Corporate Governance and its Principles a) Objective of Study: To provide overview structure through which corporations set and

pursue their objectives, while reflecting the context of the social, regulatory and market environment. Corporate Governance is a mechanism for monitoring the actions, policies and decisions of corporations it also involves the alignment of interest of corporation and all other stakeholders.

b) Broad Action Plan: To govern Board and management structure and process.

To look after corporate responsibility and compliance. Financial transparency and information disclosure to stakeholders. Ownership structure and exercise of Internal control and transparence. Recent development and evolution in Corporate Governance.

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CONTENTS Sr. No 1 Title Page No. Introduction - Meaning of Corporate Governance. - Principles of Corporate Governance. - The Scope and Objectives of Corporate Governance. - Drivers of Good Corporate Governance. Framework - Separation of Management from Ownership, and Ownership structure of Companies. - Significant development since 1970s, - Development for Listed Companies - New Frontiers for Corporate Governance. Corporate Governance Reportings - Best Practice, - Types of Reporting - Financial Transparency and information disclosure. Functions of Boards - Appointment of Independent Directors - Corporate Transparency - Assessment of Directors, Boards and Companies. Evolution of Corporate Governance. - Whistle Blower Mechanism - Corporate Social Responsibility Reporting. - Sustainability Reporting. Indian Companies Corporate Governance Report. - HCL - Reliance Industries. - TATA Group - Infosys Annexure - Report on Sir Adrian Cadbury Committee on Financial Aspects of Corporate Governance (1992) - Revised Clause 49 of the Listing Agreement. - Report of Kumar Mangalam Birla Committee on Corporate

8 9 10

Governance. (year 2000) Sarbanes Oxley Act 2002 Report on N. R Narayana Murthy Committee on Corporate Governance. (year 2003)

Case Study - Failure of Enron. - Satyam Computer Services Limited. Discussion and Conclusion Bibliography of References

Introduction Meaning of Corporate Governance.

Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders. Corporate governance has also been defined as "a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby mitigating agency risks which may stem from the misdeeds of corporate officers. In contemporary business corporations, the main external stakeholder groups are shareholders, debtholders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees.

Corporate governance is a set of rules that define the relationship between stakeholders, management, and board of directors of a company and influence how that company is operating. At its most basic level, corporate governance deals with issues that result from the separation of ownership and control. But corporate governance goes beyond simply establishing a clear relationship between shareholders and managers.

The presence of strong governance standards provides better access to capital and aids economic growth. Corporate governance also has broader social and institutional dimensions. Properly designed rules of governance should focus on implementing the values of fairness, transparency, accountability, and responsibility to both shareholders and stakeholders. In order to be effectively and ethically governed, businesses need not only good internal governance, but also must operate in a sound institutional environment. Therefore, elements such as secure private property rights, functioning judiciary, and free press are necessary to translate corporate governance laws and regulations into on-the-ground practice. Good corporate governance ensures that the business environment is fair and transparent and that companies can be held accountable for their actions. Conversely, weak corporate governance leads to waste, mismanagement, and corruption. It is also important to remember that although corporate governance has emerged as a way to manage modern joint stock corporations it is equally significant in state-owned enterprises, cooperatives, and family businesses. Regardless of the type of venture, only good governance can deliver sustainable good business performance.

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 Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principles 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 principles recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders :[15][16][17] 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:[18] Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board :[19][20] 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 :[21][22] 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:[23][24] 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.

The Scope and Objectives of Corporate Governance.

Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders.[5] Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have an impact on the way a company is controlled. An important theme of governance is the nature and extent of corporate accountability. A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare. In large firms where there is a separation of ownership and management and no controlling shareholder, the principalagent issue arises between upper-management (the "agent") which may have very different interests, and by definition considerably more information, than shareholders (the "principals"). The danger arises that rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management.[10] This aspect is particularly present in contemporary public debates and developments in regulatory policy.

Corporate governance refers to the rules, procedures, and administration of the firms
contracts with its shareholders, creditors, employees, suppliers, customers, and sovereign governments. Governance is legally vested in a board of directors who have a fiduciary duty to serve the interests of the corporationrather than their own interests or those of the firms management. With this simple definition, we assume that directors and managers are motivated to serve the interests of the corporation by incentive pay, by their own shareholdings and reputational concerns, and by the threat of takeover. The operation of the board and the remuneration of the Executive Directors are vital in maintaining and protecting the interests of the different stakeholder groups. If we accept that the shareholders collectively own the business and they have invested in it to maximise their wealth, then their main aim is to grow the overall value of their share capital and maximise returns in the form of dividends. However, there are potential conflicts of interest between this ambition and the managers/employees of the group who are looking to maximise their own wealth. Managers are appointed as agents on behalf of the shareholders of the company who have delegated this responsibility to them. In the UK and the US, corporate governance mechanisms emphasise the relationship between shareholder and management. In countries such as France, Germany and the Netherland, the corporate governance mechanisms take a stakeholders approach to governance, aiming to balance the interests of owners, managers, major creditors and employees. The main mechanisms for understanding corporate governance are the following: 1. The market for corporate control (i.e. a hostile takeover market and the market for partial control). 2. Large shareholder and creditor monitoring. 3. Internal control mechanisms, i.e. the board of directors, non-executivecommittees and the design of executive compensation contracts. 4. External mechanisms, i.e. product-market competition, external auditors and the regulatory framework of the corporate-law regime and stock exchan How governance affects firm performance? Do firms perform better when shareholders interests are likely to be dominant? Answering these questions, will lead us to evaluate the folowing points: Corporate control Changes in control due to takeover or insolvency bring dramatic changes in firm personnel and strategy. CEO and board member turnover increases radically in the event the firm goes into financial distress. Managers will avoid being taking over by either increasing the firms cash flows or by some less productive avenue. Board, Remuneration Committee, Pay and incentives A research has found that the appointment of non-executives directors is associated to a company stock price increases. An Executive that wants to take the company in a direction that might be more in its personal interests could be sacked. Another research has found a positive relationship between the percentage of shares owned by managers and board members and firms market-tobook values.

The remuneration committee is made up of non-execs, so this creates a natural control to stop the executive directors awarding themselves unjustifiable salaries and benefits. The remuneration of the Directors should be in line with other similar companies, to remain competitive and retain its top executives. The remuneration packages are intended to align the interests of Director and Shareholders by linking cash and share incentives to performance. However, some argue that the increase in share price was also associated with a decline in the value of the firms outstanding debt. And corporate performance cannot be reliably increased simply by adding outsiders to the board of directors or by increasing the CEOs stockholdings. Recent Corporate Scandals Corporate governance failures can lead to disastrous consequences beyond anyone expectations. Parmalat- a world leader in the dairy food business, entered bankruptcy protection in 2003 when investors least expected it. How the Italian group so much praised siphoned away billions of euros without its shareholders, nor its top managers suspecting it? One of the problem at Parmalat was due to its ownership and control structures-There was a limited presence of shareholders and mainly linked by family ties. Parmala was a holding company with all the other companies within the group controlled by the Tanzani family. The family had the majority if not all of the voting rights. As this happens, other shareholders had limited control over the activities of the group-hence limited power to block any decisions. Managers had also limited power to influence decisions taken by the family shareholders. In that case, the family managed to siphoned away almost millions of euros to other companies owned by the family. In summary, the demise of Parmalat was a failure to fully implement the corporate governance mechanisms listed above. Statutory auditors Some thought that the Parmalat case was country-specific, however, Enron the giant American Energy failed victim to corporate governance problems with the help of Arthur Andersen-the US accounting firm.

Drivers of Good Corporate Governance. The key underlying driver of corporate governance is the need for external funding. An organisation has to attract and retain shareholders and obtain loan finance to meet funding peaks. To be attractive to investors it has to demonstrate that funds will not be wasted, but will be used responsibly to produce consistent returns for investors. Corporate governance is the substance behind such a demonstration of effectiveness and it needs to create and harness power to achieve that end. Business is driven by the exercise of power; corporate governance is driven by the need to moderate and channel that power. Power, like its analogue

electricity, is both useful and dangerous. Wikipedia defines power as a measure of a persons ability to control the environment around them, including the behaviour of other persons the exercise of power seems endemic to humans as social beings. J K Galbraith classified power as condign (based on force), compensatory (through the use of various resources) and conditioned (the result of persuasion), and the source of power as personality (individuals), property (material resources) and organisational (hierarchical). Michel Foucault, the French philosopher, links power with knowledge, hence the power of doctors and priests. More recent thinking on power, e.g. Steven Lukes, focuses on the enabling nature of power, leading to empowerment. This is the key means of moderating and channelling power, and avoiding the concentration of power which makes effective corporate governance impossible, and unleashes the excesses of domineering leaders like Jean-Marie Messier, former CEO of Vivendi. As Lord Acton warned: All power tends to corrupt; absolute power corrupts absolutely. If domineering leaders can destroy shareholder value for their investors, as in the case of Marconi, are entrepreneurs, who often risk their own resources, a better model for the exercise of power? Entrepreneurs are often motivated by the need to succeed, rather than by the fruits of success, as in the case of Sir Chris Evans, who has established 20 successful sciencebased companies, four quoted on the London Stock Exchange including Celsis and Enzymatix. Each has moved from innovation, through nurture to maturity; each needs effective corporate governance to consolidate its success. Some entrepreneurs dislike the responsibility of corporate governance; Sir Kenneth Morrison of Morrison plc fought against it but came in line to fund his acquisition of Safeways. Others, like Sir Richard Branson, operate mainly through private companies and have limited external accountability. This is a key driver of the move to private equity structures. Few individuals can be totally self-sufficient; most will need external support even if they are self-funding, like Boris Berezovsky and other Russian oligarchs. Sovereign wealth funds (SWF) are accountable only to their owner governments, most of which have created SWFs to invest windfall profits from natural resources. SWFs now total $2.2 trillion (est.), and most are located in GCC countries, China, Singapore, Russia and Norway. Many banks have been partially recapitalised by SWFs since the sub-prime crisis and companies, such as Siemens, are seeking them as investors. Some SWFs have rigorous governance, e.g. Norway, but most are closed and do not publish details of their activities or of the motives behind their investments. Recently a code for SWFs has been developed by the IMF and many are promising to observe it. Is it real or just a smokescreen? We can see that power is not always exercised openly and that some holders of power do not wish, or need, to be accountable other than to themselves or their closed circle. This situation is disquieting for other parties the EU Commission is concerned about the risk of SWF takeover of strategic companies, and the USA is monitoring the situation closely. Trust in SWFs is low among OECD country governments and their emerging role as a lender/investor of last resort is increasingly disquieting. The need for greater transparency is being pressed on SWFs, particularly when major banks and investment operations are subject to increasing scrutiny to block flows of dirty money. In his book Power and Influence (2007), Robert Dilenschneider

