Corporate Governance- Corporate Governance: Meaning, Historical Perspective, Theoretical basis of CG, CG Mechanism, CG System, Good CG,Land mark in the emergence of CG: CG Committees, World Bank on CG, OECD Principle, Sarbanes, Oxley act-2002

CORPORATE GOVERNANCE
ARYA SCHOOL OF MANAGEMRENT & IT(ASMIT) , BBSR

CONCEPTUAL OVERVIEW CORPORATE
GOVERNANCE
Rashmi Ranan Pani!"ahi# Lecturer, Department of MBA/ MFC (Master of Finance and
Control), Education# Arya School of Manaement ! "#, Bhu$anes%ar, "ndia
ABSTRACT
Corporate o&ernance is a process that aims to allocate corporate resources in a manner that
ma'imi(es &alue for all sta)eholders * shareholders, in&estors, employees, customers, suppliers,
en&ironment and the community at lare and holds those at the helms to account $y e&aluatin
their decisions on transparency, inclusi&ity, e+uity and responsi$ility, #he -orld Ban) defines
o&ernance as the exercise of political authority and the use of institutional resources to
manage society's problems and affairs. Corporate o&ernance is the set of processes, customs,
policies, la%s, and institutions affectin the %ay a corporation (or company) is directed,
administered or controlled, Corporate o&ernance also includes the relationships amon the
many sta)eholders in&ol&ed and the oals for %hich the corporation is o&erned, "n
contemporary $usiness corporations, the main e'ternal sta)eholder roups are shareholders, de$t
holders, trade creditors, suppliers, customers and communities affected by the corporation's activities.
Internal stakeholders are the board of directors, executives, and other employees. This paper
highlighted the points on corporate o&ernance. meanin, historical perspecti&e, issues in c,
theoretical $asis of c, c mechanism, c system, ood c , Land mar) in the emerence of C/.
C/ Committees, -orld Ban) on C/, 0ECD 1rinciple, Sar$anes, 0'ley act23443, "ndian
Committees and uidelines, C"" "nitiati&es,
Corporate Governance: Meaning, Historical Perspective, Issues in CG, Theoretical basis of
CG, CG Mechanism, CG System, Good CG
G$%&"nan'& is ###################################
A means %here$y society can $e sure that lare corporations are %ell2run institutions to
%hich in&estors and lenders can confidently commit their funds,
Corporate o&ernance are the policies, procedures and rules o&ernin the relationships
$et%een the shareholders, (sta)eholders), directors and manaers in a company, as defined
$y the applica$le la%s, the corporate charter, the company5s $yla%s, and formal policies,
1rimarily it is a$out manain top manaement, $uildin in chec)s and $alances to ensure
that the senior e'ecuti&es pursue strateies that are in accordance %ith the corporate mission,
Corporate o&ernance o&erns the relationship amon the many players in&ol&ed (the
sta)eholders) and the oals for %hich the corporation is o&erned,
Corporate o&ernance is the set of processes, customs, policies, la%s, and institutions affectin
the %ay a corporation (or company) is directed, administered or controlled, Corporate
o&ernance also includes the relationships amon the many sta)eholders in&ol&ed and the oals
for %hich the corporation is o&erned, #he principal sta)eholders are the shareholders,
6
MR( RASHMIRAN)AN PANIGRAHI, LECTURER IN FINANCE, ASMIT
manaement, and the $oard of directors, 0ther sta)eholders include employees, customers,
creditors, suppliers, reulators, and the community at lare,
Corporate o&ernance is a multi2faceted su$7ect, An important theme of corporate o&ernance is
to ensure the accounta$ility of certain indi&iduals in an orani(ation throuh mechanisms that
try to reduce or eliminate the principal2aent pro$lem,
Accountability
Fundamental Pillars of Corporate
Governance
Corporate
Governance
TransparencyResponsibility
Fairness
A''$*n+a,i-i+.
Clarifyin o&ernance roles ! responsi$ilities, and supportin &oluntary efforts to ensure the
alinment of manaerial and shareholder interests and monitorin $y the $oard of directors
capa$le of o$7ecti&ity and sound 7udment,
T"ans/a"&n'.
8e+uirin timely disclosure of ade+uate information concernin corporate financial
performance,,
!esponsibility": Ensurin that corporations comply %ith rele&ant la%s and reulations that
reflect the society5s &alues
#airness2. Ensurin the protection of shareholders5 rihts and the enforcea$ility of contracts
%ith ser&ice/resource pro&iders,
P"in'i/-&s $0 '$"/$"a+& !$%&"nan'&1
9ey elements of ood corporate o&ernance principles include honesty, trust and interity,
openness, performance orientation, responsi$ility and accounta$ility, mutual respect and
commitment to the orani(ation of importance is ho% directors and manaement de&elop a
model of o&ernance that alins the &alues of the corporate participants and then e&aluate this
model periodically for its effecti&eness, "n particular, senior e'ecuti&es should conduct
themsel&es honestly and ethically, especially concernin actual or apparent conflicts of interest,
and disclosure in financial reports,
C$mm$n-. a''&/+&2 /"in'i/-&s $0 '$"/$"a+& !$%&"nan'& in'-*2&1
Ri!h+s an2 &3*i+a,-& +"&a+m&n+ $0 sha"&h$-2&"s. 0rani(ations should respect the rihts
of shareholders and help shareholders to e'ercise those rihts, #hey can help shareholders
e'ercise their rihts $y effecti&ely communicatin information that is understanda$le and
accessi$le and encourain shareholders to participate in eneral meetins,
3
In+&"&s+s $0 $+h&" s+a4&h$-2&"s. 0rani(ations should reconi(e that they ha&e leal and
other o$liations to all leitimate sta)eholders,
R$-& an2 "&s/$nsi,i-i+i&s $0 +h& ,$a"2. #he $oard needs a rane of s)ills and
understandin to $e a$le to deal %ith &arious $usiness issues and ha&e the a$ility to re&ie%
and challene manaement performance, "t needs to $e of sufficient si(e and ha&e an
appropriate le&el of commitment to fulfill its responsi$ilities and duties, #here are issues
a$out the appropriate mi' of e'ecuti&e and non2e'ecuti&e directors,
In+&!"i+. an2 &+hi'a- ,&ha%i$*". Ethical and responsi$le decision ma)in is not only
important for pu$lic relations, $ut it is also a necessary element in ris) manaement and
a&oidin la%suits, 0rani(ations should de&elop a code of conduct for their directors and
e'ecuti&es that promotes ethical and responsi$le decision ma)in, "t is important to
understand, thouh, that reliance $y a company on the interity and ethics of indi&iduals is
$ound to e&entual failure, Because of this, many orani(ations esta$lish Compliance and
Ethics 1rorams to minimi(e the ris) that the firm steps outside of ethical and leal
$oundaries,
5is'-$s*"& an2 +"ans/a"&n'.. 0rani(ations should clarify and ma)e pu$licly )no%n the
roles and responsi$ilities of $oard and manaement to pro&ide shareholders %ith a le&el of
accounta$ility, #hey should also implement procedures to independently &erify and
safeuard the interity of the company:s financial reportin, Disclosure of material matters
concernin the orani(ation should $e timely and $alanced to ensure that all in&estors ha&e
access to clear, factual information,
THEORETICAL BASIS OF CORPORATE GOVERNANCE
#here are four $road theories to e'plain and elucidate corporate o&ernance, #hese are. (i)
Aency #heory (ii) Ste%ardship #heory (iii) Sta)eholder #heory and (i&) Socioloical #heory,
$ $G%&C' TH%(!'
#he fundamental theoretical $asis of corporate o&ernance is agency costs, A2am Smi+h had
i2&n+i0i&2 +h& a!&n'. /"$,-&m (manaerial nelience and profusion), Shareholders are the
o%ners and the principals too, #he manaement, the $oard, chosen $y the shareholders are the
aents, 1rincipals may %ant to carry out the o$7ecti&es of the company $ut the aents may not
+uite e'actly match the re+uirements, #he cost of the ;dissonance< caused $y the aency
pro$lem is the aency cost, #here are many a %ay throuh %hich the manaement o counter to
the o$7ecti&es of the shareholders such ma'imi(in shareholder returns, 0stentatious life styles
of directors, empire $uildin etc, are e'amples,
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#he A!&n'. pro$lem occurs %hen.
