INTRODUCTION

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation 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, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. Corporate governance is a multi-faceted subject. An important part of corporate governance deals with accountability, fiduciary duty, disclosure to shareholders and others, and mechanism of auditing and control. In this sense, corporate governance players should comply with codes to the overall good of all constituents. Another important focus is economic efficiency, both within the corporations ( such as the best practice guidelines) as well as externally (national institutional frameworks ). In this economic view, the corporate governance system should be designed in such a way as to optimize results, as well as to detect and prevent frauds. Some argue that the firm should act not only in the interest of the shareholders but also off all the other stakeholders. Governance makes decisions that the define expectations, grant power, or verify performance. It consists either of a separate process or of a specific part of the management or leadership processes. Sometimes people setup a government to administer these processes and systems. In the case of a business or a non profit organization, governance develops and manages consistent, cohesive policies, processes and decision-rights for a given area of responsibility. For example, managing at a corporate level might involve evolvic policies on privacy, on internal investment, and on the use of data.

WORD- ORIGIN The word Governance derives from Latin origins that suggest the notion of steering. One can contrast this sense of steering a group or society with the traditional Top-Down approach of governments driving society. Distinguish between governances power to and governments power over.

DEFINITION Corporate Governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment . (Shleifer and Vishny) Corporate Governance is about is about promoting corporate fairness, transparency and accountability. (J Wolfensohn) (President of the World Bank quoted by an article in Financial Times, June 21st1999) 1.The OCED has defines corporate governance as involving an asset of relationships between a companys management, its board, its shareholder and other stakeholders. Corporate governance also provider the structure through the objectives of the company are set, and the means of attaining those objectives and monetary performance. Good governance should provide proper incentives for the board management to pursue objectives that are in the interest of the company and shareholders and should facilitate effective monitoring thereby encouraging firms to use resources efficiently.

WHAT IS CORPORATE GOVERNANCE? Corporate governance is typically perceived by academic literature as dealing with problems that results from the separation of ownership and control. From this perspective, corporate governance would focus on: the internal structure of BOD; the creation of independent committees rules for disclosures of information to shareholders and creditors; and control of the management. An adequate institutional and legal framework is in place in India for effectively implementing a code of sound corporate governance in banks. The statutes have build-in legal provisions that prohibit or strongly limit activities and relationship that diminish the quality of corporate governance in banks, they have been advised to place before their board of directors the report of consultative group of directors of banks and setup to review the supervisory role of boards of banks. The recommendations include the responsibility of the BOD, role and responsibility of independent and non- executive directors, fit and proper norms for nomination of directors in private sector banks, etc. The banks were advised to adopt and implement the recommendations on the basis of the decisions taken by their board. Transparency and disclosures standards are also important constituents of a sound corporate governance mechanism. Transparency and accounting standards in India have been enhanced to align with international best practices. However, there are many gaps in the disclosures in India vis-a-vis the international standards, particularly in the areas of risk management strategies and practices, risk parameters, risk concentrations, performance measures, component of capital structure, etc. Hence, the disclosure standards need to be further broad-based in consonance with improvements in the capability of market players to analyze the information objectively.

History In the 19th century, state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, to make corporate governance more efficient. Since that time, and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law, and because the US's wealth has been increasingly securitized into various corporate entities and institutions, the rights of individual owners and shareholders have become increasingly derivative and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for corporate governance reforms. In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern corporation in society. Berle and Means' monograph "The Modern Corporation and Private Property" (1932, Macmillan) continues to have a profound influence on the conception of corporate governance in scholarly debates today. In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and Worldcom, as well as lesser corporate debacles, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, and, more recently, Fannie Mae and Freddie Mac, led to increased shareholder and governmental interest in corporate governance. This culminated in the passage of the Sarbanes-Oxley Act of 2002. But, since then, the stock market has greatly recovered, and shareholder zeal has waned accordingly.

Principles of corporate governance

Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principals of Corporate Governance (OECD, 1998 and 2004), the SarbanesOxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principals recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders:[7][8][9]Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. Interests of other stakeholders:[10]Organizations should recognize that they have legal, contractual, social, and market driven obligations to nonshareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. Role and responsibilities of the board:[11][12] The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment to fulfill its responsibilities and duties. Integrity and ethical behavior:[13][14] Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency:[15][16] Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Parties to corporate governance

The most influential parties involved in corporate governance include government agencies and authorities, stock exchanges, management (including the board of directors and its chair, the Chief Executive Officer or the equivalent, other executives and line management, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns (risk) are necessarily lower for a controlling shareholder. A board of directors is expected to play a key role in corporate governance. The board has the responsibility of endorsing the organization's strategy, developing directional policy, appointing, supervising and remunerating senior executives, and ensuring accountability of the organization to its investors and authorities.

All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments , while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital. Many parties may also be concerned with corporate social performance. A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes, they are less likely to engage with the corporation. When this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action. There is substantial interest in how external systems and institutions, including markets, influence corporate governance. Ownership structures and elements Ownership structure refers to the types and composition of shareholders in a corporation. Researchers often "measure" ownership structures by using some observable measures of ownership concentration or the extent of inside ownership. Some features or types of ownership structure involving corporate groups include pyramids, cross-shareholdings, rings, and webs. German "concerns" (Konzern) are legally recognized corporate groups with complex structures.

