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Corporate governance refers to the accountability of the Board of Directors to all stakeholders
of the corporation i.e. shareholders, employees, suppliers, customers and society in general;
towards giving the corporation a fair, efficient and transparent administration.
It is the technique by which companies are directed and managed. It means carrying the
business as per the stakeholders’ desires. It is actually conducted by the board of Directors and
the concerned committees for the company’s stakeholder’s benefit. It is all about balancing
individual and societal goals, as well as, economic and social goals.
Corporate Governance is the interaction between various participants (shareholders, board of
directors, and company’s management) in shaping corporation’s 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
individual’s actual performance is according to the standard performance. These dimensions
of corporate governance should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of
getting a fair return on their investment. Corporate Governance clearly distinguishes between
the owners and the managers. The managers are the deciding authority.

Corporate Governance deals with determining ways to take effective strategic decisions. It
gives ultimate authority and complete responsibility to the Board of Directors. In today’s
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 ensures transparency which ensures strong and balanced economic
development. This also ensures that the interests of all shareholders (majority as well as
minority shareholders) are safeguarded. It ensures that all shareholders fully exercise their
rights and that the organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects.
Corporate Governance encourages a trustworthy, moral, as well as ethical environment.

“The present paper aims at reviewing the various developments in Corporate Governance in
India. The emergence of new technologies in the era of globalisation and liberalisation entirely
changed the nature of business transactions. By the evolution of business life cycles business
transactions became very complex and managing risk became a challenging task for the
organisations. Concerns about corporate governance in India were, however, largely triggered
by Harshad Mehta stock market scam of 1992 followed by incidents of companies allotting
preferential shares to their promoters at deeply discounted prices and the recent scam of
sathyam. Good corporate governance became a key word to handle accounting scandals and to
mitigate growing concern about the quality of financial statements. In short Corporate
Governance is about promoting corporate fairness, transparency and accountability.”

Corporate Governance is essentially all about how corporations are directed, managed,
controlled and held accountable to their shareholders. In India, the question of Corporate
Governance has come up mainly in the wake of economic liberalization and de-regularization
of industry and business. With the rapid pace of globalization many companies have been
forced to tap international financial markets and consequently to face greater competition than
before. Both policymakers and business managers have become increasingly aware of the
importance of improved standards of Corporate Governance. India has one of the best corporate
governance laws but poor implementation together with socialistic policies of the pre-reform
era has affected corporate governance. Concentrated ownership of shares, pyramiding and
tunneling of funds among group companies mark the Indian corporate landscape.

The Main Constituents of Good Corporate Governance

Role and powers of Board: the foremost requirement of good corporate
governance is the clear identification of powers, roles, responsibilities and
accountability of the Board, CEO and the Chairman of the board.

Legislation: a clear and unambiguous legislative and regulatory framework is

fundamental to effective corporate governance.
Code of Conduct: it is essential that an organization's explicitly prescribed code of
conduct is communicated to all stakeholders and is clearly understood by them.
There should be some system in place to periodically measure and evaluate the
adherence to such code of conduct by each member of the organization.

Board Independence: an independent board is essential for sound corporate

governance. It means that the board is capable of assessing the performance of
managers with an objective perspective. Hence, the majority of board members
should be independent of both the management team and any commercial dealings
with the company.

Board Skills: in order to be able to undertake its functions effectively, the board
must possess the necessary blend of qualities, skills, knowledge and experience so
as to make quality contribution. It includes operational or technical expertise,
financial skills, legal skills as well as knowledge of government and regulatory

Management Environment: includes setting up of clear objectives and appropriate

ethical framework, establishing due processes, providing for transparency and clear
enunciation of responsibility and accountability, implementing sound business
planning, encouraging business risk assessment, having right people and right skill
for jobs, establishing clear boundaries for acceptable behaviour, establishing
performance evaluation measures and evaluating performance and sufficiently
recognizing individual and group contribution

Board Appointments: to ensure that the most competent people are appointed in
the board, the board positions must be filled through the process of extensive
search. A well-defined and open procedure must be in place for reappointments as well as for
appointment of new directors.
Board Meetings: are the forums for board decision making. These meetings enable
directors to discharge their responsibilities. The effectiveness of board meetings is
dependent on carefully planned agendas and providing relevant papers and
materials to directors sufficiently prior to board meetings.