#he desires or a oal of the principal and aent conflict and it is difficult or e'pensi&e for the
principal to &erify that the aent has $eha&ed appropriately,
E6am/-&1 0&er di&ersification $ecause increased product di&ersification leads to lo%er
employment ris) for manaers and reater compensation
S$-*+i$n1 1rincipals enae in incenti&e2$ased performance contracts, monitorin mechanisms
such as the $oard of directors and enforcement mechanisms such as the manaerial la$or mar)et
to mitiate the aency pro$lem
M&'hanisms +ha+ h&-/ "&2*'& a!&n'. '$s+s1
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B( THE STEWAR5SHIP THEORY
#he theory defines situations in %hich manaers are not moti&ated $y indi&idual oals, $ut
rather they are ste%ards %hose moti&es are alined %ith the o$7ecti&es of their principals, "t
assumes that manaers are trust%orthy and ha&e hih reputations, #herefore their $eha&ior %ill
not run counter to the interests of the company, #here is a sinificant emphasis on the
responsi$ility of the $oard to the shareholders in a corporate o&ernance model that is
em$oldened $y stewardship and trusteeship. #hese concepts of ste%ardship and trusteeship are
tracea$le in the scriptures of "ndia and Christendom,
S+&9a"2 is a /&"s$n 9h$ mana!&s $+h&":s /"$/&"+. an2 0inan'ia- a00ai"s an2 is &n+"*s+&2
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BASIC BEHAVIORAL 5IFFERENCES BETWEEN AGENCY & STEWAR5SHIP
THEORIES
E
Ste%ardship theory can $e reduced to the follo%in $asics.
#he theory defines situation in %hich manaers are not moti&ated $y indi&idual oals,
$ut rather they are ste%ards %hose moti&es are alined %ith the o$7ecti&es of their
principles,
/i&en a choice $et%een self2ser&in $eha&iour and pro2orani(ational $eha&ior, a
ste%ard5s $eha&iour %ill not depart from the interests of his orani(ation,
Control can $e potentially counterproducti&e, $ecause it undermines the pro2
orani(ational $eha&iour of the ste%ard, $y lo%erin his moti&ation,
C( THE STA<EHOL5ER THEORY
Manaers are responsi$le to ma'imi(e the total %ealth of all sta)eholders of the firm, rather
than only the shareholders %ealth, "t deals %ith the '$mm$n in+&"&s+s $0 &m/-$.&&s,
'*s+$m&"s, 2&a-&"s, !$%&"nm&n+, and +h& s$'i&+. at lare and dra%s all of them into corporate2
mi', "t is often critici(ed as ;%ooly minded li$eralism< $ecause it is not applica$le in practice
$y companies, But the defense is that manaers can act efficiently only $y dra%in upon the
resources of the sta)eholders and as such there is a ;contract< $et%een the company and the
sta)eholders
#he primary feature of the sta)eholder theory of corporate o&ernance is that those %ho ha&e a
sta)e in the functionin of the firm are made up of lare and di&erse roups,
Simply put, sta)eholders are those %ho see) some $enefit from the optimum runnin of the
firm, Sta)eholders ha&e different oals and see) different $enefits from the firm, -or)ers see)
7o$ security, the "8S %ants its ta' payments, in&estors %ant di&idends, and the community
%ants a solid economic $ase, #he sta)eholder theory holds that these different interests do, in
F
fact, control the firm in their o%n specific %ays, and none has any $etter riht to ha&e its &oice
heard than any other,
F*n'+i$n2. #he sta)eholder theory is $oth a descripti&e and a normati&e theory, "t is descripti&e
in that it functions as a %ay of descri$in ho% a company is constituted and controlled, "n
this case, one can see ho% customers or in&estors all ha&e their say in ho% the firm
mar)ets its products, for e'ample, "t is a normati&e theory in that it suests ho% a firm
should $e run,
B&n&0i+s#1 Sta)eholder theory is a hihly democratic and participatory concept of corporate
o&ernance, @nder this model, the firm is not merely a profit2ma)in machine for elite
in&estors and ma7or e'ecuti&es, "t is a profoundly social institution that is meant to ser&e
more than its shareholders, "t is a communal institution that $enefits lare sements of the
local population, #housands of li&es are potentially connected to and dependent upon the
proper %or)ins of the firm,
5( SOCIOLOGICAL THEORY
#he socioloical approach has focused mostly on $oard composition and implications for po%er
and %ealth distri$ution in the society, @nder this theory, $oard composition, financial reportin,
and disclosure and auditin are of utmost importance to reali(e the socio2economic o$7ecti&es of
corporations,
MECHANISMS AN5 CONTROLS
Corporate o&ernance mechanisms and controls are desined to reduce the inefficiencies that
arise from moral ha(ard and ad&erse selection, For e'ample, to monitor manaers: $eha&iour, an
independent third party (the e'ternal auditor) attests the accuracy of information pro&ided $y
manaement to in&estors, An ideal control system should reulate $oth moti&ation and a$ility,
INTERNAL CORPORATE GOVERNANCE CONTROLS
"nternal corporate o&ernance controls monitor acti&ities and then ta)e correcti&e action to
accomplish oranisational oals, E'amples include.
M$ni+$"in! ,. +h& ,$a"2 $0 2i"&'+$"s. #he $oard of directors, %ith its leal authority to
hire, fire and compensate top manaement, safeuards in&ested capital, 8eular $oard
meetins allo% potential pro$lems to $e identified, discussed and a&oided, -hilst non2
e'ecuti&e directors are thouht to $e more independent, they may not al%ays result in more
effecti&e corporate o&ernance and may not increase performance,
GHI
Different $oard
structures are optimal for different firms, Moreo&er, the a$ility of the $oard to monitor the
firm:s e'ecuti&es is a function of its access to information, E'ecuti&e directors possess
superior )no%lede of the decision2ma)in process and therefore e&aluate top manaement
on the $asis of the +uality of its decisions that lead to financial performance outcomes, ex
ante, "t could $e arued, therefore, that e'ecuti&e directors loo) $eyond the financial criteria,
In+&"na- '$n+"$- /"$'&2*"&s an2 in+&"na- a*2i+$"s. "nternal control procedures are
policies implemented $y an entity:s $oard of directors, audit committee, manaement, and
other personnel to pro&ide reasona$le assurance of the entity achie&in its o$7ecti&es related
to relia$le financial reportin, operatin efficiency, and compliance %ith la%s and
reulations, "nternal auditors are personnel %ithin an orani(ation %ho test the desin and
implementation of the entity:s internal control procedures and the relia$ility of its financial
reportin
H
Ba-an'& $0 /$9&". #he simplest $alance of po%er is &ery commonJ re+uire that the
1resident $e a different person from the #reasurer, #his application of separation of po%er is
further de&eloped in companies %here separate di&isions chec) and $alance each other:s
actions, 0ne roup may propose company2%ide administrati&e chanes, another roup
re&ie% and can &eto the chanes, and a third roup chec) that the interests of people
(customers, shareholders, employees) outside the three roups are $ein met,
R&m*n&"a+i$n. 1erformance2$ased remuneration is desined to relate some proportion of
salary to indi&idual performance, "t may $e in the form of cash or non2cash payments such
as shares and share options, superannuation or other $enefits, Such incenti&e schemes,
ho%e&er, are reacti&e in the sense that they pro&ide no mechanism for pre&entin mista)es
or opportunistic $eha&iour, and can elicit myopic $eha&iour,
E=TERNAL CORPORATE GOVERNANCE CONTROLS
E'ternal corporate o&ernance controls encompass the controls e'ternal sta)eholders e'ercise
o&er the oranisation, E'amples include.
competition
de$t co&enants
demand for and assessment of performance information (especially financial statements)
o&ernment reulations
manaerial la$our mar)et
media pressure
ta)eo&ers
CORPORATE GOVERNANCE SYSTEM1
#he role of the manaement is to run the enterprise %hile the role of the $oard is to see that it is
$ein run %ell and in the riht direction, Corporate o&ernance systems &ary around the %orld,
Scholars tend to suest three $road &ersions.
