Corporate Governance-The Role of Board of Director in Terms of Management and Financial Accounting
What is Corporate Governance?
Generally speaking the term corporate governance (is a system) came to our understanding in 1980′s in order to clarify how businesses can be managed, and controlled via general principles. Corporate Governance is set of procedures and activities that have impacts on decisions made by board of directors and managers. (David F. L. et. al,. 2004).
Activity of board:
Boards of directors are responsible for the governance of companies. They are responsible to clarify company’s strategic intentions as well as leader shipping. Based on (Coles et. al, 2001), board of directors’ concentration is on top managers to see whether they are providing worthy values for shareholders or not. There are different specifications and characteristics for board of directors around the world. Board of directors must reveal their opinions on the connected transactions and make recommendation in the annual report. The job of board of directors is to acknowledge and oversee strategies, plans and all issues performed by executive board. Although some directors are trying to improve their ability in terms of performing tasks, others neglect and do not perform their duties appropriately. Unfortunately legal environment is not very helpful in terms of their accountability.
Number of Board members:
Numbers of directors are different based of financial and non-financial firms. It was identified that financial firms have an average larger board than manufacturing firms (Hayes et al, 2000 and Booth et al, 2002). Researchers approach toward number of boards of directors differs. Board size of 12 and 11 reported by While Vafeas (1999) and Shivdasani and Yermack (1999) respectively but all researchers believe that number of board members depends on size and scope of business. In this respect, larger boards are formed due to positive correlation of board size with firm size (Yermack, 1996; and Baker and Gompers, 2000).
Education:
Having educated managers will increase the likelihood of firms in case of implementing innovative activities and solving ambiguities (Hambrick and Mason, 1984). According to Wallace and Cooke (1990), higher the educational level, the more will be the political awareness and intellectuality and corporate accountability.
Frequency of meetings:
In terms of relationship between board meeting and effective governance, allocation of time for meetings is very important from the eyes of market, believing that more meetings in less valuable. Vafeas (1999) also mentioned that performance decreases when the number of meetings goes up. The average board of directors in large companies meets once a month and decreases for smaller companies to once every two to three months, Board’s meetings normally take one to two hours. Executive board meetings are usually longer, take normally for 3 hours and they meet more often which depends on the amount of work needed to be done.
Election of directors:
The election of directors is on the shoulder of shareholders at their annual meeting. One share one vote normally applies, although not mandatory. Cumulative voting is the default voting scheme, but companies are authorized to establish their own voting rules in the article of association.
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Corporate governance and the role of board of directors in terms of Management Accounting:
In today’s world, the phenomena of management accounting and control systems have been emphasized. According to Bruns J., William J. and McKinon (1993) the procedure of collecting and submitting useful info to managers is called management accounting. It is also mentioned by Horngren et al., 2006; Drury, 1992; Kaplan et al., 2004 that information necessary for managers to make decision in order to achieve objectives for a business is the result of management accounting (MA). MA helps companies in terms of measurement, analysis and report preparation based on available information.
Controlling and Planning are considered as important parts of management accounting which facilitates and coordinates the process of decision making. Planning mainly shows itself in the budgeting process. Managers must control actual performances in order to find differences in terms of budgeted amounts. Management accounting has been used by internal managers to evaluate the firm in terms of accountability and the boards of directors are responsible planning corporate strategy, monitoring managerial performance and increasing returns to share holders because the board is accountable for shareholders for the success of financial soundness of the organization. The board may transfer powers to senior management to run day to day operation of organization but should supervise all the activities of senior management or other people in charge to see whether their activities are based on law and regulations or not. In terms of risk taking the board and management should be aware of all activities. They are responsible to establish complete and accurate written policies for the business of companies. Also implementation of management accounting by private sector can help the governments to achieve benefit a lot. At first, more industries will be capable of recognizing their financial self interest which reduces the financial pressure on government. Second, through implementing management accounting government will be more effective in terms of applying its rules and policies (Bouma, 2000). Management accounting methods and models are always under development especially after the 1997-1998 financial crises in Asia. Study conducted by Akira Nishimura, emeritus professor of Kyushu University in 2005 revealed the fact in the formative years of management accounting, the concentration was based on control through the plane standard costing, budgetary control, and other systems and the control system was based on feedback control but the disadvantage of this method was its narrow and restricted business policies comparing to today’s strategic business management. At that time the concentration was increasing the efficiency and improvement in productivity. Also another disadvantage was valuing the control of cost and expenses by middle managers rather than focusing on decision making by top managers (This systems is called traditional management accounting). After the development of mathematical management accounting and quantitative one the concept of management accounting changed. They shifted profit-based management from the tactical and feedback to strategic and made the planning-control process better. These methods helped manager to better decision making.
Corporate governance and the role of board of directors in terms of Financial Accounting:
Financial accounting is a tool for managers and external users such as those who hold shares of a company as well as, creditors, and government. It provides data according to the results of its operations and the financial status of the business. Analysis of Financial statements informs outsiders about the necessary information to make investment decision therefore, accuracy of mentioned statements are very important. Companies’ profitability, ability to pay current liabilities and to sell inventory and collect receivables, ability to pay long-term debt and analysis of stock as an investment reveals such information (ratio analysis). Members of boards of directors are responsible for checking the accuracy and implementation of strategies and further decisions when necessary. Scientific investigations revealed the fact that corruption occurs in many companies and it is a real threat for continuation of businesses. Many definitions are available for corruption but the most appropriate one is the abuse of public power by private benefit (Tanzi, 1998). It can be said that corruption is an activity with which interests of a business or entity can be threatened. The mentioned activity can be done by any individual in the business like director, employees and alike. With regard to the definition of corruption mentioned above, Mensah, Aboagye, Addo, & Buatsi, 2003 said that having no governance systems provide an environment for corruption to grow therefore; corporate governance cannot be ignored by businesses. It defines regulations and mechanism to make the activity of firm transparent and accountable. Directors and managers in firms are those who determine the corporate culture therefore, their decision should be made ethically. It has been seen that managers try to misconduct information in financial reports when their companies face with difficulties. Sometimes they hire external consultant to help them in this case. So the necessity of having external auditors in order to prevent fraudulent reporting is undeniable. In this case external auditors, internal control systems and other independent strategies to system can be helpful to make information revealed by managers transparent and reliable (Rezaee, 2005).
All the companies must use Generally Accepted Accounting Principles (GAAP) to record their accounts based on standards as well as Financial Accounting Standards Board (FASB) to enable external auditors check the accuracy of businesses in terms of accountability and sustainability because the use of accounting information can be made implicit or explicit.
Management Accounting Vs. Financial Accounting:
Research has proved the fact that both financial and management accounting provides necessary data for users to make decision. The important issue is that for which user the data is provided? Financial accounting provides data to those who are considered as an external individual or body to a company such as creditors, stockholders while Managerial accounting concentrates on users who are inside a company regardless of their level of management as well as internal decision making for planning and controlling purposes. Managerial accounting focuses on future while financial accounting reveals the past information and focuses on segments of products of a company therefore, it is extremely crucial for board of directors to consider both in order to analyze trend of company. Disclosure quality and financial reporting are other tools to assess the corporate governance of a firm (Mitton, 2002). La Porta, Lopez-de-Silanes, Shleifer, and Vishny, 1997, 1998, 2000a, henceforth LLSV argue that from the eyes of corporate governance, several standards exist in accounting which help to make verifiable contracts. A term called financial transparency helps outsiders to be assured of not being exposed to illegal and fraudulent activities performed by companies.
Discussion:
Although majority believe that rules and regulations revealed by the government help firms to run their businesses better, some believe that rules play a role of barrier in case of having a more profitable. They sometimes try to falsify information given to outsiders who want to make investment decision. Is it ethical?
Further investigations clarified that more study is needed in terms of analyzing the behavior of managers and directors in this regard and to find a better and more applicable methods for implementation of the policies.
Conclusion:
To sum up, the role of board of directors is very crucial in firms due to the fact that all the rules and regulations should be implemented under their supervision for the purpose of achieving required standards and qualifications and minimizing fraudulent as well as corruption of managers and in charged people. Information based on clarified standards revealed by the firm help outsiders to make better investment decisions. Not only that but also it helps the board itself for internal audits, checking accuracy of accounts for any fraudulent as well as helping them to find the potentials for further decision makings.
Reference:
1. Baker, M. and Gompers, P. (2000). The Determinants of Board Structure and Function in Entrepreneurial Firms. Working paper, Harvard Business School.
2. Booth, D. W. O’Leary, P. Popenoe, and W. W. Danforth (2002). U.S. Atlantic Continental Slope Landslides: Their Distribution, General Attributes, and Implications. U.S. Geological Survey Bulletin, pp. 14-22.
3. Bouma, J., Bartolomeo, M., Bennett, M., Heydkamp, P., James, P., Wolters, T., (2000). Environmental management accounting in Europe: current practice and future potential. The European Accounting Review, 9(1), pp. 31 – 52.
4. Burns J. and Williams J. and Mckinnon (1993). Information and Managers: A Field Study. Journal of Management Accounting Research. Fall Vol. 5. pp. 22.
5. Coles, J.W., Mc Williams, V.B. and Sen, N. (2001). An Examination Of The Relationship Of Governance Mechanisms To Performance. Journal of Management, Volume 27, pp. 23-50.
6. David F. L. and Scott A. R. and Irem T. (2004). Does Corporate Governance Really Matter? The Wharton School University of Pennsylvania Philadelphia, pp. 19104 – 6365.
7. Drury, C. (1992). Management and cost accounting. 3rd ed. Chapman & Hall. pp. 874.
8. Hambrick, D. C., Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review 9 (2): pp.193-206.
9. Hayes, R., Mehran, H., Schaefer, S. (2000). Board Committee Structures, Ownership and Firm Performance. Working Paper, Federal Reserve Bank of New York and University of Chicago.
10. Horngren, Ch., Datar, S., Foster, G. (2006). Cost Accounting: A Managerial Emphasis. 12th ed. Prentice- Hall, pp. 868
11. Kaplan, Atkinson, Banker, Mark Young S. (2004). Management Accounting. 3 ed. Prentice Hall, pp. 741.
12. La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 1998. Law and Finance. Journ. of Pol. Econ., 106, pp. 1113-1155.
13. La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 1997. Legal Determinants of External Finance. Journ. of Fin., 52, pp. 1131-1150.
14. La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 2000a. Investor Protection and Corporate Governance. Journ. of Finanl. Econ., 58, pp. 3-27.
15. Mensah S., Aboagye K., Addo E., & Buatsi S. (2003), Corporate Governance And Corruption In Ghana Empirical Findings And Policy Implications, African Capital Markets Forum. Occasional papers and reports.
16. Mitton, T. (2002). A Cross-Firm Analysis of The Impact Of Corporate Governance On The East Asian Financial Crisis. Journal of Financial Economics, Volume 64, pp. 215-241.
17. Rezaee, Z. (2005). Causes, consequences, and deterrence of financial statement fraud Critical Perspectives on Accounting, 16: 3, pp.277-298.
