13

A REPORT

ON

“COMPARATIVE ANALYSIS
OF BEST PRACTICES OF
CORPORATE GOVERNANCE”

Submitted by:
SOURAV KUMAR MUDI
(08BS0003947)

Submitted to:
Prof. Amit Majumder
ICFAI Business School,
Kolkata

Date of Submission: 07/01/10

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INTRODUCTION

CORPORATE GOVERNANCE
Corporate Governance is typically perceived by academic literature as dealing with
“problems that result from the separation of ownership and control”. From this perspective,
corporate governance would focus on: The internal structure and rules of the board of
directors; the creation of independent audit committees; rules for disclosure of information to
shareholders and creditors, and, control of the management.

DEFINITION:
Corporate Governance is the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as, the board, managers,
shareholders and other stakeholders, and spells out the rules and procedures for making
decisions on corporate affairs.
According to the Advisory Board of the National Association of Corporate Directors
(NACD), New York “Corporate Governance ensures that long-term strategic objectives and
plans are established and that the proper management structure is in place to achieve those
objectives, while at the same time making sure that the structure functions to maintain the
corporation’s integrity, reputation and responsibility to its various constituencies.”

RELEVANCE OF CORPORATE GOVERNANCE

Different economies have systems of corporate governance that differ in the relative strength
exercised by the stakeholders and how they influence managements. Good corporate
governance means governing the corporation in such a way that the interests of shareholders
are protected whilst ensuring that other stakeholder’s requirements are fulfilled as far as
possible.
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OBJECTIVES OF CORPORATE GOVERNANCE

Good governance is integral to the existence of a company. It inspires and strengthens
investor confidence by ensuring company’s commitment to higher growth and profits. It aims
at the following:-
i. Installation of a properly structured board which is capable of taking independent and
objective decisions.
ii. Ensuring a properly balanced board having representation of an adequate number of
nonexecutive independent directors capable of taking care of the interests of all the
stakeholders.
iii. Adoption of transparent procedures and practices in decision making by an informed
comity of board members.
iv. Effective and regular monitoring of management functioning by the Board.
v. Disclosures to shareholders with a view to help become informed of the relevant of
the relevant developments impacting the company.
vi. Exercise of effective control on corporate affairs by the board at all times.

The overall objectives of governance should be to maximize long-term value and

shareholder’s wealth.

NEED AND IMPORTANCE

Corporate Governance is needed to create a corporate culture of consciousness, transparency
and openness. It refers to a combination of laws, rules, regulations, procedures and voluntary
practices to enable companies to maximize shareholders long-term value. It should lead to
increasing customer satisfaction, shareholder value and wealth.

BENEFITS
• Creation and enhancement of a corporation’s competitive advantage
• Enabling a corporation perform efficiently by preventing fraud and malpractices
• Providing protection to shareholder’s interests
• Enhancing the valuation of an enterprise
• Ensuring compliance of laws and regulations
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CODE OF CORPORTE GOVERNANCE

In the recent years, there have been considerable concerns in India and other countries above
standard of corporate governance. While the company law and in common law directors are
obliged to act in a best interest of shareholders, there have been many instances of board
room behavior difficult to reconcile with these ideal. There have been many cases of
excessive debate financing laced with fraud, generosity with which they reward leading
executive, dis-proportionating pay increases for executive and procedures which have been
less transparent. In the train of these and many scandals there has been increasing and violent
demand for greater transparency and good corporate governance.
But legislation alone is not enough. The end note of the report of Kumar Mangalam Birla
committee report on corporate governance sums up the issue well. It states corporate
governance extends beyond corporate law. Its fundamental objective is not the mere
fulfillment of requirement of law but ensuring the board’s commitment to managing the
company in a transparent manner for maximizing long term shareholders value. The
effectiveness of corporate governance is still cannot nearly be legislative bylaw, neither can
any system of corporate governance be static.
In such an environment it would be naïve to assume that company would voluntarily adopt
the best corporate practices. The Kumar Mangalam Birla committee on corporate governance
assumes under Indian conditions a statutory rather than a voluntary code would be for more
purposive and meaningful. There other recommendation flows from this premise. Raguveer
Srinivasan in his comments on the committee report (October 1991, investment word) points
out that these recommendation certainly run the risk of being branded as a micro managing
team but it needs to be pointed out that there is a no other way of introducing the concept in
the country. A start has to be made from somewhere to push Indian companies into adopting
best governance practices and these recommendations serve that purpose.
India too had its share of scams and scandals and there was all round disquiet, and public
concern and demand for a best corporate governance. Expected improvement after
liberalization, due to international competition, also did not come about. In reorganization of
the key importance of corporate governance and public concern, at that time when Indian
economy is integrating with global economy and Indian economy is striving for international
competitiveness, the confederation of Indian industry (CII) took a special initiative. A
national task for corporate governance was set up in mid 1996 under the leadership of Rahul
Bajaj, past president, CII and CMD, Bajaj auto limited.
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On the board of directors, CII has made the following recommendation:

• A simple board structure can maximize shareholders as well as to tier board.