Japanese keiretsu () and South Korean chaebol (which tend to be familycontrolled) are corporate groups which consist of complex interlocking business relationships and shareholdings. Cross-shareholding are an essential feature of keiretsu and chaebol groups) [3]. Corporate engagement with shareholders and other stakeholders can differ substantially across different ownership structures. Family ownership In many jurisdictions, family interests dominate ownership structures. It is sometimes suggested that corporations controlled by family interests are subject to superior oversight compared to corporations "controlled" by institutional investors (or with such diverse share ownership that they are controlled by management). A recent study by Credit Suisse found that companies in which "founding families retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial peers." Since 1996, this superior performance amounts to 8% per year.[4] Forget the celebrity CEO. "Look beyond Six Sigma and the latest technology fad. A study by Business Week [5] claims that "BW identified five key ingredients that contribute to superior performance. Not all are qualities are unique to enterprises with retained family interests. Institutional investors Many years ago, worldwide, investors were typically individuals or families, irrespective of whether or not they acted through a controlled entity. Over time, markets have become largely institutionalized: investors are largely institutions that invest the pooled funds of their intended beneficiaries. These institutional investors include pension funds (also known as superannuation funds), mutual funds, hedge funds, exchange-traded funds, and financial institutions such as insurance companies and banks. In this way, the majority of investment now is described as "institutional investment" even though the vast majority of the funds are for the benefit of individual investors.

The significance of institutional investors varies substantially across countries. In developed Anglo-American countries (Australia, Canada, New Zealand, U.K., U.S.), institutional investors dominate the market for stocks in larger corporations. While the majority of the shares in the Japanese market are held by financial companies and industrial corporations, these are not institutional investors if their holdings are largely with-on group. The largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest investment management firm for corporations, State Street Corp.) are designed to maximize the benefits of diversified investment by investing in a very large number of different corporations with sufficient liquidity. The idea is this strategy will largely eliminate individual firm financial or other risk and. A consequence of this approach is that these investors have relatively little interest in the governance of a particular corporation. It is often assumed that, if institutional investors pressing for will likely be costly because of "golden handshakes") or the effort required, they will simply sell out their interest.

BENEFITS/OBJECTIVES 1) Enhancing overall companies performance. 2) Preparing a small enterprise growth so helping to secure new business opportunities when they arise 3) Increasing attractiveness to investors and lenders which enables faster growth. 4) Increasing companies ability to identify and mitigate the risk, manage crisis and respond to changing market trend. 5) Increasing market confidence as a whole. 6) All company suffers from corporate scandals which scare potential investor away from the market. 7) To build an environment of trust and confidence amongst these having competition and conflicting interest. 8) To enhance shareholders value and protect the interest of stakeholders by enhancing the corporate performance and accountability. 9)To have system and procedures which are transparent and which inform the stakeholders about the working of corporations.

Good Governance can be understood as a set of 8 major characteristics: Participation Rule of law Transparency Responsiveness Consensus orientation Equity and inclusiveness Effectiveness and Efficiency Accountability

KEY ELEMENTS FOR GOOD CORPORATE GOVERNANCE PRINCIPLES: 1)Honesty 2)Trust and Integrity 3) Openness 4)Responsibility and accountability 5) Commitment to Organisation 6)Role and Responsibility of board 7) Integrity and ethical behavior 8)Disclosure and Transparency

Principles Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports. Commonly accepted principles of corporate governance include: Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is

understandable and accessible and encouraging shareholders to participate in general meetings.

Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders. Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person. Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries. Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization

should be timely and balanced to ensure that all investors have access to clear, factual information.

Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers' behavior, an independent third party (the external auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability. Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.[28] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore

evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.

Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting

Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.

Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

In publicly-traded U.S. corporations, boards of directors are largely chosen by the President/CEO and the President/CEO often takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). The practice of the CEO also being the Chair of the Board is known as "duality". While this practice is common in the U.S., it is relatively rare elsewhere. It is illegal in the U.K.

External corporate governance controls External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:

competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labour market

media pressure takeovers

OVERVIEW OF BANK CORPORATE GOVERNANCE Corporate governance for banking organizations is arguably of greater importance than for other companies, given the crucial financial intermediation role of banks in an economy, the need to safeguard depositors funds and their high degree of sensitivity to potential difficulties arising from ineffective corporate governance. Effective corporate governance practices, on both a system-wide and individual bank basis, are essential to achieving and maintaining public trust and confidence in the banking system, which are critical to the proper functioning of the banking sector and economy as a whole. Bank failures can pose significant public costs and consequences due to their potential impact on deposit insurance mechanisms and the possibility of broader macroeconomic implications, such as contagion risk and impact on payment systems. Indeed, banks and other financial companies may lose large amounts of money in a short period in the case of events such as fraud. In addition, poor corporate governance can lead markets to lose confidence in the ability of a bank to properly manage its assets and liabilities, including deposits, which could in turn trigger a liquidity crisis or a run on deposits. Banks also typically have access to confidential customer information, which can potentially be misused by employees for personal gains. Moreover, review and analysis of the investments, activities, risk exposures and financial statements of banks may in some cases be more complex than such reviews of other companies for several reasons, including the unrated, borrower-

specific nature of a banks loan portfolio, as well as valuation challenges. In light of these sensitivities, minimum standards of corporate governance for banks should therefore be more ambitious than for non-financial firms