Strategy Setting: the objective of the company must be clearly documented in a

long term corporate strategy including an annual business plan together with
achievable and measurable performance targets and milestones.

Business and Community Obligations: though the basic activity of a business

entity is inherently commercial yet it must also take care of community's
obligations. The stakeholders must be informed about the approval by the proposed
and ongoing initiatives taken to meet the community obligations.

Financial and Operational Reporting: the board requires comprehensive, regular,

reliable, timely, correct and relevant information in a form and of a quality that is
appropriate to discharge its function of monitoring corporate performance.
Audit Committee: is inter alia responsible for liaison with management, internal
and statutory auditors, reviewing the adequacy of internal control and compliance
with significant policies and procedures, reporting to the board on the key issues.
Risk Management: risk is an important element of corporate functioning and
governance. There should be a clearly established process of identifying, analyzing
and treating risks, which could prevent the company from effectively achieving its
objectives. The board has the ultimate responsibility for identifying major risks to
the organization, setting acceptable levels of risks and ensuring that senior
management takes steps to detect, monitor and control these risks.

Evolution of Corporate Governance in India

The concept of good governance is very old in India dating back to third century B.C. where
Chanakya elaborated fourfold duties of a king viz. Raksha, Vriddhi, Palana and Yogakshema.
Substituting the king of the State with the Company CEO or Board of Directors the principles
of Corporate Governance refers to protecting shareholders wealth (Raksha), enhancing the
wealth by proper utilization of assets (Vriddhi), maintenance of wealth through profitable
ventures (Palana) and above all safeguarding the interests of the shareholders (Yogakshema or
safeguard). Corporate Governance was not in agenda of Indian Companies until early 1990s
and no one would find much reference to this subject in book of law till then. In India, weakness
in the system such as undesirable stock market practices, boards of directors without adequate
fiduciary responsibilities, poor disclosure practices, lack of transparency and chronic
capitalism were all crying for reforms and improved governance. The fiscal crisis of 1991 and
resulting need to approach the IMF induced the Government to adopt reformative actions for
economic stabilization through liberalization. The momentum gathered albeit slowly once the
economy was pushed open and the liberalization process got initiated in early 1990s. As a part
of liberalization process, in 1999 the Government amended the Companies Act, 1956. Further
amendments have followed subsequently in the year 2000, 2002 and 2003.The major corporate
governance initiatives launched in India since the mid 1990s.There are various reforms which
were channelled through a number of different paths with both the Security and Exchange
Board of India (SEBI)and the Ministry of Corporate Affairs, Government of India (MCA)
playing important roles.

A. Committee on Corporate Governance

1. Confederation of Indian Industries (CII): The Confederaton of Indian Industries is set up a

taskforce in 1995 under Rahul Bajaj, a reputed industrialist. In April 1998, the CII released the
code called “Desirable Corporate Governance”. It looked into various aspects of Corporate
Governance and was first to criticize nominee directors and suggested dilution of government
stake in companies.

2. Kumar Mangalam Birla Committee Report

While the CII code was well received by corporate sector and some progressive companies
also adopted it, it was felt that under Indian conditions a statutory rather than a voluntary code
would be more meaningful. Consequently the second major initiative was undertaken by the
Securities and Exchange Board of India (SEBI) which set up a committee under the
chairmanship of Kumar Mangalam Birla in 1999 with the objective of promoting and raising
of standards of good corporate governance. In early 2000 the SEBI Board accepted and ratified
the key recommendations of this committee and these were incorporated into Clause – 49 of
the Listing Agreement of the Stock Exchanges.

