Professional Documents
Culture Documents
Corporate Governance
Ch. No. Topic Pg. No.
Executive Summary. Corporate Governance Introduction. Corporate Governance in India. Changes since Liberalization. Parties to Corporate Governance. Principles of Corporate Governance. Corporate Governance Models around the World. Corporate Governance and Firm Performance. Corporate Governance at Large Companies. Corporate Governance at Small Companies. CG Practices followed by India. Systematic Problems of Corporate Governance. Mechanisms and Controls Corporate Governance. Internal Corporate Governance Controls. External Corporate Governance Controls. Conclusion.
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EXECUTIVE SUMMARY
CORPORATE GOVERNANCE
INTRODUCTION Corporate governance is "the system by which companies are directed and controlled". It involves regulatory and market mechanisms, and the roles and relationships between a companys management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees. Definition Corporate Governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity. Sound corporate governance is reliant on external market place commitment and legislation, plus a healthy board culture, which safeguards policies and processes'.
Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principalagent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world. Corporate Governance as defined by SEBI committee (India) is the Acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as business ethics and a moral duty. See also
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Corporate Social Entrepreneurship regarding employees who are driven by their sense of integrity (moral conscience) and duty to society. This notion stems from traditional philosophical ideas of virtue (or self governance) and represents a "bottom-up" approach to corporate governance (agency) which supports the more obvious "top-down" (systems and processes, i.e. structural) perspective. i.e. structural) perspective. Good Corporate Governance: Reduces risk Stimulates performance Improves access to capital markets Enhances the marketability of goods and services Improves leadership Demonstrates transparency and social accountability.
HISTORY - UNITED STATES 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. Since the late 1970s, corporate governance has been the subject of significant debate in the U.S. and around the globe. Bold, broad efforts to reform corporate governance have been driven, in part, by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners. In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. The California Public Employees' Retirement System led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated). In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia, South Korea, Malaysia and The Philippines severely affected by the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies.
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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, led to increased shareholder and governmental interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002.
Thus, the role of the internal auditor has substantially got escalated and the external auditor perhaps took a back seat. However, a specific section of Sarbanes-Oxley Act requires senior management to assess and report on the effectiveness of disclosure controls and procedures as well as on internal controls for financial reporting. All of these have to be in the public disclosure domain of the reports but outside the financial statements. There is one risk to merely lean heavily on the certification, which after a while become ritualistic. It would be good to be associated with the framing of the robust audit programmed and the companys disclosure control framework. Further an internal auditor must have the highest ethics and be willing to sacrifice everything (consultation assignments) to maintain their independence within the auditing company. If there are different sections of companies, which offer turn-key management consultation, at least those who are involved in the audit exercise should disassociate themselves from being a part of consulting side of the companys work. Some of the provisions in the Act are quite draconian particularly one would be the internal auditor of publicly traded financial services company, as there are threats of fines and imprisonment, the internal auditors voice is heard loud and clear by the Board and as such all those Boards who choose to ignore this valuable advice would in my opinion be consigned to the dust bin of history. Complex collapses, misfeasance and malfeasance of staggering proportions, Auditors failing in their duties, call for tough Regulatory responses like the above Act and related rules introduced and interpreted by Securities and Exchange Commission in USA.
their own. Borrowers therefore routinely recouped their investment in a short period and then had little incentive to either repay the loans or run the business. Frequently they bled the company with impunity, siphoning off funds with the DFI nominee directors mute spectators in their boards. This sordid but increasingly familiar process usually continued till the companys net worth was completely eroded. This stage would come after the company has defaulted on its loan obligations for a while, but this would be the stage where Indias bankruptcy reorganization system driven by the 1985 Sick Industrial Companies Act (SICA) would consider it sick and refer it to the Board for Industrial and Financial Reconstruction (BIFR). As soon as a company is registered with the BIFR it wins immediate protection from the creditors claims for at least four years. Between 1987 and 1992 BIFR took well over two years on an average to reach a decision, after which period the delay has roughly doubled. Very few companies have emerged successfully from the BIFR and even for those that needed to be liquidated, the legal process takes over 10 years on average, by which time the assets of the company are practically worthless. Protection of creditors rights has therefore existed only on paper in India. Given this situation, it is hardly surprising that banks, flush with depositors funds routinely decide to lend only to blue chip companies and park their funds in government securities. Financial disclosure norms in India have traditionally been superior to most Asian countries though fell short of those in the USA and other advanced countries. Noncompliance with disclosure norms and even the failure of auditors reports to conform to the law attract nominal fines with hardly any punitive action. The Institute of Chartered Accountants in India has not been known to take action against erring auditors. While the Companies Act provides clear instructions for maintaining and updating share registers, in reality minority shareholders have often suffered from irregularities in share transfers and registrations deliberate or unintentional. Sometimes non-voting preferential shares have been used by promoters to channel funds and deprive minority shareholders of their dues. Minority shareholders have sometimes been defrauded by the management undertaking clandestine side deals with the acquirers in the relatively scarce event of corporate takeovers and mergers.