. The OECD principles define corporate governance as involving a set of relationships between a companys management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. From a banking industry perspective, corporate governance involves the manner in which the business and affairs of individual institutions are governed by their boards of directors and senior management, which affects how banks: Set corporate objectives (including generating economic returns to owners); Run the day-to-day operations of the business; Meet the obligation of accountability to their shareholders and take into account the interests of other recognised stakeholders Align corporate activities and behaviour with the expectation that banks will operate in a safe and sound manner, and in compliance with applicable laws and regulations; and Protect the interests of depositors.

WHY CORPORATE GOVERNANCE IN BANKS

If we examine the need for improving corporate governance in banks, two reasons stand out: 1) Bank exist because the are willing o take on and manage risk. Besides, with the rapid pace of financial innovation and globalization, the face of banking business is going a sea change. Banking business is becoming more complex and diversified. Risk taking and management is less regulated competitive market will have to be done in such a way that investors confidence is not enforced. 2) Even in a regulated setup, as it was in India prior to 1991, some big banks in the public sector and a few in the private sector had incurred substantial losses. This along with the massive failures of Non Banking Financial Companies(NBFCS) had adversely impacted investors confidence. 3) Moreover, protecting the interest of the depositors become a paramount importance to banks. In other corporates, this is not and need not be so for two reasons; The depositors collectively entrust a very large sum of their hard earned money to the care of the banks. It is found that in India, the depositors contribution was well over 15. % times the shareholders stake in banks as early as in March 2001. this is bound to be much more now. The depositors are very large in number and are scattered and have a little say in the administration of the banks. In other corporates, big lenders do exercise the right to direct the management in any case; the lenders stake in them might not exceed 2 or 3 times the owners stakes.

4) Banks deal in peoples fund and should therefore act as trustees of the deposit. Regulators t world over has recognized the vulnerability of depositors to the whims of the managerial misadventures in banks and therefore, has been regulating banks more tightly than other corporates. To sum the objective of governance in banks should be protection of depositors interest and then be to optimize the shareholders interest. All other considerations would fall in place once these two are achieved.

Banking supervision cannot work effectively if sound corporate governance is not in place and consequently banking supervisors have a strong interest in ensuring that there is effective corporate governance at every banking organization. Supervisory experience underscores the necessary of having the appropriate level of accountability and checks the balances within each banks. Put. Plainly sound corporate governance makes the work of supervisors infinitely easier. Sound corporate governance can contribute to a collaborative working relationship between bank management and bank supervisors.

CORPORATE GOVERNANCE IN BANKS INDIAN CONEXT

In the content of corporate governance, the Indian banking sector has a special role to play, not only because of the critical nature of the business but because it is the sector that has had large public ownership- which is one in the process of being divested historically, banks has been used for government policy implementation. The differences and criticalities of the sector arise out of the following factors: A) In the case of banks and financial intermediaries, interest of other stakeholders, namely the depositors, appear to be more important as compared to other corporate to other corporate.

B)The risk in baking institutions is many( for example credit risk, counter party risk, liquidity risk etc) and these have systematic implication. The East Asian crisis of the 1990s is a case in point. Corporate governance in general is a systematic process for enhancing wealth generating capacity, meeting stakeholders and social expectations.

In this context, governance in banks and financial institutions (FIs) has been attracting special attention in India during the past few years for a number of reasons. Firstly with Liberalizations and Globalizations, the Indian economy, while the global markets, on the other hand the development outside the country are also affecting the domestic markets. It is well understood that vulnerable, unstable and opaque banking and financial system can severely system can severely disrupt macro economic performance of that country. It is therefore necessary to strengthen both supervisory and regulatory framework pf of the banking and financial system. Further, with increasing deregulation, inspite of the fact that the banking and financial system all over the globe including India, are required to meet certain international benchmark or standard as per regulation, particularly in the areas of supervision, accounting and disclosures. However, the issues are complex and merely meeting these standards would not be sufficient by themselves for stability in the long run unless there are well established governance processes permitting throughout an organization through a system proper conduct and professional management. When referring to a banking institution it should a read as meaning both on a solo and a consolidated basis a banking institutions must have a satisfactorily level of

corporate governance related to its size and nature of its business and activities undertaken corporate governance of banks in any is important for several reasons. 1) Banks have an overwhelmingly dominant position in economies financial system and are extremely important engines of economic growth. 2) As financial market usually are underdeveloped banks in economies are typically the most important source of finance for the majority of firms. 3) As well as providing a generally accepted means of payment, banks in countries are usually the main depository of economys savings.

