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CORPORATE GOVERNANCE

ACKNOWLEDGEMENT

At the outset, I am thankful to my college SANPADA COLLEGE OF COMMERCE AND TECHNOLOGY, and the authorities, for providing me an opportunity to undertake my Bachelor Degree in Banking And Insurance (BBI), and also for sponsoring me to undertake project. I am thankful to the management for giving me an opportunity to undertake my project ( A Study on) under the guidance of Prof. SHREKESH POOJARI as my mentor.

I would like to thank our Faculty guide, Prof. SHREKESH POOJARI for providing valuable suggestions and guidance during the project. His perspective has encouraged me to incorporate a different dimension to the project.

I am grateful to my colleagues for being a wonderful support a through at the same time I am thankful to all my friends of Sanpada College of Commerce & Technology for being with me at different junctures of need. I thank

I also acknowledge great sense of gratitude to all those who have enriched and improved my thinking, through their conversations, thoughts, experience and guided me to complete this report.

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CERTIFICATE

This is to certify that the project work titled CORPORATE GOVERNANCE has been completed by S.VENKATESH OF T.Y.B.B.I under the guidance of Prof. SHREKESH POOJARI during the academic year 20011-12 This report is submitted towards the partial fulfillment of Bachelor of Banking And Insurance, Oriental Education Society, Mumbai University. The information in the project report is unique, true and fair to the best of my knowledge.

PROF. SHREKESH.POOJARI (PROJECT GUIDE)

PLACE: DATE:

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DECLARATION

I hereby declare that the project work entitled CORPORATE GOVERNANCE to the UNIVERSITY OF MUMBAI is a record of an original work done by me under the guidance of PROF.

SHREKESH.POOJARI and this project work has not performed the


basis for the award of any Degree ship/fellowship and similar project if any. or Diploma/associate

S.VENKATESH (T.Y.B.B.I) PLACE: DATE:

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UNIVERSITY OF MUMBAI.
PROJECT REPORT ON CORPORATE GOVERNANCE
A PROJECT REPORT SUMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR BACHELOR OF BANKING AND INSURANCE

SUBMITTED BY: S.VENKATESH

UNDER GUIDANCE OF:

PROF. SHREKESH.POOJARI

SANPADA COLLEGE OF COMMERCE & TECHNOLOGY Sector No . 2, Plot No. 3-5, Adj. Sanpada station Navi Mumbai. 2011-2012

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Chapter -1 INTRODUCTION

Understand the meaning and genesis of corporate governance Definition of corporate governance Risk and concept of corporate governance Importance of corporate governance

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Meaning:
Corporate governance while not a new concept, has in the 1990s become an issue of global importance. Corporate governance is a set of process, customs, policies, laws and institutions affecting the way a also includes the relationships among the many players involved (stakeholders) and the goal for which the corporation is governed. The principal players are the stakeholder, management and board of directors. Other stakeholders include employees, suppliers, customer, banks and other lenders, regulators, the environment and the community at large. According to sir Adrian Cadbury: Corporate governance is concerned with the holding the balance between economic and social goal and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The main aim is it align as nearly as possible the interest of individual, corporation and society.

Definition of corporate governance:


Corporate governance refers to the relationship that exists between the different participants, and defining the direction and performance of corporate firm. The following are the main actors in corporate governance: the CEO, i.e., the management the board of directors the shareholders The other actors who influence governance in corporation/firms are the staff, suppliers, customers, creditors and the community. Before discussing the role of

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different bodies, the understanding of corporation is must, what a corporation stands for and who should define the direction of the firm. The definition of corporation refers to an instrument or a body by means of which capital is acquired, used for investing in assets producing goods and services, and their distribution. As per the corporation law, the purpose of business corporation should be engage in such activities which contribute the raising the profits of the firm and enhance the value/gain of the shareholders. It has a legal entity and originates from the authority of the land. A corporation differs from the people who constitute it. Thus it follows from above that, once the individual forms the corporation, they together constitute the corporation in the eyes of the Laws. Definitions of corporate governance vary widely. They tend to fall into two categories. The first set of definitions concerns itself with a set of behavioral patterns: that is, the actual behavior of corporations, in terms of such measures as performance, efficiency, growth, financial structure, and treatment of shareholders and other stakeholders. The second set concerns itself with the normative framework: that is, the rules under which firms are operatingwith the rules coming from such sources as the legal system, the judicial system, financial markets, and factor (labor) markets. For studies of single countries or firms within a country, the first type of definition is the most logical choice. It considers such matters as how boards of directors operate the role of executive compensation in determining firm performance, the relationship between labor policies and firm performance, and the role of multiple shareholders. For comparative studies, the second type of definition is the more logical one. It investigates how differences in the normative framework affect the behavioral patterns of firms, investors, and others. In a comparative review, the question arises how broadly to define the framework for corporate governance. Under a narrow definition, the focus would
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be only on the rules in capital markets governing equity investments in publicly listed firms. This would include listing requirements, insider dealing arrangements, disclosure and accounting rules, and protections of minority shareholder rights. Under a definition more specific to the provision of finance, the focus would be on how outside investors protect themselves against expropriation by the insiders. This would include minority right protections and the strength of creditor rights, as reflected in collateral and bankruptcy laws. It could also include such issues as the composition and the rights of the executive directors and the ability to pursue class-action suits. One can define corporate governance as the range of institutions and policies that are involved in these functions as they relate to corporations. Both markets and institutions will, for example, affect the way the corporate governance function of generating and providing high-quality and transparent information is performed.

Rise of the concept of corporate governance:

The word corporate governance is relatively a new addition to the vocabulary of management science in Japan, said of Mitsubishi Corporation. The economic recession of the late nineties and the early years of new millennium which gripped Japan is being described as a governance recession. Downturn in trading and low returns on investment are the most significant phenomena of the Japanese economy during this period. These downturn are described to inappropriate structure of
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corporate governance, which failed to respond to the changing business environment. It is the pertinent to quote the example of Daimler Benz, the crown jewel of the German industry, which learnt through hard experience to bring a change in the classical accounting system and practices on the disclosure, so as to attract the foreign capital. It is implied that emerging markets reflected the changes needed in the structure of governance. The fact that governance considerations are vital in the competition for acquisition of capital is also shown when Australian stock Exchange denied Rupert Murdoch, an internationally known tycoon, his proposed listing. Rupert Murdoch was to dispose his non-voting share. The governments round the world have been concerned about developing international code on governance. With the reduction in the trade barrier by the countries, the investors are willing to invest across the world. Now they are able to access detailed information on investment opportunities in corporates easily on the internet. Global companies are looking for first class regulatory and legal system, among other conditions. The successive efforts of the shareholders of the firms like Westing House, American Express, Sears, ITT, etc., have displayed that the well informed equity owners of the firms have the potential to influence the governance of the firm. The word corporate governance started in the UK during the late eighties. In 1992, the UK developed a code on governance under the chairmanship of Adrian Cadbury, governor, Bank of England. Corporate governance occupies a significant place in the international business. Today the subject is being taught in many B schools as a part of their curriculum. In order to be able to appreciate the issue related to governance, one

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needs to understand the underlying concept and the related assumptions in these subjects, besides their inter-linkages to understand the business scenario.

Importance:
The scandals and crises are just manifestations of a number of structural reasons why corporate governance has become more important for economic development and a more important policy issue in many countries. The reasons are as follows: (a) The private, market-based investment process underpinned by good corporate governance is now much more important for most economies than it used to be. Privatization has raised corporate governance issues in sectors that were previously in the hands of the state. Firms have gone to public markets to seek capital, and mutual societies and partnerships have converted themselves into listed corporations. (b) Due to technological progress, liberalization and opening up of financial markets, trade liberalization, and other structural reformsnotably, price deregulation and the removal of restrictions on products and ownershipthe allocation within and across countries of capital among competing purposes has become more complex, as has monitoring of the use of capital. (c) The mobilization of capital is increasingly one step removed from the principalowner, given the increasing size of firms and the growing role of financial intermediaries. The role of institutional investors is growing in many countries, with many economies moving away from pay as you go retirement systems. (d) Programs of deregulation and reform have reshaped the local and global financial landscape. Long-standing institutional corporate governance

arrangements are being replaced with new institutional arrangements, but in the meantime, inconsistencies and gaps have emerged.