Boards of directors have been largely ineffective in India in monitoring the actions of management. They are routinely packed with friends and allies of the promoters and managers, in flagrant violation of the spirit of corporate law. The nominee directors from the DFIs, who could and should have played a particularly important role, have usually been incompetent or unwilling to step up to the act. Consequently, the boards of directors have largely functioned as rubber stamps of the management. For most of the post-Independence era the Indian equity markets were not liquid or sophisticated enough to exert effective control over the companies. Listing requirements of exchanges enforced some transparency, but non-compliance was neither rare nor acted upon. All in all therefore, minority shareholders and creditors in India remained effectively unprotected in spite of a plethora of laws in the books.
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Finally, 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 simply to invest in a very large number of different companies with sufficient liquidity, based on the idea that this strategy will largely eliminate individual companys financial or other risk and, therefore, these investors have even less interest in a particular company's governance. Since the marked rise in the use of Internet transactions from the 1990s, both individual and professional stock investors around the world have emerged as a potential new kind of major (short term) force in the direct or indirect ownership of corporations and in the markets. Even as the purchase of individual shares in any one corporation by individual investors diminishes, the sale of derivatives (e.g., exchange-traded funds (ETFs), Stock market index options, etc.) has soared. So, the interests of most investors are now increasingly rarely tied to the fortunes of individual corporations. But, the ownership of stocks in markets around the world varies; for example, the majority of the shares in the Japanese market are held by financial companies and industrial corporations (there is a large and deliberate amount of cross-holding among Japanese keiretsu corporations and within S. Korean chaebol 'groups') , whereas stock in the USA or the UK and Europe are much more broadly owned, often still by large individual investors.
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PRINCIPLES OF CORPORATE GOVERNANCE 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 openly and effectively communicating information and by encouraging shareholders to participate in general meetings. Interests of other stakeholders: 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: 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. Integrity and ethical behavior: 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: 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.
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Issues involving corporate governance principles include: Internal controls and internal auditors. The independence of the entity's external auditors and the quality
Of their audits Oversight and management of risk. Oversight of the preparation of the entity's financial statements Review of the compensation arrangements for the chief Executive officer and other senior executives. The resources made available to directors in carrying out their Duties. The way in which individuals are nominated for positions on the Board. Dividend policy.
