ABSTRACT

Corporate scandals involving companies like the Maxwell Group, Enron, WorldCom and the
recent banking crisis have influenced the corporate governance norms in the United States,
the UK and India. The Satyam computers scandal highlighted deficiencies in the Indian
corporate governance regime and its implementation. This project examines the key
differences between the corporate governance regimes in the UK and India and highlights the
corporate governance issues relevant for Indian companies on the growth path.

INTRODUCTION

Corporate Governance is the interaction between various participants (shareholders, board of

directors, and companys management) in shaping corporations performance and the way it
is proceeding towards. The relationship between the owners and the managers in an
organization must be healthy and there should be no conflict between the two. The owners
must see that individuals actual performance is according to the standard performance. These
dimensions of corporate governance should not be overlooked.
Corporate Governance deals with determining ways to take effective strategic decisions. It
gives ultimate authority and complete responsibility to the Board of Directors. In todays
market- oriented economy, the need for corporate governance arises. Also, efficiency as well
as globalization are significant factors urging corporate governance. Corporate Governance is
essential to develop added value to the stakeholders.
Corporate Governance has a broad scope. It includes both social and institutional aspects.
Corporate Governance encourages a trustworthy, moral, as well as ethical environment.
Whilst corporate regulations may lead in part to improve governance, which is mainly about
how companies are directed and controlled, the prime responsibility for superior governance
ought to lie within the company rather than outside it. For example, the balance sheet is the
result of structural and strategic decisions and activities across the organization, from stock
options to risk management, from the board of directors' composition to the decentralization
of decision-making process.1
CG is known to be one of the criteria that foreign institutional investors are increasingly
depending on when deciding on which companies to invest in. As far as corporate
transparency is concerned, too few companies are genuinely transparent in the Middle East,
thus the regional leaderships, board of directors as well as CEO's, are encouraged to
voluntarily design good CG, that addresses the managements' concerns over government
regulation and strict internal procedures and how it could adversely impact their ability to
manage their business effectively. Investors, board members, and CEO's have to recognize
the need for trade-off between enhancing corporate reputation and delivering growth.

1 Why We Need Corporate Governance, By Yahya Shakweh

HISTORY AND EVOLUTION OF CORPORATE GOVERNANCE IN INDIA

The evolution of Corporate Governance in India began in early 90s. The starting
point was the recommendations of the Cadbury Committee Report after which
followed various committees, leading to a formal Corporate Governance Code. This
code was notified by Securities Exchange Board of India (SEBI) by inserting a new
Clause 49 in the listing guidelines to the Stock Exchanges making it mandatory for
the listing companies to follow the requirements of Clause 49 effective January 01,
2006. The major areas of compliance in Clause 49 are

Appointment of required number of independent directors

Larger role of Audit Committee

CEO/CFO Certification of Accounts (will become applicable for 2005-06

Accounts)

Code of Conduct for Board / Senior Management

Risk Minimization Report to the Board

Legal Compliance Report to the Board

Compliance relating to Subsidiary Companies

Information items to Board

Global Landmarks in the Emergence of Corporate Governance

There were several frauds and scams in the corporate history of the world. It was felt that the
system for regulation is not satisfactory and it was felt that it needed substantial external
regulations. These regulations should penalize the wrong doers while those who abide by
rules and regulations, should be rewarded by the market forces. There were several changes
brought out by governments, shareholder activism, insistence of mutual funds and large
institutional investors, that corporate they invested in adopt better governance practices and
in formation of several committees to study the issues in depth and make recommendations,
codes and guidelines on Corporate Governance that are to be put in practice. All these
measures have brought about a metamorphosis in corporate that realized that investors and
society are serious about corporate governance.