Clause 49 of the Listing Agreement

After liberalization serious efforts have been made towards overhauling the system with SEBI
formulating the Clause 49 of the Listing Agreements dealing with corporate governance.
Clause 49 of the Listing Agreement to the Indian stock exchange comes into effect from 31
December 2005. It has been formulated for the improvement of corporate governance in all
listed companies. Clause 49 of Listing Agreements, as currently in effect, includes the
following key requirements:

 Board Independence: Boards of directors of listed companies must have a minimum

number of independent directors. Where the Chairman is an executive or a promoter or
related to a promoter or a senior official, then at least one-half the board should
comprise independent directors. In other cases, independent directors should constitute
at least one third of the board size.
 Audit Committees: Listed companies must have audit committees of the board with a
minimum of three directors, two-thirds of whom must be independent. In addition, the
roles and responsibilities of the audit committee are to be specified in detail.
 Disclosure: Listed companies must periodically make various disclosures regarding
financial and other matters to ensure transparency.
 CEO/CFO certification of internal controls: The CEO and CFO of listed companies
must (a) certify that the financial statements are fair and (b) accept responsibility for
internal controls.
 Annual Reports: Annual reports of listed companies must carry status reports about
compliance with corporate governance norms.
3. Department of Corporate Affairs (DCA)

In May 2000, the Department of Corporate Affairs (DCA) formed a broad based study group
under the chairmanship of Dr. P.L. Sanjeev Reddy, Secretary of DCA. The group was given
the ambitious task of examining ways to “operationalise the concept of corporate excellence
on a sustained basis” so as to “sharpen India’s global competitive edge and to further develop
corporate culture in the country”. In November 2000 the Task Force on Corporate Excellence
set up by the group produced a report containing a range of recommendations for raising
governance standards among all companies in India.

4. Naresh Chandra Committee Report

A committee was appointed by Ministry of Finance and Company Affairs in August 2002
under the chairmanship of Naresh Chandra to examine and recommend inter alia amendments
to the law involving the auditor-client relationships and the role of independent directors. The
committee made recommendations in two key aspects of corporate governance: financial and
non-financial disclosures: and independent auditing and board oversight of management.

5.Narayana Murthy Committee Report in 2002

The SEBI constituted a committee under the chairmanship of Narayana Murthy for reviewing
implementation of the corporate governance code by listed companies and issue of revised
clause 49. Some of the major recommendations of the committee primarily related to audit
committees, audit reports, independent directors, related party transactions, risk management,
directorships and director compensation, codes of conduct and financial disclosures.

6. Irani Committee Report

The Companies Act 1956 was enacted on the recommendations of the Bhaba Committee set
up in 1950 with the object to consolidate the existing corporate laws and to provide a new basis
for corporate operation in independent India. With enactment of this legislation in 1956 the
Companies Act 1913 was repealed. The need for streamlining this Act was felt from time to
time as the corporate sector grew in pace with the Indian economy and as many as 24
amendments have taken place since 1956. The major amendments to the Act were made
through Companies (Amendment) Act 1998 after considering the recommendations of Sachar
Committee followed by further amendments in 1999, 2000, 2002 and finally in 2003 through
the Companies (Amendment) Bill 2003 pursuant to the report of R.D. Joshi Committee. After
a hesitant beginning in 1980, India took up its economic reforms programme in 1990s and a
need was felt for a comprehensive review of the Companies Act 1956. The Government
therefore took a fresh initiative in this regard and constituted a committee in December 2004
under the chairmanship of Dr. J.J. Irani with the task of advising the government on the
proposed revisions to the Companies Act 1956.

7. Central Coordination and Monitoring Committee

A high powered Central Coordination and Monitoring Committee (CCMC) co-chaired by
Secretary, Department of Corporate Affairs’ and Chairman, SEBI was set up by the Department
of Corporate Affairs to monitor the action taken against the vanishing companies and
unscrupulous promoters who misused the funds raised from the public. It was decided by this
committee that seven Task Forces be set up at Mumbai, Delhi, Chennai, Kolkata, Ahmedabad,
Bangalore and Hyderabad.


The concept of "governance" is not new. It is as old as human civilization. Simply put
"governance" means: the process of decision-making and the process by which decisions are
implemented (or not implemented). Governance can be used in several contexts such as
corporate governance, international governance, national governance and local governance. It
is participatory, consensus oriented, accountable, transparent, responsive, effective and
efficient, equitable and inclusive and follows the rule of law. It assures that corruption is
minimized, the views of minorities are taken into account and that the voices of the most
vulnerable in society are heard in decision-making. It is also responsive to the present and
future needs of society.