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Chapter-2 Corporate Governance & Development

To know the corporate governance & its Development in the economy Concepts and the objectives The link between the corporate governance and other foundations of development Corporate governance matters for growth and development

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Introduction:
There is an investigation of the relationship between corporate governance and economic development and well-being. It finds that better corporate frameworks benefit firms through greater access to financing, lower cost of capital, better firm performance, and more favorable treatment of all stakeholders. There is also evidence that when a countrys overall corporate governance and property rights system are weak, voluntary and market corporate governance mechanisms have limited effectiveness. Less evidence is available on the direct links between corporate governance and poverty. Two events are responsible for the heightened interest in corporate governance. During the wave of financial crises in 1998 in Russia, Asia, and Brazil, the behavior of the corporate sector affected entire economies, and deficiencies in corporate governance endangered the stability of the global financial system. Just three years later confidence in the corporate sector was sapped by corporate governance scandals in the United States and Europe that triggered some of the largest insolvencies in history. In the aftermath, not only has the phrase corporate governance become nearly a household term, but economists, the corporate world, and policymakers everywhere began to recognize the potential macroeconomic consequences of weak corporate governance systems. The scandals and crises, however, are just manifestations of a number of structural reasons why corporate governance has become more important for economic development and well-being. The private, market based investment process is now much more important for most economies than it used to be, and that process is underpinned by better corporate governance. With the size of firms increasing and the role of financial intermediaries and institutional investors growing, the mobilization of capital has increasingly become one-step removed from the principal-owner. At the same time, the allocation of capital has become more
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complex as investment choices have widened with the opening up and liberalization of financial and real markets, and as structural reforms including price deregulation and increased competition, have increased companies exposure to market forces risks. These developments have made the monitoring of the use of capital more complex in certain ways, enhancing the need for good corporate governance. It aims to trace the many dimensions through which corporate governance works in firms and countries. A well-established body of research has for some time acknowledged the increased importance of legal foundations, including the quality of the corporate governance framework, for economic development and well-being. Research has started to address the links between law and economics, highlighting the role of legal foundations and well defined property rights for the functioning of market economies. It also provides some background on the ownership patterns around the world that determine and affect the scope and nature of corporate governance problems.

Concept and Objectives:


Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. In other words, 'good corporate governance' is simply 'good business'. It ensures:

Adequate disclosures and effective decision making to achieve corporate objectives;

Transparency in business transactions; Statutory and legal compliances;

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Protection of shareholder interests;

In other words, corporate governance is 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 deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. In this regard, the management needs to prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders. 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. It integrates all the participants involved in a process, which is economic, and at the same time social. The fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. Hence it harmonizes the need for a company to strike a balance at all times between the need to enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. Further, its objective is to generate an environment of trust and confidence amongst those having competing and conflicting interests. It is integral to the very existence of a company and strengthens investor's confidence by ensuring company's commitment to higher growth and profits. Broadly, it seeks to achieve the following objectives:

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

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

The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information;

The board has an effective machinery to sub serve the concerns of stakeholders;

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

The board effectively and regularly monitors the functioning of the management team.

THE LINK BETWEEN CORPORATE GOVERNANCEAND OTHER FOUNDATIONS OF DEVELOPMENT.


The research on the role of corporate governance for economic development and well-being is best understood from the broader perspective of other foundations for development, notably the importance of finance, the elements of a financial system, property rights, and competition. Three elements of this are worth highlighting.

The link between finance and growth:


First, over the past decade, the importance of the financial system for growth and poverty reduction has been clearly established. One demonstration is the link between finance and growth. Almost regardless of how financial development is measured, there is a cross-country association between it and the level of GDP per
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capita growth. Numerous pieces of evidence have been assembled over the past few years to indicate the relation is a causal one: that is, it is not only the result of better countries having both larger financial systems and growing faster. The relationship has been established at the level of countries, industrial sectors, and firms and has consistently survived a rigorous series of econometric probes.

The link between the development of banking systems and market finance and growth:
Second, and importantly for the analysis of corporate governance, the development both of banking systems and of market finance helps economic growth. Banks and securities markets are complementary in their functions, although markets will naturally play a greater role for listed firms. More generally, the findings provide support for the functional view of finance. That is, it is not financial institutions or financial markets that matter; it is the functions that they perform that matter. In particular, for any regression model of growth that is selected and adapted by adding various measures of stock market development relative to banking system development, the results are consistent. None of these measures of financial sector structure has any statistically significant impact on growth. To function well, financial institutions and financial markets, in turn, require certain foundations, including good governance.

The link between legal foundations and growth:


Third, the role of legal foundations is now better understood and documented. Legal foundations matter crucially for a variety of factors that lead to higher growth, including financial market development, external financing, and the

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quality of investment. Legal foundations include property rights that are clearly defined and enforced and other key regulations. Comparative corporate governance research took off following the works of economists Rafael La Porte, Florencio Lopez-de-Silanes, Andrei Shleifer, andRobert Vishny.

CORPORATE GOVERNANCE IMPORTANT FOR GROWTH AND DEVELOPMENT


The literature has identified several channels through which corporate governance affects growth and development: The first is the increased access to external financing by firms. This in turn can lead to larger investment, higher growth, and greater employment creation. The second channel is a lowering of the cost of capital and associated higher firm valuation. The third channel is better operational performance through better allocation of resources and better management. This creates wealth more generally. Fourth, good corporate governance can be associated with a reduced risk of financial crises. This is particularly important, as financial crises can have large economic and social costs. Fifth, good corporate governance can mean generally better relationships with all stakeholders. All these channels matter for growth, employment, poverty, and well-being more generally.

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Better operational performance:

In the end, the way better corporate governance can add value is by improving the performance of firms, whether through more efficient management, better asset allocation, better labor policies, and similar efficiency improvements. Evidence for the United States, and elsewhere strongly suggests that at the firm level, better corporate governance leads not only to improved rates of return on equity and higher valuation, but also to higher profits and sales growth. This evidence is maintained when controlling for the fact that better firms may adopt better corporate governance and perform better due to other reasons. Across countries, there is also evidence that operational performance is higher in better corporate governance countries, although the evidence is less strong.

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The role of entrenched owners and managers:


Evidence shows that firms adapt to weaker environments by adopting voluntary corporate governance measures. A firm may adjust its ownership structure, for example, by having more secondary, large block holders, which can serve as effective monitors of the primary controlling shareholders. This may convince minority shareholders of the firms willingness to respect their rights. Or a firm may adjust its dividend behavior if it has difficulty convincing shareholders that it will reinvest properly and for their benefit. These voluntary mechanisms can include hiring more reputable auditors. Since auditors have some reputation at stake as well, they may agree to conduct an audit only if the firm itself is making sufficient efforts to enhance its own corporate governance. The more reputable the auditor, the more the firm needs to adjust its own corporate governance. A firm can also issue capital abroad or list abroad, thereby subjecting itself to higher level of corporate governance and disclosure. There is also evidence that the voluntary corporate governance adopted by firms matter more in weak corporate governance environments. Markets can adapt as well, partly in response to competition, as listing and trading migrate to competing exchanges, for example. While there can be races to the bottom, with firms and markets seeking lower standards, markets can and will set their own, higher corporate governance standards. One example is the Novo Mercado in Brazil, which has different levels of corporate governance standards, all higher than the main stock exchange. Firms can choose the level they want, and the system is backed by private arbitration measures to settle corporate governance disputes. Efforts like these can help corporations improve corporate governance at low cost as they can list locally.