 Developments in UK

In England, the seeds of modern corporate governance were sown by the Bank of Credit and
Commerce International (BCCI) Scandal. The Barings Bank was another landmark. It
heightened peoples awareness and sensitivity on the issue and resolve that something ought
to be done to stem the rot of corporate misdeeds. These couple of examples of corporate
failures indicated absence of proper structure and objectives of top management. Corporate
Governance assumed more importance in light of these corporate failures, which was
affecting the shareholders and other interested parties.
As a result of these corporate failures and lack of regulatory measurers from authorities as an
adequate response to check them in future, the Committee of Sponsoring Organizations
(COSO) was born. The report produced in 1992 suggested a control framework and was
endorsed a refined in four subsequent UK reports: Cadbury, Ruthman, Hampel and Turbull.
Several companies, which saw explosive growth in earnings, ended the decade in a
memorably disastrous manner. Such spectacular corporate failures arose primarily out of
poorly managed business practices.
The publication of a serious of reports consolidated into the Combined Code on Corporate
Governance (The Hampel Report) in 1998 resulted in major changes in the area of corporate
governance in United Kingdom. The corporate governance committees of last decade have
analyzed the problems and crises besetting the corporate sector and the markets and have
sought to provide guidelines for corporate management. Studying the subject matter of the
corporate codes and the reports produced by various committees highlighted the key practical
problem and concerns driving the development of corporate governance over the last decade.2

Corporate Governance Committees

a) Cadbury committee on Corporate Governance 19923
The stated objectives of the Cadbury Committee5was To help raise the standards of
corporate governance and the level of confidence in financial reporting and auditing by
setting out clearly what it sees as the respective responsibilities of those involved and what it
believes his expected of them. The committee investigated the accountability of the board of
directors to shareholders and to society. It submitted its report and associated Code of Best
Practices in 1992 wherein it spelt out the methods of governance needed to achieve a
balance between the essential power of the board of directors and their proper accountability.
2 A.C.Fernando (2006), Corporate Governance, Principles, Policies and Practices. pp 77, Pearson
3 Cadbury Committee Report : A report by the committee on the financial aspects of corporate governance. The committee
was chaired by Sir Adrian Cadbury and issued for comment on (27 may 1992)

Its recommendations were not mandatory. The Cadbury recommendations are in the nature of
guidelines relating to the board of directors, non-executive directors, executive directors and
those on reporting and control. The stress in the Cadbury committee report is on the crucial
role of the board and the need for it to observe the Code of Best Practices. Its important
recommendations include the setting up of an audit committee with independent members.
Code of best practices had 19 recommendations. The recommendations are in the nature of
guidelines relating to the board of directors, non-executive directors, executive directors and
those on reporting. The stress in the Cadbury committee report is on the crucial role of the
board and the need for it to observe the Code of Best Practices. Its important
recommendations include the setting up of an audit committee with independent members.
To reduce the power of executive directors in the boardroom the committee recommended a
greater role for non-executive directors, changes in board operations, and a more active role
for auditors.

b) The Paul Ruthman Committee

The committee was constituted later to deal with the said controversial point of Cadbury
Report. It watered down the proposal on the grounds of practicality. It restricted the reporting
requirement to internal financials controls only as against the effectiveness of the companys
system of internal control as stipulated by the Code of Best Practices contained in the
Cadbury Report.

c) Hampel Committee
The final report submitted by the Committee chaired by Ron Hampel had some important and
progressive elements, notably the extension of directors responsibilities to all relevant
control objectives including business risk assessment and minimizing the risk of fraud.
The Hampel Report (Committee on Corporate Governance) in 1998 was designed to be a
revision of the corporate governance system in the UK. The remit of the committee was to
review the Code laid down by the Cadbury Report. It asked whether the code's original
purpose was being achieved. Hampel found that there was no need for a revolution in the UK
corporate governance system. The Report aimed to combine, harmonise and clarify the
Cadbury and Greenbury recommendations.

c) The Greenbury Committee4

This committee was setup in January 1995 to identify good practices by the Confederation of
British Industry remuneration and to prepare a code of such practices for use by public
4 Greenbury Committee Report (1994) investigating board membersremuneration and responsibilities