4) Many developing economies have recently liberalized their banking system through privatization or disinvestment and reducing the role of economic regulation consequently, managers of banks in these economies have obtained greater freedom in how they run their banks.

CORPORATE GOVERNANCE AND THE WORLD BANK :The world bank report on corporate governance is a landmark in the evolution of the theory and its implications of this concept of best corporate behavior. Governance in relation to a business organization concerns with the intrinsic nature, purpose, integrity and identity of the organization and focuses primarily on the relevance continuity and the fiduciary aspects of the organization. It involves monitoring and overseeing strategic direction, socio-economic and cultural context, externalities and constituencies of the organization. Hence, corporate governance can be called as an umbrella term encompassing specific issues arising from interactions among senior management personnel, shareholders, board of directors, depositors, borrowers, other constituencies and the society at a large. It deals with the exercise of power over the direction of enterprise, the supervision of

executive actions, acceptance of duty to be accountable and regulation of the affairs of the corporation. The world bank report on corporate governance recognizes the complexity of the very concept of corporate governance and therefore focuses on the principle on which it is based. These principles such as transparency, accountability, fairness and responsibility are universal in their application. The way they are put into practice have to be determined by those with the responsibility for implementing them.

Corporate governance is concerned with holding the balance between economies and social goals and between individual and community goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the corporations and the society. The World Bank report points the way to the establishment of trust and the encouragement of he enterprises. It marks and important milestone in the development of corporate governance

THE CHALLENGES OF ADOPTING BETTER CORPORATE GOVERNANCE NORMS

The recent growth in corporate governance literature has focused on ways that corporations work. Firm behavior was earlier modeled on the argument of the neo classicist who ascertained that firms are nothing more than production counters. All activities of the firm were geared so as to maximize profit. Finance literature in particular came a long way in explaining the various financial theories of firms and the behaviors associated with them. With the increasing understanding that mere economic and production based explanations do not exhaustively describe the motivations for governance. Researchers have focused on the behavioral side of firms performance to justify the economic rationale of such critical behaviors.

The foundational argument of corporate governance as seen by both academic as well as other independent researchers can be traced back to the pioneering work of Berle and Means (1932) who observed as early as 1930s, that the modern corporations having acquired a very large size can create the possibility of the separation of control over the firm from its direct ownership. Earstwhile promoters who largely controlled and managed their organizations increasingly needed specialized skills.

Professionals with the required skill sets were to be hired. Berle and Means observations of the departure of the owners from the actual control of the corporations led to a renewed emphasis on the behavioral dimension of the theory of the firm. The modern day uproar over corporate governance problems of insider trading, excessive executive compensation, managerial expropriations of shareholders wealth, false reporting, non disclosure of certain accounting and governance malpractises and self dealing among others, are assumes to be related to the theory of separation of ownership and control. Theoretical interest in corporate governance in india is a recent phenomenon. It is a result of a spate of corporate scandals that shook the country during the early liberalization era. Obscure companies quickly listed on the exchanges during the stock market boom of 199394 only to disappear siphoning off public fund funds and leaving the retail investors with illiquid stock. The sudden appearance of fly-by-night operators during the period coupled with the emergence of a new breed of shareholders like the foreign investors, mutual funds and private equity placement companies and their demand for better governance practices has compelled the policy makers to think of the governance in corporate India. The demand of financial liberalization, it appears, have help in imparting greater control in the banks in their operations Responsibility has now been totally fixed

upon them for any likely loan losses. This has led to banks now extending external finance in lieu of some control rights, apart from there pecuniary priorities. Since the structure of corporate finance in India is highly dependent on banks financial resources, some authors argue that the legal structure should be so developed that banks are free from excessive portfolio restrictions and governance mechanisms be so revised that banks representations on board become a reality. This would enable banks to maintain proper checks and balances apropos of expropriations of shareholder value by the managers.

Varied opinions were articulated in India in response to wide ranging corporate scam\scandals like violations of foreign exchange regulations, making clandestine payments to politicians, involvement in illegal activities and unethical deals by the top industrial houses. While some suggested that the investigations might scare away the foreign investors and the economy would once again be in tatters, others stressed on the importance os social responsibilities of business. The code was prepard with the view that Indian companies had to adopt the best of corporate practices if they were to access domestic as well as foreign capital at competitive rates. The code agreed that there was no unique way of understanding corporate governance. Differentstructures established in different countries might not be pertinent to local conditions. With increased exposure to global markets it became imperative on corporations to focus on transparency and adopt a) That government, set government companies, societies and local authorities owned or controlled by the Central Government or otherwise; b) Exercise superintendence over the vigilance administration of the various Ministries of the Central Government or corporations established by or under any Central Act, Government companies and Societies, local authorities owned or controlled by that government. The persons referred in Clause (c) of subsection (1) are as follows:a) Group A Officers of the Central Government.

b) Such level Officers of the corporations established by or under any Central Act, Government companies, societies and other local authorities, owned or controlled by the Central Government, as that Govt. may, by notification in the Official Gazette, specify in this behalf. c) Provided that till such time a notification is issued under this clause, all officers of the said corporations, companies, societies and local authorities shall redeem to be the persons referred to clause(c) of the subsection (1)

While there are 5 cause for corruption in our system, there are 4 key players in the country. These are the Neta( the corrupt Politician), the Babu( the corrupt bureaucrat ), the Lala( the corrupt businessman) and the Dada ( the criminal) who have combined together in different formulations, permutations and combinations. They have made our countries one of the most corrupt countries in the world, to tackle these players and it is necessary to look at the psychology which breeds corruption.