gives copious advice on how to obtain and exercise power. His most revealing thought is search for power but never forget to share it. In a complex world of inter-dependencies, absolute power is unsustainable. Organization Resistance to corporate governance is founded on a repudiation of agency theory. Where employees control the operations of the organisation, which is normally the case, they fail to recognise that they are the servants of the organisation and are tempted to behave like masters. This self-serving attitude encourages hidden agendas and biases decisions in their favour. The inflation in rewards, and their divorce from business results, is an extreme symptom of this malady.Where this malady becomes too apparent, as in scandals like Enron, Parmalat, etc., there is a grave danger of overreaction. Sarbanes-Oxley is such an overreaction which has made governance overprescriptive and created a massive bureaucracy to police it. As we saw in Chapter 1, self-regulation is the best approach to governance in that it engenders responsibility and allows a flexible response to situations as they develop. Selfregulation, linked to a framework of laws, is a British tradition, dating back at least as far as the medieval guilds. These set standards, controlled recruitment and apprenticeship and policed behaviour. In the modern world controlled entry is less acceptable, but much of the spirit of the guilds sustains self-regulation in a more complex world. External regulation creates conflict and expense at its extreme it could be a return to the system of the Soviet Union. A key driver of corporate governance is the concept of fairness. The FSA refuses to define the term but expatiates at length on the subject. The OECD defines fairness as protecting shareholder rights and ensuring contracts with resource providers are enforceable. This implies that all shareholders have clear rights and that supply contracts are clear and even-handed. Fairness operates more widely in corporate governance, not least in stakeholder situations, and it has both legal and behavioural roots. Concepts of fairness emerged strongly in eighteenth-century philosophy, e.g. Hume, Kant and in particular Rousseaus Social Contract. The legal roots of fairness lie in the courts of equity and have shaped jurisprudence ever since. John Rawls book

As per research conducted by Department of Trade and Industry & Kings College, London, there are 18 drivers of good corporate governance: 1. Board Independence 2. Diversity, human and social capital within the board 3. High engagement in board processes 4. Presence of large block shareholders 5. Shareholder activism 6. Breadth and depth of public information disclosure

7. Breadth and depth of private information sharing 8. Independence of the external auditors 9. Competence of the audit committee 10. Presence of internal control systems and support of whistle blowing. 11. Long term performance-related incentives 12. Transparent and independent control of the remuneration committee 13. An active markets for corporate control 14. Transparency and protection for shareholders and stakeholders during mergers and acquisitions 15. Board power in takeover bids, subject to shareholder veto 16. Shareholder involvement within corporate governance 17. Voice mechanisms for debt holders 18. Employee participation in financial outcomes and collective voice in decision making. The efficiency of corporate governance in a particular organization depends upon a combination of drivers. These drivers may substitute or complement each other in terms of their efforts on organizational outcomes including business strategy and performance. As per my views, most important drivers of Good and Effective Corporate Governance system are : 1. Board Independence 2. Presence of large block shareholders i.e Institutional Investors 3.Shareholder Activism As far as Board Independence in the company is concerned, in practice it can be rarely noticed. Directors are mostly serving as Independent Directors on the Board of the Company from last 15-20 years and are just regarded as the expensive furniture of the company. There should be certain fixed term for independent directors otherwise, they would lose their independence. There are more committees of Board and less commitment. The question arises: Do promoters who are leading corporates really understand the value of Corporate Governance Standards? , What is situation of Promoters Interests vs. Shareholders Interests and how it can be tackled? The conduct of Board Meetings is more important than the composition of Board of Directors. Board functioning is important rather than names of high profile candidates on Board. Rise of Shareholders Activism is still a baby step in India. The shareholders are becoming more focused now. Some of the global examples of Share holders Activism are :

1. Apple agreed to investor demands requiring a majority share vote in order for any candidate to be elected to it s board of directors not just a simple majority. 2. Los Angeles County Employee retirement association or Lacera made it mandatory for all board of directors to elected annually. 3.Shareholder rejected CITI CEO Vikram Pandits $15 million compensation in non binding vote. 4.Merger of Sea Goa and Sterlite Industries 5.Coal India Vs. The Children Investment Fund 6.Veritas, Canadian Research Firm raised Corporate Governance and Accounting Practices issues at Reliance Industries, Reliance Communications, Kingfisher and most recently DLF. 7.SEBI mandated AMCs to disclose their general policies and procedures for exercising the voting rights in respect of shares held by them More Institutional Investors should be involved. Proxy Voting Advisory firms is also emerging in India for eg. Institutional Investors Advisory Services, In govern Research Services. In nutshell, Corporates and Board of Directors should have fear of law. There should be strong enforcement of laws and regulations to prevent corporate frauds. Fraud cases should be resolved swiftly by fast track redressal forums.
Board members should be informed and act ethically and in good faith, with due diligence and care, in the best interest of the company and the shareholders. Review and guide corporate strategy, objective setting, major plans of action, risk policy, capital plans, and annual budgets. Oversee major acquisitions and divestitures. Select, compensate, monitor and replace key executives and oversee succession planning .Align key executive and board remuneration (pay) with the longer-term interests of the company and its shareholders. Ensure a formal and transparent board member nomination and election process. Ensure the integrity of the corporations accounting and financial reporting systems, including their independent audit. Ensure appropriate systems of internal control are established. Oversee the process of disclosure and communications.

Framework - Separation of Management from Ownership - Significant development in Worlds - Development for Listed Companies. - New Frontiers for Corporate Governance. Separation of Management from Ownership, and Ownership structure of Companies.
Some people argue that shareholders do not completely control the corporation. They argue that shareholder ownership is too diffuse (spread out) and fragmented for effective control of management. A striking feature of the modern large corporation is the diffusion of ownership among thousands of investors. One of the most important advantages of the corporate form of business organization is that it allows ownership of shares to he transferred. The resulting diffuse ownership, however, brings with it the separation of ownership and control of the large corporation. The possible separation of ownership and control raises an important question: Who controls the firm? Managerial goals may be different from those of shareholders. What will managers maximize if they are left to pursue their own goals rather than shareholders goals? Some financial economists propose the notion of expense preference. They argue that managers obtain value from certain kinds of expenses. In particular, company cars, office furniture, office location, and funds for discretionary investment have value to managers beyond that which comes from their productivity. Economists conducted a series of interviews with the chief executives of several large companies. From these interview they concluded that managers are influenced by two basic underlying motivations: 1. Survival. Organizational survival means that management will always try to command sufficient resources to avoid the firms going out of business. 2. Independence and self-sufficiency. This is the freedom to make decisions without encountering external parties or depending on outside financial markets. The above-mentioned interviews suggested that managers do not like to issue new shares of stock. Instead, they like to be able to rely on internally generated cash flow.

These motivations lead to what is thought to be the basic financial objective of managers: the maximization of corporate wealth. Corporate wealth is defined as that wealth over which management has effective control; it is closely associated with corporate growth and corporate size. Corporate wealth is not necessarily shareholder wealth. Corporate wealth tends to lead to increased growth by providing funds for growth and limiting the extent to which new equity is raised. Increased growth and size are not necessarily the same thing as increased shareholder wealth.