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CORPORATE GOVERNANCE MODELS AROUND THE WORLD The Anglo-US Model: The Anglo-US model is characterized by share ownership of individual, and increasingly institutional, investors not affiliated with the corporation (known as outside shareholders or outsiders); a well-developed legal framework defining the rights and responsibilities of three key players, namely management, directors and shareholders. Key Players in the Anglo-US Model:
MANAGEMENT
SHAREHOLDERS
BOARD OF DIRECTORS The Japanese Model: The Japanese model is characterized by a high level of stock ownership by affiliated banks and companies; a banking system characterized by strong, long-term links between bank and corporation; a legal, public policy and industrial policy framework designed to support and promote keiretsu (industrial groups linked by trading relationships as well as cross-shareholdings of debt and equity); boards of directors composed almost solely of insiders; and a comparatively low (in some corporations, non-existent) level of input of outside shareholders, caused and exacerbated by complicated procedures for exercising shareholders votes. Key Players in the Japanese Model: (Outside shareholders) GOVERNMENT (Independent directors) KEIRETSU
MANAGEMENT
BANK
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The German Model: The German model governs German and Austrian corporations. The German corporate governance model differs significantly from both the Anglo-US and The Japanese model, although some of its elements resemble the Japanese model. The German model prescribes two boards with separate members. German corporations have a two-tiered board structure consisting of a management board (composed entirely of insiders, that is, executives of the corporation) and a supervisory board (composed of labor/employee representatives and shareholder representatives). Table showing different Models around the World
Features Corporate Objectives Focus Measuring of Success Anglo American Shareholders Value Capital Market Return On Financial Capital German Long Term India Shareholders Val ue Corporate Body Keiretsu Busi Maximize ness Network Surplus Return On Human Return On Return On capital Social Financial Capital Capital Japanese Long Term
Decision Making
Liquid
Physical capital R&D human capital Less Important Du Less e To Close Ties Important With Banks Due To Close Ties With Banks
Take overs Rare Take overs Take overs Rare Hostile Takeovers Rare Hostile Hostile Take overs Takeovers
Low Institutional
High Banks
Board Composition
Ex Directors
: And Non Ex Non Ex Directors Directors : Organization al Health Low Short Term Gains Moderate Subjet To Govt. Approvals Moderate Subject To Govt. Approvals Low Uncertain
High
Moderate
Low
High
Moderate
Low
Weakness
Dynamic Market Long Term Based Liquid Industrial Capital Strategy Internalization Non Stable Capital Problematic Strong Oversea Investment Instability Vulnerable To Glo bal Capitals Market
Long Term Recent Govt. Industrial And Organ. Strategy Activism Cii Stable Capital Secretive Corrupt Financial Speculation Secretive Corrupt Financial Speculation. Lack Of Proper Disclosure
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In its 'Global Investor Opinion Survey' of over 200 institutional investors first undertaken in 2000 and updated in 2002, McKinsey found that 80% of the respondents would pay a premium for well-governed companies. They defined a well-governed company as one that had mostly out-side directors, who had no management ties, undertook formal evaluation of its directors, and was responsive to investors' requests for information on governance issues. The size of the premium varied by market, from 11% for Canadian companies to around 40% for companies where the regulatory backdrop was least certain (those in Morocco, Egypt and Russia) Other studies have linked broad perceptions of the quality of companies to superior share price performance. In a study of five year cumulative returns of Fortune Magazine's survey of 'most admired firms', Antunovich et al. found that those "most admired" had an average return of 125%, whilst the 'least admired' firms returned 80%. In a separate study Business Week enlisted institutional investors and 'experts' to assist in differentiating between boards with good and bad governance and found that companies with the highest rankings had the highest financial returns. On the other hand, research into the relationship between specific corporate governance controls and some definitions of firm performance has been mixed and often weak. The following examples are illustrative. Board composition Some researchers have found support for the relationship between frequency of meetings and profitability. Others have found a negative relationship between the proportion of external directors and profitability, while others found no relationship between external board membership and profitability. In a recent paper Bhagat and Black found that companies with more independent boards are not more profitable than other companies. It is unlikely that board composition has a direct impact on profitability, one measure of firm performance. Remuneration/Compensation The results of previous research on the relationship between firm performance and executive compensation have failed to find consistent and significant relationships between executives' remuneration and firm performance. Low average levels of pay-performance alignment do not necessarily imply that this form of governance control is inefficient. Not all firms experience the same
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levels of agency conflict, and external and internal monitoring devices may be more effective for some than for others. Some researchers have found that the largest CEO performance incentives came from ownership of the firm's shares, while other researchers found that the relationship between share ownership and firm performance was dependent on the level of ownership. The results suggest that increases in ownership above 20% cause management to become more entrenched, and less interested in the welfare of their shareholders. Some argue that firm performance is positively associated with share option plans and that these plans direct managers' energies and extend their decision horizons toward the long-term, rather than the short-term, performance of the company. However, that point of view came under substantial criticism circa in the wake of various security scandals including mutual fund timing episodes and, in particular, the backdating of option grants as documented by University of Iowa academic Erik Lie and reported by James Blander and Charles Forelle of the Wall Street Journal.