#he Anlo2American model
#he /erman model
#he Kapanese model
THE ANGLO#AMERICAN MO5EL
#his is also )no%n as unitary $oard model, in %hich all directors participate in a sinle $oard
comprisin $oth e'ecuti&e and non2e'ecuti&e directors in &aryin proportions, #his approach to
o&ernance tends to $e shareholder oriented, "t is also called the LAnlo2Sa'on5 approach to
corporate o&ernance $ein the $asis of corporate o&ernance in America, Britain, Canada,
Australia and other Common%ealth la% countries includin "ndia,
#he ma7or features of this model are as follo%s.
#he o%nership of companies is more or less e+ually di&ided $et%een indi&idual
shareholders and institutional shareholders,
Directors are rarely independent of manaement,
Companies are typically run $y professional manaers %ho ha&e nelii$le o%nership
sta)e, #here is a fairly clear separation of o%nership and manaement,
Most institutional in&estors are reluctant acti&ists, #hey &ie% themsel&es as portfolio
in&estors interested in in&estin in a $roadly di&ersified portfolio of li+uid securities, "f
M
they are not satisfied %ith a company5s performance, they simply sell the securities in
the mar)et and +uit,
#he disclosure norms are comprehensi&e, the rules aainst insider tradin tiht, and the
penalties for price manipulations stiff, all of %hich pro&ide ade+uate protection to the
small in&estors and promote eneral mar)et li+uidity, #hey also discourae lare
in&estors from ta)in an acti&e role in corporate o&ernance,
GERMAN MO5EL
Corporate o&ernance in the /erman model is e'ercised throuh t%o $oards, in %hich the upper
$oard super&ises the e'ecuti&e $oard on $ehalf of sta)eholders and is typically societal oriented,
"n this model, althouh shareholders o%n the company, they do not entirely dictate the
o&ernance mechanism, #hey elect F4 percent of mem$ers of super&isory $oard and the other
half is appointed $y la$our unions, ensurin that employees and la$ourers also en7oy a share in
o&ernance, #he super&isory $oard appoints and monitors the manaement $oard,
THE )APANESE MO5EL
#his is the $usiness net%or) model, %hich reflects the cultural relationships seen in the Kapanese
)eiretsu net%or), in %hich $oards tend to $e lare, predominantly e'ecuti&e and often ritualistic,
#he reality of po%er in the enterprise lies in the relationships $et%een top manaement in the
companies in the )eiretsu net%or), "n this model the financial institution has accrual role in
o&ernance, #he shareholders and the main $an) toether appoint $oard of directors and the
president,
Th& 2is+in'+i%& 0&a+*"&s of the Kapanese corporate o&ernance mechanisms are as follo%s.
#he president %ho consults $oth the super&isory $oard and the e'ecuti&e manaement is
included,
"mportance of the lendin $an) is hihlihted,
IN5IAN MO5EL OF GOVERNANCE
"ndian corporate is o&erned $y the Company5s Act 6NFH %hich follo%s more or less the @9
model, #he pattern of pri&ate companies is mostly that of closely held or dominated $y a
founder, his family and associates, "ndia has adopted the )ey tenets of Anlo2American e'ternal
and internal control mechanisms after economic li$erali(ation,
ANGLO AMERICAN GERMAN )APANESE
Share holders Shareholders and employees
/unions
Shareholders and $an)s
Elects Elects Elects
Board of Directors Super&isory Board Super&isory Board appoints
1resident And 1resident
Appoints Appoints Appoints
O
0fficers/E'ecuti&e Manaement Board E'ecuti&e Board
Manae Manae Manae
Company Company Company
IN5IAN MO5EL > ANGLO AMERICAN MO5EL ?GERMAN MO5EL
ELEMENTS OF GOO5 CORPORATE GOVERNANCE
/ood corporate o&ernance is characteri(ed $y a firm commitment and adoption of ethical
practices $y an orani(ation across its entire &alue chain and in all of its dealins %ith a %ide
roup of sta)eholders encompassin employees, customers, &endors, reulators and
shareholders (includin the minority shareholders), in $oth ood and $ad times, #o achie&e this,
certain chec)s and practices need to $e %hole2heartedly em$raced, /ood o&ernance deals %ith
certain o$liation to society at lare, o$liation to in&estors, o$liation to employees, o$liation
to customers ! Manaerial o$liations %hich are as follo% 2.
OBLIGATION TO SOCIETY AT LARGE
A corporation is a creation of la% as an association of persons formin part of a society in %hich
it operates, "ts acti&ities are $ound to impact the society as the society5s &alue %ould ha&e an
impact on the corporation, #herefore, they ha&e mutual rihts and o$liations to dischare for
the $enefit of each other,
Na+i$na- in+&"&s+1 A company (and its manaement) should ne committed in all its actions
to $enefit the economic de&elopment of the countries in %hich it operates and should not
enae in any acti&ity that %ould militate aainst such an o$7ecti&e,
P$-i+i'a- n$n#a-i!nm&n+1 A company should $e committed to and support a functionin
democratic constitution and system %ith a transparent and fair electoral system and should
not support directly or indirectly any specific political party or candidate for political office,
L&!a- '$m/-ian'&s1 #he manaement of a company should comply %ith all applica$le
o&ernment la%s, rules and reulations, Leal compliance %ill also mean that corporations
should a$ide $y the ta' la%s of the nations in %hich they operate and these should $e paid
on time and as per the re+uired amount,
R*-& $0 -a91 /ood o&ernance re+uires fair, leal frame%or)s that are enforced impartially,
"t also re+uires full protection of rihts, particularly those of minority shareholders, "mpartial
enforcement of la%s re+uires an independent 7udiciary and reulatory authorities,
H$n&s+ an2 &+hi'a- '$n2*'+1 E&ery officer of the company includin its directors,
e'ecuti&es and non e'ecuti&e directors, manain director, CE0, CF0 and CC0 should deal
on $ehalf of the company %ith professionalism, honesty, commitment and sincerity as %ell
as hih moral and ethical standards,
C$"/$"a+& 'i+i;&nshi/1 A corporate should $e committed to $e a ood corporate citi(en not
only in compliance %ith all rele&ant la%s and reulations $ut also $y acti&ely assistin in the
impro&ement of the +uality of life of the people in the communities in %hich it operates %ith
the o$7ecti&e of ma)in them self reliant and en7oy a $etter +uality of life,
N
E+hi'a- ,&ha%i$*"1 Corporations ha&e a responsi$ility to set e'emplary standards of ethical
$eha&iour, $oth internally %ithin the orani(ations, as %ell as in their e'ternal relationships,
S$'ia- '$n'&"n. #he Company should ha&e concerns to%ards the society, "t can help the
needy people ! sho% its concern $y not pollutin the %ater, air ! land, #he %aste disposal
should not affect any human or other li&in creatures,
H&a-+h. an2 sa0& 9$"4in! &n%i"$nm&n+1 A company should $e a$le to pro&ide a safe and
healthy %or)in en&ironment and comply %ith the conduct of its $usiness affairs %ith all
reulations reardin the preser&ations of en&ironment of the territory it operates in,
C$m/&+i+i$n1 A company should mar)et its products ! ser&ices on its o%n merits ! should
not resort to unethical ad&ertisements or include unfair ! misleadin pronouncements on
competitors5 products ! ser&ices,
Tim&-. "&s/$nsi%&n&ss1 /ood o&ernance re+uires that institutions ! processes try to ser&e
all sta)eholders %ithin a reasona$le time frame,
Corporations should uphold the fair name of the country,
OBLIGATION TO INVESTORS
#he in&estors as shareholders and pro&iders of capital are of paramount importance to a
corporation, A company has follo%in o$liations to in&estors.