18. Shivdasani and Yarmak (1999). CEO Involvement in the Selection of New Board Member: An Empirical Analysis. 54 Journal of Finance. pp. 1829 – 1853.
19. Tanzi, V. (1998). Corruption around the world: causes, consequences, scope, and cures. Working Paper no 98/63, International Monetary Fund, Washington DC, pp. 1-39.
20. Vafeas (1999). Board Meeting Frequency and Firm Performance. 53 Journal of Financial Economics pp. 113-142.
21. Wallace, R.S.O. and Cooke, T.E. (1990). The Diagnosis and Resolution of Emerging Issues in Corporate Disclosure Practices. Journal of Accounting and Business Research, Vol. 20, Spring: pp.143-151.
22. Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 1996, 40, pp. 185-211.
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Alireza ZIAEI MOAYYED is an MBA student with specialization in Global Marketing:
If you are interested in more of his article writing and knowledge sharing activities please visit his web page at www.globalmarketinginsight.wordpress.com
~please study: goo.gl ~credits video: youtube.com Domestic public broadcasting is on the Congressional chopping block in the US, but there are more taxpayer dollars for US international broadcasting than ever–8 million in 2011. Few Americans have ever heard of the Broadcasting Board…
There are several definitions for corporate governance. However, the most appropriate definition which is more relevant to small and medium size enterprises (SMEs) describes corporate governance as “a set of rules, regulations and structures which aim to achieve optimum performance by implementing appropriate effective methods in order to achieve the corporate objectives”. In other words, corporate governance refers to internal disciplines or systems which govern the relationships among ‘key players’ or entities that are instrumental in the performance of the organization. Moreover, it supports the organization’s sustainability on the long term and establishes responsibility and accountability.
The guidelines of corporate governance aim to achieve greater transparency, fairness and hold executive management of the organization accountable to shareholders. In doing so, corporate governance plays a pivotal role in protecting shareholders and, in the meantime, duly consider the interest of the organization at large without prejudice to employees’ rights. Whilst executive management should have reasonable level of power to run the business, corporate governance ensures that such powers are set to practical dimensions in order to minimize misuse of authority to serve objectives not necessarily in the best interest of the shareholders. Therefore, it provides a framework for maximizing profits , promoting investment opportunities and eventually  creating more jobs.
In general, corporate governance highlights two major principles:
Oversight and control over the executive management’s performance and  strategic directions Accountability of the executive management to the shareholders
For that reason the principles of corporate governance apply on those who assume the ultimate responsibility for success or failure of the organization. On the other hand, it is imperative to understand that the proper implementation of good corporate governance does not necessarily guarantee success of the organization. Meanwhile, a bad corporate governance practice is certainly a common syndrome causing failure in many organizations.
It is interesting to know that a recent survey revealed that more than 48% of investors are willing to pay additional premium over stock prices for companies known to implement sound corporate governance practices as opposed to other companies which may have same level of profitability but characterized with inefficient management or a record of poor governance practices.
The misconception about SME’s stems its roots from the size and contribution of this segment to the economy. The reality is today SMEs may appear small in size but likely many of them have potentials to grow and become big entities in future. Sadly, this prophecy still not well realized and as a result, implementation of good corporate governance practices continues to be ignored.
SEMs in Egypt form large segment of business activities. Generally, they take the form of private companies owned by small number of shareholders. Often have less than 100 employees. Such companies are usually family-owned run by family members where the authorities and powers are generally held by an individual normally the major shareholder. For that reason the owners commonly consider themselves as running their personal properties.
Perhaps the question that strikes the mind of business owners and directors of small and medium size companies as well as the executive management team ” why should we opt to choose to introduce new systems and internal rules which impose limits on the way we do business and our business conduct?”. The answer is simply corporate governance plays a significant role for SMEs since it defines the role of shareholders as owners on the one hand, and as business managers on the other hand. This is best done through a process that spells out governance rules and guidelines. These aim to assist all parties to understand how to manage the organization. As a result, internal conflicts would be better managed and more attention given to achieve growth objectives and support profitability.
There are at least three reasons for small and medium size companies to show greater interest to implement corporate governance principles:
The good governance practices pave the way to companies to grow or attract additional investors as alternative to raising capital through borrowing from banks at high cost. Additionally, companies may consider going public through IPO. Sound governance practices lead to improved internal control systems which results in more accountability and higher profitability. The latter is attributed to enhanced controls which minimize the likelihood for fraud losses. Corporate governance framework ensures that shareholders are freed from executive and administrative duties. As a result, conflicts among business owners who assume management roles in the organization would be reduced to a greater extent particularly in organizations owned by few number of shareholders where the distinction between ownership and management capacity is blurred.
Raising capital has been for a long time  seen as the major challenge facing SMEs.  The real challenge is absence of good corporate governance practices in such organizations. Consequently, it would be difficult to access sources of finance from banks or investors.
Adoption of corporate governance framework is not common not only in Egypt, but also in most developing countries. This is mainly due to lack of awareness about what corporate governance is about and its relationship with corporate performance and objectives. Besides, the widespread fallacy that implementing corporate governance entails high costs coupled with doubts that such costs would not generate the envisaged benefits to the organization.
The biggest challenge for small and medium size companies in Egypt  is about how far they can cope with the external business conditions and internal problems which threaten their ability to survive. Surveys indicate that one-third of this category of companies collapse after three years for the following reasons:
Absence of planning and forward thinking Inadequate leadership and management skills at senior management level Lack of future business plans for growth and new investment plans Problems with cash flows Inability to innovate, present ideas for business development and cope with ever changing business environment and economic conditions Inadequate access to technical assistance
If we consider the main reasons why small and medium size companies fail, we may conclude that implementing corporate governance contributes to a far extent to support chances for these companies to perform well, grow and adopt better process for decision making. For family owned businesses, corporate governance improves management efficiency, limits internal conflicts and helps in making transition of ownership to heirs a smooth process.
Practically speaking, we need to realize that SMEs may face several problems in implementing corporate governance framework which may often seen costly exercise. Consequently, it is essential that consideration should be given to reduce the relevant requirements for compliance and disclosure and introduce less expensive financial and administrative alternatives which such companies can afford.
In order to help small and medium size organizations to implement corporate governance, we recommend that the competent state authorities issue a code for SME’s corporate governance similar to that issued by General Authority for Investment in collaboration with Cairo & Alexandria Exchange. Particular attention should be given to the following:
Transparency (strategies, organization chart, processes etc) Role of Advisory Board and relationship with other entities Risk management system and planning Human resources function with focus on succession plans for senor management
Finally, we propose a short prescription to deal with the challenges and assist in implementing corporate governance framework for SMEs:
Separate ownership from management duties and specify clear roles and responsibilities for business owners, partners and other stakeholders Create a balanced board and invite non-executive directors who would add value to the board (replace the board of director with an advisory board for companies that are not legally required to establish a board of director). Non-executive directors play an important role in ensuring integrity of the financial data provided to the board and to protecting shareholders’ interest. They also exercise control over executive management and reduce the risks arising from poor management practices or gross negligence Introduce Code of Business Conduct Raise corporate culture with a focus on  benefits of corporate governance Develop senior management’s administrative and technical skills particularly in areas such as strategic planning and leadership Create clear organization charts Establish independent internal audit function (or employ an internal auditor based on the size of the organization) Create job descriptions which establish clear responsibilities and reporting lines Introduce succession plans and rules for conflicts of interest
About Hany Abou-El-Fotouh:
Director Policy & Corporate Affairs, CI Capital Holding – the investment banking arm of Commercial International Bank, Egypt. He is a leading expert on money laundering and terrorist financing controls and corporate governance best practices in the MENA region. Founder of the Middle East Compliance Officers’ Forum (MECOF), he has been honored for his work in promoting compliance culture and awareness in the MENA regioN
Contact:
Middle East Compliance Officers Forum
H Hassan,
Tel- 2011-2665600
hanyfotouh@yahoo.com
hany.abouelfotouh@arabbanking.com.eg
http://www.linkedin.com/in/hanyfotouh
Company Law is very very complicated and interesting. If we look at all the corporate regulations or law, it is very clear that it focuses mainly on the interests of the shareholders. The liability of the members is limited in limited companies and as such the shareholders will be clueless often when their investment in the Company is not properly managed.
While the professionals use the term “Corporate Governance” with its relevance, many use the term “Corporate Governance” generally and emphasizing on good governance. While it is true that the “Corporate Governance” is meant to provide “Good Governance” in the Company, there is a specific way to understand the term “Corporate Governance”.
The term “Corporate Governance” is used in Listed Public Companies as they need to comply with the “Corporate Governance” commitments agreed with the Stock Exchanges. The term “Corporate Governance” is specifically used under clause 49 of the model listing agreement to be entered into with the Stock Exchanges and the violation of which may lead an action by the Stock Exchange to de-list the company’s shares.
While we look at the logical understanding and analysis of “Corporate Governance”, we need to look at the corporate set-up in brief and have an understanding of the law or the regulations governing different kinds of companies. While the provisions of Companies Act, 1956 provides certain kinds of companies like company limited by shares, company limited by guarantee, an unlimited company, a company incorporated under section 25 and a producer company etc; the concept has become vague with describing companies based on certain elements like “Family Companies”. For the purpose of getting a basic understanding as to the law or regulations governing the Companies in India, we can consider following kind companies.
a)Â Â Â A Private Company Limited by Guarantee.
b)Â Â Â A Public Limited Company.
c)Â Â Â Â A Listed Public Company.
The basic set-up and the concept of company is as follows:
1)Â Â Â The term “Company” is defined under section 3 of the Companies Act, 1956 as “a company which is registered under the provisions of Companies Act, 1956″.
2)Â Â Â Â Every Company should provide the basic information as to its share capital, the name, the registered office, the objects, initial subscribers, the authorized share capital, the directors and especially the chosen regulations. Every Company provides the basic information as referred to above by filing “Memorandum” and “Articles of Association”. Memorandum contains very basic and important information about the Company as everybody knows.
3)Â Â Â The Company is managed by professionals called directors and they are entrusted with certain powers to conduct the day-to-day affairs of the Company.
4)Â Â Â Every Company is supposed to conduct a meeting of all its shareholders and it is called “Annual General Body Meeting”.
5)Â Â Â The shareholders are conferred with certain vital powers in the Company and even the Board can not usurp the powers of Shareholders at times.
6)Â Â Â Thus, certain decisions in the Company are taken by the Board and certain decisions are taken by shareholders in the Annual General Body Meetings.
7)Â Â Â Every Company is supposed to provide certain vital information about the company in the form of final reports to the shareholders like Annual Report and Financial Statements like Balance Sheet and Profit & Loss Account.
8)Â Â Â The Registrar of Companies, the Central Government, the Company Law Board and the Company Court discharges various responsibilities in regulating the Companies.
9)Â Â Â Important changes, events and data are filed by every company with the Registrar of Companies and those are accessible by the shareholders.
10)Â Â Â Â Â Â Â Â Â Â Other professionals like Chartered Accountants and Company Secretary discharge their responsibilities in the Company for the protection of the shareholders and compliance of corporate regulations.
