NAME: KRUSHNAKANT G.

THAPA

STANDARD: T.Y. B.F.M

ROLL NO: 09

DIVISION: A

TOPIC COVERED

CORPORATE GOVERNANCE

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SR.NO

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CONTENTS

PAGE NO.

1.

Introduction

2.

Definition

3.

History & Milestones in the Concept Of Corporate Governance

4.

Objective of Corporate Governance

5.

Seven Characteristics of Corporate Governance

6.

Principles of Corporate Governance

7.

Fundamentals Principles of Corporate Governance

8.

Main Issues in Corporate Governance

9.

Executive Pay

10.

Separation of Chief Executive Officer and Chairman of the Board

Roles

11.

Corporate Governance Framework

12.

Corporate Governance Codes

13.

Self-Regulatory Codes

14.

The Combined Codes

15.

Stock Exchange Listing Standards

16.

Other Guidelines

17.

OECD Report (Organization for Economic Co-operation

Development)

18.

Role of Listing Agreements in Furthering Good Corporate

Governance

19.

Different Committees in Corporate Governance

20.

Audit committee

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21.

Nomination Committee

22.

Remuneration Committee

23.

Models

24.

Regulations

25.

Sarbanes Oxley Act

26.

Roles & Responsibilities of Top Authorities under Corporate

Governance

27.

Chief Executive Officer

28.

Chairman

29.

Managing Director

30.

Board Members-Their Roles & Responsibilities

31.
32.

Different Board Committees-Their Roles & ResponsibilitiesRights

of Investors & Shareholders
Corporate Governance in Globalized Economy

33.

Global Strategies in Corporate Governance

34.

Mechanisms & Control

35.

Internal Corporate Governance Control

36.

External Corporate Governance Control

37.

Financial Reporting & Independent Auditors

38.

Conclusion

39.

Bibliography

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INTRODUCTION
Corporate Governance is the set of processes, customs, policies, laws & institutions affecting the way
a corporation is directed, administered or controlled. Corporate Governance also includes the
relationships among the many stakeholders involved & the goals for which the corporation is governed.
The principle stakeholders are the shareholders, the Board of Directors, Employees, Customers,
Creditors, Suppliers & the community at large.
Corporate Governance is a multi-faceted subject. It aims at ensuring the accountability of certain
individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent
problem.
Interest in the corporate governance practices of modern corporations, particularly in relation to
accountability, increased following the high-profile collapses of a number of large corporations during
20012002, most of which involved accounting fraud; and then again after the recent financial crisis in
2008. Corporate scandals of various forms have maintained public and political interest in the
regulation of corporate governance. In the U.S., these include Enron and MCI Inc. (formerly
WorldCom).

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 DEFINITION OF CORPORATE GOVERNANCE

According to SEBI:Corporate Governance is the acceptance by the management of the inalienable
rights of shareholders as the true owners of the corporation & of their own role as trustees on behalf of
the shareholders. It is about commitment to values, about ethical business conduct & about making a
distinction between personal & corporate funds in the management of a company.
According to Gabrielle ODonovan, A Business Author: Corporate Governance is an internal
system encompassing policies, processes & people which serves the need of shareholders & other
stakeholders, by directing & controlling management activities with good business savvy, objectivity,
accountability & integrity.
Other Definitions: Corporate governance has also been more narrowly defined as "a system of law and
sound approaches by which corporations are directed and controlled focusing on the internal and
external corporate structures with the intention of monitoring the actions of management and directors
and thereby, mitigating agency risks which may stem from the misdeeds of corporate officers."
One source defines corporate governance as "the set of conditions that shapes the ex post bargaining
over the quasi-rents generated by a firm." The firm itself is modeled as a governance structure acting
through the mechanisms of contract. Here corporate governance may include its relation to corporate
finance.

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 HISTORY & MILESTONES IN THE CONCEPT OF

CORPORATE

GOVERNANCE
The focus on the need for Corporate Governance probably arose in the aftermath of Watergate scandal
in the United States. Investigations revealed the existence of widespread evil of making of political
contributions & bribing of Government officials by several major corporations.
As a result, the Fraud & corrupt Practices Act, 1977 was passed to check & review the internal control
systems of the corporations a spate of scandal & corporate collapses in the late 1980s &1990s in the
United States & United Kingdom led shareholders & banks to express concern about the safety of their
investments. The companies like Polly Peck, British & Commonwealth, Bank of Credit & Common
International (BCCI), Robert Maxwells Mirror Group News International were all victims of both
boom to bust decade of the 1980s. With a view to prevent the recurrence of such failures Cadbury
Committee under Sir Adrian Cadbury was set up by London Stock Exchange in May 1991 to draft a
code of best Practices for the UK Corporations. The Cadbury Committee report was the milestone in the
history of the concept of Corporate Governance.
In the early 2000s, the massive bankruptcies of Enron and World com, as well as lesser corporate
scandals led to increased political interest in Corporate Governance, This is reflected in the passage of
the Sarbanes-Oxley Act of 2002. Other triggers for continued interest in the Corporate Governance of
organizations included the financial crisis of 2008/9 and the level of CEO pay.
East Asia
In 1997, the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, South
Korea, Malaysia, and the Philippines through the exit of foreign capital after property assets collapsed.
The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the
institutions in their economies.
Iran
The Tehran Stock Exchange introduced a corporate governance code in 2007 that reformed "board
compensation polices, improved internal and external audits, ownership concentration and risk
management. However, the code limits the directors independence and provides no guidance on
external control, shareholder rights protection, and the role of stakeholder rights.

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 OBJECTIVES OF CORPORATE GOVERNANCE

Corporate Governance is about promoting corporate fairness, transparency & accountability. In other
words Good Corporate Governance is simply good business. The aim of Good Corporate
Governance is to ensure commitment on the board in managing the company in a transparent manner
for maximizing long-term value of the company for its shareholders & all other partners. It ensures:

Adequate disclosures & effective decision making to achieve corporate objectives.

Transparency in business transactions.
Statutory & legal compliances.
Protection of shareholders interests.
Commitment to values & ethical conduct of business.

The fundamental objective of Corporate Governance is to enhance shareholders value & protect the
interests of other stakeholders by improving the corporate performance & accountability. Further, its
objective is to generate an environment of trust & confidence amongst those having competing &
conflicting interests.
It is integral to the very existence of a company & strengthens investors confidence by ensuring
companys commitment to higher growth & profits. Broadly, it seeks to achieve the following
objectives:

A properly structured board capable of taking independent & objective decisions is in place at
the helm of affairs.

The board is balance as regards the representation of adequate number of non-executive &
independent directors who will take care of their interests & well-being of all the stakeholders.

The board adopts transparent procedure and practices & arrives at decision on the strength of
adequate information.

The board has an effective machinery to sub serve the concerns of shareholders.

The board keeps the shareholders informed of relevant developments impacting the company.

SEVEN CHARACTERISTICS OF CORPORATE GOVERNANCE

Discipline
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Corporate discipline is a commitment by a companys senior management to adhere to behavior that is

usually recognized and accepted to be correct & proper. This encompasses a companys awareness of,
and commitment to, the underlying principles of good governance, particularly at senior management
level. For Examplea corporate may have following agenda
All involved parties will have a commitment to adhere to procedures, processes, and authority
structures established by the government.
Transparency
Transparency is the ease with which an outsider is able to make meaningful analysis of a companys
actions, its economic fundamentals and the non-financial aspects pertinent to that business .This is a
measure of how good management is at making necessary information available in a candid, accurate
and timely manner- not only the audit data but also general reports and press releases. It reflects
whether or not investors obtain a true picture of what is happening inside the company.
All actions implemented and their decision support will be available for inspection by authorized
organization and provider parties.
Independence
Independence is the extent to which mechanisms have been put in place to minimize or avoid potential
conflicts of interest that may exists, such as dominance by a strong chief executive or large share owner.
These mechanisms range from the composition of the board to appointments to committees of the
board, and external parties such as auditors. The decisions made, and internal process established,
should be objective and not allow for undue influences.
All processes, decision making, and mechanisms used will be established so as to minimize or avoid
potential conflicts of interest.

