1 > What is Good Corporate Governance ?

Corporate Governance is the art of directing and controlling the

organization by balancing the needs of the various stakeholders. This
often involves resolving conflicts of interest between the various
stakeholders and ensuring that the organization is managed well
meaning that the processes, procedures and policies are implemented
according to the principles of transparency and accountability.

Whenever one speaks about corporate governance, it has to be borne in

mind that the organizations have duties and responsibilities towards their
shareholders and stakeholders and hence they need to be governed in
accordance with the law and keeping in mind the interests of the
stakeholders and shareholders.

The next aspect of corporate governance is that the notion of economic

efficiency must be followed when directing, managing and controlling
organizations. For instance, it is truism that corporations exist to make
profits and hence the profitability and revenue generation ought to be the
aim for which the corporates must strive for.

Theoritical basis of corporate governance

1. Stewardship Theory:
The stewardship theory of corporate governance discounts the
possible conflicts between corporate management & owners and
shows a preference for a board of directors made up primarily of
corporate insiders. This theory assumes that managers are basically
trustworthy and attach significant value to their own personal
reputations.
2. Stakeholder Theory:
Stakeholder theory has a lengthy history that dates back to 1930s.
The theory represents a synthesis of economics, behavioral
science, business ethics and the stakeholder concept. The theory
considers the firm as an input-output model by explicitly adding all

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 interest groups – employees, customers, dealers, government and
the society at large - to the corporate mix.
3. Sociological Theory:
The sociological approach to the study of corporate governance
has focused mostly on board composition and the implications for
power and wealth distribution in society. Problems of interlocking
directorships and the concentration of directorships in the hands of
a privileged class are viewed as major challenges to equity and
social progress. Under this theory, board composition, financial
reporting, disclosure and auditing are necessary mechanisms to
promote equity and fairness in society.

Machanism of corporate governanc

Internal Mechanism
The foremost sets of controls for a corporation come from its internal
mechanisms. These controls monitor the progress and activities of the
organization and take corrective actions when the business goes off
track. Maintaining the corporation's larger internal control fabric, they
serve the internal objectives of the corporation and its internal
stakeholders, including employees, managers and owners. These
objectives include smooth operations, clearly defined reporting lines and
performance measurement systems. Internal mechanisms include
oversight of management, independent internal audits, structure of the
board of directors into levels of responsibility, segregation of control and
policy development.
External Mechanism
External control mechanisms are controlled by those outside an
organization and serve the objectives of entities such as regulators,
governments, trade unions and financial institutions. These objectives

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include adequate debt management and legal compliance. External
mechanisms are often imposed on organizations by external stakeholders
in the forms of union contracts or regulatory guidelines. External
organizations, such as industry associations, may suggest guidelines for
best practices, and businesses can choose to follow these guidelines or
ignore them. Typically, companies report the status and compliance of
external corporate governance mechanisms to external stakeholde

Models of CG

Anglo-US Model
The Anglo-US model is based on a system of individual or institutional
shareholders that are outsiders of the corporation. The other key players
that make up the three sides of the corporate governance triangle in the
Anglo-US model are management and the board of directors. This model
is designed to separate the control and ownership of any corporation.
Therefore the board of most companies contains both insiders (executive
directors) and outsiders (non-executive or independent directors).
Traditionally, though, one person holds the position of CEO and
chairman of the board of directors. This concentration of power has led
many companies to include more outside directors now.

Japanese Model
The Japanese model involves a high level of ownership by banks and
other affiliated companies and "keiretsu," industrial groups
linked by trading relationships and cross-shareholding. The key players
in the Japanese system are the bank, the keiretsu (both major inside
shareholders), management and the government. Outside shareholders

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have little or no voice and there are few truly independent or outside
directors.

German Model
As in Japan, banks hold long-term stakes in corporations and their
representatives serve on boards. However they serve on boards
continuously, not just during times of financial difficulty as in Japan. In
the German model, there is a two-tiered board system consisting of a
management board and a supervisory board. The management board is
made up of inside executives of the company and the supervisory board
is made up of outsiders such as labor representatives and shareholder
representatives.