limited companies of United Kingdom. The committee aimed to provide an answer to the
general concerns about the accountability by the proper allocation of responsibility for
determining directors remuneration, the proper reporting to shareholders and greater
transparency in the process. The committee produced the Greenbury Code of Best Practice
which was divided into the four sections: Remuneration Committee, Disclosures,
Remuneration Policy and Service Contracts and Compensation. The Greenbury committee
implement the code as set out to the fullest extent practicable, that they should make annual
compliance statements, and that investor institutions should use their power to ensure that the
best practice is followed. (CBI), in determining directors recommended that UK companies
should use their power to ensure that the best practice is followed.
d) The Turnbull Report
" Internal Control: Guidance for Directors on the Combined Code" , published by the Internal
Control Working Party of the Institute of Chartered Accountants in England and Wales - sets
out how directors of listed companies should comply with the UK's Combined Code
requirements in respect of internal controls, including financial, operational, compliance and
risk management. Organisations that wish to be good corporate citizens, whether publicly
quoted, privately owned or in the public sector, look to the Combined Code - and therefore to
the Turnbull Report - for guidance on how to do this.
e) UK Combined Code on Corporate Governance
UK incorporated companies listed on the UK Stock Exchange are subject to the Combined
Code on Corporate Governance. The most recent (2003) version of the Code combines the
Cadbury and Greenbury reports on corporate governance, the Turnbull Report on Internal
Control (revised and republished as the Turnbull Guidance in 2005), the Smith Guidance on
Audit Committees and elements of the Higgs Report. The Combined Code is, in 2006,
subject to a review. <br />The Financial Reporting Council (FRC) is the independent UK
regulator and is also responsible for the statutory oversight and regulation of auditors and of
the professional accountancy and actuarial bodies. The UK Combined Code works on what is
known as a Comply or explain basis; in other words, companies may choose not to comply
with specific provisions but, in that case, will have to provide a proper public explanation of
their decision.
World Bank on Corporate Governance
The World Bank, involved in sustainable development was one of the earliest economic
organization study the issue of corporate governance and suggest certain guidelines. The
World Bank report on corporate governance recognizes the complexity of the concept and
focuses on the principles such as transparency, accountability, fairness and responsibility that
are universal in their applications. Corporate governance is concerned with holding the
balance between economic and social goals and between individual and communal goals. The
governance framework is there to encourage the efficient use of resources and equally to
require accountability for the stewardship of those resources. The aim is to align as nearly as
possible, the interests of individuals, organizations and society. The foundation of any

corporate governance is disclosure. Openness is the basis of public confidence in the

corporate system and funds will flow to those centers of economic activity, which inspire
trust. This report points the way to establishment of trust and the encouragement of
enterprise. It marks an important milestone in the development of corporate governance.

Corporate governance: History in India

There have been several major corporate governance initiatives launched in India since the
mid-1990s. The first was by the Confederation of Indian Industry (CII), Indias largest
industry and business association, which came up with the first voluntary code of corporate
governance in 1998. The second was by the SEBI, now enshrined as Clause 49 of the listing
agreement. The third was the Naresh Chandra Committee, which submitted its report in 2002.
The fourth was again by SEBI the Narayana Murthy Committee, which also submitted its
report in 2002. Based on some of the recommendation of this committee, SEBI revised
Clause 49 of the listing agreement in August 2003. Subsequently, SEBI withdrew the revised
Clause 49 in December 2003, and currently, the original Clause 49 is in force.

Recommendations of various committees on Corporate Governance in India

CII Code recommendations

(a) No need for German style two-tiered board.
(b) For a listed company with turnover exceeding Rs 100 crores, if the chairman is also
the MD, at least half of the board should be independent directors, else at least 30%.
(c) No single person should hold directorships in more than 10 listed companies.
(d) Non-executive directors should be competent and active and have clearly defined
responsibilities like in the Audit committee.
(e) Directors should be paid a commission not exceeding 1% (3%) of net profits for a
company with (out) an MD over and above sitting fees.
(f) Stock options may be considered too.
(g) Attendance record of directors should be made explicit at the time of re-appointment.
Those with less than 50% attendance shouldnt be re-appointed.
(h) Key information that must be presented to the board is listed in the code.
(i) Audit Committee: Listed companies with turnover over Rs. 100 crores or paid-up
capital of Rs. 20 crores should have an audit committee of at least three members, all

non-executive, competent and willing to work more than other non-executive

directors, with clear terms of reference and access to all financial information in the
company and should periodically interact with statutory auditors and internal auditors
and assist the board in corporate accounting and reporting.
(j) Reduction in number of nominee directors.
(k) FIs should withdraw nominee directors from companies with individual FI
shareholding below 5% or total FI holding below 10%.