1. Accountability
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Individuals or groups in a company, who make decisions and take actions on specific issues, need to be
accountable for their decisions & actions. Mechanisms must exist and be effective to allow for
accountability. These provide investors with the means to query and assess the actions of the board and
its committees.
Identifiable groups within the organizations such as governance boards who take actions or make
decisions are authorized & accountable for their actions.
2. Responsibility
With regard to management, responsibility pertains to behavior that allows for corrective action and for
penalizing mismanagement. Responsible management would, when necessary, put in place what it
would take to set the company on the right path. While the board is accountable to the company, it must
act responsively to and with responsibility towards all stakeholders of the company.
Each contracted party is required to act responsibly to the organization and its stakeholders.
3. Fairness
The systems that exist within the company must be balanced in taking into account all those that have
an interest in the company and its future. The rights of various groups have to be acknowledged &
respected. For example, minority share owner interests must receive equal consideration to those of the
dominant share owners.
All decisions taken, processes used, and their implementation will not be allowed to create unfair
advantage to any one particular party.
4. Social Responsibility
A well-managed company will be aware of, and respond to, social issues, placing a high priority on
ethical standards. A good corporate citizen is increasingly seen as one that is non-discriminatory, nonexploitative, and responsible with regard to environmental and human rights issues. A company is likely
to experience indirect economic benefits such as improved productivity and corporate reputation by
taking those factors into consideration.

5. PRINCIPLES OF CORPORATE GOVERNANCE

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Contemporary discussions of Corporate Governance tend to refer to principles raised in three

documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate
Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury
and Organization for Economic Co-operation and Development (OECD) reports present general
principles around which businesses are expected to operate to assure proper governance. The SarbanesOxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the
United States to legislate several of the principles recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders exercise
their rights by openly and effectively communicating information and by encouraging
shareholders to participate in general meetings.

Interests of other stakeholders: Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.

Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing

corporate officers and board members. Organizations should develop a code of conduct for their
directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency: Organizations should clarify and make publicly known the roles
and responsibilities of board and management to provide stakeholders with a level of
accountability. They should also implement procedures to independently verify and safeguard
the integrity of the company's financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors have access to clear,
factual information.

6. Fundamentals Principles Of Corporate Governance

Transparency: It involves explaining of companys policies & actions to those to whom it owes
responsibilities. It should lead to the making of appropriate disclosures without jeopardizing
companys strategic interests. Internally, transparency means openness in a companys
relationship with its employees as well as the conduct of its business in a manner that will bear

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scrutiny. Unfortunately total transparency is not the dominant culture in corporations.

Transparency requires courage
Accountability: It signifies that the Board of Directors are accountable to the shareholders &
management is accountable to the Board of Directors. Both the Board & the management must
be accountable to the shareholders for the performance of task assigned to them. It is necessary
to ensure that there is an effective management of resources & achievement of results with
efficiency coupled with empowerment. Accountability provides impetus to performance.
Trusteeship: Large corporations have both a social & economic purpose. They represent a
mixture of interest of shareholders, lender of capital as well as business associates & employees.
It creates a responsibility of trusteeship on the Board of Directors who must act to protect &
enhance shareholders value. The Board must ensure that the company fulfills its obligations &
responsibilities to all its stakeholders.
Empowerment: It signifiesthat management must have the freedom to drive the enterprise
forward. It is the process of actualizing the potential of its employees. Empowerment generates
creativity & innovation throughout the organization by truly vesting decision making powers at
the most appropriate levels in the organization hierarchy.
Ethics:A corporation must set specific standards of ethical behavior both within the
organizations & in its external relationships. Deviation from ethical principles corrupts
organizational culture & undermines stakeholders value.
Oversight: It means the existence of a system of checks & balances. It should prevent misuse of
power & facilitate timely management response to change & risks.

7. MAIN ISSUES IN CORPORATE GOVERNANCE

Corporate Governance are a set of structural arrangements that are emerging in free market economies
to align the management of companies with the interests of their shareholders and other stakeholders &
society at large.
Corporate Governance addresses three basic issues:

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Ethical Issues

Efficiency Issues
Accountability issues

Ethical Issues:
They are concerned with the problem of fraud, which is becoming wide spread in capitalist
economies. Corporations often employ fraudulent means to achieve goals. They perform cartels
to exert tremendous pressure on the government to formulate public policy, which may
sometimes go against the interests of individuals & society at large. At times corporations may
resort to unethical means like bribes, giving gifts to potential customers & lobbying under the
cover of public relations in order to achieve their goal of maximizing long run owner value.

Efficiency Issues:
They are concerned with the performance of the management. Management is responsible for
ensuring reasonable returns on investment made by the shareholders. In developed countries,
individuals usually invest their money through mutual, retirement & tax funds. In India,
however, small shareholders are still important source of capital for corporations. The potential
return on the investments of the shareholders is dependent upon the efficient & effective use of
the funds by the management of the company.

Accountability Issues:
This issue concentrates on the stakeholders need for transparency of management in the conduct
of the business. Since the activities of the management influence the workers, customers & the
society at large, some of the accountability issues are concerned with the social responsibility
that a corporation must shoulder.

8. Executive pay
Increasing attention and regulation (as under the Swiss referendum "against corporate Rip-offs" of
2013) has been brought to executive pay levels since the financial crisis of 20072008. Research on the
relationship between firm performance and executive compensation does not identify consistent and
significant relationships between executives' remuneration and firm performance. Not all firms
experience the same levels of agency conflict, and external and internal monitoring devices may be
more effective for some than for others. Some researchers have found that the largest CEO performance
incentives came from ownership of the firm's shares, while other researchers found that the relationship
between share ownership and firm performance was dependent on the level of ownership. The results
suggest that increases in ownership above 20% cause management to become more entrenched, and less
interested in the welfare of their shareholders.
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Some argue that firm performance is positively associated with share option plans and that these plans
direct managers' energies and extend their decision horizons toward the long-term, rather than the shortterm, performance of the company. However, that point of view came under substantial criticism circa
in the wake of various security scandals including mutual fund timing episodes and, in particular, the
backdating of option grants as documented by University of Iowa academic Erik Lie and reported by
James Blander and Charles Forelle of the Wall Street Journal.
Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of
options faced various criticisms. A particularly forceful and long running argument concerned the
interaction of executive options with corporate stock repurchase programs. Numerous authorities
(including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in
concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in
part, corporate stock buybacks for U.S. Standard &Poors 500 companies surged to a $500 billion annual
rate in late 2006 because of the impact of options. A compendium of academic works on the
option/buyback issue is included in the study Scandal by author M. Gumport issued in 2006.
A combination of accounting changes and governance issues led options to become a less popular
means of remuneration as 2006 progressed, and various alternative implementations of buybacks
surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of
implementing a share repurchase plan.

9. Separation of Chief Executive Officer and Chairman of the Board Roles

Shareholders elect a board of directors, who in turn hire a Chief Executive Officer (CEO) to lead
management. The primary responsibility of the board relates to the selection and retention of the CEO.
However, in many U.S. corporations the CEO and Chairman of the Board roles are held by the same
person. This creates an inherent conflict of interest between management and the board.
Critics of combined roles argue the two roles should be separated to avoid the conflict of interest and
more easily enable a poorly performing CEO to be replaced. Buffett wrote in 2014: "In my service on
the boards of nineteen public companies, however, Ive seen how hard it is to replace a mediocre CEO
if that person is also Chairman. (The deed usually gets done, but almost always very late.)

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Advocates argue that empirical studies do not indicate that separation of the roles improves stock
market performance and that it should be up to shareholders to determine what corporate governance
model is appropriate for the firm.
In 2004, 73.4% of U.S. companies had combined roles; this fell to 57.2% by May 2012. Many U.S.
companies with combined roles have appointed a "Lead Director" to improve independence of the
board from management. German and UK companies have generally split the roles in nearly 100% of
listed companies. Empirical evidence does not indicate one model is superior to the other in terms of
performance. However, one study indicated that poorly performing firms tend to remove separate CEO's
more frequently than when the CEO/Chair roles are combined.

10. CORPORATE GOVERNANCE FRAMEWORK

To create shareholders value while protecting other stakeholders interests so as to:
a)
b)
c)
d)

Increase investors confidence

Motivate human resources
To improve economic efficiency
Economic performance is only one yardstick for measuring success, social and environmental

responsibilities are also equally important.

e) To remain competitive in the national economy.
Structure of Corporate Governance Framework.
It should achieve the following:
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Protect shareholders rights.

Ensure equitable treatment of all shareholders including minority and foreign shareholders.

Recognize the rights of stakeholders as established by law and encourage active co-operation
between corporations and stakeholders in creating wealth, jobs and sustainability of financially
sound enterprises.

Ensure timely and accurate disclosure of all material matters regarding the corporations
including the financial situation, performance, ownership and governance of the company.

Ensure strategic guidance of the company, effective monitoring of management by the board and
the boards accountability to the company and the shareholders.