Ownership Structure
When you start a business, you must decide whether it will be a sole proprietorship, partnership, corporation or limited liability company (LLC). (If you need a brief explanation of the main business types, see: Types of Ownership Structures.) Which of these forms is right for your business depends on the type of business you run, how many owners it has and its financial situation. No one choice suits every business: Business owners have to pick the structure that best meets their needs. This article introduces several of the most important factors to consider, including: the potential risks and liabilities of your business the formalities and expenses involved in establishing and maintaining the various business structures your income tax situation, and your investment needs. Risks And Liabilities In large part, the best ownership structure for your business depends on the type of services or products it will provide. If your business will engage in risky activitiesfor example, trading stocks or repairing roofsyoull almost surely want to form a business entity that provides personal liability protection (limited liability), which shields your personal assets from business debts and claims. A corporation or a limited liability company (LLC) is probably the best choice for you. To learn more about the advantages and disadvantages of each type of business structure, see Ways to Organize Your Business, a chart that compares the pros and cons of each. Formalities And Expenses Sole proprietorships and partnerships are easy to set upyou dont have to file any special forms or pay any fees to start your business. Plus, you dont have to follow any special operating rules. LLCs and corporations, on the other hand, are almost always more expensive to create and more difficult to maintain. To form an LLC or corporation, you must file a document with the state and pay a fee, which ranges from about $40 to $800, depending on the state where you form your business. In addition, owners of corporations and LLCs must elect officers (usually, a president, vice president and secretary) to run the company. They also have to keep records of important business decisions and follow other formalities. If youre starting your business on a shoestring, it might make the sense to form the simplest type of businessa sole proprietorship (for one-owner businesses) or a partnership (for businesses with more than one owner). Unless yours will be a particularly risky business, the limited personal liability provided by an LLC or a corporation may not be worth the cost and paperwork required to create and run one. Income Taxes Owners of sole proprietorships, partnerships and LLCs all pay taxes on business profits in the same way. These three business types are pass-through tax entities, which means that all of the profits and losses pass through the business to the owners, who report their share of the profits (or

deduct their share of the losses) on their personal income tax returns. Therefore, sole proprietors, partners and LLC owners can count on about the same amount of tax complexity, paperwork and costs. Owners of these unincorporated businesses must pay income taxes on all net profits of the business, regardless of how much they actually take out of the business each year. Even if all of the profits are kept in the business checking account to meet upcoming business expenses, the owners must report their share of these profits as income on their tax returns. In contrast, the owners of a corporation do not report their shares of corporate profits on their personal tax returns. The owners pay taxes only on profits they actually receive in the form of salaries, bonuses and dividends. The corporation itself pays taxes, at special corporate tax rates, on any profits that are left in the company from year to year (called retained earnings). Corporations also have to pay profits on dividends paid out to shareholders, but this rarely affects small corporations, which seldom pay dividends. This separate level of taxation adds a layer of complexity to filing and paying taxes, but it can be a benefit to some businesses. Owners of a corporation dont have to pay personal income taxes on profits they dont receive. And, because corporations enjoy a lower tax rate than most individuals for the first $50,000 to $75,000 of corporate income, a corporation and its owners may actually have a lower combined tax bill than the owners of an unincorporated business that earns the same amount of profit. Investment Needs Unlike other business forms, the corporate structure allows a business to sell ownership shares in the company through its stock offerings. This makes it easier to attract investment capital and to hire and retain key employees by issuing employee stock options. But for businesses that dont need to issue stock options and will never go public, forming a corporation probably isnt worth the added expense. If its limited liability that you want, an LLC provides the same protection as a corporation, but the simplicity and flexibility of LLCs offer a clear advantage over corporations. For more help on choosing between a corporation and an LLC, read the article Corporations vs. LLCs. Changing Your Mind Your initial choice of a business structure isnt set in stone. You can start out as sole proprietorship or partnership and later, if your business grows or the risk of personal liability increases, you can convert your business to an LLC or a corporation.

Development for Listed Companies

Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires, among many other elements:

Independent directors: "Listed companies must have a majority of independent directors...Effective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility

of damaging conflicts of interest." (Section 303A.01) An independent director is not part of management and has no "material financial relationship" with the company. Board meetings that exclude management: "To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management." (Section 303A.03)

Boards organize their members into committees with specific responsibilities per defined charters. "Listed companies must have a nominating/corporate governance committee composed entirely of independent directors." This committee is responsible for nominating new members for the board of directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of listing standards as well as outside regulations. (Section 303A.04 and others)[38]

Clause 49 of the Indian Listing Agreement to the Indian stock exchange comes into effect from 31 December 2005. It has been formulated for the improvement of corporate governance in all listed companies. In corporate hierarchy two types of managements are envisaged: i) companies managed by Board of Directors; and ii) those by a Managing Director, whole-time director or manager subject to the control and guidance of the Board of Directors.

As per Clause 49, for a company with an Executive Chairman, at least 50 per cent of the board should comprise independent directors. In the case of a company with a non-executive Chairman, at least one-third of the board should be independent directors.

It would be necessary for chief executives and chief financial officers to establish and maintain internal controls and implement remediation and risk mitigation towards deficiencies in internal controls, among others.

Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance report to stock exchange in the prescribed form. The clause also requires that there be a separate section on corporate governance in the annual report with a detailed compliance report.

A company is also required to obtain a certificate either from auditors or practicing company secretaries regarding compliance of conditions as stipulated, and annex the same to the director's report.

The clause mandates composition of an audit committee; one of the directors is required to be "financially literate".

It is mandatory for all listed companies to comply with the clause by 31 December 2005.

In late 2002, SEBI constituted the Narayana Murthy Committee to assess the adequacy of current corporate governance practices and to suggest improvements. Based on the recommendations of this committee, SEBI issued a modified Clause 49 on 29 October 2004 (the revised Clause 49) which came into operation on 1 January 2006.

The revised Clause 49 has suitably pushed forward the original intent of protecting the interests of investors through enhanced governance practices and disclosures. Five broad themes predominate. The independence criteria for directors have been clarified. The roles and responsibilities of the board have been enhanced. The quality and quantity of disclosures have improved. The roles and responsibilities of the audit committee in all matters relating to internal controls and financial reporting have been consolidated, and the accountability of top managementspecifically the CEO and CFOhas been enhanced. Within each of these areas, the revised Clause 49 moves further into the realm of global best practices (and sometimes, even beyond). By Circular dated 8 April 2008, the Securities and Exchange Board of India amended Clause 49 of the Listing Agreement to extent the 50% independent directors rule to all Boards of Directors where the NonExecutive Chairman is a promoter of the Company or related to the promoters of the company.

Clause 49 - Corporate Governance

The company agrees to comply with the following provisions: I. Board of Directors A. Composition of Board (i) The board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. The number of independent directors would depend on whether the Chairman is executive or non-executive. In case of a non-executive chairman, at least one-third of board should comprise of independent directors and in case of an executive chairman, at least half of board should comprise of independent directors. Explanation (i) : For the purpose of this clause, the expression independent director shall mean non-executive director of the company who (a) apart from receiving directors remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies; (b) is not related to promoters or management at the board level or at one level below the board; (c) has not been an executive of the company in the immediately preceding three financial years; (d) is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity. (e) is not a supplier, service provider or customer of the company. This should include lessor-lessee type relationships also; and
(f) is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares.

Explanation (ii): Institutional directors on the boards of companies shall be considered as independent directors whether the institution is an investing institution or a lending institution. (B) Non executive directors compensation and disclosures

(i) All compensation paid to non-executive directors shall be fixed by the Board of Directors and shall be approved by shareholders in general meeting. Limits shall be set for the maximum number of stock options that can be granted to non-executive directors in any financial year and in aggregate. The stock options granted to the non-executive directors shall vest after a period of at least one year from the date such non-executive directors have retired from the Board of the Company. (ii) The considerations as regards compensation paid to an independent director shall be the same as those applied to a non-executive director. (iii) The company shall publish its compensation philosophy and statement of entitled compensation in respect of non-executive directors in its annual report. Alternatively, this may be put up on the companys website and reference drawn thereto in the annual report. Company shall disclose on an annual basis, details of shares held by non-executive directors, including on an if-converted basis. (iv) Non-executive directors shall be required to disclose their stock holding (both own or held by / for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should accompany their notice of appointment (C) Independent Director (i) Independent Director shall however periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure any taint. In the event of any proceedings against an independent director in connection with the affairs of the company, defence shall not be permitted on the ground that the independent director was unaware of this responsibility.
(ii) The considerations as regards remuneration paid to an independent director shall be the same as those applied to a non executive director

(D)

Board Procedure (i) The board meeting shall be held at least four times a year, with a maximum time gap of four months between any two meetings. The minimum information to be made available to the board is given in AnnexureIA.

(ii) A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place. Explanation: For the purpose of considering the limit of the committees on which a director can serve, all public limited companies, whether listed or not, shall be included and all other companies (i e private limited companies, foreign companies and companies under Section 25 of the Companies Act, etc) shall be excluded. (iii) Further only the three committees viz. the Audit Committee, the Shareholders Grievance Committee and the Remuneration Committee shall be considered for this purpose.

(E)

Code of Conduct (i) It shall be obligatory for the Board of a company to lay down the code of conduct for all Board members and senior management of a

company. This code of conduct shall be posted on the website of the company.
(ii) All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The annual report of the company shall contain a declaration to this effect signed by the CEO and COO.

Explanation: For this purpose, the term senior management shall mean personnel of the company who are members of its management/operating council (i.e. core management team excluding Board of Directors). Normally, this would comprise all members of management one level below the executive directors (F) Term of Office of Nonexecutive directors (i) Person shall be eligible for the office of non-executive director so long as the term of office did not exceed nine years in three terms of three years each, running continuously. II Audit Committee. A. Qualified and Independent Audit Committee A qualified and independent audit committee shall be set up and shall comply with the following: (i) The audit committee shall have minimum three members. All the members of audit committee shall be non-executive directors, with the majority of them being independent. (ii) All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise. Explanation (i) : The term financially literate means the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows. Explanation (ii) : A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individuals financial sophistication, including being or having been a chief executive officer, chief financial officer, or other senior officer with financial oversight responsibilities. (iii) The Chairman of the Committee shall be an independent director; (iv) The Chairman shall be present at Annual General Meeting to answer shareholder queries;
(v) The audit committee should invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executives of the company. The finance director, head of internal audit and when required, a representative of the external auditor shall be present as invitees for the meetings of the audit committee; (vi) The Company Secretary shall act as the secretary to the committee.