Thus, basically, a company is a complicated and well regulated set-up with ultimate motive of business expansions and the interests of shareholders.
Now, let us look at the regulations governing various kinds of companies in brief.
Private Limited Companies:
Regulated by the provisions of Companies Act, 1956, the regulations of the Company in the form of Articles of Association and the Central Government rules as applicable.
Public Limited Companies:
Regulated by the provisions of the Companies Act, 1956, regulated by the Articles of Association, regulated by the Central Government Rules, regulated by the Accounting Standards issued by ICAI etc.
While both the Private Limited Companies and Public Limited Companies are governed by the provisions of Companies Act, 1956, Private Limited Companies are relaxed from many provisions and Private Limited Companies are given liberty to modify certain provisions by having a regulation in the Articles. The difference is from application point of view.
Listed Public Companies:
Regulated by the provisions of Companies Act, 1956, Articles of Association, the SEBI regulations, Central Government rules, regulations of Stock Exchanges to some extent like complying with the listing agreements, Accounting Standards issued by ICAI etc.
We can see the clear difference among the regulations governing Private Limited Companies, Public Limited Companies and Listed Public Companies. The difference is due to their exposure to the market and the interests of shareholders. While the Private Limited Companies are not allowed to solicit investment from the public by issuing prospectus or advertisement etc., the Public Limited Companies are allowed to issue a prospectus or advertisement soliciting investment from the public. The listed companies tend to attract more capital in view of the well regulated primary market and the option of easy transfer of shares in the secondary market.
Now let us look at the issue of Corporate Governance. Every Company which has opted to list its shares in the recognized Stock Exchanges should enter into a listing agreement and non-compliance of the terms and conditions of the agreement can lead to a stringent action by the Stock Exchanges like de-listing of shares.
Clause 49 of the listing agreement to be entered into by the listed companies with the Stock Exchanges refers to certain conditions under the heading “Corporate Governance”. The said clause 49 mandates various conditions to be complied with by the Companies under the head “Corporate Governance”. Thus, it is specific to the Listed Public Companies though the word “Corporate Governance” is used in general and as a synonymous to “Good Governance”.
We know the authority of SEBI over listed public companies. In view of section 55A of Companies Act, 1956, SEBI governs certain issues like issuance of shares etc. SEBI issues very very detailed regulations governing the Listed Public Companies with frequent changes, amendments and introductions with the ultimate object of regulating the capital market or protecting the interests of investors/shareholders.
Though, the SEBI regulates the companies on certain issues, the shares are listed actually with the Stock Exchanges and trading takes place there as we know. As an additional protection to the shareholders, Stock Exchanges are permitted to impose additional conditions to be complied with by the listed public companies and the listing agreement is one among them.
The listing agreement to be complied with by all the listed companies, though lists out many conditions, clause 49 occupies significance. Clause 49 of the listing agreement emphasizes on executive directors, composition of directors, independent directors, disclosures by non-executive directors and their compensation, provisions as to committees like Audit Committee, Code of Conduct, some additional disclosures, CFO/CEO certification and a report on Corporate Governance etc.
The logic behind the further conditions on the listed companies under clause 49 of the listing agreement is just a further effort to eliminate the loopholes and for the protection of investors/shareholders.
The provisions of Companies Act, 1956 itself deal with the rights of the shareholders, the responsibilities of Board, the books to be maintained by the Company, the reports to be filed with the statutory authorities like Registrar of Companies, the financial statements, the clear bifurcation of powers with sound logic and a mechanism for the protection of the interests of the shareholders and frauds inside. We have a mechanism for the enforcement of the provisions of Companies Act, 1956, but, a need was felt for further stringent regulations and specialist enforcement agencies in view of the market participations and the stakes involved. This is the logic behind establishment of SEBI and various connected regulations governing listed companies including listing agreements to be entered into with the Stock Exchanges.
The SEBI or Stock Exchanges may not have the power to enforce the provisions of Companies Act, 1956, but, it is not right to say that the Company Law Board or the Company Court can not enforce SEBI regulations etc. though it is followed as a practice.
After Saytam Episode, everybody focused and criticized at “Corporate Governance” regulations.  But, there always exist a limitation. The listed agreement refers to the appointment of independent directors, but, how can we expect that an independent director, being a human being, is impartial always. These are all the limitations and upon which nobody can have any control. When the auditors of Satyam were attacked, the ICAI has rightly focused on the limitations on auditing as I feel. There are standards and law as to how the auditors should audit the accounts of the Company. It may be standard governing Chartered Accountants that they should find the truth in the averments in a document or a particular transaction. The standard may be ideal, but, it is not possible practically. This can be a limitation on auditing. Likewise, there tend to be limitations on “Corporate Governance” too.
We have been working so hard to strengthen our regulations further and ensure the safety of the investment of shareholders/investors. It will be a continuing process as ICAI and ICSI always focuses on the new areas upon which they can prescribe standards. Some obsolete regulations will go, some regulations may get amended and new regulations may come in the course.
I am of the strong opinion that our listed companies are well regulated though the issues of insider trading, inter-company transactions in violation of regulations, non-disclosures, oppression and mismanagement will remain always and to be tackled carefully.
Note: My intention to provide a basic understanding of “Corporate Governance” and I am aware of the complicated issues and the vastness of the subject.
I contend that this story is just the tip of the iceberg into the US government’s black operations to further the Patriot Act, funding for Homeland Security and the TSA, and to keep intensity up for the so called War on Terror. Respected lawyer and community leader, Kurt Haskell, has nothing to gain from pointing his finger at the federal government. He witnessed the underwear bomber, Umar Farouk Abdulmutallab, being whisked past security and led onto NorthWest Airlines flight 253, by a well-dressed man with an American accent- all without the passenger’s proper visa and passport documentation. What the news piece doesn’t mention is that the State Dept did indeed put Mutallab on the plane, at the behest of “an unnamed US intelligence agency.” Undersecretary Patrick F. Kennedy (Detroit news article was removed from web!). THIS is why we are being groped, molested, and body scanned at the airport by the TSA! Because the government claims the underwear bomber is a real threat! Stand up America- the politicians say our rhetoric is dangerous. Maybe the government itself is terribly dangerous…. These video clipsmay contain copyrighted material. Such material is made available for educational purposes only. This constitutes a ‘fair use’ of any such copyrighted material as provided for in Title 17 USC section 107 of the US Copyright Law. News piece aired January 25, 2011 – FOX 2 WJBK Detroit, Michigan
Corporate Governance: Indian Perspective Vis-a-vis International Perspective
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Corporate governance: Indian perspective vis-Ã -vis international perspective.
The word ‘corporate governance’ has become a buzzword these days because of two factors. The first is that after the collapse of the Soviet Union and the end of the cold war in 1990, it has become the conventional wisdom all over the world that market dynamics must prevail in economic matters. The concept of government controlling the commanding heights of the economy has been given up. This, in turn, has made the market the most decisive factor in settling economic issues.
This has also coincided with the thrust given to globalisation because of the setting up of the WTO and every member of the WTO trying to bring down the tariff barriers. Globalisation involves the movement of four economic parameters namely, physical capital in terms of plant and machinery, financial capital in terms of money invested in capital markets or in FDI, technology, and labour moving across national borders. The pace of movement of financial capital has become greater because of the pervasive impact of information technology and the world having become a global village.
When investments take place in emerging markets, the investors want to be sure that not only are the capital markets or enterprises with which they are investing, run competently but they also have good corporate governance. Corporate governance represents the value framework, the ethical framework and the moral framework under which business decisions are taken. In other words, when investments take place across national borders, the investors want to be sure that not only is their capital handled effectively and adds to the creation of wealth, but the business decisions are also taken in a manner which is not illegal or involving moral hazard.
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Corporate governance therefore calls for three factors:
a) Transparency in decision-making
b) Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken, and
c) The accountability is for the safeguarding the interests of the stakeholders and the investors in the organization.
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Implementation of corporate governance has depended upon laying down explicit codes, which enterprises and the organisations are supposed to observe. The Cadbury’s code in United Kingdom was the starting point, which led to a number of other codes. In India itself we have the Kumaramangalam Birla code as a result of the committee headed by him at the behest of the SEBI. Earlier we had the CII coming up with the code for corporate governance recommended by the committee headed by Shri Rahul Bajaj. The codes, however, can only be a guideline. Ultimately effective corporate governance depends upon the commitment of the people in the organisation. The very first issue of corporate governance in India is, do the India managements really believe in corporate governance?
Corporate governance depends upon two factors. The first is the commitment of the management for the principle of integrity and transparency in business operations. The second is the legal and the administrative framework created by the government. If public governance is weak, we cannot have good corporate governance. The dramatic Enron case has highlighted how companies, which were the darlings of the stock market and held up as models for vigorous and innovative growth can ultimately collapse like a house of cards as they were based on fraud and dishonesty. The association of the accounting firm Anderson has also raised a doubt about the credibility of even well regarded global players.
In the Indian context, the need for corporate governance has been highlighted because of the scams we have been having almost as an annual feature ever since we had liberalisation from 1991. We had the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. I have been suggesting that we should learn from especially the United States to see whether we can replicate similar conditions in our capital market. It is not that the United States is free of scams. Right now the Enron issue is examined by a number of committees at different levels in the United States. At the end of all these examinations, they are likely to come with a better
model. In the Indian corporate scene we must be able to induct global standards so that at least while the scope for scams may still exist, we can reduce the scope to the minimum.
I. BRIEF HISTORY
The “revolution†started in the early 1990s with the Cadbury Report on the financial aspects of corporate governance, to which was attached a code of best practice. Aimed at listed companies and looking especially at standards of corporate behaviour and ethics, the “Cadbury Code†was gradually adopted by the City and the Stock Exchange as a benchmark of good boardroom practice. In 1995, the Greenbury Report added a set of principles on the remuneration of executive directors (in response to some particular “fat cat†scandals, notably that involving British Gas chief Cedric Brown, whose 75 per cent rise incensed both unions and small shareholders), and in 1998 the Hampel Report brought the two together and produced the first Combined Code. A year later, the Turnbull Report concentrated on risk management and internal controls.
In each case, the reports were prompted either by shareholder disquiet over perceived shortcomings in corporate structures and their ability to respond to poor performance, or to government threats of legislation if the corporate sector failed to put its house in order.
In 2002 Derek Higgs, an investment banker was given the brief to look again at corporate governance and build on the previous reports to produce a single, comprehensive code. Shortly afterwards, the full consequences of the Enron and WorldCom scandals were realised, leading to new unease. The Higgs Report came out in early 2003, but was greeted with horror by some leading companies, with claims that it placed an unrealistic burden on non-executives and marginalised the role of the chairman. The task of taking Higgs’s draft forward was passed to the Financial Reporting Council (FRC), a body established by government and comprising members from industry, commerce and the professions. The FRC consulted further and produced a revised Code that followed most of Higgs’s recommendations but softened a few of the more contentious points, and so gained general acceptance. With rather less fuss, at the same time Sir Robert Smith, chairman of the Weir Group, was leading a review of the role of audit committees and his recommendations were incorporated into the new Code. The 2003 Code was updated with minor amendments in June 2006, with the new version applying to financial years beginning on or after November 1, 2006.
Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.†The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty. On January 1, 2006, India entered a new era of corporate governance as the reforms popularly known as “Clause 49†took full effect.1 A decade in the making—and complicated by Enron and the other corporate scandals of this time period—Clause 49 has brought broad new requirements related to board composition, audit committee activity, information disclosure, and top management certification. The similarities with Sarbanes Oxley and other governance reforms around the globe should be obvious.
II.        A BRIEF HISTORY OF CORPORATE GOVERNANCE REFORM IN INDIA
Corporate governance and financial regulation in India was generally considered quite poor until the economic reforms of the early 1990s. The Securities and Exchange Board of India (SEBI) was established in 1992 by an act of Parliament, and SEBI was given the job of regulating stock exchanges, brokers, fraudulent trade practices, and other areas of corporate activity.5 As its power grew over the decade, SEBI started to play a much more active role in setting minimum standards for corporate behavior. In addition, a voluntary code of corporate governance was developed by the Confederation of Indian Industry (CII), a group of well-regarded Indian firms.
Near the turn of the century, SEBI commissioned a series of projects to improve Indian corporate governance by building on CII’s code (and by converting the voluntary code into a mandatory one). This work would eventually lead to the Clause 49 reforms. The first SEBI committee, comprised of 17 prominent business leaders and chaired by Kumar Mangalam Birla, advocated a variety of new governance requirements— including a minimum number of independent directors, the creation of audit committees and shareholders’ grievance committees, and additional management disclosures on firm performance.
These recommendations were soon adopted, but, importantly, they were not imposed on every public company through legislation (in contrast with Sarbanes Oxley in the United States). Instead, SEBI implemented the Birla Committee reforms by modifying the listing requirements for firms seeking to go public on an Indian stock exchange. Thus was born Clause 49, a new collection of corporate governance obligations that individual firms would agree to when they signed listing contracts with any stock exchange in the country. As part of a gradual roll-out process, the Birla Committee reforms were not imposed immediately on all public firms. Instead, they were made mandatory in 2001 for the largest Indian companies (and for newly listing firms), and then expanded to smaller public companies over the next few years.
All of this seemed fine until 2002, when fallout from Enron, WorldCom, and other corporate governance catastrophes caused Indian regulators to wonder whether Clause 49 went far enough. SEBI decided to sponsor a second corporate governance committee chaired by Narayana Murthy, the renowned leader of Infosys Technologies. The Murthy Committee went to work and released its additional recommendations in 2003. SEBI quickly adopted these suggestions and issued a revised Clause 49 in 2004.
The Murthy Committee reforms expanded on the Birla Committee’s work in several areas. One main focus related to the qualifications for independent director status: a number of specific requirements were added to disqualify material suppliers and customers, recently departed executives, relatives, and other closely-related parties. A second set of changes affected the audit committee: it was now required to meet more frequently (four times per year), and members had to satisfy new financial literacy requirements. A third important change mandated CEO and CFO certification of financial reports and internal controls. And a number of additional shareholder disclosures, including expanded discussion of financial results, were added to the Clause 49 requirements. As before, these reforms were phased in gradually; all public firms were not required to comply with the Murthy Committee rules until January 1, 2006.
The fruits of this labor were generally well-received, and Clause 49 seems to have improved the overall state of Indian corporate governance. For example, a recent study by Bernard Black and Vikramaditya Khanna argues that stock prices of imminently affected firms jumped almost four percent when SEBI announced its decision to pursue the initial Clause 49 reforms. Similarly, the World Bank as part of its 2005 standards and codes initiative benchmarked India’s regulatory framework to the OECD principles of corporate governance. It announced that India has indeed come a long way over the past decade, reporting that “a series of legal and regulatory reforms have transformed the Indian corporate governance framework and improved the level of responsibility/accountability of insiders, fairness in the treatment of minority shareholders and stakeholders, board practices, and transparency.â€
But in this same study, the World Bank also flags four areas of concern. First, many sanctions seem inadequate, and there is a need for stricter enforcement of governance violations in order to increase compliance with Clause 49. Second, the division of regulatory responsibility between SEBI, the Department of Company Affairs (DCA), and the individual stock exchanges needs to be clarified to prevent oversight from slipping between jurisdictional flagstones. Third, board practices need to be strengthened to avoid director “rubber stamping,†especially by establishing credible institutions for training board members on their fiduciary responsibilities.21 And finally, according to the World Bank, institutional investors and large independent shareholders still need to become “important forces to monitor insiders and play a disciplining role in the governance of corporations.â€
                 Â
CONCLUSION
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The ethical temperature of any business or capital market depends on three factors. The first is the individual’s sense of values. The second is the social values accepted by the business and industry. Let us not forget that when Harshad Mehta Scam took place, it was claimed that the manner in which the bank receipts were being treated was the prevailing norm. Perhaps a similar argument would have been given in the Ketan Parikh Scam. In other words, practices which were later on found to be highly objectionable become acceptable because that was the prevailing market practice. Social values will depend upon the standards set up by professional bodies like the Association of Chartered
Accountants or Cost Accounts of India and so on. The third and perhaps the most decisive factor is the system. It is here we face the main challenge. Our system encourages lack of corporate governance. Some of the specific steps that should be taken to improve corporate governance are the following:
a)Â Â Â Â Â Â Â Â The Sick Industries Companies Act (SICA) has become so convenient for the unscrupulous managements that we find in our country industries become sick, the industrialist do not become sick. BIFR has also been called the Bureau of Industrial Funeral Rites! It is high time we scrap the entire system. This will mean the abolition of SICA and organisations like BIFR there under. Mere tinkering with the system by making amendments is not going to improve the situation.
b)        The entire banking system and the Banking Secrecy Act call for a review. Our banking system is such that if you borrow one lakh of rupees, you are afraid of the bank but if you borrow ten crores of rupees, the bank is afraid of you. With the amount of NPA going beyond 58000 crores, it is high time that we amend the Banking Secrecy Act to reveal those who are willful defaulters. The Narasimham Committee’s recommendation about putting this condition at the time of issuing new loans can cover only to some extent the moral hazard. It is high time that practice of disclosing the name of willful defaulters is made more practical and timely. Publishing the names in the case of suits, which have been filed, is of no value at all because by that time the matter is all but over.
c)Â Â Â Â Â Â Â Â Laws like the Benami Transactions Prohibition Act and the Prevention of Money Laundering Act should be implemented effectively and vigorously. Agencies like the CVC can be used to ensure that corrupt practices are effectively punished because it is the atmosphere, which encourages proper corporate behaviour. In India today we have a system where the level of public governance is very poor. There is no fear of punishment at all. In such a situation it is only a saint who will be observing strictly the rules of corporate governance.
Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.
Corporate governance is a multi-faceted subject.[1] An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focus on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world (see section 9 below).
There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and Worldcom. In 2002, the US federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance.
In A Board Culture of Corporate Governance business author Gabrielle O’Donovan defines corporate governance as ‘an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes’.
O’Donovan goes on to say that ‘the perceived quality of a company’s corporate governance can influence its share price as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus the international organisational environment; how policies and processes are implemented and how people are led. External forces are, to a large extent, outside the circle of control of any board. The internal environment is quite a different matter, and offers companies the opportunity to differentiate from competitors through their board culture. To date, too much of corporate governance debate has centred on legislative policy, to deter fraudulent activities and transparency policy which misleads executives to treat the symptoms and not the cause.’[2]
It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.
Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.†The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty.
Impact of Corporate Governance
The positive effect of good corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development.[4] After East Asian economies collapsed in the late 20th century, the World Bank’s president warned those countries, that for sustainable development, corporate governance has to be good. Economic health of a nation depends substantially on how sound and ethical businesses are.
Parties to corporate governance
Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management and shareholders). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.
In corporations, the shareholder delegates decision rights to the manager to act in the principal’s best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. With the significant increase in equity holdings of investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse.
A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organisation’s strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organisation to its owners and authorities.
The Company Secretary, known as a Corporate Secretary in the US and often referred to as a Chartered Secretary if qualified by the Institute of Chartered Secretaries and Administrators (ICSA), is a high ranking professional who is trained to uphold the highest standards of corporate governance, effective operations, compliance and administration.
All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organisation. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital.
A key factor in an individual’s decision to participate in an organisation e.g. through providing financial capital and trust that they will receive a fair share of the organisational returns. If some parties are receiving more than their fair return then participants may choose to not continue participating leading to organizational collapse.
Internal corporate governance controls
Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:
Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.[5] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm’s executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.
Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour.
External corporate governance controls
External corporate governance controls encompass the controls external stakeholders exercise over the organisation. Examples include:
demand for and assessment of performance information (especially financial statements)
debt covenants
government regulations
media pressure
takeovers
competition
managerial labour market
telephone tapping
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Codes and guidelines
Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect.
For example, companies quoted on the London and Toronto Stock Exchanges formally need not follow the recommendations of their respective national codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance.
In the United States, companies are primarily regulated by the state in which they incorporate though they are also regulated by the federal government and, if they are public, by their stock exchange. The highest number of companies are incorporated in Delaware, including more than half of the Fortune 500. This is due to Delaware’s generally business-friendly corporate legal environment and the existence of a state court dedicated solely to business issues (Delaware Court of Chancery).
Most states’ corporate law generally follow the American Bar Association’s Model Business Corporation Act. While Delaware does not follow the Act, it still considers its provisions and several prominent Delaware justices, including former Delaware Supreme Court Chief Justice E. Norman Veasey, participate on ABA committees.
Corporate Governance in India : Post- Satyam the way ahead: What needs to be done ?
TITLE : Corporate Governance in India : Post – Satyam the way ahead : What needs to be done?
                                               Â
                                                          Abstract
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                    Corporate governance has been a topic of hot debate in developed countries like U.K. & U.S.A. for the last two decades. With the opening up of economies, it has also been a concern for developing country like India. This is because opening up of economies has changed the scenario of Indian market i.e. on one hand, it has made the world market accessible to the Indian corporates & on the other hand, it has increased competition in the domestic market with the advent of the multinational companies. In this changed scenario, the quality of governance has been an important factor not only for survival of the companies but also for influencing the company’s ability to raise money from capital market. Again corporate governance is important in Indian context because of the scams that occurred since liberalisation from 1991, for e.g. the UTI scam, Ketan Parekh scam , Harshad Mehta scam, & the latest Satyam Fraud case.Â
                 In this paper, we will look into the historical background of corporate governance in India, recent developments in corporate governance in India till date, issues related with respect to corporate governance in India . We will also look into the latest & the biggest scam that had occurred with respect to corporate governance i.e. The Satyam Fraud Case & will try to suggest some solutions so that such frauds does not occur in the near future.