11. CORPORATE GOVERNANCE CODES

Meaning & Definition
A code is a set of rules, which are accepted as general principles, or a set of written rules, which state
how people in a particular organization or country should behave
Thus, it is a set of standards agreed on by a group of people who do a particular job. A regulation is an
official rule that lays down how things should be done. Both codes & regulations are set of rules or
principles or standards that are intended to control, guide, or manage behavior or the conduct of
individuals working in organizations, the basic difference being that codes are self-imposed or selfregulated sets of rules, while regulations are official i.e. imposed by the State (government).
Many corporate governance codes were developed by non-governmental organizations. Stock
exchanges, investor groups and professional associations were responsible for promoting and
commissioning codes or principles for corporate governance. In addition to the codes developed by
non-governmental organizations. Governments also issue rules or guide lines on matters concerning
governance through capital market regulatory organizations like SEBI
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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.

12.Self-Regulatory Codes
Codes are generally self-regulatory rules for guiding conduct or behavior. They do not direct or control
behavior by some official authority. International Capital Markets Group (1992) listed the following
benefits of self-regulation:

In self-regulation it is possible to impose ethical standards, which go beyond those, which can
be imposed by statutory legislation.

Self-regulators are directly accountable to the members of their group. Self-regulatory systems
have built in motivation to regulate for effectiveness and least interference.

Self-regulation operates in an environment where there is willingness to accept regulations

formulated from within for the common good of the group.

Self-regulators, being part of the group understand the issues facing the group more intimately
and are therefore more sensitive to the needs of the entire group.

The regulated have an opportunity to participate at all levels of the self-regulatory process.
This makes it easier for them to appreciate and accept new regulations.

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Self-regulation has a built-in system of checks and balances as the regulated see it as their duty
to expose non-compliance.

Self-regulators can identify complex regulatory problems at an early stage and develop suitable
solutions before these problems reach a stage where they can disrupt group operations.

Self-regulations are more comprehensive than, official regulations and are easier to operate and
implement.

13.The Combined Code

Governance & Codes of Best Practice
The code has been drawn on the basis of reports submitted by the three committees The Cadbury,
Green Bury and the Hampel Committees. Under rules 12-43 A (Code of Corporate Governance),
companies incorporated in United Kingdom are required to include in their Annual Reports a statement
furnishing, inter alia, details of their compliance with the provision of the code.
A. DIRECTORS
Principle 1: The Board
Every listed company should be headed by an effective board which should lead and control the
company.
Principle 2: Chairman and CEO
There are two key tasks at the top of every public company the running of the board and the
executive responsibility for the running of the companys business. There should be a clear division
of responsibilities at the head of the company which will ensure a balance of power and authority,
such that no one individual has unfettered powers of decision.
Principle 3: Board Balance
The board should include a balance of executive and non-executive directors such that no individual
or small group of individuals can dominate boards decision taking.
Principle 4: Supply of Information
The board should be supplied in a timely manner with information in a form and of a quality
appropriate to enable it to discharge its duties.
Principle 5: Appointments to the Board
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There should be a formal and transparent procedure for the appointment of new directors to the
board.
Principle 6: Re-election
All directors should be required to submit themselves for re-election at regular intervals and atleast
every three years.

B. DIRECTORS REMUNERATION
Principle 1: The Level & Make-up of Remuneration
Levels of remuneration should be sufficient to attract and retain the directors needed to run the
company successfully, but companies should avoid paying more than is necessary for this purpose.
A proportion of executive directors remuneration should be structured so as to link rewards to
corporate and individual performance.

Principle 2: Procedure
Companies should establish a formal and transparent procedure for developing policy on executive
remuneration and for fixing the remuneration packages of individual directors. No director should
be involved in deciding his or her remuneration.

Principle 3: Disclosure
The companys annual report should contain a statement of remuneration policy and details of the
remuneration of each director.
C. RELATIONS WITH SHAREHOLDERS
Principle 1: Dialogue with Institutional Shareholders
Companies should be ready, where practicable, to enter into a dialogue with Institutional
shareholders based on the mutual understandings of objectives.
Principle 2: Constructive use of AGM
Boards should use the AGM to communicate with private investors and encourage their
participation.

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D. ACCOUNTABILITY & AUDIT

Principle 1: Financial Reporting
The board should present a balanced and understandable assessment of the companys position and
prospects.
Principle 2: Internal Control
The board should maintain a sound system of internal control to safeguard shareholders investment
and the companys assets.
Principle 3: Audit Committees & Auditors
The board should establish formal and transparent arrangements for considering how they should
apply the financial reporting and internal control principles and for maintaining an appropriate
relationship with the companys auditors.
Principle 4: Board of Directors
The full board should meet a minimum of six times a year, preferably at an interval of two months
and each meeting should have agenda items that require at least half-a-days discussions.

14.Stock Exchange Listing Standards

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Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to
meet certain governance standards. For example, the NYSE Listed Company Manual requires, among
many other elements:
Independent directors: "Listed companies must have a majority of independent directors. Effective
boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a
majority of independent directors will increase the quality of board oversight and lessen the possibility
of damaging conflicts of interest." (Section 303A.01) An independent director is not part of
management and has no "material financial relationship" with the company.
Board meetings that exclude management: "To empower non-management directors to serve as a more
effective check on management, the non-management directors of each listed company must meet at
regularly scheduled executive sessions without management." (Section 303A.03)
Boards organize their members into committees with specific responsibilities per defined charters.
"Listed companies must have a nominating/corporate governance committee composed entirely of
independent directors." This committee is responsible for nominating new members for the board of
directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of
listing standards as well as outside regulations. (Section 303A.04 and others)
Organization for Economic Co-operation and Development Principles
One of the most influential guidelines has been the Organization for Economic Co-operation and
Development (OECD) Principles of Corporate Governancepublished in 1999 and revised in 2004.
[2]

The OECD guidelines are often referenced by countries developing local codes or guidelines.

Building on the work of the OECD, other international organizations, private sector associations and
more than 20 national corporate governance codes formed the United Nations Intergovernmental
Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce
their Guidance on Good Practices in Corporate Governance Disclosure. This internationally
agreedbenchmark consists of more than fifty distinct disclosure items across five broad categories:

Auditing
Board and management structure and process
Corporate responsibility and compliance in organization

Other Guidelines

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The investor-led organization International Corporate Governance Network (ICGN) was set up by
individuals centered around the ten largest pension funds in the world 1995. The aim is to promote
global corporate governance standards. The network is led by investors that manage 18 trillion dollars
and members are located in fifty different countries. ICGN has developed a suite of global guidelines
ranging from shareholder rights to business ethics.
The World Business Council for Sustainable Development (WBCSD) has done work on corporate
governance, particularly on Accounting and Reporting, and in 2004 released Issue Management Tool:
Strategic challenges for business in the use of corporate responsibility codes, standards, and
frameworks. This document offers general information and a perspective from a business
association/think-tank on a few key codes, standards and frameworks relevant to the sustainability
agenda.
In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate
Governance - the Foundation for Corporate Citizenship and Sustainable Business, linking the
environmental, social and governance responsibilities of a company to its financial performance and
long-term sustainability.
Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision is the
degree to which companies manage their governance responsibilities; in other words, do they merely try
to supersede the legal threshold, or should they create governance guidelines that ascend to the level of
best practice. For example, the guidelines issued by associations of directors, corporate managers and
individual companies tend to be wholly voluntary but such documents may have a wider effect by
prompting other companies to adopt similar practices.

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 OECD REPORT (ORGANIZATION FOR ECONOMIC CO-OPERATION

AND DEVELOPMENT
In the meeting held on 27-28 April 1998, OECD Ministers asked the OECD to develop a set of
Corporate Governance principles that could be useful to members and non-members countries. In June
1998, the OECD ad-hoc Task Force on Corporate Governance, with representatives from all member
countries and key international organizations, includes the World Bank. This body also had a number of
representatives from the private sectors and labour representatives with special expertise in Corporate
Governance. Even though the principles are primarily aimed at governments, they also provide
guidance for stock exchanges, investors, private corporations, and national commissions on Corporate
Governance as they deal with best practices, listing requirements and codes of conduct.
The Principles by OECD fall into five broad areas:
1. The Rights of Shareholders
The Corporate Governance framework should protect shareholders rights. The protection of the
rights of shareholders and the ability of the shareholders to influence the behaviour of the
corporation are key for effective corporate governance. Shareholders have the right to secure
ownership and registration of shares, as well as the right to share in the residual profits of the
company. The ability to participate in basic decisions concerning the company, chiefly by
participation in general shareholders meeting is forth as an important right. The Principles call
for disclosure of corporate structures and devices that redistribute control over the company in
ways that deviate from proportionality to ownership. Transfers of controlling interest in the
company should take place under fair and transparent conditions and anti-takeover defenses not
be used to shield management form accountability. Investors are urged to use their voting rights.
This is very important, because even large shareholders can have no effective role in shaping
major decisions affecting the corporation if they fail to vote.
2. The Equitable Treatment of Shareholders
The Corporate Governance framework should ensure the equitable treatment of all shareholders,
including minority and foreign shareholder. All shareholders should have the opportunity to
obtain effective redress for violation of their rights.

