Global Journal of Finance and Management ISSN 0975 - 6477 Volume 2, Number 2 (2010), pp.

197-207 Research India Publications http://www.ripublication.com/gjfm.htm Corporate Governance: Meaning and Implementation Sanjay Kumar*1 and V.K. Singh1 1Faculty of Management Studies Gurukul Kangri University, Haridwar-249404 (India) *Corresponding Author E-mail: tlc.sanjay@gmail.com Abstract Globalization has not only significantly increasing and intensifying business risks, but also it has compelled Indian companies to adopt international norms of transparency and good governance. Corporate Governance policy recognizes the challenge of this new business reality. A meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations. The practice of policy on Corporate Governance leads to the creation of the right corporate culture in which the company is managed, that fulfils the purpose of Corporate Governance. This research paper aims to give an insight into the Corporate Governance policy that recognizes the challenges of this new business reality and its ability to respond to the dynamics of a fast changing business environment. Introduction Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. - ICSI definition of Corporate Governance Since the commencement of the liberalization process, economic scenario has begun to alter radically. Globalization has not only significantly increasing and intensifying business risks, but also it has compelled Indian companies to adopt 198 Sanjay Kumar and V.K. Singh international norms of transparency and good governance. Equally, in the resultant competitive context, freedom of executive management and its ability to respond to

the dynamics of a fast changing business environment will be the new success factors. Corporate Governance policy recognizes the challenge of this new business reality. The ambit of significance of Corporate Governance lies far beyond this as per Business Ethics and Corporate Governance: Towards Organisational Excellence (2005). Corporate Governance can be defined as a systematic process by which companies are directed and controlled to enhance their wealth generating capacity. Since large corporations employ vast quantum of societal resources, the governance process should ensure that the companies are managed in a manner that meets stakeholders aspirations and societal expectations. Some experts like Narayana Murthy, J J Irani and Naushir Mirza adopt a broader definition of CG to include the interests of all the stakeholders like employees, customers and the society at large. Sustaining the balance between different and often conflicting interest groups is however an extremely difficult task, which is in fact, the real challenge of good governance. Corporate Governance initiative is based on two core principles. These are: 1. Management must have the executive freedom to drive the enterprise forward without undue restraints; and 2. This freedom of management should be exercised within a framework of effective accountability. Any meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations. From the above definition and core principles of Corporate Governance, there emerge the cornerstones of governance philosophy, namely trusteeship, transparency, empowerment and accountability, control and ethical corporate citizenship. The practice of each of these leads to the creation of the right corporate culture in which the company is managed, that fulfils the purpose of Corporate Governance. Trusteeship Large corporations themselves have both a social and economic purpose. They

represent a coalition of interests, namely those of the shareholders, other providers of capital, business associates and employees. This belief therefore casts a responsibility of trusteeship on the Company's Board of Directors. They are to act as trustees to protect and enhance shareholders value, as well as to ensure that the Company fulfils its obligations and responsibilities to its other stakeholders. Inherent in the concept of trusteeship is the responsibility to ensure equity, namely, that the rights of all shareholders, large or small are protected. Corporate Governance: Meaning and Implementation 199 Transparency Transparency means explaining Company's policies and actions to those to whom it has responsibilities. Therefore, transparency must lead to maximum appropriate disclosures without jeopardising the Company's strategic interests. Internally, transparency means openness in Company's relationship with its employees, as well as, the conduct of its business in a manner that will bear scrutiny. Transparency enhances accountability. Empowerment and Accountability Empowerment is an essential concomitant of first core principle of governance that management must have the freedom to drive the enterprise forward. Empowerment is a process of actualizing the potential of its employees. Empowerment unleashes creativity and innovation throughout the organisation by truly vesting decisionmaking powers at the most appropriate levels in the organizational hierarchy. The Board of Directors are accountable to the shareholders, and the management is accountable to the Board of Directors. Empowerment, combined with accountability, provides an impetus to performance and improves effectiveness, thereby enhancing shareholders value. Control Control is a necessary concomitant of its second core principle of governance that the freedom of management should be exercised within a framework of appropriate checks and balances. Control should prevent misuse of power, facilitate timely management response to change, and ensure that business risks are pre-emptively and effectively managed.