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CORPORATE GOVERNANCE IN LARGE COMPANIES: TATA STEEL LIMITED Good Corporate Governance should be an integral part of all processes. Tata Steel has ensured corporate governance at all stages of the business process. Every year the company aims to exceed its targets on Employee and customer Satisfaction Indexes and the corporate citizenship index. In order to improve its internal management system it has also adopted the following two systems of evaluation: Tata Code of conduct Follows guidelines established by the UN Global Compact. A Company signing to the Tata Code of Conduct entitles that company to use the brand name. It prescribes principles by which all employees are expected to act. 1. The Companys Corporate Governance Philosophy: The Company has set itself the objective of expanding its capacities and becoming globally competitive in its business. As a part of its growth strategy, the Company believes in adopting the best practices that are followed in the area of Corporate Governance across various geographies. The Company emphasizes the need for full transparency and accountability in all its transactions, in order to protect the interests of its stakeholders. The Board considers itself as a Trustee of its Shareholders and acknowledges its responsibilities towards them for creation and safeguarding their wealth. In accordance with the Tata Steel Group Vision, Tata Steel Group (the Group) aspires to be the global steel industry benchmark for value creation and corporate citizenship. The Group expects to realise its Vision by taking such actions as may be necessary in order to achieve its goals of value creation, safety, environment and people.
2. Board of Directors:
The Company has a non-executive Chairman and the number of Independent Directors is more than one-third of the total number of Directors. As on 31st March, 2009, the Company has 14 Directors on its Board, of which 8 Directors are independent. The number of Non-Executive Directors (NEDs) is more than
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50% of the total number of Directors. The Company is in compliance with clause 49 of the Listing Agreement pertaining to compositions of directors. None of the Directors on the Board is a Member on more than 10 Committees and Chairman of more than 5 Committees (as specified in Clause 49), across all the companies in which he is a Director. The necessary disclosures regarding Committee positions have been made by the Directors. Name Mr. R. N. Tata (Chairman) Mr. James Leng Mr. Nusli N. Wadia Mr. S. M. Palia Mr. Suresh Krishna Mr. Ishaat Hussain Dr. J. J. Irani Mr. Subodh Bhargava Mr. Jacobus Schraven Dr. Anthony Hayward Mr. Andrew Roob Dr. T. Mukherjee Mr. Philippe Varin Mr. B. Muthyraman Category NINE INE INE INE INE NINE NINE INE INE INE INE NINE NINE NIEX
3. Audit Committee
The Company had constituted an Audit Committee in the year 1986. The scope of the activities of the Audit Committee is as set out in Clause 49 of the Listing Agreements with the Stock Exchanges read with Section 292A of the Companies Act, 1956. The terms of reference of the Audit Committee are broadly as follows: To review compliance with internal control systems; To review the findings of the Internal Auditor relating to various functions of the Company; To hold periodic discussions with the Statutory Auditors and Internal Auditors of the Company concerning the accounts of the Company,
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internal control systems, scope of audit and observations of the Auditors/Internal Auditors; To review the quarterly, half-yearly and annual financial results of the Company before submission to the Board; To make recommendations to the Board on any matter relating to the financial management of the Company, including Statutory & Internal Audit Reports; Recommending the appointment of statutory auditors and branch Auditors and fixation of their remuneration. Names of Members Mr. Subhodh Bhargava, Chairman Mr. S. M. Palia, Member Mr. Ishaat Hussain Member, Chartered Accountant Mr. Andrew Robb, Member Category Independent, Non Executive Independent, Non Executive Non Independent, Non Executive Independent, Non Executive
4. Remuneration Committee The Company had constituted a Remuneration Committee in the year 1993. The broad terms of reference of the Remuneration Committee are as follows: Review the performance of the Managing Director and the Whole-time Directors, after considering the Companys performance. Recommend to the Board remuneration including salary, perquisites and commission to be paid to the Companys Managing Director and Whole time Directors. Finalize the perquisites package of the Managing Director and Wholetime Directors within the overall ceiling fixed by the Board. Recommend to the Board, retirement benefits to be paid to the Managing Director and Whole-time Directors under the Retirement Benefit Guidelines adopted by the Board. The Remuneration Committee also functions as the Compensation Committee as per SEBI guidelines on the Employees Stock Option Scheme. The Company, however, has not yet introduced the Employees Stock Option Scheme.