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Higher firm valuation:

The quality of the corporate governance framework affects not only the access to and amount of external financing, but also the cost of capital and firm valuation. Outsiders are less willing to provide financing and are more likely to charge higher rates if they are less assured that they will get an adequate rate of return. Conflicts between small and large controlling shareholders are greater in weaker corporate governance settings, implying that smaller investors are receiving lower rates of return. There is clear empirical evidence for these effects. The cost of capital has been shown to be higher and valuation lower in weaker property rights countries. Investors also seem to apply a discount in their valuation for firms and countries with relatively worse corporate governance. Furthermore, in countries with weaker property rights, controlling shareholders also obtain a fraction of the value of the firm that exceeds their direct ownership stake, at the expense of minority shareholders.

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CHAPTER-3 NATURE AND SYSTEMS OF CORPORATE GOVERANANCE

Definition & scope Benefits of good governance Corporate governance and economic performance OECD principles Models of corporate governance Corporate Governance in India Factors influencing corporate governance

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Definition and Scope:


Corporate governance comprises the systems and processes which ensure the functioning of the firm in a transparent manner for the benefit of all the stakeholders and accountable to them. The focus is on relationship between owners and board in directing and controlling companies as legal entities in perpetuity. A companys ability to create wealth for its owners however, depends on the role and freedom given to it by society. Sir Adrian Cadbury in his preface to the World Bank publication, Corporate Governance: A Framework for Implementation; states that Corporate governance is holding the balance between economic and social goods and between individual and community 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, corporations and society .The incentive to corporate aims and to attract investment. The incentive for states is to strengthen their economies and discourage fraud and mismanagement. The focus on corporate governance arises out of the large dependence of companies on financial markets as the preeminent sources of capital. The quality of corporate governance shapes the future and the growth of capital market. But capital markets and financial markets in general can function properly if individuals have access to accurate basic information about the companies they invest the link between a companys management, board and its financial reporting system is crucial. In the context of globalization, capital is likely to flow to markets which are well regulated and practices high standards of transparency, efficiency and integrity.
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Benefits of Good Governance : Good governance leads to congruence of interests of board, management including owner managers and shareholders. Good governance provides stability and growth to the company. Good governance system builds confidence among investors. Good governance reduces perceived risk, consequently reducing coat of capital. Well governed companies enthuse employees to acquire and develop company specific skills. In the knowledge driven economy excellence in soft skills like management will be the ultimate tool for corporates to leverage a competitive advantage in the financial markets. Adoption of good corporate practices promotes stability and long term sustenance relationship. A good corporate citizen becomes an ethical icon and enjoys a position of pride in corporate culture. Potential stakeholders aspire to enter into relationship with enterprises whose governance credentials are exemplary. Corporate Governance and Economic Performance: Tradeoff between compliance with normative obligations such as the increasing opportunities for stakeholders participation, access to information and economic performance of the firm can be decided in the political realm. Finally the existence of condition for fair choice of basic practices of corporate governance may not be met since the system of rights and constitutional state envisaged in a democratic system may not obtain in all countries. This may
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result in bias in the selection of practices and structure favoring those able to mobilize wealth and other sources of social power. While a corporation has universal obligations, there cannot be any one set of correct practices and structure of corporate governance. Specific obligations are assumed by a corporation through their decision and practices. Among the various attempts to evolve best global standards, the principles evolved by organization for economic cooperation and development (OECD) released in 1999 have been accepted as an international benchmark. OECD principles recognize that different legal systems, institutional frameworks across countries have led to the development of range of different approaches to corporate governance. The OECD principles like other good corporate governance regimes protect the interest of not only the shareholders but all stakeholders like employees, creditors, suppliers, customers and environment. OECD Principles:

The OECD principles of corporate governance cover five major areas. The rights of shareholders. The equitable treatment of shareholders. The role of transparency. Disclosure and transparency.

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The responsibilities of the board. Rights of shareholders: Rights of shareholder mentioned in the OECD report cover the registration of the right to ownership with the company, conveyance or transfer of shares, obtain relevant information from the company on a timely and regular basis, participate and vote in general shareholders meetings, elect members of the board and share in the profits of the company. The OECD principles emphasize that information on shareholders who exercise control disproportionate to their equity ownership should be disclosed. Equitable Treatment of Shareholders: All shareholders should be treated equitably and the law should not make any distinction among different shareholders holding a given class or type of shares. Any changes in voting rights of common shareholders can be done only with the consent of those shareholders. Role of stakeholders: The rights if the stakeholders as established by law should be recognized and active cooperation between corporations and stakeholders in creating wealth, jobs and sustainability of financially sound enterprises should be encouraged. While the shareholders are the true owners, the functioning of a company affects several other economic players in the society. Employees are directly as they develop and adopt company specific skills. There is a significant synergetic relationship between the company and its employees. Corporate entities have also an impact on the environment of the community in which they are located. Polluting units may generate profits for shareholders but impose costs on society. Representation of employees and community on the board are mooted. Role of Board: The main task of a board is to monitor the performance of the executives and to ensure that returns to shareholders are maximized. True
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independence of the board can be ensured by having a majority of outside directors who do not have any financial of pecuniary involvement with the company. Disclosures and Transparency: Timely disclosures relating to financial position, ownership pattern and shareholding helps in infusing a sense of discipline and accountability among managers. Increased transparency and information help to reduce information symmetry between management and shareholders. Adoption of internationally accepted best practices improves the understanding and comfort of foreign investors about the operations of the companies and lowers their risk perception. Models of Corporate Governance:

