding best-in-class practices of corporate governance for listed companies. It is worth noting
that most of the CII Code was subsequently incorporated in SEBI’s Kumar Mangalam Birla Committee
Report and thereafter in Clause 49 of the Listing Agreement. Moreover, the CII Code was the first
and probably a unique instance where an industry association took the lead in prescribing corporate
governance standards for listed companies. Corporate governance guidelines - both mandated and
voluntary - have evolved since 1998, thanks to the efforts of several committees appointed by the
Ministry of Corporate Affairs (MCA) and the SEBI. Indeed, it is fair to say that in terms of norms,
guidelines and standards set for the board of directors, financial and non-financial disclosures and
information to be shared by the management to stakeholders and the wider public, Indian corporate
governance standards rank among the best in the world. And CII is privileged to be a part of this
movement. Unfortunately, history tells us that even the best standards cannot prevent instances of
major corporate misconduct. This has been true in the US - Enron, Worldcom, Tyco and, more
recently gross miss-selling of collateralised debt obligations; in the UK; in France; in Germany; in
Italy; in Japan; in South Korea; and many other OECD nations. The Satyam-Maytas Infra-Maytas
Properties scandal that has rocked India since 16th December 2008 is another example of a massive
fraud. Satyam is a one-off incident - especially considering the size of the malfeasance. The
overwhelming majority of corporate India is well run, well regulated and does business in a sound
and legal manner. However, the Satyam episode has prompted a relook at our corporate governance
norms and how industry can go a step further through some voluntary measures. With this in mind,
the CII set up a Task Force under Mr Naresh Chandra in February 2009 to recommend ways of
further improving corporate governance standards and practices both in letter and spirit. The
recommendations of the Naresh Chandra Task Force evolved over a series of meetings. The leitmotif
of the report is to enunciate additional principles that can improve corporate governance in spirit
and in practice. The report enumerates a set of voluntary recommendations with an objective to
establish higher standards of probity and corporate governance in the country. The
recommendations outlined in this report are aimed at listed companies and wholly owned
subsidiaries of listed companies.
About the Audit Committee:

16. Prohibition fo any direct financial interest in the client by the audit firm, its partners, or
members of the engagement team as well as their direct relatives and also any relative who
has more than 2 percent of the share capital of the audit client or of the share of the profits.
17. Prohibition of any loans or guarantees by the audit firm, or partners, or other members of
the engagement team from the audit client.
18. Prohibition of any business relationship with the audit client by the audit firm, its partners or
members of engagement, and their direct relatives.
19. Prohibition of personal relationships which would result in the exclusion of the audit firm or
partners or members of engagement like with key executives or senior managers belonging
to the top two managerial level of the company.
20. Prohibition of any partner or member of the engagement team from joining client before 2
years not being engaged in the audit of the client.
21. Prohibition of undue dependence on an audit client. The fee received from any one client
should not exceed 25 percent of the total revenues of the audit firm. Firms in the initial five
years from the commencement of their activities and those whose total revenues are less
than Rs. 15 lakhs per year exempted.
22. Prohibition of non-audit services like accounting and book keeping services, internal audit
services, design and implementation of financial information systems actuarial services,
services of broker, dealer, investment advisory or investment banking, other financial
services which are sometimes outsourced by the client, or management services which are
outsourced, recruitment services, valuation and fairness opinion services, etc.
23. Fifty percent audit partners and members of the engagement team be rotated every five
years in the case of clients whose net worth exceeds Rs. 10 crores or whose turnover
exceeds Rs. 50 crores. Those who are compulsorily rotated could return after a gap of 3
years.
24. The management should provide a clear description of each material liability and its risks
followed by auditor’s comments on the management view.
25. Qualifications of accounts, if any, by auditors must be adequately highlighted in order to
attract shareholders attention.
26. The qualification, if any, in the report shall be explained to the shareholders at the
company’s annual general meeting.
27. The audit firm should separately send a copy of the qualified report to the ROC (Registrar of
Companies), SEBI and the principal stock exchanges with a copy of the letter marked to the
management of the company.
28. The Section 225 of the Companies Act needs to be amended to require a special resolution
of shareholders in case an auditor, who is otherwise eligible for reappointment, is sought to
be replaced. Also, the reasons for such replacement shall be explained, about which the
outgoing auditor has right to comment.
29. The audit committee should review the independence of the audit firm, discuss and prepare
the annual work programmes with the auditor and also recommend to the board with
reasons about the appointment/reappointment or removal of the auditors along with the
annual remuneration.
30. The audit firm should submit annually a certificate of independence to the audit committee
and/or the board of directors.
39. The CEO/CFO should certify the balance sheet and profit and loss account and all the
schedules and notes on accounts and cash flows in the case of companies whose net worth
exceeds Rs. 10 crores or whose turnover exceeds Rs 50 crores, Very clearly stating any
deficiencies in the design and operation of internal controls and any significant changes in
the accounting policies during the year under review.
40. Three independent quality review boards (QRB) should be set up, one each for ICAI, ICSI,
and ICWAI to periodically examine and review the quality of audit, secretarial and cost
accounting firms, to judge and comment on the quality and sufficiency of systems,
infrastructure and practice. The QRBs should review the audit quality reviews of the audit
firms for the top 150 listed companies accounting to market capitalization, with the freedom
for DCA to alter few samples after the period. The funding of the QRB’s will be done by the
respective institutes.
41. An independent prosecution directorate be created within ICAI to exclusively deal with all
disciplinary cases.
42. Complaints received should be registered by the prosecution directorate and sent to the
member or firm within 15 days of receipt and the prosecution directorate should ask for
required documents from the complainants and the respondent within 60 days. On receipt
of documents they will be placed before the disciplinary committee within 20 days of
receiving the documents. The disciplinary committee shal hear the cases and decisions
recorded in a report and should d etail lthe punishment to be awarded. The ICAI council
should consider the report within 45 days from the date of the report and act upon them.
Appeal if any shall be placed before the appellate body headquartered in New Delhi,
composed of a presiding officer and four other members. The presiding officer shall be a
retired judge of the Supreme Court or a retilred chief justilce of a hligh court. Two members
shall be past president of ICAI and the remaining two nominated by the DCA. The quorum
shall be three.
43. The disciplinary committee’s awards of the punishment, if any, shall be publicized through
suitable media.
44. The findings of the appellate body shall be made by the central government in order to
ensure independence. The expenses incurred by the disciplinary committee shall be borne
by ICAI’s council including the emoluments of the members, sitting fees, other allowances
and expenses. All expenses of the prosecution directorate will be borne by the council of
ICAI. Every complaint (other than those made by the central or state government) shall be
accompanied by a fee of Rs. 5000, which will be returned in case the complaint holds some
ground. Fees in the case of frivolous complaints are not refunded and will go towards
funding.
45. Independent disciplinary mechanism may be designed by ICSI and ICWAI along similar lines.
46. While appointing independent directors, care must be taken to see that they have no
material pecuniary relationships or transactions with the company, its promoters, senior
management, or lits holding company, or subsidiaries, or associate companies; are not
related to promoters or management at the board level and one level below; have not been
executives of the company in the last three years; are not partners or executives of a
statutory audit firm, internal audit firm or legal firm or consulting firm associated with rthe
company for the last three years; are not significant suppliers, vendors or customers of the
company; do not hold more than 2 percent of the voting shares; and have not been directors
of the company for more than three terms of three years each (maximum of nine years).
However, nominee directors of a financial institution will be excluded in the determination
of the number of independent directors and cross non-executive directorships of executives
will not be treated as independent. The committee also recommended that the above
criteria for independent directors shall be made applicable for all listed companies and also
unlisted companies with a net worth of Rs. 10 Crores and above or a turnover of Rs. 50
crores and above.
47. In the case of companies as detailed above, not less than 50 percent of the board of
directors should be independent. However, unlisted public companies with a maximum of
50 shareholders and without debt of any kind from the public, banks, or other financial
institutions as long as they do not change their character and also those unlisted subsidiaries
of listed companies. Nominee directors again will be excluded both from the number and
denominator.
48. Since corporate governance norms require companies to have a number of committees, the
boards should have a minimum size. The minimum size should be seven with at least four
independent directors in the case of all listed companies as well as unlisted public
companies with a net worth of Rs. 10 crores and above or turnover of Rs. 50 crores and
above. Again, this will not be applicable to companies with no more than 50 shareholders or
those without any debt till they change their character and for unlisted subsidiaries of listed
companies.
49. The minutes of meetings of the board as well as audit committees shall disclose the timings
and duration of each meeting, dates of meetings, and the attendance record of members in
the case of companies detailed above.
50. Those directors who find it difficult to attend the meetings physically must participate in the
proceedings through tele-conference or video-conference duly minuted.
51. All information given to the press or analysts, in the case of all listed companies and unlisted
companies meeting the above-mentioned criteria, should be transmitted to all board
members.
52. Audit committees shall be constituted of only independent directors if the committees are
indeed to be independent excepting those public companies with not more than 50
shareholders and without debt of any kind and also unlisted subsidiaries of listed companies.
53. The chairman of the audit committee must annually certify whether and to what extent each
of the functions listed in the audit committee charter were discharged during the year in
addition to dates and frequency of meetings. It should also provide its views on the
adequacy of the internal control systems, perceptions of risks and in the event of any
qualifications, why the committee accepted and recommended the financial statements
with qualifications.
54. The statutory limit (of Rs. 5000) on sitting fee should be revised as it is considered too small
to attract talent. The present statutory limits of 1 percent commission of net profit to
independent directors and also provisions relating to the stock options are adequate and do
not need any revision. The vesting of the stock options shall be staggered over at least three
years.
55. The non-executive and independent directors must be granted protection from certain
criminal and civil liabilities because they are not expected to be in the know of every
technical infringement committed by the management.
56. DCA should encourage institutions and their proposed centres for corporate excellence to
have regular training programme for independent directors. The funding could come from
the Investor Education and Protection Fund (IEPF). Every independent director should
undergo at least one such training course before assuming his/her responsibilities. An
untrained independent director should be disqualified under Section 274(1)(g) of the
Companies Act 1956, giving reasonable notice. Of course, this requirement might be
introduced in a phased manner as there is paucity of the availability of such training
programmes.
57. SEBI should refrain from introducing subordinate legislation in areas where specific
legislations exist under Companies Act, 1956. In case any additional requirements in the
existing provisions are found necessary by SEBI, such requirements must be done through
suitable amendments of the Companies Act 1956. DCA should respond to such requirements
quickly.
58. The government should strengthen the DCA by increasing the number of DCA offices and
quality and quantity of physical infrastructure. They should outsource expertise when
needed. The inspection capacity needs to be strengthened and it should become a regular
administrative function. It is very essential that the DCA functionaries continuously upgrade
themselves through training.
59. A corporate serious fraud office (CSFO) should be set up to investigate into any instances of
corporate frauds. This should be multifunctional team which can detect frauds and also
direct and supervise prosecutions. The appointments to and the functioning of this office
shall be by different committees headed by the cabinet secretary.
60. The penalties in the case of offences need to be rationalized and must be related to the
sums involved in the offences. The criteria for disqualification under Section 274(1)(g) of the
Companies Act, 1956 shall be extended beyond non-payment of debt. Independent
directors must be treated differently as is done in the case of nominee directors
representing financial institutions. Stricter norms should be prescribed for the companies
registered as brokers with SEBI. Also, greater accountability should be provided for with
respect to transfers of money. Companies Act must suitably be amended to give DCA the
powers of attachment of bank accounts, etc., on the same lines as SEBI.
61. Consolidated financial statements should be mandatory for companies having subsidiaries.
CADBURY COMMITTEE REPORT

The first-ever organized attempt at establishing a set of guidelines was in the U.K. The Finance
Reporting Council, the London Stock Exchange, and the British Accounting Profession sponsored to
set up a committee under the chairmanship of Sir Adrian Cadbury in May 1991. This was set up
essentially to address the concerns about eh low level of investor confidence in fiscal reporting and
in the ability of the auditors to carry out their jobs, consequent to the financial scandals and
collapses like those of Coloroll, Polly Peck, etc. But as could be seen from the preface of the report,
the scandals at companies like Bank of Credit and Commerce International (BCCI), Maxwell, etc., the
committee looked at how governance could be improved by including independent directors,
separating the roles of chairman and CEO, and establishing audit committees of the boards for all
companies listed on the London Stock Exchange. The Committee submitted its report in December,
1992.

The Cadbury Report must be lauded as it was one of the pioneering initiatives by any country and
has also been path breaking in its recommendations and also has been used ever since as a
reference point for many other corporate governance guidelines initiated by many other countries.
The Committee explains the rationale behind setting up of the committee by the sponsors as
addressing the concerns which were basically ‘the perceived low level of confidence, both in
financial reporting and in the ability of auditors to provide the safeguards which the users of
company reports sought and expected’ and unexpected failures of major companies and by
criticisms of the lack of effective board accountability for such matters as directors’ pay’. And in
order to address these concerns, the committee had recommended ‘that the board needs to state
order to address these concerns, the committee had recommended ‘that the board needs to state
that financial controls of the business are reviewed and in order.

Within very short span, the Cadbury Committee made its impact in the UK. Garratt wrote that ‘the
pressure for change which the original Cadbury report has unleashed now looks unstoppable and it
is not just the small shareholders and outraged members of the pulic who of directors’ service
contracts shortened from the present 3 years to a maximum of one, and a retirement age of 70
years for listed companies.’ In about 2 years, most of the recommendations were getting
implemented despite the fact that it was voluntary in nature and there was no effort or pressure to
enforce the guidelines. One of the important recommendations of the committee was to create a
procedure through the use of which the independent directors could seek independent professional
advice if they had lack of clarity or felt uncertain about the executives’ decisions.

Summary of recommendations:

Compliance with the code of best practice:

27. The boards of all listed companies registered in the UK should comply with the Code of Best
Practice set out on pages 58 to 60. As many other companies as possible should aim at
meeting its requirements.
28. Listed companies reporting in respect of years ending after 30 June 1993 should make a
statement about their compliance with the Code in the report and accounts and give
reasons for any areas of non-compliance.
29. Companies’ statements of compliance should be reviewed by the auditors before
publication. The review should cover only those parts of the compliance statement which
relate to provisions of the Code where compliance can be objectively verified. The Auditing
Practices Board should consider guidance for auditors accordingly.
30. All parties concerned with corporate governance should use their influence to encourage
compliance with the Code. Institutional shareholders in particular, with the backing of the
Institutional Shareholders’ Committee, should use their influence as owners to ensure that
the companies in which they have invested comply with the Code.

Keeping the Code up to date:

31. The Committee’s sponsors, convened by the Financial Reporting Council, should appoint a
new Committee by the end of June 1995 to examine how far compliance with the Code has
progressed, how far our other recommendations have been implemented, and whether the
Code needs updating our sponsors should also determine whether the sponsorship of the
new Committee should be broadened and whether wider matters of corporate governance
should be included in its brief. In the mean time the present committee will remain
responsible for reviewing the implementation of its proposals.

Directors’ service contracts

32. The Companies Act should be amended to come inline with the requirement of the Code
that directors’ service contracts should not exceed three years without shareholders’
approval.
Interim reporting:
33. Companies should expand their interim reports to include balance sheet information. The
London Stock Exchange should consider amending the continuing obligations accordingly.
There should not be a requirement for a full audit, but interim reports should be reviewed
by the auditors and the Auditing Practices Board should develop appropriate guidance. The
Accounting Standards Board in conjunction with the London Stock Exchange should clarify
the accounting rules which companies should follow in preparing interim reports. The
inclusion of cash flow information should be considered by the Committee’s successor body.
Enhancing the perceived objectivity of the audit
34. Fees paid to audit firms for non-audit work should be fully disclosed. The essential principle
is that disclosure should enable the relative significance of the company’s audit and non-
audit fees to the audit firm to be assessed, both in a UK context and, where appropriate, a
worldwide context. The 1991 Regulations under the Companies Act should be reviewed and
amended as necessary.
35. The accountancy profession should draw up guideliens on the rotation of audit partners.

Enhancing the effectiveness of the audit.

36. Directors should report on the effectiveness of their system of internal control, and the
auditors should report on their statement. The accountancy profession together with
representatives of preparers of accounts should draw up criteria for assessing effective
system of internal control and guidance for companies and auditors.
37. Directors should state in the report and accountants that the business is going concern, with
supporting assumptions or qualifications as necessary, and the auditors should report on this
statement. The accountancy profession together with representatives of preparers of
accounts should develop guidelines for companies and auditors.
38. The question of legislation to back the recommendations on additional reports on internal
control systems and going concern should be decided in the light of experience.
39. The government should consider introducing legilslation to extend to the auditors of all
companies the statutory protection already available to auditors in the regulated sector
(banks, building societies, insurance, and investment business) so that they can report
reasonable suspicion of fraud freely to the appropriate investigatory authorities.s
40. The accountancy profession together with the legal professions and representatives of
preparers of accounts should consider further the question of illegal acts other than fraud.
41. The accounting profession should continue its efforts to improve its standards and
procedures so as to strengthen the standing and independence of auditors.

Voting by Institutional Investors

42. Institutional Investors should disclose their policies on the use of their voting rights.

Endorsement of work by others:

43. The Committee gives its full support to the objectives of the Financial Reporting Council and
the Accounting Standards Board. It welcomes the action by the Financial Reporting Review
Panel over companies whose accounts fall below accepted reporting standards.
44. The Committee supports the initiative of the Auditing Practices Board on the development
of an expanded audit report. It also gives its full support to the lead which it is taking on the
development of auditing practice generally.
45. The Committee welcomes the statement by the Institutional Shareholders’ Committee on
the Responsibilities of Institutional Shareholders in the UK.
Issues for the Committee’s Successor Body:
46. Issues which the Committee has identified that its successor body may wish to review or
consider in greater depth include: the application of the Code to smaller listed companies;
directors’ training; the rules for disclosure of directors’ remuneration, and the role which
shareholders could pay; a recruitment for inclusion of a cash flow information in interim
reports; and the procedures for putting forward resolutions at general meetings. The
Committee and its successor will also keep watch on developments regarding the nature and
extent of auditors’ liabi
47.
48.
49.
50.
51.
52. lity.
Report of K.M. Birla Committee on Corporate Governance:

SEBI, having taken up the role of capital regulator, tried to create and regulate a realm for Corporate
Governance for the Indian Companies. While a number of governance guidelines were available
abroad, SEBI felt that such governance guidelines have to be in consideration with the corporate
environment that exists in the country and so, import of any guidelines from abroad did not make
sense. SEBI has already initiated a number of steps in the direction of improving governance by
strengthening the disclosure norms for IPOs, reporting utilization of funds in the annual reports,
quarterly results, insisting on appointment of a compliance officer, and for issues on a preferential
basis, and also about takeovers and acquisitions. SEBI wanted to further strengthen the Corporate
Governance system in the country.

Hence, it appointed a Committee on Corporate Governance on 7 May 1999 under the chairmanship
of Shri Kumar Mangalam Birla, a member of the SEBI board to prepare a set of corporate governance
guidelines for the Indian companies in the Indian context. The major recommendations of the
committee, which would form the essence of the Clause 49 guidelines of the listing agreement
between companies and the stock exchanges which forms the basis of corporate governance in India
today.

The committee divided the recommendations into two categories, namely, mandatory and non-
mandatory. The recommendations which are absolutely essential for corporate governance can be
defined with precision and which can be enforced through the amendment of the listing agreement
could be classified as mandatory. Others, which are either desirable or which may require change of
laws, may, for the time being, be classified as non-mandatory.

E. MANDATORY
17. Not less than 50 percent of the boad shall be non-executive directors. In the case of non-
executive chairman, at least one-third of the board should comprise independence directors
and in the case of an executive chairman, at least half of the board should be independent.
18. Financial Institutions will appoint nominees on the boards only on selective basis and where
it is essential. And such nominees, if present, will act in the same manner as any other
director.
19. A qualified and independent audit committee with a minimum of three members and
majority of indpenedent members with the chairman of the committee being an
independent member and at least one member having financial and accounting knowledge
be a set up by the board, which would go a long way in enhancing the creditability of the
financial disclosures and promoting transparency. The committee can get advice from the
executives if necessary and the company secretary will be the secretary of the committee.
20. The audit committee must meet at least thrice a year, one necessarily every six months and
for finalization of annual accounts and functions.
21. The quorum should be either two members or one-third of the audit committee, whichever
is higher.
22. The Committee can secure the help of outside expertise, if necessary.
23. The Committee must look into the reasons for substantial defaults in the payments to
depositors, debenture hoders, shareholders (non-payment of declared dividends), and
creditors.
24. The board should meet at least four times a year with maximum time gaps between
meetings being 4 months.
25. A director should not be a member in more than 10 committees or act as a Chairman of
more than five committees across all companies in which he is director. Every director
should inform the company about committee positions he occupies in other companies.
26. The board of directors should decide the remuneration of non-executive directors.
27. Management must disclose to the board all material, financial, and commercial transactions
where they have personal interest or where there are potential conflicts with the interests
of the company.
28. While appointing new directors or re-appointing of a director, the shareholders must be
provided with a brief resume of the director, details of his expertise in specific functional
areas, and details of other directorships of committee of the boards.
29. A Committee to redress grievances of the shareholders be set up under the chairmanship of
non-executive director.
30. The power of share transfer should be transferred to an officer, or a committee, or to the
registrar and transfer agents.
31. A separate section on corporate governance be included in the annual reports.
32. The company should obtain a certificate from the auditors of the company regarding the
compliance of all the mandatory recommendations.
F. NON-MANDATORY
5. The Chairman has a distinctive role from that of the chief executive and hence even if the
Chairman is non-executive, he should be entitled to maintain an office at the company’s
expense and be reimbursed all the expenses in connection with the performance of his
duties.
6. The board should set up a remuneration committee to set the company’s remuneration
packages for executive directors. The committee shall be constituted of at least three
directors, all non-executive with the chairman being independent director. The Chairman
should be present at the AGM.
7. All the details of remuneration package, such as components, service contracts, notice
periods, severance fees, etc, shall be provided.
8. The half-yearly declaration of financial performance including summary of the significant
events in last six months should be sent to each household of shareholders.

NARAYANA MURTHY COMMITTEE REPORT

While SEBI adopted most of the recommendations of the Kumar Mangalam Birla Committee, it was
felt that since the governance standards have been evolving, it was necessary to evaluate the
adequacy of existing governance practices and further improving them. Hence, a Committee was
constituted under the chairmanship of Sri N.R. Narayana Murthy, Chairman of Infosys Technologies
Ltd, to recommend ways of improving governance further.

The recommendations were:

G. MANDATORY
14. Audit Committee will review the following information mandatorily:
• Financial statements and draft audit report, including quarterly/half yearly financial
information
• Management Discussion and Analysis (MDA) of financial condition and results of the
operation
• Reports relating to compliance with laws and risk management.
• Record of related party transactions.
15. All audit committee members should be ‘financially literate’ and at least one of the member
should have accounting or related financial management expertise.
16. If the company has followed a treatment different from the prescribed accounting
standards, management should justify why such a treatment would be more representative
of the reality.
17. A statement of all transactions with related parties including their bases should be placed
before the audit committee for ratification/approval. And the definition of a ‘related party’
will be as per Accounting Standard 18 issued by ICAI.
18. The board shall be informed about the risk assessment and minimization procedures. A
quarterly report on risks, mitigation plans and any limitations to the risk taking capacity of
the company shall be placed before the board by the management.
19. Companies raising money through IPO should disclose the use/application of funds to the
audit committee on a quarterly basis. Any diversion of funds other than those stated in the
documents shall be consolidated into a statement and be certified by the auditors.
20. A code of conduct for all board members and senior management be laid down and posted
on the company’s website. All board members and senior management personnel shall
affirm compliance with the code on annual basis. A declaration by the CEO and COO to this
effect shall be provided in the annual report.
21. There shall be no nominee directrors. All director appointments shall be made by the
Shareholders.
22. Compensation to NEDs (Non-Executive Directors) may be fixed by the board and approved
by the shareholders. Companies should publish their compensation philosophy and the
compensation paid to the NEDs. The details of shares held by NEDs should be disclosed on
an annual basis. NEDs before joining a company should disclose their holding of the
company’s shares to the company.
23. Employees who observe any unethical practices should have direct access to audit
committee.
24. Companies have to make an annual declaration that they have not denied any personnel
access to the audit committee and that they have provided protection to ‘whistle-blowers’.
25. The provisions relating to the composition of the board of directors of the holding company
should be made applicable to the composition of the board of directors of the subsidiary
companies. At least one independent director on the BOD of the parent company shall be a
director on the BOD of subsidiary company. The audit committee of the parent comp-any
shall also review the financial statements of the subsidiary company. The board of the
parent company has to declare that it has reviewed the affairs of the subsidiary company
also.
26. SEBI should make compulsory the disclosures in the report issued by the security analysts if
the company about which they write is a client of the analyst’s employer or associate of the
analyst’s employer and also the nature of services offered to the company, if any, and also
whether the analyst, or the analyst’s employer, or an associate of the analyst’s employer
holds or held, or intends to hold and security in the company.
H. NON-MANDATORY
4. Companies should be encouraged to move towards a regime of unqualified financial
statements.
5. Companies should train the board members in the business model of the company as well as
the risk profile of the business parameters of the company, their responsibilities as directors
and the best ways to discharge them.
6. Performance evaluation of NEDs should be conducted by a peer group and shall form the
basis for reappointments for further term.