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Names of Members
Category
Mr. Suresh Krishna, Chairman Mr. R. N. Tata, Member Mr. S.M. Palia, Member
Independent, Non executive Non Independent, Non Executive Independent, Non Executive
Remuneration Policy
The Company while deciding the remuneration package of the senior management members takes into consideration the following items: employment scenario remuneration package of the industry and remuneration package of the managerial talent of other industries The annual variable pay of senior managers is linked to the performance of the Company in general and their individual performance for the relevant year measured against specific Key Result Areas.
5. Shareholders Committee
An Investors Grievance Committee was constituted on 23rd March, 2000 to specifically look into the redressal of Investors complaints like transfer of shares, non-receipt of balance sheet and non-receipt of declared dividend, etc. Names of Members Mr. Ishaat Hussain, Chairman Mr. Suresh Krishna, Member Category Not Independent, Non Executive Independent, Non-Executive
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Committees
In addition to the above Committees, the Board has constituted 4 more Committees, viz. Executive Committee of the Board, the Nomination Committee, Committee of Directors and the Ethics and Compliance Committee. The terms of reference of the Executive Committee of the Board (ECB) are to approve capital expenditure schemes and donations within the stipulated limits and to recommend to the Board, capital budgets and other major capital schemes, to consider new businesses, acquisitions, divestments, changes in organizational structure and also to periodically review the Companys business plans and future strategies. The Nomination Committee has been constituted on 18th May, 2006 with the objective of identifying Independent Directors to be inducted to the Board from time to time and to take steps to refresh the constitution of the Board from time to time. The Committee of Directors has been constituted to approve of certain routine matters such as Opening and Closing of Bank Accounts of the Company, to grant limited Powers of Attorney to the Officers of the Company, to appoint proxies to attend general meetings on behalf of the Company etc. Ethics and Compliance Committee In accordance with the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, as amended (the Regulations), the Board of Directors of the Company adopted the revised Tata Code of Conduct for Prevention of Insider Trading and the Code of Corporate Disclosure Practices (the Code) to be followed by Directors, Officers and other Employees. The Code is based on the principle that Directors, Officers and Employees of a Tata Company owe a fiduciary duty to, among others, the shareholders of the Company to place the interest of the shareholders above their own and conduct their personal securities transactions in a manner that does not create any conflict of interest situation. The Code also seeks to ensure timely and adequate disclosure of Price Sensitive Information to the investor community by the Company to enable them to take informed investment decisions with regard to the Companys securities.
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6. General Body Meetings a. No Extra-Ordinary General Meeting of the shareholders was held during the year. b. No Postal Ballot was conducted during the year. None of the resolutions proposed for the ensuing Annual General Meeting need to be passed by Postal Ballot. c. Special Resolutions passed in previous 3 Annual General Meetings:
7. Disclosures 1) The Board has received disclosures from key managerial personnel relating to material, financial and commercial transactions where they and / or their relatives have personal interest. There are no materially significant related party transactions which have potential conflict with the interest of the Company at large. 2) The Company has complied with the requirements of the Stock Exchanges, SEBI and other statutory authorities on all matters relating to capital markets during the last three years. No penalties or strictures have been imposed on the Company by the Stock Exchanges, SEBI or other statutory authorities relating to the above. 3) The Company has adopted a Whistle Blower Policy and has established the necessary mechanism in line with clause 7 of the Annexure 1D to Clause 49 of the Listing Agreement with the Stock Exchanges, for employees to report concerns about unethical behavior. No personnel has been denied access to the Ethics Counselor/Chairman of the Audit Committee. 4) The Company has fulfilled the following non-mandatory requirements as prescribed in Annexure 1D to Clause49 of the Listing Agreement with the Stock Exchanges : The Company has set up a Remuneration Committee. The Company has moved towards a regime of unqualified financial statements.