(B)

Meeting of Audit Committee The audit committee shall meet at least thrice a year. One meeting shall be held before finalization of annual accounts and one every six months. The quorum shall be either two members or one third of the members of the audit committee, whichever is higher and minimum of two independent directors.

(C)

Powers of Audit Committee The audit committee shall have powers which should include the following: 1. To investigate any activity within its terms of reference.
2. To seek information from any employee. 3. To obtain outside legal or other professional advice. 4. To secure attendance of outsiders with relevant expertise, if it considers necessary.

(D)

Role of Audit Committee (i) The role of the audit committee shall include the following: 1. Oversight of the companys financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. 2. Recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services.
3. Reviewing with management the annual financial statements before submission to the board, focusing primarily on;

(a) Any changes in accounting policies and practices. (b) Major accounting entries based on exercise of judgment by management.
(c) Qualifications in draft audit report. (d) Significant adjustments arising out of audit. (e) The going concern assumption. (f) Compliance with accounting standards. (g) Compliance with stock exchange and legal requirements concerning financial statements (h) Any related party transactions

4. Reviewing with the management, external and internal auditors, the adequacy of internal control systems.
5. Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. 6. Discussion with internal auditors any significant findings and follow up there on. 7. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. 8. Discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern. 9. Reviewing the companys financial and risk management policies. 10. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors.

Explanation (i): The term related party transactions shall have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered Accountants of India. Explanation (ii): If the company has set up an audit committee pursuant to provision of the Companies Act, the company agrees that the

said audit committee shall have such additional functions / features as is contained in the Listing Agreement. (E) Review of information by Audit Committee (i) The Audit Committee shall mandatorily review the following information: 1. Financial statements and draft audit report, including quarterly / half-yearly financial information;
2. Management discussion and analysis of financial condition and results of operations; 3. Reports relating to compliance with laws and to risk management; 4. Management letters / letters of internal control weaknesses issued by statutory / internal auditors; and 5. Records of related party transactions 6. The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee

III. A.

Audit Reports and Audit Qualifications Disclosure of Accounting Treatment In case it has followed a treatment different from that prescribed in an Accounting Standards, management shall justify why they believe such alternative treatment is more representative of the underlined business transactions. Management shall also clearly explain the alternative accounting treatment in the footnote of financial statements. IV. Whistle Blower Policy (A) Internal Policy on access to Audit Committees: (i) Personnel who observe an unethical or improper practice (not necessarily a violation of law) shall be able to approach the audit committee without necessarily informing their supervisors.
(ii) Companies shall take measures to ensure that this right of access is communicated to all employees through means of internal circulars, etc. The employment and other personnel policies of the company shall contain provisions protecting whistle blowers from unfair termination and other unfair or prejudicial employment practices. (iii) Company shall annually affirm that it has not denied any personnel access to the audit committee of the company (in respect of matters involving alleged misconduct) and that it has provided protection to whistle blowers from unfair termination and other unfair or prejudicial employment practices. (iv) Such affirmation shall form a part of the Board report on Corporate Governance that is required to be prepared and submitted together with the annual report. (v) The appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the Audit Committee.

V.

Subsidiary Companies (i) The company agrees that provisions relating to the composition of the Board of Directors of the holding company shall be made applicable to the composition of the Board of Directors of subsidiary companies.
(ii) At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of the subsidiary company. (iii) The Audit Committee of the holding company shall also review the financial statements, in particular the investments made by the subsidiary company.

(iv) The minutes of the Board meetings of the subsidiary company shall be placed for review at the Board meeting of the holding company.

(v) The Board report of the holding company should state that they have reviewed the affairs of the subsidiary company also. VI. Disclosure of contingent liabilities (i) The company agrees that management shall provide a clear description in plain English of each material contingent liability and its risks, which shall be accompanied by the auditors clearly worded comments on the managements view. This section shall be highlighted in the significant accounting policies and notes on accounts, as well as, in the auditors report, where necessary. VII. Disclosures (A) Basis of related party transactions (i) A statement of all transactions with related parties including their basis shall be placed before the Audit Committee for formal approval/ratification. If any transaction is not on an arms length basis, management shall provide an explanation to the Audit Committee justifying the same. (B) Board Disclosures Risk management (i) It shall put in place procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. (ii) Management shall place a report certified by the compliance officer of the company, before the entire Board of Directors every quarter documenting the business risks faced by the company, measures to address and minimize such risks, and any limitations to the risk taking capacity of the corporation. This document shall be formally approved by the Board. (C) Proceeds from Initial Public Offerings (IPOs) (i) When money is raised through an Initial Public Offering (IPO) it shall disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their quarterly declaration of financial results. Further, on an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus. This statement shall be certified by the independent auditors of the company. The audit committee shall make appropriate recommendations to the Board to take up steps in this matter. (D) Remuneration of Directors (a) All pecuniary relationship or transactions of the non-executive directors vis-a-vis the company shall be disclosed in the Annual Report. (ii) Further the following disclosures on the remuneration of directors shall be made in the section on the corporate governance of the annual report. (a) All elements of remuneration package of all the directors i.e. salary, benefits, bonuses, stock options, pension etc.
(b) Details of fixed component and performance linked incentives, along with the performance criteria. (c) Service contracts, notice period, severance fees. (d) Stock option details, if any and whether issued at a discount as well as the period over which accrued and over which exercisable.

(E)

Management

(i) As part of the directors report or as an addition there to, a Management Discussion and Analysis report should form part of the annual report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the companys competitive position: (a) Industry structure and developments.
(b) Opportunities and Threats. (c) Segmentwise or product-wise performance. (d) Outlook. (e) Risks and concerns. (f) Internal control systems and their adequacy. (g) Discussion on financial performance with respect to operational performance. (h) Material developments in Human Resources / Industrial Relations front, including number of people employed.

Management shall make disclosures to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.) (F) Shareholders (i) In case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following information: (a) A brief resume of the director;
(b) Nature of his expertise in specific functional areas; and (c) Names of companies in which the person also holds the directorship and the membership of Committees of the board. (ii) Information like quarterly results, presentation made by companies to analysts shall be put on companys web-site, or shall be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own website. (iii) A board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall be designated as Shareholders/Investors Grievance Committee. (iv) To expedite the process of share transfers the board of the company shall delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight.

VIII. CEO/CFO certification (i) CEO (either the Executive Chairman or the Managing Director) and the CFO (whole-time Finance Director or other person discharging this function) of the company shall certify that, to the best of their knowledge and belief: (a) They have reviewed the balance sheet and profit and loss account and all its schedules and notes on accounts, as well as the cash flow statements and the Directors Report; (b) These statements do not contain any materially untrue statement or omit any material fact nor do they contain statements that might be misleading;
(c) These statements together present a true and fair view of the company, and are in compliance with the existing accounting standards and / or applicable laws / regulations;

(d) They are responsible for establishing and maintaining internal controls and have evaluated the effectiveness of internal control systems of the company; and they have also disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, and what they have done or propose to do to rectify these; (e) They have also disclosed to the auditors as well as the Audit Committee, instances of significant fraud, if any, that involves management or employees having a significant role in the companys internal control systems; and (f) They have indicated to the auditors, the Audit Committee and in the notes on accounts, whether or not there were significant changes in internal control and / or of accounting policies during the year.

IX. Report on Corporate Governance (i) There shall be a separate section on Corporate Governance in the annual reports of company, with a detailed compliance report on Corporate Governance. Non-compliance of any mandatory requirement i.e. which is part of the listing agreement with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted. The suggested list of items to be included in this report is given in Annexure-1B and list of non-mandatory requirements is given in Annexure 1C. (ii) The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format given below. The report shall be submitted either by the Compliance Officer or the Chief Executive Officer of the company after obtaining due approvals.

Format of Quarterly Compliance Report on Corporate Governance Name of the Company: Quarter ending on:
Particulars Clause of Compliance status Remarks

I.

Listing Agreement (Yes/No/N.A.) 1 2 4 Board of Directors 49 I (A) Composition of Board 49 (IA) (B) Non-executive Directors compensation & disclosures (IB) (C) Independent Director (D) Board Procedure 9 (ID) Code of Conduct

(IC)

(E) 9 (IE) (F) Term of office of non-executive directors

49 (IF)

II.

