Doing Things Right:

Corporate Governance in India A conceptual Frame work

Introduction:
In the present era corruption, scandals, corporate frauds are on rise. In the business world, the
business enterprises are directly or indirectly involved in all these unethical and socially
unacceptable practices. Collapses of high profile companies like Enron, WorldCom, Lemon
brothers, Sathyam scandal and many have shattered the trust of investors worldwide and has
attracted the attention to create a subject of good corporate governance. So corporate governance
has become an essential tool for improving corporate performance and advancing the
development of market oriented democracies. Corporate governance is a central and dynamic
aspect of business. Good governance practices maintain the integrity of business transactions and
in so doing strengthen the rule of law and proper governance. Good corporate governance
practices instill in companies the essential vision, processes and strucutures to make decisions
that ensure longer term sustainability.
Governance Concept in Ramayana
To provide the maximum happiness for the maximum number of people for the maximum
period, based on the principles of Dharma righteousness and moral values.
- Ayodhya Kand
What is Governance
Corporate Governance is the application of best management practices, Compliance of law
in true letter and spirit and adherence to ethical standards for effective management and
distribution of wealth and discharge of social responsibility for sustainable development of all
stakeholders.
-

The Institute of Company Secretaries of India

CORPORATE GOVERNANCE PRACTICES

CORPORATE
GOVERNANCE
stakeholders

ORGANIZATION

TRANSPERANCY

stakeholders

ACCOUNTABILITY

CUSTOMERS
SOCIETY

RESPONSIBILITY

Figure 1
Organization practices follows to fulfill the expectations of all stakeholders i.e. shareholders,
employees, creditors, customers, government, regulatory authority and society at large in a
right way is known as corporate governance practices.

Objective of the study

The main objectives of the study are:

To define the concept of corporate governance

To understand the Need and importance of corporate governance in the present scenario
To understand the applicability of governance principles in organizations
To know the benefits of good corporate governance

Driving Forces of CG in India

1) Unethical Business Practices

Security Scams --- Harshad Mehtha Security Scam

Equity allotments at discount rates to the controlling groups

Disappearance of Companies (1993-94) - around 4,000

companies with 25,000 crores without starting business

2) Impact of Globalization

Integration with Foreign Market

Foreign Investors expectations

New Business Opportunities --- IT & ITES, BPO etc.,

New Capital formation FII, FDI

3) Impact of Privatisation

New structure of ownership

Multinational Companies

Brief history of corporate governance in India

Unlike South-East and East Asia, the corporate governance initiative in India was not
triggered by any serious nationwide financial, banking and economic collapse

The initiative in India was initially driven by an industry association, the Confederation
of Indian Industry

In December 1995, CII set up a task force to design a voluntary code of corporate
governance.

The final draft of this code was widely circulated in 1997.

In April 1998, the code was released. It was called Desirable Corporate
Governance: A Code.

Between 1998 and 2000, over 25 leading companies voluntarily followed the
code: Bajaj Auto, Hindalco, Infosys, Dr. Reddys Laboratories, Nicholas Primal,
Bharat Forge, BSES, HDFC, ICICI and many others

Following CIIs initiative, the Securities and Exchange Board of India (SEBI) set up a
committee under Kumar Mangalam Birla to design a mandatory-cum-recommendatory
code for listed companies

The Birla Committee Report was approved by SEBI in December 2000

Became mandatory for listed companies through the listing agreement, and implemented
according to a rollout plan:

2000-01: All Group A companies of the BSE or those in the S&P CNX Nifty
index 80% of market cap.

2001-02: All companies with paid-up capital of Rs.100 million or more or net
worth of Rs.250 million or more.

2002-03: All companies with paid-up capital of Rs.30 million or more

Following CII and SEBI, the Department of Company Affairs (DCA) modified the
Companies Act, 1956 to incorporate specific corporate governance provisions regarding
independent directors and audit committees.

In 2001-02, certain accounting standards were modified to further improve financial

disclosures. These were:

Disclosure of related party transactions.

Disclosure of segment income: revenues, profits and capital employed.

Deferred tax liabilities or assets.

Consolidation of accounts.