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CORPORATE GOVERNANCE IN SMALL COMPANIES: Governance Structure ABC Ltd. (Name changed) is an Unlisted Public Limited Company on which compliance of the Provisions of the Corporate Governance, where possible, is advisable. Corporate Governance Report as required under Clause 49 of the Listing Agreements is not applicable, since the company is an Unlisted Company. The Company does not follow any Corporate Governance Philosophy. Board of Directors The Board of Directors of the Company comprises of minimum number of Directors required for the public limited Company as per the Companies Act, 1956, i.e. three in numbers. Mr. VKS is the Chairman & Managing Director of the Company. Mr. AKC and Mr. BP are the other members of the Board. None of the Directors is disqualified under Section 274. The names and designations of the Directors on the Board and their attendance at Board Meetings during the year are given below:
S. No. Member Designation No of Meetings Held During the Year Meetings Attended
1 2 3
5 5 5
5 5 5
Dates for the Board Meetings in the ensuing year are decided as per the Requirement of the company, sometimes even after closing of relevant year and are never communicated to the Directors. Board Meetings are shown to be held at the Registered Office of the Company in Delhi. While all the Directors are stationed at different locations other than Delhi. The Director, Mr. BP, located at Bangalore, is shown present in all the Board Meetings, despite of the fact that there is no proof of his presence in Delhi on the Board Meeting Dates. The Agenda of the Board Meetings are never being sent to the Directors. The Corporate Governance practices are not at all followed to the mark as most of the decision in Board Meeting is influenced/ depends upon the Consent of the Managing Director.
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Audit Committee Depending upon the size of the company, the company is not required to have an Audit Committee. Remuneration Committee There is a requirement of Remuneration Committee in the company. However, no Remuneration Committee is formed by the company. Remuneration Policy The company does not follow any Remuneration Policy. The remuneration of key managerial personnel is decided by CMD of the company, solely at his discretion. Shareholders Committee The company is not required to have Shareholders Committee, since the company is a closely held Unlisted Public Limited Company. Discloser and Transparency The Company lacks on the ground of Discloser & transparency as the Company does not have well defined accountability & authority structure. The Company 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 stakeholders have access to clear, factual information.
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CORPORATE GOVERNANCE PRACTICES FOLLOWED BY INDIA Corporate Governance Evolution and Challenges While recent high-profile corporate governance failures in developed countries have brought the subject to media attention, the issue has always been central to finance and economics. The issue is particularly important for developing countries since it is central to financial and economic development. Recent research has established that financial development is largely dependent on investor protection in a country de jure and de facto. With the legacy of the English legal system, India has one of the best corporate governance laws but poor implementation together with socialistic policies of the pre-reform era has affected corporate governance. Concentrated ownership of shares, pyramiding and tunneling of funds among group companies mark the Indian corporate landscape. Boards of directors have frequently been silent spectators with the DFI nominee directors unable or unwilling to carry out their monitoring functions. Since liberalization, however, serious efforts have been directed at overhauling the system with the SEBI instituting the Clause 49 of the Listing Agreements dealing with corporate governance. Corporate governance of Indian banks is also undergoing a process of change with a move towards more market-based governance. Corporate governance has been a central issue in developing countries long before the recent spate of corporate scandals in advanced economies made headlines. Indeed corporate governance and economic development are intrinsically linked. Effective corporate governance systems promote the development of strong financial systems irrespective of whether they are largely bank-based or market-based which, in turn, have an unmistakably positive effect on economic growth and poverty reduction. There are several channels through which the causality works. Effective corporate governance enhances access to external financing by firms, leading to greater investment, as well as higher growth and employment. The proportion of private credit to GDP in countries in the highest quartile of creditor right enactment and enforcement is more than double that in the countries in the lowest quartile. As for equity financing, the ratio of stock market capitalization to GDP in the countries in the highest quartile of shareholder right enactment and enforcement is about four Times as large as that for countries in the lowest quartile. Poor corporate Governance also hinders the creation and development of new firms.
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Good corporate governance also lowers the cost of capital by reducing risk and creates higher firm valuation once again boosting real investments. There is a variation of a factor of in the control premium (transaction price of shares in block transfers signifying control transfer less the ordinary share price) between countries with the highest level of equity rights protection and those with the lowest. Effective corporate governance mechanisms ensure better resource allocation and management raising the return to capital. The return on assets (ROA) is about twice as high in the countries with the highest level of equity rights protection as in countries with the lowest protection. Good corporate governance can significantly reduce the risk of nation-wide financial crises. There is a strong inverse relationship between the quality of corporate governance and currency depreciation. Indeed poor transparency and corporate governance norms are believed to be the key reasons behind the Asian Crisis of 1997. Such financial crises have massive economic and social costs and can set a country several years back in its path to development. Finally, good corporate governance can remove mistrust between different stakeholders, reduce legal costs and improve social and labor relationships and external economies like environmental protection. Making sure that the managers actually act on behalf of the owners of the company the stockholders and pass on the profits to them are the key issues in corporate governance. Limited liability and dispersed ownership essential features that the joint-stock company form of organization thrives on inevitably lead to a distance and inefficient monitoring of management by the actual owners of the business. Managers enjoy actual control of business and may not serve in the best interests of the shareholders. These potential problems of corporate governance are universal. In addition, the Indian financial sector is marked with a relatively unsophisticated equity market vulnerable to manipulation and with rudimentary analyst activity; a dominance of family firms; a history of managing agency system; and a generally high level of corruption. All these features make corporate governance a Particularly important issue in India.