The Role of Stakeholders

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The Corporate Governance framework should recognize the rights of stakeholders and encourage
active co-operation between corporations and stakeholders in creating wealth, jobs, and financially
sound enterprises. This Principle states that the Corporate Governance framework should recognize
the legal rights of stakeholders. A Corporate Governance structure has to be concerned with finding
ways to encourage the various stakeholders in the firm to make the much needed investment in
human and physical capital. It is ultimately in the long term self-interest of firms to recognize that
their employees and other stakeholders constitute a valuable resource for building competitive and
profitable companies, whether or not those employees or other stakeholders have legal place in
Corporate Governance structure.
3. Disclosure & Transparency
The Corporate Governance framework should ensure that timely and accurate disclosure is made on
all material matters regarding the corporation, including the financial situation, performance,
ownership, and governance of the company.
Transparency is widely recognized as a central and indispensable element of an effective Corporate
Governance system. The Principles require the timely and accurate disclosure of information on all
material matters regarding the financial situation, performance, accordance with high quality
standards. The Principles also requires for an annual independent audit so as to impose an external,
objective control on the preparation and presentation of financial statements.

The Role of Board

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The Corporate Governance framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the boards accountability to the company and
the shareholders.
The board is the main mechanism for monitoring management and providing strategic guidance to the
company. The OECD has a number of different boards. Some board emphasizes the monitoring of the
management conduct while other boards are more concerned with providing a strategic vision for the
corporations. The accountability of the board to the company and its shareholders is a basic tenet of
sound Corporate Governance everywhere. The Principles make it clear that it is the duty of the board to
act fairly with respect to all group of shareholders, to deal fairly with stakeholders and to assure
compliance with applicable laws. The responsibilities of the board includes: reviewing corporate
strategy and planning; overseeing management; managing potential conflicts of interest; and assuring
the integrity of accounting, reporting and communication systems. The Principles also stress the need
for objective judgment on corporate affairs by board members, independent of the opinion of
management.

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 ROLE OF LISTING AGREEMENTS IN FURTHERING GOOD CORPORATE

GOVERNANCE
Listing provisions have gained particular significance in India as regard their role in promoting good
Corporate Governance SEBI, enjoy adequate powers under securities contracts (Regulations) Act, 1956
and the SEBI Act, 1992 to direct stock exchanges to amend the provision of listing agreements form
time to time, so as to protect investors interest and to promote orderly development of securities market
through implementation of Corporate Governance.
The following clauses of listing agreement are pertinent from the standpoint of Corporate Governance:
1. Clause 24 A: It requires the listed company to comply with SEBI guidelines on disclosure and
investor protection.

2. Clause 40 A: It requires compliance with SEBI Regulations, 1977 by the acquires and the
company where any person acquires or agrees to acquire any securities beyond 5% of voting
capital or exceeding 10% of the voting rights of the company under clause 40B, compliance
with the aforesaid Act is mandatory where takeover offer is made or a change in control of
management of company is involved.
3. Clause 43 A: It casts an obligation on the company to disclose the fact of delisting together with
reason / jurisdiction and suspension of trading in securities at the stock exchange at which these
are listed.
4. Clause 45: It provides that there shall be five public shareholders for every rupees one lakh of
net capital offer made to public and ten incase of offer for sale.
5. Clause 46: It requires the company to appoint company secretary who shall act as compliance
officer and directly lease with authorities like SEBI, stock exchanges, Registrar & investors.
6. Clause 47: It requires that permission for delisting of securities from other than regional stock
exchange shall be subject to company passing a special resolution of shareholders in the general
meeting and publishing a notice in the newspapers offering justification for proposed delisting.
CLAUSE 49
The company agrees to comply with the following provisions:
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I.

Board of Directors

A. Composition of Boards
i) The Board of Directors of the company shall have an optimum combination of executive and nonexecutives directors with not less than fifty percent of the board of directors comprising of nonexecutive director. The number of independent directors would depend on whether the Chairman is
executive or non-executive. In case of non-executive chairman, at least one third of board should
comprise of independent directors and in case of an executive chairman, at least half of board
should comprise of independent directors.
B. Composition of Boards
i) All compensation paid to non-executive directors shall be fixed by the Board of Directors and shall be
approved by shareholders in general meeting. Limits shall be set for the maximum number of stock
options that can be granted to non-executive directors in any financial year and in aggregate. The
stock options granted to the non-executive directors shall vest after a period of at least one year
from the date such non-executive directors have retired from the Board of the Company.
ii) The considerations as regards compensation paid to an independent director should be the same as those
applied to a non-executive director.
iii)The company shall publish its compensation philosophy and statement of entitled compensation in
respect of non-executive directors in its annual report. Alternatively, this may put up on the
companys website and reference drawn thereto in the annual report. Company shall disclose on an
annual basis, details of shares held by non-executive directors, including on an if-converted basis.
iv) Non-executive directors shall be required to disclose their stock holding in the listed company in which
they are proposed to be appointed as directors, prior to their appointment. These details should
accompany their notice of appointment

C. Independent Director
Independent Director shall however periodically review legal compliance reports prepared by the
company as well as steps taken by the company to cure any taint. In the event of any proceedings
against an independent director in connection with the affairs of the company, defense shall not be
permitted on the ground that the independent director was unaware of this responsibility.
i)

The considerations as regards remuneration paid to an independent director shall be the same as those
applied to a non-executive director.
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D. Board Procedure
The board meeting shall be held at least four times a year, with a maximum time gap of four months
between any two meetings. The minimum information to be made available to the board is given in
Annexure-IA.

A director shall not be a member in more than 10 committees or act as Chairman of more than
five committees across all companies in which he is a director. Furthermore it should be a mandatory
annual requirement for every director to inform the company about the committee positions he occupies
in other companies and notify changes as and when they take place.

E. Code of Conduct
i)
It shall be obligatory for the Board of the company to lay down the code of conduct
for all board members and senior management of a company. This code of conduct
ii)

shall be posted on the website of the company.

All Board members and senior management personnel shall affirm compliance with
the code on an annual basis. The annual report of the company shall contain a
declaration to this effect signed by the CEO and COO.

F. Term of Office of Non-executive Directors

Person shall be eligible for the non-executive director so long as the term of office did not exceed nine
years in three terms of three years each, running continuously.
II.

Audit Committee
A. Qualified and Independent Audit Committee
A qualified and independent audit committee shall be set up and shall comply with the
following:

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i)

The audit committee shall have minimum three members. All the members of audit
committee shall be non-executive directors, with the majority of them being

ii)

independent.
All members of audit committee shall be financially literate and at least one member

iii)
iv)

shall have accounting or related financial management expertise.

The Chairman of the committee shall be an independent director.
The Chairman shall be present at Annual General Meeting to answer shareholder
queries.

v)

The audit committee should invite such of the executives, as it considers appropriate
to be present at the meetings of the committee, but on occasions it may also meet
without the presence of any executives of the company. The finance director, head of
internal audit and when required, a representative of the external auditor shall be

vi)

present as invitees for the meeting of the audit committee.

The Company Secretary shall act as the secretary to the committee.

B. Meeting of Audit Committee

The audit committee shall meet at least thrice a year. One meeting shall be held before
finalization of annual accounts and one every six months. The quorum shall be either two
members or one third of the members of the audit committee, whichever is higher and
minimum of two independent directors.

C. Powers of Audit Committee

The audit committee shall have powers which should include following:
1. To investigate any activity within its terms of reference.
2. To seek information from any employee.
3. To obtain outside legal or other professional advice.
4. To secure attendance of outsiders with relevant expertise, if it considers necessary

D. Role of Audit Committee

Recommending the appointment and removal of external auditor, fixation of audit

fee and also approval for payment for any other services.
Reviewing with management the annual financial statements before submission to

the board.
Reviewing with management, external and internal auditors, the adequacy of internal
control systems.

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Reviewing the adequacy of internal audit function, including the structure of the
internal audit department, staffing and seniority of the official heading the

department, reporting structure coverage and frequency of internal audit.