Problems of Governance in Companies:

While routine governance regulations become applicable for public sector companies formed under
the Companies Act, 1956 and come under the purview of SEBI regulations the moment they mobilize
funds from the public, the typical organizational structure of PSUs makes it difficult for the
implementation of corporate governance practices as applicable to other publicly-listed private
enterprises. The typical difficulties faced are:

1) INVOLVEMENT OF NOMINEE DIRECTORS

The board of directors will comprise essentially of bureaucrats drawn from various ministries which
are interested in the PSUs (Public Sector Undertaking). In addition, there may be nominee directors
from banks or financial institutions who have loan or equity exposures to the unit. The effect will be
to have a board much bey0nd the required size, rendering decision-making a difficult process.

2) LACK OF PROCIFICIENCY:

The chief executive of managing director (or chairman and managing director) and other functional
directors are likely to be bureaucrats and not necessarily professionals with the required expertise.
This can affect the efficient running of the enterprise.

Difficult to attract expert professionals as independent directors. The laws and regulations may
necessitate a percentage of independent component on the board; but many professionals may not
be enthused as there are serious limitations on the impact they can make.

3) VARIATIONS IN PAY SCALES

The lower pay levels applicable to public sector executives also act as a deterrent to professional
executives taking up public sector executive positions. For example, the CEO of SBI, the country’s
largest commercial bank, is paid only Rs. 29 Lakhs , while his private sector counterparts in HDFC
Bank earns Rs. 10 Crores, and ICICI Bank CEO earns 2.66 Crore. The highest compensation received
by a non-executive independent director at SBI is Rs. 1,65,000 for board meetings, whereas his
counterparts in ICICI and HDFC bank are paid upto Rs. 8,40,000 and Rs. 6,20,000, respectively for
attending board / committee meetings. While ICICI pays Rs. 20,000 per board as well as committee
meetings and HDFC Bank pays Rs. 20,000 per board and committee meeting, except for investor
grievance committee for which only Rs. 10,000 is paid, SBI can pay only upto Rs. 5,000 for
attendance at a central board meetings and Rs. 2,5000 for attending a board level committee.
4) POLITICAL INFLUENCE:

Due to their very nature, there are difficulties in implementing better governance practices. Many
public sector corporations are managed and governed according to the whilms and fancies of
politicians and bureaucrats. Many of them view PSUs as a means to their ends. A lot of them have
turned sick due to overdoses of political interference, even when their areas of operations offered
enormous opportunities for advancement and growth. And when the economy was opened up,
many of them lacked the competitiveness to fight it out with their counterparts.

5) CONFLICTS OF INTEREST

Avoiding conflicts of interest is vital. A conflict of interest within the framework

of corporate governance occurs when an officer or other controlling member of a
corporation has other financial interests that directly conflict with the objectives
of the corporation. For example, a board member of a solar company who owns a
significant amount of stock in an oil company has a conflict of interest because,
while the board he or she serves on represents the development of clean energy,
they have a personal financial stake in the success of the oil industry. When
conflicts of interest are present, they deteriorate the trust of shareholders and the
public while making the corporation vulnerable to litigation.

6) OVERSIGHT ISSUES

Effective corporate governance requires the board of directors to have substantial

oversight of the company’s procedures and practices. Oversight is a broad term
that encompasses the executive staff reporting to the board and the board’s
awareness of the daily operations of the company and the way in which its
objectives are being achieved. The board protects the interests of the
shareholders, acting as a check and balance against the executive staff. Without
this oversight, corporate staff might violate state or federal law, facing substantial
fines from regulatory agencies, and suffering reputational damage with the
public.

7) ACCOUNTABILITY ISSUES

Accountability is necessary for effective corporate governance. From the top-level

executives to lower-tier employees, each level and division of the corporation
should report and be accountable to another as a system of checks and balances.
Above all else, the actions of each level of the corporation is accountable to the
shareholders and the public. Without accountability, one division of the
corporation might endanger the success of the entire company or cause
stockholders to lose the desire to continue their investment.

8) TRANSPARENCY

To be transparent, a corporation must accurately report their profits and losses

and make those figures available to those who invest in their company.
Overinflating profits or minimizing losses can seriously damage the company’s
relationship with stockholders in that they are enticed to invest under false
pretenses. A lack of transparency can also expose the company to fines from
regulatory agencies.

9) ETHICS VIOLATIONS

Members of the executive board have an ethical duty to make decisions based on
the best interests of the stockholders. Further, a corporation has an ethical duty
to protect the social welfare of others, including the greater community in which
they operate. Minimizing pollution and eschewing manufacturing in countries
that don’t adhere to similar labor standards as the U.S. are both examples of a
way in which corporate governance, ethics, and social welfare intertwine.

The Role of Capital Market Governance:

Capital Market is an organized market mechanism for effective and efficient transfer of money
capital or financial resources from the investing class to the entrepreneur class in the private and
public sectors of the economy.

Simply, it is the market for all financial instruments, short-term and long-term as also commercial,
industrial and government papers. It provides reasonable measure of safety and fair dealings in the
buying & selling of securities.

Governance of companies is taken care by the boards of directors, who represent and are
responsible to the shareholders through their fiduciary duties. In companies that are listed, the
shares get exchanged or transacted between investors through a process facilitated by institutions
that constitute the capital market.

In addition to institutional investors, capital markets include intermediaries and even experts, who
continually acquire and disseminate into on a timely basis, enabling fair and efficient execution of
financial transactions.
Capital market institutions, such as stock exchange brokers, investment bankers, financial
institutions, etc. play a vital role in the Corporate Governance of listed companies. Along with these
institutions, Foreign Institutional Investors (FIIs), audit firms, regulatory agencies such as RBI, SEBI,
IRDA, etc., State Government and Central Government play an important role in bringing a platform
for transactions in capital and the way capital market function and establish norms for Corporate
Governance.

2) Institutional Investors:

Institutional investors have become major shareholders in the corporations. Every shareholder has
access to the same information and hence can act upon it. Thus, information advantages are rather
limited. So, institutions with their power and clout, aided with the kind of funds available with them,
usually, engage exclusive personnel to study, monitor, and make judgements on companies and
their future. This, in fact, enables them to avoid making wrong investments and make only good
investments. These institutions are supposed to follow the concept of a ‘prudent man rule’ as a test
of satisfactory fiduciary concept. A prudent man will manage the money of others just as he would
manage his own, that is, carefully and wisely.

The principal idea is that Managers of other people’s money must always put the interests of their
clients first – ahead of their own interest. But this does not always happen. Investment Managers
act in their own interests, when they increase the assets under management in order to earn better
fees, or ignore the interests of the investors who may be looking for the best risk-adjusted return
from their investments.

Institutional investors have been applying pressure on corporate to improve board structure and
achieve board independence. Many observers see such activism as ultimately improving investor
returns.

2) Investment Bankers (Ex: Axis Capital Ltd., HSBC, etc.)

Their ploy with companies usually starts with Initial Public Offers (IPOs) of companies. In order to
‘gain mandate for IPOs, the banks had to promise the new companies that they would
wholeheartedly sponsor the IPO, by making an extra effort to distribute the shares to investors all
over the world, by following the company in research after the issue, and by making a secondary
market in the stock for institutional investors’.

Investment Bankers and Institutional Investors offering a variety of financial and other services often
acted in connivance with the companies, not acting in the best interests of their clients and/or
investors. Most of the investment banks who employed analysts to ascertain the future prospects of
a potential client, advised on possible mergers and acquisitions, and also in identifying potential IPO
candidates. Such analysts, however, to get the jump on other analysts and on the company’s own
announcements, had to be plugged in to the company’s CEO and CFO (Chief Financial Officer)
closely, so as to receive information that not everyone was getting.
3) Asset Management Companies (Mutual Funds)

Trillions of dollars have been under the management of different types of asset management
companies all over the world. In the beginning, many of the local industrial houses joined hands
with foreign asset management companies to start mutual funds. Stringent regulations and capital
adequacy requirements restricted the entry and growth. But as time passed by, the asset
management industry (restricted to mutual funds as India was yet to open the doors to pension
funds) gained growth and became attractive.

While mutual fund business has grown considerably over the years, it has also added many other
banking and non-banking services such as commercial banking, credit cards, broking, etc. Also, pure
commercial banks, sensing that mutual funds could be a threat to their deposit mobilization efforts,
have also started their own mutual fund schemes. The fund managers try to maximize the assets
under management since their rewards essentially are decided by the size of assets under their
management while investors want the best risk-adjusted returns on their investments. These two
aims need not go together.

These asset management companies are powerful players in exercising (or failing to exercise) control
rights. As an industry, they can make the difference between governance success and failures. But
many of the agency conflicts among professional fund managers have become embedded in the
system itself, and appear to have weakened the overall ability of the market to defend against value-
destroying behavior on the part of the corporations. Some of the funds, however, are governance
conscious.

4) Insurance Companies

Insurance companies also invest heavily in equity assets. Some schemes such as ULIPs (Unit Linked
Insurance Plans) are more like mutual funds rather than insurance products. Most of the insurance
companies have also floated mutual funds. Many of these are issues that were earlier applicable to
the two other types, namely investment bankers and asset management companies, but most
insurance companies have also entered into many other areas of financial services.

5) Venture Capitalists/Private Equipty

Venture Capitalists (VCs) usually enter a company at the time of start up. Since they invest in or
acquire a reasonable holding in equity, they are usually given a seat on the board. While the
presence of a dominant shareholder is desirable for better governance, they are mostly concerned
about the financial success of the company, and their commitment to any company is only as long as
they get the right price to exit. Hence one cannot expect any long-term commitment for the better
governance of the company. The company also may have to compromise when it comes to the
choice of director. They have no choice but to be content with the choice offered by the venture
capital. When more than one VC invests in a company, the choice may be further limited.
6) Banks

Banks play a very important role in the development of entrepreneurship and the economy. They
help mobilize savings of the people of a country and lend it to entrepreneurs to meet their capital
investment needs, as well as working capital needs.

Banks play a very important role in the early stages of development of an economy since the capital
markets are likely to be less active and entrepreneurs have to resort to borrowing resources to meet
their capital needs. Less developed countries have less developed capital markets and hence, have
to resort to borrowings from banks in order to meet their fund requirements. Even when the capital
markets are developed, banks can play a major role as borrowing enables a company to avail of tax
benefits on interest payable, reducing the cost of capital as cost of capital on debt compared to that
of equity is low. Thus, while there is no doubt about the role played by banks in the development,
growth, and sustainability of the corporate sector.

In India, through the economic policy initiatives taken by the then Government under P.V.
NarasimhaRao, investment requirements of companies were mostly met by the development
financial institutions and banks. Given thrust of active involvement in the control firms, banks and
financial institutions included nomination of directors by them on the boards of companies to which
they lent funds.

7) Stock Exchanges:

Stock Exchanges also play a vital role in the capital market of any country. The joint stock company
concept needs an exchange mechanism enabling investors to transact their holdings. In addition to
this, stock exchanges try to bring in a discipline in the firms by insisting on many disclosure
requirements keeping the investors in mind.

Many countries have incorporated the governance mechanism for companies by incorporating
necessary guidelines through listing agreements between the company and stock exchange/s. In
India also, SEBI regulators corporate governance through a clause (Clause 49) forming part of the
listing agreements.

Regulator’s Role in Good Corporate Governance:

Corporate Governance, as of now, encompasses only companies or corporate entities have chosen
to raise money from the public. Even though the stakeholder theory or approach has been
considered as good for the running of an enterprise, the underlying premise of corporate
governance continues to be the shareholder theory or approach, as the assumption that continues
to pervade even today is that corporate governance is required because (or only because) there is a
possibility for agency conflict to exist between owners and managers.

The companies also depend on a number of stakeholders for their success – other service providers,
customers, government, and of course, the shareholders. They are accountable for all these
stakeholders. While it is expected that the corporate entity takes care of the interests of the
interests of the different stakeholders voluntarily, there may arise situations which may affect the
stakeholders, since the corporate entity may act in ways that will try to achieve one of its objectives
– making more money for the business and increasing the wealth of the providers of capital (the
shareholders). This is where some kind of external regulation makes sense.

In India, till eighties, productivity was not encouraged and the freedom of entrepreneurs restricted.
Regulators were, to a very large extent, anti-entrepreneurship and anti-development. At the other
extreme, the regulatory regime was gradually relaxed to such an extent that it resulted in a situation
of chaos, as was the case in the U.S. Relaxations of regulations led to exploitation by market players
leading to conflicts of interest situations culminating in crises such as Enron, WorldCom, etc. U.S.
Government gives a response - Act to discipline the corporate.

To make corporate governance more effective the SEBI since its setup in 1992 has taken up number
of initiatives, appointed various committees and has brought amendments to the Clause 35B and the
Clause 49 of listing agreement. Here the SEBI’s role in corporate governance is illustrated through
norms and provisions as stated these two clauses; the Clause 35B and the Clause 49 of listing
agreement. SEBI norms and guidelines under Clause 35B and 49 of the listing agreement for effective
Corporate Governance: Since its establishment, SEBI has taken initiatives to align Indian corporate
governance practices with the global standards adopted in advanced economies. The recent
amendments to Clause 35B and 49 of the listing agreement make Governance more effective and
rigorous in protecting the interest of all stakeholders. The amended Clause 49 of listing agreement is
in alignment with the new Companies Act, 2013. This clause is applicable to listed companies but as
per SEBI clarification, in future this clause will be applicable to non-listing companies also.

Can Regulators make a few people sit around a table in the boardroom, behind closed doors, and
behave in the right manner? Should they make the regulations even more stringent or should they
encourage and take steps to develop more activism among institutions such as institutional
investors, auditors, banks, etc., and within boards? Some of the regulations themselves have to be
seriously looked into.

➢ Most of the capital market regulators require corporate to announce quarterly performance.
This essentially puts pressure on corporate to show better performance every quarter.
Prices of company stocks are very much liked to such announcements.
➢ When executive compensation is linked to the company’s stock performance, there could be
incentives for executives to do some dressing of the financial performance or cut a few
corners here and there.
➢ Notwithstanding the limitations of regulation on corporate governance and firm behavior,
regulations are necessary even in the most market oriented economies.
➢ The involvement of the political process on the economic policies may result in, and at times
even significant, deviations from total free market conditions.
➢ Laws and regulations influence both structures and processes, which in turn can influence
behavior, but only to a degree. Regulations fail to deal effectively with the aberrant
behavior of some CEOs and other executives.
➢ Regulators constantly face the possibility that inadequate regulation will result in costly
failures, as against the possibility that over-regulation will result in opportunity costs in the
form of economic efficiencies which are not achieved. There are no definitive answers with
respect to optimum regulatory structures with respect to corporate governance.
➢ It has also been the experience of many countries that when laws and regulations are too
stringent, the prosperity to break them, or at least find loo holes in them, becomes higher.
Hence, it is better to adopt a ‘normative’ approach of development rather than a ‘coercive’
approach.
➢ While SEBI constituted a number of committees to study the corporate governance practices
and make their recommendations (K.M. Birla, Narayana Murthy Committees, etc.,) the
Deparmrtment of Company Affairs has also set up a number of committees (Naresh Candhra
Committee, Irani Committee, etc.) not to step on each other’s brief.

Pillars of Effective Corporate Governance The important elements of good Corporate Governance
are: Transparency • Accountability • Disclosure • Equity • Fairness • Rule of Law • Participatory
The SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India Act, 1992 was enacted by the Indian Parliament ‘to
provide for the establishment of a Board to protect the interests of the investors in securities and to
promote the development of, and to regulate the securities market and for matters connected
therewith or incidental thereto’.

Objectives of SEBI:-

Section 11(1) of the SEBI Act, 1992 explains the powers and functions of SEBI. As per the Act, it shall
be the duty of the board to protect interests of the investors in securities and to promote the
development of, and regulate the secutieis market by such measures as it thinks fit.

The statutory objectives are:

5. Protection of investors’ interests in securities.

6. Promotion of the development of the securities market.
7. Regulation of the securities market.
8. Matters connected therewith and incidental thereto.

Functions of SEBI:
To realize the above core objectives and to carry out its tasks, the Act spells out the functions of SEBI
in a greater details, as under:
16. Regulating the business in stock exchanges and any other securities markets.
17. Registering and regulating the working of stock brokers, sub-brokers, share transfer agents,
bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other intermediaries who
may be associated with securities markets in any manner.
18. Registering and regulating the working of the depositories, participants, custodians of
securities, foreign institutional investors, credit rating agencies, and such other
intermediaries as the board may, by notification, specify in this behalf.
19. Registering and regulating the working of venture capital funds and collective investment
funds and collective investment schemes including mutual funds.
20. Promoting and regulating self-regulatory organizations.
21. Pr0hibiting and regulating self-regulatory organizations.
22. Prohibiting fraudulent and unfair trade practices relating to securities markets.
23. Prohibiting insider trading in securities.
24. Regulating substantial acquisition of shares and takeover of companies.
25. Calling for information from, undertaking inspection, conducting inquiries and audits of the
stock exchanges, mutual funds and other persons associated with the securities markets and
intermediaries and self-regulatory organizations in the securities market.
26. Performing such functions and exercising such powers under the provisions of the Securities
Contracts (Regulation) Act 1956 as may be delegated to it by the central government.
27. Levying fees or other charges.
28. Conducting research.
29. Calling from or furnishing to any such agencies, as may be specified by the board, such
information as may be considered necessary by it for the efficient discharge of its functions.
30. Performing such other functions as may be prescribed.

Powers of the Board:

To carry out its responsibilities under the Act, the board is entrusted with the same powers as are
vested in a civil court in respect of the following matters, namely:
3. The discovery and production of books of account and other documents at such place and
such time as may be specified by the board.
4. Inspection of any books, registers and other documents of stockbrokers, sub-brokers, and
share transfer agents.

Powers to issue directions:

The SEBI is empowered to issue directions to the following intermediaries:
➢ stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who may be associated with securities
market.
➢ Depository, depository participant, custodian of securities, foreign institutional investor,
credit rating agencies, or any other intermediary associated with the securities market.
➢ Sponsors of venture capital funds, or collective investment schemes including mutual funds.
➢ And to any company with regard to matters to be disclosed by the companies as specified in
Section 11A.

Registration of Intermediaries:

➢ No stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who may be associated with securities
market shall buy, sell or deal in securities except under and in accordance with the
conditions of a certificate of regulations made under this Act.
➢ No depository (participant) custodian of securities, foreign institutional investor, credit
rating agencies, or any other intermediary associated with the securities market as the
board may, by notification in this behalf specify, shall buy or sell or deal in securities except
under and in accordance with the conditions of a certificate of registration obtained from
the Board in accordance with the regulations made under this Act.
➢ No person shall sponsor or cause to be sponsored or carry on or cause to be carried on may
venture capital funds or collective investment schemes including mutual funds unless he
obtains a certificate of registration from the board in accordance with all regulations.

Establishment of Securities Appellate Tribunals:

The SEBI Act also contained a provision for the establishment of an appellate authority to arbiter and
exercise power in matters of disputes over SEBI’s decisions as a regulator.

Civil Court not to have jurisdiction:

It is stipulated in the SEBI Act that under Section 15(Y) that no civil court shall have jurisdiction to
entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed
under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or
under this Act to determine and no injunction taken or to be taken in pursuance of any power
conferred by or under this Act.

SEBI (Amendment) Bill, 2002:

The major changes made under this Act were:
5. Search and seizure powers: Earlier, a SEBI officer could only ask market players for specific
documents, which allowed the latter to conceal incriminating documents. In the new Act,
SEBI officers, armed with a search warrant from judicial magistrate, can search the entity’s
premises and even size documents.
6. Freeze bank accounts: With an authorization from the judicial magistrate, freeze bank
accounts of any person or entity involved in any market violation.
7. Greater monetary penalties: Earlier, the maximum fine that SEBI could impose on a violator
was only upto INR 5 lakhs. This limit has now been increased manifold in market
manipulation or insider trading violations, the find could go upto INR 25 crore or three times
the profits made bny the entity concerned.
8. More board strength: The strength of the SEBI’s board has been increased from six to nine of
which three (excluding the Chairman) will have to be full-time directors. The Securities
Appellate Tribunal. The SEBI body that decides on appeals made by market intermediaries
and companies against orders passed by the SEBI Chairman, has also been strengthened
with an increase in number of members from one to three.

SEBI’s role in promoting C.G.:

The SEBI has been focusing on the following areas:
➢ Ensuring timely disclosure of relevant information.
➢ Providing an efficient and effective market system.
➢ Demonstrating reliable and effective enforcement.
➢ Enabling the highest standards of governance.

SEBI’S Role in the new Era:

The SEBI has made progress in number of areas:
➢ Abolition of capital issues control and retaining the sole authority for new capital issues.
➢ Regulation and reform of the capital market by arming itself with necessary authority and
powers.
➢ Regulating stock exchanges under Securities Contracts Regulation Act.
➢ Bringing all primary and secondary market intermediaries under the regulatory framework.
➢ Enforcing the companies to disclose all material facts and specific risk factors associated with
projects while going in for public issues.
Government’s Role in Corporate Governance

The Government has a role in the establishment and overseeing the running of such corporate
bodies. In India, the law under which body corporate are formed is the company law. The Company
Law in Idia made its first appearance in 1857 as Joint Stock Companies Act. Thereafter the
Companies Act 1866 was passed which was changed in 1882. Then it was replaced by the Indian
Companies Act 1913, which was later replaced by the Companies Act, 1956. It is seen that, even
today, though a number of amendments have been incorporated from time to time.

A company can empower any person to execute deeds under the common seal and it becomes
binding on the company. While there are a large number of provisions in the company law relating
to governance, we will limit our discussion to those with direct impact on the governance of a
company.

Memorandum of Association (MOA): It is the constitution of the company and hence its foundation.
A Memorandum of Association (MOA) is a legal document prepared in the formation and
registration process of a limited liability company to define its relationship with shareholders. The
MOA is accessible to the public and describes the company’s name, physical address of registered
office, names of shareholders and the distribution of shares. It is the constitution of the company
and hence its foundation. Thus, this is considered as a supreme document and comprises of
following important clauses:

7. Name Clause: The name of the company that must end with the term “limited”. Also, it must be
ensured that the name selected for the company should not resemble with the name of any existing
company.
8. Registered Office Clause: This clause requires to mention the registered office address of the
company.
9. Objective Clause: The objective clause requires to mention clearly the objective behind the
incorporation of the company, i.e. the purpose for which the company is being established.
10. Liability Clause: This clause requires to mention the extent to which the shareholders are
liable to pay off the debt obligations in the event of the dissolution of the company.
11. Capital Clause: Company’s authorized capital along with the nominal value of all kinds of
shares need to be disclosed here. Also, the company is required to state the list of its assets over
here.
12. Association Clause: As per this clause, the willingness of shareholders is required with
respect to their association with the company. For a public limited company minimum, seven
members are required to sign the memorandum, whereas in a case of a private limited company
minimum two members are required to do the same

Articles of Association (AOA) This prescribes rules regarding internal management of the company.
It describes the authorities and responsibilities of members (shareholders), directors, managing
director, manager, etc. It also contains provisions regarding raising funds through issue of shares,
borrowing, etc.

Body of members: They are real owners of the company but have no authority to look after the day-
to-day affairs of the company, or enter into contracts on behalf of the company. They must meet
atleast once a year at the AGM. They have powers to (1) adopt directors’ report (2) adopt auditors’
report (3) elect directors (4) appoint auditors and fix their remuneration (5) declare dividend. They
can also exercise powers to approve the proposed actions of the company at the AGM or specially
called meeting of members, namely the EGM.

Board of Directors: Directors elected by members from the board of directors, who has the
authority to supervise and regulate the activities of the company. It has the overall control over the
affairs of the company. The board must meet at least once every quarter and as often as necessary
for the purpose of business.

Managing Director/Manger/Director: Since the board cannot look after the day-to-day affairs of the
company, they appoint a manager, managing director, or a whole-time director, who work under the
overall supervision and control of the board.

Different roles of Government in the Economy:

There are four important roles played by the government in an economy, namely:

➢ The regulatory role

➢ The promotional role
➢ The entrepreneurial role
➢ The planning role

Regulatory Role:

➢ Government may determine the conditions under which persons or corporations may enter
certain lines of business as in the granting of charter, a franchise, a licence, or permitting any
‘person’ to use public facilities.
➢ Government may regulate or assist the conduct of economic ventures of various types once
they are under way.
➢ Govt. may control the relationship between various segments of the economy, the purpose
being to settle conflicts of interests or of legal rights and to prevent concentration of
economic power in the hands of few monopolicies.
➢ Government may put in place legally constituted regulatory bodies to protect investors,
consumers and the general public by ensuring best corporate practices.

Promotional role:

The promotional role played by government is very important in developed as well as developing
countries. Thus, considering the whole of its activities, a government does more to assist and to
help develop industrial, labour, agricultural and consumer interests than it does to regulate them.

The government have to assume direct responsibility to build up and strengthen the necessary
development of infrastructure such as power, transport, finance, marketing, institutions – for
training and guidance and other promotional activities.

Entrepreneurial role:

➢ In a democracy, the national emergency of war inevitably causes an expansion of state

activities, including public ownership because modern requirements of total war cause
people to forsake their convictions concerning private responsibilities and to concentrate on
massed power in the state apparatus.
➢ Major economic dislocations, such as the great depression of the 1930s, also tend to
stimulate state activities, again leaving a residue of public ownership that takes time to
efforts to dissipate, if it is ever finally accomplished.
➢ When a private undertakings become unprofitable but the need for their services continues,
government may be prevailed upon to acquire and manage such non-profitable business
concerns even at a loss.
➢ Governments are also required to extend the owner-manager relationship when there is a
pronounced wastage of national resources, or when the threat to them is great, thus
diminishing the nation’s ability to defend itself or to preserve the bases of a sound economy.