A corporation is a congregation of various stakeholders, namely customers, employees,

investors, vendor partners, government and society. In this changed scenario an Indian
corporation, as also a corporation else-where, should be fair and transparent to its stakeholders
in all its transactions. This has become imperative in today’s globalized business world where
corporations need to access global pools of capital, need to attract and retain the best human
capital from various parts of the world, need to partner with vendors on mega collaborations
and need to live in harmony with the community. Unless a corporation embraces and
demonstrates ethical conduct, it will not be able to succeed. Corporations need to recognize
that their growth requires the cooperation of all the stakeholders; and such cooperation is
enhanced by the corporations adhering to the best Corporate Governance practices.

(1) “Corporate governance means that company managers its business in a manner that is
accountable and responsible to the shareholders. In a wider interpretation, corporate
governance includes company’s accountability to shareholders and other stakeholders such as
employees, suppliers, customers and local community.” – Catherwood.

(2) “Corporate governance is the system by which companies are directed and controlled.” –
The Cadbury Committee (U.K.)
Need for Corporate Governance
“A code of corporate governance cannot be imported from outside, it has to be developed
based on the country’s experience. There cannot be any compulsion on the corporate
sector to follow a particular code. An equilibrium should be struck so that corporate
governance is not achieved at the cost of the growth of the corporate sector”

-Sir Adian Cadbury

The need for corporate governance is highlighted by the following factors:

(i) Wide Spread of Shareholders:

Today a company has a very large number of shareholders spread all over the nation and even
the world; and a majority of shareholders being unorganised and having an indifferent attitude
towards corporate affairs. The idea of shareholders’ democracy remains confined only to the
law and the Articles of Association; which requires a practical implementation through a code
of conduct of corporate governance.

(ii) Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present-day-times; with
institutional investors (foreign as well Indian) and mutual funds becoming largest shareholders
in large corporate private sector. These investors have become the greatest challenge to
corporate managements, forcing the latter to abide by some established code of corporate
governance to build up its image in society.

(iii) Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have shaken public confidence in
corporate management. The event of Harshad Mehta scandal, which is perhaps, one biggest
scandal, is in the heart and mind of all, connected with corporate shareholding or otherwise
being educated and socially conscious. The need for corporate governance is, then, imperative
for reviving investors’ confidence in the corporate sector towards the economic development
of society.

(iv) Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of reasonable price,
better quality, pollution control, best utilisation of resources etc. To meet social expectations,
there is a need for a code of corporate governance, for the best management of company in
economic and social terms.

(v) Hostile Take-Overs:

Hostile take-overs of corporations witnessed in several countries, put a question mark on the
efficiency of managements of take-over companies. This factors also points out to the need for
corporate governance, in the form of an efficient code of conduct for corporate managements.

(vi) Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that there has been a great
increase in the monetary payments (compensation) packages of top level corporate executives.
There is no justification for exorbitant payments to top ranking managers, out of corporate
funds, which are a property of shareholders and society. This factor necessitates corporate
governance to contain the ill-practices of top managements of companies.

(vii) Globalisation:
Desire of more and more Indian companies to get listed on international stock exchanges also
focuses on a need for corporate governance. In fact, corporate governance has become a
buzzword in the corporate sector. There is no doubt that international capital market recognises
only companies well-managed according to standard codes of corporate governance.

Principles or Issues of Corporate Governance:

The fundamental or key principles of corporate governance are described below:

(i) Transparency:
Transparency means the quality of something which enables one to understand the truth easily.
In the context of corporate governance, it implies an accurate, adequate and timely disclosure
of relevant information about the operating results etc. of the corporate enterprise to the

In fact, transparency is the foundation of corporate governance; which helps to develop a high
level of public confidence in the corporate sector. For ensuring transparency in corporate
administration, a company should publish relevant information about corporate affairs in
leading newspapers, e.g., on a quarterly or half yearly or annual basis.

(ii) Accountability:
Accountability is a liability to explain the results of one’s decisions taken in the interest of
others. In the context of corporate governance, accountability implies the responsibility of the
Chairman, the Board of Directors and the chief executive for the use of company’s resources
(over which they have authority) in the best interest of company and its stakeholders.