• The full board must meet six times a year, preferably at an interval of two months and
meeting must have an agenda of at least half days meeting.

• Listed companies with a turnover in a excess of rupees two hundred crores and above
should have professionally competent and acclaim non executive directors.

• Non-executive directors should account for at least thirty percent of board, if the
chairman is a non-executive director.

• No single director should hold directorship in more than ten companies.

• Non-executive directors to play an important role in maximizing long term

shareholders value, should become active participants and not be passive advisors.

• Pay a commission over and above sitting fees and offer stock option as incentives.

• Director who doesn’t attend fifty percent or more of meetings must not be considered
for reappointment, generally.

• All key permission players must be placed before the board of directors.

• Audit committee must be appointment to assist the BOD of the company and must
have full access to all financial information.

• Companies with paid up capital of more than rupees 20crs should provide the same
information towards domestic investors which they provide to GDR investor.

• Companies with a turnover of rupees 100crs or a paid up capital of rupees 20crs

should set up audit committees with in 2years.

• The member of board should have clear responsibilities.

• The board should not be boll dozed by the nominees of management.

• FIs should divest there stake in companies where they have less than 10% stake: or
progressively smaller role for the FIs expect in the case of habitual defaulters.
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• Creditors should desist from appointing a nominee on a company board if its loan
interests are being paid in time.

• Companies should not accept for the deposits if they have defaulted on fixed deposits.

• The key information such as annual operating plans and budgets, quarterly results,
internal audit reports etc must be regularly reported to the board.

• The takeover board should be modified to reflect international norms.

• The triggers should increase to 30% and the minimum bid should reflect at least 50%
takeover.

OBJECTIVE
To study the comparative analysis for the understanding of commonalities and differences in
corporate governance practices among two companies – Ford Motor and Hero Honda
Motor, through a comparative analysis of corporate governance codes and on the basis of the
CGS (Corporate Governance Score) following different parameters.

METHODOLOGY
Research is totally based on secondary data, which also can be used for the reference.
Secondary data has been collected basically, from the Annual Reports of the companies and
moreover, from the company own websites. Corporate Governance Score (CGS) has been
calculated through by given structured questionnaire collecting data from the company
brochures, annual reports, sustainability reports, corporate governance reports and websites.
This is an exploratory type of research. And this research needs further study also Research is
a kind of pilot study.
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FORD MOTOR COMPANY

(More products people want)

Ford motor company a global automotive industry leader based on Dearborn, Mich.,
manufactures or distributes automobiles across six continents. With about 2,13,000
employees and about 90 plants worldwide, the company’s wholly owned brands include
Ford, Lincoln, Mercury and Volvo. The company provides financial services through Ford
Motor Credit Company.

“Offering consumers more fuel efficient vehicle choices, including improving and
increasing our hybrid vehicle offerings, is part of Ford’s broad plan to deliver technology
solutions for affordable fuel economy for millions”.
Derrick Kuzak, Ford Group Vice-president, Global product Development
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HERO HONDA
(DRIVEN BY PASSION)

Over the course of two and half decades, both the partners Hero and Honda, have fine-tuned
and perfected their roles. As the largest motor cycle producer in the world, Honda has been
able to consistently provide technical knowhow, design specifications and R&D innovations
to its most prolific affiliate in the world, Hero Honda. This has led to the development of
world class, value-for-money motorcycles and scooters for the Indian market.

Since both partners are completely focus on their respective skills, they have been able not
just to complement each other, but also draw from each other strengths. Today every second
motor cycle sold in the country is a Hero Honda. There are more Hero Honda bikes on this
country’s roads than the total population of some European countries put together.

Hero Honda has built two world class manufacturing facilities at Dharuhera and Gurgaon in
Haryana. These two units two churn out over 3 million bikes per year. The company’s third,
and its largest and most sophisticated plant at Haridwar has also gone on-stream. All this
happened in the span of just of two and half decades.

Not surprisingly, the company is in no mood to take its hand and off the throttle. As
Brijmohan Lal Munjal, the chairman, Hero Honda Motors succinctly puts it, “We pioneered
India’s Motorcycle Industry, and it’s our responsibility to now to take the industry to the
next level. We’ll do all it takes to reach there”.