Forms of Government regulation:

The more important forms of regulation of private enterprises by the government especially in
developing countries like India are as follows:

➢ General direction and regulation of investment activity in private enterprises. This is

achieved through economic planning and industrial licensing policy.
➢ Regulation of investment, location, size and expansion of individual enterprises and specific
industries through a well-defined policy of industrialization.
➢ Regulation of prices of commodities and industrial products through legislative authority and
systematic investigation into cost structures and mark-ups.
➢ Regulation of monopolies and unfair trade practices or restrictive practices through
legislation.
➢ Regulation of wages and bonus for employees in a private sector to minimize exploitation,
ensure reasonable standards of living and maintain peace and harmony in industry.
➢ Regulation of corporate management.
➢ Regulation of specific norms of business activity such as speculation in shares and
commodities or imports/exports etc.

The Governments have to be proactive in the following areas:

➢ Government should ensure that stakeholders’ interests are protected by continuous
monitoring of companies, to see that they do not cheat their stakeholders.
➢ Government should make laws to govern companies, to undertake all the activities within
the rules of the game. It should also make sure that all companies adhere to rules, as for
example – MRTP (Monopolies and Restrictive Trade Practices) Act.
➢ If companies do not adhere to rules and regulations the government should penalize such
companies and make sure that they do not repeat it again.
➢ Government has appointed regulators to regulate several sectors, to monitor the activities
of companies, to allow them to a have fair competition in the market and also to save them
from disputes when problems arise – RBI, TRAI, SEBI, IRDA (Insurance Regulatory
Development Authority)

Enactment of Laws:
Different laws have been enacted by the government to fulfill the needs of different people in
society like employees, employers, customers and the society at large. To protect employees,
government has brought in legislations such as Factory Acts, Minimum Wages Act, Labour Laws and
Trade Union Act to make sure that they are well protected and their problems are solved.

As a Role Model:
Government should portray itself corrupt-free so that companies can follow its worthy example.
Removal of the licence system for several industries, greater transparency in administration,
granting of autonomy to public sector enterprises, reducing the role of the Inspector Raj in the
economy, allowing greater degree of competition in industries which were hitherto protected, will
all go a long way to reduce corruption.

Areas that need special attention:

The government should ensure that the quality of audit, which is required for effective corporate
governance, should be considerably improved. Government should ensure with assistance from
industry, the accountability of the CEOs and CFOs. It should try to maintain the quality and
effectiveness of the legal regulatory framework as well as the administrative framework.

Corporate Governance Defined

Philip Cochran and Steven Wartick defined Corporate Governance as “an umbrella term that
includes specific issues arising from interactions among senior management, shareholders, boards of
directors, and other corporate stakeholders”.
Bob Garatt has defined as “Corporate Governance deals with the appropriate board structures,
processes, and values to cope with the rapidly changing demands of both shareholders and
stakeholders in around their enterprises.

Principles of Corporate Governance:

The fundamental or key principles of corporate governance are described below:
(i) Transparency:
Transparency means the quality of something which enables one to understand
the truth easily. In the context of corporate governance, it implies an accurate,
adequate and timely disclosure of relevant information about the operating
results etc. of the corporate enterprise to the stakeholders.
In fact, transparency is the foundation of corporate governance; which helps to
develop a high level of public confidence in the corporate sector. For ensuring
transparency in corporate administration, a company should publish relevant
information about corporate affairs in leading newspapers, e.g., on a quarterly or
half yearly or annual basis.
(ii) Accountability:
Accountability is a liability to explain the results of one’s decisions taken in the
interest of others. In the context of corporate governance, accountability implies
the responsibility of the Chairman, the Board of Directors and the chief executive
for the use of company’s resources (over which they have authority) in the best
interest of company and its stakeholders.
(iii) Independence:
Good corporate governance requires independence on the part of the top
management of the corporation i.e. the Board of Directors must be strong non-
partisan body; so that it can take all corporate decisions based on business
prudence. Without the top management of the company being independent; good
corporate governance is only a mere dream.
(iv) Fairness
The board of directors should treat all stakeholders fairly and equitably.
(v) Honesty
The directors must protect the shareholders interests in the organisation, and
should give confidence to the shareholders that their interests are being
protected.
(vi). Integrity
Moral and ethical issues should be considered when making decisions relevant to
the organisation.
(vii) Objectivity

The objectives of the corporation must be clearly recognized in a long-term corporate strategy
including an annual business plan along with achievable and measurable performance targets and
milestones.
Agency Theory:
Agency theory is a principle that is used to explain and resolve issues in the relationship between
business Principals and their Agents.

According to the Agency theory, developed by Michael Jensen and William Meckling, in the typical
corporate form, the owners are content with the ownership and control over the assets and the
resources of the company are in the hands of Managers who by convention need not hold any stake
in the company.

Hires and delegates

Self Self
Principal Agent
interest performs
interest

Principals: These are the shareholders, owner of the company delegates work/responsibility to the
Managers.

Agents: These are the Managers appointed by the shareholders, to run the company on behalf of the
shareholders.

Agency Problem: The objectives of Manager (Agent) are different from the shareholders (Principal).
This conflict in objective is agency problem.

A standard Principal-Agent theory is governed by contracts. Such contracts spell out the terms of
performance of the contracting parties. It includes terms of timing, scope and redress of grievances
arising of non-performance by the parties. But Agency theory is applied when such a contract or any
term is missing.

Demsetz and Lehn (1985) say that contracts between the shareholders and the Managers are very
costly to write and enforce because (1) the information asymmetry between Managers and Owners
(2) Monitoring is difficult as shareholders are not in a position to observe everything a Manager
does, (3) redress of problems even when detected is difficult because of widely disbursed nature of
shareholders and coordinating their action is costly.

Phan (2000) says that “Even when it becomes apparent that the management is not doing its job, all
a shareholders can do is, to vote with his feet by selling the stock. Further, selling stock is not
effective way of changing management unless there is a run on the stock of the company, which is
unlikely in most situations”.

The Agents do not manage the firm and risks associate with it, had become Agent conflict.
According to many experts, these conflicts were anticipated and authorities had been implementing.
Even media has been very active in bringing out such conflicts.
According to Phan (2000), there are two categories of solutions to overcome the agency
related problems. “one the Agency related problems, one is the board of directors represents the
shareholders when the ownership of capital is separated from the control of capital, as in the case of
large, public corporations with dispersed ownership of shares. It is internal mechanism of control. It
relies on the enterprise and goodwill of corporate watchdogs to ensure that Managers abide by the
principles of maximizing efficiency.

The other category of solution is the external mechanism of control. The behavior of the Managers
is indirectly constrained by the working of a series of competitive markets that systematically punish
the company for deviating from efficiency maximization.

Companies owned and managed by same

people

Expansion required investors

(Shareholders – Limited Liability)

Delegated running of company to Managers

(Agents)

Separation of Goods

Criticisms of Agency Theory: Agency Problems

➢ It has been erected on a single, questionable abstraction that governance involves a contract
between two parties.
➢ It is based on dubious conjectural morality that people maximize their personal utility.
➢ The theoretical research has remained the mainstay of published papers in corporate
governance.

Stewardship theory

This is also called as shareholder theory. According to this, the boards have a stewardship role for
the resources entrusted to them by the shareholders. The power over the corporation is exercised
by directors who are nominated and appointed by shareholders and hence accountable to them for
the stewardship over the company’s resources.

Empower & Trust

Profit
Intrinsic,
Principal Agent
& returns
extrinsic
Protect & maximize motives
wealth

The theory is based on the belief that the directors can be trusted. This is also the theoretical
foundation for most of the legislations and regulations in almost all the countries and for good
governance. The roles, duties, and tasks of directors are essentially based on this.

According to Peter Block(1996), “Stewardship begins with the willingness to be accountable, for
some larger body than ourselves – an organization, a community. Stewardship springs from a set of
beliefs about reforming an organization that affirms our choice of service over the pursuit of self-
interest. Whe we choose service over self-interest, we say we are willing to be deeply accountable
choosing to control the world around us. It requires a level of trust that we are not used to holding”.

As Block (196) says, “Stewardship is to hold something in trust for another”. Block defines
stewardship as “the choice to preside over the orderly distribution of power”. This means giving
people at the bottom and the boundaries of the organization choice over how to serve a customer, a
citizen, a community. It is the willingness to be accountable for the well-being of the larger
organization by operating in service rather than in control of those around us.

Thus, the heart of the stewardship theory is the commitment to service. The directors on the boards
acting on the principle of stewardship will hold the company in trust on behalf of the different
stakeholders.

While conventional agency theory attributed that agents have their own self-interest in the way they
managed, led, and governed, Stewardship theory begins with the willingness to be accountable for
some larger body than ourselves.

Stakeholder Theory

Jensen (2005) evolved this stakeholder theory which says that “Corporations should attempt to
maximize not value of their shares (or financial claims), but distributed among all corporate
‘stakeholders’ include employees, customers, suppliers, local communities and tax collectors”.

While corporations have been concentrating on value maximization for more than 200 years,
starting with Adam Smith who thought that social wealth and welfare are likely to be greatest when
corporations seek to maximize the stream of profits that can be divided among their shareholders,
over a period of time the goal has got transformed to one of ‘maximization of the long-run market
value of the firm, where the value of the firm is mainly but not necessarily entirely defined by the
company’s stock price.

Stakeholder theory has been getting wide acceptance among organizations, politicians and even
governance conscious organizations and governments because the theory has a perspective of long-
term rather than short-term in the ‘value-maximization proposition’ of the earlier years.

The widespread use of the tool ‘Balance Score Card(BSC) which is a multidimensional performance
measurement process, where not only the financial performance, which is historical in nature, but
also the internal business processes, the customers, and the learning and growth aspects which will
consider the sustainability of the business are also taken into consideration.

According to Jensen, “Stakeholder theory is completely consistent with value-maximization or value-

seeking behavior, which implies that managers must pay attention to all constituencies that can
affect the value of the firm’. But with multiple constituencies competing with conflicting interests,
the decision-making process for the boards and managers becomes difficult.

It allows Managers and Directors to devote the firm’s resources to their own favourite causes – the
environment, art, cities, medical research – without being held accountable for the effect of the
expenditure on firm value. By expanding this power of managers in unproductive way, stakeholder
theory increases the agency costs in the economic system. And since it expands the power of
Managers, it is not surprising that stakeholder theory receives substantial support from them.

Emergence of Corporate Governance in India and the landmarks:

➢ India had been British Colonial State till 1947.

➢ Formal Control and regulation over the financial dealings of Indian Companies started with
the enactment of the RBI Act, 1934. It is the beginning of the Indian Corporate Governance history.
➢ The Country had already 6 fully operational stock exchanges before 1947 (independence).
(Ahmedabad, Calcutta, Madras, Punja, Uttar Pradesh, Nagpur and Hyderabad).
➢ Indian Corporate Governance got further boost by the enactment of post-independence
laws, consolidating the rights of investors.
➢ The Companies Act, 1956 provided some basic features of business operations, especially
with reference to Board formation, issue of shares and management of share capital.
➢ Because of the Industrial Policy in Mid 1950s, the Government attention focused more on
creating public sector companies that regulating governance of the existing companies.
➢ The public sector companies worked under the Government protection with minimal
responsibility for governance, leading to heights of inefficiency.
➢ The private sector struggled under license-raj and red-tapism (rise to corruption), adopted
short cuts to run the businesses.
➢ The Indian equity market was large controlled by dominant private sector players and stock
market manipulators until private sector players and stock market manipulators until the enactment
of Economic Policy in 1991.
➢ The Indian business scenario changed completely with the liberal economic policy in 1991 by
allowing investments, reduction in taxes, import tariffs.
➢ The Developing economy, and development of strong financial system (both bank-based and
market-based) was felt necessary. The SEBI Act of 1992 filled this gap.
➢ SEBI established in 1988 became an empowered and fully functional watchdog of the Indian
Stock Market in 1992 with the enact of SEBI Act, 1992. This Act was amended two times in 1995 and
1999 to clarify the “disclosure” norms and empowers SEBI Act.
➢ SEBI Act along with various financial regulations enforced by the RBI, Finance Ministry,
Government of India, acted as affective corporate governance in the Indian Economy.
➢ Encouraged by the Private sector efforts for code based governances, SEBI formulated a
Committee under the chairmanship of Kumar Mangalam Birla to work out the corporate governance
codes.
➢ The Codes formulated by the Birla Committee, were introduced through Clause 49 of the
SEBI in 2000. It was further re-enforced by SEBI in 2003, by appointing Narayana Murthy Committee
to make additional recommendations to enhance effectiveness and incorporated the
recommendations by revising the Clause 49 from Jan’2006.
➢ The Companies Act, 2008, which has replaced the earlier Companies Act, 1956, is the latest
milestone for Corporate Governance in India. It has incorporated the social view of business in the
form of “Corporate Social Responsibility(CSR).
➢ Thus Indian Corporate Governance moving towards for fulfilling the global accepted
objectives of Corporate Governance.
➢ “Corporate Governance Guidelines 2009” and “Corporate Social Responsibility voluntary
Guidelines 2009” by the Ministry of Company Affairs (MCA) were issued for strengthening corporate
governance framework in India.
➢

NEED FOR CORPORATE GOVERNANCE:

21) Need to live in harmony with the community
A corporation is a congregation of various stakeholders, namely customers, employees,
investors, vendor partners, government, and society. A corporation should be fair and
transparent to its stakeholders in all its transactions. This has become imperative in today’s
globalized business world where corporations need to access global pools of capital, need to
attract and retain the best human capital from various parts of the world, need to partner
with vendors on mega collaborations, and need to live in harmony with the community. Or
else, it will not be able to succeed.
22) Ethical Leadership:
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.
23) Beyond the realm of law
It stems from the culture and mindset of management, and cannot be regulated by
legislation alone. Corporate governance deals with conducting the affairs of a company,
such that there is fairness to all stakeholders and that its actions benefit the greatest
number of stakeholders. It is about openness, integrity, and accountability. What legislation
can and should do, is to lay down a common framework – the ‘form’ to ensure standards.
The substance will ultimately determine the credibility and integrity of the process.
24) Requires the cooperation of all the stakeholders:
Corporations need to recognize that their growth requires the cooperation of all the
stakeholders; and such cooperation is enhanced by the corporation adhering to the best
corporate governance practices. In this regard, the management needs to act as trustees of
the shareholders at large and prevent asymmetry of benefits between various sections of
shareholders, especially between the owner-managers and the rest of the shareholders.
25) Improving the economic efficiency of a firm
Corporate Governance is a key element in improving the economic efficiency of a firm.
Good corporate governance also helps ensure that corporations take into account the
interests of a wide range of constituencies, as well as of the communities within which they
operate. Further, it ensures that their Boards are accountable to the shareholders. This, in
turn, helps assure that corporations operate for the benefit of society as a whole. While
large profits can be made taking advantage of the asymmetry between stakeholders in the
short run, balancing the interests of all stakeholders alone will ensure survival and growth in
the long run.
26) Avoid heavy cost beyond regulatory problems.
The failure to implement good governance can have a heavy cost beyond regulatory
problems. Evidence suggests that companies that do not employ meaningful governance
procedures can pay a significant risk premium when competing for scarce capital in the
public markets. In fact, recently, stock market analysts have acquired an increased
appreciation for the correlation between governance and returns. In this regard, an
increasing number of reports not only discuss governance in general terms, but also have
explicitly altered investment recommendations based on the strength or weakness of a
company’s corporate governance infrastructure.
27) For the Credibility
The credibility offered by good corporate governance procedures also helps maintain the
confidence of investors – both foreign and domestic – to attract more ‘patient’, long-term
capital, and will reduce the cost of capital. This will ultimately induce more stable sources of
financing.
28) Result of Financial Crisis:
Often, increased attention on corporate governance is a result of financial crisis. For
instance, the Asian financial crisis brought the subject of corporate governance to the
surface in Asia. The many instances of corporate misdemeanors have also shifted the
emphasis on compliance with substance, rather than form, and brought 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. By
this very principle only those industrialists whose corporations are governed properly should
be allowed to be a part of committees. This includes the Prime Minister and Finance
Minister’s advisory councils, committees set up by the Confederation of Indian Industry (CII),
the Security Exchange Board of India (SEBI), the Department of Company Affairs, ministries,
and the boards of large banks and financial institutions.
29) Provides the structure
The definition in the preamble of the OECD principles is also all encompassing: ‘Corporate
governance… involves a set of relationships between a company’s management, its board,
its shareholders, and other stakeholders. Corporate governance also provides the structure
through which the objectives of that company are set, and the means of attaining those
objectives and monitoring performance are determined.
30) To ensure that it is run properly.
The most common school of thought would have us believe that if management is about
running business, governance is about ensuring that it is run properly. All companies need
governing as well as managing. The aim of “Good Corporate Governance” is to enhance the
long-term value of the company for its shareholders and all other partners. The enormous
significance of corporate governance is clearly evident in this definition, which encompasses
all stakeholders. Corporate governance integrates all the participants involved in a process,
which is economic, and at the same time social.
OECD Principles (Organization for Economic Cooperation and Development)

The OECD (Organization for Economic Cooperation and Development) came into full force on
September 30, 1961. The key function of the OECD was to provide management consulting to
member governments. OECD is an international organisation that works to build better policies
for better lives. It’s goal is to shape policies that foster prosperity, equality, opportunity and well-
being for all.
The OECD seeks to promote governance reforms in a close cooperation with other international
organization. This is normally done in joint collaboration with the World Bank and International
Monetary Fund (IMF). Roundtables, summoning senior policymakers, regulators and market
participants are organized to enhance the comprehension of governance and to support
regional reform efforts.
The OECD principles of corporate governance become part of the core 12 standards of global
financial stability. Currently, it has become a benchmark used by international financial
institutions. The OECD principles were designed to flexible and can be adopted in different cultures,
circumstances and traditions in different countries. Most countries’ corporate governance codes
are based on the principles of the OECD, and Ghana’s corporate governance code has this element.
Right from the beginning, OECD recognized that there cannot be a formula for corporate governance
that can be followed by all countries or as Mallin (2007) says, ‘One size does not fit all’. The
principles are of such nature that they represent certain common characteristics that are
fundamental to good corporate governance. The taskforce published its report in 1999.
Subsequently, the principles were reviewed and revised in 2004. These principles approached the
subject from five major aspects.

The OECD has five main corporate governance principles and these are discussed below:

1 Rights of Shareholders and Key Ownership Functions

The broad term of references included establishing the shareholder rights with reference to
ownership, being informed of fundamental corporate changes, opportunity to participate effectively
and vote in shareholder meetings, adequate disclosure of special rights to certain shareholders like
control disproportionate to their equity ownership, ensuring transparent and efficient functioning of
the market for corporate control while stating that shareholders should consider the costs and
benefits of extending their voting rights.

2 Equitable Treatment of Shareholders

There should not be any discrimination among big and small, domestic and foreign shareholders. All
shareholders within the same class should be members and managers should be required to disclose
any material interests in transactions or matters affecting the corporation.

3. Stakeholder perspective
Care should be exercised to see that the rights of stakeholders that are protected by law are
respected. IN case of violation of their rights, stakeholders should have the opportunity to get
redressal for their grievances. Adequate mechanisms shall be provided in the corporate governance
framework to improve shareholder participation in enhancing performance. The shareholders
should have access to relevant information wherever stakeholder participate in the governance
process.

4. Disclosure and transparency:

The corporate governance framework should ensure that timely and accurate disclosure is made on
all matters regarding the corporation including the financial situation, performance ownership, and
governance of the company. Disclosures must be available on aspects like the financial and
operating results, company objectives, share ownership and voting rights, board members and other
key executives and also their remunerations, foreseeable risk factors, material issues regarding
employees and other stakeholders, governance structures and policies, etc. Information should be
prepared, audited and disclosed in accordance with high quality standards of accounting, disclosure
and audit. Independent auditor should conduct an annual audit to provide an external and objective
assurance about the preparation and presentation of financial statements. These should be fair,
timely and cost efficient methods of disseminating information for access by users.

5. Responsibilities of the board:

The governance framework should ensure the strategic guidance of the company, effective
monitoring of management by the board, and the board’s accountability to the company and the
stakeholders. Towards achieving this, the board members should exercise due diligence and care
and act in the best interests of the company and the shareholders. Board should treat all
shareholders fairly especially when board decisions may affect different shareholder groups
differently. Compliance with all applicable laws must be ensured while taking into account the
interests of stakeholders. Board should also take necessary steps into review and guide corporate
strategy, risk policy, budgets, business plans, setting of performance objectives, selection of key
executives – monitor and replace them where necessary and also plan for succession. IT should also
monitor the implementation of corporate performance, oversee major capital expenditures,
acquisitions, and divestitures, review executive remuneration, ensure a formal and transparent
board nomination process, monitor and manage conflicts of interest of stakeholders like board
members, executives, and shareholders, ensure integrity of the company’s accounting and financial
reporting systems and independent audit, constitute the board with sufficient number of non-
executive board members who can exercise independent judgement, etc.

GRI (Global Reporting Initiative)

The Global Reporting Initiative (GRI) is an international, multi-stakeholder and independent non-
profit organization that promotes economic, environmental and social sustainability. The GRI was
established in 1997 in partnership with the United Nations’ Environment Programme (UNEP). The
organization has developed Sustainability Reporting Guidelines that strive to increase the
transparency and accountability of economic, environmental, and social performance and provides
all companies and organizations with a comprehensive sustainability reporting framework that is
widely used around the world.

The GRI sustainability reporting guidelines are the most widely used comprehensive sustainability
reporting standard in the world – provide organizations with the tools to meet the sustainability
challenges. A sustainability report conveys disclosures on an organization’s most critical impacts –
be they positive or negative on environment, society, and the economy.

Sustainability is a broad term considered synonymous with others used to describe reporting on
economic, environmental, and social impacts (e.g. triple bottom line, corporate responsibility
reporting, etc.) Sustainability reporting is the practice of measuring, disclosing and being
accountable to internal and external stakeholders for organizational performance towards the goal
of sustainable development. A sustainability report should provide balanced and reasonable
representation of the sustainability performance of a reporting organization – including both
positive and negative contribution.

Importance of GRI Guidelines:

By using the Guidelines, reporting organizations can generate reliable, relevant and standardized
information with which to:
➢ Access opportunities and risks, and
➢ Enable more informed decision making – both within the business and among its
stakeholders.
By developing and communicating their understanding about the connections between sustainability
and business, companies can:
➢ Enhance their value
➢ Measure and manage change, and
➢ Drive improvement and innovation

An ever-greater number of companies and other organizations are recognizing the need to make
their operations more sustainable. At the same time, governments, stock exchanges, markets,
investors, and society at large are calling on companies to be transparent about their sustainability
goals, performance and impacts. The GRI Sustainability Reporting Guidelines – the most widely used
comprehensive

G4 REPORT :
In May 2013, the Global Reporting Initiative (GRI) launched the fourth generation of its sustainability
reporting guidelines: the GRI G4 Sustainability Guidelines (the Guidelines). This latest round of
Guidelines took more than two-and-a-half years to develop. A broad range of stakeholders were
consulted, from expert Working Groups to public comment.
SIX ESSENTIAL ELEMENTS TO INCLUDE IN THE REPORT:
➢ Choose the ‘in accordance’ option that is right for your organization, and meet the
requirements
➢ Explain how you have defined the organization’s material Aspects, based on impacts and the
expectations of stakeholders
➢ Indicate clearly where impacts occur (Boundaries)
➢ Describe the organization’s approach to managing each of its material Aspects (DMA)
➢ Report Indicators for each material Aspect according to the chosen ‘in accordance’ option
➢ Help your stakeholders find relevant content by providing a GRI Content Index sustainability
reporting standard in the world – provide organizations with the tools to meet these
challenges.
PRINCIPLES FOR DEFINING REPORT CONTENT
These Principles are designed to be used in combination to define the report content. The
implementation of all these Principles together is described under the Guidance of G4-18 on pp. 31-
40 of the Implementation Manual.
Stakeholder Inclusiveness Principle: The organization should identify its stakeholders, and explain
how it has responded to their reasonable expectations and interests. Stakeholders can include those
who are invested in the organization as well as those who have other relationships to the
organization. The reasonable expectations and interests of stakeholders are a key reference point
for many decisions in the preparation of the report.
Sustainability Context Principle: The report should present the organization’s performance in the
wider context of sustainability. Information on performance should be placed in context. The
underlying question of sustainability reporting is how an organization contributes, or aims to
contribute in the future, to the improvement or deterioration of economic, environmental and social
conditions, developments, and trends at the local, regional or global level. Reporting only on trends
in individual performance (or the efficiency of the organization) fails to respond to this underlying
question. Reports should therefore seek to present performance in relation to broader concepts of
sustainability. This involves discussing the performance of the organization in the context of the
limits and demands placed on environmental or social resources at the sector, local, regional, or
global level.
Materiality Principle: The report should cover Aspects that: Reflect the organization’s significant
economic, environmental and social impacts; or Substantively influence the assessments and
decisions of stakeholders Organizations are faced with a wide range of topics on which they could
report. Relevant topics are those that may reasonably be considered important for reflecting the
organization’s economic, environmental and social impacts, or influencing the decisions of
stakeholders, and, therefore, potentially merit inclusion in the report. Materiality is the threshold at
which Aspects become sufficiently important that they should be reported.

Completeness Principle: The report should include coverage of material Aspects and their
Boundaries, sufficient to reflect significant economic, environmental and social impacts, and to
enable stakeholders to assess the organization’s performance in the reporting period. Completeness
primarily encompasses the dimensions of scope, boundary, and time. The concept of completeness
may also be used to refer to practices in information collection and whether the presentation of
information is reasonable and appropriate.