Consequences of Poor Corporate Governance

Before getting to the benefits of good corporate governance let us take a peep at some of the consequences of poor corporate governance. Although the near collapse of the financial system in Ghana in the 1970s and the early 1980s could in general be attributed to economic-wide mismanagement, much of it bears the traits of poor corporate governance.

Unqualified people were employed in most of the banks. The banking industry in Ghana was too slow in insisting on training and qualification before placement. In the army, the best in military tactics could not become an officer without attending an officers course; similarly, the best mechanical fitter could never be taken as an engineer without a formal training as such; yet, in Ghanaian banks, until quite recently, it was possible for one to enter the establishment as a clerk and simply by years of service rise to the level of senior management without any formal training

in banking. Was it surprising that loans were given without proper documentation or collateral? Was it surprising that a facility could be granted to someone whose address was near the big tree, Koforidua?

Improper appraisal of projects was also prevalent. Facilities were granted more on the basis of whom you know and how much you are willing to share with the bank official. These elements of poor governance structures introduced into the financial system problems of adverse selection and moral hazard, leading to poor allocation of resources. In other words, because of the poor governance structure, resources did not go to those with the best use. Kalabule and corruption were the order of the day. Credit was poorly allocated, productive processes suffered and the economy as a whole declined. Such were the consequences of poor corporate governance.

The Structural Adjustment Programme (SAP) and the Financial Sector Adjustment Programme (FINSAP) which were initiated in the 1980s helped to clean up the balance sheets of the banks and instituted elements of proper corporate governance in them. The corporate restructuring was helped in no small way by the improvements in the macro economy also.

Corporate Governance in Indian Scenario

A company is the largest form of business organization. Its dimension may be global. There are a lot of stakeholders in a corporate body. The companies philosophy on corporate governance is to attain the highest level of transparency, accountability and integrity. Procedures and systems which are in accordance with best practices for governance. The true meaning of corporate governance is to satisfy the aspirations of all stakeholders, customers, suppliers, leaders, employees the share holders and the expectations of the society. The Board of directors supports the broad principles of corporate governance and lays string emphasis on its trusteeship role to align and direct the actions of the organization to achieve its a vowed objectives of transparency, accountability and integrity. Factors influencing corporate governance; The Ownership structure; The structure of ownership of a company determines, to considerable extent, how a corporation is managed and controlled. Our corporate sector is characterized by the c o-existence of state owned, private and multinational enterprises. The shares of these enterprises (except those belonging to the public sector) are held by institutional as well as small investors. Large shareholders tend to be active in Corporate Governance either through their representatives on company boards/through their active participation I n annual general body meetings. This has been demonstrated by Reliance Industries Ltd., which has the highest number of equity shareholders spread across the country.

The Structure of Company Boards; Along with the structure of ownership, the structure of company boards has considerable influence on the way the companies are managed and controlled. The Board of Directors is responsible for establishing corporate objectives, developing broad policies and selecting top-level executives to carryout those objectives and policies. The board also requires management's performance to ensure that the company is run well and shareholder's interests are protected. Company boards are permitted to vary in size, composition and structure to best serve the interests of the corporation and the shareholders. Boards can be singletired/two-tired with regard to the size of the board, opinions and practices vary. Some argue that the adequate size is to range from 9 to15. Some put the figure at 10. Yet others recommend a minimum of 5 and a maximum of 10. The Financial Structure: Along with the notion that the structure of ownership matters in Corporate Governance is the notion that the financial structure of the company ie., Proportion between debt and equity, has implications for the quality of governance. Recent research has shown contrary to the Modigliani-Miller hypothesis that the financial structure of the firm has no relationship to the value of a firm, that the financial structure does matter, it is no secret that the lenders exercise significant influence on the way a company is managed and controlled. Banks can perform the important function of screening and monitoring companies as the (banks) are better informed than other investors. Further, banks can diminish short-term biases in managerial decision-making by favouring investments that would generate higher

benefits in the long run. Banks play a more favourable role than other investors in reducing the costs of financial distress.