Ethical Corporate Citizenship Corporations itself have a responsibility to set exemplary standards of ethical behaviour, both internally i.e., within the organization, as well as in their external relationships. Unethical behaviour corrupts organizational culture and undermines stake holders value. The Governance Structure Flowing from the philosophy and core principles, Corporate Governance must take place at three interlinked levels, namely Strategic supervision by the Board of Directors Strategic management by the Corporate Management Committee Executive management by the Divisional Chief Executive assisted by the Divisional Management Committee 200 Sanjay Kumar and V.K. Singh The right balance between freedom of management and accountability to shareholders can be achieved by segregating strategic supervision from strategic and executive management. The Board of Directors (Board) as trustees of the shareholders will exercise strategic supervision through strategic direction and control, and seek accountability for effective strategic management from the Corporate Management Committee (CMC). The CMC will have the freedom, within Board approved direction and framework, to focus its attention and energies on the strategic management of the Company. The Divisional Chief Executive, assisted by the Divisional Management Committee, will have the freedom to focus on the executive management of the divisional business. The 3-tier governance structure thus ensures that: 1. Strategic supervision (on behalf of the shareholders), being free from involvement in the task of strategic management of the Company, can be conducted by the Board with objectivity, hereby sharpening accountability of management. 2. Strategic management of the Company, uncluttered by the day-to-day tasks of executive management, remains focused and energised; and 3. Executive management of the divisional business, free from collective strategic responsibilities as a whole, gets focused on enhancing the quality, efficiency and effectiveness of its business. The core roles of the various entities at the three levels of Corporate Governance will be as follows: Board of Directors (Board) The primary role of the Board of Directors is that of trusteeship to protect and enhance shareholders value through strategic supervision. As trustees they will

ensure that the Company has clear goals relating to shareholder value and its growth. They should set strategic goals and seek accountability for their fulfillment. They will provide direction, and exercise appropriate control to ensure that the Company is managed in a manner that fulfills stakeholders aspirations and societal expectations. The Board must periodically review its own functioning to ensure that it is fulfilling its role. There must be a balanced Board, consisting of Executive and Non-Executive Directors, the latter including independent professionals. Executive directors, including the Executive Chairman, shall not generally exceed 1/3rd of the total strength of the Board. The Non-Executive Directors shall comprise eminent professionals, drawn from amongst persons with experience in business / finance / law / public enterprises. Directors shall be appointed / re-appointed for a period of three to five years, and in the case of Executive Directors upto the date of their retirement, whichever is earlier. The Board shall determine from time to time the retirement age for both Executive and Non-Executive Directors. The Board shall specify the maximum number of company Directorships which can be held by members of the Board. Corporate Governance: Meaning and Implementation 201 Non-Executive Directors are expected to play a critical role in imparting balance to the Board processes by bringing an independent judgement to bear on issues of strategy, performance, resources, standards of Company conduct, etc. The Board shall meet at least six times a year and as far as possible meetings shall be held once in two months. The annual calendar of meetings should be agreed upon at the beginning of each year. The quorum for meetings should be one third of members or as laid down in the Articles of Association of the Company and decisions shall be taken by simple majority, unless statutorily required otherwise. Meetings should be governed by a structured agenda. All major issues included in the agenda shall be backed by comprehensive background information to enable the Board to take informed decisions. Agenda papers, as far as practicable, shall be circulated at least three working days prior to the meeting. Normally items for the Board Agenda, except those emanating from Board Committees, shall have been examined by the CMC. Minutes should be circulated within 15 working days of the meeting and confirmed at the next meeting. Board decisions shall record the related logic as far as practicable.

The Board shall have the following Committees whose terms of reference shall be determined by the Board from time to time: Audit Committee: To provide assurance to the Board on the adequacy of internal control systems and financial disclosures. The Head of Internal Audit will act as cocoordinator to the Audit Committee, but will be administratively under the control of the Director accountable to the Board for the Finance function. Remuneration Committee: To recommend to the Board compensation terms for Executive Directors and the senior most level of management below the Executive Directors. Nominations Committee: To recommend to the Board nominations for membership of the CMC and the Board, and oversee succession for the senior most level of management below the Executive Directors. Investor Services Committee: To look into redressal of shareholder and investors grievances, approval of transmissions, sub-division of shares, issue of duplicate shares, etc. Terms of Reference of the Board Committees shall include: Objectives, Role, Responsibilities Authority / Powers Membership & Quorum Chairmanship Tenure Frequency of Meetings The composition of these Committees will be as follows:202 Sanjay Kumar and V.K. Singh Committee Members Chairman Audit Committee Directors of the Company, as may be decided by the Board, with not less than 3 members, all being NonExecutive Directors with majority of them being independent; and with at least one Director having financial and accounting knowledge. The Director accountable to the Board for the Finance function, Head of Internal Audit and representative of External