PRINCIPLES FOR DEFINING REPORT QUALITY

Balance: The report should reflect positive and negative aspects of the organization’s performance
to enable a reasoned assessment of overall performance
Comparability: The organization should select, compile and report information consistently. The
reported information should be presented in a manner that enables stakeholders to analyze changes
in the organization’s performance over time, and that could support analysis relative to other
organizations.
Accuracy : The reported information should be sufficiently accurate and detailed for stakeholders to
assess the organization’s performance.
Timeliness : The organization should report on a regular schedule so that information is available in
time for stakeholders to make informed decisions
Clarity : The organization should make information available in a manner that is understandable and
accessible to stakeholders using the report.
Reliability: The organization should gather, record, compile, analyze and disclose information and
processes used in the preparation of a report in a way that they can be subject to examination and
that establishes the quality and materiality of the information.

Clause 49 Guidelines
SEBI in January 2000 considered the recommendations of the Kumar Mangalam Birla Committee to
promote and raise the standard of corporate governance of listed companies. It decided to
incorporate a new clause in the listing agreement between companies and stock exchanges to
include the recommendations of the committee. The following guidelines were incorporated.

SEBI in January 2000 considered the recommendations of the Kumar Mangalam Birla
Committee to promoite and raise the standard of corporate governance of llisted companies.
It dercided to incorporate a new clause in the listing agreement between companies and stock
exchanges to include the recommendation of the committee. The following guidelines were
incorporated.
I. The board of directors
(a) The board shall have optimum combination of excutive and non-executive directors.
In case the company has an executive chairman, at least half of the board shall be
independent and case of a non-executive chairman, at least one-third of the board shall be
independent.
(b) All pecuniary relationships or transactions of the non-executive directors and the
company should be disclosed in the annual report.
II. Audit committee
(a) A qualified and independent committee shall be set up. The committee shall have
minimum three members, all non-executive directors, with the majority beiung
independent, and the chairman must attend the AGM to answer shareholder queries. The
committee can invite executives to be present at the meetings. The CFO/finance director,
the head of internal audit, and a representative of the secretary of the committee.
(b) The committee shall meet at least thrice a ylear, once before the finalization of annual
accounts and others in a gap of 6 months. The quorum shall be either two members or
one third of the members whichever is higher with a minimum of two independent
directors.
(c) The powers of the audit committee shall include
➢ To investigate any activity within its terms of reference
➢ To seek information from any employee
➢ To obtain outside advice
➢ To secure attendance of outside experts if necessary
(d) The committee’s role will include
➢ Oversight of the company’s financial reporting with adequate disclosure
➢ Recommending the appointment or removal of external lauditor, fixation of audit
fee, and approval of fees for any other services
➢ Discuss with management the annual financial statements before submission to
the board with focus on
o Any changes in accounting policies and practice
o Qualifications in draft audit report
o Significant adjustments arising out of audit
o The going concern assumption
o Compliance with accounting standards
o Compliance with requirements by stock exchanges and other legal aspects
o Any related party transactions that may have potential conflict with the interests of
the company at large.
➢ Review of internal control systems with management, internal, and external auditors
➢ Review of internal audit functions including structure, staff, leadership, reporting structure,
frequency of internal audit, etc.
➢ Discussion with internal auditors on any significant findings and follow up there on.
➢ Review of any internal investigations by internal auditors.
➢ Discussion and finalization of nature and scope of audit with external auditors.
➢ Review of the company’s financial risk management policies.
➢ To look into the reasons of substantial defaults in the payments to depositors, debenture
holders, shareholders (non-payment of declared dividends), and creditors.

III. Remuneration of Directors:

➢ The remuneration of non-executive directors shall be decided by the board.
➢ All details regarding remuneration shall be disclosed in the report on corporate governance
in the annual report. Details like salary, benefits, bonuses, stock options, perquisites, etc., as
well as details of fixed components and performance linked incentives along with
performance criteria and service contracts, notice periods, severance pays and stock option
details.
IV. Board Procedure
➢ Board should meet at least four times a year with a maximum gap of 4 months between two
meetings.
➢ No Director can be a member of more than 10 committees or act as chairman of more than
five committees across all companies in which one is a director. It is mandatory for every
director to declare the committee positions he occupies to the company and notify the
changes as and when they take place.
V. Management
➢ In addition to the director’s report, MDA is added.
➢ Report is added as a part of the annual report, MDA should discuss:
o The industry and developments
o Opportunities and threats
o Segment-wise or product-wise performance
o Outlook
o Risks and concerns
o Internal control systems and adequacy
o Financial performance with respect to operational performance.
o Material developments in HR/industrial relations including number of people
employed
o All financial and commercial transactions made by Managements, where they have a
personal interest that may have a potential conflict with the interests of the
company at large.
VI. Share holders
o When a new director is to be appointed, the shareholders must be provided with a
brief resume of the director, nature of his expertise in specific functional areas,
and names of companies where the person holds directorship and membershlips of
committees of the board.
o Information like quarterly results and presentation to analysts on its website be
forwarded to the stock exchanges who may disply them on their website.
o There must be a committee (shareholders/investors’ grievance committee) to look
into the grievances of the shareholders regarding transfer of shares, non-receipt of
balance sheet non-receipt of declared devidends, etc.
o The company must expedite the process of share transfe5rs and for this it should
delegate the power to either an officer, a committee, or to the registrar and transfer
agents with the delegated authority attending to the transfer formalities at least
once a fortnight.
VII. Report on Corporate Governance
There shall be a separate section on corporate governance in the annual reports with a
detailed compliance report ---compliance with any mandatory requirement and the extent to
which non-mandatory requirement have been adopted along with the annual returns.
VIII. Compliance
The company shall obtain a certificate of compliance with regard to corporate governance
requirements from the external auditors which shall be annexed to the corporate governance
report and sent to the stock exchanges along with the annual returns.
IX. Schedule of implementation
o By all entities seeking listing for the first time, at the time of listing.
o By 31 March 2001 by all entities in group of BSE A or in S&P Nifty Index as on 1
January 2000.
o By 31 March 2002 by all entities which are listed with paid-up capital Rs 10 crores
and above or net worth of Rs 25 crores or more any time in the history of the
company.
o By 31 March 2003 by all entities which are listed with paid capital of Rs 3 crores and
above.
o The non-mandatory requirements shall be implemented at the discretion of the
company. Disclosures regarding adoption /non-adopti0nj of the non-mandatory
requirements shall be made in the corporate governance report.

Amendments to Clause 49
27. Institutional directors will be considered as independent directors.
28. For the purpose of the number of memberships of committees, only public limited
companies (listed and unlisted) shall be included and private limited companies,
foreign companies, and companies of Sections 25 of the Companies Act shall be
excluded. Also, only audit committee, shareholders grievance committee and
remuneration committee shall be considered for this purpose.
29. Institutional directors will be considered as independent in the case of government
companies also.
30. Those companies which were required to comply with the provision in the first phase will be
required to submit a quarterly compliance report to stock exchanges within 15 days from
the end of quarter.
31. The date compliance by all companies with a share capital of Rs. 3 crores and above or net
worth of Rs. 25 crores or more at any time in the history of the company was extended to 31
March, 2004. The submission of the quarterly reports also will start after 15 days from the
quarter ending 31 March, 2004.
32. Stock exchanges shall ensure that all provisions of corporate governance have been
complied with before granting any new listing.
33. Stock exchanges shall set up a cell to monitor the compliance with the provision of corporate
governance. The cell has to submit a consolidated compliance report to SEBI within 30 days
of each quarter.
34. The compliance date for companies with share capital of Rs. 3 crorres and above or net
worth of Rs. 25 crores or more will be 31 March, 2005. The submission of the quarterly
compliance reports also will start from 15 days from 31 March, 2005.
35. Those companies which apply for listing must necessarily have audit committees and
investor / shareholder grievance committee before they are granted permission for listing.
36. The definition of independent director has been detailed. An independent director shall be
a non-executive director (1) who apart from receiving the director’s remuneration does not
have any material pecuniary relationships or transactions with the company, its promoters,
its directors, its senior management or its holding company, its subsidiaries and associates
which may affect the independence of the director; (2) has not been executive of the
company in the immediately preceding three financial years; and (3) is not partner or
executive or was not a partner or an executive during the preceding three years of any of
the following: (a) statutory audit firm or the internal audit firm that is associated with the
company; (b) the material supplier, or a service provider, or a customer, or a lessor, or a
lessee of the company which may affect the independence of the company; and (d) a
substantial shareholder of the company owing 2 percent or more of voting shares.
37. Minimum number of board meetings shall be four with the maximum time gap of three
months between any two meetings.
38. The board shall periodically review compliance reports of all laws applicable to the company;
prepared by the company as well as steps taken by the company to rectify instances of non-
compliance.
39. The board shall lay down a code of conduct for all board members and senior management
of the company. It shall be posted on the website of the company. All board members and
COMMITTEES ON CORPORATE GOVERNANCE
With the formation of corporate form of organizations, the frame work of corporate governance got
wide recognition and quite peculiarly it was prevalent in various manifestations throughout the
world. The theme of Corporate Governance has got recognition due to the constitution and
formation of various committees and formulation of various laws throughout the world.
With respect to India, after the economic initiatives in 1991, the Govt. of India thought it fit to
respond to the developments taking placing the world over and accordingly the initiatives
recommended by Cadbury Committee Report got prominence. In order to give due prominence
Confederation of Indian Industry (CII), the Associated Chambers of Commerce and Industry
(ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted committees to
recommend initiatives in Corporate Governance.
The report of various committees helped a lot to streamline the corporate throughout the world.
Some of the Committees with its formation is given under the following table 3.1.
COMMITTEES ON CORPORATE GOVERNANCE
Sl.No. Committee Country Date of Submission
1. Cadbury England 1992
2. King Committee South Africa 1994 & 2002
3. CII India 1996
4. Hampel England 1998
5. Kumar Mangalam Birla India 2000
6. Narayana Murthy India 2003
Committee
7. Naresh Chandra India 2009
Committee

Naresh Chandra Committee Report

For over a decade, the Confederation of Indian Industry (CII) has been at the forefront of the
corporate governance movement in India. In April 1998, it released a Task Force report entitled
“Desirable Corporate Governance: A Code”, which outlined a series of voluntary recommendations
regarding best-in-class practices of corporate governance for listed companies. It is worth noting
that most of the CII Code was subsequently incorporated in SEBI’s Kumar Mangalam Birla Committee
Report and thereafter in Clause 49 of the Listing Agreement. Moreover, the CII Code was the first
and probably a unique instance where an industry association took the lead in prescribing corporate
governance standards for listed companies. Corporate governance guidelines - both mandated and
voluntary - have evolved since 1998, thanks to the efforts of several committees appointed by the
Ministry of Corporate Affairs (MCA) and the SEBI. Indeed, it is fair to say that in terms of norms,
guidelines and standards set for the board of directors, financial and non-financial disclosures and
information to be shared by the management to stakeholders and the wider public, Indian corporate
governance standards rank among the best in the world. And CII is privileged to be a part of this
movement. Unfortunately, history tells us that even the best standards cannot prevent instances of
major corporate misconduct. This has been true in the US - Enron, Worldcom, Tyco and, more
recently gross miss-selling of collateralised debt obligations; in the UK; in France; in Germany; in
Italy; in Japan; in South Korea; and many other OECD nations. The Satyam-Maytas Infra-Maytas
Properties scandal that has rocked India since 16th December 2008 is another example of a massive
fraud. Satyam is a one-off incident - especially considering the size of the malfeasance. The
overwhelming majority of corporate India is well run, well regulated and does business in a sound
and legal manner. However, the Satyam episode has prompted a relook at our corporate governance
norms and how industry can go a step further through some voluntary measures. With this in mind,
the CII set up a Task Force under Mr Naresh Chandra in February 2009 to recommend ways of
further improving corporate governance standards and practices both in letter and spirit. The
recommendations of the Naresh Chandra Task Force evolved over a series of meetings. The leitmotif
of the report is to enunciate additional principles that can improve corporate governance in spirit
and in practice. The report enumerates a set of voluntary recommendations with an objective to
establish higher standards of probity and corporate governance in the country. The
recommendations outlined in this report are aimed at listed companies and wholly owned
subsidiaries of listed companies.
About the Audit Committee:

31. Prohibition fo any direct financial interest in the client by the audit firm, its partners, or
members of the engagement team as well as their direct relatives and also any relative who
has more than 2 percent of the share capital of the audit client or of the share of the profits.
32. Prohibition of any loans or guarantees by the audit firm, or partners, or other members of
the engagement team from the audit client.
33. Prohibition of any business relationship with the audit client by the audit firm, its partners or
members of engagement, and their direct relatives.
34. Prohibition of personal relationships which would result in the exclusion of the audit firm or
partners or members of engagement like with key executives or senior managers belonging
to the top two managerial level of the company.
35. Prohibition of any partner or member of the engagement team from joining client before 2
years not being engaged in the audit of the client.
36. Prohibition of undue dependence on an audit client. The fee received from any one client
should not exceed 25 percent of the total revenues of the audit firm. Firms in the initial five
years from the commencement of their activities and those whose total revenues are less
than Rs. 15 lakhs per year exempted.
37. Prohibition of non-audit services like accounting and book keeping services, internal audit
services, design and implementation of financial information systems actuarial services,
services of broker, dealer, investment advisory or investment banking, other financial
services which are sometimes outsourced by the client, or management services which are
outsourced, recruitment services, valuation and fairness opinion services, etc.
38. Fifty percent audit partners and members of the engagement team be rotated every five
years in the case of clients whose net worth exceeds Rs. 10 crores or whose turnover
exceeds Rs. 50 crores. Those who are compulsorily rotated could return after a gap of 3
years.
39. The management should provide a clear description of each material liability and its risks
followed by auditor’s comments on the management view.
40. Qualifications of accounts, if any, by auditors must be adequately highlighted in order to
attract shareholders attention.
41. The qualification, if any, in the report shall be explained to the shareholders at the
company’s annual general meeting.
42. The audit firm should separately send a copy of the qualified report to the ROC (Registrar of
Companies), SEBI and the principal stock exchanges with a copy of the letter marked to the
management of the company.
43. The Section 225 of the Companies Act needs to be amended to require a special resolution
of shareholders in case an auditor, who is otherwise eligible for reappointment, is sought to
be replaced. Also, the reasons for such replacement shall be explained, about which the
outgoing auditor has right to comment.
44. The audit committee should review the independence of the audit firm, discuss and prepare
the annual work programmes with the auditor and also recommend to the board with
reasons about the appointment/reappointment or removal of the auditors along with the
annual remuneration.
45. The audit firm should submit annually a certificate of independence to the audit committee
and/or the board of directors.
62. The CEO/CFO should certify the balance sheet and profit and loss account and all the
schedules and notes on accounts and cash flows in the case of companies whose net worth
exceeds Rs. 10 crores or whose turnover exceeds Rs 50 crores, Very clearly stating any
deficiencies in the design and operation of internal controls and any significant changes in
the accounting policies during the year under review.
63. Three independent quality review boards (QRB) should be set up, one each for ICAI, ICSI,
and ICWAI to periodically examine and review the quality of audit, secretarial and cost
accounting firms, to judge and comment on the quality and sufficiency of systems,
infrastructure and practice. The QRBs should review the audit quality reviews of the audit
firms for the top 150 listed companies accounting to market capitalization, with the freedom
for DCA to alter few samples after the period. The funding of the QRB’s will be done by the
respective institutes.
64. An independent prosecution directorate be created within ICAI to exclusively deal with all
disciplinary cases.
65. Complaints received should be registered by the prosecution directorate and sent to the
member or firm within 15 days of receipt and the prosecution directorate should ask for
required documents from the complainants and the respondent within 60 days. On receipt
of documents they will be placed before the disciplinary committee within 20 days of
receiving the documents. The disciplinary committee shal hear the cases and decisions
recorded in a report and should d etail lthe punishment to be awarded. The ICAI council
should consider the report within 45 days from the date of the report and act upon them.
Appeal if any shall be placed before the appellate body headquartered in New Delhi,
composed of a presiding officer and four other members. The presiding officer shall be a
retired judge of the Supreme Court or a retilred chief justilce of a hligh court. Two members
shall be past president of ICAI and the remaining two nominated by the DCA. The quorum
shall be three.
66. The disciplinary committee’s awards of the punishment, if any, shall be publicized through
suitable media.
67. The findings of the appellate body shall be made by the central government in order to
ensure independence. The expenses incurred by the disciplinary committee shall be borne
by ICAI’s council including the emoluments of the members, sitting fees, other allowances
and expenses. All expenses of the prosecution directorate will be borne by the council of
ICAI. Every complaint (other than those made by the central or state government) shall be
accompanied by a fee of Rs. 5000, which will be returned in case the complaint holds some
ground. Fees in the case of frivolous complaints are not refunded and will go towards
funding.
68. Independent disciplinary mechanism may be designed by ICSI and ICWAI along similar lines.
69. While appointing independent directors, care must be taken to see that they have no
material pecuniary relationships or transactions with the company, its promoters, senior
management, or lits holding company, or subsidiaries, or associate companies; are not
related to promoters or management at the board level and one level below; have not been
executives of the company in the last three years; are not partners or executives of a
statutory audit firm, internal audit firm or legal firm or consulting firm associated with rthe
company for the last three years; are not significant suppliers, vendors or customers of the
company; do not hold more than 2 percent of the voting shares; and have not been directors
of the company for more than three terms of three years each (maximum of nine years).
However, nominee directors of a financial institution will be excluded in the determination
of the number of independent directors and cross non-executive directorships of executives
will not be treated as independent. The committee also recommended that the above
criteria for independent directors shall be made applicable for all listed companies and also
unlisted companies with a net worth of Rs. 10 Crores and above or a turnover of Rs. 50
crores and above.
70. In the case of companies as detailed above, not less than 50 percent of the board of
directors should be independent. However, unlisted public companies with a maximum of
50 shareholders and without debt of any kind from the public, banks, or other financial
institutions as long as they do not change their character and also those unlisted subsidiaries
of listed companies. Nominee directors again will be excluded both from the number and
denominator.
71. Since corporate governance norms require companies to have a number of committees, the
boards should have a minimum size. The minimum size should be seven with at least four
independent directors in the case of all listed companies as well as unlisted public
companies with a net worth of Rs. 10 crores and above or turnover of Rs. 50 crores and
above. Again, this will not be applicable to companies with no more than 50 shareholders or
those without any debt till they change their character and for unlisted subsidiaries of listed
companies.
72. The minutes of meetings of the board as well as audit committees shall disclose the timings
and duration of each meeting, dates of meetings, and the attendance record of members in
the case of companies detailed above.
73. Those directors who find it difficult to attend the meetings physically must participate in the
proceedings through tele-conference or video-conference duly minuted.
74. All information given to the press or analysts, in the case of all listed companies and unlisted
companies meeting the above-mentioned criteria, should be transmitted to all board
members.
75. Audit committees shall be constituted of only independent directors if the committees are
indeed to be independent excepting those public companies with not more than 50
shareholders and without debt of any kind and also unlisted subsidiaries of listed companies.
76. The chairman of the audit committee must annually certify whether and to what extent each
of the functions listed in the audit committee charter were discharged during the year in
addition to dates and frequency of meetings. It should also provide its views on the
adequacy of the internal control systems, perceptions of risks and in the event of any
qualifications, why the committee accepted and recommended the financial statements
with qualifications.
77. The statutory limit (of Rs. 5000) on sitting fee should be revised as it is considered too small
to attract talent. The present statutory limits of 1 percent commission of net profit to
independent directors and also provisions relating to the stock options are adequate and do
not need any revision. The vesting of the stock options shall be staggered over at least three
years.
78. The non-executive and independent directors must be granted protection from certain
criminal and civil liabilities because they are not expected to be in the know of every
technical infringement committed by the management.
79. DCA should encourage institutions and their proposed centres for corporate excellence to
have regular training programme for independent directors. The funding could come from
the Investor Education and Protection Fund (IEPF). Every independent director should
undergo at least one such training course before assuming his/her responsibilities. An
untrained independent director should be disqualified under Section 274(1)(g) of the
Companies Act 1956, giving reasonable notice. Of course, this requirement might be
introduced in a phased manner as there is paucity of the availability of such training
programmes.
80. SEBI should refrain from introducing subordinate legislation in areas where specific
legislations exist under Companies Act, 1956. In case any additional requirements in the
existing provisions are found necessary by SEBI, such requirements must be done through
suitable amendments of the Companies Act 1956. DCA should respond to such requirements
quickly.
81. The government should strengthen the DCA by increasing the number of DCA offices and
quality and quantity of physical infrastructure. They should outsource expertise when
needed. The inspection capacity needs to be strengthened and it should become a regular
administrative function. It is very essential that the DCA functionaries continuously upgrade
themselves through training.
82. A corporate serious fraud office (CSFO) should be set up to investigate into any instances of
corporate frauds. This should be multifunctional team which can detect frauds and also
direct and supervise prosecutions. The appointments to and the functioning of this office
shall be by different committees headed by the cabinet secretary.
83. The penalties in the case of offences need to be rationalized and must be related to the
sums involved in the offences. The criteria for disqualification under Section 274(1)(g) of the
Companies Act, 1956 shall be extended beyond non-payment of debt. Independent
directors must be treated differently as is done in the case of nominee directors
representing financial institutions. Stricter norms should be prescribed for the companies
registered as brokers with SEBI. Also, greater accountability should be provided for with
respect to transfers of money. Companies Act must suitably be amended to give DCA the
powers of attachment of bank accounts, etc., on the same lines as SEBI.
84. Consolidated financial statements should be mandatory for companies having subsidiaries.
CADBURY COMMITTEE REPORT

The first-ever organized attempt at establishing a set of guidelines was in the U.K. The Finance
Reporting Council, the London Stock Exchange, and the British Accounting Profession sponsored to
set up a committee under the chairmanship of Sir Adrian Cadbury in May 1991. This was set up
essentially to address the concerns about eh low level of investor confidence in fiscal reporting and
in the ability of the auditors to carry out their jobs, consequent to the financial scandals and
collapses like those of Coloroll, Polly Peck, etc. But as could be seen from the preface of the report,
the scandals at companies like Bank of Credit and Commerce International (BCCI), Maxwell, etc., the
committee looked at how governance could be improved by including independent directors,
separating the roles of chairman and CEO, and establishing audit committees of the boards for all
companies listed on the London Stock Exchange. The Committee submitted its report in December,
1992.

The Cadbury Report must be lauded as it was one of the pioneering initiatives by any country and
has also been path breaking in its recommendations and also has been used ever since as a
reference point for many other corporate governance guidelines initiated by many other countries.
The Committee explains the rationale behind setting up of the committee by the sponsors as
addressing the concerns which were basically ‘the perceived low level of confidence, both in
financial reporting and in the ability of auditors to provide the safeguards which the users of
company reports sought and expected’ and unexpected failures of major companies and by
criticisms of the lack of effective board accountability for such matters as directors’ pay’. And in
order to address these concerns, the committee had recommended ‘that the board needs to state
order to address these concerns, the committee had recommended ‘that the board needs to state
that financial controls of the business are reviewed and in order.

Within very short span, the Cadbury Committee made its impact in the UK. Garratt wrote that ‘the
pressure for change which the original Cadbury report has unleashed now looks unstoppable and it
is not just the small shareholders and outraged members of the pulic who of directors’ service
contracts shortened from the present 3 years to a maximum of one, and a retirement age of 70
years for listed companies.’ In about 2 years, most of the recommendations were getting
implemented despite the fact that it was voluntary in nature and there was no effort or pressure to
enforce the guidelines. One of the important recommendations of the committee was to create a
procedure through the use of which the independent directors could seek independent professional
advice if they had lack of clarity or felt uncertain about the executives’ decisions.

Summary of recommendations:

Compliance with the code of best practice:

53. The boards of all listed companies registered in the UK should comply with the Code of Best
Practice set out on pages 58 to 60. As many other companies as possible should aim at
meeting its requirements.
54. Listed companies reporting in respect of years ending after 30 June 1993 should make a
statement about their compliance with the Code in the report and accounts and give
reasons for any areas of non-compliance.
55. Companies’ statements of compliance should be reviewed by the auditors before
publication. The review should cover only those parts of the compliance statement which
relate to provisions of the Code where compliance can be objectively verified. The Auditing
Practices Board should consider guidance for auditors accordingly.
56. All parties concerned with corporate governance should use their influence to encourage
compliance with the Code. Institutional shareholders in particular, with the backing of the
Institutional Shareholders’ Committee, should use their influence as owners to ensure that
the companies in which they have invested comply with the Code.

Keeping the Code up to date:

57. The Committee’s sponsors, convened by the Financial Reporting Council, should appoint a
new Committee by the end of June 1995 to examine how far compliance with the Code has
progressed, how far our other recommendations have been implemented, and whether the
Code needs updating our sponsors should also determine whether the sponsorship of the
new Committee should be broadened and whether wider matters of corporate governance
should be included in its brief. In the mean time the present committee will remain
responsible for reviewing the implementation of its proposals.

Directors’ service contracts

58. The Companies Act should be amended to come inline with the requirement of the Code
that directors’ service contracts should not exceed three years without shareholders’
approval.
Interim reporting:
59. Companies should expand their interim reports to include balance sheet information. The
London Stock Exchange should consider amending the continuing obligations accordingly.
There should not be a requirement for a full audit, but interim reports should be reviewed
by the auditors and the Auditing Practices Board should develop appropriate guidance. The
Accounting Standards Board in conjunction with the London Stock Exchange should clarify
the accounting rules which companies should follow in preparing interim reports. The
inclusion of cash flow information should be considered by the Committee’s successor body.
Enhancing the perceived objectivity of the audit
60. Fees paid to audit firms for non-audit work should be fully disclosed. The essential principle
is that disclosure should enable the relative significance of the company’s audit and non-
audit fees to the audit firm to be assessed, both in a UK context and, where appropriate, a
worldwide context. The 1991 Regulations under the Companies Act should be reviewed and
amended as necessary.
61. The accountancy profession should draw up guideliens on the rotation of audit partners.