Outsider Model: Outsider model obtaining in UK and USA in which control and ownership are distinct and separate. Since equity ownership is widely dispersed among a large number of institutional holders and small investors, control vests with professional
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managers. The model is also referred to as principal-agent model where the shareholders, the principals entrust the management of the firm to managers, the agents. In actual practice with the growth of the firm the gulf between shareholders and managers has widened and became distant giving rise to the agency problem, ensuring that managers function in the interests of the shareholders. The dichotomy between ownership and control has necessitated the adoption of regulatory and legal frameworks to ensure that corporate practices protect the interests of shareholders as well as other stakeholders. Features of Companies in Outsider Model in UK and USA : The US and UK have similar foundations in common law and the features of corporate governance are alike. Both American and British Companies combine managers with outside directors into a unitary board, Boards comprise a large number of non-executive directors, markets in both countries have companies with widely dispersed share ownership, high levels of public disclosure, relatively low levels of outside regulation and clearly defined legal duties of care and loyalty to shareholders. There are however subtle differences. While both countries have boards relatively small, boards with between 7 and 12 directors. British boards are slightly larger with more executive on their boards. Non-executive directors on British boards work with executive directors as a collective body. In US the nonexecutive directors tend to monitor management and do not get involved in operational matters. The British boards also combine chairman of board and CEO. While 95% of FTSE 100 companies have separated the two positions, the number of S&P 500 companies in 2003 which have combined the two positions is only 21%. In Britain the chairman leads the board and CEO leads the company.America has chosen a system of checks and balances for its government but not for its business because of its mistrust of the former and desire not to slow down
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competitiveness of latter. There are of course checks and balances like ethics to install an understanding of how one should behave in terms of fiduciary duty, internal compliance and company governance as well as industry self-regulation. The recent scandals however reveal a critical violation of fiduciary duty because of conflicts of interest or greed. n the US the higher proportion of outside directors on the boards may reduce the need for independent chairman while in the UK the split roles at the heads of companies may allow for strong board independence. Centralization of Regulation in US: While the British have consolidated almost all public company oversight into a super regulatory body, the Financial services Authority, the US has decentralized and checked power is reflected in the balanced roles of Securities and Exchange Commission (SEC), exchange listing rules and state statutes. Shareholders : Shareholders in Britain enjoy numerous and specific ownership rights than their counter parts in US. Shareholders in Britain vote on dividends, buy backs, financial statements, preemptive rights and small acquisitions and spin offs. In US shareholders vote for directors and auditors. Market for Corporate Control: The approach to take over defenses and the market for corporate control are quite different. The prevalence of defenses such as poison pills, green mail, dual class voting stock in US is owed to the factor that law and regulation have entrusted to directors to take immediate decision on offers for the company. The US approach emphasizes directors fiduciary duty to adopt maximum defense where volatile prices and ready cash make them attractive targets. The directors in British boards
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have little altitude and have to follow the rules of the City Code on takeovers and Mergers. The code set up specific time table for voting on bids, ensures equal treatment of shareholders and in its preference for auctions regulates the statements both sides may make to the market after an approach. Structural defenses like poison pills freeze out provisions and green mail ate not allowed. The British governance system assumes a conflict of interest when boards decide on mergers. Disclosures: The corporations in US are required to report on director backgrounds in AGM notices and make public filling to SEC which provides free access to an online database of corporations. In UK companies report twice a year and investors have to depend only on annual reports. Insider model : The insider has two variants, the European and East Asian. In the European model a relatively small compact group of shareholders exercise control over corporation. On the other hand, the East Asian model of corporate governance, the founding family generally holds the controlling share either directly or through holding companies. In all Asian countries control is enhanced through pyramid structures and cross holding among firms. In Japanese form of insider system, several companies are linked together through interlocking directorships, which are backed by cross holdings of one anothers shares. With these intertwined groups of firms, called keiretsu, there is also a main bank and several another financial institutions, which holds share in the companies in the group and sit on the companys supervisory boards. Within a Japanese keiretsu control is multidirectional with each company able to exercise some control over the companies that control it. The Korean Chaebol is a hybrid between the German corporate pyramid and the
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Japanese Keiretus. In 1995 the top 30 chaebol accounted for 40.2% of the value added in Koreas manufacturing sector, ownership stakes in the chaebol are relatively small, 10% for 70 largest chaebolaffiliater companies. Founding families however can maintain control through cross shareholdings among member companies. Banks and other financial institutions, unlike japan do not play a monitoring role. Claessens, Djankov and lang examined the separation of ownership and control for 2,980 corporations in nine East Asian countries found that separation of management from ownership control is rare and the top management of about 60% of firms that are not widely held is related to the family of the controlling shareholders. The separation of ownership and control is most pronounced among family controlled as are small firms. It is a observed that concentration of control generally diminishes with the level of a countrys economic development. In the European insider model the controlling

shareholders are backed by complex shareholders agreements. The controlling group maintains longer term and stable relationship among themselves. In the European countries where this insider model is extant corporate sector depends on banks as a source of finance and the corporate entities have quite levels of debt equity ratios.

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Market Versus Bank Oriented Systems of Governance:

Side by side comparison of bank and market It may distinguish between market oriented and bank oriented or relations-based systems of corporate governance. A major difference between the two systems was the degree to which creditors monitored the firms. In the bank oriented system bank enter into long term relationships; and in market system, an arms length relationship is maintained. In England creditors preferred hands off approach. In the German economy banks play a dominant role in financial intermediation as well as in the monitoring of corporations. One form of monitoring was to place bank officers on the supervisory boards of industrial companies or to purchase large block of shares. It was not hands-on relationship banking. However, in the light of recent development we may note that the crucial difference between American and German systems of governance may be traced to the different ownership structures and not to the role of banks per se. The US while nurturing the corporate form of organization has established elaborate legal framework to preserve competition and prevent dominance. Oversight is provided by independent audit, stock exchanges and SEC. In the US economy both corporate finance and control are market based. Large companies in US and UK are listed in
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the stock markets and their ownership concentration is modest. In the UK as well as USA there is a market for corporate control in which hostile takeover is important and banks play a limited role. Outside the Anglo Saxon world most companies are private, the ownership of listed companies is highly concentrated, family ownership is very important and hostile takeovers are rare and pyramidal control schemes are common in some countries bank ownership of equity is important. The German economy may be typically characterized as bank system. While banks shareholding is small, they enjoy significant voting rights on the bearer form shares deposited with them by shareholders. They have representatives on the top two tier boards. Banks are required to consult shareholders give their advice and take their instructions on voting.

Corporate Governance in India:

While the predominant form of corporate governance is much closer to the Asian insider model, there are a number of firms that resemble the European version

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where the control is maintained through pyramidal form of ownership and control. The concept of industrial house which controls several companies is quite commonly accepted although the funding family does not own the company. There are quite a few companies whose practices of corporate governance are a matter of concern. Dilution of accounting and reporting standards have allowed corporations from manipulating resources for their own vested interest sideling the stakeholders of the company. Investors have suffered on account of unscrupulous management of the companies, which have raised capital from the market at high valuations and performed much worse than the past reported figures; leave alone the future projections at the time of raising money. Another example of bad governance has been the allotment of promoters shares, on preferential basis at preferential prices, disproportionate to market valuation of shares, leading to further dilution of wealth of minority shareholders. There are also many companies, which are not paying adequate attention to the basic procedures for shareholders service; for example, many of these companies do not pay adequate attention to redress investors grievances such as delay in transfer of shares, delay in dispatch of share certificates and dividend warrants and non-receipt of dividend warrants; companies also do not pay sufficient attention to timely dissemination of information to investors as also to the quality of such information. Although the securities law and companies Act address several of these investor grievances, the implementation and inadequacy of penal provisions have left a lot to be desired.

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Factors Influencing Corporate Governance : a) Integrity of the management: A Board of directors with a low level of integrity is tempted to misuse the trust, reposed by shareholders and other stakeholders, to take decisions that benefit a few at the cost of others. b) Ability of the board: The collective ability, in terms of knowledge and skill, of the board of directors to effectively supervise the executive management determines the effectiveness of the board. c) Adequacy of the process: Board of directors cannot effectively supervise the executive management if the process fails to provide sufficient and timely information to the board, necessary for reviewing plans and the performance of the enterprise. d) Commitment level of individual board members: The quality of a board depends on the commitment of individual members to tasks, which thy are expected to perform as board members. e) Quality of corporate reporting: The quality of corporate reporting depends on the transparency and timeliness of corporate commination with shareholders in making economic decisions and in correctly evaluating the management in its stewardship function. f) Participation of stakeholders in the management: The level of participation of stakeholders determines the number of new ideas being generated in optimum utilization of resources and for improving the administrative structure and the process. Therefore an enterprise should encourage and facilitate stakeholders participation.

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Chapter-4 THE THREE ANCHORS OF CORPORATE GOVERNANCE

Know Accountability and Responsibilities Approaches to Balance Board and CEO Functions Board and Shareholders Election of Directors

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Introduction:
The three anchors of corporate governance are board of directors, management and shareholders. While each of them has important responsibilities of its own, it is their interaction with each others that is the key to effective governance. In tandem they constitute an effective set of checks and balances. The system can become unbalance if any one of them is not functioning well.

Accountability and Responsibilities:

Mr. Obama Signs Credit Card accountability

The girl is showing her responsibility

The relationship in the governance triangle consisting of boards of directors management, management-board of directors and boards of directors-shareholders depend on mutual accountabilities and responsibilities. The board lays down policy and monitors performance and counsels and management. The board hires and fires and through the Remuneration Committee sets the compensation for the CEO. It may be noted that in USA the jobs of CEO and Chairman are usually combined while in India the practice varies. In some they are held by different individuals while in others they are combined. Sir Adrian Cadbury believes that the jobs of Chairman and Chief executive demand different abilities and perhaps temperaments. In it is very much in shareholders interests to ensure they are performed by different people.
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Separation of Board from Management:


The new governance rules that have been adopted are designed to distance the board from management and thereby prevent conflicts of interest that can compromise the relationship. The changes call for an increase in the number of independent directors and the committees on Audit and compensation be composed entirely of independent directors. The New York stock exchange proposals also put forth the idea of director independence. They should have no material relationship with the company.