Auditors shall be the Permanent Invites with the Company Secretary to act as the Secretary. One of the Independent Directors, to be determined by the Board. Remuneration Committee Non-Executive Directors, as may be decided by the Board, with the Director accountable to the Board for the HR Function as the Secretary. One of the Independent Directors, to be determined by the Board. Normally meetings of the Board Committees shall be convened by their respective Chairman. However, any member of the Committee may, with the consent of the concerned Chairman, convene a meeting of the Committee. The Chairmanship of Board Committees shall be for two years at a time. Signed minutes of Board Committee meetings shall be tabled for the Board's information as soon as possible. However, issues requiring Board's attention / approval should be tabled in the form of a note to the Board from the Committee Chairman. In the event there are no issues to be brought before the Board by the Audit Committee, the Committee Chairman shall submit a 'NIL' report to the Board. Corporate Management Committee (CMC) The primary role of the CMC is strategic management of the Company's businesses within Board approved direction / framework. The CMC will operate under the superintendence and control of the Board. The composition of the CMC will be determined by the Board (based on the recommendation of the Nominations Committee), and will consist of all the Executive Directors and three or four key senior members of the management. Membership of the CMC shall be reviewed by the Nomination Committee annually. The CMC shall be convened and chaired by the Executive Chairman of the Company. The Company Secretary shall be the

Secretary of the CMC. The quorum for meetings will be 50% of the members, subject to a minimum of three members. Decisions will be taken by simple majority. Minutes of CMC meetings shall be tabled before the Board for its information. Corporate Governance: Meaning and Implementation 203 However, issues arising from CMC Meetings and requiring Board's approval / attention should be tabled in the form of a note from the relevant Executive Director. Agenda items shall be backed by comprehensive notes from the concerned member / invitee, along with DMC approval where applicable. Agenda papers, as far as practicable, shall be circulated at least three days prior to the meeting. The CMC shall normally meet once a month. Divisional Management Committee (DMC) Executive management of the divisional business to realize tactical and strategic objectives in accordance with CMC / Board approved plan. Composition of the DMC shall be determined by the Line Director with the approval of the CMC. The Divisional CEO shall convene and chair the DMC meetings. If the Divisional CEO, for any reason, is not in a position to convene a required DMC meeting, he shall in writing delegate the power to convene and chair the required meeting to one of the DMC members identified by name. Such delegation should be either for a specific meeting or for meetings to be held during a specific period of time. It cannot be a general, open-ended delegation. The key functions of the Division shall be represented on the DMC. Normally the Divisional Financial Controller, in addition to being a member, shall act as the Secretary to the DMC and will be responsible for circulation and custody of agenda notes and minutes. The DMC shall generally meet at least once a month to review Divisional performance and related issues. Quorum for meetings shall be 50% of the members subject to a minimum of three members. Decisions will be taken by simple majority. Minutes of meetings shall be tabled before the CMC for its information. Agenda items shall be backed by comprehensive notes from the relevant member / invitee. Agenda papers, as far as practicable, shall be circulated at least three days prior to the meeting. Legal Compliance It is the Company's policy to comply fully with all applicable laws and regulations.

Ensuring legal and regulatory compliance is the responsibility of the Chief Executives of the Businesses and the Divisional Management Committees. The Company cannot accept practices which are unlawful or may be damaging to its reputation. Divisional Management Committees must satisfy themselves that sound and adequate arrangements exist to ensure that they comply with the legal and regulatory requirements impacting each business and identify and respond to developments in the regulatory environment in which they operate. In the event the implication of any law is not clear, the Company's Legal Department shall be consulted for advice. Health and Safety The Company must attach great importance to a healthy and safe work environment. It must be committed to provide good physical working conditions and encourages 204 Sanjay Kumar and V.K. Singh high standards of hygiene and housekeeping. Particular attention should be paid to training of employees to increase safety awareness and adoption of safe working methods, particularly designed to prevent serious or fatal accidents. Environment Policies The Company must believe that commitment to sustainable development is a key component of responsible corporate citizenship and therefore deserves to be accorded the highest priority. Accordingly, the Company is committed to Best Practices in environmental matters arising out of its business activities and expects each business to fully demonstrate this commitment. In addition to complying with applicable laws and regulations, Businesses must establish procedures for assessing the environmental effects of their present and future activities. They should adopt Best Practices in their environmental policies and procedures. Personal Conduct All directors, senior management and employees have the obligation to conduct themselves in an honest and ethical manner and act in the best interest of the Company at all times. They are expected to demonstrate exemplary personal conduct through adherence to the following: Avoidance of Conflict of Interest All directors, senior management and employees must avoid situations in which their personal interest could conflict with the interest of the Company. This is an area in