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SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE Demand for information: In order to influence the directors, the shareholders must combine with others to form a significant voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting. Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors. Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process. Role of the Accountant & Auditors: Financial reporting is a crucial element necessary for the corporate governance system to function effectively. Accountants and auditors are the primary providers of information to capital market participants. The directors of the company should be entitled to expect that management prepare the financial information in compliance with statutory and ethical obligations, and rely on auditors' competence.
Current accounting practice allows a degree of choice of method in determining the method of measurement, criteria for recognition, and even the definition of the accounting entity. The exercise of this choice to improve apparent performance (popularly known as creative accounting) imposes extra information costs on users. In the extreme, it can involve non-disclosure of information.
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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.
review and can veto the changes, and a third group check that theinterests 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.
External corporate governance controls External corporate governance controls encompass the controls external Stakeholders exercise over the organization. Examples include: Competition debt covenants financial statements) government regulations takeovers
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CONCLUSION
Corporate governance is extremely important to a company. If you have a well formed corporate governance programme in place, that would probably take care of most CSR (corporate social responsibility) issues. Enhanced brand value is the pay-off for getting this right, good corporate governance is basically about making better decisions for the long term health of the company. I think it is risk management, where the risk is the value of your brand. The company is also likely to benefit from fewer disruptions to its business from strikes, boycotts and regulation.
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REFRENCES
Author(s): Rashmita Sahoo (Corporate Governance in Indian Financial Service Sector ) Source: International Journal of Management Research & Reviews Vol.: 2, No.: 7, July 2012 [Page 1213-1225] Keyword(s):Corporate Governance; Financial Services; Organizational Performance; Boards of directors. Author(s): Andrew Mullineux; For The Jean Monnet Project (Financial Integration; Structural Change; Foreign Direct Investment; Economic Growth in EU-25)(Is there an Anglo-American Corporate Governance Model?) Source: International Economics and Economic Policy Vol.: 7, No.: 4, December 2010 [Page 437-448] Keyword(s):Corporate governance-Institutional investors-Private equity Author(s):Chaiyasit Anuchitworawong (The Value of Principles-Based Governance Practices and the Attenuation of Information Asymmetry ) Source: Asia-Pacific Financial Markets Vol.: 17, No.: 2, June 2010 [Page 171-207] Keyword(s):Cost of capital-Information asymmetry-Corporate governance. Author(s):Meghna Rishi, Anjana Singh(CORPORATE GOVERNANCE AND INTERNATIONAL BEST PRACTICES: THE CASE OF SATYAM) Publish April 2011 - September 2011 Author(s): Shan Yuan George; Round David K(China's Corporate Governance: Emerging Issues and Problems ) Source: Modern Asian Studies Vol.: 46, No.: 5, September 2012 [Page 1316-1344] Author(s):Jan folke Siebels(The Implications for Corporate Governance) Source: International Journal of Management Reviews Vol.: 14, No.: 3, September 2012 [Page 280-304]
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Author(s):Adrian C. H.Lei; Frank M.Song(Board Structure, Corporate Governance and Firm Value) Source: Applied Financial Economics Vol.:22, No.:15, August, 1 2012 [Page1289-1303] Keyword(s):Corporate Governance; Board Structure; Firm Value; Family Ownership; Internal Corporate Governance Mechanisms Author(s) : Yves Fassin Stakeholder Management, Reciprocity and Stakeholder Responsibility Source - Journal of Business Ethics Vol.: 109, No.1,August 2012 Key words- Corporate Social Responsibility; Business Ethics; Corporate Governance; Fairness; Reciprocity; Stakeowner
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BIBLIOGRAPHY
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