Regulatory Compliance & Corporate Governance

ACKNOWLEDGEMENTS
The Group would like to convey their sincere thanks to Professor for his unstinted support & guidance without which it would not have been possible for us to carry out the study. His valuable inputs on the subject Legal Aspects of Management and deliberations in the class were knowledge enriching & facilitated in completing the project.

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Contents
Introduction .................................................................................................. 4 What is Corporate Governance? ................................................................. 4 Structure of Corporate Governance ........................................................... 6 The Evolution of Corporate Governance.................................................... 9 International Corporate Governance ........................................................ 14 Corporate Governance in India ................................................................. 18 Systemic Problem of Corporate Governance .......................................... 19 Corporate Governance: Regulatory Compliance ................................... 21 Best Corporate Experiences in Corporate Governance.......................... 24 Nokia...................................................................................................... 24 Dabur ..................................................................................................... 24 ONGC..................................................................................................... 25 Royal Philips Electronics..................................................................... 26 Tata Sons .............................................................................................. 27 Toyota.................................................................................................... 29 Conclusion .................................................................................................. 31

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Introduction
A countrys growth and progress; its sustainability and consistency solely depend on the systematic approach and practice of good governance. Good Governance can help to create a healthy and effective development of the economy, which in turn will provide equity and benefits to its shareholders. Corporate Governance has evolved and grown significantly as a burning issue in the last decade. Numerous countries have issued codes of Corporate Governance and the recommendations of these codes symbolize Good Governance in the Corporations undoubted contribute towards increased transparency, morality, ethics and disclosure. <Swami (Dr.) Parthasarathy, Corporate Governance Principles, Mechanisms & Practice, Page 3-4, Year- 2010, Publisher- Biztantra, New Delhi>

What is Corporate Governance?

Corporate Governance is the set of processes, customs, policies, laws and institutions affecting the way a Corporation is directed or controlled. Corporate Governance is important for the economic health of Corporations and the Society in general. The key elements of Corporate Governance principles include honesty, ethics, transparency, integrity, openness, responsibility, accountability, mutual respect and commitment to the Organisation. <Swami (Dr.) Parthasarathy, Corporate Governance Principles, Mechanisms & Practice, Page 3-4, Year- 2010, Publisher- Biztantra, New Delhi>

Corporate governance is all about the policies, procedures and rules governing the relationships between the shareholders, stakeholders, Directors and Managers in a company, as defined by the applicable laws, the Corporate charter, the Companys bylaws, and formal policies. Primarily it is about managing top management, building in checks and balances to ensure that the senior executives pursue strategies that are in accordance with the corporate mission. It consists of a set of processes, customs, policies, laws and institutions affecting the way of a corporation is directed, administered or controlled. Corporate governance governs the relationship among the many players involved (the stakeholders) and the goals for which the corporation is governed. Page|4 of 31

<www.scu.edu/ethics/practicing/focusareas/.../ItiBose.pdf, 22.11.2011, 10:19 PM> The Integrity of corporations, financial institutions and markets is particularly central to the health of economies & their stability. Corporate Governance refers to the processes, mechanism, principles and structure by which the business & affairs of the company are directed, managed and governed effectively. The ultimate goal is to enhance long term shareholder value by improving corporate governance and accountability. <Swami (Dr.) Parthasarathy, Corporate Governance Principles, Mechanisms & Practice, Page 3-4, Year- 2010, Publisher- Biztantra, New Delhi> J.Wolfensohn, the then president of the World Bank has opined that corporate governance is about promoting corporate fairness, transparency and accountability. <Quoted in Financial Times, June 21, 1999> <http://heritageinstitute.com/governance/definitions.htm, 01.12.2011, 8:01 AM> Corporate Governance is a system by which companies are directed and controlled. The objectives are Protecting the long term interest and enhancing the values of shareholders and other stakeholders (viz. customers, employees, creditors, bankers, regulators and society at large) Harmonizing rights & interest of shareholders and stakeholders by continuous exercise of striking balance. Reducing the risks normally faced by the company/ organization. Responsibility to introduce and effectively implement Corporate Governance is exclusively of Board of Directors in a manner that it becomes way of organizational life and not merely written rules or regulations or code of ethics. Ethics & Transparency are cardinals of Corporate Governance.