Enhancing the effectiveness of the audit.

62. Directors should report on the effectiveness of their system of internal control, and the
auditors should report on their statement. The accountancy profession together with
representatives of preparers of accounts should draw up criteria for assessing effective
system of internal control and guidance for companies and auditors.
63. Directors should state in the report and accountants that the business is going concern, with
supporting assumptions or qualifications as necessary, and the auditors should report on this
statement. The accountancy profession together with representatives of preparers of
accounts should develop guidelines for companies and auditors.
64. The question of legislation to back the recommendations on additional reports on internal
control systems and going concern should be decided in the light of experience.
65. The government should consider introducing legilslation to extend to the auditors of all
companies the statutory protection already available to auditors in the regulated sector
(banks, building societies, insurance, and investment business) so that they can report
reasonable suspicion of fraud freely to the appropriate investigatory authorities.s
66. The accountancy profession together with the legal professions and representatives of
preparers of accounts should consider further the question of illegal acts other than fraud.
67. The accounting profession should continue its efforts to improve its standards and
procedures so as to strengthen the standing and independence of auditors.

Voting by Institutional Investors

68. Institutional Investors should disclose their policies on the use of their voting rights.

Endorsement of work by others:

69. The Committee gives its full support to the objectives of the Financial Reporting Council and
the Accounting Standards Board. It welcomes the action by the Financial Reporting Review
Panel over companies whose accounts fall below accepted reporting standards.
70. The Committee supports the initiative of the Auditing Practices Board on the development
of an expanded audit report. It also gives its full support to the lead which it is taking on the
development of auditing practice generally.
71. The Committee welcomes the statement by the Institutional Shareholders’ Committee on
the Responsibilities of Institutional Shareholders in the UK.
Issues for the Committee’s Successor Body:
72. Issues which the Committee has identified that its successor body may wish to review or
consider in greater depth include: the application of the Code to smaller listed companies;
directors’ training; the rules for disclosure of directors’ remuneration, and the role which
shareholders could pay; a recruitment for inclusion of a cash flow information in interim
reports; and the procedures for putting forward resolutions at general meetings. The
Committee and its successor will also keep watch on developments regarding the nature and
extent of auditors’ liabi
73.
74.
75.
76.
77.
78. lity.
Report of K.M. Birla Committee on Corporate Governance:

SEBI, having taken up the role of capital regulator, tried to create and regulate a realm for Corporate
Governance for the Indian Companies. While a number of governance guidelines were available
abroad, SEBI felt that such governance guidelines have to be in consideration with the corporate
environment that exists in the country and so, import of any guidelines from abroad did not make
sense. SEBI has already initiated a number of steps in the direction of improving governance by
strengthening the disclosure norms for IPOs, reporting utilization of funds in the annual reports,
quarterly results, insisting on appointment of a compliance officer, and for issues on a preferential
basis, and also about takeovers and acquisitions. SEBI wanted to further strengthen the Corporate
Governance system in the country.

Hence, it appointed a Committee on Corporate Governance on 7 May 1999 under the chairmanship
of Shri Kumar Mangalam Birla, a member of the SEBI board to prepare a set of corporate governance
guidelines for the Indian companies in the Indian context. The major recommendations of the
committee, which would form the essence of the Clause 49 guidelines of the listing agreement
between companies and the stock exchanges which forms the basis of corporate governance in India
today.

The committee divided the recommendations into two categories, namely, mandatory and non-
mandatory. The recommendations which are absolutely essential for corporate governance can be
defined with precision and which can be enforced through the amendment of the listing agreement
could be classified as mandatory. Others, which are either desirable or which may require change of
laws, may, for the time being, be classified as non-mandatory.

I. MANDATORY
33. Not less than 50 percent of the boad shall be non-executive directors. In the case of non-
executive chairman, at least one-third of the board should comprise independence directors
and in the case of an executive chairman, at least half of the board should be independent.
34. Financial Institutions will appoint nominees on the boards only on selective basis and where
it is essential. And such nominees, if present, will act in the same manner as any other
director.
35. A qualified and independent audit committee with a minimum of three members and
majority of indpenedent members with the chairman of the committee being an
independent member and at least one member having financial and accounting knowledge
be a set up by the board, which would go a long way in enhancing the creditability of the
financial disclosures and promoting transparency. The committee can get advice from the
executives if necessary and the company secretary will be the secretary of the committee.
36. The audit committee must meet at least thrice a year, one necessarily every six months and
for finalization of annual accounts and functions.
37. The quorum should be either two members or one-third of the audit committee, whichever
is higher.
38. The Committee can secure the help of outside expertise, if necessary.
39. The Committee must look into the reasons for substantial defaults in the payments to
depositors, debenture hoders, shareholders (non-payment of declared dividends), and
creditors.
40. The board should meet at least four times a year with maximum time gaps between
meetings being 4 months.
41. A director should not be a member in more than 10 committees or act as a Chairman of
more than five committees across all companies in which he is director. Every director
should inform the company about committee positions he occupies in other companies.
42. The board of directors should decide the remuneration of non-executive directors.
43. Management must disclose to the board all material, financial, and commercial transactions
where they have personal interest or where there are potential conflicts with the interests
of the company.
44. While appointing new directors or re-appointing of a director, the shareholders must be
provided with a brief resume of the director, details of his expertise in specific functional
areas, and details of other directorships of committee of the boards.
45. A Committee to redress grievances of the shareholders be set up under the chairmanship of
non-executive director.
46. The power of share transfer should be transferred to an officer, or a committee, or to the
registrar and transfer agents.
47. A separate section on corporate governance be included in the annual reports.
48. The company should obtain a certificate from the auditors of the company regarding the
compliance of all the mandatory recommendations.
J. NON-MANDATORY
9. The Chairman has a distinctive role from that of the chief executive and hence even if the
Chairman is non-executive, he should be entitled to maintain an office at the company’s
expense and be reimbursed all the expenses in connection with the performance of his
duties.
10. The board should set up a remuneration committee to set the company’s remuneration
packages for executive directors. The committee shall be constituted of at least three
directors, all non-executive with the chairman being independent director. The Chairman
should be present at the AGM.
11. All the details of remuneration package, such as components, service contracts, notice
periods, severance fees, etc, shall be provided.
12. The half-yearly declaration of financial performance including summary of the significant
events in last six months should be sent to each household of shareholders.

NARAYANA MURTHY COMMITTEE REPORT

While SEBI adopted most of the recommendations of the Kumar Mangalam Birla Committee, it was
felt that since the governance standards have been evolving, it was necessary to evaluate the
adequacy of existing governance practices and further improving them. Hence, a Committee was
constituted under the chairmanship of Sri N.R. Narayana Murthy, Chairman of Infosys Technologies
Ltd, to recommend ways of improving governance further.

The recommendations were:

K. MANDATORY
27. Audit Committee will review the following information mandatorily:
• Financial statements and draft audit report, including quarterly/half yearly financial
information
• Management Discussion and Analysis (MDA) of financial condition and results of the
operation
• Reports relating to compliance with laws and risk management.
• Record of related party transactions.
28. All audit committee members should be ‘financially literate’ and at least one of the member
should have accounting or related financial management expertise.
29. If the company has followed a treatment different from the prescribed accounting
standards, management should justify why such a treatment would be more representative
of the reality.
30. A statement of all transactions with related parties including their bases should be placed
before the audit committee for ratification/approval. And the definition of a ‘related party’
will be as per Accounting Standard 18 issued by ICAI.
31. The board shall be informed about the risk assessment and minimization procedures. A
quarterly report on risks, mitigation plans and any limitations to the risk taking capacity of
the company shall be placed before the board by the management.
32. Companies raising money through IPO should disclose the use/application of funds to the
audit committee on a quarterly basis. Any diversion of funds other than those stated in the
documents shall be consolidated into a statement and be certified by the auditors.
33. A code of conduct for all board members and senior management be laid down and posted
on the company’s website. All board members and senior management personnel shall
affirm compliance with the code on annual basis. A declaration by the CEO and COO to this
effect shall be provided in the annual report.
34. There shall be no nominee directrors. All director appointments shall be made by the
Shareholders.
35. Compensation to NEDs (Non-Executive Directors) may be fixed by the board and approved
by the shareholders. Companies should publish their compensation philosophy and the
compensation paid to the NEDs. The details of shares held by NEDs should be disclosed on
an annual basis. NEDs before joining a company should disclose their holding of the
company’s shares to the company.
36. Employees who observe any unethical practices should have direct access to audit
committee.
37. Companies have to make an annual declaration that they have not denied any personnel
access to the audit committee and that they have provided protection to ‘whistle-blowers’.
38. The provisions relating to the composition of the board of directors of the holding company
should be made applicable to the composition of the board of directors of the subsidiary
companies. At least one independent director on the BOD of the parent company shall be a
director on the BOD of subsidiary company. The audit committee of the parent comp-any
shall also review the financial statements of the subsidiary company. The board of the
parent company has to declare that it has reviewed the affairs of the subsidiary company
also.
39. SEBI should make compulsory the disclosures in the report issued by the security analysts if
the company about which they write is a client of the analyst’s employer or associate of the
analyst’s employer and also the nature of services offered to the company, if any, and also
whether the analyst, or the analyst’s employer, or an associate of the analyst’s employer
holds or held, or intends to hold and security in the company.
L. NON-MANDATORY
7. Companies should be encouraged to move towards a regime of unqualified financial
statements.
8. Companies should train the board members in the business model of the company as well as
the risk profile of the business parameters of the company, their responsibilities as directors
and the best ways to discharge them.
9. Performance evaluation of NEDs should be conducted by a peer group and shall form the
basis for reappointments for further term.

Problems of Governance in Companies:

While routine governance regulations become applicable for public sector companies formed under
the Companies Act, 1956 and come under the purview of SEBI regulations the moment they mobilize
funds from the public, the typical organizational structure of PSUs makes it difficult for the
implementation of corporate governance practices as applicable to other publicly-listed private
enterprises. The typical difficulties faced are:

1) INVOLVEMENT OF NOMINEE DIRECTORS

The board of directors will comprise essentially of bureaucrats drawn from various ministries which
are interested in the PSUs (Public Sector Undertaking). In addition, there may be nominee directors
from banks or financial institutions who have loan or equity exposures to the unit. The effect will be
to have a board much bey0nd the required size, rendering decision-making a difficult process.

2) LACK OF PROCIFICIENCY:

The chief executive of managing director (or chairman and managing director) and other functional
directors are likely to be bureaucrats and not necessarily professionals with the required expertise.
This can affect the efficient running of the enterprise.

Difficult to attract expert professionals as independent directors. The laws and regulations may
necessitate a percentage of independent component on the board; but many professionals may not
be enthused as there are serious limitations on the impact they can make.

3) VARIATIONS IN PAY SCALES

The lower pay levels applicable to public sector executives also act as a deterrent to professional
executives taking up public sector executive positions. For example, the CEO of SBI, the country’s
largest commercial bank, is paid only Rs. 29 Lakhs , while his private sector counterparts in HDFC
Bank earns Rs. 10 Crores, and ICICI Bank CEO earns 2.66 Crore. The highest compensation received
by a non-executive independent director at SBI is Rs. 1,65,000 for board meetings, whereas his
counterparts in ICICI and HDFC bank are paid upto Rs. 8,40,000 and Rs. 6,20,000, respectively for
attending board / committee meetings. While ICICI pays Rs. 20,000 per board as well as committee
meetings and HDFC Bank pays Rs. 20,000 per board and committee meeting, except for investor
grievance committee for which only Rs. 10,000 is paid, SBI can pay only upto Rs. 5,000 for
attendance at a central board meetings and Rs. 2,5000 for attending a board level committee.
4) POLITICAL INFLUENCE:

Due to their very nature, there are difficulties in implementing better governance practices. Many
public sector corporations are managed and governed according to the whilms and fancies of
politicians and bureaucrats. Many of them view PSUs as a means to their ends. A lot of them have
turned sick due to overdoses of political interference, even when their areas of operations offered
enormous opportunities for advancement and growth. And when the economy was opened up,
many of them lacked the competitiveness to fight it out with their counterparts.

5) CONFLICTS OF INTEREST

Avoiding conflicts of interest is vital. A conflict of interest within the framework

of corporate governance occurs when an officer or other controlling member of a
corporation has other financial interests that directly conflict with the objectives
of the corporation. For example, a board member of a solar company who owns a
significant amount of stock in an oil company has a conflict of interest because,
while the board he or she serves on represents the development of clean energy,
they have a personal financial stake in the success of the oil industry. When
conflicts of interest are present, they deteriorate the trust of shareholders and the
public while making the corporation vulnerable to litigation.

6) OVERSIGHT ISSUES

Effective corporate governance requires the board of directors to have substantial

oversight of the company’s procedures and practices. Oversight is a broad term
that encompasses the executive staff reporting to the board and the board’s
awareness of the daily operations of the company and the way in which its
objectives are being achieved. The board protects the interests of the
shareholders, acting as a check and balance against the executive staff. Without
this oversight, corporate staff might violate state or federal law, facing substantial
fines from regulatory agencies, and suffering reputational damage with the
public.

7) ACCOUNTABILITY ISSUES

Accountability is necessary for effective corporate governance. From the top-level

executives to lower-tier employees, each level and division of the corporation
should report and be accountable to another as a system of checks and balances.
Above all else, the actions of each level of the corporation is accountable to the
shareholders and the public. Without accountability, one division of the
corporation might endanger the success of the entire company or cause
stockholders to lose the desire to continue their investment.

8) TRANSPARENCY

To be transparent, a corporation must accurately report their profits and losses

and make those figures available to those who invest in their company.
Overinflating profits or minimizing losses can seriously damage the company’s
relationship with stockholders in that they are enticed to invest under false
pretenses. A lack of transparency can also expose the company to fines from
regulatory agencies.

9) ETHICS VIOLATIONS

Members of the executive board have an ethical duty to make decisions based on
the best interests of the stockholders. Further, a corporation has an ethical duty
to protect the social welfare of others, including the greater community in which
they operate. Minimizing pollution and eschewing manufacturing in countries
that don’t adhere to similar labor standards as the U.S. are both examples of a
way in which corporate governance, ethics, and social welfare intertwine.

The Role of Capital Market Governance:

Capital Market is an organized market mechanism for effective and efficient transfer of money
capital or financial resources from the investing class to the entrepreneur class in the private and
public sectors of the economy.

Simply, it is the market for all financial instruments, short-term and long-term as also commercial,
industrial and government papers. It provides reasonable measure of safety and fair dealings in the
buying & selling of securities.

Governance of companies is taken care by the boards of directors, who represent and are
responsible to the shareholders through their fiduciary duties. In companies that are listed, the
shares get exchanged or transacted between investors through a process facilitated by institutions
that constitute the capital market.

In addition to institutional investors, capital markets include intermediaries and even experts, who
continually acquire and disseminate into on a timely basis, enabling fair and efficient execution of
financial transactions.
Capital market institutions, such as stock exchange brokers, investment bankers, financial
institutions, etc. play a vital role in the Corporate Governance of listed companies. Along with these
institutions, Foreign Institutional Investors (FIIs), audit firms, regulatory agencies such as RBI, SEBI,
IRDA, etc., State Government and Central Government play an important role in bringing a platform
for transactions in capital and the way capital market function and establish norms for Corporate
Governance.

3) Institutional Investors:

Institutional investors have become major shareholders in the corporations. Every shareholder has
access to the same information and hence can act upon it. Thus, information advantages are rather
limited. So, institutions with their power and clout, aided with the kind of funds available with them,
usually, engage exclusive personnel to study, monitor, and make judgements on companies and
their future. This, in fact, enables them to avoid making wrong investments and make only good
investments. These institutions are supposed to follow the concept of a ‘prudent man rule’ as a test
of satisfactory fiduciary concept. A prudent man will manage the money of others just as he would
manage his own, that is, carefully and wisely.

The principal idea is that Managers of other people’s money must always put the interests of their
clients first – ahead of their own interest. But this does not always happen. Investment Managers
act in their own interests, when they increase the assets under management in order to earn better
fees, or ignore the interests of the investors who may be looking for the best risk-adjusted return
from their investments.

Institutional investors have been applying pressure on corporate to improve board structure and
achieve board independence. Many observers see such activism as ultimately improving investor
returns.

2) Investment Bankers (Ex: Axis Capital Ltd., HSBC, etc.)

Their ploy with companies usually starts with Initial Public Offers (IPOs) of companies. In order to
‘gain mandate for IPOs, the banks had to promise the new companies that they would
wholeheartedly sponsor the IPO, by making an extra effort to distribute the shares to investors all
over the world, by following the company in research after the issue, and by making a secondary
market in the stock for institutional investors’.

Investment Bankers and Institutional Investors offering a variety of financial and other services often
acted in connivance with the companies, not acting in the best interests of their clients and/or
investors. Most of the investment banks who employed analysts to ascertain the future prospects of
a potential client, advised on possible mergers and acquisitions, and also in identifying potential IPO
candidates. Such analysts, however, to get the jump on other analysts and on the company’s own
announcements, had to be plugged in to the company’s CEO and CFO (Chief Financial Officer)
closely, so as to receive information that not everyone was getting.
3) Asset Management Companies (Mutual Funds)

Trillions of dollars have been under the management of different types of asset management
companies all over the world. In the beginning, many of the local industrial houses joined hands
with foreign asset management companies to start mutual funds. Stringent regulations and capital
adequacy requirements restricted the entry and growth. But as time passed by, the asset
management industry (restricted to mutual funds as India was yet to open the doors to pension
funds) gained growth and became attractive.

While mutual fund business has grown considerably over the years, it has also added many other
banking and non-banking services such as commercial banking, credit cards, broking, etc. Also, pure
commercial banks, sensing that mutual funds could be a threat to their deposit mobilization efforts,
have also started their own mutual fund schemes. The fund managers try to maximize the assets
under management since their rewards essentially are decided by the size of assets under their
management while investors want the best risk-adjusted returns on their investments. These two
aims need not go together.

These asset management companies are powerful players in exercising (or failing to exercise) control
rights. As an industry, they can make the difference between governance success and failures. But
many of the agency conflicts among professional fund managers have become embedded in the
system itself, and appear to have weakened the overall ability of the market to defend against value-
destroying behavior on the part of the corporations. Some of the funds, however, are governance
conscious.

4) Insurance Companies

Insurance companies also invest heavily in equity assets. Some schemes such as ULIPs (Unit Linked
Insurance Plans) are more like mutual funds rather than insurance products. Most of the insurance
companies have also floated mutual funds. Many of these are issues that were earlier applicable to
the two other types, namely investment bankers and asset management companies, but most
insurance companies have also entered into many other areas of financial services.

5) Venture Capitalists/Private Equipty

Venture Capitalists (VCs) usually enter a company at the time of start up. Since they invest in or
acquire a reasonable holding in equity, they are usually given a seat on the board. While the
presence of a dominant shareholder is desirable for better governance, they are mostly concerned
about the financial success of the company, and their commitment to any company is only as long as
they get the right price to exit. Hence one cannot expect any long-term commitment for the better
governance of the company. The company also may have to compromise when it comes to the
choice of director. They have no choice but to be content with the choice offered by the venture
capital. When more than one VC invests in a company, the choice may be further limited.
6) Banks

Banks play a very important role in the development of entrepreneurship and the economy. They
help mobilize savings of the people of a country and lend it to entrepreneurs to meet their capital
investment needs, as well as working capital needs.

Banks play a very important role in the early stages of development of an economy since the capital
markets are likely to be less active and entrepreneurs have to resort to borrowing resources to meet
their capital needs. Less developed countries have less developed capital markets and hence, have
to resort to borrowings from banks in order to meet their fund requirements. Even when the capital
markets are developed, banks can play a major role as borrowing enables a company to avail of tax
benefits on interest payable, reducing the cost of capital as cost of capital on debt compared to that
of equity is low. Thus, while there is no doubt about the role played by banks in the development,
growth, and sustainability of the corporate sector.

In India, through the economic policy initiatives taken by the then Government under P.V.
NarasimhaRao, investment requirements of companies were mostly met by the development
financial institutions and banks. Given thrust of active involvement in the control firms, banks and
financial institutions included nomination of directors by them on the boards of companies to which
they lent funds.

7) Stock Exchanges:

Stock Exchanges also play a vital role in the capital market of any country. The joint stock company
concept needs an exchange mechanism enabling investors to transact their holdings. In addition to
this, stock exchanges try to bring in a discipline in the firms by insisting on many disclosure
requirements keeping the investors in mind.

Many countries have incorporated the governance mechanism for companies by incorporating
necessary guidelines through listing agreements between the company and stock exchange/s. In
India also, SEBI regulators corporate governance through a clause (Clause 49) forming part of the
listing agreements.

Regulator’s Role in Good Corporate Governance:

Corporate Governance, as of now, encompasses only companies or corporate entities have chosen
to raise money from the public. Even though the stakeholder theory or approach has been
considered as good for the running of an enterprise, the underlying premise of corporate
governance continues to be the shareholder theory or approach, as the assumption that continues
to pervade even today is that corporate governance is required because (or only because) there is a
possibility for agency conflict to exist between owners and managers.

The companies also depend on a number of stakeholders for their success – other service providers,
customers, government, and of course, the shareholders. They are accountable for all these
stakeholders. While it is expected that the corporate entity takes care of the interests of the
interests of the different stakeholders voluntarily, there may arise situations which may affect the
stakeholders, since the corporate entity may act in ways that will try to achieve one of its objectives
– making more money for the business and increasing the wealth of the providers of capital (the
shareholders). This is where some kind of external regulation makes sense.

In India, till eighties, productivity was not encouraged and the freedom of entrepreneurs restricted.
Regulators were, to a very large extent, anti-entrepreneurship and anti-development. At the other
extreme, the regulatory regime was gradually relaxed to such an extent that it resulted in a situation
of chaos, as was the case in the U.S. Relaxations of regulations led to exploitation by market players
leading to conflicts of interest situations culminating in crises such as Enron, WorldCom, etc. U.S.
Government gives a response - Act to discipline the corporate.

To make corporate governance more effective the SEBI since its setup in 1992 has taken up number
of initiatives, appointed various committees and has brought amendments to the Clause 35B and the
Clause 49 of listing agreement. Here the SEBI’s role in corporate governance is illustrated through
norms and provisions as stated these two clauses; the Clause 35B and the Clause 49 of listing
agreement. SEBI norms and guidelines under Clause 35B and 49 of the listing agreement for effective
Corporate Governance: Since its establishment, SEBI has taken initiatives to align Indian corporate
governance practices with the global standards adopted in advanced economies. The recent
amendments to Clause 35B and 49 of the listing agreement make Governance more effective and
rigorous in protecting the interest of all stakeholders. The amended Clause 49 of listing agreement is
in alignment with the new Companies Act, 2013. This clause is applicable to listed companies but as
per SEBI clarification, in future this clause will be applicable to non-listing companies also.

Can Regulators make a few people sit around a table in the boardroom, behind closed doors, and
behave in the right manner? Should they make the regulations even more stringent or should they
encourage and take steps to develop more activism among institutions such as institutional
investors, auditors, banks, etc., and within boards? Some of the regulations themselves have to be
seriously looked into.

➢ Most of the capital market regulators require corporate to announce quarterly performance.
This essentially puts pressure on corporate to show better performance every quarter.
Prices of company stocks are very much liked to such announcements.
➢ When executive compensation is linked to the company’s stock performance, there could be
incentives for executives to do some dressing of the financial performance or cut a few
corners here and there.
➢ Notwithstanding the limitations of regulation on corporate governance and firm behavior,
regulations are necessary even in the most market oriented economies.
➢ The involvement of the political process on the economic policies may result in, and at times
even significant, deviations from total free market conditions.
➢ Laws and regulations influence both structures and processes, which in turn can influence
behavior, but only to a degree. Regulations fail to deal effectively with the aberrant
behavior of some CEOs and other executives.
➢ Regulators constantly face the possibility that inadequate regulation will result in costly
failures, as against the possibility that over-regulation will result in opportunity costs in the
form of economic efficiencies which are not achieved. There are no definitive answers with
respect to optimum regulatory structures with respect to corporate governance.
➢ It has also been the experience of many countries that when laws and regulations are too
stringent, the prosperity to break them, or at least find loo holes in them, becomes higher.
Hence, it is better to adopt a ‘normative’ approach of development rather than a ‘coercive’
approach.
➢ While SEBI constituted a number of committees to study the corporate governance practices
and make their recommendations (K.M. Birla, Narayana Murthy Committees, etc.,) the
Deparmrtment of Company Affairs has also set up a number of committees (Naresh Candhra
Committee, Irani Committee, etc.) not to step on each other’s brief.

Pillars of Effective Corporate Governance The important elements of good Corporate Governance
are: Transparency • Accountability • Disclosure • Equity • Fairness • Rule of Law • Participatory
The SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India Act, 1992 was enacted by the Indian Parliament ‘to
provide for the establishment of a Board to protect the interests of the investors in securities and to
promote the development of, and to regulate the securities market and for matters connected
therewith or incidental thereto’.

Objectives of SEBI:-

Section 11(1) of the SEBI Act, 1992 explains the powers and functions of SEBI. As per the Act, it shall
be the duty of the board to protect interests of the investors in securities and to promote the
development of, and regulate the secutieis market by such measures as it thinks fit.