Audit Committee 9 (II) (A) Qualified & Independent Audit Committee (B) Meeting of Audit Committee (C) (D) II(D) (E) Powers of Audit Committee Role of Audit Committee Review of Information by Audit Committee

9 (IIA) 9 (IIB) 9 (IIC)

III.
IV. V. VI. VII.

Audit Reports and Audit Qualifications

Whistle Blower Policy Subsidiary Companies 49 (V) Disclosure of contingent liabilities Disclosures 49 (VII) (A) Basis of related party transactions

49 (IIE)

49 (III)

49 (IV)

49 (VI)

(II

A)

(B) Board Disclosures (VIIB) (C) Proceeds from Initial Public offerings (VIIC) (VIID) (D) Remuneration of Directors

49 49

(E) Management (VIIE) (F) Shareholders 49 (VIIF) VIII.CEO/CFO Certification (VIII) IX. Report on Corporate Governance X. Compliance 49 (X)

49 49 (IX)

Note: (1) The details under each head shall be provided to incorporate all the information required as per the provisions of the clause 49 of the Listing Agreement. (2) In the column No.3, compliance or non-compliance may be indicated by Yes/No/N.A.. For example, if the Board has been composed in accordance with the clause 49 I of the Listing Agreement, Yes may be indicated. Similarly, in case the company has not come out with an IPO, the words N.A. may be indicated against 49 (VIIC). (3) In the remarks column, reasons for non-compliance may be indicated, for example, in case of requirement related to circulation of information to the shareholders, which would be done only in the AGM/EGM, it might be indicated in the Remarks column as will be complied with at the AGM. Similarly, in respect of matters which can be complied with only where the situation arises, for example, Report on Corporate Governance is to be a

part of Annual Report only, the words will be complied in the next Annual Report may be indicated. X. Compliance The company shall obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance as stipulated in this clause and annex the certificate with the directors report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual returns filed by the company. Schedule of implementation (1) The provisions of the revised clause 49 shall be implemented as per the schedule of implementation given below: (i) By all entities seeking listing for the first time, at the time of listing. (ii) By all companies which were required to comply with the requirement of the erstwhile clause 49 i.e. all listed entities having a paid up share capital of Rs 3 crores and above or net worth of Rs 25 crores or more at any time in the history of the entity. These entities shall be required to comply with the requirement of this clause on or before March 31, 2004. (2) The non-mandatory requirement given in Annexure 1C shall be implemented as per the discretion of the company. However, the disclosures of the adoption/non-adoption of the non-mandatory requirements shall be made in the section on corporate governance of the Annual Report.
Annexure 1A

Information to be placed before Board of Directors 1. Annual operating plans and budgets and any updates. 2. Capital budgets and any updates. 3. Quarterly results for the company and its operating divisions or business segments. 4. Minutes of meetings of audit committee and other committees of the board. 5. The information on recruitment and remuneration of senior officers just below the board level, including appointment or removal of Chief Financial Officer and the Company Secretary. 6. Show cause, demand, prosecution notices and penalty notices which are materially important. 7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems. 8. Any material default in financial obligations to and by the company, or substantial non-payment for goods sold by the company. 9. Any issue, which involves possible public or product liability claims of substantial nature, including any judgement or order which, may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company. 10. Details of any joint venture or collaboration agreement. 11. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property. 12. Significant labour problems and their proposed solutions. Any significant development in Human Resources/ Industrial Relations front like

signing of wage agreement, implementation of Voluntary Retirement Scheme etc. 13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business. 14. Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material. 15. Non-compliance of any regulatory, statutory nature or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer etc. Annexure 1B Suggested List of Items to Be Included In the Report on Corporate Governance in the Annual Report of Companies 1. A brief statement on companys philosophy on code of governance.
2. Board of Directors:

(i) Composition and category of directors, for example, promoter, executive, non- executive, independent non-executive, nominee director, which institution represented as lender or as equity investor. (ii) Attendance of each director at the BoD meetings and the last AGM. (iii) Number of other BoDs or Board Committees in which he/she is a member or Chairperson. (iv) Number of BoD meetings held, dates on which held. 3. Audit Committee. (i) Brief description of terms of reference (ii) Composition, name of members and Chairperson (iii) Meetings and attendance during the year 4. Remuneration Committee. (i) Brief description of terms of reference (ii) Composition, name of members and Chairperson (iii) Attendance during the year (iv) Remuneration policy (v) Details of remuneration to all the directors, as per format in main report. 5. Shareholders Committee. (i) Name of non-executive director heading the committee (ii) Name and designation of compliance officer (iii) Number of shareholders complaints received so far (iv) Number not solved to the satisfaction of shareholders (v) Number of pending complaints 6. General Body meetings. (i) Location and time, where last three AGMs held. (ii) Whether any special resolutions passed in the previous 3 AGMs (iii) Whether any special resolution passed last year through postal ballot details of voting pattern (iv) Person who conducted the postal ballot exercise (v) Whether any special resolution is proposed to be conducted through postal ballot (vi) Procedure for postal ballot 7. Disclosures.

(i) Disclosures on materially significant related party transactions that may have potential conflict with the interests of company at large. (ii) Disclosure of accounting treatment, if different, from that prescribed in Accounting standards with explanation. (iii) Details of non-compliance by the company, penalties, strictures imposed on the company by Stock Exchange or SEBI or any statutory authority, on any matter related to capital markets, during the last three years. (iv) Whistle Blower policy and affirmation that no personnel has been denied access to the audit committee. 8. Means of communication. (i) Half-yearly report sent to each household of shareholders. (ii) Quarterly results (iii) Newspapers wherein results normally published (iv) Any website, where displayed (v) Whether it also displays official news releases; and (vi) The presentations made to institutional investors or to the analysts. (vii) Whether MD&A is a part of annual report or not. 9. General Shareholder information (i) AGM : Date, time and venue (ii) Financial Calendar (iii) Date of Book closure (iv) Dividend Payment Date (v) Listing on Stock Exchanges (vi) Stock Code (vii) Market Price Data : High., Low during each month in last financial year (viii) Performance in comparison to broad-based indices such as BSE Sensex, CRISIL index etc. (ix) Registrar and Transfer Agents (x) Share Transfer System (xi) Distribution of shareholding (xii) Dematerialization of shares and liquidity (xiii) Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date and likely impact on equity (xiv) Plant Locations (xv) Address for correspondence Annexure 1C Non-Mandatory Requirements 1. Chairman of the Board A non-executive Chairman should be entitled to maintain a Chairmans office at the companys expense and also allowed reimbursement of expenses incurred in performance of his duties. 2. Remuneration Committee (i) The board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the companys policy on specific remuneration packages for executive directors including pension rights and any compensation payment.

(ii) To avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the executive directors should comprise of at least three directors, all of whom should be nonexecutive directors, the chairman of committee being an independent director. (iii) All the members of the remuneration committee should be present at the meeting. (iv) The Chairman of the remuneration committee should be present at the Annual General Meeting, to answer the shareholder queries. However, it would be up to the Chairman to decide who should answer the queries. 3. Shareholder Rights The half-yearly declaration of financial performance including summary of the significant events in last six-months, should be sent to each household of shareholders.
4. Postal Ballot

Currently, though there is requirement for holding the general meeting of shareholders, in actual practice only a small fraction of the shareholders of that company do or can really participate therein. This virtually makes the concept of corporate democracy illusory. It is imperative that this situation which has lasted too long needs an early correction. In this context, for shareholders who are unable to attend the meetings, there should be a requirement which will enable them to vote by postal ballot for key decisions. Some of the critical matters which should be decided by postal ballot are given below: (i) Matters relating to alteration in the memorandum of association of the company like changes in name, objects, address of registered office etc; (ii) Sale of whole or substantially the whole of the undertaking; (a) Sale of investments in the companies, where the shareholding or the voting rights of the company exceeds 25%;
(b) Making a further issue of shares through preferential allotment or private placement basis; (c) Corporate restructuring; (d) Entering a new business area not germane to the existing business of the company; (e) Variation in rights attached to class of securities; (f) Matters relating to change in management.

5.

Audit qualifications Company may move towards a regime of unqualified financial statements. 6. Training of Board Members Company shall train its Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them. 7. Mechanism for evaluating non-executive Board Members The performance evaluation of non-executive directors should be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group evaluation should be the mechanism to determine whether to extend/ continue the terms of appointment of non-executive directors.

New Frontiers for Corporate Governance

Although institutional investors play a major role in our public equity markets, far less is known about the governance of those investor entities than about investee corporations. These investors are critical to individuals, equity markets, publicly held companies, the economy and to the troubling (and conceptually difficult) issue of good versus bad short-termism in investor and investee behavior. Put simply, the fundamental issue is whether institutional investors are part of the problem or part of the solution within the current state of market capitalism. By institutional investors we mean, at a minimum, pension funds, mutual funds, insurance companies, hedge funds and endowments of non-profit entities like universities and foundations. Recent developments in public policy treat shareholders (primarily institutional investors) as part of the solution. The Dodd-Frank Act in the United States and the Stewardship Code in the United Kingdom, for instance, essentially place big bets that institutions can and will police the market with new powers and responsibilities. While this is a worthy objective, it rests on unexamined and unsophisticated assumptions. In a new paper, Are Institutional Investors Part of the Problem or Part of the Solution?, we attempt to outline major descriptive and prescriptive issues relating to these institutional investors (the paper is available from Yales Millstein Center here, and from the Committee for Economic Development here). We call for much greater intellectual and institutional effort in addressing these vital but under-analyzed questions. Set out below is the essence of our argument for much more sophisticated analysis of the governance of institutional investors based on development of much more robust data bases about the critical elements of investor governance and performance. Over the last twenty years, institutional investors have owned an increasing share of public equity markets more than 70 percent of the largest 1,000 companies in the United States in 2009, for example. Over the past two years, in response to failures of some boards of directors and business leaders, shareholders, including institutional investors, have been given increased powers to participate in or have disclosures about discrete spheres of governance in publicly held corporations. Moreover, during this same period, and in multiple jurisdictions, there have been increasing calls from both the public and private sectors for institutional investors to play a broad stewardship role by engaging with investee companies to help achieve long-term sustainable value and to help curb the excessive risk taking seen as a factor in the financial crisis. But with these shifts in market and legal powers have come questions about institutional investors which are similar to those raised in the recent past about the corporations in which they invest. These questions relate to goals, strategies, governance, performance and accountability and, importantly, the separation of ownership and control (i.e. agency problems). They boil down to a bedrock query: do investors have the capacity to perform the role now expected of them?