T$9a"2s sha"&h$-2&"s1 A company should $e committed to enhance shareholder &alue and
comply %ith all reulations and la%s that o&ern shareholders rihts, #he $oaFrd of
directors of the company shall and fairly inform its shareholders a$out all rele&ant aspects of
the company5s $usiness and disclose such information in accordance %ith the respecti&e
reulations and areements, E&ery employee shall stri&e for the implementation of and
compliance %ith this in his professional en&ironment, Failure to adhere to the code could
attract the most se&ere conse+uences includin termination of employment or directorship as
the case may $e,
M&as*"&s /"$m$+in! +"ans/a"&n'. an2 in0$"m&2 sha"&h$-2&" /a"+i'i/a+i$n1 A related
issue of e+ual importance is the need to $rin a$out reater le&els of informed attendance
and meaninful participation $y shareholders in matters relatin to their companies %ithout
such freedom $ein a$used to interfere %ith manaement decision, An ideal corporate
should address this issue and relate it to more meaninful and transparent accountin and
reportin,
#ransparency means that information is freely a&aila$le and directly accessi$le to those %ho
%ill $e affected $y such decisions and their enforcement, "t also means that enouh
information is pro&ided and that it is pro&ided in easily understanda$le forms and media,
Finan'ia- "&/$"+in! an2 "&'$"2s1 A company should prepare and maintain accounts of its
$usiness affairs fairly and accurately in accordance %ith the financial and accountin
reportin standards, la%s and reulations of the country in %hich it conducts the $usiness
affairs,
-ilful material misrepresentation of and/or misinformation on the financial accounts and
reports shall $e rearded as the &iolation of the firm5s ethical conduct and also %ill in&ite
appropriate ci&il or criminal action under the rele&ant la%s,
OBLIGATION TO EMPLOYEES
"n the conte't of enhanced a%areness of $etter o&ernance practices, manaements should
reali(e that they ha&e their o$liations to%ards their %or)ers too,
64
Fai" &m/-$.m&n+ /"a'+i'&s1 An ideal corporate should pro&ide e+ual access and fair
treatment to all employees on the $asis of meritJ the success of the company %ill $e
impro&ed %hile enhancin the proress of indi&iduals and companies, #he applica$le la$our
and employment la%s should $e follo%ed %here&er it operates,
E3*a- $//$"+*ni+i&s1 A company should pro&ide e+ual opportunity to all its employees and
all +ualified applicants for employment %ithout reard to their race, caste, reliion, colour,
marital status, se', ae, nationality and disa$ility,
H*man& +"&a+m&n+1 Companies should treat employees as their first customers and a$o&e
all as human, #hey ha&e to meet the $asic needs of all employees in the orani(ation, #here
should $e a friendly, healthy and competiti&e en&ironment for the %or)ers to pro&e their
a$ility,
Pa"+i'i/a+i$n1 1articipation of $oth men and %omen is a )ey cornerstone of corporate
o&ernance, 1articipation could $e either direct or throuh representati&es, "t needs to $e
informed and orani(ed, #his means freedom of association and e'pression on one hand and
an orani(ed ci&il society on the other,
Em/$9&"m&n+1 Empo%erment unleashes creati&ity and inno&ation throuhout the
orani(ation $y truly &estin decision ma)in po%ers at the most appropriate le&els in the
orani(ational hierarchy,
E3*i+. an2 in'-*si%&n&ss1 A corporation is a miniature of a society %hose %ell $ein
depends on ensurin that all its employees feel that they ha&e a sta)e in it and do not feel
e'cluded from the main stream, #his re+uires all roups, particularly the most &ulnera$le,
ha&e opportunities to impro&e or maintain their %ell $ein,
Pa"+i'i/a+i%& an2 '$--a,$"a+i%& &n%i"$nm&n+1 #here should not $e any form of human
e'ploitation in the company, #here should $e e+ual opportunities for all le&els of
manaement in any decision2ma)in, #he manaement should culti&ate the culture %here
employees should feel they are secure and are $ein %ell ta)en care of, Colla$orati&e
en&ironment %ould $rin peace and harmony $et%een the %or)in community and the
manaement, %hich in turn, $rins hiher producti&ity, hiher profits and hiher mar)et
share,
OBLIGATION TO CUSTOMERS
A company5s e'istence cannot $e 7ustified %ithout its caterin to the needs of its customers, #he
companies ha&e an o$liation to its employees, %ithout %hose assistance they cannot reali(e
their o$7ecti&es,
@*a-i+. $0 /"$2*'+s an2 s&"%i'&s1 #he Company should $e committed to supply oods and
ser&ices of the hihest +uality standards, $ac)ed $y efficient after sales ser&ice consistent
%ith the re+uirements of the customers to ensure their total satisfaction, #he +uality
standards of company5s oods and ser&ices should meet not only the re+uired national
standards $ut also should endea&our to achie&e international standards,
P"$2*'+s a+ a00$"2a,-& /"i'&s1 Companies should ensure that they ma)e a&aila$le to their
customers +uality oods at afforda$le prices %hile ma)in normal profit is 7ustifia$le,
profiteerin and fattenin on the miseries of the poor consumers is unaccepta$le, Companies
must constantly endea&our to update their e'pertise, technoloy and s)ills of manpo%er to
cut do%n costs and pass on such $enefits to customers, #hey should not create a scare in the
midst of scarcity or $y themsel&es create an artificial scarcity to ma)e undue profits,
Un9a%&"in! '$mmi+m&n+ +$ '*s+$m&" sa+is0a'+i$n1 Companies should $e fully committed
to satisfy their customers and earn their ood%ill to stay lon in the $usiness, #hey should
66
encourae the %arranties and uarantees i&en on their products and in case of harmful or
su$2standard products should replace them %ith ood ones,
MANAGERIAL OBLIGATIONS
P"$+&'+in! '$m/an.:s ass&+s1 #he assets of the company should not $e dissipated or
misused $ut in&ested for the purpose of conductin the $usiness for %hich they are duly
authori(ed, #hese include tani$le as %ell as intani$le assets,
B&ha%i$*" +$9a"2 !$%&"nm&n+ a!&n'i&s1 A company5s employees should not offer or i&e
any of the firm5s funds or property as donation to any o&ernment aencies or their
representati&es directly or throuh intermediaries in order to o$tain any fa&oura$le
performance of official duties,
C$n+"$-1 control is a necessary principal of o&ernance that the freedom of manaement
should $e e'ercised %ithin a frame%or) of appropriate chec)s and $alances, Control should
pre&ent misuse of po%er, facilitate timely manaement response to chane and ensure that
$usiness ris)s are pre2empti&ely and effecti&ely manaed,
C$ns&ns*s $"i&n+&21 /ood o&ernance re+uires mediation of the different interests in
society to reach a $road consensus on %hat is in the $est interest of the %hole community
and ho% this can $e achie&ed,
Gi0+s an2 2$na+i$ns1 #he Company5s employees should neither recei&e nor ma)e directly
or indirectly any illeal payments, remuneration, ifts, donations or compara$le $enefits
%hich are intended to or percei&ed to o$tain $usiness or uncompetiti&e fa&ours for the
conduct of its $usiness,
Uni+# II#1 Land mar) in the emerence of C/. C/ Committees, -orld Ban) on C/, 0ECD
1rinciple, Sar$anes, 0'ley act23443, "ndian Committees and uidelines, C"" "nitiati&es,
Lan2ma"4s in +h& Em&"!&n'& $0 C$"/$"a+& G$%&"nan'&
0&er a period of time, a chane had come in the perception of people a$out corporate
o&ernance from the e'clusi&e $enefits of shareholders to the $enefit of all sta)eholders,
5&%&-$/m&n+s in +h& US 2. Corporate o&ernance ained importance in the @S after the
-aterate scandal that in&ol&ed @S corporate ma)in political contri$utions and offerin
$ri$es to o&ernment officials,
5&%&-$/m&n+s in +h& U< 2. "n Enland, seeds of modern corporate o&ernance %ere so%n
in the aftermath of the Ban4 $0 C"&2i+ an2 C$mm&"'& In+&"na+i$na- (BCC") scandal,
BCC", a lo$al $an) %as made up of holdin companies, affiliates, su$sidiaries, $an)s2%ith2
in2$an)s, #he BCC" entities flarantly e&aded leal restrictions in the mo&ement of capital
and oods almost on a daily routine,
63
Another landmar) that heihtened people5s a%areness and sensiti&ity on the issue and
resol&e the rot of corporate misdeeds, -hich leads to failure of Barins Ban), Britain5s
oldest merchant $an) failed $ecause of unhealthy trades on $ehalf of its customers and lost
P6,E $illion and pulled its shutter do%n,
CG COMMITTEES
#hrouhout the @S, @9, and other countries a num$er of committees ot appointed to
recommend reforms and reulations in corporate o&ernance, #hey are all )no%n $y the names
of the indi&iduals that had chaired the committees,
Th& Ca2,*". C$mmi++&& $n C$"/$"a+& G$%&"nan'&, 7AA8 2 Si" A2"ian Ca2,*".