Birla Committee (SEBI) recommendations (2000)

(a) At least 50% non-executive members.
(b) For a company with an executive Chairman, at least half of the board should be
independent directors, else at least one-third. Non-executive Chairman should have an
office and be paid for job related expenses.
(c) Maximum of 10 directorships and 5 chairmanships per person. Audit Committee: A
board must have a qualified and independent audit committee, of minimum 3
members, all non-executive, majority and chair independent with at least one having
financial and accounting knowledge.
(d) Its chairman should attend AGM to answer shareholder queries.
(e) The committee should confer with key executives as necessary and the company
secretary should be the secretary of the committee.
(f) The committee should meet at least thrice a year -- one before finalization of annual
accounts and one necessarily every six months with the quorum being the higher of
two members or one-third of members with at least two independent directors.
(g) It should have access to information from any employee and can investigate any
matter within its TOR, can seek outside legal/professional service as well as secure
attendance of outside experts in meetings.
(h) It should act as the bridge between the board, statutory auditors and internal auditors
with arranging powers and responsibilities.
(i) Remuneration Committee: The remuneration committee should decide remuneration
packages for executive directors. It should have at least 3 directors, all Nonexecutive
and be chaired by an independent director.
(j) The board should decide on the remuneration of non-executive directors and all
remuneration information should be disclosed in annual report.
(k) At least 4 board meetings a year with a maximum gap of 4 months between any 2
meetings. Minimum information available to boards stipulated.

Narayana Murthy committee (SEBI) recommendations (2003)

(a) Training of board members suggested.
(b) There shall be no nominee directors.

(c) All directors to be elected by shareholders with same responsibilities and

accountabilities.
(d) Non-executive director compensation to be fixed by board and ratified by
shareholders and reported.
(e) Stock options should be vested at least a year after their retirement.
(f) Independent directors should be treated the same way as non-executive directors.
(g) The board should be informed every quarter of business risk and risk management
strategies.
(h) Boards of subsidiaries should follow similar composition rules as that of parent and
should have at least one independent directors of the parent company.
(i) The Board report of a parent company should have access to minutes of board
meeting in subsidiaries and should affirm reviewing its affairs.
(j) Performance evaluation of non-executive directors by all his fellow Board members
should inform a re-appointment decision.
(k) While independent and non-executive directors should enjoy some protection from
civil and criminal litigation, they may be held responsible of the legal compliance in
the companys affairs.
(l) Code of conduct for Board members and senior management and annual affirmation
of compliance to it.

Law can only provide a minimum code of conduct for proper regulation of human being or
company.5 Law is made not to stop any act but to ensure that if you do that act, you will face
such consequences i.e. good for good and bad for bad. Thus, in the same manner, role of law
in corporate governance is to supplement and not to supplant. It cannot be the only way to
govern corporate governance but instead it provides a minimum code of conduct for good
corporate governance. Law provides certain ethics to govern one and all so as to have
maximum satisfaction and minimum friction. It plays a complementary role. Role of law in
corporate governance is in Companies Act which imposes certain restrictions on Directors so
that there is no misrepresentation of documents, there is no excessive of power, so that it
imposes duty not to make secret profit and make good losses due to breach of duty,
negligence, etc, duty to act in the best interest of the company etc.

Report of the Company Affairs Committee of the Confederation of the British Industry, Page 71