Board and Management:

The changes introduced by focusing on board and Audit Committee composition have not succeeded in establishing a healthy distance between the management and board. The board should be free to monitor and the management tree to manage. If the two functions are combined as under a system of Chief executive officer Chairman, there is no separation of powers and functions. The policy making, strategy formulation and monitoring is done by the same person who is supposed to execute them. The efficiency of all these measures to distance Board from management would be lost if we let a person wear two hats at the same time that of Chairman of the board and Chief executive officer of management. At the outset it
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should be noted that letting management personnel be members of the board howsoever senior they may be by calling them full time directors/executive directors has confounded the concepts of transparency and accountability. Good corporate governance demands the separation of the board and management. Even in the case of promoters whose personal wealth is tied to the company they have to make a choice to be satisfied by being a member of the board or management team. This of course goes against the grain of Indian corporate governance, the founding family as owners being the board as well as management. Management accountability will be non-existent to the shareholders in such circumstances.

Family Dominated Companies:

Infosys like a family dominated business.

Family dominated companys own substantial stakes in a large number of quoted companies here as well as in U.S. In the U.S. the founding family is an influential investor in more than one-third of standard and poors 500 companies. On average while the family owns 18% of the equity its control of the board tends to be disproportionately large. However, family dominated companies are both more profitable and better marker performers than non-family especially when a
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dynamic family member with a profound sense of stewardship is managing Director/CEO. The key difference between the family firms and others is the independence of the board packed with friends and relatives do badly, while those with strong directors do better. It is good governance that makes the difference.

Approaches to Balance Board and CEO Functions:


The (US) Conference Board Commission on public Trust and private Enterprise (CPTPE) 2003 noted three principal approaches to provide the appropriate balance between board and CEO functions. Separation of the offices of Chairman and CEO with those two roles being performed by separate individuals. The chairman would be one of the independent directors. Separation of offices but not a member of management and would not report to CEO. Chairman who is a non-independent director may be designated as lead independent director without any relationship with CEO or management that compromises his or her ability to act independently. Where there is no separation of chairman and CEO position a presiding director position could be established. Duties of non-CEO chairman whether he is an independent director or not, the lead independent director and presiding director should be articulated.

Non CEO Chairman:


The duties of non- CEO Chairman according to CPTPE should include
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i.

Presiding at board meeting and at meetings of non management directors,

ii. iii. iv. v.

Approval over information sent to the board, Deciding board meeting agenda, Serving as principal liaison to the independent directors and Setting meeting schedules.

Duties of Lead Independent Director (CPTPE):


i. ii. iii. Chairing meeting of the non-management directors, Serving as principal liaison to the independent directors, Working with the non CEO Chairman to finalize flow to the board meeting agenda and meeting schedules.

Duties of presiding Director (CPTPE):


i. ii. iii. iv. v. vi. Preside at board meetings in the absence of chairman, Presiding at executive sessions of the non management directors, Serving as the principal liaison to the independent directors, Approve information to be sent to the board, Approve agenda for board meeting, Set meeting schedules. A non CEO Chairman who is not an independent director should not be a member of the management team and should not report to the CEO. The non management directors should have regular, frequent meetings without the CEO or other directors who are members of management present.

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Board and Shareholders:

The regulatory efforts and operation of market forces have let out this relationship in the third anchor of corporate governance. By and large shareholders do not know what the directors are doing and directors do not know what the shareholders want. Board members are elected by shareholders to serve as their agents but in practice shareholders have not exerted much influence over directors. The exchange of information between the two anchors is poor and directors are not accountable to shareholders. There is no way for shareholders to know whether the directors have acted in there is no efficient mechanism to nominate or even endorse director candidates. Shareholders on their part are quite apathetic and mute. Their communication is limited to formal proxy votes which historically ratified boards wishes. Shareholders have access to no mechanism through which to effect changes, except for calling an extraordinary general body meeting. The relationship between the two anchors, board and shareholders is not linked together
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in any manner or by any method except for the provision of annual general meeting. The absence of the link has created an imbalance in the governance mechanism. It has also encouraged a closer relationship and stronger link between board and management who fill the void. Directors can be effective in taking care of shareholder interests of we set up a strong structure of board meetings and enfranchisement of shareholders. Three steps mooted in this connection are record of voting at Board meetings, letting shareholders put up as well as elect a director on their behalf and make resolutions passed at shareholders meeting binding.

Transparency:

If the individual directors votes on corporate resolutions in key corporate proxy statements are recorded, the directors become accountable to shareholders. When people are held recount able for their actions as individuals rather than as a group they tend to weigh their choices more carefully. Directors would have greater incentive to air their views if individual votes are published. Such accumulated information to create director score boards would supplement board selfevaluation.

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Election of Directors:

While the shareholders in theory have the right to attend meetings and participate in the election of directors of the Board, the cast majority of director elections are uncontested. The only method is open to shareholders is to mount a proxy fight which entails publishing and mailing their own list of proposed directors to shareholders escalating the contest in effect into a fight for control of the firm. The campaign has to be has to be financed by shareholders out of their out of their pockets whereas the companys own proxy materials sent to shareholders before annual meetings company cost/or shareholders money. To enfranchise the shareholders and democratize election of company directors shareholders may be allowed to put their won candidates on the Companys proxy material. This would avoid the expense and stark choices of a proxy fight. In US has proposed the grant of right to shareholders under special circumstances, such as opposition to companys proxy by withholding votes, and duration of share ownership for 3-5 years. The proposal has been opposed on the ground that it would create confusion in elections when more than one candidate contests a board seat.

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Chapter 5 Corporate Social Responsibilities

Stakeholders Sustainable governance Social contract between business and society The Global Compact (2000) An Overview

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Introduction:
The concept of corporate social responsibilities is not new. The history of corporate activity shows that business have always encompassed the notion of broader obligations to the communities in which they operate. Companies have recognized the value of enlightened self interest responding to their own specific circumstances. A project on corporate responsibilities was launched in 1969 by Ralph Nadir and several other lawyers to change the purpose of corporation. In Naders view the corporation is to be transformed from the means of maximizing investor wealth to a vehicle for using a private wealth to redress social ills. Stakeholders theory embodies many aspects of the theory of corporate social responsibility. On the other hand, value based management holds that the social mission of corporation is to make as much money as possible for its owners while confirming the rules of society and let shareholders, employees and customers undertake their own efforts. In practice corporations that wish to maximize shareholder value generally find in their interest to devote corporate resources to constituencies such as employees, customer, suppliers and local communities. CSR concerns have shifted from local and particular to that of global and generic. This results in a new focus on the environment, human and labor practices.

Stakeholders:
The issue of how responsible companies should be to those other than their shareholders have come to the fore when entire communities are adversely affected when companies fail. The approach of Anglo-Saxon shareholder capitalism is that companies should exclusive pursue the interests of shareholders; and the other, stakeholder capitalism which acknowledges that companies are also responsible to their workers and local communities often by having representatives
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from both on their boards. The issue have further cofounded by anti-globalization view which faults multinationals for exploiting third world workers, and pollute the environment. It has to be noted that over half of the worlds 100 largest economic entities are transnational corporations not nations. There is demand that companies should be made to behave more responsibly and that government use companies to implement their social policy: limit working hours, promote social harmony and clean up environment. In practice Anglo-Saxon companies have taken on social obligations without the prompting of governments. Family dominated companies in India are also involved in development of institutions of higher learning, healthcare and places of worship. The robber-barons in USA have built much of the educational and health infrastructure, company towns and introduced health care benefits. A distinction should therefore be made between the demands of the capital market and practices of the companies. Companies believe that taking care of their workers and other in the society is in the long term interest of the company. Such a policy builds trust which gives benefits of doubt when dealing with customers, workers and even regulators. It also gives an edge in attracting employees and customers. Companies are not in business of building fairer societies. That is the job of government.