Stated 0$7ecti&e %as ;to help raise the standards of corporate o&ernance and the le&el of
confidence in financial reportin and auditin $y settin out clearly %hat it sees as the
respecti&e responsi$ilities of those in&ol&ed and %hat it $elie&es is e'pected of them<,
#he Cad$ury committee in&estiated the accounta$ility of the $oard of directors to
shareholders and to the society, #he Cad$ury Code of $est 1ractices had 6N
recommendations in the nature of /uidelines to the $oard of directors, none'ecuti&e
directors, e'ecuti&e directors and such other officials,
CORPORATE GOVERNANCE COMMITTEES
7( Ca2,*". '$mmi++&& R&/$"+
Th& "&/$"+ 9as main-. 2i%i2&2 in+$ +h"&& /a"+s1#
A, 8e&ie%in the structure and responsi$ilities of Boards of Directors and recommendin a
Code of Best 1ractice
B, Considerin the role of Auditors and addressin a num$er of recommendations to the
Accountancy 1rofession
C, Dealin %ith the 8ihts and 8esponsi$ilities of Shareholders
A( R&%i&9in! +h& s+"*'+*"& an2 "&s/$nsi,i-i+i&s $0 B$a"2s $0 5i"&'+$"s an2 "&'$mm&n2in!
a C$2& $0 B&s+ P"a'+i'&
7( B$a"2 $0 2i"&'+$"s1
meet reularly, retain full and effecti&e control o&er the company and monitor the
e'ecuti&e manaement
$alance of po%er and authority
8( N$n#E6&'*+i%& 5i"&'+$"s
independent 7udment
independent of manaement and free from any $usiness
B( E6&'*+i%& 5i"&'+$"s
full and clear disclosure of directors5 total emoluments
C( Finan'ia- R&/$"+in! an2 C$n+"$-s
a $alanced and understanda$le assessment of their company5s position should report that the
$usiness
should ensure that an o$7ecti&e and professional relationship is maintained %ith the auditors,
B( C$nsi2&"in! +h& "$-& $0 A*2i+$"s an2 a22"&ssin! a n*m,&" $0
"&'$mm&n2a+i$ns +$ +h& A''$*n+an'. P"$0&ssi$n
6C
o e'ternal and o$7ecti&e chec)
o professional and o$7ecti&e relationship $et%een the $oard of directors and auditors should $e
maintained
o to desin audit
o reular rotation of audit partners to pre&ent unhealthy relationship,
A''$*n+an'. P"$0&ssi$n sh$*-2 +a4& +h& -&a2 in1#
(i) De&elopin a set of criteria for assessin effecti&enessJ
(ii) De&elopin uidance for companies on the form in %hich directors should reportJ and
(iii) De&elopin uidance for auditors on rele&ant audit procedures and the form in %hich
auditors should report,
C( 5&a-in! 9i+h +h& Ri!h+s an2 R&s/$nsi,i-i+i&s $0 Sha"&h$-2&"s
Elect the directors to run the $usiness on their $ehalf
Appoint the auditors to pro&ide an e'ternal chec)
Committee:s report places particular emphasis on the need for fair and accurate reportin of a
company:s proress to its shareholders
#0 ma)e reater use of their &otin rihts and ta)e positi&e interest in the $oard functionin
Effecti&eness of eneral meetins could $e increased,
8( Th& Pa*- R*+hman C$mmi++&&
#he committee %as constituted later to deal %ith the said contro&ersial point of Cad$ury 8eport,
"t %atered do%n the proposal on the rounds of practicality, "t restricted the reportin
re+uirement to internal financial controls only as aainst ;the effecti&eness of the company5s
system of internal control< as stipulated $y the Code of Best 1ractices contained in the Cad$ury
8eport,
#he final report su$mitted $y the Committee chaired $y 8on =ampel had some important and
proressi&e elements, nota$ly the e'tension of directors5 responsi$ilities to ;all rele&ant control
o$7ecti&es includin $usiness ris) assessment and minimi(in the ris) of fraudQ,<
B( Th& G"&&n,*". C$mmi++&& 7AAD
#his committee %as setup in Kanuary 6NNF to identify ood practices $y the Confederation of
British "ndustry (CB"), in determinin directors5 remuneration and to prepare a code of such
practices for use $y pu$lic limited companies of @nited 9indom,
#he committee aimed to pro&ide an ans%er to the eneral concerns a$out the a''$*n+a,i-i+. $y
the proper allocation of responsi$ility for determinin directors5 remuneration, the proper
reportin to shareholders and reater transparency in the process,
#he committee produced the /reen$ury Code of Best 1ractice %hich %as di&ided into the 0$*"
s&'+i$ns. R&mm*n&"a+i$n C$mmi++&&, 5is'-$s*"&s, R&m*n&"a+i$n P$-i'. and S&"%i'&
C$n+"a'+s and C$m/&nsa+i$n,
#he /reen$ury committee recommended that @9 companies should implement the code as set
out to the fullest e'tent practica$le, that they should ma)e annual compliance statements, and
that in&estor institutions should use their po%er to ensure that the $est practice is follo%ed,
C( Th& Ham/&- C$mmi++&& 7AAD
#he =ampel committee %as setup in >o&em$er 6NNF to promote hih standards on Corporate
/o&ernance $oth to protect in&estors and preser&e and enhance the standin of companies listed on
the London Stoc) E'chane, #he committee 2&%&-$/&2 0*"+h&" +h& Ca2,*". "&/$"+, And it made
the follo%in recommendations,
6E
i) Th& a*2i+$"s sh$*-2 "&/$"+ $n in+&"na- '$n+"$- /"i%a+&-. +$ +h& 2i"&'+$"s,
ii) Th& 2i"&'+$"s main+ain an2 "&%i&9 a-- '$n+"$-s(
iii) C$m/ani&s sh$*-2 +im& +$ +im& "&%i&9 +h&i" n&&2 0$" in+&"na- a*2i+ 0*n'+i$n an2 '$n+"$-(
"t also introduced the com$ined code that consolidated the recommendation of earlier corporate
o&ernance reports (Cad$ury Committee and /reen$ury Committee),
D( Th& C$m,in&2 C$2& 7AAE
#he com$ined code %as su$se+uently deri&ed from 8on =ampel Committee5s Final 8eport,
Cad$ury 8eport and the /reen$ury 8eport, #he com$ined code is appended to the listin rules
of the London Stoc) E'chane, As such, compliance of the code is mandatory for all listed
companies in @9, #he stipulations contained in the Com$ined Code re+uire, amon other
thins, that the $oards should maintain a sound system of internal control to safeuard
shareholder5s in&estments and the company5s assets, #he directors should, at least annually,
conduct a re&ie% of the effecti&eness of the roup5s system of internal control co&erin all
controls, includin financial, operational and compliance and ris) manaement, and report to
shareholders that they ha&e done so,
F( Th& T*"n,*-- C$mmi++&&
#he #urn$ull Committee %as set up $y the "nstitute of Chartered Accountants in Enland and -ales
("CAE-) in 6NNN to pro&ide uidance to assist companies in implementin the re+uirements of the
Com$ined Code relatin to internal control,
#he committee
1ro&ided uidance to assist companies in implementin the re+uirements of the Com$ined
Code relatin to internal control,
"t recommended that %here companies do not ha&e an internal audit function, the $oard
should consider the need for carryin out an internal audit annually,
#he committee also recommended that $oard of directors confirm the e'istence of
procedures for e&aluation and manain )ey ris)s,
Corporate /o&ernance is constantly e&ol&in to reflect the current corporate economic and leal
en&ironment, #o $e effecti&e, corporate o&ernance practices need to $e tailor to particular
needs, o$7ecti&es and ris) manaement structure of an orani(ation,
WORL5 BAN< ON CORPORATE GOVERNANCE
#he -orld Ban), in&ol&ed in sustaina$le de&elopment %as one of the earliest economic
orani(ation o study the issue of corporate o&ernance and suest certain uidelines, #he
-orld Ban) report on corporate o&ernance reconi(es the comple'ity of the concept and
focuses on the principles such as transparency, accounta$ility, fairness and responsi$ility that