COMPARATIVE ANALYSIS OF FORD
MOTOR AND HERO HONDA
Dimensions Ford Motor
Board Composition ED – 3
NED – 10
ID – 10 , by default they are NED
1. Audit Committee
2. Nominating and Governance
Board Committees 3. Finance Committee
4. Compensation Committee
5. Sustainability Committee
1. BOD meetings – 11 times
2. Environment & Public – 4 times
3. Audit Committee – 4 times
Frequency of Meetings 4. Nominating Governance – 4 times
Annually 5. Finance Committee – 4 times
6. Sustainability Comm. – 3 times
7. Compensation Comm. – 4 times
1. No director who is an employment
or a former employee of the company,
can be independent until 3 years
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Hero Honda
ED - 4
NED - 4
ID - 8
1. Audit Committee
2. Remuneration Committee
3. Shareholder’s Grievance
4. Share Transfer
5. Committee of Directors
1. BOD meetings – 4 times
2. Audit Committee – 7 times
3. Remuneration Comm. – 2 times
4. Shareholder’s Grieve. – 4 times
5. Share Transfer – As per requirement
6. Committee of Directors – 2 times
1. No director can be independent if he or
she is, or in the past 3 years, has been,
part of an interlocking directorship

after termination of such employment.
Independence of 2. No director who is or in the past 3 yrs.
Directors has been, affiliated with or employed
by, the company’s present or former
independent auditor can be independent 2. No director can be independent if he or
until 3 years after the end of the affilia-
tion, employment or auditing.
1. Protect the company’s nonpublic
information.
2. Do not buy or sell stock based on
nonpublic information.
Insider Trading 3. Do not “tip” others about nonpublic
information so they can buy or sell stock.
1. Contacts from a government including any The company has regularly sent, both
Police or any other law enforcement
Agencies.
Means of 2. Legal enquiries : forward to the office of the results to both the Stock exchanges,
Communication General Counsel or local legal office.
3. The media: Forward to public affairs.
4. Financial enquiries: Forward to investor
relations or public affairs.
5.Vehicle to dealer complaints: Forward to Ford
Customer Service Division (FCSD).
Vienot – II Separation of the offices of chairman and CEO
Committee is clearly defined as per the committee.
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which an executive officer, of the
company serves of the compensation
committee of another company that
employs the director.
she is receiving or in the last 3 years
has received more than $100,000
during any 12 month period in direct
compensation from the company.
In compliance with SEBI guideline
on prevention of Insider Trading,
the company has instituted code of
conduct for its management, staff
and relevant business associates.
The code lays down guidelines,
which advises them on procedures to
be followed and disclosures to be
made, while dealing with shares of
the company and cautioning them on
consequences of non-compliances.
By post as well as fax the annual
audited as well as quarterly un-audited
BSE & NSE, after they are taken on
record by the Board of Directors.
Same.
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Norby Committee No such rule is in here. The annual report should contain
information about the age of the
individual directors and directors
should retire from the board in the
year they turn 70 at the latest.
Appointments to the audit committee should be No such appointments would be
Audit Committees, made by the board on the recommendation of the done.
Smith Report nomination committee, in consultation with the
Audit committee Chairman.

An infrastructure that allows for the reporting There has neither been any non-
Of any potential violations of Policies and compliance of any legal provision
Directives, and any violations of laws which of applicable law nor any penalty,
Compliances by the are related to the business. It assess these stricture imposed by SEBI or any
Company compliances with companies ethical stands other authorities, on any matters
through regular legal audits that cover a range related to capital market during the
of topics relating to legal requirements and the last three years.
Internal Policies.

J. J. Irani Committee 1/3rd of the board consist of Independent This is not applicable in here.
Directors.

Attendance Records Chairman of audit, finance committee, Chairmen of all the Board
Nominating Committee, Compensation Committees are present in AGM.
Committee and other committees are present
in AGM.

NED’s payment NED’s can’t be pay in ESOP’s. NED’s can’t be pay in Employee
Stock Options (ESOP).

Disclosure of Execut. There is no disclosure of the executives pay In the annual report, there is a
Pay in Fixed part & in fixed or variable part in the annual report. Clear disclosure of the executives
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Variable part pays in the fixed part as well as in

the variable part.

RESULTS OF ANALYSIS

Case 1: Hero Honda

CGS = 44 out of 61.
It means %CGS = 72%

Case 2: Ford Motor

CGS = 49 out of 61.
It means %CGS = 81%

Result shows, that among the two major automobile companies, one foreign,
Ford Motors and another Indian, Hero Honda, the most effective company in
terms of the best practices of Corporate Governance is Ford Motor.
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BIBLIOGRAPHY

1.BOOKS AUTHORS
 Practices of Corporate Governance A.C.Fernando
 Business Ethics & Corporate Governance ICMR
 Corporate Governance Practices Taxman’s

2. JOURNAL
 Annual Report 09 , Ford Motors

 Annual Report 08, Ford Motors

 Sustainability Report 09, Ford Motors
 Sustainability Report 08, Ford Motors
 Annual Report 09, Hero Honda
 Corporate Governance Report 09, Hero Honda
 Annual Report 08, Hero Honda
 Corporate Governance Report 08, Hero Honda

3. WEBSITES
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 www.fordmotors.com
 www.herohonda.com

 www.google.com

 www.wikipedia.com