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Sustainable governance:

Superior corporate governance is rewarded by a premium in the market place. investors are willing to pay more in emerging markets for the shares of companies that had implemented high standards of corporate governance. Companies have to build on understanding of challenges of sustainability beginning with climate but including global income disparity, water usage, biodiversity, labor practice and human rights into their long term strategies. Otherwise they will be viewed as a poor or risk. Those who fail to act on concerns embodied in sustainable governance will be plagued by doubts and questions from NGOs, government, customer and major investors. Companies that fails to understand sustainability, to pursue fair and equitable solutions to climate change and to anticipate what lies ahead will be caught off guard by unexpected economic risk, environmental hazards and social demands. Sustainable governance is not an option. To restore confidence, to build the structure of trust, companies must commit themselves to openness, transparency and fairness. They must do this through innovations in listing exchanges, governance reforms and disclosure through the Global Reporting Initiative (GRI). GRI released its sustainability reporting guidelines in August 2002 is expected to foster transparency and accountability of corporate activities beyond financial matters.
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Social contract between business and society:

The objective of shareholder value maximization has however to be as a part of the social contract between business and society. This contract has obligations, opportunity and mutual advantage for both sides according to Davis of McKinney and company. Otherwise it could lead managers to focus exclusively in improving the short term performance of their business neglecting important long term opportunities and issues such as trust of customers, investment in innovation and other growth prospects. Maximization of shareholder value also obscure questions of ethics and legitimacy. Multinational enterprises need to tackle such issues for reasons of integrity and enlightened self interest. The fundamental basis of social contract between business and society is the efficient provision of goods and services that society wants. Business has to restate and reinforce their own social contracts to secure for the long term the shareholders investment.

The new approach calls for:


Introduction of explicit processes to make sure that social issues and emerging social forces are part of overall strategic planning.

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Establishment of ever higher standards of integrity and transparency and active involvement in debates on social issues that shape their business context. The ultimate purpose of business is the efficient provision of goods and services that society wants. It is the fundamental basis of the contract between business and society. Such a noble purpose is not only more motivating but also beneficial shareholder value over long term. Shareholder value creation or profits are measure and reward of efficient provision of goods. Restating and reinforcing the business own social contract will also secure for the long term the shareholders investment

The Global Compact (2000):


The global compact, United Nations global compact programme launched by UN in 2000 calls on companies to embrace nine principles in the areas of human rights, labor standards and environment. The Global Compact is a value-based platform designed to promote institutional learning. It is utilizes the power of transparency designed to promote and dialogue to identify and disseminate good practices based on universal principles. The nine principles are drawn from the Universal Declaration of Human Rights, the International Labor Organizations Fundamental Principles on Rights at work and the Rio principles on Environment and Development. According to these principles, business should: Support

and respect the protection of internationally

proclaimed human rights: corporate leadership in human rights is good


for the community and for business. The benefits of responsible engagement for business include a greater chance of a stable and harmonious atmosphere

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in which to do business, and a better understanding of the opportunities and problems of the social context. Further, the benefits impact from ill thoughtthrough business initiatives. Uphold the freedom of association and the effective recognition

of the right to collective bargaining: Freedom of association and the


exercise of collective bargaining provide opportunities for constructive rather than confrontational dialogue which harness energy to focus on solutions that result in benefits to the enterprise, its stakeholders, and the society at large. Support the elimination of all forms of forced and compulsory

labor:
Forced labor robs societies of the opportunities to apply and develop human resources for the labor markets of today and develop the skills in education of children for the labor markets of tomorrow. Support the effective abolition of child labor: Child labor results in scores of under-skilled, unqualified workers and jeopardizes future skills improvements in the workforce. Children who do not complete their primary education are likely to remain illiterate and will not acquire the skills needed to get a job and contribute to the development of a modern economy. Eliminate discrimination in respect of employment and

occupation:
Discrimination in employment and occupation restricts the available pool of workers and skills, and isolates an employer from the wider community.

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Non-discriminatory practices help ensure that the best-qualified person fills the job. Support a precautionary approach to environmental

challenges:
It is more cost-effective to take early actions to ensure that irreversible environmental damage does not occur. This requires developing a lifecycle approach to business activities to manage the uncertainty and ensure transparency

An Overview:
Concerning both public owned and private owned industrial/business both have one thing in common: the capital is provided by one group, and business is managed by another group of professionals. This means that the roles are divided between two bodies. In case of public owned enterprise, equity is provided by the state/government and management of the enterprise is in the hands of the managers who are professionals. Managers are responsible for making the best use of resources of enterprise in furtherance of its objectives. Effective management of the enterprise is inevitable for two reasons: (a) to achieve the economic goals on year to year basis and (b) to attract stable and low cost of capital for investment on long term basis. The owners of the capital are interested in appreciation in the value of equity provided. For this purpose, the owners of the capital depend upon the framework and the structure, i.e., the board of directors, of the enterprise to monitor the performance of the managers so that managers are able to add value to the capital invested. There are some illustrations of PSUs like Steel Authority of India Ltd. (SAIL), NTPC and others where the union government is the major equity
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shareholder with private individual ownership of shares. Likewise, in Tata Steel Company and Tata Motors (Telco), there are financial institutions, banks, staff etc., who jointly constitute the major shareholders along with Tata Sons. In these enterprises, management is in the hands of the professional mangers who are engaged to manage the company, in in furtherance of organizational goals. Corporate governance has received utmost attention since the early nineties in India and the western nations, including the US. The increase in the attention is due to the multitude of factors but the main one is the anxiety of the enterprises concerned to put up a clear image of the company in the society and to restore confidence in the viability of the company in the society and to keep the enterprise free from any legal implications. The board of directors of the enterprise or in the case of two-tier system, the supervisory board are the vital organs of the corporate structure. The board is designed to hold the management accountable to the providers of the equity for harnessing the resources of the organization on the best possible manner. The beginning of new millennium has witnessed the global movement on the good governance which resulted in a number of corporate guidelines/codes on the best practices on governance. The global movement has underlined the significance that the world attaches to the corporate governance and the role of board of directors in monitoring governance of management activities. Effective governance is contingent upon security regulations, market trends, company law of country, audit and account rules, legal atmosphere, etc. An understanding of these rules in different countries is inevitable if one wants to understand their practices on corporate governance. For example, in some

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instances, the governance code with listing and / or has legally mandatory rules for disclosure, as essential requirement. The Cadbury Report of the UK, Dey report of Canada and guideline issued by the board of directors of GE, US, have served as a reference and basis for development of guideline on corporate governance. Guidelines on the subject have also been issued by stock exchanges and other bodies like institutional investors, corporate managers and association of directors, which are voluntary. Mostly these guidelines are not Mandatory, e.g., the companies listed on the Toronto and London stock exchanges are not obliged to observe the recommendations of the Dey report or Cadbury report. But such companies have, of necessity, to follow the disclosure requirements.

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Chapter -6 A STUDY OF CORPORATE GOVERNANCE INBANKS

Introduction Main Indicator Of Corporate Governance Unethical Business Practices Sources

Conference on Corporate Governance of Banks in Eurasia, London.