<http://cab.org.in/Lists/Knowledge%20Bank/Attachments/114/Corporate%20Governance. ppt, 12.12.2011, 8:00 PM>

Governance, Good Governance & Corporate Governance

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Governance Governance is not merely about ownership and control. Even an owner has to learn to govern. Good Governance Good governance is about simplicity in processes combined with checks and balances, clarity of roles, assignment of responsibilities and obligation, all of which would lead to enhanced accountability, wherever it is due. Corporate Governance Corporate Governance encompasses commitment to values and to ethical business conduct to maximise shareholder values on a sustainable basis, while ensuring fairness to all stakeholders. Corporate Governance is a way of life and not a set of rules. It is a way of life that necessitates taking into account the shareholders interest in every business decision. <www.mcx-sx.com/downloads/Corporate_Governance.pdf, 18.11.2011, 9:21 PM>

Poor Governance versus Good Corporate Governance

Poor governance Undermines integrity of corporations and discourages the use of public markets as a means to intermediate savings Particularly the areas of transparency and disclosure have been a major factor behind instability in the financial markets across the globe Good corporate governance Essential pre-requisite for the integrity and credibility of capital market players Contributes to the development of a vibrant economy and robust capital markets

<http://www.nfcgindia.org/T.%20V.%20Mohandas%20Pai.ppt, 25.11.2011, 7:34 AM>

Structure Governance
The

of

Corporate
Board of Directors

Managers

Corporate

Governance

structure specifies the relations and the distribution of rights and

Shareholders

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responsibilities among primarily three groups of participants i.e. The Board of Directors Managers & Shareholders

The system spells out the rules & procedures for making decisions on Corporate Affairs, provides the structure through which the company objectives are set, as well as the means of attaining and monitoring the performance of those objectives. Corporate Governance helps in ensuring conditions whereby the Organisations Directors and Managers act in the larger interests of the Organisation and its shareholders and to ensure the means by which managers are held accountable to capital providers for use of assets. <Swami (Dr.) Parthasarathy, Corporate Governance Principles, Mechanisms & Practice,Year- 2010, Publisher- Biztantra, New Delhi>

www.scu.edu/ethics/practicing/focusareas/.../ItiBose.pdf, 12.12.2011, 10:19 pm

Performance Expectations of Stakeholders

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<Swami (Dr.) Parthasarathy, Corporate Governance Principles, Mechanisms & Practice, Page 22, Year- 2010, Publisher- Biztantra, New Delhi>

Corporate Governance Framework

<http://www.iirmworld.org.in/ppt/yrkreddy.pps#383,4,Slide

<Corporate

Governance

Framework by Nadereh Chamlou, Magdi Iskande>, 13.12.2011, 6:20 AM>

4Ps of Corporate Governance

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<http://lcgc.lifeforeveryone.com/, 26.11.2011, 08:30 AM

Corporate Governance can also be explained on the basis of 4Ps (People, Processes & Performance). Business cannot run with only profits, but there must be recognition for human aspects too. This is possible by Corporate Governance. Corporate Governance has the integrated framework, where the people are formally either trained or helped to develop to work for a definite and defined purpose in applying the systematic processes consistently to give constant growth by better performance. <Swami (Dr.) Parthasarathy, Corporate Governance Principles, Mechanisms & Practice, Page 27-32, Year- 2010, Publisher- Biztantra, New Delhi>

The Evolution of Corporate Governance

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Since the mid-1990s, several corporate governance guidelines and regulations have been prepared in different parts of the world. Some of the guidelines are: Cadbury Committee Report (1992) CalPERS- Global Corporate Governance Principles (1996) Market Specific Principles- UK and France (1997) Market Specific Principles- Japan and Germany (1997) Core Principles and Guidelines- USA (April 1998) TIAA-CREF- Policy Statement on Corporate Governance (September 1997) Business Roundtable- Statement on Corporate Governance (September 1997) Hampel Report on Corporate Governance- UK (January 1998) The Sarbanes-Oxley Act USA (August 2002) The Higgs Report- UK (January 2003)