Policymakers who championed the transfer of enhanced powers to investors went well beyond available knowledge in crafting such a response to the financial crisis. This leap of faith is perhaps understandable in light of the severity of the 2008 market seizures and the political pressures that arose in their wake. But there is no mistaking that the approach represents, in effect, a big bet that investor institutions can and will exercise their new rights responsibly, and that such behavior will make markets more sustainable, less prone to error, and more in sync with the interests of capital providers. Moves to further empower investors lend urgency to the need to deepen knowledge of investor governance and behavior. Three organizations the Committee for Economic Development, The Millstein Center for Corporate Governance and Performance at the Yale School of Man agement, and the Aspen Institute Business and Society Program agreed to explore this issue, especially because the level of available research effort and prescriptive analysis lags behind the voluminous writing on publicly held corporations. The trio convened a research roundtable in January 2011 with academics, think-tank analysts, leading practitioners and former regulators. The purpose was to identify salient areas for future research and analysis. Our paper outlining the empirical and normative issues posed by institutional investors proceeds from three fundamental and potentially interrelated questions which were identified as central at the research roundtable. First, do such investors adequately advance the goals of the individuals who give institutions their moneywhether those individuals are pension fund beneficiaries, mutual fund investors, insurance beneficiaries or hedge fund investors? The question is the classic principal/agent problem: do those who manage trillions of dollars of other peoples money advance the interests of the ultimate beneficiaries who may be dispersed and disengaged or their own interests? This question has special salience today because of the many different steps in the investment chain. Agents abound. For example, one common sequence is that an individual contributes money to a pension fund; the trustees and executives, after being advised by an investment consultant, then allocate those monies to both internal and external fund managers, or to managers of fund of funds who in turn distribute the monies to yet other asset managers. Second, do institutional investors contribute significantly to undesirable shorttermism in their publicly held investee companies? A number of commentators have argued that institutional investors put pressure on boards of directors and business leaders for increases in short-term share price at the expense of balanced long-term investment, risk management and integrity because of investor strategy (beat composite indices, for instance), compensation (say, for performance during quarter or year) and other competitive factors (e.g. continually outperform peer investors, not just indices). Such pressure from investment managers arguably helped cause financial institutions to assume high leverage in an overheated housing market to keep stock price rising in lockstep with other financial service companies. Given these factors, commentators have said: Unsurprisingly, investment managers focus on delivering short-term returns.pressuring investee companies to maximize their near-term profits. Third, can institutional investors become more effective stewards of publicly held investee corporations, and how does that stewardship role differ from the role of boards of directors to oversee the direction of companies? This issue arises in part from the criticism that institutional investors were passive in the face of problems which caused the credit crisis and the financial meltdown (as opposed to being an active cause of that meltdown through short-term pressures): .a successful financial system requires the oversight of vigilant market participants [w]hen pension funds, mutual funds, insurance funds and other major investors are silent, vigilance is absent.[s]uch passivity invites abuse. This criticism of institutional investor passivity has arisen many times before the most recent crisis. But the stewardship aspiration also stems from a desire to articulate fully the roles and responsibilities

of shareholders embodied, in part, by recent policy initiatives such as the U.K. Stewardship Code and U.S. Dodd-Frank reforms. Such a stewardship role is different than simply selling a stock. As Roger Ferguson, President and CEO of TIAA-CREF, has said: Better to engage management on governance and strategy issues before problems arise and shareholder value plummets. But given the complexity of many corporate decisions and difficulties directors themselves have in overseeing multi-factorial business tradeoffs what is realistic in terms of time, effort and contribution in the relationship both from the stewards and from boards/management? Do the investor stewards relate to boards, to management, or to both and at what level of detail and on what kind of decisions? The answers to these three fundamental questions about institutional investors will, of course, vary with type of investor. Answers will also turn on the interplay between factual research results and analysis of important prescriptive concepts and questions which, when articulated properly, provide the foundation for normative judgments about what are proper public policies or proper private ordering arrangements to address defined institutional investor problems. The three issues also may be interrelated. For example, beneficial owners who contribute to pension funds may seek steady, long-term growth in their assets, not short-term, up-and-down volatility; fund managers may seek to exploit short-term volatility for their own benefit, even though it is inconsistent with the longer-term objectives of the beneficial owners; and such steady long-term growth may be consistent with a proper investor stewardship role with investee companies played by those who control other peoples money (the money of the beneficial owners). Even if the objectives of beneficial owners are, in fact, short-term, as with investors in some hedge funds, then those objectives may cause undesirable short-termism in investee companies and may preclude a serious stewardship role because of short time horizons (or because trading strategies are largely indifferent to governance concerns). The paper is intended to spotlight knowledge gaps and identify practical remedies. It contends that addressing these fundamental questions is central to understanding even more fundamental issues relating to the state of market capitalism, issues for individual investors, the potential impact on equity markets, constraints on publicly held companies, and the health of the economy. It seeks to make the case that we need to have as much under standing about investor entities as we do about investee companies. It points the way analytically towards the variety of issues which need to be addressed in answering the three generic questions without trying to bias the outcomes. It invites much greater attention to these critical questions from all across the intellectual and policy spectrum. Our bottom line assertion: the increasingly important role of institutional investors in our economy and our public markets requires substantial new intellectual attention. Our principle concern is that either public mandates or private efforts are needed to assemble a global database with fundamental empirical information about different types of institutional investors: in particular their goals, time frames, strategies, governance structures, governance processes, incentives, compensation practices, transparency, holding periods and market impact and their view of fiduciary duties, accountability, and the stewardship role. Such a database is a necessary prerequisite for efforts to advance understanding of the critical role institutions increasingly play in the functioning of capital markets around the world. Second, we hope analysts from all across the intellectual spectrum will engage in the three fundamental prescriptive questions which provided the framework for our paper. Do institutional investors carry out the goals of their individual beneficiaries? Do institutional investors contribute to improper short-termism? How can institutional investors play a stewardship role in support of longer-term corporate strategies which effectively counters improper short-termism and which meshes appropriately with the responsibilities of boards of directors and senior leaders of investee companies?

But we must emphasize that these intellectual challenges require institutional attention and support. We hope the paper can be the basis for workshops convened by regulators, thinktanks, business, law and public policy schools. But beyond conferences to energize work on this critical set of issues, it would certainly be appropriate and definitely in the public interest for academic institutions to establish capacity both to conduct and to collect descriptive and prescriptive research in a comprehensive and systematic way. Study of the many issues raised in this paper (and many more outside of it) is surely appropriate. But it is also necessary to understand these problems holistically to comprehend the systematic interrelationships that actions on one set of issues may have on other pertinent institutional investor problems. Although research is certainly being conducted on institutional investors in a variety of settings, we are not aware of academic or think-tank centers dedicated to a comprehensive approach to this vital area.

Functions of Boards - Appointment of Independent Directors - Corporate Transparency - Assessment of Directors, Boards and Companies.
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company ororganization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors. It is often simply referred to as "the board". A board's activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detailed in the organization's [bylaws]. The bylaws commonly also specify the number of members of the board, how they are to be chosen, and when they are to meet. In an organization with voting members, e.g., a professional society, the board acts on behalf of, and is subordinate to, the organization's full group, which usually chooses the members of the board. In a stock corporation, the board is elected by the shareholders and is the highest authority in the management of the corporation. In a non-stock corporation with no general voting membership, e.g., a typical university, the board is the supreme governing body of the institution; [1] its members are sometimes chosen by the board itself.[2][3] Typical duties of boards of directors include:[4][5]

governing the organization by establishing broad policies and objectives; selecting, appointing, supporting and reviewing the performance of the chief executive; ensuring the availability of adequate financial resources; approving annual budgets; accounting to the stakeholders for the organization's performance; setting the salaries and compensation of company management;

The legal responsibilities of boards and board members vary with the nature of the organization, and with the jurisdiction within which it operates. For companies with publicly trading stock, these responsibilities are typically much more rigorous and complex than for those of other types

SarbanesOxley Act

The SarbanesOxley Act of 2002 has introduced new standards of accountability on boards of U.S. companies or companies listed on U.S. stock exchanges. Under the Act, directors risk large fines and prison sentences in the case of accounting crimes. Internal control is now the direct responsibility of directors. The vast majority of companies covered by the Act have hired internal auditors to ensure that the company adheres to required standards of internal control. The internal auditors are required by law to report directly to an audit board, consisting of directors more than half of whom are outside directors, one of whom is a "financial expert." The law requires companies listed on the major stock exchanges (NYSE, NASDAQ) to have a majority of independent directorsdirectors who are not otherwise employed by the firm or in a business relationship with it.

Size
According to the Corporate Library's study, the average size of publicly traded company's board is 9.2 members, and most boards range from 3 to 31 members. According to Investopedia, some analysts think the ideal size is seven.[42]

Committees
While a board may have several committees, twothe compensation committee and audit committeeare critical and must be made up of at least three independent directors and no inside directors. Other common committees in boards are nominating and governance.[42][43]

Compensation
Directors of Fortune 500 companies received median pay of $234,000 in 2011. Directorship is a part-time job. A recent National Association of Corporate Directors study found directors averaging just 4.3 hours a week on board work.[44]

Function of the Board of Directors

The function of the Board of Directors. is to manage, represent and supervise, as may be necessary, so as to ensure that the Company fulfils its corporate objectives, while seeking to protect the Company's general interests and create value for the benefit of all the shareholders. Without prejudice to the powers delegated to it, the Board, directly or through its Committees, has exclusive powers regarding a number of matters, including:

Approving Ferrovial's strategic guidelines, management goals and annual budgets .