THE FUTURE:
As we go to the future, corporate governance will become more relevant and a more acceptable practice. Seeds are already sown towards honest but practices. More and more progressive companies are drawing and enforcing codes of conduct, are accepting tougher accounting standards and are following more stringent disclosure norms than are mandated by law. These tendencies would be further strengthened by a variety of forces that are acting today and would become stronger in years to come. Such forces are; a. Deregulation: Economic reforms have not only increased growth prospects, but they have also made markets more competitive. This means that in order to survive, companies will need to invest continuously in a large scale. b. Disintermediation: Meanwhile, financial sector reforms have made it imperative for firms to rely on capital markets to a greater degree for their needs of additional capital. c. Institutionalization: Simultaneously the increasing institution of the capital markets has tremendously enhanced the disciplining power of the market d. Globalization: Globalization of financial markets has exposed issuers, investors and intermediaries to the higher standards of disclosure and corporate governance that prevail in more developed capital markets. e. Tax Reforms: Tax reforms coupled with deregulation and competition have tilted the balance away from block money transactions. This means the worst forms of mis-governance less attractive than in the pa

CADBURY COMMITTEE REPORT

The stated objective of the Cadbury committee was to help raise the standardsof corporate governance and level of confidence in financial reporting andauditing by setting out clearly what it sees as the respective responsibility ofthose involved and what it believes is expected of them. The committee investigated accountability of the board of directors toshareholders and to the society. It submitted its report and associated code ofbest practices in December 1992. Wherein it spelt out the methods ofgovernance needed to achieve balance between essential powers of the board ofdirectors and heir accountability. The resulting report, and associated the Codeof best practices published in Dec 1992 was generally well received while e therecommendations themselves were not mandatory. The companies listed on theLondon Stock Exchanges were required to clearly state in their accountswhether or not code has been followed. The companies who did not complywere requires to explain the reason for that. The Cadbury Code for best practices at 19 recommendations being thepioneering on corporate governance it would in order to make brief referencesto them the recommendations are in the nature of guidelines relating to board ofdirections, coexecutive directors, executive directors and tose on reporting andcontrol. Relating to board of directors these are:The board should meet regularly, retain full and efficient control over the company and monitor the executive management. Reserved to it for decision to ensure direction and control of the company isfirmly in its hand. There should be an agreed procedure for directors in thefurtherance of their duties to take independent professional advise of necessaryat the company expenses. The stated objective of the Cadbury committee was to help raise the standardsof corporate governance and level of confidence in financial reporting andauditing by setting out clearly what it sees as the respective responsibility ofthose involved and what it believes is expected of them. The committee investigated accountability of the board of directors toshareholders and to the society. It submitted its report and associated code ofbest practices in December 1992. Wherein it spelt out the methods ofgovernance needed to achieve balance between essential powers of the board ofdirectors and heir accountability. The resulting report, and associated the Codeof best practices published in Dec

1992 was generally well received while e therecommendations themselves were not mandatory. The companies listed on theLondon Stock Exchanges were required to clearly state in their accountswhether or not code has been followed. The companies who did not complywere requires to explain the reason for that. The Cadbury Code for best practices at 19 recommendations being thepioneering on corporate governance it would in order to make brief referencesto them the recommendations are in the nature of guidelines relating to board ofdirections, coexecutive directors, executive directors and tose on reporting andcontrol. Relating to board of directors these are:The board should meet regularly, retain full and efficient control over the company and monitor the executive management. Reserved to it for decision to ensure direction and control of the company isfirmly in its hand. There should be an agreed procedure for directors in thefurtherance of their duties to take independent professional advise of necessaryat the company expenses.

THE CORRUPTION IN CORPORATE GOVERNANCE (Address in ASCI Conference on 'Governance in Banking and Finance' at Mumbai on 14.06.99,) N. Vittal, Central Vigilance Commissioner 1) Corporate governance has been attracting a lot of attention and debate in thelast few years. As I see it, this is directly related to the increasing pace ofglobalisation and investments made in emerging markets by foreign investinginstitutions. The collapse of South East Asian countries' economies from mid-1997 brought home the fact that when as a process of globalisation, investmenttakes place in foreign countries, investing institutions want to be sure thatenterprises in which they invest are not only managed competently but alsoethically. Corporate governance represents the ethical framework in whichmanagement decisions are taken. 2)At another level corporate governance is viewed as a method of ensuring thatshareholder value is enhanced. After all the investors are interested in seeingthat their returns are enhanced through better market capitalisation. This processof enhancement of shareholder value probably is facilitated if there is greatertransparency and hence the whole focus on norms about disclosures and so on.In other words, we go back to the fundamental issue that when we talk ofinvestment in enterprises and particularly in the banking and financial sector,trust is of utmost value. After all, the whole business is based on trust. Theelement of trust is an important input in assessment of risks involved in anyenterprise. The element of trust becomes vital as greater the trust, greater alsowill be willingness to risk larger investments. While at one level investmentdecisions in business enterprises involve the hard headed and hardnosedaccountant's approach in terms of costs and return on investment, when thereally critical investment decisions are taken, the softer non-financial aspects oftrust and assessment of risk become significant. We can therefore see the closerelationship between the need for corporate governance and the measures fortransparency and other structural arrangements to instil a sense of confidence ininvestment decisions. 3) Where does corruption come in corporate governance? vCorruption as weknow is basically an aberration. Corruption is basically dishonesty. When wetalk about corruption in corporate governance, we are referring to the corruptpractices, which go to harm the interests of the shareholder