CRITICAL ANALYSIS

The Satyam debacle has exposed the chinks in Indian corporate governance mechanism and
the monitoring authorities. It has raised many questions about corporate governance in India
the role of boards, of independent directors, of the auditors, of investors and of analysts.
Unanimously it has been a gross failure of corporate governance standards in India and
protection of rights of minority investors.
The board of directors is central to good governance, and the role of the board has featured
prominently in discussions about Satyam. The board is the body charged with having
oversight of the operations of the firm and setting its strategy. It should ensure that the
company is upholding high standards of probity and conduct, and provide a probing analysis
of the activities of management. In particular, non-executive directors are supposed to give an
independent assessment of the quality of management. But time and time again, failures of
corporate governance suggest that they do not. The infractions of law have arisen despite
independent directors which were stopped by external forces. There are several reasons
pointing to these anomaliesFirst, it is difficult to appoint truly independent directors. This is particularly hard to achieve
in countries such as India where family ownership is widespread and there is a close-knit
group of corporate leaders. It is difficult for non-executive directors to perform a scrutiny
objective at the best of times, but it is particularly difficult to do so when faced with a
dominant CEO who expects support not criticism from the companys board. Many countries
have sought to separate the roles of chairman and CEO. However, it can inhibit firms from
implementing effective strategies, especially in companies operating with new technologies,
such as Indian IT/ITES firms, requiring visionary strategies.
Next, the very idea of independent directors is to ensure commitment to values, ethical
business conduct and about making a distinction between personal and corporate funds in the
management of a company. Yet, most independent directors have become sidekicks for the
management, eying their commission and fees, forgetting their very purpose of appointment.
In the process, they implicitly transform into dependent directors.

To add to that the present corporate governance modelled on the Western Anglo-Saxon model
which does not address many of the current crises faced by India Inc. Professor Jayant Rama
Verma of IIM Bangalore had extensively commented on the unsuitability of the Western
Code of Corporate Governance in his well-researched paper on the subject titled 'Corporate
Governance in India - Disciplining the dominant shareholder' (1997): According to him, the
governance issue in the Anglo-Saxon world aims essentially at disciplining the management
which is unaccountable to the owners. In contrast, the problem in the Indian corporate sector,
he pointed out, is disciplining the dominant shareholder and protecting the minority
shareholders, vindicated in the recent Satyam case. To understand the issues that driving
corporate governance in the West, a brief idea about it is inevitable. After successfully
working over the decades separating ownership and management, owners, (especially,
institutional owners) realised that they have lost control over the management or the board.
Professor Verma points out succinctly," The management becomes self-perpetuating and the
composition of the board itself is largely influenced by the whims of the CEO. Corporate
governance reforms in the US and the UK have focussed on making the board independent of
the CEO. In contrast, the issues in India are entirely distinct - primarily due to our overall
social-economic conditions. Therefore the issue in Indian corporate governance is not a
'conflict between management and owners' as elsewhere, but 'a conflict between the dominant
shareholders and the minority shareholders'. And Professor Verma rightly concludes, The
board cannot even in theory resolve this conflict" and that some of the most glaring abuses
of corporate governance in India have been defended on the principle of shareholder
democracy since they have been sanctioned by resolutions of the general body of
shareholders."
By now it is increasingly obvious that the very concept of corporate governance modelled on
the Western system is un-workable in a country like India. These efforts are akin to taking a
hair of an elephant, transplanting it on the head of a bald man and making him look like a
bear. In the West the focus is on ownerless, CEO-driven paradigm. In India, it is still familycontrolled, owner-driven paradigm. CEOs do not matter much in the management of the
company. Yet, the general discussion centres on a standard, global prescription to manage
diverse situations. Needless to emphasise, the solution to these problems in India lies not
within the company, but outside. This is precisely what happened in the Satyam case where
outsiders of the company took the lid off the fraud.
In spite of numerous suggestions by the Securities and Exchange Board of India (SEBI), for
peer reviews of audits among the companies listed in the Nifty and Sensex indices they have
fallen flat on the industry fraternity. Presumably, SEBI will allocate the audits to firms that
are part of a panel of reputed auditors. The simple solution would be for the regulator to make
this course of action mandatoryauditors could be allotted audits by the regulator. To avoid
the allegations of overregulation, companies can submit a list of their preferred auditors, from
which the regulator will have to choose. Audits could also be rotated annually, keeping them
on their toes. And these same rules could also be applied to rating agencies, internal auditors,
independent directors etc. From time to time these mechanisms can be fine-tuned and made
more practical.