Approving Ferrovial's policy in the following areas: investments and finance, structure of the group of companies, corporate governance, corporate social responsibility, remuneration and evaluation of senior executives, risk control and management, shareholder remuneration and own shares. Appointment and removal of the Company's Managing Director, after consultation with the Nomination and Remuneration Committee. Directors' remuneration, based on a proposal from the Nomination and Remuneration Committee.

Drafting financial statements, monitoring the Companys quarterly financial statements and supervising the information that must be provided periodically to the markets or supervisory authorities. Approving investments or transactions whose size or special characteristics makes them strategic, except where their approval is reserved for the Shareholders' Meeting. Approving the incorporation and acquisition of holdings in companies domiciled in tax havens and of special purpose vehicles, where their nature, object, accounting, finances or any other circumstance might impair the group's transparency. Based on a report by the Audit and Control Committee, granting the exemptions and other authorizations regarding directors' duties which are within its power, in accordance with the Regulation of the Board of Directors.

Independent director
An Independent Director (also sometimes known as a outside director or non-executive director) is a director (member) of a board of directors who does not have a material or pecuniary relationship with company or related persons, except sitting fees. Independent Directors do not own shares in the company. (Some sources state non-executive directors are different from independent ones in that non-executive director are allowed to hold shares in the firm while independent directors are not. [1] In the US, independent outsiders make up 66% of all boards and 72% of S&P 500 company boards, according to The Wall Street Journal.[2]

US
The NYSE and Nasdaq stock exchange standards for independent directors are similar. Both require that "a majority of the board of directors of a listed company be `independent,`"[3] Both allow compensation for directors of $120,000/year or less (as of August 2008).[4] The NYSE states: no director qualifies as independent unless the board of directors affirmatively determines that the director has no material relationship with the listed company, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company.[5] Nasdaqs rules say that an independent director must not be an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the companys board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.[5] According to the Conference Board, "other than delisting a company ... there really is no penalty" by the stock exchanges or the SEC for not having enough independent directors.[5]

India
In India as of 2004, a majority of the minimum seven directors of public companies having share capital in excess of Rs. 5 crore (Rs 50,000,000) should be independent. Clause 49 of the listing agreements defines independent directors as follows: "For the purpose of this clause the expression 'independent directors' means directors who apart from receiving director's remuneration, do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in judgment of the board may affect independence of judgment of the directors."[1] Maximum compensation or "sitting fee" as of 2004 was Rs. 20,000/-.[1]

Effectiveness
Some researchers have complained that firms have appointed "independent directors who are overly sympathetic to management, while still technically independent according to regulatory definitions."[6] One complaint against the independence regulations is that CEOs may find loopholes to influence directors. While the NYSE has a $1 million limit on business dealing between directors and the firm, this does not include charitable contributions. Two critics of management influence over boards note that "a director who is an officer or employee of a charitable organization can still be considered independent even if the firm on whose board the director sits contributes more than $1 million to that organization.

Who is an Independent Director?

Independent Director means non-executive Director who, apart from receiving directors remuneration, does not have any material/ pecuniary relationship or transaction with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates, which in judgment of the Board may affect independence of judgment of the Director. The Companies Act, 1956 do not specifically gives the definition of the Independent Director. However clause 49 of the Listing Agreement gives the definition. As per revised clause 49 of the Listing Agreement the definition of the term independent directors would mean a non-executive director who: 1. Does not have a pecuniary relationship with the company, its promoters, senior management or affiliate companies. 2. Is not related to promoters or the senior management. 3. Has not been an executive with the company in the immediately three preceding financial years. 4. Is not a partner or executive of the auditors/lawyers/consultants of the company for the last three years. 5. Is not a supplier, service provider or customer of the company. 6. Does not hold 2 per cent or more of the shares of the company. Senior management means personnel of the company who are members of its core management team excluding the Board of Directors, and would comprise of all members of management one level below the executive directors, including all functional heads.

Normally Nominee Directors of Bank or Financial Institution will not be considered as independent Director as per the Companies Act. However under Clause 49 of the Listing Agreement issued by SEBI such Directors are considered as independent Director. Role of Independent Director An independent director is a person having many years of experience and acts as a guide for the company. The role they play in a company broadly includes improving corporate credibility and governance standards, function as watchdog, play a vital role in risk management. Independent Director plays an active role in various committees to be set up by a company to ensure good governance. Listed companies are required to set up audit committees of minimum three directors, on which, two-thirds should be Independent Director. The role and responsibility of an Independent Director arising out clause 49 requirements of role of audit committee would include 1. Oversight of company financial reporting process and disclosure of its financial information. 2. Recommending to Board on the appointment, re-appointment and if required replacement or removal of statutory auditor and fixation of audit fees. 3. Review with management, the annual financial statements before approval by the board with particular reference to Directors Responsibility Statement, changes in accounting policy, major accounting estimates, audit findings adjustments, compliance with listing and other legal requirements, disclosure of related party transactions and qualification in the draft audit report. 4. Review of quarterly financial statements. 5. Review with management, performance of statutory and internal auditors, adequacy of internal control systems, adequacy of internal audit function including their structure, frequency, reporting. 6. Discussing significant finding of internal auditors, including internal investigations made by them into areas of fraud, irregularities or major failures of internal control systems. 7. Discussing with auditors on the scope of the audit. 8. Reviewing reasons for defaults into payments. 9. Reviewing the whistle blower mechanism. 10. Mandatory review must be made of related party transactions and internal control weaknesses. 11. Review financial statements of subsidiary companies with special attention to investments made by them. 12. Review uses/application of funds from public issues, rights issues, preferential issues etc. 13. Disclose shareholdings in the listed company. Duties & Responsibilities of an Independent Director The duties and responsibilities of independent Directors are normally as they are of director of the Company: 1. He should furnish information in the prescribed form to the company about disclosure of General Notice of directorship, membership of body corporate and other entities. 2. He should also inform the Company about any change in the details submitted subsequently. 3. He should provide a list of his relatives as defined in the Companies Act and their directorship and interest in other concerns. 4. The Director shall have fiduciary duty to act in good faith and in the interest of the company.

5. It is the duty of the Independent Director to acquire proper understanding of the business of the Company. 6. He should act only within the powers laid down by the Memorandum of Association and Articles of Association and by applicable law and regulations. 7. He should not be a Director of more than fifteen Companies. Such an Independent Director could be working as member of Audit Committee prescribed under Section 292A of the Companies Act. In such situation he has to look into the obligations of Audit Committee and perform the duty.

Corporate Transparency
Corporate transparency describes the extent to which a corporation's actions are observable by outsiders. This is a consequence of regulation, local norms, and the set of information, privacy, and business policies concerning corporate decisionmaking and operations openness to employees, stakeholders, shareholders and the general public. Standard & Poor's has included a definition of corporate transparency in its GAMMA Methodology aimed at analysis and assessment of corporate governance. As a part of this work, Standard & Poor's Governance Services publishes the [http://www2.stanCorporate transparency describes the extent to which a corporation's actions are observable by outsiders. This is a consequence of regulation, local norms, and the set of information, privacy, and business policies concerning corporate decisionmaking and operations openness to employees, stakeholders, shareholders and the general public. Standard & Poor's has included a definition of corporate transparency in its GAMMA Methodology aimed at analysis and assessment of corporate governance. As a part of this work, Standard & Poor's Governance Services publishes the Transparency Index calculated as the average score for the largest public companies in various countries. Transparency International publishes an index of corporate transparency based on public disclosure of anticorruption programmes and country-by-country reporting. Corporate transparency is also used to refer to radical transparency in corporate governance.[citation needed]dardandpoors.com/portal/site/sp/en/ap/page.product/equityresearch_gamma/2,5,13,0,0,0,0,0,0,6,1, 0,0,0,0,0.html Transparency Index] calculated as the average score for the largest public companies in various countries. Transparency International publishes an index of corporate transparency based on public disclosure of anti-corruption programmes and country-by-country reporting. Corporate transparency is also used to refer to

radical transparency in corporate governance

An objective of many proposed corporate governance reforms is increased transparency. This goal has been relatively uncontroversial, as most observers believe increased transparency to be unambiguously good. We argue that, from a corporate governance perspective, there are likely to be both costs and benefits to increased transparency, leading to an optimum level beyond which increasing transparency lowers profits. This result holds even when there is no direct cost of increasing transparency and no issue of revealing information to regulators or product-market rivals. We show that reforms that seek to increase transparency can reduce firm profits, raise executive compensation, and inefficiently increase the rate of CEO turnover. We further consider the possibility that executives will take actions to distort information. We show that executives could have incentives, due to career concerns, to increase transparency and that increases in penalties for distorting information can be profit reducing.

In response to recent corporate governance scandals, governments have responded by adopted a number of regulatory changes. One component of these changes has been increased disclosure requirements. For example, Sarbanes-Oxley (sox), adopted in response to Enron, Worldcom, and other public governance failures, required detailed reporting of o-balance sheet nancing and special purpose entities. Additionally, sox increased the penalties to executives for misreporting. The link between governance and transparency is clear in the publics (and regulators) perceptions; transparency was increased for the purpose of improving governance. Yet, most academic discussions about transparency have nothing to do with corporate governance. The most commonly discussed benet of transparency is that it reduces asymmetric information, and hence lowers the cost of trading the rms securities and the rms cost of capital. To oset this benet, commentators typically focus on the direct costs of disclosure, as well as the competitive costs arising because the disclosure provides potentially useful information to product-market rivals.2 While both of these factors are undoubtedly important considerations in rms disclosure decisions, they are not particularly related to corporate governance. In this paper, we provide a framework for understanding the role of transparency in corporate governance. We analyze the eect that disclosure has on the contractual and monitoring relationship between the board and the ceo. We view the quality of information the rm discloses as a choice variable that aects the contracts the rm and its managers. Through its impact on corporate governance, higher quality disclosure both provides bene- ts and imposes costs. The benets reect the fact that more accurate information about performance allows boards to make better personnel decisions about their executives. The costs arise because executives have to be compensated for the increased risk to their careers implicit in higher disclosure levels, as well as for the incremental costs they incur trying to distort information in equilibrium. These costs and benets complement existing explanations for disclosure. Moreover, because they are directly about corporate governance, they are in line with common perceptions of why rms disclose information.