and stakeholders.The management of enterprises, which come in the way of corporategovernance, becomes relevant in his context. Perhaps we can simplify the wholeconcept of corruption in corporate governance by saying that if we are able tomake an enterprise work in a transparent and honest manner, to that extent,automatically there will be less corruption. If there is less corruption,automatically there will be good corporate governance. After all, corruptionflourishes if there is no transparency. In fact, the well-known anticorruptionNGO in Germany is called Transparency International. We can look at the issueof governance in the banking and financial sectors from two different angles.The first is the straightforward issue of corruption in these sectors and the basicassumption that if corruption can be checked in these sectors, automaticallycorporate governance will improve. Of course, corporate governance has itsown significance in terms of increasing the element of trust attractinginvestment, enhancing shareholder value and also protecting interests of thestakeholders. This apparently also has the focus on transparency as a method ofbuilding trust and the steps taken to combat the likelihood of lack oftransparency in the banking and financial sector may also be studied. This is thesecond aspect. 4)We may begin with the first aspect of corruption in the banking and financialsector. Ever since I became the Central Vigilance Commissioner, I have beentrying to understand the roots and the dynamics of corruption and explore whatshould be done to tackle the issue of corruption? Basically, the level ofcorruption in any organisation depends on three aspects. The first is theindividual executive's sense of values. This goes back to the values inculcated inthe individual due to his family background, religion, upbringing and so on.That is why we find that there are corrupt people among those who are earningsubstantially and who are very rich and there are honest people who are poor our system, which breeds the corruption mosquitoes, and this is what I amtrying to tackle. Under the powers vested in me under Section 8 of the CentralVigilance Commission Ordinance, I have initiated orders to ban post tendernegotiations except with L1, and also insist on computerisation of banks at leastto the extent of 70% of their business by 1.1.2001. Incidentally Section 8 of theOrdinance gives the following powers to the Central Vigilance Commissioner. The functions and power of the Commission shall be to

a.

exercise superintendence over the functioning of the Delhi Special PoliceEstablishment in so far as it relates to the investigation of offencesalleged to have been committed under the Prevention of Corruption Act1988; b. inquire or cause an inquiry or investigation to be made on a referencemade by the Central Government wherein it is alleged that a publicservant being an employee of the Central Government or a corporationestablished by or under any Central Act, Government Company, Societyand any local authority owned or controlled by that Government, hascommitted an offence under the Prevention of Corruption Act 1988; c. inquire or cause an inquiry or investigation to be made into any complaintagainst any official belonging to such category of officials specified insub-section (3) wherein it is alleged that he has committed an offenceunder the Prevention of Corruption Act 1988; d. review the progress of investigations conducted by the Delhi SpecialPolice Establishment into offences alleged to have been committed underthe Prevention of Corruption Act 1988; e. review the progress of applications pending with the competentauthorities for sanction of prosecution under the Prevention of CorruptionAct 1988; f. tender advice to the Central Government, corporations established by orunder any Central Act, Government Companies, societies and localauthorities owned or controlled by the Central Government on suchmatters as may be referred to it by that Government, said Governmentcompanies, societies and local authorities owned or controlled by theCentral Government or otherwise; . exercise superintendence over the vigilance administration of the variousMinistries of the Central Government or corporations established by orunder any Central Act, Government companies, societies, localauthorities owned or controlled by that Government. The persons referred to in clause ( c ) of sub-section (l) are as follows:a. Group "A" Officers of the Central Government b. Such level officers of the corporations established by or under anyCentral Act, Government companies, societies and other local authorities,owned or controlled by the Central Government, as that Governmentmay, by notification in the Official Gazette, specify in this behalf. Provided that till such time a notification is issued under this clause, all officersof the said corporations, companies, societies and local authorities shall bedeemed to be the persons referred to in clause ( c ) of sub-section (l).

6) While there are five causes for corruption in our system, there are four keyplayers in our corruption scene in the country. These are the neta (the corruptpolitician), the babu (the corrupt bureaucrat), the lala (the corrupt businessman)and the dada (the criminal), who have combined together in differentformulations, permutations and combinations. They have made our country oneof the most corrupt countries in the world. We will therefore have to tacklethese players and for this we will have to look at the psychology which breedscorruption 7) So with empowered public who is informed about transparent practices ingovernment, we should be able to bring in better check over corruption.Nevertheless there is still one sticking point. There should be effectivepunishment of the corrupt people. Today in our system only three things areeffective. The first is the "Bhramastra" of the judiciary called contempt of court.Court orders can be appealed against and there can be endless litigation. Butonce a contempt of court order is issued, everyone knows they have to obey itbecause otherwise they will have to spend time in jail. The second are thecriminals who are able to impose their will by using sheer violence andterrorism. The third effective lubricant in our system is bribe. Many offices have a notorious reputation for corruption. It is only the grease, which probablymakes the wheels of the various institutions move. And it is this we have tofight against. 8) The Chairman of the Law Commission, Justice Jeevan Reddy has drafted anact the Corrupt Public Servants (Forfeiture of Property) Act 1998. I have sentthis to the government with the request to enact such a law as urgently aspossible. Under this law the CVC will be empowered to confiscate ill-gottenwealth of the corrupt public servants. There may still be a doubt that after alltoday also laws that are not effective. How can the CVC be effective even withthe above law? The best method is that the CVC can issue a seizure orderagainst which I understand there can be no stay and then start the process of thewhole investigation and show cause notices etc. In this way, the corrupt personwill be effectively prevented from enjoying and using his ill-gotten wealth itselfto engage the best legal brains and escape punishment. 9) It was brought to my notice that there is another law The BenamiTransaction Prohibitions Act 1988. I have requested the government toempower the CVC under this act. You will be interested to know that eventhought the act was passed in 1988 and it provides for confiscation of benamiproperties as per rules