Introduction:
Globally, Corporate Governance guidelines and best practices have evolved over a period of time. In the United States of America as well as India in the late 1800 and the early 1900s there were only closely held family owned corporate and the
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concept of public limited companies was non-existent. The owners made strategic decisions and bore the entire consequences-positive or negative. However, by the 1930s increasing number of companies went public and corporate ownership was dispersed across a large number of individuals and issues of Accountability, Transparency and control were raised by these shareholders in the Annual meeting of the shareholders. The years subsequently saw the strengthening of the rights of the shareholders and the stakeholders which gained momentum only in the early nineties. The Cadbury Committee report was a landmark effort from UK in 1992 followed by vienot report in France in 1995. The confederation of British Industry in January 1995 set up theGreenbury committee to recommend a code of governance for the UK Industries followed by the Hampel committee appointed by the London Stock Exchange (LSE). The 30 member Organization for Economic Cooperation and Development (OECD) in 1999 published the general principles of corporate Governance. However, the Sarbanes Oxley Act 2002 of US brought in sweeping changes in financial reporting. In India, the confederation of Indian Industry (CII) tools the lead and framed the code of Corporate Governance in 1998. The Securities and Exchange Board of India (SEBI) appointed the Kumaramangalam Birla Committee and its recommendations were accepted in 1999 and enshrined in the Clause 49 of the Listing Agreement of the stock exchange. The Department of company affairs appointed the Naresh Chandra committee in 2002, to repost on the relationship between the auditors and their clients. Then the SEBI appointed Narayana Murthy committee recommendation were also incorporated in to the revised Clause 49 in

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2006. Further, the Corporate Governance Rating by agencies like CRISIL and ICRA are now used to benchmark companies on Corporate Governance practices.

Main Indicator Of Corporate Governance:


Existence of good corporate governance: It is a primary and most fundamental indicator of good corporate governance. The good governance code should be based on widely accepted views of government, Business Association, social organization or stakeholders. Moreover the existence of the code should be used as a benchmark to measure the companys actual governance. The role, Responsibility and competence of the board:There has to be a system that ensures that the board is empowered, informed, competent and effective on a continuous basis. The board must provide the stewardship to the company to take up the role and responsibility in running the company efficiently and effectively. Involvement of Non-Executive or independent directors: These directors are appointed in the boards to provide independent, objective and professional opinion in the board meetings on matters of importance and concern to company. All the governance codes recommend a large proportion of Independent Directors on the company boards and much depends on how they are appointed, by whom they are influenced and what financial interest they have in the company. Dissemination of material Information:To avoid insider trading the timely and adequate dissemination of material information to the public is sign of good governance.

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Distinction between the role of the Responsibilities of the Board and Management: Governance standard of the company is basically judged from the split between the role and responsibilities of the board and management. The board is expected to steward the company, set the strategic objectives, provide guidance and judgment independent of management, and exercise control over the company, remaining all along accountable to the shareholders in particular and the stakeholders in general. Disclosure of Remuneration Package: Shareholders, as the owners of the company have full right to know about the compensation policies and packages of the directors as well as the executive. Extraordinarily high remuneration packages drain the companys resources at the expense of shareholders. Specialized Board Committees: The quality of board increases if some key decision requiring specialized expertise are entrusted to various committees constituted by the board. Audit committee is very important to maintain accountability in the corporate system through supervising and monitoring of the system of the financial reporting. The specialized committee may handle such important matters as nomination of directors, accounting standards and procedures, audit system, reporting system, compensation of the company executive and the like.

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Unethical Business Practices:


The different unethical business practices include issues of Whistle Blowing, bribes, accepting gifts, Insider trading, conflicts of interest, window dressing etc. Globally these issue have been In the limelight under Sarbanes-Oxley Act 2002and nationally SEBI under clause 49 of the listing agreement has taken policy initiatives avoid the following: Whistle Blower protection: allow an employee to report illegal activities by those in position of authority in their company without any treat of backlash. Insider Trading: Using price sensitive information by a company employees or individuals in violation of the fiduciary relationship that exist with the company to make illegal profits in the transaction of the shares of that company. Prohibition of short selling of company shares:No employee or director should directly or indirectly sell any equity shares including derivatives of his company if he doesnt own the share and indulge in short selling. Bribes/ kickbacks: Corruption should be avoided strictly inside or outside the company, so that later company should not suffer from any huge losses which may turn in to scandal. Conflicts of interest: Avoidance of any situation that would lead to or tend to lead to any conflicts of interest between personal interest and the interest of the company, resulting in impairing the exercise of independent judgment. Window dressing: The deceptive practice of using accounting tricks to make companys balance sheet and income statement appear better than the

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reality and the deceptive practice of mutual funds to buy strong stocks before the year ending to make their holding look impressive. Funding of expense account/ Misappropriation of funds:Full, fair, accurate, timely understandable records of the finances without presenting false bills and incorrect accounts. KPMGs fraud survey 2002 finds that majority of cash losses occurs due to misappropriation, forged document, expense accounts, diversion of funds, kickbacks , secret commission and false and misleading information. Misuse of company assets: Using company property, asset or resources for the benefits of the employee, his/ her relatives or associates / friend is prohibited as the same can be used only for legitimate business purpose only. Antitrust/ Monopoly activity: Avoid all anti-competitive and unlawful business practices and discourage corrupt and dishonest means. Avoid enticing away key employees of competitors to lessen competition, price fixing, hoarding and black marketing etc. Hacking: A software designer who illegally enters encrypted sites and accounts of others through modified software and hardware is highly unethical. Misuse of confidential information: Directors and employees must protect the confidential information entrusted to them by the company, its customers and all business associates.

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Sources:
Market Initiative- CRISIL, a leading credit rating agency developed a yardstick which help measure the Governance & Value Creation Rating (GVC) of companies including the Banks. The assessment is made on the basis of the following Governance Process: The Treatment of shareholders, transparency & disclosures, composition and functioning of Board Wealth management: The levels of wealth creation and distribution among stakeholders and the future wealth creation capacity, wealth being utilized for the ultimate good of all stake holders in the medium to long term. The wealth should be shared proportionately and equitably among the shareholders without resorting to disproportionate sharing methods like ESOP and Sweat equity. Regulatory Initiative: All listed companies including banks have to adhere to the listing agreement, which specifies: Audit committee: Should include qualified and Independent Directors who are finance literate and the chairman should be well versed in Management and Accounts. The appointment and removal of the external auditors should be decided by them to endure that accounting norms are strictly followed. Composition of the board: If Non-executive chairman then 1/3rd Board of Directors should be Independent otherwise of the Board members should be Non-Executive, Independent Directors. The shareholders should approve the compensation paid to the Non-Executive Directors. Code of conduct: the BOD and the senior management should follow this code.
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Legislature Initiative: the companies Act 1956 alone can provide the statutory backing to the corporate governance standards, which require a bill to be passed in the parliament. There are two areas that need the necessary legal support to ensure compliance: Audit process: A disciplinary mechanism is needed to check the performance of auditors. Proper process to be laid down for appointment and qualification of auditors

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Chapter -7 CORPORATE GOVERNANCE IN INDIAN BANKING SECTOR

Introduction Measures taken by Banks and RBI for implementation of best practices Needs for corporate governance in banks

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Introduction:
Corporate governance of banking institutions is an important issue in the financial systems of developing economies and the widespread banking reforms. Given the important financial intermediation role of banks in and economy, their high degree of sensitivity to potential difficulties arising from ineffective corporate governance and the need to safeguard depositors funds, corporate governance for banking organizations is of great importance to the international financial system and merits targeted supervisory guidance. The Indian economy has seen wide ranging reforms for over a decade now, covering industry, trade, taxation, external sector, banking and financial markets. This has strengthened the fundamentals of the Indian economy and transformed the operating environment for banks and financial institutions in the country. Banking as a sector has been unique and the interests of other stakeholders appear more important to it than in the case of non-banking and non-finance organizations. The corporate governance of banks in developing economies is important for several reasons. First, banks have an overwhelmingly dominant position in developing-economy financial systems, and are extremely important engines growth. Second, as financial markets are usually

underdeveloped, banks in developing economies are typically the most important source of finance for the majority of firms. Third, as well as providing a generally accepted means of payment, banks in developing countries are usually the main depository for the economys saving. Fourth, many developing economies have recently liberalized their banking systems through privatization and reducing the role of economic regulation.