(iii) Independence:
Good corporate governance requires independence on the part of the top management of the
corporation i.e. the Board of Directors must be strong non-partisan body; so that it can take all
corporate decisions based on business prudence. Without the top management of the company
being independent; good corporate governance is only a mere dream.

SEBI guidelines

(a) Board of Directors:

Some points in this regard are as follows:
(i) The Board of Directors of the company shall have an optimum combination of executive
and non-executive directors.

(ii) 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 the Board should comprise of
independent directors; and in case of executive chairman, at least, half of the Board should
comprise of independent directors.
The expression ‘independent directors’ means directors, who apart from receiving director’s
remuneration, do not have any other material pecuniary relationship with the company.

(b) Audit Committee:

Some points in this regard are as follows:
(i) It shall have minimum three members, all being non-executive directors, with the majority
of them being independent, and at least one director having financial and
accounting knowledge.
(ii)The Chairman of the committee will be an independent director.

(iii)The Chairman shall be present at the Annual General Meeting to answer shareholders’

(c) Remuneration of Directors:

The following disclosures on the remuneration of directors shall be made in the section on the
corporate governance of the Annual Report:
(i) All elements of remuneration package of all the directors i.e. salary, benefits, bonus, stock
options, pension etc.

(ii) Details of fixed component and performance linked incentives, along with performance

(d) Board Procedure

Some Points in this Regards are:
(i) Board meetings shall be held at least, four times a year, with a maximum gap of 4
months between any two meetings.

(ii) (ii) A director shall not be a member of more than 10 committees or act as chairman
of more than five committees, across all companies, in which he is a director.

(e) Management:
A Management Discussion and Analysis Report should form part of the annual report to the
shareholders; containing discussion on the following matters (within the limits set by the
company’s competitive position).

(i) Opportunities and threats

(ii) Segment-wise or product-wise performance

(iii) Risks and concerns

(iv) Discussion on financial performance with respect to operational performance

(v) Material development in human resource/industrial relations front.

(f) Shareholders:
Some points in this regard are:
(i) In case of appointment of a new director or reappointment of a director, shareholders must
be provided with the following information:
1. A brief resume (summary) of the director

2. Nature of his expertise

3. Number of companies in which he holds the directorship and membership of committees of

the Board.

(ii) A Board Committee under the chairmanship of non-executive director shall be formed to
specifically look into the redressing of shareholders and investors’ complaints like transfer of
shares, non-receipt of Balance Sheet or declared dividends etc. This committee shall be
designated as ‘Shareholders / Investors Grievance Committee’.

(g) Report on Corporate Governance:

There shall be a separate section on corporate governance in the Annual Report of the company,
with a detailed report on corporate governance.

(h) Compliance:
The company shall obtain a certificate from the auditors of the company regarding the
compliance of conditions of corporate governance. This certificate shall be annexed with the
Directors’ Report sent to shareholders and also sent to the stock exchange.

Benefit of corporate governance

 Improving access to capital.

Much attention to corporate governance issues in emerging markets among policymakers and
academics has focused on the role governance can play in improving access for emerging
market companies to global portfolio equity. An increasing volume of empirical evidence
indicates that well-governed companies receive higher market valuations.* However,
improving corporate governance will also increase all other capital flows to companies in
developing countries: from domestic and global capital; equity and debt; and from public
securities markets and private capital sources.

 Improving performance.

Equally important and, irrespective of the need to access capital, good corporate governance
brings better performance for clients. Improved governance structures and processes help
ensure quality decision-making, encourage effective succession planning for senior
management and enhance the long-term prosperity of companies, independent of the type of
company and its sources of finance.

 Adding value.

Corporate governance is a priority because it presents opportunities to manage risks and add
value to clients. In addition to the benefits to individual client companies, working to improve
corporate governance contributes more broadly to the mission that promote sustainable private
sector investment in developing countries.

 Reducing investment risk.