Discussion with internal auditors any significant findings and follow up there on.
Reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failureof internal control

systems of a material nature and reporting the matter to the board.

Discussion with external auditors before the audit commences about nature and

scope of audit as well as post audit discussion to ascertain any area of concern.
Reviewing the companys financial and risk management policies.
To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders and creditors.

E. Review of Information by Audit Committee

i)
Financial statements and draft audit report, including quarterly / half yearly financial
ii)
iii)
iv)

information.
Management discussion and analysis of financial condition and results of operations.
Reports relating to compliance with laws and to risk management.
Management letters / letters of internal control weaknesses issued by statutory /

v)
vi)

internal auditors.
Records of related party transactions.
The appointment, removal and terms of remuneration of the Chief internal auditor
shall be subject to review by the audit committee

III.

Audit Reports and Audit Qualifications

A. Disclosure of Accounting Treatment
In case it has followed a treatment different from that prescribed in an Accounting
Standards, Management shall justify why they believe such alternative treatment which is
more representative of the underlined business transactions. Management shall also clearly
explain the alternative accounting treatment in the footnote of financial statements.

IV.

Whistle Blower Policy

A. Internal Policy on access to Audit Committee
i)
Personnel who observe an unethical or improper practice shall be able to approach
the audit committee without necessarily informing their supervisors.

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ii)

Companies shall take measures to ensure that this right of access is communicated to
all employees through means of internal circulars, etc. The employment and other
personnel policies of the company shall contain provisions protecting whistle
blowers from unfair termination and other unfair or prejudicial employment

iii)

practices.
Company shall annually affirm that it has not denied any personnel access to the
audit committee of the company and that it has provided protection to whistle
blowers from unfair termination and other unfair or prejudicial employment

V.

iv)

practices.
Such affirmation shall form a part of the Board report on Corporate Governance that

v)

is required to be prepared and submitted together with the annual report.

The appointment, removal and terms of remuneration of the chief internal auditor

shall be subject to review by the Audit Committee.

Subsidiary Companies
i)
The company agrees that provisions relating to the composition of the Board of Directors
of the holding company shall be made applicable to the composition of the Board of
ii)

Directors of subsidiary companies.

At least one independent director on the Board of Directors of the holding company shall

iii)

be a director on the Board of Directors of the subsidiary company.

The Audit Committee of the holding company shall also review the financial statements,

iv)

in particular the investments made by the subsidiary company.

The minutes of the Board meeting of the subsidiary company shall be placed for review

v)

at the Board meeting of the holding company.

The Board report of the holding company should state that they have reviewed the affairs
of the subsidiary company also.

VI.

Disclosure of Contingent Liabilities

The company agrees that management shall provide a clear description in plain English
of each material contingent liabilities and its risk, which shall be accompanied by the
auditors clearly worded comments on the managements view. This section shall be
highlighted in the significant accounting policies and notes on accounts, as well as, in the
auditors report, where necessary.

VII.

Disclosures
A. Basis of Related Party Transactions
i)
A statement of all transactions with related parties including their basis shall be
placed before the Audit Committee for formal approval / ratification. If any

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transaction is not on an arms length basis, management shall provide an explanation

to the Audit Committee justifying the same.
B. Board Disclosures Risk Management
i)
It shall put in place procedures to inform Board members about the risk assessment
and minimization procedures. These procedures shall be periodically reviewed to
ensure that the executive management control risk through means of a properly
ii)

defined framework.
Management shall place a report certified by the compliance officer of the company,
before the entire Board of Directors every quarter documenting the business risks
faced by the company, measures to address and minimize such risks, and any
limitations to the risk taking capacity of the corporations. This document shall be
formally approved by the Board.

C. Proceeds from Initial Public Offerings (IPOs)

When money is raised through an Initial Public Offerings it shall disclose to the Audit
Committee, the uses / applications of funds by major category, on a quarterly basis as a part
of their quarterly declaration of financial results. Further, on an annual basis, the company
shall prepare a statement of funds utilized for purposes other than those stated in the offer
document / prospectus. This statement shall be certified by the independent auditors of the
company. The audit committee shall make appropriate recommendation to the Board to take
up steps in this matter.
D. Remuneration of Directors
i)
Disclosure on the remuneration of directors shall made in the section on the
ii)

corporate governance of the annual report.

All elements of remuneration package of all the directors i.e. salary, benefits,

iii)

bonuses, stock options, pension etc.

Details of fixed component and performance linked incentives, along with the

iv)
v)

performance criteria.
Service contracts, notice period, severance fees.
Stock option details, if any and whether issued at discount as well as the period
over which accrued and over which exercisable

E. Management
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As part of the directors report or as an addition there to, a Management Discussion and
Analysis report should form part of the annual report to the shareholders. This Management
Discussions and Analysis should include discussion on the following matters within the
limits set by the companys competitive position:

Industry structure and developments.

Opportunities and Threats.

Segment-wise or product-wise performance.

Outlook.

Risks and concerns.

Internal control systems and their adequacy.

Discussion on financial performance with respect to operational performance.

Material developments in Human Resources / Industrial Relations front, including

number of people employed.
Management shall make disclosures to the board relating to all material financial and
commercial transactions, where they have personal interest that may have a potential conflict
with the interest of the company at large.
F. Shareholders

In case of the appointment of a new director or re-appointment of a director the

shareholder must be provided with the following information:
a) A brief resume of the director.
b) Nature of his expertise in specific functional areas.
c) Name of the companies in which the person also holds the directorship and the

membership of committees of the board.

Information like quarterly results, presentation made by companies to analyze shall
be put on companys website, or shall be sent in such a form so as to enable the stock

exchange on which the company is listed to put it on its own website.

A board committee under the chairmanship of a non-executive director shall be
formed to specifically look into the redressal of shareholder and investors complaints

like transfer of shares, non-receipt of balance sheet, non-receipt of declared.

To expedite the process of share transfers the board of the company shall delegate the
power of share transfer to an officer or a committee or to the registrar and share
transfer agents. The delegated authority shall attend to share transfer formalities at
least once in fortnight.

VIII.

CEO/CFO Certification
CEO and the CFO of the company shall certify that, to the best of their knowledge and belief:

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i)

They have reviewed the balance sheet and profit and loss account and all its
schedules and notes on accounts, as well as cash flow statements and the Directors

IX.

ii)

Report.
These statements do not contain any materially untrue statement or omit any

iii)
iv)

material fact nor do they contain statements that might be misleading.

These statement together present a true and fair view of the company
Details of fixed component and performance linked incentives, along with the

v)
vi)

performance criteria.
Service contracts, notice period, severance fees.
Stock option details, if any and whether issued at a discount as well as the period

over which accrued and over which exercisable

Report on Corporate Governance
i)
There shall be separate section on Corporate Governance in the annual reports of
company, with a detailed compliance report on Corporate Governance. Non-compliance
of any mandatory requirement i.e. which is part of listing agreement with reasons thereof
and the extent to which the non-mandatory requirements have been adopted should be
ii)

specifically highlighted.
The companies shall submit a quarterly compliance report to the stock exchanges within
15 days from the close of quarter. The report shall be submitted either by the Compliance
Officer or the Chief Executive Officer of the company after obtaining due approvals.

DIFFERENT COMMITTEES IN CORPORATE GOVERNANCE

AUDIT COMMITTEE
Introduction
The audit committee plays a critical role in management oversight. The combination of
requirements imposed by the Sarbanes Oxlay Act, SEC regulations and stock exchange listing standards
has dramatically increased the number of scope of the committees responsibilities. Traditionally, audit
committees focused on ensuring the accuracy of financial statements prepared by the senior managers.
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But in todays environment, audit committees are also concerned with the retention and performances of
external auditors, the effectiveness of internal controls, compliance with code of ethics and the anatomy
of whistle blowing procedures for accounting related issues.
Composition of Audit Committee
1) The audit committees should have minimum three members all being independent and with
atleast one director having financial and accounting knowledge.
2) The chairman of the committee should be an independent director.
3) The chairman should be present at annual general meeting to answer shareholder quarries.
4) The audit committees should invite such of the executives, as it considers appropriate to be
present at the meetings of the committee but an occasions if may a ISO meet without the
presence of any executives of the company. Finance director and head of the internal audit and
when required a representative of external, a representative of the external auditor should be
present as invites for the meeting of the audit committee.
5) The company secretary should act as the secretary to the committee.