<www.nfcgindia.org/library/cgitp.pdf, 20.11.2011, 09:53 AM> The evolution of the corporate governance guidelines is elaborated below:Cadbury Report, United Kingdom 1995 The objective of the Cadbury committee was to investigate how large public companies should adopt corporate governance guidelines with a focus on the procedures of financial report production and the role of the accounting profession. Issues included the role of the board of directors, standard s of financial reporting, accountability of the auditors and directors pay. The Committee Aimed to improve information to shareholders, reinforce self-regulation and strengthen auditor independence. Produced the Cadbury Code of Best Practice. Recommended that: (i) The boards of Directors should report on the effectiveness of companies systems of internal control. (ii) The directors service contracts should not exceed three years without approval by the shareholders. (iii) Each listed company should establish an audit committee of at least three nonexecutive directors. Page|10 of 31

<Swami (Dr.) Parthasarathy, Corporate Governance Principles, Mechanisms & Practice, Page 195-197, Year- 2010, Publisher- Biztantra, New Delhi> <www.nfcgindia.org/pdf/corporate_governance_report.pdf, 12.12.2011, 10:15 PM> Greenbury Report, United Kingdom, 1995 The report dealt with the remuneration of executives and non-executives board members and recommended the setting up of a remuneration committee in each public company to determine remuneration packages for the board members. It also provided suggestions on the disclosure of remuneration and the setting up of remuneration policy and service contracts and compensation. The Committee Aimed to provide an answer to the general concerns about the accountability and level of directors. Argued against statutory control and for strengthening accountability by the proper allocation of responsibility for determining directors remuneration, the proper reporting to shareholders, and greater transparency in the process. Produced the Greenbury Code of best practice which was divided into four sections thus: i. Remuneration Committee ii. Disclosure iii. Remuneration Policy iv. Service contracts and compensation. <Swami (Dr.) Parthasarathy, Corporate Governance Principles, Mechanisms & Practice, Page 195-197, Year- 2010, Publisher- Biztantra, New Delhi> <www.nfcgindia.org/pdf/corporate_governance_report.pdf, 12.12.2011, 10:15 PM> Hampel Report, United Kingdom, 1998 Four major issues were discussed with practical guidelines offered; (a) the role of directors (b) directors compensation (c) the role of shareholders (d) accountability and audit. The Hampel Report Developed the Cadbury report. Produced the combined code. Recommended that:

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i. The auditor maintains and reviews all controls. ii. Companies that do not already have an internal audit function should free time to time review their need for one. iii. Introduced the combined code that consolidated recommendations of extant corporate governance reports(Cadbury and Greenbury) The Turnbull Committee It was set up by the ICAEW in 1999 to provide guidance to assist companies in implementing the requirement of the combined code relating to internal control. Provided guidance to assist companies in implementing the requirements of the combined code relating to internal control. Recommended that where companies do not have an internal audit function, the board should consider the need for carrying out an internal audit annually. Recommended that boards of directors confirm the existence of procedures for evaluating and managing key risks. <Swami (Dr.) Parthasarathy, Corporate Governance Principles, Mechanisms & Practice, Page 195-197, Year- 2010, Publisher- Biztantra, New Delhi> CII Voluntary Code of Corporate Governance, 1998 This was the first of the voluntarily evolved codes in India. Kumara Mangalam Birla Committee, India, 1999 The mandatory recommendations of the Kumar Mangalam committee include the constitution of Audit Committee and Remuneration Committee in all listed companies, appointment of one or more independent directors in them, recognition of the leadership role of the Chairman of a company, enforcement of Accounting Standards, the obligation to make more disclosures in annual financial reports, effective use of the power and influence of institutional shareholders, and so on. The Committee also recommended a few provisions, which are non- mandatory.

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