CHANGING SCENARIO OF CORPORATE GOVERNANCE

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a
corporation (or company) is directed, administered or controlled. Corporate governance also includes the
relationships among the many stakeholders involved and the goals for which the corporation is governed.
The principal stakeholders are the shareholders/members, management, and the board of directors. Other
stakeholders include labour (employees), customers, creditors (e.g., banks, bond holders), suppliers,
regulators, and the community at large.Corporate governance is a multi-faceted subject. An important theme
of corporate governance is to ensure the accountability of certain individuals in an organization through
mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of
discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong
emphasis on shareholders' welfare.

In A Board Culture of Corporate Governance, business author Gabrielle O'Donovan defines corporate
governance as 'an internal system encompassing policies, processes and people, which serves the needs of
shareholders and other stakeholders, by directing and controlling management activities with good business
savvy, objectivity, accountability and integrity. Sound corporate governance is reliant on external
marketplace commitment and legislation, plus a healthy board culture which safeguards policies and
processes'.

Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance
by management of the absolute rights of shareholders as the true owners of the corporation and of their own
role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business
conduct and about making a distinction between personal & company’s funds in the management of a
company.” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles
of the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty.
Corporate governance has been a highly discussed issue in the United States and Europe over the last
decade. In India, these issues came into force in the last couple of years. The corporate governance code was
modeled on the lines of the Cadbury Committee (1992) in the United Kingdom. On account of the interest
generated by Cadbury Committee Report, the Confederation of Indian Industry (CII), the Associated
Chambers of Commerce and Industry (ASSOCHAM) and the Securities and Exchange Board of India
(SEBI) constituted Committees to recommend initiatives in Corporate Governance.
In the Indian context, the need for corporate governance has been highlighted because of the scams
occurring frequently since the emergence of the concept of liberalization from 1991 such as the Harshad
Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. In the
Indian corporate scene, there is a need to induct global standards so that at least while the scope for scams
may still exist, it can be at least reduced to the minimum.
Reforms in corporate governance
Corporate governance represents the value framework, the ethical framework and the moral framework
under which business decisions are taken. The investors want to be sure that not only is their capital handled
effectively and adds to the creation of wealth, but the business decisions are also taken in a manner which is
not illegal or involving moral hazard. Arguably, the past few years has witnessed more corporate-
governance reform than the previous several decades.
Yet things happening in the companies show that directors and institutional investors clearly agree that too
little reform has taken place to improve meaningfully board governance. If we consider why corporate
governance suddenly has become a popular subject of discussion we will realize that it is the direct result of
globalization. Globalization involves the movement of four elements of the economy very fast across
national borders. These are physical capital in terms of plant and machinery, financial capital as invested in
capital markets, technology and labour. It is this investment of financial capital in the capital markets round
the world which is a special feature of late 20th century globalization and which distinguishes it from the
features of globalization in the past.
Given the pressure from shareholders and the resistance from management and many directors, it falls to
boards to take the lead in finding the solutions that satisfy executives and shareholders alike. Any failure to
respond may leave boards more exposed to the ire of investors. then , the CEOs face a second wave of
reform that will prove more disturbing and troublesome than the accounting and board independence
reforms characterized by the landmark Sarbanes-Oxley legislation in the US and the highest priority of both
investors and directors in the US is to split the chairman and CEO roles. Investors know how CEOs have
dominated boards over the past decade and believe that only by separating the roles; the boards will have the
independence to provide much-needed oversight.
For long time, most matters relating to the rights of shareholders were governed by the company law. Over
the last few decades, in many countries, the responsibility for protection of investors has shifted to the
securities law and the securities regulators at least in case of large listed companies. In India, the Securities
and Exchange Board of India (SEBI) was set up as a statutory authority in 1992, and has taken a number of
initiatives in the area of investor protection.
The SEBI is planning to come out with a corporate governance rating index. The corporate governance
rating index is still at a theoretical stage. The objective is to measure the level of corporate governance in a
company. The index will be based on three principles: the level of wealth creation by a corporate, the quality
of wealth management and sharing of the wealth with all stake holders.

Corporate Governance and Listing

The financial crisis in East Asia in the late 1990s and its depressing effects on weak developing economies
has led the international community to admit that in a world of increased globalization and integrated capital
markets, financial crises in individual countries can put at risk international financial stability. This
recognition led to a range of initiatives by the international community such as setting up of the Financial
Stability Forum and promoting the assessment of systemically important countries on execution of a set of
12 standards and codes relevant to private and financial sector development.

The ‘Reports on the Observance of Standards and Codes’ is one such initiative prepared within the
framework of these standards and is a joint initiative of the World Bank and the International Monetary
Fund. The World Bank takes the lead on assessment in three areas (i) corporate governance (ii) accounting
and auditing and (iii) insolvency regimes and creditor rights. So far the World Bank has conducted ROSC
assessments in the area of corporate governance in over 30 countries including India.
The World Bank’s corporate governance country assessments are a diagnostic instrument based on the
OECD Principles of Corporate Governance. They assess the laws, rules, regulations and practices governing
the rights and obligations of listed companies, intermediaries and investors in a given country. These
assessments are a tool of communication between policy makers and domestic and international investors to
reach a common understanding in an environment where countries are competing to attract capital.
The current corporate governance assessment for India has found that over the last few years, a series of
legal and regulatory reforms have transformed the Indian corporate governance framework and improved
the level of responsibility and accountability of insiders, equality in the treatment of minority shareholders
and stakeholders, board practices, and transparency.