which it is impossible to provide comprehensive guidance but the guiding principle is that conflict, if any, or potential conflict must be disclosed to higher management for guidance and action as appropriate. Transparency and Audit-ability All directors, senior management and employees shall ensure that their actions in the conduct of business are totally transparent except where the needs of business security dictate otherwise. Such transparency shall be brought about through appropriate policies, systems and processes, including as appropriate, segregation of duties, tiered approval mechanism and involvement of more than one manager in key decisions and maintaining supporting records. It shall be necessary to voluntarily ensure that areas of operation are open to audit and the conduct of activities is totally auditable. Protection of Confidential Information No director, senior management and employee shall disclose or use any confidential information gained in the course of employment/ association with the Company for personal gain or for the advantage of any other person. No information either formally or informally shall be provided to the press, other publicity media or any Corporate Governance: Meaning and Implementation 205 other external agency except within approved policies. Company Facilities No director, senior management and employee shall misuse Company facilities. In the use of Company facilities, care shall be exercised to ensure that costs are reasonable and there is no wastage. Leading by Example The organisation's directors and senior management set the professional tone for the Company. Through both their words and their actions, the organisation's leadership conveys what is acceptable and unacceptable behaviour. The company's directors, senior management and employees must constantly reinforce through their actions and behaviour that the company stated beliefs of responsible corporate citizenship are rooted in individual conviction and personal integrity Any instance of non-adherence to the Code of Conduct / any other observed unethical behaviour on the part of those covered under this Code should be brought to the attention of the immediate reporting authority, who shall in turn report the same to

the Head of Corporate Human Resources. Divisional CEO: The Divisional CEO shall function as the Chief Operating Officer with executive responsibility for day-to-day operation of the Divisional business, and shall provide leadership to the Divisional Management Committee in its task of executive management of the Divisional business. In this process of governance, code of conduct laid down by the companies for its directors, senior management personnel and employees plays the most important role. This Code is derived from three interlinked fundamental principles, viz. good corporate governance, good corporate citizenship and exemplary personal conduct. The Corporate Governance Policy is the apex level instrument guiding conduct of the affairs of the Company and clearly delineates the roles, responsibilities and authorities of the key entities in the governance structure of the Company. The Code of conduct forms an integral part of the Company's Governance Policy. The directors, senior management and employees must adhere to the Corporate Governance Policy of the Company. In the conduct of the Company's business, the practice of good corporate citizenship is a prerequisite and embraces the following: Dealing with People in the Organization In dealing with each other, directors, senior management and employees shall uphold the values which are at the core of HR Philosophy - trust, teamwork, mutuality and collaboration, meritocracy, objectivity, self respect and human dignity. Indeed, these values form the basis of HR management systems and processes. In selection and recruitment, while meritocracy will be a prime criterion, managers will scrupulously consider all factors that go towards securing the interests of the Company. It must focus on meritocracy, equity and upholding of Company values in all people 206 Sanjay Kumar and V.K. Singh processes including performance management systems, appraisals, remuneration and rewards. A Gender Friendly Workplace As a good corporate citizen, it must be committed to a gender friendly workplace. It

should seek to enhance equal opportunities for men and women, prevent/stop/redress sexual harassment at the workplace and institute good employment practices. The company should maintain an open door for reportees; encourages employees to report any harassment concerns and is responsive to employee complaints about harassment or other unwelcome and offensive conduct. A committee has to be constituted to enquire into complaints and to recommend appropriate action, wherever required. The company must demand, demonstrate and promote professional behaviour and respectful treatment of all employees. Relationships with Suppliers and Customers All directors, senior management and employees shall ensure that in their dealings with suppliers and customers, the Company's interests are never compromised. Accepting gifts and presents of more than a nominal value, gratuity payments and other payments from suppliers or customers will be viewed as serious breach of discipline as this could lead to compromising the Company's interests. Conclusion Corporate governance is in essence determination of how companies are governed, how executive actions are supervised and how a company is accountable to regulations imposed on it by law or other commitments to shareholders. Corporate governance is also concerned with the ethics, values and morals of a company and its directors.