are uni&ersal in their applications,
Corporate o&ernance is concerned %ith holdin the $alance $et%een economic and social oals
and $et%een indi&idual and communal oals, #he o&ernance frame%or) is there to encourae
the efficient use of resources and e+ually to re+uire accounta$ility for the ste%ardship of those
resources, #he aim is to alin as nearly as possi$le, the interests of indi&iduals, orani(ations
and society,
#he foundation of any corporate o&ernance is disclosure, 0penness is the $asis of pu$lic
confidence in the corporate system and funds %ill flo% to those centers of economic acti&ity,
%hich inspire trust, #his report points the %ay to esta$lishment of trust and the encouraement
of enterprise, "t mar)s an important milestone in the de&elopment of corporate o&ernance,
OEC5 PRINCIPLES
6F
0rani(ation for Economic Co2operation and De&elopment (0ECD) %as one of the earliest non2
o&ernmental orani(ations to %or) on and spell out principles and practices that should o&ern
corporate in their oal to attain lon2term shareholder &alue,
#he 0ECD %ere trend setters as the Code of Best practices are associated %ith Cad$ury report,
#he 0ECD principles in summary include the follo%in elements,
i) #he rihts of shareholders
ii) E+uita$le treatment of shareholders
iii) 8ole of sta)eholders in corporate o&ernance
i&) Disclosure and #ransparency
&) 8esponsi$ilities of the $oard
i) THE RIGHTS OF SHAREHOL5ERS
The corporate governance frame)or* should protect shareholders+ rights
A( Basic shareholder rihts include the riht to. 6) secure methods of o%nership reistrationJ 3)
con&ey or transfer sharesJ C) o$tain rele&ant information on the corporation on a timely and
reular $asisJ E) participate and &ote in eneral shareholder meetinsJ F) elect mem$ers of the
$oardJ and H) share
in the profits of the corporation,
B( Shareholders ha&e the riht to participate in, and to $e sufficiently informed on, decisions
concernin fundamental corporate chanes such as.
6) amendments to the statutes, or articles of incorporation or similar o&ernin documents of the
companyJ 3) the authorisation of additional sharesJ and C) e'traordinary transactions that in
effect result in the sale of the company,
C( Shareholders should ha&e the opportunity to participate effecti&ely and &ote in eneral
shareholder meetins and should $e informed of the rules, includin &otin procedures, that
o&ern eneral shareholder meetins.
6, Shareholders should $e furnished %ith sufficient and timely information concernin the date,
location and aenda of eneral meetins, as %ell as full and timely information reardin the
issues to $e decided at the meetin,
3, 0pportunity should $e pro&ided for shareholders to as) +uestions of the $oard and to place
items on the aenda at eneral meetins, su$7ect to reasona$le limitations,
C, Shareholders should $e a$le to &ote in person or in a$sentia, and e+ual effect should $e i&en
to &otes %hether cast in person or in a$sentia,
5( Capital structures and arranements that ena$le certain shareholders to o$tain a deree of
control disproportionate to their e+uity o%nership should $e disclosed,
E( Mar)ets for corporate control should $e allo%ed to function in an efficient and transparent
manner,
F( Shareholders, includin institutional in&estors, should consider the costs and $enefits of
e'ercisin their &otin rihts,
ii) THE E@UITABLE TREATMENT OF SHAREHOL5ERS
Th& '$"/$"a+& !$%&"nan'& 0"am&9$"4 sh$*-2 &ns*"& +h& &3*i+a,-& +"&a+m&n+ $0 a--
sha"&h$-2&"s, in'-*2in! min$"i+. an2 0$"&i!n sha"&h$-2&"s( A-- sha"&h$-2&"s sh$*-2 ha%&
+h& $//$"+*ni+. +$ $,+ain &00&'+i%& "&2"&ss 0$" %i$-a+i$n $0 +h&i" "i!h+s(
A( All shareholders of the same class should $e treated e+ually,
6, -ithin any class, all shareholders should ha&e the same &otin rihts, All in&estors should $e
a$le to o$tain information a$out the &otin rihts attached to all classes of shares $efore they
purchase, Any chanes in &otin rihts should $e su$7ect to shareholder &ote,
6H
3, Dotes should $e cast $y custodians or nominees in a manner areed upon %ith the $eneficial
o%ner of the shares,
C, 1rocesses and procedures for eneral shareholder meetins should allo% for e+uita$le
treatment of all shareholders, Company procedures should not ma)e it unduly difficult or
e'pensi&e to cast &otes,
B( "nsider tradin and a$usi&e self2dealin should $e prohi$ited,
C( Mem$ers of the $oard and manaers should $e re+uired to disclose any material interests in
transactions or matters affectin the corporation,
iii) THE ROLE OF STA<EHOL5ERS IN CORPORATE GOVERNANCE
The corporate governance frame)or* should recognise the rights of sta*eholders as
established by la) and encourage active co"operation bet)een corporations and sta*eholders
in creating )ealth, ,obs, and the sustainability of financially sound enterprises
A( #he corporate o&ernance frame%or) should assure that the rihts of sta)eholders that are
protected $y la% are respected,
B( -here sta)eholder interests are protected $y la%, sta)eholders should ha&e the opportunity to
o$tain effecti&e redress for &iolation of their rihts,
C( #he corporate o&ernance frame%or) should permit performance2enhancin mechanisms for
sta)eholder participation,
5( -here sta)eholders participate in the corporate o&ernance process, they should ha&e access
to rele&ant information,
i%) 5ISCLOSURE AN5 TRANSPARENCY
#he corporate o&ernance frame%or) should ensure that timely and accurate disclosure is made
on all material matters reardin the corporation, includin the financial situation, performance,
o%nership, and o&ernance of the company,
A( Disclosure should include, $ut not $e limited to, material information on.
6, #he financial and operatin results of the company,
3, Company o$7ecti&es,
C, Ma7or share o%nership and &otin rihts,
E, Mem$ers of the $oard and )ey e'ecuti&es, and their remuneration,
F, Material foreseea$le ris) factors,
H, Material issues reardin employees and other sta)eholders,
M, /o&ernance structures and policies,
B( "nformation should $e prepared, audited, and disclosed in accordance %ith hih +uality
standards of accountin, financial and non2financial disclosure, and audit,
C( An annual audit should $e conducted $y an independent auditor in order to pro&ide an
e'ternal and o$7ecti&e assurance on the %ay in %hich financial statements ha&e $een prepared
and presented,
5( Channels for disseminatin information should pro&ide for fair, timely and cost2efficient
access to rele&ant information $y users,
%) THE RESPONSIBILITIES OF THE BOAR5
#he corporate o&ernance frame%or) should ensure the strateic uidance of the company, the
effecti&e monitorin of manaement $y the $oard, and the $oard5s accounta$ility to the
company and the shareholders,
A( Board mem$ers should act on a fully informed $asis, in ood faith, %ith due dilience and
care, and in the $est interest of the company and the shareholders,
6M
B( -here $oard decisions may affect different shareholder roups differently, the $oard should
treat all shareholders fairly,
C( #he $oard should ensure compliance %ith applica$le la% and ta)e into account the interests
of sta)eholders,
5( #he $oard should fulfil certain )ey functions, includin.