It is in interest to reduce the risk of investments by improving the governance of investee
companies. In the worst corporate governance environments, poor standards and weak
enforcement continue to be barriers to investment. Improving the corporate governance of
investee companies allows companies to work in higher risk environments. It should also bring
an increase in the market valuation of companies and attract more investors, which together
increase the opportunities for companies to exit its equity investments on favourable terms. In
recent years, IFC has worked with some of our highest-profile clients to improve their
governance and to better communicate the quality of their governance to markets.

 Developing capital markets.

Improving corporate governance contributes to the development of the public and private
capital markets. Poor standards of governance, particularly in the area of transparency and
disclosure have been a major factor behind instability in the financial markets across the globe.
This was seen in the case of the East Asian financial crisis of 1997, where so-called "crony
capitalism" combined with macroeconomic imbalances to interrupt decades of outstanding
economic growth. Most recently, poor corporate governance contributed to the spread of
corruption and fraud that led to the dramatic corporate failures in United States and Western

Theories of Corporate Governance

Agency theory:

This theory is about the conflicts that arise between the Principal and the Agent because of
differences in the goals resulting in additional costs to the firm thereby eroding the wealth of
the firm and its shareholders. Study by Berle and Means (1932) has brought into focus the
divergence in the profit maximizing and cost minimizing ideals of the firm’s behavior. This
causes agency costs, since managers and owners, having conflicting objectives, try to control
each other. Owners’ expect managers/agents to operate the businesses with planned outcomes
to enhance shareholders’ wealth, which the managers may not do.

Stewardship theory:

Stewardship theory has a more social-oriented perspective on Corporate Governance. Although

agency theory appears to be the dominant 6 paradigm underlying most governance research
and prescriptions, researchers in psychology and sociology have suggested theoretical limits of
agency theory because of its focus on only economic assumptions. There are non-economic
assumptions supporting stewardship theory. The dominant non-monetary motive, which directs
managers to accomplish their job, is their desire to perform excellently because their
reputations are at stake.

Resource dependence theory:

This theory focuses on the resources the directors can provide to the firm for its effective
operations and profitability. Some suggest that the boards have a critical role to play in
achieving economic efficiency and since some directors may have access to some strategic
resources required by the firm, they may be appointed to the board. Some suggest that directors
may also bring in specialized skills and expertise which will help them to cope with uncertainty
by connecting with external resources and held that environmental linkages could reduce
transaction costs associated with environmental interdependency.

Stakeholder Theory:

Stakeholder is a term originally introduced by the Stanford Research Institute (SRI) referring
to “those groups without whose support the organization would cease to exist”. Stakeholders
of a firm include suppliers, buyers, public policy decision makers, social groups and
Government. The conventional view that the success of the firm is dependent only on
maximizing shareholders’ wealth has limitations due to negative externalities imposing
external costs on the society. This theory states that the success of the firm is dependent on the
relationship that a firm has with its stakeholders. Stakeholder theory states that, managers and
entrepreneurs must take into account the legitimate interests of those groups and individuals
who can affect or be affected by their activities. Some suggest that the firms should carry out
socially responsible activities to reduce the risk of governmental intrusions that may affect firm
value. The underlying emphasis of this theory is that managers should have broad stake holder
orientations rather than narrow shareholder orientations.

Managerial Hegemony Theory:

Managerial hegemony theory states that CEOs and Management dominate the boards of
directors resulting in passive roles for NED and independent directors. This is because CEOs
dominate the director selection process and therefore control the board. Vancil (1987) is also
skeptical about the ability of outside directors to make independent judgments on firm
performance due to the dominant role played by CEOs in selecting outside directors. Stiles and
Taylor (1993) cited Sir Adrian Cadbury’s quote that up to 80 % of outside appointments to the
boards of large British companies were made on the old boys’ network. All these may
negatively influence the board cohesiveness since Non executive and independent directors are
involved in the decision-making process of the firm and, at the same time, act as monitors of
management. This conflict of interest will impair the efficiency of the firm despite being
dominated by outside directors.