Functions of Audit Committee

1) To discuss with independent auditors any problems that they experience in completing the audit.
2) To review the interim and final accounts in totality.
3) To review the companys financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct sufficient and credible.
4) To recommend the appointment and removal of external auditor, taxation of audit free and also
approval for payment for any other services.
5) To review with the management the annual financial statements before submission to the board.

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6) To review with the management external and internal auditor, the adequacy of internal control
system.
7) To discuss with internal auditors of any significant findings and follow up thereon.
8) To discuss with the external auditors before audit commences, of the nature and scope of audit.
Also post audit discussion to ascertain any area of concern.
9) To review companys financial and risk management policies.
10) To look into the reasons for substantial defaults in the payments to the depositors, debentures
holders, shareholders and creditors.
11) To make recommendations regarding the audit fee, selection and replacement of auditors.
12) To review the adequacy of internal audit function, including the structure of the internal audit
department, starting and seniority of the official heading the department, reporting structure,
coverage and frequency of internal audit.

Powers of Audit Committee

Being a committee of the board the audit committee derives its powers from the authorization of the
board. The committee recommends following powers to the auditors:

To investigate any activity within its terms of reference.

To seek information from any employee.

To obtain legal or other professional advice.

To secure attendance of outsiders with relevant expertise, if it considers necessary.

Five guiding principles for audit committee:

One size does not fit for all when delegating oversight responsibility to the audit committee,
recognize that the needs and dynamics of each company, board and audit committee are unique.

The board must ensure the audit committee must comprises the right individuals to provide
independent, objective and effective oversight.

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The board and audit committee must continually assess whether and insist about integrity and
accuracy in financial reporting.

The audit committees oversight process should facilitate its understanding and monitoring of
key roles responsibilities and risks within the financial reporting environment.

The audit committee must continually reinforce its direct responsibility for the external
auditor, as required under Sarbanes Oxlay.

Nomination Committees
Introduction
Committees are usually set up to select the new non-executive directors. Usually, it is headed by the
chairman and its shortlists and interviews the final candidates.
Role of Nomination Committee
1) Oversee board organization, including committee assignments.
2) Determine qualifications for board membership.
3) Identity and evaluate candidates for nominations to the board.
4) Propose a slate of nominees for selection by the shareholders at the annual meeting of the
shareholders.
5) Act as the contact point for shareholder input to the nomination process.
6) Oversee director orientation and training.
7) Oversee the annual assessment of the board and its committees.
8) Oversee the development of and recommend corporate govern and principles for adoption of the
full board.
9) Oversee CEO succession planning for other senior management positions.

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 Importance Rules for disclosure of Nomination Committee

Whether its board has a dedicated nominating committee, and if not the reasons why it did not
torn such a committee and a description of the process adopted to determine director nominees.

Whether nominating committee members satisfy independent requirement imposed by national

exchange or inter dealer qualification system.

Whether a company pays any third parties a fee to assist in the process of identifying and
evaluating candidates and what functions these search firms perform.

The minimum qualifications and standards a company seeks for director nominees.

Whether candidates put toward by shareholders are considered for director nominees are the
processes for identifying and evaluating such candidates.

Whether a company has rejected any candidates nominated by large long term shareholders or
group of shareholders.

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 Remuneration Committee
Shareholders are becoming concerned about the lack of transparency regarding the remuneration of
directors and top level managers. The board sets up the remuneration committee to objectively review
the remuneration packages of the executive directors and other top level managers.
This committee, which is made up of independent directors chalks out the remuneration policy. Such
policy checks the reasonable increase of executive remuneration.
The remuneration committee designs a transparent remuneration policy that can attract and retain
directors and top management and motivate them to achieve the long term goals of the organization.

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 MODELS
Different models of corporate governance differ according to the variety of capitalism in which they are
embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The
coordinated or Multi stakeholder Model associated with Continental Europe and Japan also recognizes
the interests of workers, managers, suppliers, customers, and the community. A related distinction is
between market-orientated and network-orientated models of corporate governance.
Continental Europe
Some continental European countries, including Germany and the Netherlands, require a two-tiered
Board of Directors as a means of improving corporate governance.[28] In the two-tiered board, the
Executive Board, made up of company executives, generally runs day-to-day operations while the
supervisory board, made up entirely of non-executive directors who represent shareholders and
employees, hires and fires the members of the executive board, determines their compensation, and
reviews major business decisions.
India
The Securities and Exchange Board of India Committee 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."
United States, United Kingdom
The so-called "Anglo-American model" of corporate governance emphasizes the interests of
shareholders. It relies on a single-tiered Board of Directors that is normally dominated by non-executive
directors elected by shareholders. Because of this, it is also known as "the unitary system". Within this
system, many boards include some executives from the company (who are ex officio members of the
board). Non-executive directors are expected to outnumber executive directors and hold key posts,
including audit and compensation committees. In the United Kingdom, the CEO generally does not also
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serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major
misgivings regarding the impact on corporate governance.

REGULATIONS
Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These
may vary in many respects between countries, but a corporation's legal person status is fundamental to
all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right
without reference to any particular real person. It also results in the perpetual existence that
characterizes the modern corporation. The statutory granting of corporate existence may arise from
general purpose legislation (which is the general case) or from a statute to create a specific corporation,
which was the only method prior to the 19th century.
In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in
some countries, and various laws and regulations affecting business practices. In most jurisdictions,
corporations also have a constitution that provides individual rules that govern the corporation and
authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in
English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum] and
Articles of Association. The capacity of shareholders to modify the constitution of their corporation can
vary substantially. The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent
modifications. This law made it illegal to bribe government officials and required corporations to
maintain adequate accounting controls. It is enforced by the U.S. Department of Justice and the
Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied
on corporations and executives convicted of bribery.
The UK passed the Bribery Act in 2010. This law made it illegal to bribe either government or private
citizens or make facilitating payments (i.e., payment to a government official to perform their routine
duties more quickly). It also required corporations to establish controls to prevent bribery.

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 Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high-profile corporate scandals.
It established a series of requirements that affect corporate governance in the U.S. and influenced
similar laws in many other countries. The law required, along with many other elements, that:
The Public Company Accounting Oversight Board (PCAOB) is established to regulate the auditing
profession, which had been self-regulated prior to the law. Auditors are responsible for reviewing the
financial statements of corporations and issuing an opinion as to their reliability.
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial statements.
Prior to the law, CEO's had claimed in court they hadn't reviewed the information as part of their
defense.
Board audit committees have members that are independent and disclose whether or not at least one is a
financial expert, or reasons why no such expert is on the audit committee.
External audit firms cannot provide certain types of consulting services and must rotate their lead
partner every 5 years. Further, an audit firm cannot audit a company if those in specified senior
management roles worked for the auditor in the past year. Prior to the law, there was the real or
perceived conflict of interest between providing an independent opinion on the accuracy and reliability
of financial statements when the same firm was also providing lucrative consulting services.

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 ROLE & RESPONSIBILITIES OF TOP AUTHORITIES UNDER

CORPORATE GOVERNANCE
Chief Executive Officer
Roles of Chief Executive Officer
1. Leader
Advises the Board
Advocates / promotes organization & stakeholder change related to organization mission
Supports motivation of employees in organization products / programs & operations
2. Visionary / Information Bearer
Ensures staff and Board have sufficient & up-to-date information
Looks to the future for change opportunities
Interfaces between Board & employees
Interfaces between organization & community
3. Decision Maker
Formulates policies and planning recommendations to the Board
Decides or guides courses of action in operations by staff
4. Manager
Oversee operations of organization
Implements plans
Manages human resources of organization
Manages financial and physical resources
5. Board Developer
Assists in the selection and evaluation of board members
Makes recommendations, supports Board during orientation and self-evaluation
Supports boards evaluation of Chief Executive

Responsibilities of Chief Executive Officer

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There is no standardized list of the major functions and responsibilities carried out by position of chief
executive officer. The following list is one perspective and includes the major functions typically
addressed by job descriptions of chief executive officers.

Board Administration and Support

He supports operations and administration of Board by advising and informing board members,
interacting between Board and staff, and supporting Boards evaluation of chief executive.

Program, Product and Service Delivery

CEO oversees design, marketing, promotion, delivery and quality of programs, products and
services.

Financial. Tax, Risk and Facilities Management

CEO recommends yearly budget for board approval and prudently manages organizations
resources within those budget guidelines according to current laws and regulations.

Human Resource Management

He effectively manages the human resources of the organization according to authorized
personnel policies and procedures that fully conform to current laws and regulations.

Community and Public Relations

CEO assures the organization and its mission, programs, products and services are consistently
presented in strong, positive image to relevant stakeholders.