6, 8e&ie%in and uidin corporate stratey, ma7or plans of action, ris) policy, annual $udets
and $usiness plansJ settin performance o$7ecti&esJ monitorin implementation and corporate
performanceJ and o&erseein ma7or capital e'penditures, ac+uisitions and di&estitures,
3, Selectin, compensatin, monitorin and, %hen necessary, replacin )ey e'ecuti&es and
o&erseein succession plannin,
C, 8e&ie%in )ey e'ecuti&e and $oard remuneration, and ensurin a formal and transparent
$oard nomination process,
E, Monitorin and manain potential conflicts of interest of manaement, $oard mem$ers and
shareholders, includin misuse of corporate assets and a$use in related party transactions,
F, Ensurin the interity of the corporation5s accountin and financial reportin systems,
includin the independent audit, and that appropriate systems of control are in place, in
particular, systems for monitorin ris), financial control, and compliance %ith the la%,
H, Monitorin the effecti&eness of the o&ernance practices under %hich it operates and ma)in
chanes as needed,
M, 0&erseein the process of disclosure and communications,
#he 0ECD uidelines are some%hat eneral and $oth the Anlo2American system and
Continental European (or /erman) system %ould $e +uite consistent %ith it,
SARBANES# O=LEY ACT, 8GG8
#he Sar$anes20'ley Act (S0A) is a sincere attempt to address all the issues associated %ith
corporate failure to achie&e +uality o&ernance and to restore in&estor5s confidence, #he Act
%as formulated to protect in&estors $y impro&in the accuracy and relia$ility of corporate
disclosures, made precious to the securities la%s and for other purposes, #he act contains a
num$er of pro&isions that dramatically chane the reportin and corporate director5s o&ernance
o$liations of pu$lic companies, the directors and officers, #he important pro&isions in the S0A
Act are $riefly i&en $elo%,
i) Es+a,-ishm&n+ $0 P*,-i' C$m/an. A''$*n+in! O%&"si!h+ B$a"2 (PCAOB)1 S0A creates a
ne% $oard consistin of fi&e mem$ers of %hom t%o %ill $e certified pu$lic accountants, All
accountin firms ha&e to et reistered %ith the $oard, #he $oard %ill ma)e reular inspection
of firms, #he $oard %ill report to SEC, #he report %ill $e ultimately for%arded to Conress,
ii) A*2i+ C$mmi++&&1 #he S0A pro&ides for ne% impro&ed audit committee, #he committee is
responsi$le for appointment, fi'in fees and o&ersiht of the %or) of independent auditors, #he
reistered pu$lic accountin firms should report directly to audit committee on all critical
accountin policies,
iii) C$n0-i'+ $0 In+&"&s+1 #he pu$lic accountin firms should not perform any audit ser&ices for a
pu$lically traded company,
i&) A*2i+ Pa"+n&" R$+a+i$n1 #he act pro&ides for mandatory rotation of lead audit or co2ordinatin
partner and the partner re&ie%in audit once e&ery F years,
6O
&) Im/"$/&" in0-*&n'& $n '$n2*'+ $0 A*2i+s . Accordin to act, it is unla%ful for any e'ecuti&e or
director of the firm to ta)e any action to fraudulently influence, coerce or manipulate an audit,
&i) P"$hi,i+i$n $0 n$n#a*2i+ s&"%i'&s 1 @nder S0A act, auditors are prohi$ited from pro&idin non2
audit ser&ices concurrently %ith audit financial re&ie% ser&ices,
&ii) CEOs an2 CFOs a"& "&3*i"&2 +$ a00i"m +h& 0inan'ia-s 1 CE0s and CF0s are re+uired to
certify the reports filed %ith the Securities and E'chane Commission (SEC),
&iii) L$ans +$ 5i"&'+$"s1 Th& a'+ /"$hi,i+s @S and forein companies %ith Securities traded
%ithin @S from ma)in or arranin from third parties any type of personal loan to directors,
i') A++$"n&.s 1 #he attorneys dealin %ith pu$licly traded companies are re+uired to report
e&idence of material &iolation of securities la% or $reach of fiduciary duty or similar &iolations
$y the company or any aent of the company to Chief Counsel or CE0 and if CE0 does not
respond then to the audit committee or the Board of Directors,
') S&'*"i+i&s Ana-.s+s1 #he S0A has pro&ision under %hich $ro)ers and dealers of securities
should not retaliate or threaten to retaliate an analyst employed $y $ro)er or dealer for any
ad&erse, neati&e or unfa&ora$le research report on a pu$lic company, #he act further pro&ides
for disclosure of conflict of interest $y the securities analysts and $ro)ers or dealers,
'i) P&na-+i&s1 #he penalties are also prescri$ed under S0A act for any %ron doin, #he
penalties are &ery stiff, #he Act also pro&ides for studies to $e conducted $y Securities and
E'chane
Commission or the /o&ernment Accountin 0ffice in the follo%in area.
i) Auditor5s 8otation
ii) 0ff $alance Sheet #ransactions
iii) Consolidation of Accountin firms ! its impact on industry
i&) 8ole of Credit 8atin "ndustry
&) 8ole of "n&estment Ban) and Financial Ad&isers,
IN5IAN COMMITTEES AN5 GUI5ELINES & CII INITIATIVES
C$"/$"a+& G$%&"nan'& Ini+ia+i%&s in In2ia H His+$"i'a- P&"s/&'+i%&H C$"/$"a+& G$%&"nan'&
$0 In2ia Has Un2&"!$n& A Pa"a2i!m Shi0+
#here ha&e $een se&eral ma7or corporate o&ernance initiati&es launched in "ndia since the mid2
6NN4s, #he FIRST %as $y the Confederation of "ndian "ndustry (C""), "ndia5s larest industry
and $usiness association, %hich came up %ith the first &oluntary code of corporate o&ernance
in 6NNO, #he SECON5 %as $y the SEB", no% enshrined as Clause EN of the listin areement,
#he THIR5 %as the >aresh Chandra Committee, %hich su$mitted its report in 3443, #he
FOURTH %as aain $y SEB" R the >arayana Murthy Committee, %hich also su$mitted its
report in 3443, Based on some of the recommendation of this committee, SEB" re&ised Clause
EN of the listin areement in Auust 344C, Su$se+uently, SEB" %ithdre% the re&ised Clause EN
in Decem$er 344C, and currently, the oriinal Clause EN, FIFTH 9as 8ecent De&elopments in
6N
"ndia C"" #as)force on Corporate /o&ernance * 344N SI=TH %as Corporate /o&ernance
Doluntary /uidelines *344N(
7( THE CII CO5E# 1
More than a year $efore the onset of the Asian crisis, C"" set up a committee to e'amine
corporate o&ernance issues, and recommend a &oluntary code of $est practices, #he committee
%as dri&en $y the con&iction that ood corporate o&ernance %as essential for "ndian companies
to access domestic as %ell as lo$al capital at competiti&e rates, #he first draft of the code %as
prepared $y April 6NNM, and the final document (Desira$le Corporate /o&ernance. A Code),
%as pu$licly released in April 6NNO, #he code %as &oluntary, contained detailed pro&isions, and
focused on listed companies,
8( <UMAR MANGALAM BIRLA COMMITTEE REPORT AN5 CLAUSE CA#1
-hile the C"" code %as %ell2recei&ed and some proressi&e companies adopted it, it %as Felt
that under "ndian conditions a statutory rather than a &oluntary code %ould $e more 1urposeful,
and meaninful, Conse+uently, the second ma7or corporate o&ernance initiati&e in the country
%as underta)en $y SEB", "n early 6NNN, it set up a committee under 9umar Manalam Birla to
promote and raise the standards of ood corporate o&ernance, "n early 3444, the SEB" $oard
had accepted and ratified )ey recommendations of this committee, and these %ere incorporated
into Clause EN of the Listin Areement of the Stoc) E'chanes,
B( THE NARESH CHAN5RA COMMITTEE REPORT ON CORPORATE GOVERNANCE#1
#he >aresh Chandra committee %as appointed in Auust 3443 $y the Department of Company
Affairs (DCA) under the Ministry of Finance and Company Affairs to e'amine &arious
corporate o&ernance issues, #he Committee su$mitted its report in Decem$er 3443, "t made
recommendations in t%o )ey aspects of corporate o&ernance. financial and non2financial
disclosures. and independent auditin and $oard o&ersiht of manaement,
C( NARAYANA MURTHY COMMITTEE REPORT ON CORPORATE GOVERNANCE#1
#he fourth initiati&e on corporate o&ernance in "ndia is in the form of the recommendations of
the >arayana Murthy committee, #he committee %as set up $y SEB", under the chairmanship of
Mr, >, 8, >arayana Murthy, to re&ie% Clause EN, and suest measures to impro&e corporate
o&ernance standards, Some of the ma7or recommendations of the committee primarily related
to audit committees, audit reports, independent directors, related party transactions, ris)
manaement, directorships and director compensation, codes of conduct and financial
disclosures,
D( CII TAS<FORCE ON CORPORATE GOVERNANCE I 8GGA#1
Satyam is a one2off incident 2 especially considerin the si(e of the malfeasance, #he
o&er%helmin ma7ority of corporate "ndia is %ell run, %ell reulated and does $usiness in a
sound and leal manner, =o%e&er, the Satyam episode has prompted a reloo) at our corporate
o&ernance norms and ho% industry can o a step further throuh some &oluntary measures,
-ith this in mind, the C"" set up a #as) Force under Mr, >aresh Chandra in Fe$ruary 344N to
recommend %ays of further impro&in corporate o&ernance standards and practices $oth in
letter and spirit, #he report enumerates a set of &oluntary recommendations %ith an o$7ecti&e to
esta$lish hiher standards of pro$ity and corporate o&ernance in the country,
#he recommendations in $rief are as under.