The statutory objectives are:

9. Protection of investors’ interests in securities.

10. Promotion of the development of the securities market.
11. Regulation of the securities market.
12. Matters connected therewith and incidental thereto.

Functions of SEBI:
To realize the above core objectives and to carry out its tasks, the Act spells out the functions of SEBI
in a greater details, as under:
31. Regulating the business in stock exchanges and any other securities markets.
32. Registering and regulating the working of stock brokers, sub-brokers, share transfer agents,
bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other intermediaries who
may be associated with securities markets in any manner.
33. Registering and regulating the working of the depositories, participants, custodians of
securities, foreign institutional investors, credit rating agencies, and such other
intermediaries as the board may, by notification, specify in this behalf.
34. Registering and regulating the working of venture capital funds and collective investment
funds and collective investment schemes including mutual funds.
35. Promoting and regulating self-regulatory organizations.
36. Pr0hibiting and regulating self-regulatory organizations.
37. Prohibiting fraudulent and unfair trade practices relating to securities markets.
38. Prohibiting insider trading in securities.
39. Regulating substantial acquisition of shares and takeover of companies.
40. Calling for information from, undertaking inspection, conducting inquiries and audits of the
stock exchanges, mutual funds and other persons associated with the securities markets and
intermediaries and self-regulatory organizations in the securities market.
41. Performing such functions and exercising such powers under the provisions of the Securities
Contracts (Regulation) Act 1956 as may be delegated to it by the central government.
42. Levying fees or other charges.
43. Conducting research.
44. Calling from or furnishing to any such agencies, as may be specified by the board, such
information as may be considered necessary by it for the efficient discharge of its functions.
45. Performing such other functions as may be prescribed.

Powers of the Board:

To carry out its responsibilities under the Act, the board is entrusted with the same powers as are
vested in a civil court in respect of the following matters, namely:
5. The discovery and production of books of account and other documents at such place and
such time as may be specified by the board.
6. Inspection of any books, registers and other documents of stockbrokers, sub-brokers, and
share transfer agents.

Powers to issue directions:

The SEBI is empowered to issue directions to the following intermediaries:
➢ stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who may be associated with securities
market.
➢ Depository, depository participant, custodian of securities, foreign institutional investor,
credit rating agencies, or any other intermediary associated with the securities market.
➢ Sponsors of venture capital funds, or collective investment schemes including mutual funds.
➢ And to any company with regard to matters to be disclosed by the companies as specified in
Section 11A.

Registration of Intermediaries:

➢ No stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust
deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who may be associated with securities
market shall buy, sell or deal in securities except under and in accordance with the
conditions of a certificate of regulations made under this Act.
➢ No depository (participant) custodian of securities, foreign institutional investor, credit
rating agencies, or any other intermediary associated with the securities market as the
board may, by notification in this behalf specify, shall buy or sell or deal in securities except
under and in accordance with the conditions of a certificate of registration obtained from
the Board in accordance with the regulations made under this Act.
➢ No person shall sponsor or cause to be sponsored or carry on or cause to be carried on may
venture capital funds or collective investment schemes including mutual funds unless he
obtains a certificate of registration from the board in accordance with all regulations.

Establishment of Securities Appellate Tribunals:

The SEBI Act also contained a provision for the establishment of an appellate authority to arbiter and
exercise power in matters of disputes over SEBI’s decisions as a regulator.

Civil Court not to have jurisdiction:

It is stipulated in the SEBI Act that under Section 15(Y) that no civil court shall have jurisdiction to
entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed
under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or
under this Act to determine and no injunction taken or to be taken in pursuance of any power
conferred by or under this Act.

SEBI (Amendment) Bill, 2002:

The major changes made under this Act were:
9. Search and seizure powers: Earlier, a SEBI officer could only ask market players for specific
documents, which allowed the latter to conceal incriminating documents. In the new Act,
SEBI officers, armed with a search warrant from judicial magistrate, can search the entity’s
premises and even size documents.
10. Freeze bank accounts: With an authorization from the judicial magistrate, freeze bank
accounts of any person or entity involved in any market violation.
11. Greater monetary penalties: Earlier, the maximum fine that SEBI could impose on a violator
was only upto INR 5 lakhs. This limit has now been increased manifold in market
manipulation or insider trading violations, the find could go upto INR 25 crore or three times
the profits made bny the entity concerned.
12. More board strength: The strength of the SEBI’s board has been increased from six to nine of
which three (excluding the Chairman) will have to be full-time directors. The Securities
Appellate Tribunal. The SEBI body that decides on appeals made by market intermediaries
and companies against orders passed by the SEBI Chairman, has also been strengthened
with an increase in number of members from one to three.

SEBI’s role in promoting C.G.:

The SEBI has been focusing on the following areas:
➢ Ensuring timely disclosure of relevant information.
➢ Providing an efficient and effective market system.
➢ Demonstrating reliable and effective enforcement.
➢ Enabling the highest standards of governance.

SEBI’S Role in the new Era:

The SEBI has made progress in number of areas:
➢ Abolition of capital issues control and retaining the sole authority for new capital issues.
➢ Regulation and reform of the capital market by arming itself with necessary authority and
powers.
➢ Regulating stock exchanges under Securities Contracts Regulation Act.
➢ Bringing all primary and secondary market intermediaries under the regulatory framework.
➢ Enforcing the companies to disclose all material facts and specific risk factors associated with
projects while going in for public issues.
Government’s Role in Corporate Governance

The Government has a role in the establishment and overseeing the running of such corporate
bodies. In India, the law under which body corporate are formed is the company law. The Company
Law in Idia made its first appearance in 1857 as Joint Stock Companies Act. Thereafter the
Companies Act 1866 was passed which was changed in 1882. Then it was replaced by the Indian
Companies Act 1913, which was later replaced by the Companies Act, 1956. It is seen that, even
today, though a number of amendments have been incorporated from time to time.

A company can empower any person to execute deeds under the common seal and it becomes
binding on the company. While there are a large number of provisions in the company law relating
to governance, we will limit our discussion to those with direct impact on the governance of a
company.

Memorandum of Association (MOA): It is the constitution of the company and hence its foundation.
A Memorandum of Association (MOA) is a legal document prepared in the formation and
registration process of a limited liability company to define its relationship with shareholders. The
MOA is accessible to the public and describes the company’s name, physical address of registered
office, names of shareholders and the distribution of shares. It is the constitution of the company
and hence its foundation. Thus, this is considered as a supreme document and comprises of
following important clauses:

13. Name Clause: The name of the company that must end with the term “limited”. Also, it must
be ensured that the name selected for the company should not resemble with the name of any
existing company.
14. Registered Office Clause: This clause requires to mention the registered office address of the
company.
15. Objective Clause: The objective clause requires to mention clearly the objective behind the
incorporation of the company, i.e. the purpose for which the company is being established.
16. Liability Clause: This clause requires to mention the extent to which the shareholders are
liable to pay off the debt obligations in the event of the dissolution of the company.
17. Capital Clause: Company’s authorized capital along with the nominal value of all kinds of
shares need to be disclosed here. Also, the company is required to state the list of its assets over
here.
18. Association Clause: As per this clause, the willingness of shareholders is required with
respect to their association with the company. For a public limited company minimum, seven
members are required to sign the memorandum, whereas in a case of a private limited company
minimum two members are required to do the same

Articles of Association (AOA) This prescribes rules regarding internal management of the company.
It describes the authorities and responsibilities of members (shareholders), directors, managing
director, manager, etc. It also contains provisions regarding raising funds through issue of shares,
borrowing, etc.

Body of members: They are real owners of the company but have no authority to look after the day-
to-day affairs of the company, or enter into contracts on behalf of the company. They must meet
atleast once a year at the AGM. They have powers to (1) adopt directors’ report (2) adopt auditors’
report (3) elect directors (4) appoint auditors and fix their remuneration (5) declare dividend. They
can also exercise powers to approve the proposed actions of the company at the AGM or specially
called meeting of members, namely the EGM.

Board of Directors: Directors elected by members from the board of directors, who has the
authority to supervise and regulate the activities of the company. It has the overall control over the
affairs of the company. The board must meet at least once every quarter and as often as necessary
for the purpose of business.

Managing Director/Manger/Director: Since the board cannot look after the day-to-day affairs of the
company, they appoint a manager, managing director, or a whole-time director, who work under the
overall supervision and control of the board.

Different roles of Government in the Economy:

There are four important roles played by the government in an economy, namely:

➢ The regulatory role

➢ The promotional role
➢ The entrepreneurial role
➢ The planning role

Regulatory Role:

➢ Government may determine the conditions under which persons or corporations may enter
certain lines of business as in the granting of charter, a franchise, a licence, or permitting any
‘person’ to use public facilities.
➢ Government may regulate or assist the conduct of economic ventures of various types once
they are under way.
➢ Govt. may control the relationship between various segments of the economy, the purpose
being to settle conflicts of interests or of legal rights and to prevent concentration of
economic power in the hands of few monopolicies.
➢ Government may put in place legally constituted regulatory bodies to protect investors,
consumers and the general public by ensuring best corporate practices.

Promotional role:

The promotional role played by government is very important in developed as well as developing
countries. Thus, considering the whole of its activities, a government does more to assist and to
help develop industrial, labour, agricultural and consumer interests than it does to regulate them.

The government have to assume direct responsibility to build up and strengthen the necessary
development of infrastructure such as power, transport, finance, marketing, institutions – for
training and guidance and other promotional activities.

Entrepreneurial role:

➢ In a democracy, the national emergency of war inevitably causes an expansion of state

activities, including public ownership because modern requirements of total war cause
people to forsake their convictions concerning private responsibilities and to concentrate on
massed power in the state apparatus.
➢ Major economic dislocations, such as the great depression of the 1930s, also tend to
stimulate state activities, again leaving a residue of public ownership that takes time to
efforts to dissipate, if it is ever finally accomplished.
➢ When a private undertakings become unprofitable but the need for their services continues,
government may be prevailed upon to acquire and manage such non-profitable business
concerns even at a loss.
➢ Governments are also required to extend the owner-manager relationship when there is a
pronounced wastage of national resources, or when the threat to them is great, thus
diminishing the nation’s ability to defend itself or to preserve the bases of a sound economy.

Forms of Government regulation:

The more important forms of regulation of private enterprises by the government especially in
developing countries like India are as follows:

➢ General direction and regulation of investment activity in private enterprises. This is

achieved through economic planning and industrial licensing policy.
➢ Regulation of investment, location, size and expansion of individual enterprises and specific
industries through a well-defined policy of industrialization.
➢ Regulation of prices of commodities and industrial products through legislative authority and
systematic investigation into cost structures and mark-ups.
➢ Regulation of monopolies and unfair trade practices or restrictive practices through
legislation.
➢ Regulation of wages and bonus for employees in a private sector to minimize exploitation,
ensure reasonable standards of living and maintain peace and harmony in industry.
➢ Regulation of corporate management.
➢ Regulation of specific norms of business activity such as speculation in shares and
commodities or imports/exports etc.

The Governments have to be proactive in the following areas:

➢ Government should ensure that stakeholders’ interests are protected by continuous
monitoring of companies, to see that they do not cheat their stakeholders.
➢ Government should make laws to govern companies, to undertake all the activities within
the rules of the game. It should also make sure that all companies adhere to rules, as for
example – MRTP (Monopolies and Restrictive Trade Practices) Act.
➢ If companies do not adhere to rules and regulations the government should penalize such
companies and make sure that they do not repeat it again.
➢ Government has appointed regulators to regulate several sectors, to monitor the activities
of companies, to allow them to a have fair competition in the market and also to save them
from disputes when problems arise – RBI, TRAI, SEBI, IRDA (Insurance Regulatory
Development Authority)

Enactment of Laws:
Different laws have been enacted by the government to fulfill the needs of different people in
society like employees, employers, customers and the society at large. To protect employees,
government has brought in legislations such as Factory Acts, Minimum Wages Act, Labour Laws and
Trade Union Act to make sure that they are well protected and their problems are solved.

As a Role Model:
Government should portray itself corrupt-free so that companies can follow its worthy example.
Removal of the licence system for several industries, greater transparency in administration,
granting of autonomy to public sector enterprises, reducing the role of the Inspector Raj in the
economy, allowing greater degree of competition in industries which were hitherto protected, will
all go a long way to reduce corruption.

Areas that need special attention:

The government should ensure that the quality of audit, which is required for effective corporate
governance, should be considerably improved. Government should ensure with assistance from
industry, the accountability of the CEOs and CFOs. It should try to maintain the quality and
effectiveness of the legal regulatory framework as well as the administrative framework.
IV UNIT
STRUCTURE OF THE BOARD
Purpose of the Board:
The purpose of the board is ‘to ensure the company’s prosperity by collectively
directing the company’s affairs, whilst meeting the appropriate interests of its
shareholders and relevant stakeholders’. But there exists a lot of confusion about what
are the really important issues that come under the purview of the board and what are
to be left to others (management).
Whatever the information that the board considers, the questions they pose, and the
discussions that take place at board meetings, they have only two fundamental
outcomes: to make decisions and to learn.

Corporate governance guidelines about board structure:

Over the years, the board has developed corporate governance guidelines to fulfill our
corporate responsibility to various stakeholders. Those guidelines ensure that the
board will have the necessary authority and practices in place, to review and evaluate
our operations when required. Further, these guidelines allow the board to make
decisions that are independent of the management. The board may change these
guidelines from time to time to effectively achieve our stated objectives.

Board Compositions with a special reference to Infosys Ltd.

Size and composition of the board : The current policy is to have an appropriate mix
of executive and independent directors to maintain the independence of the boad, and
to separate the board functions of governance and management. The board consists of
15 members, six of who are executive or full-time directors, one is non-executive and
8 are independent directors. Four of executive directors are our founders. The board
believes that the current size is appropriate, based on our present circumstances. The
board periodically evaluates the need for change in composition of its size.

Responsibilities of the Chairman, Co-chairman, CEO and the COO.: Our current
policy is to have a non-executive chairman and chief mentor – N.R. Narayana Murthy;
a co-chairman – Nandan M. Nilekani, a chief executive Officer (CEO) and managing
director – Salil Parekh; and Chief Operating Officer – S.D. Shibulal. There are clear
demarcations of responsibility and authority among these officials.
➢ The chairman and chief mentor is responsible for mentoring our core
management team in transforming us into a world-class, next-generation
organization that provides state-of-the-art, technology-leveraged business
solutions to corporations across the world. He also interacts with global
thought leaders to enhance our leadership position. In addition, he continues to
interact with various institutions to highlight and help bring about the benefits
of IT to every section of society. As chairman of the board, he is also
responsible for all board matters.
➢ The co-chairman of the board focuses on key client relationships, deals with
broader industry issues, provides global thought leadership, leads
transformation initiatives, contributes to strategy, and is a brand ambassador.
➢ The CEO and MD is responsible for corporate strategy, brand equity, planning,
external contacts and other management matters. He is also responsible for
achieving the annual business plan acquisitions.
➢ The COO is responsible for all customer service operations. He is also
responsible for technology, new initiatives, and investments. The co-chairman,
CEO, COO, the other executive directors and the senior management make
periodic presentations to the board on their responsibilities, performance, and
targets.
Board membership criteria: The nominations committee works with the entire board
to determine the appropriate characteristics, skills and experience required for the
board as a whole as well as its individual members. Board members are expected to
possess the expertise, skills, and experience required to manage and guide a high-
growth, high-tech software company, deriving revenue primarily from G-7 countries.
Expertise in strategy, technology, finance, quality, and human resources is essential.
Generally, the members will be between 40 to 60 years of age, and will not be related
to any executive directors or independent directors. They are generally not expected
to serve in any executive or independent position in any company that is in direct
competition with us.
Selection of new directors: The board is responsible for the selection of new
directors. The board delegates the screening and selection process involved in
selecting new directors to the nominations committee, which consists of exclusively of
independent directors. The nominations committee in turn makes recommendations to
the board on the induction of any new directors.
Membership term: The board constantly evaluates the contribution of the members
and periodically makes recommendations to the shareholders about re-appointments
as per statute. The current law in India mandates the retirement of one-third of the
board members (who are liable to retire by rotation) every year, and qualifies the
retiring members for re-appointment. Executive directors are appointed by the
shareholders for a maximum period of 5 years at a time, but are eligible for re-
appointment upon completion of their term. Non-executive/independent directors do
not have a specified term, but retire by rotation as per law. The nominations
committee of the board recommendations such appointments and re-appointments.
However, the membership term is limited by the retirement age for members.
Retirement policy: Under this policy, the maximum age of retirement for executive
directors is 60 years, which is the age of superannuation for our employees. Their
continuation as members of the Board upon superannuation/retirement is determined
by the nominations committee. The age limit for serving on the board is 65 years.
Board compensation policy: The compensation committee determines and
recommends to the board, the compensation payable to the directors. All board-level
compensation is approved by the shareholders, and separately disclosed in the
financial statements. Remuneration of the executive directors consists of a fixed
component and a performance incentive. The compensation committee makes a
quarterly appraisal of the performance of the executive directors based on a detailed
performance-related matrix. The annual compensation of the executive directors is
approved by the compensation committee, within the parameters set by the
shareholders at the shareholders’ meetings. The compensation payable to
independent is limited to a fixed amount per year as determined and approved by the
Board. The sum of which is within the limit of 1 percent of our net profits for the year,
calculated as per the provisons of the Companies Act, 1956.

Non-executive/dependent directors’ remuneration: Section 309 of the Companies

Act, 1956 provides that a director who is neither in the whole-time employment of the
company nor a managing director may be paid remuneration by way of commission, if
the company, by special resolution, authorizes such payment. Members of the
company at the annual general meeting held on 12 June 2004, approved payment of
remuneration by way of commission to NEDs, at a sum not exceeding 0.5 percent per
annum of our net profits. We have paid Rs. 4.19 crore as commission to our NEDs.

Memberships in other board: Executive directors may, with the prior consent of the
chairperson of the BOD, serve on the board of one other business entity, provided that
such a business entity is not in direct competition with our business operations.
Executive directors are also allowed to serve on the Board of corporate or government
bodies whose interests are germane to the future of the software business, or key
economic institutions of the nation, or whose prime objective is benefiting society.
Independent directors are not expected to serve on the boards of competing
companies. Other than this, there are no limitations on them, save those imposed by
law and good corporate governance practices.

Board Organizations usually found:

As we know, a BOD is a statutory requirement of a corporate. The duty of this
statutory body is represent and protect primarily the interests of the shareholders who
have taken the risk of investing their hard-earned savings in the shares of the corporate
and also the interests of other stakeholders. The board thus has the primary role of
exercising accountability to shareholders.
A board’s responsibilities are derived from laws, customs, traditions, and
contemporary practices management does while running the company to ensure that
the mission of the corporate is implemented.

Name Designation

Nandan M Nilekani Chairman

Inderpreet Sawhney Chief Compliance Officer

Nilanjan Roy Chief Financial Officer

A G S Manikantha Co. Secretary & Compl. Officer

Jayesh Sanghrajka Deputy Chief Financial Officer

Krishnamurthy Shankar Group Head

Richard Lobo Head - Human Resource

D Sundaram Independent Director

Kiran Mazumdar Shaw Independent Director

Michael Gibbs Independent Director

Punita Kumar Sinha Independent Director

Uri Levine Independent Director

Salil Parekh Managing Director & CEO

Mohit Joshi President

S Ravi Kumar President

U B Pravin Rao Whole Time Director & COO

Boards can be organized either as:
i. All-executive
ii. Majority-executive
iii. Majority non-executive
iv. Two-tier (where there will be two boards instead of one).

Director

The board-management differentiation

We will use the common framework as given to differentiate between governance and
management, and also describe the various types of boards.

Director

The all-executive board

In all-executive board, every director is also a fulltime employee of the company and
is paid for his full-time services for the company. The potential issue that can arise is
that the board is monitoring and supervising its own performance. In effect, the board
members are evaluating their own answer sheets written by them as Managers. While
this can have advantages of less or no communication gap and information blocks, it
can give rise to conflicts of interests.
Director

The majority-executive board

A majority executive board will have its membership dominated by whole-time

directors (WTDs). While there may be few non-executive directors (NEDs), members
of the executive clan will far outnumber the NEDs.

The NEDs get appointed because there is a need – a need for certain expertise which
is not available within the company. Or they may come in as nominees of a few major
investors to protect their interests or may be appointed to take care of strategic
suppliers, customers, or government bodies.

Director

The majority non-executive board

The majority non-executive directors board will have more outside directors than
executive directors. The members of unitary boards, whether executive or non-
executive, have to be elected by the shareholders at the general meeting. While
theoretically the law requires that the members have to be elected by the shareholders,
shareholders usually end up ratifying the nomination made by the board or the
nomination committee.
Director

Some of the developed and developing countries follow the Anglo-American system
of a unitary board structure. European countries like Germany, Austria, and
Scandinavian countries like Denmark and Netherlands require a two-tier board or
dual-board system consisting of a supervisory board and a management board.

The management board is responsible for managing the enterprise, with its members
jointly accountable for the management of the enterprise. All of a company’s major
functions shall be represented on the management board. It is the chairman of the
management board who coordinates the work of the management board. The
supervisory board appoints, supervises, and advises the management board, and is
responsible for decisions of fundamental importance to the enterprise.

The supervisory board will have a chairman appointed to coordinate the work of the
supervisory board. The supervisory board consists of representatives of the
shareholders and employees. The members of the supervisory board are appointed by
shareholders (shareholder representatives) at the general meeting and employee
representatives are nominated by the employees of the enterprise.

Employee representation is compulsory on the supervisory board. The supervisory

board appoints, supervises, advises, and if necessary dismisses members of the
management board. It is responsible for taking decisions of fundamental importance
to the enterprise. Representatives elected by shareholders as well as employees are
equally obliged to acat in the company’s interests. It also approves the distributions of
profit proposed by the management board. It has to ensure the integrity of the
company’s accounting, audit and financial reporting systems.

The supervisory board can never have more than two former members of the
management board so as to maintain its independence from the management board.
The differences between supervisory and management boards are given in the below
table:

Supervisory Board Management Board

Members who are shareholder Members are appointed by the
representatives are elected by supervisory board
shareholders in general meeting and
members who are employee
representatives are nominated by
employees.
Controls the direction of the business Manages the business
enterprise
Oversees the establishment of the Provides the various financial information
operating systems and information and other reports to supervisory board
systems by the management board and implements appropriate systems for
better management of business.

Role of the Board in ensuring good corporate governance

The clear message from the series of corporate debacles that occurred in America and
several parts of the world, was imple that the board of directors is increasingly being
recognized as a critical success factor for corporations, be they large or small, private
or public. This understanding and appreciation of the role of the boards as being
valuable has resulted in several recommendations to boost their contributions to
success of companies by innumerable committees that have been appointed by
governments and public spirited organizations all over the world.

The following points will enumerate how a strategic board can be built to ensure
better governance practice.
1. Small size of the board: The smaller the size of the board, the greater will be
the involvement of its members. This will lead to a more cohesive functioning
and decision-making could be expedited, all of which will add to the efficiency
of the organization.
2. Independence of the board: Independence should be the essence of strategic
boards. To achieve this end, it is advisable to have less number of insiders and
more outsiders. This kind of composition of the board will add to the
‘proactiveness of the company’s board’. Further, an insider’s allegiance is
likely to be to his or her boss and not necessarily to the company’s
shareholders./ Another downside to an insider dominated board is that not only
can the CEO intimidate insiders, but insiders can also inhibit the CEO.
Managements have a vested interest to prefer insiders as directors to the board
as they are likely to continue the status quo in policies and procedures that they
themselves have helped to create and retain the present senior managers.
3. Diversity of the Board: It is of great importance that the board is composed of
members with varied experience and expertise and diverse professional
qualifications, but also of people with different ethnic and cultural
backgrounds. ‘With markets in general, and shareholders in particular
becoming active in governance issues, the pressures are intensifying on
companies to diversify and broaden board membership. And thankfully, the
phenomenon is not restricted to just the US and UK, this increased activism is
forcing companies worldwide to reform their boards in tune with the rapid
globalization of business.
4. A well-informed board: It goes without saying that the effectiveness and
efficiency of the board of directors depends on the intelligent, timely and
accurate information it gets from the management. The ernance have
recommended that even non-executive, independent directors should have
access to a free flow of information on various issues in which they are called
upon to decide. They should be allowed to have professional advice, if needs
be, and the cost of it should be borne by the company.
5. The board should have a longer vision and broader responsibility: The
very objective and composition of the board dictate the need for a broader
responsibility and longer vision than those of chief executives. The CEO has a
specific and focused mission of running the enterprise as a profitable one by
concentrating on its day-to-day transactions. While the concerns of the CEO
will centre around his immediate tasks on hand to enable a company solve its
problems and tackle issues that would lead to the profitability of the firm
during a financial year, the board, especially when it is composed of several
outside directors, will work out long term strategies, take investment decisions
and such other policy perspectives that would ensure not only the secular
interests of the firm, but also of all its stockholders.