                 The term ‘Corporate Governance’ has become a buzzword worldwide. According to Vittal, N., this is because of two reasons. First is ,that after the collapse of Soviet Union & the end of cold war in 1990 the concept of government controlling the commanding heights of the economy has gone, instead the concept that market dynamics must prevail in the economic matters has been the conventional wisdom that is accepted worldwide. Second reason is the setting up of World Trade Organisation (WTO) as a means of promoting globalisation. Globalisation involves the movement of four economic parameters namely financial capital in terms of money invested in the capital markets, physical capital in terms of plant & machinery, financial capital in terms of money invested in the Foreign Direct Investment (FDI) & labour moving across national borders. According to Vittal, N., the pace of movement of the financial capital has grown because of the world becoming a global village .Â
 2.0 CORPORATE GOVERNANCE IN INDIA : A BRIEF HISTORY [PRE- LIBERALIZATION i.e. PRE-1991] : Â
               The historical development of Indian corporate laws are marked with many interesting contrasts. For example at independence, India inherited one of the world’s poorest economies but it had a factory sector which accounted for a tenth of the national product. India also had four functioning stock markets and a banking system which had well-developed lending norms & recovery procedure.[ Goswami, O. (2002) ]Â
               Corporate development in India was marked by the managing agency system, which contributed to the birth of dispersed equity ownership & also gave rise to the practice of management enjoying controlling rights disproportionately greater than their stock ownership. [ Goswami, O. (2002) ]Â
                The enactment of 1951 Industries (Development & Regulation) Act & the 1956 Industrial Policy Resolution marked the beginning of a regime & culture of protection, licensing & red tape that encouraged corruption & stilted the growth of the Indian corporate sector. Soon, corruption, nepotism & inefficiency became the hallmark of Indian corporate sector. [Chakrabarty, R., Megginson, W. & Yadav, P. (2007)]Â
                The corporate bankruptcy & reorganisation system was also not free from problems. In this regard, we should consider the SICA or the Sick Industrial Companies Act 1985 & the Board for Industrial & Financial Reconstruction (BIFR) . According to SICA, a company is declared ‘sick’ only when its entire net worth has been eroded & it has been referred to BIFR. The BIFR usually took over 2 years on average just to reach a decision with respect to the companies. Only a few companies emerged successfully from the BIFR & the legal process on average took more than 10 years by which the assets of the company were virtually worthless. Thus, protection of the creditors’ rights existed only in paper & the bankruptcy process was featured among the worst in the World Bank survey on business climate. [ Goswami, O. (2002) ] Â
                   Again, although the Companies Act provided clear instruction for maintaining & updating share registers but in reality minority shareholders often suffered from irregularities in share transfers & registrations .For example, there were cases where the rights of the minority shareholders were compromised by the management’s private deals in case of corporate takeovers. [Chakrabarty, R., Megginson, W. & Yadav, P. (2007) ]Â
              Thus it can be concluded that for most of the pre-liberalization era the Indian equity markets were not sophisticated enough to exert effective control over the companies. Listing requirements of exchanges provided some transparency but non-compliance was not rare & was also not punished.Â
2.1 RECENT DEVLOPMENTS IN CORPORATE GOVERNANCE IN INDIA TILL DATE [POST- LIBERALIZATION i.e. POST- 1991]:
               Liberalization of the Indian economy began in 1991. Since then, there has been major changes in both laws & regulations & in the corporate governance landscape.
 (a)   The most important development in the field of corporate governance & investor protection has been the establishment of the Securities & Exchange Board of India (SEBI) in 1992. It has played a crucial role in establishing the basic minimum ground rules of corporate conduct in India. [Chakrabarty, R., Megginson, W. & Yadav, P. (2007) ]
 (b)  The next significant event was the Confederation of Indian Industry (CII) Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj . The committee was formed in1996 & it submitted it’s recommendation on April 1998. [Chakrabarty, R., Megginson, W. & Yadav, P. (2007)]Â
(c)Â Â Â Later two more committees were constituted by SEBI, one chaired by Kumar Mangalam Birla & the other by Narayana Murthy. The Birla committee submitted its report on early 2000 & the second committee submitted its report on 2003.The recommendation of these two committees had been instrumental in bringing major changes in the corporate governance through the formulation of Clause 49 of the Listing Agreement. [ Chakrabarty, R., Megginson, W. & Yadav, P. (2007)]Â
(d)Â Â Along with SEBI, the Department of Company Affairs & The Ministry of Finance , Government of India, also took some initiatives for improving corporate governance in India. For example, the establishment of a study group to operationalize the Birla Committee recommendations in 2000, the Naresh Chandra Committee on Corporate Audit & Governance in 2002 & the Expert Committee on Corporate Law (J.J. Irani Committee) in late 2004. [ Goswami, O. (2002) ]Â Â Â
(e)Â Â Â SEBI implemented the recommendations of the Birla Committee through the enactment of Clause 49 of the Listing agreement. Clause 49, can be referred to as a milestone with respect to the changes in corporate governance in India. It is similar to Sarbanes – Oxley Act (SOX) in U.S. [Chakrabarty, R., Megginson, W. & Yadav, P. (2007)]
 Clause 49 looks into the following matters :
           (i)   Composition of the board of the directors.
          (ii)    Composition & Functioning of the Audit Committee.
          (iii)   Governance & disclosures regarding subsidiary
                    companies.
           (iv)  Disclosures by the company.
            (v)   CEO/CFO certification of the financial results.
            (vi)   Reporting on corporate governance as part of the
                     annual report.
             (vii) Certification of compliance of a company with the
                      provisions of Clause 49.
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 (f)   The National Foundation for Corporate Governance (NFCG) was formed by the Ministry of Corporate Affairs, Govt. of India, in partnership with Confederation of Indian Industry (CII), Institute of Chartered Accountants of India (ICAI) & Institute of Company Secretaries of India (ICSI) with the goal of promoting better corporate governance practices in India.[http://www.nfcgindia.org/home.html]
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 3.0 ISSUES IN CORPORATE GOVERNANCE IN INDIA:
            Corporate governance has been a topic of hot debate in developed countries like U.K. & U.S.A. for the last two decades. With the opening up of economies ,it has also been a concern for developing country like India. This is because, opening up of economies has changed the scenario of Indian market i.e. on one hand, it has made the world market accessible to the Indian corporates & on the other hand, it has increased competition in the domestic market with the advent of the multinational companies. In this changed scenario, the quality of governance has been an important factor not only for survival of the companies but also for influencing the company’s ability to raise money from capital market.Â
                Corporate governance is also important in Indian context because of the scams that occurred since liberalisation from 1991, for e.g. the UTI scam, Ketan Parekh scam , Harshad Mehta scam & the latest & the biggest of them all the Satyam Fraud scam .Â
                 Another reason, is that in emerging market like India when investments take place investors want to verify that not only are the capital markets or the companies on which they have invested run competently but they also have good corporate governance. Â
               Another reason, is that it is believed that poor transparency & corporate governance norms were one of the main reasons for the Asian crisis in 1997. And also because such crisis have huge impact on the economy which can set a country several years back in its path to development. [Vittal, N.]Â
                Another reason, is that the legal & administrative environment in India provide excellent scope for corrupt practices in business. [Vittal, N.]Â
                According to Goswami, (2000), the research on corporate governance has remained in its infancy in India because of opaque disclosure practices followed by Indian corporate sector.
                However it should be noted that the corporate governance problems in India is different from that in U.S. or U.K. The governance issue in U.S. or U.K. is that of disciplining the management while the problem in the Indian corporate sector is that of disciplining the dominant shareholder & protecting the minority shareholders .[Varma, J. (1997)]
Â
 4.0 THE SATYAM FRAUD CASE :
              In one of the biggest frauds in India’s corporate history, B. Ramalinga Raju, founder & CEO of Satyam Computers, India’s fourth largest IT services firm announced on January 7th, 2009 that his company has been falsifying accounts for years, overstating revenues & inflating profits by $ 1 billion. The Satyam scam had been referred to as ‘India’s Enron’ by the experts.
                 The admission of committing fraud & resignation by Raju showed that the company had been feeding investors, shareholders, clients & employees a steady diet of untruth with respect to its financial performance. Raju said in a letter addressed to the board, the stock exchanges & SEBI that Satyam’s profit was inflated over several years to unmanageable proportions & that it was forced to carry more assets & resources than its real operations. According to Raju, ‘It was like riding a tiger not knowing how to get off without being eaten’
               Raju’s departure was followed by resignation of the company’s CFO & appointment of an interim CEO. Meanwhile, a team of auditors from SEBI began investigation into the fraud. Also, since Satyam’s stocks were registered on the New York Stock Exchange along with the Bombay Stock Exchange international regulators swung into action. Two US law firms filed class- action law suits against Satyam. Satyam’s share price fell to Rs.11.50 on January 2009 compared to a high of Rs. 554 in 2008. In New York Stock Exchange also Satyam’s shares were trading at .80 in March 2009 as compared to .10 in 2008.
 [http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4344]
                 Satyam fraud case had laid bare the complete lack of accountability in the company & prompted questions about corporate governance practices of the company.  Â
     (A)  ROLE OF THE BOARD:
                 Among the many shortcomings of the Satyam episode, the most significant one has been the role of the independent directors who were supposed to safeguard the interest of all stakeholders. While the three committees had explicitly mentioned the role, independence, remuneration & responsibilities of independent directors the same did not translate into action but was only on paper.
                 According to Andrew Holland , CEO, equities Ambit capital, independent directors should also be held accountable for board decisions & audit-related compliance practices.
                Although maximum focus in the Satyam episode was on the role of the independent directors, experts believe the role of the auditors in this case Pricewaterhouse Coopers should also be taken into account.Â
                 According to a fund manager, there should be a system similar to one adopted in case of Public Sector Unit (PSU) banks where auditors are changed every three years. [http://www.rediff.com/money/2009/jan/19satyam-what-india-must-do.htm.]
                  A major reason for the fallout of the Satyam case was the issue related to the delay in implementation of Indian corporate laws. According to N.K. Jain , secretary & CEO of the Institute of Company Secretaries of India, the need of the hour is to enforce corporate laws in transparent, swift & uniform fashion.
                 According to experts, institutional investors have the tools, bandwidth & clout to extract information & play an activist role in ensuring that management don’t go off track. If institutional investors act collectively they can demand the required change in the companies they have invested.
               According to Anup Bagchi, executive director, Industrial Credit & Investment Corporation of India (ICICI) Securities, although independent directors play an important role in ensuring better risk management, it is the demand for good governance by institutional shareholders which is the best driver towards higher governance standards.
 [http://www.rediff.com/money/2009/jan/19satyam-what-india-must-do.htm]
  (D)     IMPACT ON BRAND INDIA :
                  The Satyam Fraud Scam had raised concerns about the potential damage to India’s appeal to foreign investors & the IT services industry in particular.
                   According to Michael Useem, Wharton management Professor, one or two more accounting scandals similar to Satyam will make the foreign investors wary about investing in India.
                   On the other hand, corporate India had tried to control the damage. For example, Rajeev Chandrasekhar , president of the Federation of Indian Chambers of Commerce & Industry (FICCI), called upon regulators to move quickly to demonstrate that the Satyam was an exceptional case among corporations & investors need not worry about Indian corporate governance & accounting standards.  [http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4344 ] Â
                    Even though, Raju was widely blamed for unleashing India’s Enron, a major difference between Enron & Satyam is that in Enron the CEO stonewalled, while whistleblowers came out with the truth but in Satyam there were no whistle-blowers the CEO blew the whistle on himself.