34
7( A//$in+m&n+ $0 In2&/&n2&n+
5i"&'+$"
a( N$mina+i$n C$mmi++&&
8( 5*+i&s, -ia,i-i+i&s an2
"&m*n&"a+i$n $0 in2&/&n2&n+
2i"&'+$"s
a( L&++&" $0 A//$in+m&n+ +$
5i"&'+$"s
,( Fi6&2 C$n+"a'+*a-
R&m*n&"a+i$n
'( S+"*'+*"& $0 C$m/&nsa+i$n +$
NE5s
B( R&m*n&"a+i$n C$mmi++&& $0
B$a"2
C( A*2i+ C$mmi++&& $0 B$a"2
D( S&/a"a+i$n $0 +h& $00i'&s $0 +h&
Chai"man an2 +h& Chi&0 E6&'*+i%&
O00i'&"
F( A++&n2in! B$a"2 an2 C$mmi++&&
M&&+in!s +h"$*!h T&-&#
'$n0&"&n'in! an2
Vi2&$ '$n0&"&n'in!
J( E6&'*+i%& S&ssi$ns $0
In2&/&n2&n+ 5i"&'+$"
E( R$-& $0 ,$a"2 in sha"&h$-2&"s
an2 "&-a+&2 /a"+. +"ansa'+i$ns
A( A*2i+$" I C$m/an.
R&-a+i$nshi/
7G( In2&/&n2&n'& +$ A*2i+$"s
77( C&"+i0i'a+& $0 In2&/&n2&n'&
78( A*2i+$" Pa"+n&" R$+a+i$n
7B( A*2i+$" Lia,i-i+.
7C( A//$in+m&n+ $0 A*2i+$"s
7D( @*a-i0i'a+i$ns $0 A*2i+$"s
R&/$"+
7F( Whis+-& B-$9in! P$-i'.
7J( Ris4 Mana!&m&n+ F"am&9$"4
7E( Th& -&!a- an2 "&!*-a+$".
s+an2a"2s
7A( Ca/a,i-i+. $0 R&!*-a+$".
A!&n'i&s # Ens*"in! @*a-i+. in
A*2i+ P"$'&ss
8G( E00&'+i%& an2 C"&2i,-&
En0$"'&m&n+
87( C$n0is'a+i$n $0 Sha"&s
88( P&"s$na- Lia,i-i+.
8B( Lia,i-i+. $0 5i"&'+$"s an2
Em/-$.&&s
8C( Ins+i+*+i$na- A'+i%ism
8D( M&2ia as a s+a4&h$-2&"
Accordin to the report, much of $est2in2class corporate o&ernance is
&oluntary * of companies ta)in conscious decisions of oin $eyond the
mere letter of la%,
F( CORPORATE GOVERNANCE VOLUNTARY GUI5ELINES I8GGA
More recently, in Decem$er 344N, the Ministry of Corporate Affairs (MCA)
pu$lished a ne% set of ;Corporate /o&ernance Doluntary /uidelines 344N<,
desined to encourae companies to adopt $etter practices in the runnin of
$oards and $oard committees, the appointment and rotation of e'ternal
auditors, and creatin a %histle $lo%in mechanism, #he uidelines are di&ided
into the follo%in si' parts.
6, Board of Directors
3, 8esponsi$ilities of the Board
C, Audit Committee of the Board
E, Auditors
F, Secretarial Audit
H, "nstitution of mechanism for -histle Blo%in
#hese uidelines pro&ide for a set of ood practices %hich may $e &oluntarily
adopted $y the 1u$lic companies, 1ri&ate companies, particularly the $ier
ones, may also li)e to adopt these uidelines, #he uidelines are not intended to
$e a su$stitute for or additions to the e'istin la%s $ut are recommendatory in
nature,
8eferences Q
36
6, "n its $roadest sense the Lconstituents5 may $e thouht of as those
sta)eholders %ho ha&e a Lmoral interest5 or Lsta)e5 in the e'istence and
acti&ities of a corporation, "n a more narro% sense it em$races, at the
core, shareholders and employees, $ut also e'tends to certain customers,
suppliers and lenders, "t is this loose definition of Lsta)eholders5 %hich
%e adopt here,
3, >ational Foundation for Corporate /o&ernance , Discussion 1aper .
Corporate /o&ernance in "ndia . #heory and 1ractice,
C, A,C,Fernando (344H), Corporate /o&ernance, 1rinciples, 1olicies and
1ractices, pp MH, 1earson
E, A,C,Fernando (344H), Corporate /o&ernance, 1rinciples, 1olicies and
1ractices, pp MM, 1earson
F, Cad$ury Committee 8eport . A report $y the committee on the financial
aspects of corporate o&ernance, #he committee %as chaired $y Sir
Adrian Cad$ury and issued for comment on (3M may 6NN3)
H, /reen$ury Committee 8eport (6NNE) in&estiatin $oard mem$ers5
remuneration and responsi$ilities
M, #he committee report on corporate o&ernance, #he =ampel committee
report (6NNO)
O, #he com$ined code of Best practices in Corporate /o&ernance , #he
#urn$ull Committee 8eport, (6NNO)
N, 1rinciples of Corporate /o&ernance . A report $y 0ECD #as) Force on
Corporate /o&ernance, (6NNN)
64, 1atterson 8eport . #he lin) $et%een Corporate /o&ernance and
1erformance (3446)
66, Sar$anes 0'ley Act of 3443 passed $y the conress of the @nited States
of America on 3Crd Kanuary, 3443,
63, Confederation of "ndian "ndustry, (March 6NNO) Desira$le corporate
/o&ernance . A Code (Based on recommendations of the national tas)
forceon corporate o&ernance , chaired $y Shri 8ahul Ba7a7),
6C, Department of Company Affairs (3444) 8eport of the tas)force on
Corporate E'cellence throuh /o&ernance ( on the $asis of report
su$mitted $y a

33
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Corporate Governance- Corporate Governance: Meaning, Historical Perspective, Theoretical basis of CG, CG Mechanism, CG System, Good CG,Land mark in the emergence of CG: CG Committees, World Bank on CG, OECD Principle, Sarbanes, Oxley act-2002

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ARYA SCHOOL OF MANAGEMRENT & IT(ASMIT) , BBSR

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