Initiatives are being taken to (i) account for ESOPs, (ii) further increase disclosures, and
(iii) put in place systems that can further strengthen auditors independence.

Indicators of Good Corporate Governance:

Compliance to the Laws

Transparency in all business practices
Responsiveness of management
Accountability of Board members and senior executives of the corporate enterprise
Existence of well defined strategic mission and vision for corporate governing body
Equity and justice in all dealings with all stake holders
Respect and tolerance and so on are the indicators of good corporate governance
NEED FOR GOOD CORPORATE GOVERNANCE
Corporations were invented for the benefit of society. Corporate
governance infuses the democratic values of fairness, accountability, responsibility and
transparency into corporations. It maintains the integrity of business transactions and in
so doing strengthens the rule of law and democratic governance. Its goal is to maximize
long term shareholder value by improving corporate decision making and performance.
This involves establishing incentives and procedures that serve the interests of
shareholders while respecting the interests of other stakeholders in the corporation.
In the current scenario, all the people having the stake in the corporate organizations are
required to discharge their responsibilities and they should be made socially accountable
for bad/ineffective governance of their organizations. To make corporate governance
more accountable and responsible, the board is vests with roles and responsibilities
should be clearly defined and fixed for them. The board is vests with authority, power and
which is responsible for taking strategic decisions. The Board of directors who are in a

key position should be made socially accountable for all affairs of the organization.
Corporate governance is needed for the following reasons
In todays globalised world, corporations need to access global pools of capital as well as
attract and retain the best human capital from various parts of the world. Under such a
scenario, unless a corporation embraces and demonstrates ethical conduct, it will not be
able to succeed.

The credibility offered by good corporate governance procedures also helps to maintain
the confidence of investors both foreign and domestic to attract more long term

capital. This will ultimately induce more stable sources of financing.

The aim of Good Corporate Governance is to ensure commitment of the board in
managing the company in a transparent manner for maximizing long term value of the
company for its shareholders and all other partners.
Importance of Corporate governance
Governance issues rose in importance in the 1990s as competition for
finance among business increased following the de regulation of markets and the
liberalization of international trade and investment. A wave of privatization, especially in
newly formed democratic countries, magnified attention to governance issues. In too
many cases, poorly managed, corrupt privatization processes harmed new investors and
undercut the value of privatized companies. For companies to grow and economies to
develop, the efficient use of resources must be encouraged. Investors must be given the
confidence to commit their funds to private enterprises, and, in turn, must spur managers
to deliver higher performance. Effective corporate governance minimizes the corporate
scandals and promotes strong financial system and helps economic growth.

CRITICAL ISSUES IN CORPORATE GOVERNANCE

Deteriorating Ethical and moral values in BODs CEOs and managers and the mower

level personnel of the corporate Bodies.

Negligent and irresponsible shareholders who are sending their proxies to attend and vote

at general meetings.
Accountability of senior executives is not clearly defined.
Inefficient Board of directors who are incapable of monitoring the functions of mangers.
Lack of recognition of the need for effective strategies.
Improper documentation of policies, procedure, rules and so on
Too much domination of own family members and parities in the board composition.
Lack of dynamic professionalism in the top management executives.
Lack of suitable methods for value monitoring and reporting in measurable terms.
Absence of ethical and moral values in people governing the corporate enterprises.

Basic Principles of corporate governance

The organization for economic co-operation and development has laid out a set of
basic principles that should guide the functioning of corporate governance systems in almost
every country.

Basis for an effective corporate governance framework.

Rights of shareholders
Equitable treatment of shareholders
Role of stakeholders
Disclosure and transparency
Responsibilities of the Board

Applicability of governance principles in Companies

1. Effective corporate governance framework: In order to strengthen the governance,
companies are expected to establish their own legal framework consisting nature of work,
operations scope of services and expectations of the beneficiaries.
2. Code of conduct: All institutions must have a written code of business conduct for
rendering the services of micro finance to small and middle income group customers and
establish systems to ensure that it and all applicable laws are followed in letter and spirit.
3. Rights of share holders: The shareholders of the institutions should be made to exercise
their rights on the various managerial and operational aspects of the institutions. They
should be encouraged to take part actively in the general body meetings, so that
institutions can assure them their rights are always protected.
4. The Equitable Treatment of shareholders: If a board consists

of educated and

experienced directors its policies will be framed. Such board members will certainly
demand just and equitable treatment in all the aspects. Its the responsibility of the
management to ensure the equitable treatment of the shareholders for the inclusion of
effective governance model.
5. Interests of other stakeholders: All Institutions should have some obligations towards
other stakeholders. Its responsibility of the institution to meet the expectation of the
various stakeholders like beneficiaries, employees, agents and investors, creditors and
policy makers.