What is SEBI:
SEBI is a market regulator which tries to create a balance in the day to
day stock market activities and for this there are regulatory frameworks
established by SEBI. There are 17 exchanges currently operational in
Indiaand all exchanges, including NSE and BSE are regulated by SEBI
guidelines. Securities and exchange Board of India has headquarters in
Mumbai, and has regional offices in New Delhi, Kolkata, Chennai and
Ahmedabad. SEBI has also opened local offices in Jaipur, Bangalore,
Guwahati, Bhubaneswar, Patna, Kochi and Chandigarh.
SEBI has also commenced regulating the commodity derivatives market
under the Securities Contract Regulation Act (SCRA) 1956 with effect
from September 28 2015, and the Forward Contracts Regulation Act
(FCRA) 1952 got replaced with effect from September 29 2015.

When was SEBI established:

SEBI was established in the year 1988 and subsequently was given the
constitutional validity on 30th January 1992 by Government of India by
passing the SEBI Act, 1992 in the parliament of Indi

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 Powers of SEBI:

 To regulate and approve by-laws of stock exchanges

 Inspect the books of accounts of recognized stock exchanges and call for
periodical returns
 Inspect the books of financial Intermediaries.
 Compel certain companies to get listed on one or more stock exchanges
 To handle the registration of brokers

Role and Functions of SEBI:

 Primary Markets: SEBI has regulated the primary market through

1. The regulation of issuers’ access to market

2. Regulation of information production at the time of issue
3. Regulation of processes and procedures relating to issuance of securities

 Disclosure: Disclosure standards are not limited to accounting

information but was extended to other issue related communications
such as advertisements.
 Corporate Governance: SEBI has made a constant effort to improve
the standards of Corporate Governance in India.
 Settlement Systems
 Dematerialization of securities
 Institutionalization of Trading and ownership of securities
 Market Integrity and Insider Trading
 To help in developing the capital market so that the business activities
doesn’t get hampered
 To bring companies and organizations under its regulation so that the
interests of investors are not harmed
 To curtail unethical trading which includes insider trading also
 To get done the registration of Mutual Funds and Systematic Investment
Plans(SIPs) and all such funds comply with laid down rules and
regulations of Mutual funds and SIPs
 To impart training to market participants on regular basis
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Role of sebi

1. Issuers of securities

These are corporate entities which raise funds from the financial
market. SEBI ensures that they get a transparent and healthy
environment for their needs.

2. Investor

These are the ones who keep the financial market alive. They earn
from these markets thus it is the responsibility of SEBI to ensure
that investors don’t fall prey to any manipulation or fraud in the
market.

3. Financial Intermediaries

These intermediaries act as a mediator in the financial market.

Their presence brings smoothness and safety in financial
transactions

What is ethics
ethics is the study of proper business policies and practices regarding
potentially controversial issues such as corporate governance, insider
trading, bribery, discrimination, corporate social responsibility
and fiduciaryresponsibilities. Law often guides business ethics, while
other times business ethics provide a basic framework that businesses
may follow to gain public acceptance.
ethics ensure that a certain required level of trust exists between
consumers and various forms of market participants with businesses. For
example, a portfolio manager must give the same consideration to the

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portfolios of family members and small individual investors. Such
practices ensure the public receives fair treatment.
Importance and needs of ethics

1. Satisfying Basic Human Needs: Being fair, honest and ethical is

one the basic human needs. Every employee desires to be such
himself and to work for an organization that is fair and ethical in
its practices.
2. Creating Credibility: An organization that is believed to be
driven by moral values is respected in the society even by those
who may have no information about the working and the
businesses or an organization. Infosys, for example is perceived as
an organization for good corporate governance and social
responsibility initiatives. This perception is held far and wide even
by those who do not even know what business the organization is
into.
3. Uniting People and Leadership: An organization driven by
values is revered by its employees also. They are the common
thread that brings the employees and the decision makers on a
common platform. This goes a long way in aligning behaviors
within the organization towards achievement of one common goal
or mission.
4. Improving Decision Making: A man’s destiny is the sum total of
all the decisions that he/she takes in course of his life. The same
holds true for organizations. Decisions are driven by values. For
example an organization that does not value competition will be
fierce in its operations aiming to wipe out its competitors and
establish a monopoly in the market.
5. Long Term Gains: Organizations guided by ethics and values are
profitable in the long run, though in the short run they may seem to
lose money. Tata group, one of the largest business conglomerates
in India was seen on the verge of decline at the beginning of
1990’s, which soon turned out to be otherwise. The same

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 company’s Tata NANO car was predicted as a failure, and failed to
do well but the same is picking up fast now.