The Role of Directors

The board has to shoulder a larger responsibility than the CEO, whose role is limited
to being actively engaged with routine management functions. However, ‘there are
many boards that overlook more than they oversee’. This is more so in family-owned
enterprises which are common in Asisa and Latin America. In India, for instance, it is
common to find family-owned concerns being run by promoters as their personal
fiefdoms
For better governance, the board should function as follows:
1. Directors should exhibit total commitment to the company. An efficient
and indepdendent board should be conscious of protecting the interests of all
stakeholders and not concerned too much with the current price of the stock.
According to Roz Ridgway, the hallmark of a good director is that he or she
attends and actively participates in the meetings. This requires a cent percent
commitment. .
2. Directors should steer discussions properly: Another important function of
the director is to set priorities and to ensure that these are acted upon. The
directors should see that all important issues concerning the company’s
business are discussed and decision taken, and nothing trivial dominates and
bogs them down. A good director rarely dominates or hijacks the discussion to
his line of thinking, but steps in when the discussion needs to be directed or
adds newer thoughts after letting others have their say.
3. Directors should make clear their stand on issues: A director is also
expected to have the courage of conviction to disagree. A good, responsible
and duty-bound director should be willing to register dissent, when and where
needed. The management led by the CEO should know that they are bineg
challenged, should be kept on alert and should not take things for grantetd.
Directors should also be alert to any deteriorating situations in functional areas
of finance, stock market, sales, personnel and especially those relating to moral
issues.
4. Directors’ responsibility to ensure efficient CEOs: Directors have great
responsibility in the matter of employment and dismissal of the CEO. The
board as a whole, should recruit the best CEO they can probably hire, based on
antecedents and market reports, evaluate objectively on a continuing basis his
or her implementing effectively or otherwise the strategic planning devised by
the board. ‘Great boards are those which proactively govern, help avoid the
big mistakes, strategies and most importantly the best leadership is in place
with the resources to lead.
5. Challenges posed by decisions on acquisitions: One of the toughest
challenges confronted by boards arises while approving acquisitions. It so
happens in most cases that the board takes up the issue of acquisition only
when the process has been set in motion and substantially gone through by the
management. It will lead to a terrible embarrassment both to the CEO and the
board, if the half-way-gone-through proposal has to be shelved. More of these
none-too-worthy proposed acquisitions have to be accepted because of these
predicaments.
6. A board should anticipate business events: An efficient board should be able
to anticipate business events that would spell success or lead to disaster if
proper measures are not adopted in time. The directors should be alert to such
ensuring situations and be ready with the strategy to meet them so that either
way the company stands to gain.
7. Directors should have long-term focus and stakeholder interests: Directors
have a duty to act bonafide for the benefit of the company as a whole. This
duty is owed to the company, that is, the separate legal person that
incorporation brings into existence, and not to any individual or group of
individuals. This would imply, as per the current laws, that directors are
required to act in the interests of share-holders, but at the same time, to
consider such interests with long time focus. They ought to help build
productive relationships between the company and its employees, customers
and suppliers, or any other kind of investment that would serve the long term
interests of its shareholders.
8. Promoting overall interests of the company and its stakeholders are of
paramount importance: In recent times, those who advocate reform of laws
governing corporate practices stress the importance of reformulation of the
concepts behind these laws. While accepting the directors should not be
required to do anything that would be contrary to the interest of shareholders,
stresses that these interests should be understood as long term ones. This
reformulation of the concept should encourage managers to pay great attention
to the relationships that are the source of long term value. Once this becomes
accepted, it will be logically consistent for the directors to exercise their
powers in order to promote the success of the company as a business enterprise.
By doing so, they can have regard to the interests of share-holders, employees,
creditors, customers and suppliers.
9. Social responsibility: Social responsibility is seen as a means of not only
compensating the society for anti-social corporate behaviour such as causing
ecological damages, making money at the cost of patients by launching fully
untested medicines, etc. but also for making use of the resources created by the
society such as trained manpower markets for the supply of inputs for the
disposal of produced goods and services.

DUTIES AND RESPONSIBILITIES OF DIRECTORS:

Section 2(13) of the Companies Act defines a director as follows:
A Director includes any person occupying the position of director by whatever name
called. The important factor to determine whether a person is or is not a director is to
refer to the nature of the office and its duties. It does not matter by what name he is
called. If he performs the functions of a director, he would be termed as a director in
the eyes of the law, even though he may be named differently.

A director may, therefore, be defined as person having control over the direction,
conduct, management or superintendence of the affairs of a company. Again, any
person in accordance with whose directions or instructions, the board of directors of a
company is accustomed to act is deemed to be a director of the company.

Duties and responsibilities of Directors:

Directors have certain duties to discharge. These are
(i) fiduciary duties,
(ii) duties of care, skill and diligence;
(iii) duties to attend board meetings, and
(iv) duties not to delegate their functions except to the extent authorized by the Act
or the constitution of a company and to disclose his interest.

With regard to fiduciaries, directors must (a) exercise their powers honestly and
bonafide for the benefit of the company as a whole and (b) not to place themselves in
a position in which there is a conflict between their duties to the company and their
personal interests.

They must not make any secret profit out of their POSITION. Further, the fiduciary
duties of directors are owed to the company and not to individual shareholders. Of
these four, the first two duties need elucidation. Directors should carry out their duties
with reasonable care and exercise such degree of skill and diligence as is reasonably
expected of persons of their knowledge and status.

However, a director is not bound to bring any special qualification to his office, as for
instance, the director of a medical insurance company is not expected to have the
expertise of an actuary or the skills of physician. But if a director fails to exercise due
care and diligence expected of him, he is guilty of negligence.

The standard of care, skill and diligence depends upon the nature of the company’s
business and circumstances of the case. Factors such as the type and nature of work,
the division of powers between directors and other executives, general usages,
customs and conventions in the line of business in which the company is engaged and
whether directors work gratuitously or for a remuneration will have an impact on the
standards of care and diligence expected of the directors.

TYPES OF DIRECTORS
A unitary board, which is mostly observed to exist will consist of basically two types
of directors: Executive and Non-Executive Directors.

1) Executive Directors: are in full time employment of the corporate and are
expected to devote their energy and efforts to the corporation full-time. Managing
Directors and other full-time (whole-time) directors belong to this category. They are
on regular roles of the company and hence draw remuneration by way of salaries and
other perks which get fixed at intervals during their tenures. Even though they are in
full-time employment, they may also be retiring after a specific tenure, depending on
the AOA of the company. Some of these directors may be the promoters or members
belonging to the promoter families.
Executive Director is a member of both the board circle and the management triangle.
The Chief Executive Officer (CEO), some times known as the Managing Director in
common wealth law jurisdiction, is likely to be a member of the board, but does not
have to be. Similarly, the Chief Finance Officer (CF), the Chief Operating Officer
(COO), and other members of what is sometimes called the “C” suite of top executive
officers may or may not also be executive directors.

2) Non-Executive Directors: Non-Executive Directors on the other hand are not in

full-time employment with the company. They devote only part of their time for the
company. Of course, being on the board of the company only part-time does not
exonerate them from any of the directorial duties.
The Non-executive Directors does not hold any executive management position in the
company. He or she is in the board circle but not the management triangle. In recent
years, a further distinction has crystallized between those NEDs who are independent
of the company and those who, although not executives of the company, have other
connections with it.

There are different classifications for the NEDs:

a) Independent Directors : These Directors are nominated to the board for their
expertise and they are expected to have an independent view and judgement of the
company and the business. Most of the countries have made regulations regarding the
inclusion of independent directors on corporate boards upto a certain percentage of the
total board strength. As well as meeting the independence criteria, the successful
NEDs need to be capable of thinking independently, making a stand, and, if necessary,
being tough-minded in board level deliberations.
b) Connected NEDs: is a director who although not a member of the management
team, does have some relationship with the company. The connection might be that
the director is a retired executive of that company, is a close relative of the chairman
or the Chief Executive, was nominated by a large shareholder, is linked with an
important

c) Nominee Directors: A nominee director is a director who has been nominated to the board by
a major shareholder or other contractual stakeholders, such a significant lender, to represent its
interests. Nominee directors can find themselves in a tricky situations because of their inevitable
dual loyalties. As directors owe that, they treat all of the shareholders equally, in board
deliberations they should be representing the interests of all shareholders and contractual
stakeholders equally, not representing a set of interests alone.
I. Institutional Nominees: Many institutions invest in the company by lending to
the company or investing in the equity capital of the company. Such institutions would
like to protect their interests in the company. Hence, they will nominate directors on the
board. Development financial institutions (DFIs), mutual funds, venture capital
companies, investment banks all invest in companies. Normally those institutions who
have a major stake in the company by way of equity or debt would like to nominate their
representatives to the board.
II. Promoter Nominee Directors: They usually belong to the promoter families
or their associates. They might hold shares or not. In the company they are expected to
strengthen the hands of the promoter group in the boardroom.

d) Lead Independent Director: Companies may also decide to have an LID who will chair all
the meetings of the independent directors. Most companies with forward-looking boards today
encourage separate meetings of independent directors without the other members present. The
independent directors will appoint a lead director to chair such meetings of IDs. The decisions or
concerns arising from such meetings will be conveyed to the full board by the lad director or
concerns arising from such meetings will be conveyed to the full board by the lead director.

Additional Directors: If the Articles specifically so provide or enable, the Board has the
discretion, where it feels it necessary and expedient, to appoint Additional Directors who will
hold office until the next AGM. However, the number of Directors and Additional Directors
together shall not exceed the maximum strength fixed in the Articles for the Board.

Alternate Director: If so authorized by the Articles or by a resolution passed by the company in

general meeting, the Board may appoint an Alternate Director to act for a Director ("Original
Director"), who is absent for whatever reason for a minimum period of three months from the
State in which the meetings of the Board are ordinarily held. Such Alternate Director will hold
office until such period that the Original Director would have held his or her office. However,
any provision for automatic re-appointment of retiring Directors applies to the Original Director
and not to the Alternate Director.

'Shadow' Director: A person, who is not appointed to the Board, but on whose
directions the Board is accustomed to act, is liable as a Director of the company,
unless he or she is giving advice in his or her professional capacity. Thus, such a
'shadow' Director may be treated as an 'officer in default' under the Companies Act.
FUNCTIONS OF THE BOARD

The Board of Directors sets the tone and direction of an organization, thus effective board leadership
and governance is critical in helping to ensure that a civil society organization can operate to its
fullest capacity. Creating an effective board is a continual process that includes recruitment,
engagement and development, as well as striking a balance between providing oversight and
support to the organization’s leadership.
Given the significant role of the board, it’s not surprising that many of our partners have asked for
our support in evaluating the role and effectiveness of their board and in helping them to identify
ways to get the most out of their board.
The primary responsibilities of a board are:

Determine mission and strategy. It is the board's responsibility to create and review a statement of
mission and strategy that articulates the organization's goals, and means of achieving those goals.
Boards also provide a mechanism by which constituents, who may provide the mandate for the
organization, have a voice in setting strategy and providing oversight of programmatic work. Once
mission and strategy is determined, it's the board's role to ensure the organization’s programs
contribute to the laid out strategy. When need for a change in mission and strategy is identified, the
board plays a role in redefining the new vision.

Select, support and evaluate the CEO. Boards must reach consensus on the CEO's responsibilities
and undertake a careful search to find the most qualified individual for the position. The board
should also develop and maintain a succession plan for replacing an executive in case of exit.
Moreover, the board should ensure that the executive director has the moral support, as well as the
professional skills and training that he or she needs in order to further the goals of the organization.

Ensure effective planning. Boards must actively participate in an overall planning process in regards
to longer-term strategic planning and annual work planning. The Board should assist in monitoring
the organization’s performance against planned goals, and adaptively managing the plan.

Oversee financial management and protection of assets. The board must assist in developing and
approving an annual budget that supports the organization’s work plans and ensures that proper
financial controls are in place to protect the assets of the organization. It is the board’s responsibility
to select an auditor and review and respond to the results of an audit on an annual or bi-annual
basis.

Ensure adequate financial resources. The board has a responsibility to support the executive team
in their efforts to secure adequate resources for the organization to fulfill its mission.

Develop and maintain a competent board. All boards have a responsibility to articulate
qualifications for candidates, assess and maintain desired skill sets on the board, orient new
members, and periodically and comprehensively evaluate their own performance.

Ensure legal and ethical integrity. The board sets the tone of the operations of the organization, and
should articulate the values and principals that set that tone. It is ultimately responsible for
adherence to legal standards and ethical norms.

Enhance the organization's reputation. The board should be ambassadors for the organization,
articulating the importance of the mission and the value of the organization’ work. The board should
work to garner support from the community, including key stakeholders such as government, like-
minded organizations and donors.
Fixing remuneration: The board fixes Directors’ remuneration, based on a proposal from the
Nomination and Remuneration Committee.

GOVERNANCE RATINGS
Institutional investors use the corporate governance rating system as a tool to ascertain
the quality of governance systems in a company where they propose to invest or
where they have invested.

A corporate governance rating can be a powerful indicator of the extent to which a

company is currently adding, or has the potential to add in the future, the shareholder
value. This is because a company with good corporate governance is generally
perceived as more attractive to investors than one without’.

A number of rating agencies from all over the world have developed their models for
evaluating corporate from a governance point of view, and assigning them corporate
governance scores. Few of them are: Standard Poor’s (S&P), Governance Metrics
International (GMI), Institutional Shareholder Services (ISS), etc.,Credit Analysis and
Research Limited (CARE).

Since Corporate governance depends greatly on the levels of transparency and the
reporting practices in the country in general, ‘an appropriate approach for a corporate
governance rating system is first to have a rating of the corporate governance in a
given country. This necessitates finding out whether the country is englightened on
the need for better corporate governance, are there established guidelines, laws, or
codes of best practices, and are the corporate following these.

After establishing the scenario present in a country, the rating companies can set about
assigning governance ratings for individual companies. The rating agencies collect a
variety of information from companies but do not depend only on them. They also try
to cross-check and verify such information though other channels. Different rating
agencies follow different rating models, but the underlying fundamental principles are
rather similar – fairness, transparency, accountability, and responsibility.

According to Adilabadkar (2005), a corporate governance score is based upon the

assessment of four key areas of corporate performance:

Ownership structure, which asks who owns and controls the company and what
conflicts are likely to arise from the ownership structure;
Financial stakeholder rights and relations, which look into ownership rights,
minority shareholder protection, voting procedures and takeover defences.

Transparency and disclosure, which look at the quality and accessibility of financial
and operational disclosure, including transparency of accounting methods, the
integrity of the audit process, and how the audit committee oversees and maintains
auditor independence.

Board Structure and process, which looks at board independence, effectiveness,

successions policies, and the process of setting executive pay and aligning it with the
interests of shareholders.

S&P, which started its corporate governance score (CGS) services in 2002, is based
on four company characteristics.

➢ Ownership structure and concentration.

➢ Financial stakeholders’ rights and relations.
➢ Transparency and disclosure, and
➢ Board structure and process.
For S&P to determine a CGS for a company, the company has to request S&P for it.
S&P reviews the client company’s documents both publicly available and
confidential, and has discussions with executive management, directors, shareholders,
analysts, bankers, etc. After the process is completed, S&P awards a score on a scale
of 1 to 10 within each of the four areas mentioned above. The client company can
decide whether to make the rating public.

CRISIL uses the following rating criteria:

➢ Equitable treatment of shareholders
➢ Transparency and disclosure
➢ Composition of board
➢ Management assessment
➢ Value creation for various stakeholders.

CARE, on the other hand, uses the following criteria.

➢ Board composition and functioning
➢ Ownership structure
➢ Organization structure and management information system
➢ Shareholder relationship
➢ Disclosure and transparency
➢ Financial prudence, and
➢ Statutory and regulatory compliance.

Merits of Corporate Governance Ratings:

a) For Forms:
➢ Enables firms to obtain an independent and reliable assessment about their
quality of governance
➢ Firms can understand their relative positioning in the national and international
scenario.
➢ Firms with better ratings can expect to lower the risk premium placed on them
by capital markets, and thereby reduce cost of capital.
➢ Firms can use the ratings (their own and those of competitors) as references
and net benchmarks for further improvements.
➢ Firms get to understand whether they add value to the stakeholders of the
company.
➢ It enables firms to improve their image/visibility/credibility in the society.
➢ Enables the company to attract talent to the board and management.
b) For investors/other stakeholders
➢ Enables investors to make informed decisions.
➢ Information availability brings in institutional interest in the company resulting
in better price efficiency.
➢ Banks and other financial institutions can make informed decisions to lend and
fund the company.
➢ Employees. Customers, suppliers, and other stakeholders will be keen to
associate with a well-governed firm.
➢ Increases the confidence of the capital markets in firms.

Limitations and Demerits of Corporate Governance Ratings:

There are some demerits also.

➢ The rating agencies have to reply heavily on information provided by the firms.
➢ Different institutions offering governance ratings stress on different parameters
to ascertain governance performance. Thus, the ratings of a firm may vary
from one rater to another. This can send confusing signals to the ordinary
investors who do not know or who do not have the time to learn about the
differences in parameters.
➢ It is voluntary in nature; hence, if a company does not volunteer it need not
necessarily mean that they are low on governance performance compared to
other firms with a high rating.
➢ The methodology relies heavily on structural aspects rather than on the process
of governance. This, once again, brings back the criticism on general
governance reforms which has been more structural with consequent in-built
deficiencies.
➢ Governance scores may not be able to prevent many maladies such as insider
trading, false reporting, international fraudulent practices of the CEO and other
members of the board, or misuse of resources by the management, etc. This
was evident in the case of Satyam Computers which had a high governance
rating.
➢ The decision on making the rating public, by and large, rests with the company.
➢ Since rating is not compulsory and involves a lot of costs for the firms, only a
very small percentage have volunteered, making it difficult for an investor to
use them as a yardstick.
➢ Ratings have been assigned based on data and information abut current
working of the firm. They do not necessarily look at the historical behavior of
a firm with regard to governance matters and cannot assure that the good/bad
practices of the current will be carried over to the future.

CONFLICTS OF INTERESTS
Conflicts of interests are a major challenge to the establishment and maintenance of
good governance practices, and can occur and exist irrespective of the ownership
structures. While some of the conflicts may be similar in nature, others may be
typical to the type of ownership structures. Let us look into the conflicts of interests
in typical ownership structures.

I) Conflicts of Interests in Family-owned and Managed Companies.

II) Conflicts of Interests where Institutions hold major stakes
III) Conflicts of interests in PSUs

I) Conflicts of Interest in Family-owned and managed companies.

While the earlier allegations of family-managed partnerships or private limited
companies flourishing at the expense of publicly-listed companies managed by the
same families may no longer be valid, thanks to the transfer pricing norms to be
followed by them, a number of conflicts of interests continue to exist. The most
commonly observed conflicts are:
➢ Delineating ownership from management becomes difficult. Governance has
to be distinct from management. Managers might embrace risks which at times
could affect the very existence and/or goodwill of the organization and
business. The board’s job is to have a hold on risks in order to ensure a
sustained will-being of the business and the organization. When owners are
also in management, there can be serious conflicts of interest. The issue
becomes more complicated when owners handling management have an
overwhelmingly dominant shareholding.
➢ Another issue relating to conflicts is when the publicly-listed family companies
enter into dealings or transactions with other publicly-listed or other entities
belonging to family members or their relatives. The expression, ‘Blood is
thicker than water’, could be used to justify such transactions. Today, SEBI
insists that all such related party transactions be disclosed in the corporate
governance report. For example, the annual report of Bajaj Auto Ltd. Details
the ‘pecuniary relationship or transactions of non-executive directors’ who
belonging to the family under the heading ‘Remuneration of directors’ as
follows:
• Shekhar Bajaj is a director of Bajaj Electricals Ltd. during the
year under review, the total value of services availed by Bajaj Auto from
Bajaj Electricals Ltd. amounted to Rs. 22.8 million.
• Shekhar Bajaj is a director of Hind Musaffir Agency Ltd, an accredited
travel agency, during the year under review, the total value of services
availed by Bajaj Auto from Hind Musafir Agency Limited amounted to
Rs. 79.1 million.

Loopholes in the Company Law:

The company law also has loopholes in this regard. Under Sub-clause (5) of Clause
132, independent directors can have transactions with the company up to a value of
10% of the turnover of the company. ‘Many companies have an annual turnover in
excess of Rs. 100 billion, (Rs. In crores in the article) and if a director transacts with
such a company for Rs. 9.9 billion (Rs. In crores in the article), he would still be an
independent director, in law. Such a provision throws all canons of corporate
governance to the winds’.

➢ The issue could be relating to the nomination of independent directors itself.

The loopholes in the Companies Act enable companies and/or promoters to
nominate persons known to them. Prithvi Haldea calls such directors ‘Home
Directors’ (Independent Directors). This is because, according to the
Companies Act, persons from the wife’s side (such as brother/sister-in-law,
father-in-law) or mothers side (mother’s brother) are not considered as
relatives. Thus, relatives can be on boards, giving rise to conflicts of interests,
but they do not catch the attention as they could be classified as independent.
Promoters could thus assemble enough support from boards where
independence could be only on paper
➢ Another issue could be squeezing the public limited company for private gain.
This was evident in the case of the Satyam affair. The Rajus, who held a
minority sake of 8.65% in the flag-ship company, publicly listed Satyam and
tried to use the cash from Satyam to invest in two family-promoted companies
– unlisted Maytas Properties and listed Maytas Infrastructure (where the stake
of Rajus were reported to be 35 and 36 percent respectively).

I) Conflicts of Interests where Institutions hold major stakes:

Variety of financial interests:

Most of the institutional investors, such as pension funds, mutual funds, or insurance
companies are part of a financial conglomerate offering a variety of financial services,
such as advisory, restructuring, investment banking, venture capital, cross-border
deals, and some even commercial banking services. While the individual entitites
offer these services, they would be subsidiaries or associates of an umbrella company
offering a gamut of financial services. One mutual fund arm of a financial service
conglomerate may have invested their funds in the company’s equity and the pension
fund arm may manage the pension fund contributions of the company’s employees on
behalf of the company. The mutual fund as well as the pension fund would aim for
the total net benefits for the two arms together. They may also keep in mind the
potential business interests. While the mutual fund has a responsibility to act in a
fiduciary capacity for the investors who have put their hard-earned savings in the units
of the mutual fund, which might force the mutual fund to take a hard look at
governance of the company, they may relax on this if they stand to gain in the form of
additional businesses for the conglomerate as a whole.

According to Smith and Walter (2006), individuals who have invested funds in the
company’s equity through the mutual fund vehicle ‘are exposed to both agency
conflicts of corporate managers as well as agency conflicts of investment managers.
When institutions, such as mutual funds or investment bankers not only act as agents
on behalf of their clients (investors) but also invest their own funds generated over a
period of time, there can be conflicts of interest.

Cross Directorships:

Cross Directorships can also result in conflicts of interest. Many bank nominees may
occupy board seats on client companies. These banks, or their investment banking
arms, or mutual funds promoted by them, could also be investors in the client
company’s shares. Such cross directorships may prevent the right information from
reaching investors.

Use of Lending Power:

A financial conglomerate may use its lending power to influence a client to employ its
securities or advisory services, or on the other hand, deny credit to clients that refuse
to use their other services.

Smith and Walter (2006) identified eight basic conflicts of interest in the fund
management industry:

1. Fund Managers prefer independent directors who comply with the rules but are
cooperative, supportive, and not difficult to work with. Investors prefer
directors who will robustly perform their fiduciary duties to the mutual fund
shareholders.

Mutual fund directors are expected to represent the interests of their

shareholders in the selection of the fund management company, and in
negotiating fees and expense reimbursements. If the directors are not satisfied
with the fund manager, they can fetch another.

2. Fund managers want maximum fees and expense reimbursements. Investors

want their fund directors to negotiate minimum total costs and fully disclose
these costs. But very rarely do boards try to reduce the expenses.
Mutual fund directors get fat pay cheques so that they never even try to
question the fund managers, forget about replacing the fund manager.
3. Fund Managers want to ensure that they are re-appointed. Investors want
boards that act vigorously in selecting the best managers they can find who are
capable of top-flight, risk-adjusted performance.
4. Fund Managers want to increase asset under management. Investors want
optimum investment returns, after expenses and taxes. In reality, while funds
under management have increased considerably, the fees and other expenses
have also gone up.
5. Managers want to push their funds through brokers and financial advisers who
need to be compensated by charging fees for distributing the funds to the
investors who buy them. Investors do not want to pay these fees if they receive
no benefit from them. These fees appear to benefit management companies at
the expense of fund investments.
6. Managers want to lower unreimbursed costs through soft dollars commissions
from broker-dealers. Investors want the best-price execution of trades and
lowest commissions. Brokerages usually reimburse the various costs incurred
by fund management companies in return for volume of business. When this is
done, the fund managers may not get the best-price execution of trades and
lowest commissions.
7. Managers want to favour their own funds by obtaining a ‘shelf space’ in
distribution channels, while investors want access through brokers, to the best
and most appropriate funds for their own needs.
8. Managers want to be able to organize funds to assist other business interests of
the firm, such as investment banking and promoting investments in particular
stocks. Investors want all investment decisions by managers to be at arm’s
length and objective.

II) Conflicts of interests in PSUs

Most of the conflicts of interest in PSUs occur because of the roles played by
bureaucrats (Government officials) and politicians in the running and management of
the enterprise.

For example, politicians or bureaucrats may try to have their candidate as the
chairman and/or managing director in order to push through their private agendas
rather than getting the best professional to run the PSU. There have also been many
instances where the chairman and/or managing director, or other senior executives of
the PSU has placed orders or awarded contracts at rates higher than the best prices,
and earned hefty commissions on these. Orders or contracts may also be given to
those who do not have the necessary capabilities to execute them. What is best for the
PSU usually gets neglected. There may also be issues such as ministers or politicians
yielding to recommendations of their cadre and sometimes even creating positions or
designations that are not all needed, leading the PSU to have a bloated workforce and
driving it into the sick category. Politicians or bureaucrats may even harp on the
flimsy reason that PSUs have employment generation as one of their aims. Most of
the conflicts of interests with regret to PSUs dwell on the area of decision-making,
which is very often not founded on merit.