 1.          SEBI should develop adequate expertise for analysing financial statements so that it is able to detect fraud in the financial statements in the future. Â
2.        The Institute of Chartered Accountants of India ( ICAI )or the Government should encourage the development of a whistle-blowing committee so that anybody who finds anything doubtful or fishy about a company should report against the same immediately to the committee .Â
3. Â Â Â Â Â Â Â Â SEBI should reconsider its financial disclosure norms. A few years back SEBI suspended sending of printed copy of audited balance sheets to the shareholders as a cost cutting measure. In today’s world , it can be done easily by uploading the same in the internet.Â
            Also Bankers & Rating Agencies can also then analyse the financial statements for detecting fraud.Â
4. Â Â Â Â Â Â The ICAI should implement a rule, indicating that audit firms should be allowed to work as auditors of large companies for a period of two years on a rotation basis in order to avoid undue influence committed by the audit forms.Â
5. Â Â Â Â Â Â Â Â Â The SICA Act & BIFR should be banned with immediate effect . In India, SICA has become so convenient for unscrupulous activities that industries become sick but not the owners. [Vittal, N.]
6.           The entire banking system & the Banking Secretary Act should be reviewed. In India, if one borrows one lakh rupees one is afraid of the bank while on the other hand if one had borrowed tweleve crore rupees the bank is afraid of the person. The Narasimham committee recommendation about putting some conditions at the time of issuing new loans addresses these problems to some extent. [Vittal, N.]Â
7. Â Â Â Â Â Â The Benami Transaction Prevention Act & The Prevention of Money Laundering Act, should be encouraged in order to prevent fraudulent activities & also to ensure that corrupt practices are effectively punished .[Vittal, N.]
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 6.0 CONCLUSION :
                        Thus, in this paper we have tried to see the historical background of corporate governance in India, the developments in this field till date, the issues of corporate governance in India, the Satyam Fraud case & also provided recommendations so that similar fraud does not happen in the near future.Â
                        Thus , it can be concluded that while corporate governance framework in the country is seen at par with the developed countries the same has to be implemented in letter as well as spirit.
                         Also, shareholders should ensure that the composition of the board of directors is a balanced mix of independent directors & management appointees as this would help to keep a check on the internal process of a company.[http://www.rediff.com/money/2009/jan/19satyam-what-india-must-do.htm]
                         Also, we should approach corporate governance issues in India not merely from the point of view of the Companies Act or the guidelines issued by Birla committee, Murthy Committee, but look at the entire network of various rules & regulations impinging on business so that an integrated wholistic system is created to ensure that transparency & good corporate governance prevail.
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                                             7.0 REFERENCES :
 Â
1.     Chakrabarty, R., Megginson, W. & Yadav, P. (2007) , Corporate Governance in India , Centre for Financial Research – Working Paper No. 08-02.Â
2.     Goswami, O. (2000), The tide rises, gradually: Corporate Governance in India , paper presented at the OECD development centre. Â
3.     Goswami, O. (2002) Corporate Governance in India : Taking Action Against Corruption in Asia & the Pacific , (Manila : Asian Development Bank), Chapter 9.
 4.     Varma, J. (1997) Corporate Governance in India : Disciplining the Dominant Shareholder , IIMB Management Review [Oct- Dec. 1997 , 9 (4) , 5-18 ].
 5.     Vittal, N. Issues in Corporate Governance in India , Paper for publication in the 5th JRD Tata Memorial Lecture Series.
CORPORATE GOVERNANCE-A COMPARATIVE STUDY OF SELECT PUBLIC SECTOR AND PRIVATE SECTOR COMPANIES IN INDIA
CORPORATE GOVERNANCE-A COMPARATIVEÂ STUDY OFÂ SELECT PUBLIC SECTOR AND PRIVATE SECTOR COMPANIES IN INDIA
                                                     BY
                              Dr.V.V.S.K.PRASAD.,Professor
                                                     &
                         T. VENKATESWARA RAO., Asst.Professor
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BACKGROUND
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include labor(employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large.
Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis shareholders’ welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world (see section 9 below).
It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.
Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.†The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty.
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OBJECTIVES OF THE STUDY
Counterbalancing the very strong recent public interest in the corporate governance of private sector companies has been a vigorous interest in the governance of public sector organisations. While there are similarities between the two sectors in governance terms, there are also significant differences that shape the way government departments, authorities, corporations and even government business enterprises are organised and governed. If the public sector is looked at even more closely, there is a wide variety of forms, structures, processes and practices that can be discerned from agency to agency.
 The present study has multifold objectives :
1.     To compare and contrast corporate governance practices of Public sector and private sector companies in India.
2.     To examine whether there is any correlation between corporate governance practices and the performance of the company.
3.     To Study the investors perception on the company having good governance practices.
4.     To understand common governance practices if any , in both public sector and private sector companies.
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I. CORPORATE GOVERNANCE IN INDIAN PRIVATE SECTOR COMPANIES
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1. GRASIM
Code of Conduct (hereinafter referred to as “the Code”) has been framed and adopted by Grasim Industries Limited (hereinafter referred to as “the Company”) in compliance with the provisions of Clause 49 of the Listing Agreements entered into by the Company with the Stock Exchanges.
Applicability The Code applies to the Members of Board of Directors (hereinafter referred to as “Board Members) and Members of the Senior Management Team of the Company one level below the Executive Directors, viz. Business Heads, Unit Heads, Presidents, Joint Presidents and all other executives having similar or equivalent rank in the Company and the Company Secretary of the Company (hereinafter referred to as “Senior Managers”).
The Company Secretary shall be the Compliance Officer for the purpose of this Code.
The Code shall come into force with effect from 1 January 2006 and future amendments / modifications shall take effect from the date stated therein.
The Code shall be posted on the website of the Company.
Code of conduct The Board Members and Senior Managers shall observe the highest standards of ethical conduct and integrity and shall work to the best of their ability and judgement.
The Board Members and the Senior Managers of the Company:
1
Shall maintain and help the Company in maintaining highest degree of Corporate Governance practices.
2
Shall act in utmost good faith and exercise due care, diligence and integrity in performing their office duties.
3
Shall ensure that they use the Company’s assets, properties, information and intellectual rights for official purpose only or as per the terms of their appointment.
4
Shall not seek, accept or receive, directly or indirectly, any gift, payments or favour in whatsoever form from Company’s business associates, which can be perceived as being given to gain favour or dealing with the Company and shall ensure that the Company’s interests are never compromised.
5
Shall maintain confidentiality of information entrusted by the Company or acquired during performance of their duties and shall not use it for personal gain or advantage.
6
Shall not commit any offences involving morale turpitude or any act contrary to law or opposed to the public policy.
7
Shall not communicate with any member of press or publicity media or any other outside agency on matters concerning the Company, except through the designated spokespersons or authorised otherwise.
8
Shall not, without the prior approval of the Board or Senior Management, as the case may be, accept employment or a position of responsibility with any other organization for remuneration or otherwise that are prejudicial to the interests of the Company and shall not allow personal interest to conflict with the interest of the Company.
9
Shall in conformity with applicable legal provisions disclose personal and/ or financial interest in any business dealings concerning the Company and shall declare information about their relatives (spouse, dependent children and dependent parents) including transactions, if any, entered into with them.
10
Shall ensure compliance of the prescribed safety & environment related norms and other applicable codes, laws, rules, regulations and statutes, which if not complied with may, otherwise, disqualify him/ her from his/ her association with the Company.
11
Shall ensure compliance with SEBI (Prohibition of Insider Trading) Regulations, 1992 as also other regulations as may become applicable to them from time to time.
Annual compliance reporting: Board Member and Senior Managers shall affirm compliance with this Code on an annual basis as at the end of the each financial year of the Company (as per Appendix I within 7 days of the close of every financial year).
Acknowledgement of receipt of the code Each Board Members and Senior Managers both present and future shall acknowledge receipt of the Code or any modification(s) thereto, in the acknowledgement form annexed to this Code as Appendix – II and forward the same to the Compliance Officer.
Any breach of the aforesaid Code brought to the notice of the Compliance Officer or any member of the Board or Senior Management shall be reported to the Board of Directors of the Company for necessary action.
2. ITC
 ITC’s Corporate Governance initiative is based on two core principles. These are :
        i.           Management must have the executive freedom to drive the enterprise forward without undue restraints; and
This freedom of management should be exercised within a framework of effective accountability.
ITC believes that any meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations.
Cornerstones
From the above definition and core principles of Corporate Governance emerge the cornerstones of ITC’s governance philosophy, namely trusteeship, transparency, empowerment and accountability, control and ethical corporate citizenship. ITC believes that the practice of each of these leads to the creation of the right corporate culture in which the company is managed in a manner that fulfÃls the purpose of Corporate Governance.
Trusteeship :
ITC believes that large corporations like itself have both a social and economic purpose. They represent a coalition of interests, namely those of the shareholders, other providers of capital, business associates and employees. This belief therefore casts a responsibility of trusteeship on the Company’s Board of Directors. They are to act as trustees to protect and enhance shareholder value, as well as to ensure that the Company fulfils its obligations and responsibilities to its other stakeholders. Inherent in the concept of trusteeship is the responsibility to ensure equity, namely, that the rights of all shareholders, large or small, are protected.
Transparency :
ITC believes that transparency means explaining Company’s policies and actions to those to whom it has responsibilities. Therefore transparency must lead to maximum appropriate disclosures without jeopardising the Company’s strategic interests. Internally, transparency means openness in Company’s relationship with its employees, as well as the conduct of its business in a manner that will bear scrutiny. We believe transparency enhances accountability.
Empowerment and Accountability :
Empowerment is an essential concomitant of ITC’s first core principle of governance that management must have the freedom to drive the enterprise forward. ITC believes that empowerment is a process of actualising the potential of its employees. Empowerment unleashes creativity and innovation throughout the organisation by truly vesting decision-making powers at the most appropriate levels in the organisational hierarchy.
ITC believes that the Board of Directors are accountable to the shareholders, and the management is accountable to the Board of Directors. We believe that empowerment, combined with accountability, provides an impetus to performance and improves effectiveness, thereby enhancing shareholder value.
Control :
ITC believes that control is a necessary concomitant of its second core principle of governance that the freedom of management should be exercised within a framework of appropriate checks and balances. Control should prevent misuse of power, facilitate timely management response to change, and ensure that business risks are pre-emptively and effectively managed.
Ethical Corporate Citizenship :
ITC believes that corporations like itself have a responsibility to set exemplary standards of ethical behaviour, both internally within the organisation, as well as in their external relationships. We believe that unethical behaviour corrupts organisational culture and undermines stakeholder value.
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3. Bajaj
Code of Conduct for Directors and Members of Senior Management
This code of conduct shall apply to the directors and members of the senior management of Bajaj Auto Limited (referred to hereinafter as BAL or the Company).