Fundraising (Nonprofit specific)

He overages fund raising, planning and implementation, including identifying resources
requirements, researching funding sources, establishing strategies to approach flinders,
submitting proposals and administering fundraising records and documentation.

Chairman
The chairman is responsible for leadership of the Board. In particular, he will:

He ensures effective operation of the Board and its committees in conformity with the highest
standards of corporate governance.

He ensures effective communication with shareholders, government and other relevant

constituencies and that the views of these groups are understood by the Board.

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Chairman sets the agenda, style and tone of Board discussions to promote constructive debate
and effective decision-making.

He chairs the Nominations Committee and builds an effective and complementary Board,
initiating change and planning succession on Board and Group Executive appointments.

He ensures that all Board committees are properly established, composed and operated.

Chairman ensures comprehensive induction program for new directors and update for all
directors as and when necessary.

He supports the Chief Executive in the development of strategy and more broadly, to support
and advise the Chief Executive.

He maintains accesses to senior management as is necessary and useful, but not intrude on Chief
Executives responsibilities.

He promotes effective relationships and communications between non-executive directors and

members of the Group Executive Committee.

He ensures that the performance of the Board, its main committees and individual directors is
formally evaluated on an annual basis.

Managing Director
The first building block of Corporate Governance to be put in place in a company is the Managing
Director. In start-ups this position is generally filled by the founder.
Whatever the size or nature of the company, the role of the Managing Director is to ensure that the
company achieves its strategic objectives and to provide leadership and direction to staff.
His / Her role depends on the stage of growth of the company. Typically, the scope of the role becomes
more clearly defined as the company develops and the supporting Corporate Governance framework
required is clearer. For example, one such a framework is developed, the Managing Director may
delegate some responsibilities to members of the Management Team.
Role of the Managing Director

Develop and deliver on the companys strategic plan in the most effective and efficient manner

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Accountable for the overall performance of the company and for the day-to-day running and
management of the companys business, under delegated authority from the Board.

Responsibilities of the Managing Director

Implement the Boards policies and strategies.

Develop and present the strategic and annual business plans to the Board for approval.

Manage the day-to-day operations of the company.

Manage, motivate, develop and lead members of the Management Team.

Manage resources efficiently and effectively to achieve companys objectives.

Chair Management Team meetings.

Take a leadership role in establishing or developing the companys culture and values.

Ensure that there is a fit between strategy and culture, and the companys processes and
structure.

Develop and implement a risk management team.

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Ensure that there is a succession plan in place.

Ensure that appropriate internal audit processes and procedures are in place.

Report to the Board on progress against the strategic and annual business plans on a regular
basis. Typically, reporting against the annual plan will be monthly, while reporting against the
strategic plan will be less frequent, although it should be at least two or three times a year.

Board
The role of Board is to:

Establish the mission, goals and policies of the organization, what we should accomplish and
how we should conduct ourselves in the process.

Develop a long-range plan for the organization; define our strategy and a time frame for
achievement of our goals.

Ensure the long term financialstability and strength of the organization, develop and maintain
sources of income to provide for the continuing operation of the organization.

Ensure the long term organizational stability and strength of the organization, bring into the
organization individuals with the necessary abilities to lead and manage the organization in the
future.

Maintain the integrity, independence and ideals of the organization; do not allow individuals or
organizations to compromise these principles.

Hire and develop an executive director to manage the operations of the organization.

Exercise management oversight of the executive director and the operations; approve annual
budgets, review operating and financial results, audit for compliance with internal policies and
external requirements, review performance against goals.

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 Responsibilities of Board Members

Be committed to the mission, goals and policies of the organization.

Perform the functions and work of the board to the best of ones ability.

Contribute financially to the organization to the best of ones ability and seek financial support
from others outside of the organization.

Recommend others who could serve on the board or be of particular value to the organization in
other capacities.

Avoid any conflicts of interest and situations that would compromise the principles of the
organization or lead to the perception of compromise.

Board Members Their Roles & Responsibilities

1) The Officers
The officers have specific roles and responsibilities in addition to those they have as members of
the Board of Directors.
2) President
The president is the executive officer of the organization & in this capacity shall:
Preside over board meetings.
Serve as the chairman of the executive committee.
Be a primary spokesperson for the organization.
Lead the board in the performance of its responsibilities.
Recommend what committees should be formed and who should chair them.
Perform such duties as directed by the laws and the board.
Serve as an ex-officio member of all other committee except the nominating committee.
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3) Vice President
The vice president is the operations officer of the organization & in this capacity shall:
Perform those functions delegated to the vice president by the president
Perform the duties of the president when the president is unable to perform them.
Serve as the chair of at least one committee that is operational in scope.
4) Secretary
The secretary is the officer responsible for the records and correspondence of the organization &
in this capacity shall:
Perform those functions delegated to the secretary by the president.
Safeguard all the records of the organization.
Record and retain the minutes of all board and executive committee meetings and

collect and retain the minutes of all other committees meetings.

Give notice of meetings and distribute minutes and other documents as needed.
Serve as chair of one committee

5) Treasurer
The treasurer is the financial officer of the organization & in this capacity shall:
Perform those functions delegated to the treasurer by the president.
Safeguard the assets of the organization.
Maintain control over the receipt and disbursement of the organizations fund.
Serve as the chair of the Finance committee.
Oversee the preparation of the annual budget.
6) Executive Director
The executive director is not an elected officer, but an employee of the organization. The
executive officer is the chief staff executive & in this capacity shall:
Perform those functions delegated by the president and the board.
Establish a staff structure and hire and train personnel to fit it.
Implement the plans and policies developed by the board.
Operate the national office.
7) Board Committee & Committee Members
The Board of Directors will form committees to perform specific functions, such as financial
oversight, or perform certain work, such as plan the annual convention. Committees may have
non-board members as members except where specifically prohibited. The responsibility of
committee members in all case shall be to:
Be committed to the purpose of the committee.
Became knowledgeable about the work of the committee.
Do the work to the committee.
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 Different Board Committees Their Roles & Responsibilities

Executive Committee
The role of the executive committee is to perform the functions and duties of the board in the period
between meetings of the full board, with the exception of those functions and duties reserved
exclusively to the full board. The executive committee is comprised of the officers, the immediate past
president and three other board members.
Budget & Administration Committee
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The role of the Budget and Administration committee is to perform the properly delegated functions and
duties of the board related to ensuring the long-term financial stability and strength of the organization.
The chair of the committee is the treasurer. The committee composition should include individuals with
some background in business or finance and may include non-board members. The committees scope
may be expanded by the board to include oversight of the administrative operations of the organization.
Nominating Committee
The role of the nominating committee is to recommend to the board for its consideration a list of
qualified individuals who could become members of the board or any of its committees or contribute
substantially to the organization in other capacities. The members of the nominating committee should
not be candidates for election to the board and should understand well the organization and its needs.
Although elections may occur only annually, the committee will be involved in a continuous process of
seeking, identifying and reviewing prospective candidates.
Governance Committee
The role of the governance committee is to recommend to the board for its consideration a multi-year
plan for the organization that defines its mission, goals, needs, polices, etc., within a defined view of the
future. This committee is also responsible for establishing leadership development process; protecting
the Board integrity and establishing compliance with internal governance policies.

Revenue Generation Committee

The role of the fund development committee is to develop sources of income that will yield sufficient
income to enable the organization to be financially stable and strong on an ongoing basis and achieve its
goals.
Policy Committee
The role of the policy committee is to develop and implement programs that will successfully educate
and inform the renal community about the needs of patients and their families and about how well these
needs are being satisfied. Programs should also be developed and implemented to encourage the

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community to establish, utilize and report, on a large scale, quantifiable outcome measures of patient
health and quality of life.
Medical Advisory Board
The MAB is comprised of renal community professionals who provide advice and counsel to the
organization in technical areas as well as support the organization. This committee is responsible for
analyzing the function of increasing membership.
Program Committee
This committee is responsible for patient educational materials and programs.
Marketing Committee
This committee is responsible for developing methods and processes for surveying
designed populations. It is also responsible for creating awareness ofAmerican
Association of Kidney Patients (AAKP) both in the renal communities and general
public.

Other committees, such as: a convention committee, a bylaws committee and an

awards committee, are formed for specific activities. Subcommittees can also be
formed within a committee to address specific activities or roles.