The moot question is why these reformative suggestions have not been implemented? The
answer is that it depends on whos got more lobbying power. In the US, the large pension
funds that have been instrumental in getting more transparency from company managements.
India, on the other hand, has no tradition of shareholder activism, despite organisations such
as the Life Insurance Corporation of India having substantial stakes in companies. The
dependence of political parties on business interests to fund elections also doesnt help. The
failure of governments and regulators to pass what seems like very basic safeguards
preventing conflicts of interest, not only in India, but across the world, clearly establishes the
clout that corporate interests have. Corporate governance is thus a charade, a cosmetic
exercise rather than an attempt to get to the root of the problem.

CONCLUSION

After a slew of scandals, politicians and regulators, executives and shareholders are all
preaching the governance gospel. Corporate governance has come to dominate the political
and business agenda.
There is a growing concern among executives that hasty regulation and overly strict internal
procedures may impair their ability to run their business effectively. CEOs have to bear in
mind the potential trade-off between polishing the corporate reputation and delivering growth
for all the headlines on corporate responsibility, are investors prepared consistently to
sacrifice earnings for the sake of ethics?
Regulations are only one part of the answer to improved governance. Corporate governance
is about how companies are directed and controlled. The balance sheet is an output of
manifold structural and strategic decisions across the entire company, from stock options to
risk management structures, from the composition of the board of directors to the
decentralisation of decision-making powers. As a result, the prime responsibility for good
governance must lie within the company rather than outside it.
Designing and implementing corporate governance structures are important, but instilling the
right culture is essential. Senior managers need to set the agenda in this area, not least in
ensuring that board members feel free to engage in open and meaningful debate. Not all
board members need to be finance or risk experts, however. The primary task for the board is
to understand and approve both the risk appetite of a particular company at any particular
stage in its evolution and the processes that are in place to monitor risk.
Culture is necessary but not sufficient to ensure good corporate governance. The right
structures, policies and processes must also be in place. Transparency about a companys
governance policies is critical. As long as investors and shareholders are given clear and
accessible information about these policies, the market can be allowed to do the rest,
assigning an appropriate risk premium to companies that have too few independent directors
or an overly aggressive compensation policy, or cutting the costs of capital for companies that

adhere to conservative accounting policies. Too few companies are genuinely transparent,
however, and this is an area where most organisations can and should do much more.
If any institution, inside or outside the company, deserves scrutiny, it is the board of directors.
Executives have a clear responsibility consciously to define and implement corporate
governance policies that offer a decent level of reassurance to employees and investors.
Thereafter, disclosure is the most effective way for companies to resolve the thorny tensions
that do exist between vision and prudence, innovation and accountability.
There is an inherent tension between innovation and conservatism, governance and growth.
Asked to evaluate the impact of strict corporate governance policies on their business,
executives thought that M&A deals would be negatively affected because of the lengthening
of due-diligence procedures, and that the ability to take swift and effective decisions would
be compromised.
Scheduling regular meetings of the non-executive board members from which other
executives are excluded. Non-executives are there to exercise constructive dissatisfaction
with the management team. They need to discuss collectively and frankly their views about
the performance of the executives, the strategic direction of the company and worries about
areas where they feel inadequately briefed.
Explaining fully how discretion has been exercised in compiling the earnings and profit
figures. These are not as cut and dried as many would imagine. Assets such as brands are
intangible and with financial practices such as leasing common, a lot of subtle judgments
must be made about what goes on or off the balance sheet. Use disclosure to win trust.
Checking that non-executive directors are independent. Weed out members of the controlling
family or former employees who still have links to people in the company.
Auditing non-executives performance and that of the board. The attendance record of
nonexecutives needs to be discussed and an appraisal made of the range of specialist skills.
The board should discuss annually how well it has performed.
Broadening and deepening disclosure on corporate websites and in annual reports. Websites
should have a corporate governance section containing information such as procedures for
getting a motion into a proxy ballot. The level of detail should ideally include the attendance
record of non-executives at board meetings.
Corporate governance is not just a box ticking exercise, companies need an exchange of
practical guidance in order to conceive and implement successful governance mechanism.
Instead of a menu of corporate governance options it would be more appropriate to present
best practice guidelines applicable to businesses. These will serve as a benchmark for
appropriate customization in different companies. Corporate governance should be
considered as an obligation not a luxury. Its spirit is going to expand further and deeper in the
future.