For this code, members of the senior management (hereinafter referred to as `senior managers’) shall mean those personnel of the company, who are members of the core management team, but shall exclude the whole-time directors.
Directors and senior managers shall observe the highest standards of ethical conduct and integrity and shall work to the best of their ability and judgement. Directors and senior managers shall be governed by the rules and regulations of the company as are made applicable to them from time to time.
Directors and senior managers shall affirm compliance with this code on an annual basis as at the end of each financial year.
Code of conduct:
Directors and senior managers shall ensure that they use the company’s assets, properties and services for official purposes only or as per the terms of appointment. Directors and senior managers shall not receive directly or indirectly any benefit from the company’s business associates, which is intended or can be perceived as being given to gain favour for dealing with the company. Directors and senior managers shall ensure the security of all confidential information available to them in the course of their duties. No director or senior manager, other than the designated spokespersons shall engage with any member of press and media in matters concerning the company. In such cases, they should direct the request to the designated spokespersons. Directors and senior managers shall not engage in any material business relationship or activity, which conflicts with their duties towards the company. Senior managers shall not, without the prior approval of the managing director of the company, accept employment or a position of responsibility with any organisation for remuneration or otherwise. In case of Whole-time Directors, such prior approval must be obtained from the board of directors of the company. Directors and senior managers shall declare information about their relatives (spouse, children and parents) employed in the company.
Senior managers shall follow all prescribed safety and environment-related norms.
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4.Cipla
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As required under revised Clause 49 of the Listing Agreement the following code of conduct has been approved by the Board of Directors and is applicable to the Directors and Senior Management of the Company.
1. Ethical conduct
All directors and senior management employees shall deal on behalf of the Company with professionalism, honesty, integrity as well as high moral and ethical standards. Such conduct shall be fair and transparent and be perceived to be as such by third parties
2. Conflict of interest
business, relationship or activity, which might detrimentally conflict with the interest of the Company
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3. Transparency
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All directors and senior management employees of the Company shall ensure that their actions in the conduct of business are totally transparent except where the needs of business security dictate otherwise. Such transparency shall be brought about through appropriate policies, systems and processes.
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4. Legal compliance
All directors and senior management employees of the Company shall at all times ensure compliance with all the relevant laws and regulations affecting operations of the Company. They shall abreast of the affairs of the Company and be kept informed of the Company’s compliance with relevant laws, rules and regulations. In the event that the implication of law is not clear, the course of action chosen must be supported by eminent legal counsel whose opinion should be documented.
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5. Rightful use of company’s assets
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All the assets of the Company both tangible and intangible shall be employed for the purpose of conducting the business for which they are duly authorized. None of the assets of the Company should be misused or diverted for personal purpose.
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6. Cost consciousness
All the directors and senior management employees of the Company should strive for optimum utilization of available resources. They shall exercise care to ensure that costs are reasonable and there is no wastage. It shall be their duty to avoid ostentation in Company expenditure.
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7. Confidential information
All directors and senior management employees shall ensure that any confidential information gained in their official capacity is not utilized for personal profit or for the advantage of any other person. They shall not provide any information either formally or informally to the press or to any other publicity media unless specifically authorized to do so. They shall adhere to the provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992.
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8. Relationships with Suppliers and Customers
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The Directors and senior management employees of the Company during the course of interaction with suppliers and customers, shall neither receive nor offer or make, directly and indirectly, any illegal payments, remuneration, gifts, donations or comparable benefits which are intended or perceived to obtain business or uncompetitive favours for the conduct of its business. However this is not intended to include gifts of customary nature
9. Interaction with Media
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The Directors and senior management employees other than the designated spokespersons shall not engage with any member of press and media in matters concerning the Company. In such cases, they should direct the request to the designated spokespersons.
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10. Safety and Environment
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The Directors and senior management employee shall follow all prescribed safety and environment-related norms.
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5. HINDUSTAN UNILEVER:
Hindustan Unilever Limited believes that for a Company to be successful, it must maintain global standards of Corporate Conduct towards all its stakeholders. The Company’s foundation has therefore been rooted to stringent Corporate Governance principles. At Hindustan Unilever, we believe that the principles of fairness, transparency and accountability are the cornerstones for good governance. The HUL Code of Business Principles reflects the Company’s commitment to these principles. It is the Company’s endeavour to continue to achieve highest governance levels.
As regards the compliance with the requirements of Clause 49 of the Listing Agreement with the Stock Exchanges, the Company is in full compliance with the norms and disclosures.
BOARD OF DIRECTORS
The Board of Directors of the Company represents an optimum mix of professionalism, knowledge and experience. The total strength of the Board of Directors of the Company is 10 Directors comprising a Non-Executive Chairman, four Executive Directors and five Non-Executive Independent Directors.
COMMITTEES OF THE BOARD
Audit Committee
The Audit Committee of the Company is entrusted with the responsibility to supervise the Company’s internal control and financial reporting process. The Audit Committee also looks into controls and security of the Company’s critical IT applications,
Remuneration and Compensation Committee
The Remuneration Committee is vested with all the necessary powers and authority to ensure appropriate disclosure on the remuneration of whole-time Directors and to deal with all the elements of remuneration package of all such Directors within the limits approved by the members of the Company. The Compensation Committee administers the stock option plan of the Company.
Shareholder/Investor Grievances Committee
The Committee specifically looks into redressing of investors’ complaints with respect to transfer of shares, non-receipt of shares, non-receipt of declared dividends and ensure expeditious share transfer process. The Committee also monitors and reviews the performance and service standards of the Registrar and Share Transfer Agents of the Company and provides continuous guidance to improve the service levels for investors..
Other Functional Committees
Apart from the above statutory committees, the Board of Directors have constituted other functional committees such as committee for approving disposal of surplus assets of the Company, committee for allotment of shares under ESOP to raise the level of governance as also to meet the specific business needs.
6.HDFC BANK:
Introduction
This Code of Ethics / Conduct intends to ensure adherence to highest business and ethical standards while conducting the business of the Bank and compliance with the legal and regulatory requirements, including compliance of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and regulations framed thereunder by the Securities and Exchange Commission of USA and other statutory and regulatory authorities in India and USA. The Bank values the ethical business standards very highly and intends adherence thereto in every segment of its business.
Applicability
This Code of Ethics/Conduct is applicable to the following persons.
§                      The Board Members
Officials of the Bank one level below the Board
Ethical Conduct
The Board members / Officials shall engage in and promote honest and ethical conduct of business, including the ethical handling of actual and / or apparent conflicts of interest between personal and professional relationships.
Conflict of Interest
The Board members / Officials shall avoid conflict of interest and disclose to the Board any material transaction or relationship that reasonably could be expected to give rise to such a conflict.
Confidentiality of Information
The Board members / Officials shall ensure and take all reasonable measures to protect the confidentiality of non-public information about the Bank, its business, customers and other materially significant information obtained or created in connection with any activities with the Bank and to prevent the unauthorised disclosure of such information unless required by applicable laws or regulations or legal or regulatory process.
Disclosure of Information
The Board members / Officials shall endeavor to produce full, fair, accurate, timely and understandable disclosures in reports and documents that the Bank files with or submits to the Securities and Exchange Commission and other regulators and in other public communications made by the Bank
Compliance with Governmental Laws, Rules and Regulations
The Board members / Officials shall comply with all the applicable governmental laws and the applicable rules and regulations.
Variation of the Code and Waivers
The Code shall be reviewed from time to time for updation thereof. Any variation in the Code or any waivers from the provisions of the Code shall be approved by the Board and shall be disclosed on the Bank’s website.
Contract or Term of Employment
Nothing in this Code or other related communications by itself creates or implies an employment contract or terms of employment.
Violation of the Code
The Board shall have the powers to take necessary action in case of any violation of the code.
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II . Corporate Governance in Public sector Companies
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Keeping in view the importance and role of independent directors in the good
governance of companies, a review was undertaken in respect of all listed government
companies with the objective of assessing the compliance with the provisions of Clause 49 of
the Listing Agreement relating to independent directors on the Board. This review was
primarily based on the information and documents obtained from the Management of the
companies concerned. The review of composition of the Board as on 30 June 2007 of all the
44 Listed government companies (excluding five deemed government companies covered by
Section 619B of the Companies Act, 1956) revealed the following:
(i)
There were no independent directors on the Board of nine listed government
companies given below:.
S. No                                Name of the company
1Â Â Â Â Â Â Â Â Â Â Â Â Â Minerals and Metals Trading Corporation Ltd.
2 Â Â Â Â Â Â Â Â Â Â Â Â State Trading Corporation Ltd.
3 Â Â Â Â Â Â Â Â Â Â Â Â Container Corporation of India Ltd.
4 Â Â Â Â Â Â Â Â Â Â Â Â Hindustan Copper Ltd.
5Â Â Â Â Â Â Â Â Â Â Â Â Â National Aluminum Co. Ltd.
6Â Â Â Â Â Â Â Â Â Â Â Â Balmer Lawrie Co. Ltd.
7 Â Â Â Â Â Â Â Â Â Â Â Hindustan Cables Ltd.
8 Â Â Â Â Â Â Â Â Â Â Â Â Madras Fertilizers Ltd.
9 Â Â Â Â Â Â Â Â Â Â Â Â The Fertilizers and Chemicals Travancore Ltd.
(ii)
In 21 listed government companies, the Board did not have the required number of independent directors.
Thus, out of 44 listed government companies, the Board of 30 companies had not been
constituted as per clause 49 of the Listing Agreement.
Constitution and composition of Audit Committee in listed government
companies
Audit Committee is by far the most important working committee of the Board in the
case of a government company with an extensive role in ensuring proper financial reporting and adequacy of internal controls over such reporting. The role of Audit Committees in government companies is closely aligned to C&AG’s constitutional and statutory role in promoting fairness and transparency in financial reporting. A limited review was accordingly undertaken in respect of listed government companies with the objective of assessing the  compliance by these companies with various provisions of clause 49 of the Listing Agreement relating to constitution and composition of the Audit Committee. This review was primarily based on the information and documents obtained from the Management of the  companies concerned.
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As required by Clause 49 of the Listing agreement, the Audit Committee should have
minimum three directors as member and two thirds of which should be independent directors. As on 30 June 2007, in listed government companies revealed that an Audit Committee  existed in all listed government companies. However, the following non-compliances were  noticed with respect to composition of Audit Committee:
(a)
In the following seven government companies , the Audit Committee did not consist
of required number of independent directors:
1.India Tourism Development Corporation Ltd
.2 National Fertilizers Ltd.
 3.Mangalore Refinery and Petrochemicals Ltd.
 4.Hindustan Photo Films Mfg. Co. Ltd.
 5.Dredging Corporation of India Ltd.
 6.Hindustan Fluorocarbons Ltd.
 7.Mahanagar Telephone Nigam Ltd.
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 (b)There was no independent director in the Audit Committee of nine listed government
companies as mentioned in para 3.5.2(i) and also in case of IRCON International Ltd.