The Kumaramangalam Birla Committee to promote and raise standards of corporate governance in its report
observed that “the strong Corporate Governance if indispensable for flexible and vibrant capital markets and
is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate
disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial
reporting structure.” The recommendations of the Committee, led to the addition of Clause 49 in the listing
Agreement in the year 2000.

The second Committee on Corporate Governance under the Chairmanship of Shri N. R. Narayana Murthy
was constituted in October 2002 by SEBI and based on the recommendations of it, SEBI issued a circular on
August 26, 2003 revising Clause 49 of the Listing Agreement, to review the progress of the corporate sector
in meeting the norms of corporate governance and to determine the role of companies in responding to the
price-sensitive information circulating in the market. In enabled the mechanism of working of transparency
and integrity of the market players and participants. Also SEBI encouraged the credit rating agencies like
ICRA and CRISIL, to develop a suitable corporate governance index as a measure of wealth creation by the
companies. As the result many of the companies have been rated against this index. It is believed that the
economic compulsion would increasingly induce the companies to go in for the corporate governance rating.
Rather Corporate governance is essentially ethics-based. No legislation or regulation will serve the purpose
fully, until and unless the management of the companies brings the attitudinal changes.
Recent Trends and Challenges Ahead for Listed companies in India.
• The recent institutional structure places the supervision of listed companies partly with the
Department of Company Affairs (DCA), partly with the Securities and Exchange Board of India
(SEBI) and partly with the stock exchanges. This fragmented structure gives rise to partly cover
and weakens enforcement. A rationalized regulatory structure would help improve accountability
and market bylaw.
• The corporate governance standard is a critical factor for ensuring investors confidence. While the
Company Law can take care of the basic requirement of the form of corporate governance
structure, SEBI could be concerned with the corporate governance practices on on-going basis.
• With the SEBI trying to bring some discipline in the stock market especially in terms of greater
transparency and disclosure norms, corporate governance in the Indian context at least seems to
focus primarily and rightly on the issue of transparency. If corporate governance is concerned with
better ethics and principles, it is only natural that the focus should be on transparency. One method
of course is the code and another would be the regulatory authorities like SEBI, RBI etc. laying
down guidelines so that a certain degree of transparency is automatically ensured. Generally two
committees, the ethics committee as well as audit committee, of the board seem to be the
instruments by which the board can keep a watch over the actual practices of the enterprise and
ensure that the right values are observed and the principles of corporate governance are not
violated.
• The challenge for regulators is to improve market reliability by enforcing rules and regulations in a
professional, timely, transparent and consistent manner. Regulators should ensure that sanction and
enforcement are likely deterrents to help to line up business practices with the legal and regulatory
framework, in particular with respect to related party transactions and insider trading. This would
greatly improve confidence of investors and other stakeholders in the financial markets. New
registration requirements make sense if they help the regulator fix fraudsters and market
manipulators. And complex disclosure norms for Initial Public Offerings (IPOs) would work if
they actually weed out in doubt issues.
• A key missing element in India today is a strong focus on director professionalism. Directors are
expected to know their duties of care and loyalty to the company and all shareholders. However, as
that is not always the case, also the law or other regulations should clearly spell out the
responsibilities of directors and they themselves should engage in the formulation of their tasks and
work procedures.
The Future of corporate governance.

Frauds like Satyam case may increase investor nervousness about weak corporate governance, which are
still reeling from the global financial crisis. Besides that it is a big shock to IT industry as well as to all the
investors who were relying on such IT companies. The confidence of the investors on other IT majors will
also have a similar look at the same time every company is not badly governed company. However, the
confidence of the NRI investors and overseas investors was affected and it will not only impact the IT
companies but also the capital market in general in the coming years.

Corporate frauds are not new to India or to the world. At every corner of the world dishonest individuals and
institutions are involved in committing fraud. Corporate frauds do not happen in isolation but happens in an
organized form with the team of management and the auditing firm. India has witnessed various lapses that
have happened in the past with several companies. Satyam was the biggest ever in the list with a huge
amount of accounting fraud committed. In its case, the corporate governance lapses have been overlooked
by PwC in responsibility with the management of Satyam while auditing. Certainly an inflated cash balance
to the tune of Rs.5, 040 crore could not have escaped the eye of the auditor.

India is rated 46.1 out of 100 World Bank's annual World Governance Indicators. To such an extent the
quality of governance of companies in India has rotten up. As rightly pointed out by Shri Domodaran,
former chairman of SEBI, the case of Satyam Computer is neither the first nor the last corporate fraud to
have hit India. One of the earliest cases of serious corporate fraud where the promoter was convicted was
that of Ramakrishna Dalmia in 1956. After that an important convictions made was on Harshad Mehta in
1992 and Ketan Parikh in 2001. Yet another conviction on Dinesh Dalmia in 2004, who had alleged made a
wrongful gain of Rs. 594 crore.

To sum up, the listed companies make up the major team of capitalization and the important segment of the
economy like in India. It was rightly thought over by the planners to introduce the discipline of corporate
governance in listed companies in line with the US model making changes to Indian situations. Despite the
regulatory efforts of SEBI and CLB to discipline the corporates, yet we are still in the journey towards the
achieving quality in management of companies. Good corporate governance would help to maintain the
confidence of investors. Hence, not only by just adhering to the regulations on corporate governance a
company can contribute to the wealth and health of the investors and society but also by sticking to the
principles of ethics and self-discipline.