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Measures taken by Banks and RBI for implementation of best practices:

Prudential norms in terms of income recognition, asset classification, and capital adequacy have been well assimilated by Indian banking system. In keeping with the international best practices, starting 31 march2004, banks have adopted 90 days norm for classification of NPAs. Also, norms governing provisioning requirements in respect of doubtful assets have been made more stringent in a phased manner. Capital adequacy: All the Indian banks barring one today are well above the stipulated benchmark of 9 percent and remaining in state of preparedness to achieve the best standards of CRAR as soon as the new Basel 2 norms are made operational. On the income recognition front, there is complete uniformity now in the banking industry and the system therefore ensure responsibility and accountability on the part of the management in proper accounting of income as well as loan impairment. ALM and Risk Management Practices- at the initiative of the regulators, banks were quickly required to address the need for asset liability management followed
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by risk management practices. Both these are critical areas for an effective oversight by the board and the senior management which are implemented by the Indian banking system on tight frame and the implementation review by RBI. These steps have enabled banks to understand, measure and anticipate the impact of the interest rate risk and liquidity risk, which is deregulated environment is gaining importance. RBI has taken various steps furthering corporate governance in Indian banking system. These can be broadly classified in to the three categories: (a) transparency (b) off-site surveillance (c) Prompt corrective action. Transparency and disclosure standards are also important constituents of a sound corporate governance mechanism. Transparency and accounting standards in India have been enhanced to align with international best practices. Prompt corrective action has been adopted by RBI as a part of core principles for effective banking supervision. As against a single trigger point based on capital adequacy normally adopted by many countries, Reserve bank in keeping with Indian conditions have set to more trigger points namely non performing asset(NPA) and Return on asset(ROA) as proxies for asset quality and profitability. These trigger points will enable the invention of regulator through a set mandatory action to stem further deterioration in the health of banks showing signs of weakness. The coperate governance of banks in developing economics is severally affected by political consideration. Firstly, given the trend towards privatization of government owned banks in developing economies, there is need for the managers of such banks to be

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granted autonomy and be gradually introduced to the corporate governance practices of the private sector in prior to divestment.

Needs for corporate governance in banks:


If we examine the need for improving corporate governance in bank two reasons stand out: 1. Banks exit because they are willing to take on and manage risk. Besides, with the rapid pace of financial innovation and globalization, the face of banking business is undergoing a sea-change. Banking business is becoming more complex and diversified. Risk taking and management in a less regulated competitive market will have to be done in such a way that investors confidence is not eroded. 2. Even in a regulated set-up as it was in India prior to 1991, some big bank in public sector and a few in the private sector had incurred substantial losses. This along with massive failure of non-banking financial companies (NBFFs), had adversely impacted investors confidence. 3. Moreover, protecting the interest of depositors became a matter of paramount importance to banks. In other corporate, this is not and need not be so for two reasons: The depositors collectively entrust a very large sum of their hard-earned money to the care of the banks. It s found that in India, the depositors contributions was well over 15.5 times the shareholders stake in banks as early as in March 2001. This is bound to be much more now. The depositors are very large in numbers and are scattered and have a little say in the administration of banks. In other corporate, big lenders do exercise the

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right to direct the management. In any case, the lenders stake in them might not exceed 2 or 3 times the owners stake. 4. Banks deal in peoples fund and should, therefore act as trustees of the depositors. Regulators the world over as recognized the vulnerability of the depositors to the whims of managerial misadventures in banks and, therefore has been regulating more tightly than other corporate. To sum up, the objective of governance in banks should first be protection of depositors interest and then be to optimize the shareholders interests. All other considerations would fall in place once this two are achieved.

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Chapter -8 CASE STUDY ON SATYAM SCANDAL

Satyam Computers services limited was a consulting and an Information Technology (IT) services company founded by Mr. Ramalingam Raju in 1988. It was Indias fourth largest company in Indias IT industry, offering a variety of IT services to many types of businesses. Its networks spanned from 46 countries, across 6 continents and employing over 20,000 IT professionals. On 7 th January 2009, Satyam scandal was publicly announced & Mr. Ramalingam confessed and notified SEBI of having falsified the account. Raju confessed that Satyams balance sheet of 30 September 2008 contained:

Inflated figures for cash and bank balances of Rs 5,040 crores. An accrued interest of Rs. 376 crores which was non-existent.
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An understated liability of Rs.1,230 croreson account of funds which were arranged by himself. An overstated debtors position of Rs. 490 crores. The letter by B RamalingaRaju where he confessed of inflating his companys revenues contained the following statements: It has attained unmanageable proportions as the size of company operations grew significantly in the September quarter of 2008 and official reserves of Rs. 8,392 crores. As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. It was like riding a tiger, not knowing how to get off without being eaten.

The Scandal: The scandal all came to light with a successful effort on the part of investors to prevent an attempt by the minority shareholding promoters to use the firms cash reserves to buy two companies owned by them i.e. Maytas Properties and Maytas Infra. As a result, this aborted an attempt of expansion on Satyams part, which in turn led to a collapse in price of companys stock following with a shocking confession by Raju. The truth was its promoters had decided to inflate the revenue and profit figures of Satyam thereby manipulating their balance sheet consisting non-existent assets, cash reserves and liabilities.

The probable reasons: Deriving high stock values would allow the promoters to enjoy benefits allowing them to buy real wealth outside the company and thereby giving them opportunity

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to derive money to acquire large stakes in other firms on another hand. After the scandal, on 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. On 5th February 2009, the six-member board appointed by the Government of India named A. S. Murthy as the new CEO of the firm with immediate effect. The board consisted of: 1) 2) 3) Banker Deepak Parekh. IT expert KiranKarnik. Former SEBI member C Achuthan S Balakrishnan of Life Insurance

Corporation. 4) 5) Tarun Das, chief mentor of the Confederation of Indian Industry and T N Manoharan, former President of the Institute of Chartered Accountants

of India.

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CONCLUSION

Finally I can conclude that compliance of corporate governance is high among the Indian banks, however the composition of board should be effective. From my point of view the awards and the rewards for the corporate initiative among Indian banks both public and private, can create the right momentum to change the mind set of banks and ensure that the international norms like Basel are followed in both letter and spirit, resulting in improved transparency, accountability and competitive performance in the economy, that could help derive fully the socio economic benefits of good corporate governance. Banking is clearly a very special sub set of corporate governance with much of its management obligations enshrined in law or regulatory codes. The corporate governance of banks has an important role to play in assisting supervisory institution to perform their task, allowing supervisors to have a working relation with bank management, rather than adversarial one. With the element of good corporate governance, appropriate internal control system, better credit risk management, focus on newly emerging business like micro finance, better customer service and proactive policies, banks will definitely be able to grapple with these challenges and convert them in to opportunities.

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So corporate governance is not only useful in banks but also useful in companies, industries, firms, institutions etc. so as to have good relations with the customers and to run their businesses in successive manner considering future prospect.

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RECOMMENDATIONS
It is also relevant to note that governance or lack of it has affected all agencies of government. We have to set right all governance, not just corporate governance. In todays world a company cannot run to achieve results in a cost effective manner and stay competitive unless we fix governance problem wherever they exist. What is at stake not only the integrity of market mechanism but the survival of democracy in India. Corporate houses including banks are also taking measure to highlight the importance of corporate governance and ethical business practices among the future managers in reputed management institutes like Larsen and Turbo (L&T) Ltd. has endowed a chair for business at the management center for human values at IIMC. The government bodies honor the select corporate for their exemplary initiative in areas of corporate governance and ethical business practices and many more awards and accolades should be given. Finally I suggest that scandals like satyam case which became the major economic downturn and finally ended by arresting mr. Raju for his fraud against the company, should not take place again due to which corporate governance may suffer from negative effects.

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BIBLOGRAPHY

BOOKS: Corporate governance-(Authors) H. R.

Machiraju,Keshoprasad,N Gopalsamy

WEBSITES: www.corporate governance.com

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