(c) Though the Board of Bharat Immunological Biologicals Corporation Ltd. consisted of
required number of independent directors, the Audit Committee did not consist of two thirds
independent directors as there was only one independent director out of three directors.
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(d) In case of Neyveli Lignite Corporation Limited, there was only one independent
director, as on 31 March 2007, on the Audit Committee of four members. The compliance
with Clause 49 of the Listing Agreement was made only on 1 June 2007 by induction of three
independent directors on the Audit Committee.
(e) There was no Audit Committee during 2006-07 in case of Hindustan Organics
Chemicals Ltd. However, the Committee was constituted by the Company on 28 May 2007.
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Thus, the Audit Committee of 18 Central Government listed company had not been
constituted as per Clause 49 of the Listing Agreement.
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Non-official Directors on the Board of unlisted government companies
The DPE’s guideline on composition of Board of Directors of CPSEs issued in
March, 1992 require that at least one-third of the Directors on the Board of a CPSE should
consist of non official directors. A limited review was undertaken by Audit in respect of all
unlisted government companies in operation with the objective of assessing the compliance
by these companies with the DPE’s guideline relating to non-official directors on the Board.
This review was primarily based on the information and documents obtained from the
Management of the companies concerned. The review of composition of the Board of
unlisted companies as on 30 June 2007 revealed the following:
(i) There was no non-official director on the Board of 48 government companies
 did not have one-third non-official directors as on 30 June 2007.
Thus, the Board of 64 unlisted government companies had not been constituted as per the
Department of Public Enterprises guideline.
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Constitution and Composition of Audit Committee in unlisted government
companies
As required by Section 292A of the Companies Act, 1956, every public limited
company having paid up capital of not less than Rs. five crore shall constitute an Audit
Committee at the Board level consisting of minimum of three directors and two thirds of
which shall be directors other than Managing or whole time Directors. A limited review was
undertaken with respect to constitution and composition of Audit Committee, as on 30 June
2007, in unlisted government companies in operation covered by Section 292A based on the
information and documents obtained from the Management of the companies concerned, and
the following instances of non-compliance were noticed:
(a) No Audit Committee was formed by the following companies:
S. No                         Name of the company
1 Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Richardson & Cruddas (1972) Ltd.
2Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â HMT Machines Tools Ltd.
3 Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â HMT Watches Ltd.
4 Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Spices Trading Corporation Ltd.
5 Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Bharat Heavy Plates & Vessels Ltd.
(b) Audit Committee formed by Indian Renewable Energy Development Agency Ltd.
consisted of two directors as against the requirement of minimum three. Further, the
Committee did not consist of two thirds of directors as directors other than Managing or
whole-time directors as there was only one such director.
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Constitution of Audit Committee by unlisted government companies not covered
by Section 292A of the Companies Act, 1956
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Thirty unlisted government companies had formed Audit
Committees as good governance practice, though these were not required to do so as per
Section 292A of the Companies Act, 1956
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CONCLUSION
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The corporate governance practices of both public sector and private sector companies are almost similar. We found that the corporate governance practices exert great influence on the performance of the company. Companies which are having good governance practices will have good image among the investors and public as a whole.
Though a lion’s share of the focus in the Satyam episode was on the role of the independent directors, experts believe the role of auditors is now in spotlight. Experts believe that it is the institutional investors who have the tools, bandwidth and clout to extract information and play an activist role (as had happened in Satyam’s case) in ensuring that managements don’t go off-track. If institutional investors act collectively, they can demand the required changes at companies they have invested in. While the corporate governance framework in the country is seen at par with other developed markets, the same has to be implemented in ‘letter as well as spirit’.
Additionally, shareholders should ensure that the composition of Board of Directors is a balanced mix of independent directors and management appointees. This would help keep a check on the internal processes of the company. With shareholder activism on the rise, the proactive role of institutional investors will also make the company management more accountable. While things have improved substantially over the last five years, experts believe that more needs to be done, which will further improve disclosure levels and make managements accountable.
At the retail shareholder level, one could look at a company’s past track record (including significant events that reflect management excesses), qualitative and quantitative disclosures (vis-a-vis peers) and consistency in delivering on promises. Experts believe that more rigorous vetting is needed when small and medium companies are considered for investment.
Good public sector governance relies on keeping pace with best practice in private sector corporate governance. That is, of harnessing the potential that corporate governance principles and practices can offer. Importantly, however, it also requires an understanding of the tensions and gaps that arise in the transposition of corporate governance from the private to public sector, so that public sector corporate governance can be modified accordingly.
                                                      ********
Dr.V.V.S.K.Prasad is a Professor, in the Department of Business Administration with 20 years of teaching experience in Management. Mr. T.Venkateswara Rao is an Asst. Professor in the Department of Business Administration with 15 years of teaching experience.
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On the Listening Post this week, the on-air feud on the US airwaves and the corporate masters who have seen enough, and the two Muslim women, both murder victims but only one of them became a media martyr.
For many years I have supplied music for and played in bands that
provide music for corporate entertainment. Clients have included Audi,
The Evening Standard, Sainsburys, P.C. World, Safeways, Large corporate
clients at Henley and Ascot, I.T.V. and H.M. Treasury. Because of this
experience I felt it would be relevant in putting down some pointers in
helping clients choose the right kind of music for their particular
corporate entertainment.
Interestingly enough, most corporate hospitality entertainment work
tends to require music as an ingredient to a larger recipe. What I mean
by this is a great deal of corporate events are offering a multi
service package. Typically an organization may be putting on an
evenings entertainment to thank its workforce for a particularly
successful year. They may be offering music, food, comedy, a close up
magician, a casino and a caricaturist. The corporate client organizing
needs to decide what part the music has to play in the days/evenings
entertainment.
Questions he or she needs to ask are:
Is the music specifically for entertainment or is the music for background listening?
Do we need one style of music early on in the proceedings and then a change of style later in the days/ evenings entertainment?
Do you expect the corporate clients to be networking and discussing business or are they just there for a good time?
What overall atmosphere do you want to project with the event?
Is there going to be a change of location for the music as the entertainment event unfolds?
Different styles of music bands lend themselves to different
corporate hospitality situations. Below are a number of typical
corporate hospitality events with music suggestions for suitable music
entertainment.
Corporate entertainment model 1. Evening reception with dinner and speeches.
In a situation such as this you will typically need music from the
outset as part of the meet and greet of the corporate evening. A
four-piece swing or Latin group is ideal with a larger ensemble for
particularly large gatherings. A professional outfit can pitch the
music at just the right decibel level so your guests can talk and enjoy
the entertainment without it encroaching on conversations. The
musicians would typically be dressed in Lounge Suits or Tuxedos (or the
female equivalent) to mirror what the guests are wearing themselves.
The music portrays an atmosphere of sophistication, which again
hopefully reflects the evenings overall ambience.
It is rare for corporate clients to want to dance especially as
clients there relationship is business not pleasure! In most cases it
is more important that the band is flexible in when it is needed over
the course of the evening i.e. At the top of the night for the
reception, a smaller version of the band (The pianist maybe for the
dinner), stopping for speeches and then after the speeches to play
until other entertainment is put on for the corporate clients. In this
situation give the band a clear idea of how you expect the evening to
go. What to wear, when they will be needed, when they need to get their
instruments in the building and be set up, when breaks will be
required, let them know if it is convenient or not to feed them and
then finally how they can leave when finished so as not to disrupt the
rest of the entertainment.
Corporate entertainment model 2. Company Party.
Still corporate entertainment, still corporate hospitality but a
totally different set of requirements for the music. Ask yourself these
questions: Are your work force the type of workforce who will want to
dance at some point in the proceedings? If they are, then a
professional band with flexibility is essential. My experience is that
people of all ages will join together to dance to music from the
sixties and seventies. Whatever background music you require earlier in
the day/evening be it Latin, Swing, Rat Pack or Lounge, if you are
hoping to provide entertainment that will get people dancing remember
this fact. Sixties and Seventies. For some inexplicable reason this is
the music that gets people up on their feet.
When choosing your music ask the band if they can cover this part of
the corporate entertainment requirement. Get samples of their music if
need be. There is nothing worse than an ill equipped band struggling
through alien repertoire. However good the band is, if they do not play
the right repertoire, the right style of music then the corporate
entertainment will fall on deaf ears.
Let me at this point provide a caveat. Your workforce work together
They are not always going to be the best of friends however
professional their relationships are at work. Answer truthfully, will
they really want to dance together or is it asking too much? I would
say that in all the years of providing music for this kind of corporate
entertainment / hospitality , as long as the music is right, the
workforce tended to dance 30 or 40% of the time. It could be said that
a workforce who will enjoy each others company in this way is a
reflection on the talent of senior management to create a happy team!
Corporate entertainment model 3. Company Fun Day.
These come in two types. The type to entertain your own workforce or
the type to entertain prospective clients. Both types of corporate
entertainment require music that is fun. This means that the music must
be perceived as fun and the band must be perceived as fun. In both
cases Jolly Dixieland Jazz or the summer sounds of Latin music are most
suitable.
Ask yourself these questions: does the band need to be mobile?
Meaning do you want the music to move around the site at various points
in the proceedings? If so then the jolly jazz route is most suitable. A
good professional outfit of four or five players can play acoustically
and move around a site as directed.
If the band can be static and close to electrical power then either Jolly Jazz or Latin Music is suitable.
Is the event outdoors or indoors and do you have provision for bad
weather? This is England, never trust to luck, assume the worst! Any
band that needs power cannot play in the rain for health and safety
reasons. At the first hint of inclement weather a band will have to
breakdown their equipment. Build this situation into your corporate
entertainment music decisions.
How do you want the band to dress? It is a fun day after all! In the
past I and my musicians have dressed as Elvis, Cavemen, Circus Clowns,
in fact all manner of characters in the name of corporate entertainment
and corporate hospitality. Good bands will have suitable outfits for
most situations but don`t hesitate in providing something off the wall
for a special event. Most professional players have a strange urge to
jump into such costumes at the earliest possibility! As someone who has
played at a nudist camp and for a toga party, both dressed accordingly,
take my word for it!
To draw this article together let me say this. Choose the right kind
of music for the event. Brief the band accordingly but make sure you
have a professional and flexible outfit, things can change over the
course of the event and you want to make sure the band are both
co-operative and able to fulfill your needs. Don`t hesitate to ask the
band for any special requirements you have. Do it in plenty of time so
they have time to prepare.
The corporate entertainment and hospitality you offer to your guests
reflects directly onto your company. The music and musicians must be
the type who are aware of this. Dont go for second best just to save a
small amount of money. You need a well prepared, well dressed band who
are both polite and charming to your guests. They need to play the
right kind of music for the event in order to help make the day or
evenings corporate entertainment a resounding success!
About the author
Jeff Williams is a London based trombonist and vocalist who has worked
all over the world in most areas of the business. He also runs a
successful, specialist, live music agency using the best of London
musicians, servicing both private and corporate clients playing all
over the country. He would be happy to advise you with your own event
or party and offers bespoke solutions for the perfect occasion.
Contact him on +44(0)20 8761 8932 or +44(0)7747 801471
Email him on bonejeff@aol.com