6. Role and Responsibilities of the board: As a part of the governance measures,

institutions have to ensure that the board is strong enough to meet the emerging
challenges in the market and its commitment towards the delivery of service.
7. Integrity and ethical behavior: Establishing integrity in the process of management in
executing the tasks and developing a code of conduct to all the people of institution to
promote the ethical behavior with the stakeholders and following ethics in decision
making process of the management also.
8. Disclosure and transparency: Finally, the most important principle ne should follow is
to disclosure and transparency. Institutions have to make themselves very clear in what
respect they are transparent and to what an extent. As ultimately they are aaccountable to
shareholders and stakeholders, it becomes primary to decide on transparency and
disclosure. Institutions have direct access to the clear and factual information on any
matter of the organization.
BENEFITS OF APPLICATION OF GOVERNANCE TO STAKEHOLDERS
A well run corporation generates value for investors and lenders as well as

for its employees, customers and society as a whole.

Companies: Well governed companies perform better. Companies that institute good
governance practices expect to lower their cost of capital and can attract a wider range of
investors, many with a longer term view of investments. By acting responsibility and
fairly, a company can also build fruitful, long - term relationships with its stakeholders,

including creditors, employees, customers, suppliers, and local communities.

Investors/ Shareholders: Investors recognize the potential for higher returns fro well run
companies and are willing to pay a premium for these returns. Good governance protects
the rights of investors, especially minority investors, including their rights to have a say
in company management and major transactions and the right to be informed about their

investment.,
Stakeholder and society: Good governance calls upon companies to respect their
obligations to employees, customers, creditors, suppliers and communities. These groups
benefits from honesty, quality and reliability in their dealings with companies. Society as
a whole reaps the benefits of well run corporations as they create jobs, build confidence
in the economy and prevent waste. Countries with responsible business practices and
respect for private property can attract greater foreign investment. The productivity gains

and innovation that result from fair competition can stimulate new areas of economic
growth.
Conclusion:
Past experience on governance issues in the worldwide has shown that none of the
corporate governance was not sound with governance principles. There is ongoing need
for constant review and course correction that would keep the country healthy in terms of
its corporate excellence. In recent days, good corporate governance is important in every
field. There is a growing consensus about governance among policy makers, business
leaders and the public at large.
Application of corporate governance principles in the organization is the need of
the day. Application of principles like disclosure, transparency, establishing code of
conduct, rights of shareholders etc... will help companies to get the benefits like proper
management of the firm, sound decision making, improving the quality of service,
customer satisfaction. To enjoy more advantages and for the development of overall
efficiency in operation of the organization, corporate governance should be strengthen.

REFERENCES
Goswami, Omkar,2002,Corporate Governance in India, Taking Action Against
Corruption in Asia and the Pacific (Manila: Asian Development Bank), Chapter 9
A.C Fernando Corporate Governance: Principles, Policies and Practices, Dorling
Kindersley (India),Pvt Ltd. Third Impression, 2009,(P7)
Amarchand Mangaldas and Suresh A.Shroff & co,, Corporate Governance, CCH INDIA,
New Delhi, 2009
Shikha Chauhan, Pasricha.J.S., Corporate Governance- A Necessity, Prabandhan Indian
Journal of Management, Sept-oct,2009.
Reed D., Corporate Governance reforms in developing countries, Journal of business
ethics, Vol.37,2002

V.Balachandran and V.Chandrasekaran Corporate governance and Social Responsibility

ICFAI Center for Management Research
http://www.corporategovernance.com
http://en.wikipedia.org/wiki/corporate_governance