prescribed, in the last ten years, no rules have beenprescribed at all. I have therefore requested government for an urgent decisionon this issue. 10) It will thus be seen that if the CVC is empowered and we are able to bringan atmosphere in this country by which corruption will not be tolerated and thepeople are empowered, then by going in for confiscation of the ill-gottenwealth, we must be able to make the corrupt people in this country realise thatcorruption is a high risk business. Hopefully, corruption may then come undercontrol. 11)Coming specifically to the banking sector, the CVC has issued specificorders which may be seen the Instructions. They are designed to ensure thatthere is greater transparency introduced in the system. Exchanging information about willful defaulters and system improvement by going in for massivecomputerization are examples of this type. An equally important aspect inensuring better corporate governance in the banking sector isencouraginhonest people and punishing simultaneously the dishonest people. The entireexercise launched to have a separate chapter on the banking in the vigilancemanual, which has come into force from 1st January 1999, is based on thishealthy principle. The chapter has been drafted taking into account the inputsfrom the Indian Banks' Association, Reserve Bank of India, Central VigilanceCommission and the Central Bureau of Investigation. I hope that this will go along way in nurturing a culture of honesty in our banks and indirectly help inbetter corporate governance. 12)The second aspect of corruption in corporate governance relates totransparency and improving the ethical level by organisations systems andprocedures. Recently, the Khan Committee had also gone into the issue of bettercorporate governance. UTI has also been trying to look into this aspect. In thiscontext the observations made by Shri Swaminathan in the 'Hindu' dated the 21stof April 1999 seem to be relevan 13) As in the banking and financial sector we are concerned with the financingof corporates. The banks have to particularly ensure that they don't financecorporates or enterprises, which are having poor corporate governance. So, inthe case of the banks, therefore, not only is there an internal corporategovernance ensuring shareholder value enhancement becoming important, butalso an alertness to ensure that they are able to force better corporategovernance in the enterprises, which are funded by them, becomes equallynecessary to ensure that the corporate governance in the banking and financialsector does not become corrupt.

CASE STUDY:HDFC BANK CORPORATE GOVERNANCE INITIATIVES

The bank believes in adopting and adhering to the best recognized corporate governance practices and continuously benchmarking itself against each such practice. The bank understands and respects its fiduciary role and responsibility to shareholders and strives hard to meet their expectations. The bank believes the best board practices, transparent disclosures and shareholder empowerment are necessary for creating shareholder value. The bank has infused the philosophy of corporate governance into all its activities. The philosophy on corporate governance is an important tool for shareholder protection and maximization of their long term value. The cardinal principals such as independence, accountability, responsibility, transparency, fair and timely disclosures, credibility etc. serve as the means for implementing, the philosophy of corporate governance In letter and spirit. The code of ethics/conducts intends to ensure adherence to highest business and ethical standards while conducting the business of the bank and compliance with the legel and regulatory requirements, including the compliance of the section 406 of the Sarbanes-Oxlety Act of 2002 and the rules and regulations framed there under by the Securities and Exchange Commission of USA and other statutory and regulatory authorities in India and USA. The bank values the ethical business standard very highly and intends adherence thereto in every segment of the business.

ONE POSSIBLE SOLUTION:1) Banks have an overwhelming dominant position in developing economy financial systems and are extremely importance engines of economic growth. 2) As financial markets are usually underdeveloped banks in developing economies are typically the most important

CONCLUSION Corporate governance plays a highly significant role in banks.It is seen that the corporate governance revolves around the enhancing value,accountability at all levels; transparent and enhancing the image of theorganization would be the major ingredients of good corporate governance.After Globalisation and financial sector reforms, corporate governance has beenreceiving a lot of attention in the banking sector. Banks in a broad sense, are institutions whose business ishandling other peoples money. A joint stock bank also known as thecommercial bank, is a company whose business is banking. There are moreparticularly institutions that deal directly with the general public, a opposed tothe merchant and other institutions more with trade and industry. These banksspecialize in business connected with Bills of Exchange, especially theacceptance of foreign bills. A Merchant banker is thus a financial intermediarywho helps in transferring capital from those who possess it to those who need it.Merchant banking includes wide range of activities management of customersecurities, portfolio management project and counseling and appraisal,underwriting of shares and debentures, acting as banker for refund order,handling interest and dividend warrants etc. Thus, a merchant banker renders ahost of services to corporate and promotes industrial development in thecountry.