Other conflicts of interests in general:

While the conflicts of interests dicussed above are typical of the type of ownership,
there are a number of other kinds of conflict of interests which are general in nature
and observed across all enterprises irrespective of the ownership criteria. The
commonly observed conflicts of interests are:

A director keeps adheres to a narrow agenda reflecting the interests of the sponsoring
shareholders rather than representing the entire shareholders as a group, as the law
mandates.
The auditor in one company is an independent director in another company belonging
to the same group. While we debated about the very independence of such directors,
this can also result in conflicts of interest. Anybody who earns compensation from
one company for services as a director may lose his/her effectiveness as auditor as
he/she may bring down the rigour of audit.

An independent director acting as a consultant. David Bays, a corporate lawyer, thus,

‘One board member only accepts directorships if he is assured a minimum number of
hours of consulting contracts with the company. He makes considerably more money
than before he is “tired”,.

Another situation which could cause conflict of interest is when the CEO’s colleague
on another board is appointed as a director on the board, and is also given the
responsibility of chairing or being a member of important committees such as audit,
compensation, or nomination committees.

The CEO of a company may also appoint a college friend, a batchmate, or a room
mate as a director and also as a members or a chairman of important committees. The
law is ineffective in curbing such practices as it is very difficult to identify such earlier
associations.

An independent director of the company may also be partner of the firm of solicitors
and advocates which offer legal advisory services to the company. While we have
discussed this earlier from a real independence point of view, conflict of interest is
another fall out.

Directors may have pecuniary interests beyond compensation such as J.N. Godrej,
director at Bajaj Auto, who is also a director and shareholder of Godrej & Boyce
Manufacturing Company Ltd., which is a vendor to Bajaj Auto. Bajaj Auto purchased
goods worth Rs. 7.1 million from Godrej & Boyce as on 31st March, 2009.

REMEDIAL ACTIONS:

While it may be extremely difficult to totally eliminate the conflicts of interest,

conscious effort should be made to reduce the instances of such conflicts occurring.
Many companies and boards have adopted a ‘disclosure and go farward’ policy, but it
should be noted that disclosure of conflict of interests does not remove the conflict of
interest, it continues to exist.

As far as possible, any issue such as buying materials from companies under the
management of independent directors or being an independent director while also
being a partner of the firm offering solicitors’ services, must be declared as in the best
interests of the company by the CEO/CFO and auditors, and must be put before the
shareholders for approval.

Companies must bring out details of any type of relationship that exists between the
CEO and promoter directors with the existing/potential independent directors.

Any kind of MOU between promoters should also be brought to the board and before
the shareholders if the company publicly listed.

In the case of PSUs, the government has to take the meticulous care in constituting the
board consisting of majority of really independent directors and the chances of
political interferences should be reduced to the minimum. All transactions should be
certified by the external independent auditors, as well as the comptroller and auditor
general (CAG). The vigilance officers should function under totally independent
authority.

In the cases where conflicts of interests exist among institutions which hold major
stakes in companies, the scenario is very complex and mitigation of conflicts of
interest is very difficult considering the structure under which the institutions have
been constituted. We have already seen that institutionalizing arm’s length practices
have not yielded the desired results. The only solution could be not to have more than
one kind of service from an umbrella institution. It may sometimes increase the cost
but will definitely reduce hidden costs as well as conflicts of interests.

Also, the company should not engage the institution which has invested in the
company for any services.

THE BOARD AS A LEARNING ORGANIZATION

Revan’s proposition L G states that if organizations want to survive and grow, their
rate of learning has to be equal to or greater than the rate of change in their
environment. Since environments undergo many changes, some of them dramatic and
even punishing, organizations have to be in a continuous learning mode and failure to
do so will lead to their demise. In this context, organizations have to be adaptive
organisms.

Look at great organizations such as GE, DuPont, or Harley Davidson. They have
been able to achieve sustained success because they were always one up in learning
and adapting vis-à-vis the environment. ‘Changes in the environment will force the
organization to face ‘moments of truth’ with respect to customers, competitors,
employees, regulators, shareholders, or any or all of the stakeholders. (Garratt 1996).

For example, answers to questions such as “Who is your customer?”, “Why do they
buy from you?”, How many of them come for repeat purchases?”, “Who are your
competitors”?, “Why do customers buy from them rather than from you?”, “Do your
customers perceive ‘value for money’? and similar questions with respect to other
stakeholders will lead to exposing the company to various moments of truth.

While much of this information has to come from management, it is unlikely that
management will provide this information unsolicited. The board has to be in
continuous learning mode if it has to solicit and use such information. A board which
functions as a learning organization will be actively and fully involved and committed
to the causes of the organization. The chances of such boards being taken by surprise
by changes in the environment are less as they may have developed a great deal of
insights.

They will also be able to weather many a storm. Most boards are taken by surprise, as
in the case of Satyam. Had the directors been on a continuous learning mode, they
would have sensed the moments of truth about the various developments that
ultimately led to the downfall of the organizations. In a matter of days, the reputation
of the board as leaders of well-governed corporate entity, as well as its erudite and
eminent members, came to not anything.

So, every board must act as a learning organization and must take leadership in
making the organization a learning one (Garratt 2003).

LEVERAGING GOOD GOVERNANCE FOR COMPETITIVE ADVANTAGE

The role of the board also includes protection and creation of enterprise value. In a
competitive market scenario, the value of a company’s stock is considered to be proxy
for the enterprise value. Stock prices rise in comparision with others when the
company’s competitive position is better than that of others.

And today, everybody concurs that the board can play a very decisive role in
sharpening the company’s competitiveness. Such boards and directors ‘listen probe,
debate, and become engaged in the company’s most pressing issues.

Directors share their experience and wisdom as a matter of course. As they do,
management and the board learn together, a collective wisdom emerges, and
managerial judgment improves. The on-site coaching and counseling expand the
mental capacity of the CEO and the top management team, and give the company a
competitive edge out there in the marketplace. (Charan, 1998)

Regulations and penalties for non-compliance may force companies on compliance

and prevention of small frauds (and in some companies such as Satyam, which
apparently was complying with all the corporate governance requirements, the CEO
had to make an admission to an ongoing fraud of massive dimension for many years,
catching even the regulators by surprise and forcing the government to supercede its
board and appoint its own nominees).

By and large, such regulations or penalties have not resulted in better governance and
competitive advantage. The competitive advantage will arise from the judgement of
directors and not from the structures imposed by regulators. The collective judgement
and wisdom of directors will help management and enable the company to have a
competitive advantage. The active participation of the board in company matters,
such as, strategy development and monitoring, continuous learning, risk assessment
and management, evaluating the performance of the CEO and top management, etc.,
will enable it to create advantage for the company.
V UNIT
Corporate Social Responsibility
The developments in information technology and the effectiveness of the knowledge-
based economies have led to the creation of a new model of corporate governance.
Business leaders are now concerned about the responses of the community and the
sustainability of the environment. We need to analyze the new trends in corporate
social responsibility (CSR) against the backdrop of these changes.

The issue of social responsibility of business evokes varying – and often extreme –
responses from both the intelligentsia and businessmen. Economists like Adam Smith
and Milton Friedman were of the opinion that the only responsibility of business was
to perform its economic functions efficiently and provide goods and services to
society and earn for themselves maximum profit and that it was better to leave social
functions to other institutions of the society like the government.

Definitions of C.S.R.:

▪ CSR is “how companies manage the business processes to produce an overall

positive impact on society” (Baker, 2004)
▪ CSR is “continuing commitment by business to behave ethically and contribute to
economic development while improving the quality of life of the workforce and their
families, as well as of the local community and society at large” (World Business
Council for Sustainable Development in Hopkins, 2007)

Scope of CSR
Three levels of social responsibility can be identified (evolution of areas of social
responsibility):
Market forces: Responding to the demands of the market. Managerial decisions may
involve business responding to the economics of the market by efficiently and
effectively using resources. The greatest impact of business on society comes from
normal operations, which therefore shows greatest social responsibility.
Mandated actions: Government mandates or negotiated agreements (regulatory
requirements and guidelines, contracts/agreements with stakeholders). Managerial
decisions may reflect business responses to government-mandated requirements
and/or pressure group stakeholders (Ex: unions)
Voluntary actions: Managerial decisions may be undertaken without outside
pressure, such as in voluntary social programmes.
CSR addresses the following issues:
➢ Community, assistance in solving community problems
➢ Health and welfare
➢ Education
➢ Human rights
➢ Natural rights
➢ Natural environment, and
➢ Culture (i.e., music, arts, sports, etc.,)

Ernst and Ernst (1978) identified six areas in which corporate social objectives may be
found:
1. Environment:
This area involves the environmental aspects of production, covering pollution control
in the conduct of business operations, prevention or repair of damage to the
environment resulting from processing of natural resources and the conservation of
natural resources.
Corporate social objectives are to be found in the abatement of the negative external
social effects of industrial production, and adopting more efficient technologies to
minimize the use of irreplaceable resources and the production of waste.
2. Energy:
This area covers conservation of energy in the conduct of business operations and
increasing the energy efficiency of the company’s products.
3. Fair Business Practices:
This area concerns the relationship of the company to special interest groups.
In particular it deals with:
i. Employment of minorities
ii. Advancement of minorities
iii. Employment of women
iv. Employment of other special interest groups
v. Support for minority businesses
vi. Socially responsible practices abroad.
4. Human Resources:
This area concerns the impact of organizational activities on the people who constitute
the human resources of the organization.
These activities include:
i. Recruiting practices
ii. Training programs
iii. Experience building -job rotation
iv. Job enrichment
v. Wage and salary levels
vi. Fringe benefit plans
vii. Congruence of employee and organizational goals
viii. Mutual trust and confidence
ix. Job security, stability of workforce, layoff and recall practices
x. Transfer and promotion policies
xi. Occupational health
5. Community Development:
This area involves community activities, health-related activities, education and the
arts and other community activity disclosures.
6. Products:
This area concerns the qualitative aspects of the products, for example their utility,
life- durability, safety and serviceability, as well as their effect on pollution.
Moreover, it includes customer satisfaction, truthfulness in advertising, completeness
and clarity of labelling and packaging. Many of these considerations are important
already from a marketing point of view. It is clear, however, that the social
responsibility aspect of the product contribution extends beyond what is advantageous
from a marketing angle.

Advantages of CSR:

➢ Improved financial performance

➢ Enhanced brand image and reputation
➢ Increased sales and customer loyalty
➢ Increased ability to attract and retain employees
➢ Reduced regulatory oversight
➢ Innovation and learning
➢ Risk management
➢ Easier access to capital
➢ Reduced operating costs

Steps to attain CSR:

The International Chamber of Commerce recommends the following nine steps to

attain CSR:
1. Confirming CEO/Board commitment to prioritize responsible business
conduct;
2. Stating company purpose and agree on company values;
3. Identifying key stakeholders;
4. Defining business principles and policies;
5. Establishing implementation procedures and management systems
6. Benchmarking against selected external codes and standards;
7. Setting up internal monitoring;
8. Using language that everyone can understand;
9. Setting pragmatic and realistic objectives.

CORE-BCSD India:

There are several organizations now emerging on the Indian scene that focus on issues
of CSR. Corporate Roundtable on Development of Strategies for the Environmental
and Sustainable Development (BCSD) India Information Security, Control & Audit of
Business Information System is a unique grouping of corporate organizations that, for
instance, are trying collectively and individually to build in sustainable development
concepts in their operations. CORE-BCSD India includes some of the most
innovative, largest and also the most forward looking organizations in the country.
The objectives of sustainable development rest within the principles of CSR, because
unless the needs of the society, both present and future, are served, sustainable
development would remain only a myth. And the most significant step in pursuing
CSR information Security, Control & Audit of Business Information System is to
proactively protect the environment.

The principal deterrent to the adoption of CSR is the lack of linkagae between it and
financial success. Since no direct relationship is evident, companies find it difficult to
assess how much to invest in CSR, where to stop and how to achieve the right balance
between financial performance and CSR. Also, explicit commitment to CSR often
lays the corporation open to demands from vested interests. The CSR investments
have a very long gestation period and lack visible results making it impossible to
assess the effectiveness of investment.

The lack of comprehension and capacity to implement CSR acts as a major hindrance
to its adoption on a wider scale. Potential political interference in implementation of
CSR related activities and the lack of tools and mechanisms to measure, evaluate and
report CSR practice and performance also act as a hindrance.

Some other concerns perceived by corporate India are an anticipation of increased

demand from the interested communities and also an increase in operating cost on the
adoption of CSR. Increased interventions from regulatory bodies and a potential
adverse impact on quality of goods and services are other potentially important
concerns in implementation of CSR.

It was designed to capture perceptions and expectations (related to corporate

responsibility) of the stakeholders. The survey found that there is more trust in the
Press and NGOs than in business. The IT sector is regarded as the most responsible
and alcohol and tobacco industries as the least.

Government-controlled sectors like pharmaceutical and financial sectors are perceived

to be more socially responsible than the private sector. One of the major issues is
gender discrimination. It was felt that hiring policies and age restrictions were against
women’s interests, especially among workers.

Public expectations from corporations in social and environmental matters are rising.
Environmental pollution is being regarded with great concern. The main expectation
of the companies by the public was that they provide good quality products at low
prices, treat employees well without discrimination, protect the environment, help
bridge the gap between the rich and the poor, and help in social and economic
development.

Corporations think that NOGs are the most trustworthy to work with in the interest of
the country. Employees and the public believe the media and religious groups. The
government is not regarded with much favour when it comes to CSR. Similarly,
companies are not trusted to report fairly on their performance. External verification
is trusted. Hence, there is a great role that NGOs and media can play in moving the
agenda forward.

ETHICS and SOCIAL RESPONSIBILITY OF BUSINESS

Business Ethics in India Today:

In a recent international survey of levels of honesty in government and business,

countries were ranked by giving them points out of 10 for their honesty; Singapore
was number one in the world with 9.7 points while India was Seventh with 3.1 points.
Clearly, our country’s ethical image badly needs furnishing.

Indians are inclined to believe that they are highly ethical, certainly more so than most
others. Yet in 1964, Gunnar, in his celebrated work Asian Drama, noted that in
British days only pretty corruption at lower levels was known in the Indian
administration, whereas since independence corruption had spread throughout the
system and indeed begun from the very top. It is this, says Myrdal, which is holding
India back. Some years back, Time magazine reported that in the early years of
independence, Indian bribed bureaucrats to do things which they were not supposed to
do, but now they bribe them to do things which they are expected to do. India would
now probably have become another Asian Tiger, if corruption was not endemic in the
country.

Why so much corruption?

The common man is forced to ask what has happened to leaders. There seems to be
little doubt that the principal culprits responsible for cording the ethical sense of the
industrial and political leaders of India is first the type of governance ‘we, the people’
gave to ourselves and second, the type of economy that was imposed on us. First, we
chose an electoral process in which the spending of millions of rupees to win a seat
was forbidden, yet necessary. This single factor made corruption and black money a
substantial part of the electoral process, and therefore of government and industry.

Secondly, thousands of faceless bureaucrats and venal politicians decided every aspect
of the economy; what should be produced, how much, by whom, at what price, with
what technology and raw materials. Thus economic decision making was taken away
from economists and end-producers, from farmers, industrialists and from market
forces and handed over to politicians and bureaucrats, who had a field day in making
hay while the sun was shining.

The License Raj:

As a result, a forest of permits, lincenses and controls was set up, and the notorious
“License Raj” successfully led to the growth of corruption in the country. The
government inspector had a field day and had a say in every aspect of Indian
economy, from production to consumption, from distribution, to exchange.
Everywhere Inspection Raj touched every aspect of the life of the Indian, dwarfed his
freedom and destroyed his economic well-biding.

Black Money:

Obviously, bribes had to be paid in unaccounted cash to get licenses, permits and the
like. To get such large amounts of unaccounted cash, taxes of all kinds were evaded,
exports under-invoiced and imports over invoiced. Corruption is like cancer eating
into the very vitals of the social, political and economic life of the country.
Corruption at higher levels of the administration generates huge amounts of black
money by way of dishonest businessmen and public servants. Since black money is
so widespread and has become socially acceptable, it has corrupted every profession:
teachers, doctors, lawyers, the judiciary and it have spread its tentacles throughout
every system of the country, from top to bottom.

SOCIAL RESPONSIBILITY AND INDIAN CORPORATIONS:

The corporate world is now reaching to the community. And philanthropy is no

longer limited to signing cheques. The commitment is getting much deeper as a large
section of employees, including members of the top management, are now doing their
bit for the causes close to their heart.

Sunil Rajshekhar of Times Foundation says that corporate contribution is now gaining
a holistic approach where employees of big companies are encouraged to give back to
communities which are responsible for their sustenance. And the initiative does not
end with an odd blood donation. More companies are joining hands with NGOs to set
up labs, adopt schools and even villages, educate kids and women in slums, and start
welfare programmes for cancer and AIDS patients.

A large number of Indian companies discharge their social responsibilities quite

satisfactorily. There are many companies which have excelled in such activities but
when seen in the light of the country’s vast needs, the achievements fall short of
requirements. The money spent for social causes by companies is generally a
significant proportion of their turnover.

➢ AMM foundation of the Murugappa group provides assistance to communities

in education, medical care and research in rural development.
➢ Asian paints funded a large scale community development project to enable
farmers to use local resources effectively.
➢ The AV Birla Group is involved in social and economic development of
communities.
➢ BHEL has contributed to the development of quality of life in rural areas,
health care and family welfare, adult education, etc.,
➢ Brittannia Industries promote sports, especially tennis.
➢ Broke Bond has been interested in animal welfare, providing veterinary
services, and improvements in animal breeding.
➢ Colgate Palmolive did pioneering work in the promotion of sports, dental
health, and small industry development.
➢ Dr. Reddy’s Laboratories promotes education, livelihood and community
development.
➢ Ford India Ltd. runs education and training programmes in local schools near
the factory; has set up research chairs in two IITs in safety and environment;
has introduced measures to eliminate, recycle or treat waste products; and has
started several community welfare programmes.
➢ GAIL provides through its CSR initiatives environment protection and
horticulture care, infrastructure development to villages, drinking water and
sanitation, health care and medical facilities, educational aids and literacy
enhancement.
➢ The Godrej group focuses on environment and conservation.
➢ Gujarat Ambuja Cement has been helping communities around its facilities.
➢ HUL focuses on health, empowerment of women, and education of special
children.
➢ ICICI Bank’s focus areas are elementary education, and universal access to
financial services.
➢ The Times of India group has set up a Relief Fund to organize relief and
rehabilitation measures at times of calamities (floods, cyclones, fires,
earthquakes drought, famine, etc.) to alleviate human sufferings, distress and
losses, in any part of India.

Tata Group
The Tata Group conglomerate in India carries out various CSR projects, most of which are
community improvement and poverty alleviation programs. Through self-help groups, it has
engaged in women empowerment activities, income generation, rural community
development, and other social welfare programs. In the field of education, the Tata Group
provides scholarships and endowments for numerous institutions.

The group also engages in healthcare projects, such as the facilitation of child education,
immunization, and creation of awareness of AIDS. Other areas include economic
empowerment through agriculture programs, environment protection, providing sports
scholarships, and infrastructure development, such as hospitals, research centers, educational
institutions, sports academy, and cultural centers.

Ultratech Cement
Ultratech Cement, India’s biggest cement company is involved in social work across 407
villages in the country aiming to create sustainability and self-reliance. Its CSR activities
focus on healthcare and family welfare programs, education, infrastructure, environment,
social welfare, and sustainable livelihood.

The company has organized medical camps, immunization programs, sanitization programs,
school enrollment, plantation drives, water conservation programs, industrial training, and
organic farming programs.

Mahindra & Mahindra

Indian automobile manufacturer Mahindra & Mahindra (M&M) established the K. C.
Mahindra Education Trust in 1954, followed by Mahindra Foundation in 1969 with the
purpose of promoting education. The company primarily focuses on education programs to
assist economically and socially disadvantaged communities.

Its CSR programs invest in scholarships and grants, livelihood training, healthcare for remote
areas, water conservation, and disaster relief programs. M&M runs programs such as Nanhi
Kali focusing on education for girls, Mahindra Pride Schools for industrial training, and
Lifeline Express for healthcare services in remote areas.

ITC Group
ITC Group, a conglomerate with business interests across hotels, FMCG, agriculture, IT, and
packaging sectors has been focusing on creating sustainable livelihood and environment
protection programs. The company has been able to generate sustainable livelihood
opportunities for six million people through its CSR activities.

Their e-Choupal program, which aims to connect rural farmers through the internet for
procuring agriculture products, covers 40,000 villages and over four million farmers. It’s
social and farm forestry program assists farmers in converting wasteland to pulpwood
plantations. Social empowerment programs through micro-enterprises or loans have created
sustainable livelihoods for over 40,000 rural women.

CSR as a business strategy for sustainable development.

To IBM, CSR strategy refers to enhancing stakeholder value and the delivery of
measurable results to society at large. In the context of developing societies, “CSR is
about capacity building for sustainable livelihoods”. When CSR is adopted as a
business strategy for sustainable development, it goes to improve corporate
performance. It offers manifold benefits to corporations both internally and
externally.

Externally, it creates a positive image and goodwill among the public and earns a
special respect among peers, customers, government agencies, investors and media, all
of which go a long way in promoting long term shareholder value and sustainable
development.

Internally, it cultivates a sense of loyalty and trust amongst employees in

organizationial ethics. More significantly, it serves as a soothing diversion from the
mumdane workplace routine and gives workers a feeling of satisfaction and a meaning
of their lives.

Companies like Infosys, Wipro, Satyam, Tata Steel, Dr. Reddy’s Lab and Polaris, for
instance, find ways and means of getting their employees interested in CSR activities.
There are reasons to believe that such employee involvement has reduced attrition
rates in these organizations. It is because of all these positive factors that
organizations involve themselves in Socially Responsible Investing (SRI).

SRI is gaining importance because of two factors: (i) Socially responsible companies
offer long term value; and (ii) evaluating a company’s social impact on top of its
financial performance provides an additional hedge against risk.

For instance, a Chennai-based auto-motive parts manufacturing company faced a

severe risk at its new plant in Pune when a posse of thugs barged into the plant and
demanded INR 2.5 million as ransom when several locals who were the beneficiaries
of the company’s CSR unit came to the rescue of the company and offered to guard it
against the extortionists in future.

Many MNCs which have socio-political problems in emerging markets in which they
operate, find socially responsible investing as one of the means to blunt the adverse
sentiments against them and as a strategy to ensure their sustainable development.
Most critics of CSR are against it because they look at it separately from business
strategy.

CSR is an outcome for business models, which goes beyond just financial viability.
Cost of helping communities to develop becomes cost of the business-like materials or
labour. Billions of poor people have a potential to become part of the market, if
helped. Before looking upon the poor as a potential market, the future business
models must build sensitivities and capabilities to reach out to the poor.

Businesspersons fail to appreciate the fact that CSR is a key constituent of business
strategy, as to many of them it is pure philanthropy and ‘do good’ activity
unconnected with their business. Sound strategy provides business with a source of
competitive advantage. ‘For any competitive advantage to be sustainable, the
improper execution is bound to threaten the competitive advantage a corporate may
hold in an industry.

Besides damage to its brand and sales when it was brought to light that the company
had poor labour standards in its supply chain. On the other hand, Nike gained its
brand and sales once it started improving its labour standards down the line and
publicized its efforts to comply with them.

Nowadays, Greenpeace and other activist groups highlight socially irresponsible

corporate behavior that leads sometimes to voluntary corrective action on the part of
the companies themselves, and at other times invites government action as we have
seen in several instances of public interest.

Practitioners of CSR stress the fact that it is a cost-effective way to gain competitive
advantage. Corporations in their effort to engage in strategic CSR aim to match
business objectives with the needs of the community. For instance, in the rain-starved
Wada taluk of Thane district of Maharashtra where its bottling plant is located, Coca-
Cola has been harvesting rain water since 2003 to recharge groundwater and has been
supplying water to people in summer, in addition to instituting water supply schemes
in some villages.

All these CSR efforts of the company have been integrated with its business strategy
and have helped it to earn the goodwill of village folks, apart from reducing
absenteeism at the workplace. An IT company for instance could help educate school
or college students in its neighborhood, who could become their potential employees.
Likewise, a BPO can create its future workforce by providing vocational and soft
skills training to the children in neighboring communities. This symbiosis between
corporations and the surrounding communities will go a long way in integrating CSR
and business strategy for mutual benefit.

Evaluation of CSR Activity

How to evaluate CSR activities of corporations? Experts suggest three nbasic

principles to measure the impact of CSR sustainability, accountability and
transparency. Sustainabilkity of CSR activity implies that there must be a clear
linkage established between use of resources and their regeneration, like the soft drink
industry that uses plenty of water trying to maintain waters tables through rain
harvesting and recycling; or a paper manufacturing company that destroys thousand of
trees to make paper pulp replacing an equal number of saplings. Accountability lies in
an organization assuming responsibility for the effects of its action that have impacted
the external environment. This will call for the organization compensating for the cost
of damages caused by its actions, by creating benefits that exceed costs to all affected
stakeholders; and transparency means that the organization reports the impacts of its
action to all stakeholders truthfully without misguiding them in any manner. This will
enable stakeholders to have a full and fair view of the situation.

Why a Lukewarm Response to CSR in India?

In spite of such strategy-based advantages, why does the Indian industry lag behind
those in advanced countries in socially responsible investment? A survey conducted
by Indianngos.com, shows that the major obstacles to CSR in India are lack of
awareness and conviction amongst the Managers, and lack of impact analysis, that is,
a system of measuring the impact of social activities. Absence of a clear linkage
between CSR and financial success is another barrier to CSR. Besides, there are not
enough trained managers and experienced advisers available to overcome these
obstacles and support the process.