Unethical behaviour and issue

1. Misusing company time

Whether it is covering for someone who shows up late or altering a time

sheet, misusing company time tops the list. This category includes
knowing that one of your co-workers is conducting personal business on
company time. By "personal business" the survey recognizes the
difference between making cold calls to advance your freelance business
and calling your spouse to find out how your sick child is doing.

2. Abusive behavior

Too many workplaces are filled with managers and supervisors who use
their position and power to mistreat or disrespect others. Unfortunately,
unless the situation you're in involves race, gender or ethnic origin, there
is often no legal protection against abusive behavior in the workplace.
To learn more, check out the Workplace Bullying Institute.

3. Employee theft

According to a recent study by Jack L. Hayes International, one out of

every 40 employees in 2012 was caught stealing from their employer.
Even more startling is that these employees steal on average 5.5 times
more than shoplifters ($715 vs $129). Employee fraud is also on the
uptick, whether its check tampering, not recording sales in order to skim,
or manipulating expense reimbursements. Ethical alert: The FBI recently
reported that employee theft is the fasting growing crime in the U.S.
today.

4. Lying to employees

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The fastest way to lose the trust of your employees is to lie to them, yet
employers do it all the time. One of out every five employees report that
their manager or supervisor has lied to them within the past year.

5. Violating company internet policies

Cyberslackers. Cyberloafers. These are terms used to identify people

who surf the Web when they should be working. It's a huge, multi-
billion-dollar problem for companies. A survey conducted recently by
Salary.com found that everyday at least 64 percent of employees visit
websites that have nothing to do with their work.
FOOD & LIFESTYLE
The good news from the ERC study is that most American workers and
employers do the right thing. The survey reveals that most of us follow
our company's ethical standards of behavior, and we are willing to report
wrongdoing when we see it (unless it's the company's Internet use
policy). But for those of us who track ethical behavior in the workplace,
there are some troublesome trends in the ERC survey.

CSR
Movement aimed at encouraging companies to be more aware of the
impact of their business on the rest of society, including their own
stakeholders and the environment. [1]
Corporate social responsibility (CSR) is a business approach that
contributes to sustainable development by delivering economic, social
and environmental benefits for all stakeholders.
CSR is a concept with many definitions and practices. The way it is
understood and implemented differs greatly for each company and
country. Moreover, CSR is a very broad concept that addresses many
and various topics such as human rights, corporate governance, health

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and safety, environmental effects, working conditions and contribution
to economic development. Whatever the definition is, the purpose of
CSR is to drive change towards sustainability.

Although some companies may achieve remarkable efforts with unique

CSR initiatives, it is difficult to be on the forefront on all aspects of
CSR. Considering this, the example below provides good practices on
one aspect of CSR – environmental sustainability.

Advantage and disadvantage

 Improvement in the image of the Corporation

The most obvious advantage that a corporation can obtain by
implementing CSR policies is that of an increased goodwill value. This
serves a dual purpose – Firstly, people will want to buy the product that
the corporation is selling because of its good and clean image. Secondly,
other enterprises will want to do business and be associated with the
corporation. This increases the corporation’s prestige to such a high
level that its name may become synonymous with reliability and
goodness.
People always want to be associated with the best and the most popular,
so in that respect, the corporation rises in stature and becomes an
important player in its market.

 Increased Attraction and Retention of Employees

Companies having solid CSR commitments find it easier to recruit and
retain employees. People want to work for companies that care about the
well-being of their employees and provide good working conditions.
Compassionate attitude towards employees is highly desired by both
new recruits and old employees alike. Appraisals, financial assistance in
times of need, and attention given to personal achievements and special
days (like birthdays) make employees want to remain with the company.

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This is a huge advantage when there is a tight labor market situation.
This will reduce the cost of training new recruits and free up incentives
for existing employees. Incentives induce efficient work out from
employees. In short, if the company’s workforce is happy, the company
gets more profits due to increased efficiency in production.