Models of Corporate Governance

The Japanese model (J-Form):

Many firms of Japan are a part of intricate shareholding structures called keiretsus. A Japanese
Keiretsu is a network of different businesses that hold interest in each other to form a type of
security blanket. In a horizontal keiretsu firms are financed by a main bank with a system of
cross-share holding and horizontal network of interlinked corporations. While the central figure
in a horizontal Keiretsu is a central bank, in a vertical Keiretsu it would be a big manufacturing
company such as Toyota. Managers do not have a fiduciary responsibility only to shareholders
but also to the stakeholders. In practice the managers are expected to pursue the interests of a
wider set of stakeholders, including employees, customers and Shareholders who are
considered part of it.
German Model: (G-form)

In the German model of Corporate Governance even though the shareholders own the
corporation, they do not directly control the governance mechanism. In fact in Germany the
legal system is quite explicit that firms do not have a sole duty to pursue the interests of
shareholders because of the system of codetermination. In large corporations employees have
an equal number of seats on the supervisory board of the company which is ultimately
responsible for the strategic decisions of the company .Half of the supervisory board is elected
by the labour unions which ensure that the workers participation in the governance mechanism
is ensured. Another feature is that there is a heavy presence of banks in the equity structure of
German firms.

Chaebols of South Korea:

Chaebol refers to a South Korean form of business conglomerate. They are powerful global
multinationals owning numerous international enterprises. The traditional structure of Korean
chaebol can be explained by two of their features; their absolutely closed concentration of
ownership within the family of the founder, and their highly diversified business structure. The
founding family possesses bulk of the stocks and holds the decision making right as top
management. Chaebols suffer from a number of problems such as entrenchment, agency
conflicts, tunneling, etc (

Anglo-American Model:

The traditional model of Corporate Governance is characterized by a separation of ownership

and management. It is considered as a liberal model which is common in Anglo-American
countries, which tends to give priority to the interests of shareholders. The CEO has broad
powers to manage the corporation on a daily basis, but needs to get board approval for certain
major actions, such as hiring his/her immediate subordinates, raising money, acquiring another
company, major capital expansions, or other expensive projects. Other duties of the board may
include policy setting, decision making, monitoring management's performance, or corporate

Development of Corporate Governance Regulatory mechanisms

The regulations related to Corporate Governance have been significantly influenced by the
regulations of UK, USA and Europe. Following are some of the important enactments which
form the core element of governance systems, not only in India, but across the world.

The Cadbury Report, 1992

There were a series of governance failures in UK around the years 1990-92; Bankruptcy of
Maxwell's; Insolvency of BCCI; Polly Peck and others. These events led to the formation of a
committee chaired by Sir Adrian Cadbury whose aims were to suggest improvements and
restore investor confidence in the British Corporate Governance system. The committee made
recommendations on the arrangement of company boards and accounting systems to mitigate
Corporate Governance risks and failures. The report's recommendations have been adopted in
varying degrees by the European Union, the United States, the World Bank, and other common
wealth countries.

The Asian financial crisis (AFC)

In late 90’s, East Asian economies came to limelight due to the quick boom and burst
phenomenon disrupting the economies of not only Asian countries but many countries of the
world. The East Asian financial crisis (AFC) was primarily attributed to poor governance and
it undoubtedly established the importance of having effective Corporate Governance structures
for corporations particularly PLCs. Subsequently, World Bank brought in a series of Corporate
Governance reforms, primarily in countries to which it lends, to avoid such crisis.

Sarbanes Oxley Act, 2002 (Referred to as SOX ACT, 2002)

Enron’s scandal has been one of the serious lapses in the Corporate Governance history. Since
many world markets were inter-connected it had wider and serious ramifications resulting in
loss of billions of dollars, affecting many countries. Enron’s Governance fiasco led to the
enactment of the Sarbanes Oxley Act, 2002.This has been one of the most sweeping reforms
in the past 70 years of the Corporate Governance history Because of global importance of US
financial markets, many countries of the world reviewed their Governance regulations on the
basis of this Act. Foreign Firms which are listed in US and Subsidiaries of US firms have to
comply with its stringent internal control and financial reporting requirements of this Act.

Parmalat Scandal of Italy, 2004

It is dubbed as Europe’s Enron. Parmalat was Italy's largest food company. Primarily there was
disappearance of more than $10 billion in declared assets which came into limelight during the
auditor rotation. Subsequent to this scandal there were regulatory amendments, particularly in
the area of Auditing and Audit committee.