RIGHTS OF INVESTORS AND SHAREHOLDERS

Voting Powers on Major Issues

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This includes electing directors and proposals for fundamental changes affecting the company such as
mergers or liquidation voting takes place at the companys annual meeting.
Ownership in a Portion of Company Earnings
Shareholders have a right to share the residual of profits. They have a claim on a portion of the assets
owned by the company.
The Rights to Transfer
It means shareholders are allowed to trade their stock on an exchange. They can liquidate their funds i.e.
they can convert their investment into cash. They can move their money into other places almost
instantaneously.
Right to Receive Dividend
Along with a claim on assets, shareholders can receive a claim on any profits a company pays out in the
form of a dividend. To receive the dividend when it is declared by the BOD; is a basic right of
shareholders.
Opportunity to Inspect Corporate Books and Records
This opportunity is provided through a companys filings including its annual report. Shareholders have
a right to inspect books of accounts, register of members, register of debenture holders etc. This makes
them aware with current activities of the organization.
The Right to Sue for Wrongful Acts
Investors or shareholders have a right to take legal action against any wrongful act of the corporates.
They can sue against fraud, cheating, insider trading or other unethical and illegal activities of the
organization.

CORPORATE GOVERNANCE IN GLOBALISED ECONOMY

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Introduction
Corporate Governance in a globalize economy has become one of the most important topic for the
business environment and the governments. The proper implementation Corporate Governance
regulations by the companies bring out advantage for companies and countries.
High quality status of Corporate Governance means low capital cost, increase in financial capabilities,
liquidity, ability of overcoming crisis more easily and prevention of execution of soundly managed
companies from capital markets.
For years, the OECD has been working to promote use of Corporate Governance principles. They were
first issued in 1999 and revised in 2004 to support good Corporate Governance policy and practice, both
within OECD countries and beyond.
The International Corporate Governance Network (ICGN) statement on Global Corporate Governance
principles adopted on July 9, 1999 at the Annual Conference in Frankfurt.
The ICGN founded in 1995 at the instigation of major institutional investors, Investor companies,
financial intermediaries academics and other parties interested in the development of Global Corporate
Governance strategies
Objectives
Its main objective is to facilitate international dialogues on issues concerned. Through this process, the
ICGN holds, companies can compete more effectively and economies can best prosper.
The ICGN welcomes the OECD principles as a remarkable convergence on Corporate Governance
common ground among diverse interests, practices and cultures. The ICGN believes that companies
around the world deserve clear concrete guidance on how the OECD principles can be implemented.

Global Strategies of Corporate Governance

1. Corporate Objective
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The overriding objective of the corporation should be optimizing over time the return to its
shareowners. Corporate objective should be clearly stated and disclosed. To achieve this
objective, the corporation should endeavor to ensure long tern viability of its business, and to
manage effectively its relationship with stakeholders.
2. Communication & Reporting
Corporation should disclose accurate, adequate and timely information especially on the issues
of acquisition, ownership obligation, and sale of shares.
3. Voting Right
Corporations should act to ensure the owners right to vote. Regulations & laws should
facilitate voting rights and timely disclosure of the level of voting.
4. Strategic Focus
Major strategic modifications to the core business of a corporation should be made without prior
shareholders approval of the proposed modification. Shareholders should be given sufficient
information about any such proposal sufficiently early to allow them to make an important
judgement and exercise their voting rights.
5. Operating Performance
Corporate Governance practices should focus Boards attention on optimizing overtime the
companys operating performance. In particular the company should strive to excel in specific
sector peer group comparison.
6. Shareowner Returns
Corporate Governance practices should also focus Boards attention on optimizing profits to pay
good return to their shareholders.
7. Corporate Citizenship
Corporate should adhere to all applicable laws of the jurisdiction in which they operate. Boards
that strive for achieving co-operation between corporation and stakeholders will be most likely.

MECHANISMS & CONTROL

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise
from moral hazard and adverse selection. There are both internal monitoring systems and external
monitoring systems.[57] Internal monitoring can be done, for example, by one (or a few) large
shareholder(s) in the case of privately held companies or a firm belonging to a business group.
Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of
managers' behavior occurs when an independent third party (e.g. the external auditor) attests the
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accuracy of information provided by management to investors. Stock analysts and debt holders may
also conduct such external monitoring. An ideal monitoring and control system should regulate both
motivation and ability, while providing incentive alignment toward corporate goals and objectives. Care
should be taken that incentives are not so strong that some individuals are tempted to cross lines of
ethical behavior, for example by manipulating revenue and profit figures to drive the share price of the
company up.
Internal Corporate Governance Controls
Internal corporate governance controls monitor activities and then take corrective action to accomplish
organizational 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. 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.

Internal control procedures and internal auditors:

Internal control procedures are policies implemented by an entity's board of directors, audit
committee, management, and other personnel to provide reasonable assurance of the entity
achieving its objectives related to reliable financial reporting, operating efficiency, and
compliance with laws and regulations. Internal auditors are personnel within an organization
who test the design and implementation of the entity's internal control procedures and the
reliability of its financial reporting

Balance of power:

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The simplest balance of power is very common; require that the President be a different person
from the Treasurer. This application of separation of power is further developed in companies
where separate divisions check and balance each other's actions. One group may propose
company-wide administrative changes, another group review and can veto the changes, and a
third group check that the interests of people (customers, shareholders, employees) outside the
three groups are being met.

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 behavior, and
can elicit myopic behavior.

Monitoring by large shareholders and/or monitoring by banks and other large creditors:
Given their large investment in the firm, these stakeholders have the incentives, combined with
the right degree of control and power, to monitor the management.

External Corporate Governance Controls

External corporate governance controls encompass the controls external stakeholders exercise over the
organization. Examples include:

Competition
Debt covenants
Demand for and assessment of performance information (especially financial statements)
Government regulations
Managerial labor market
Media pressure
Takeovers

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 Financial Reporting and the Independent Auditor

The board of directors has primary responsibility for the corporation's internal and external financial
reporting functions. The Chief Executive Officer and Officer are crucial participants and boards usually
have a high degree of reliance on them for the integrity and supply of accounting information. They
oversee the internal accounting systems, and are dependent on the
corporation's accountants and internal auditors.
Current accounting rules under International Accounting Standards and U.S. GAAP allow managers
some choice in determining the methods of measurement and criteria for recognition of various
financial reporting elements. The potential exercise of this choice to improve apparent performance
increases the information risk for users. Financial reporting fraud, including non-disclosure and
deliberate falsification of values also contributes to users' information risk. To reduce this risk and to

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enhance the perceived integrity of financial reports, corporation financial reports must be audited by an
independent external auditor who issues a report that accompanies the financial statements.
One area of concern is whether the auditing firm acts as both the independent auditor and management
consultant to the firm they are auditing. This may result in a conflict of interest which places the
integrity of financial reports in doubt due to client pressure to appease management. The power of the
corporate client to initiate and terminate management consulting services and, more fundamentally, to
select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted
in the United States in the form of the Sarbanes-Oxley Act (following numerous corporate scandals,
culminating with the Enron scandal) prohibit accounting firms from providing both auditing and
management consulting services. Similar provisions are in place under clause 49 of Standard Listing
Agreement in India.

CONCLUSION
Corporate Governance is a mechanism which brings discipline, systematicness and sets proper order in
the overall administration of the corporate, state and the entire globe. It is the same link between past,
present and future. Its relevance in todays competitive worlds is same as it was during ancient period.
Worldwide steps are taken by corporates to introduce, apply and develop the Corporate Governance
framework.Corporate Governance has become the latest buzzword today. Almost every country has
institutionalized a set of Corporate Governance codes, spelt out best practices and has sought to impose
appropriate board structures. Despite the Corporate Governance revolution there exists no universal
benchmark for effective levels of disclosure and transparency. There are several corporate governance
structures available in the developed world but there is no one structure, which can be singled out as
being better than the others. There is no one size fits all structure for corporate governance. Corporate
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governance extends beyond corporate law. Its fundamental objective is not the mere fulfillment of the
requirements of law but in ensuring commitment of the board in managing the company in a transparent
manner for maximizing long term shareholder value. Effectiveness of corporate governance system
cannot merely be legislated by law. As competition increases, technology pronounces the death of
distance and speeds up communication. The environment in which companies operate in India also
changes. In this dynamic environment the systems of corporate governance also need to evolve. The
recommendations made by different expert committees will go a long way in raising the standards of
corporate governance in Indian companies and make them attractive destinations for local and global
capital. These recommendations will also form the base for further evolution of the structure of
corporate governance in consonance with the rapidly changing economic and industrial environment of
the country in the new millennium.

BIBLOGRAPHY

CORPORATE GOVERNANCE T.Y.B.F.M SIXTH SEMESTER

AUTHOR: ARCHANA PRABHUDESAI

http://articles.economictimes.indiatimes.com/
http://www.cfapubs.org/toc

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