 Regulatory Authorities become less hostile

A corporation with strong CSR programs will not be scrutinized by
regulatory authorities as much as companies without CSR programs.
The authorities will be lenient in their regulation because they feel that
the company must be complying with all regulations as it is supported
by firms and people alike for its welfare work. A company with strong
CSR programs will always work within regulations to get benefits (other
than profits) from these CSR programs.
The authorities will give fast-track preference to this company. It may
also forego cumbersome paperwork that is required to set up projects if
it thinks that this project is going to help the community to improve.

 Attracts more Capital Inflow from Various Sources

A company’s image plays a huge role in attracting investors. If the
company is engaged in CSR programs, its image gets a massive boost,
and so, people invest in its operations heavily. This company will attract
capital even from abroad in the form of FII, thus, helping the country to
get valuable foreign exchange. It will also attract investment from other
firms and industries, and it will become a name that can be trusted easily
Disadvantage

Disadvantages Corporate Social Responsibility

Now we will see why CSR is criticized in business circles.

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  Shift from the Profit-Making Objective
Milton Friedman, an economist, is the biggest critic of CSR. He says
that CSR shifts the focus of the company from the objective that made it
a financial entity in the first place – profit-making. The company forgets
about its obligations towards its shareholders that they have to make
profits for them. Instead of focusing on making profits, they engage in
CSR programs and use up funds for community welfare.
So basically, instead of an income, the company is effecting an outflow
of cash and not fulfilling its profit-making obligations.

 Company Reputation takes a hit

According to CSR policies, companies have to disclose shortcomings of
even their own products if they are found to violate the CSR program.
For example, car manufacturing companies calling back their vehicles in
large numbers when they find glitches in the model after having sold
them wallops their reputation.
This creates inconvenience to the customers, and they lose trust in the
manufacturer.

 Customer Conviction
Initially, customers like to see the companies that they trust are engaged
in social welfare programs. They like the fact that these programs are for
a good cause. Later, they grow wary of it. If they don’t see instant results
from these programs, they think that these are nothing but PR stunts. So
it becomes difficult to convince customers that the results will take some
time in coming and that they should continue believing in the good
intentions of the company.
These attempts of convincing become fruitless day by day because some
customers are impatient and have a constant desire to be appeased.

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 

 Increase in Cost of Production

More often than not, CSR programs increase the expenditure of the
company. This increased expenditure is reflected in the increased prices
of the product for which, ultimately, the customers have to pay.
Large corporations can absorb this increased expenditure. They may not
increase their products’ prices, but small businesses have no other option
but to increase their products’ prices to meet their increased expenses.

Legislation and Provisions Related to CSR

Legislation and provisions imposed on organization regarding CSR vary
from one place to another. The value of CSR differs in various contexts,
depending on the geographical location, environmental conditions,
culture and most importantly legal framework imposed by the different
countries. Here we discuss the influencing legal factors that affect an
organization in three different geographical locations: Australia, UK and
USA.

General Policies:
While supporting the general policies of OECD, an enterprise should
take fully into consideration established general policies in the nations
that operate, and consider the opinions of various other stakeholders like
employees, suppliers, investors, etc. To maintain the general policies,
the organizations should —

 Play its part to contribute to environment, social and economic

progress intending to achieving sustainable development
 Respect human rights and national human rights affected by
different countries
 Encourage local growth by maintaining a close relation with the
local communities including business interest. The organization

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 should expand organizational activities in the domestic and foreign
market to attain more exposure
 Support good corporate governance policies; develop, apply and
practice good governance principles
 Avoid seeking exemptions from the statutory or regulatory
framework imposed by the federal government concerning human
rights, health, environmental, safety, labor, financial incentives,
taxation and other issues
 Develop and enforce effective management systems and self-
regulatory practices and attempt to establish a relationship and
mutual trust between the organization and the society they operate
 Make workers employed by the multinational companies aware of
the organization’s policies through proper dissemination of those
policies and thorough training and programs
 Refrain discrimination among employees
 Carry out risk-based due diligence. For example, incorporating it
into the risk management systems of the organizations to identify,
prevent and mitigate the potential and actual adverse effects. The
nature and extent of due diligence depend on the situation they
handle.
 Avoid causing and contributing to negative impacts on subjects
covered in the OECD guidelines through the business and take
immediate action when adverse situation arises
 Enforce the necessary plan to reduce the adverse impacts where
they have not contributed the adverse impacts directly, but it is
some way directly related to a business accord in the field of
operations, products and services

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