Corporate Governance

UNIT IV Entrepreneurship and Good Governance

Corporate Governance- an Example

Johnson and Johnsons excellent Credo exemplarily epitomizes what an ideal corporate should aspire to be. Our Credo-We believe our first responsibility is to the doctors ,nurses and patients , to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers' orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.

J&J Contd.
We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical .

J&J
We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources. Our final responsibility is to our stock holders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on ,innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched.

Reserves must be created to provide for adverse times. When we operate according to these principles ,the stock holders should realize a fair return. -Johnson

& Johnson

Corporate Governance in India- History

Unlike South-East and East Asia, the corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic collapse. Also, unlike most OECD countries, the initiative in India was initially driven by an industry association, the Confederation of Indian Industry In December 1995, CII set up a task force to design a voluntary code of corporate governance The final draft of this code was widely circulated in 1997 In April 1998, the code was released. It was called Desirable Corporate Governance: A Code Between 1998 and 2000, over 25 leading companies voluntarily followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddys Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI and many others

History Contd.
Following CIIs initiative, the Securities and Exchange Board of India (SEBI) set up a committee under Kumar Mangalam Birla to design a mandatory-cum-recommendatory code for listed companies The Birla Committee Report was approved by SEBI in December 2000 Became mandatory for listed companies through the listing agreement, and implemented according to a rollout plan: 2000-01: All Group A companies of the BSE or those in the S&P CNX Nifty index 80% of market cap 2001-02: All companies with paid-up capital of Rs.100 million or more or net worth of Rs.250 million or more 2002-03: All companies with paid-up capital of Rs.30 million or more

History
Following CII and SEBI, the Department of Company Affairs (DCA) modified the Companies Act, 1956 to incorporate specific corporate governance provisions regarding independent directors and audit committees. In 2001-02, certain accounting standards were modified to further improve financial disclosures. These were: Disclosure of related party transactions. Disclosure of segment income: revenues, profits and capital employed. Deferred tax liabilities or assets. Consolidation of accounts. Initiatives are being taken to (i) account for ESOPs, (ii) further increase disclosures, and (iii) put in place systems that can further strengthen auditors independence. Brief history of corporate governance in India .

Issues of Corporate Governance

Role of owners in electing the Board Protection of minorities Role of other stakeholders in management Board structure and objectivity of the Board System of reporting and accountability Audit and internal control Effective supervision and enforcement by regulators To encourage Sustainable Development of the Company and its stakeholders

Theories of Corporate Governance

S.No

Criteria Model of Management Behaviour Motivation

Agency Economic Self-Serving Lower order/Economic Needs Other Managers Low value Commitment

Stewardship Self-Actualising Collective Sharing Higher order

1 2 3

4 5

Social Comparison Identification

Principal High Value Commitment

6
7 8 9

Power
Management Philosophy Objective Time Frame

Institutional
Control Oriented Cost Control Short Term

Personal
Involvement Oriented Performance Enhancement Long Term

STAKEHOLDER THEORY
Those of groups without whose support the organisation cease to exist. Generalised theory of agency. The relationship between the internal Stakeholders is defined by the formal and informal rules developed through the history of the relationship. External stakeholders are equally important and relationship with customers, suppliers, competitors and special interest groups are also constrained by formal and informal rules. The conception of the company as a set of relationships rather than a series of transactions, in which managers adopt an inclusive concern for all stakeholders. Important step towards a sense of Corporate citizeship.

The OECD Principles of Corporate Governance

1. Ensuring the Basis for an Effective Corporate Governance Framework- The corporate governance
framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

2. The Rights of Shareholders and Key Ownership Functions- The corporate governance
framework should protect and facilitate the exercise of shareholders rights.

OECD Principles Contd 3. The Equitable Treatment of Shareholders- The

corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

4. The Role of Stakeholders in Corporate Governance - The corporate governance framework

should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

OECD Principles Contd. 5. Disclosure and Transparency -The

corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the boards accountability to the company and the shareholders.

6. The Responsibilities of the Board - The corporate

Indian Scenario
Year - Name of Committee/Body - Areas/Aspects Covered 1998 - Confederation of Indian Industry (CII) Desirable Corporate Governance A Code 1999- Kumar Mangalam Birla Committee -Corporate Governance 2002- Naresh Chandra Committee-Corporate Audit & Governance 2003-N. R. Narayana Murthy Committee-Corporate Governance

Naresh Chandra Committee

Set up by the Department of Company Affairs(DCA), on 21st August 2002,Chaired by Naresh Chandra. Committee examined various issues such as: Statutory Auditor-Company Relationship Need for rotation of statutory audit firms Advantages of setting up an independent regulator Role of independent directors for their composition in boards.

Few Recommendations of the Committee:

Nomination Committee Letter of Appointment to Directors Fixed Contractual Remuneration Structure of Compensation to NEDs(non-executive Directors). Remuneration Committee Audit Committee Constitution Separation of Offices of Chairman & Chief Executive Officer Board Meetings through Tele-conferencing Executive Sessions Related Party Transactions Auditors Revenues from the Audit Client Certificate of Independence

Contd
Rotation of Audit Partners Auditors Liability Appointment of Auditors Qualifications in Auditors Report Institution of Mechanism for Whistle Blowing Risk Management Harmonization of Corporate Governance Standards Audit Oversight Mechanism Effective & Credible Enforcement Cancellation of Fraudulent Securities Liability of Directors & Employees Shareholder Activism Media as a stakeholder

S.NO

COMMITTEE

YEAR

PURPOSE

FOCUS

Cadbury

1992

First committee to be constituted to report on the Financial aspects of Corporate Governance

Attention on Board of Directors ,most important mechanisms requiring constant monitoring and assessment. Emphasis on corporate transparency and communication with shareholders and stakeholders.

Greenbury

1995

Remuneration Directors

of Keen to ensure that directors remuneration was linked to company performance.

Hampel

1998

Review Emphasized the need to implementation of maintain principles-based the findings of the voluntary approach t o Cadbury and corporate governance . Greenbury Committtees

Turnbull

1999

To address the issue of internal control and to respond to these provisions in the combined code.

To provide the companies with general guidance on how to develop and maintain their internal control systems and not to specify the details of such a system.

Higgs

2003

The role and effectiveness of non-executive directors , making recommendations for changes in the Combined code. In response to Enron Scandal ,with the aim of examining the role of the audit committee in UK Corporate Governance. Introduction of the SarbanesOxley Legislation in response to corporate crisis in the USA. Signed in 2002 by G.W.Bush following the bankruptcy of Worldcom.

Greater proportion of nonexecutive directors on boards and more apt remuneration for nonexecutive directors. The relationship between the external auditor and the companies they audit, as well as the role and responsibilities of companies' audit committees. Sweeping Corporate law changes relating to financial reporting, internal accounting controls and personal loans from companies to their Directors, whistle-blowing and destruction of documents.

Smith

2003

SarbanesOxley Act

2002