Transparency Is Assurance
The word "transparent" can be used to describe high-quality financial statements. The term has quickly become a part of business vocabulary. Dictionaries offer many definitions for the word, but those synonyms relevant to financial reporting are: "easily understood", "very clear", "frank" and "candid".

Consider two companies with the same and the same financial

market capitalization, same overall market-risk exposure, leverage. Assume that both also have the same earnings, earnings growth rate

and similar returns on capital. The difference is that Company A is a single-business company with easy-tounderstand financial statements. Company B, by contrast, has numerous businesses and subsidiaries with complex financials. Which one will have more value? Odds are good the market will value Company A more highly. Because of its complex and opaque financial statements, Company B's value will be discounted. The reason is simple: less information means less certainty for investors. When financial statements are not transparent, investors can never be sure about a company's real fundamentals and true risk. For instance, a firm's growth prospects are related to how it invests. It's difficult if not impossible to evaluate a company's investment performance if its investments are funneled through holding companies, hiding from view. Lack of transparency may also obscure the company's level of debt. If a company hides its debt, investors can't estimate their exposure to bankruptcy risk.

High-profile cases of financial shenanigans, such as those at Enron and Tyco, showed everyone that

managers employ fuzzy financials and complex business structures to hide unpleasant news. Lack of transparency can mean nasty surprises to come. (Find out more about what happened at Enron. Enron's

Collapse: Blurry Vision

The

Fall

Of

Wall

Street

Darling .)

The reasons for inaccurate financial reporting are varied: a small but dangerous minority of companies actively intends to defraud investors; other companies may release information that is misleading but technically conforms to legal standards. The rise of

stock option compensation

has increased the incentives for companies to misreport key

information. Companies have increased their reliance on

pro forma earnings and similar techniques,

which can include hypothetical transactions. Then again, many companies just find it difficult to present financial information that complies with fuzzy and evolving accounting standards.

Penny Stock of the Day Furthermore, some firms are simply more complex than others. Many operate in multiple businesses that often have little in common. For example, analyzing General Electric (NYSE: GE) - an enormousconglomerate with dozens of businesses, is more challenging than examining the financials of a firm like Amazon.com When firms enter new markets or businesses, the way they structure these new businesses can result in greater complexity and less transparency. For instance, a firm that keeps each business separate will be easier to value than one that squeezes all the businesses into a single entity. Meanwhile, the increasing use of derivatives, forward sales, off-balance-sheet financing, complex contractual arrangements and new tax vehicles can befuddle investors.

The cause of poor transparency, however, is less important than its effect on a company's ability to give investors the critical information they need to value their investments. If investors neither believe nor understand financial statements, the performance and fundamental value of that company remains either irrelevant or distorted.

Transparency Pays
Mounting evidence suggests that the market gives a higher value to firms that are upfront with investors and analysts. Transparency pays, according to Robert Eccles, author of "Building Public Trust The Value Reporting Revolution". Eccles shows that companies with fuller disclosure win more trust from investors. Relevant and reliable information means less risk to investors and thus a lower cost of capital, which naturally translates into higher

valuations. The key finding is that companies that share the key metrics

and performance indicators that investors consider important are more valuable than those companies that keep information to themselves.

Of course, there are two ways to interpret this evidence. One is that the market rewards more transparent companies with higher valuations because the risk of unpleasant surprises is believed to be lower. The other interpretation is that companies with good results usually release their earnings earlier. Companies that are doing well have nothing to hide and are eager to publicize their good performance as widely as possible. It is

in their interest to be transparent and forthcoming with information, so that the market can upgrade their

fair

value.
Further evidence suggests that the tendency among investors to mark down complexity explains the conglomerate discount. Relative to single-market or pure play firms, conglomerates are discounted by as much as 20%. The positive reaction associated with spin-offs and divestment can be viewed as evidence that the market rewards transparency.

Naturally, there could be other reasons for the conglomerate discount. It could be the lack of focus of these companies and the inefficiencies that follow. Or it could be that the absence of market prices for the separate businesses makes it harder for investors to assess value. It's worth noting that even if a company's financial statements are totally transparent, investors may still not understand them.

Assessment of Directors, Boards and Companies What Makes Great Boards Great In the wake of the meltdowns of such once great companies as Adelphia, Enron, Tyco, and WorldCom, enormous attention has been focused on the companies boards. Were the directors asleep at the wheel? In cahoots with corrupt management teams? Simply incompetent? It seems inconceivable that business disasters of such magnitude could happen without gross or even criminal negligence on the part of board members. And yet a close examination of those boards reveals no broad pattern of incompetence or corruption. In fact, the boards followed most of the accepted standards for board operations: Members showed up for meetings; they had lots of personal money invested in the company; audit committees, compensation committees, and codes of ethics were in place; the boards werent too small, too big, too old, or too young. Finally, while some companies have had problems with director independence because of the number of insiders on their boards, this was not true of all the failed boards, and board makeup was generally the same for companies with failed boards and those with well-managed ones. In other words, they passed the tests that would normally be applied to ascertain whether a board of directors was likely to do a good job. And thats precisely whats so scary about these events. Viewing the breakdowns through the lens of my 25 years of experience studying board performance and CEO leadership leads me to one conclusion: Its time for some fundamentally new thinking about how corporate boards should operate and

be evaluated. We need to consider not only how we structure the work of a board but also how we manage the social system a board actually is. Well be ghting the wrong war if we simply tighten procedural rules for boards and ignore their more pressing needto be strong, highfunctioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations. The Inadequacy of Conventional Good-governance advocates have Wisdom developed no shortage of remedies for failures of governance. Most of these remedies are structural: Theyre concerned with rules, procedures, composition of committees, and the like, and together theyre supposed to produce vigilant, involved boards. However, good and bad companies alike have already adopted most of those practices. Lets take a look at some of the most common. Regular Meeting Attendance. Regular meeting attendance is considered a hallmark of the conscientious director. It matters a lot and, still, as shareholder activist Nell Minow comments, Some big names on the boards barely show up due to other commitments, and when they show, theyre not prepared. Indeed, some WorldCom directors were on more than ten boards, so how well prepared could they be? Fortunes 2001 list of the mostadmired U.S. companies reveals no difference in the attendance records of board members of the most- and leastadmired companies. Data from the Corporate Library, a corporate governance Web site and database cofounded by Minow, show the same acceptable attendance records at both kinds of companies. Good attendance is important for individual board members, but it alone doesnt seem to have much impact on whether companies are successful. Equity Involvement. Board members are assumed to be more vigilant if they hold big chunks of the companys stockbut data from the Corporate Library dont suggest that this measure by itself separates good boards from bad, either. Several members of the board of GE, Fortunes most-admired corporation in 2001, had less than $100,000 of equity, whereas all board members of the least-admired companies held substantial equity stakes. Not only did all but one of the Enron board members own impressive amounts of equity in the company, but some were still buying as the shares collapsed. Board Member Skills. Patrick McGurn of Institutional Shareholder Services, like other expert observers, has frequently questioned the nancial literacy of troubled

companies audit committee members. Its certainly true that many board members have their jobs because theyre famous, rich, well connected anything but nancially literate. But just as many board members have the training and smarts to detect problems and somehow fail to do their jobs anyway. At the time of their meltdowns, for example, Kmart had six current or recent Fortune 500 CEOs on its board, and Warnaco had several prominent nanciers, a well-known retail analyst, and a toptier CEO; all those excellent credentials made little difference. On this measure, again, we nd that Fortunes most- and least-admired companies alike had board members with the training and experience to analyze complex nancial issues and to understand what kinds of risks a company is taking on. Despite Enrons disastrously complex nancial schemes, no corporation could have had more appropriate nancial competencies and experience on its board. The list includes a former Stanford dean who is an accounting professor, the former CEO of an insurance company, the former CEO of an international bank, a hedge fund manager, a prominent Asian nancier, and an economist who is the former head of the U.S. governments Commodity Futures Trading Commission. Yet members of this board have claimed to have been confused by Enrons nancial transactions. Board Member Age. According to one governance expert, Enron melted down because it lacks independent directors and several are quite long in the tooth. His remarks reect a general belief that boards become less effective as the average age of their members rises. research on executives over the past two decades has shown that, to the contrary, age is often an asset, and this general nding is supported by board data from the Corporate Library. Charles Schwab, Cisco, and Home Depot all have had several board members who are well into their sixties. Michael Dell (Dell Computer placed tenth on Fortunes 2001 list of most-admired companies) told me that when he incorporated in 1987, as a 21-year-old college dropout, he found it invaluable to have then 70-year-old George Kozmetsky, Teledynes visionary founder and the former dean of the McCombs School of Business in Austin, Texas, serve on the board; Kozmetsky stayed for more than a decade. The Past CEOs Presence. The complicated reality is that sometimes a past CEOs presence is helpful and sometimes its not. In the years I served on and even chaired commissions for the National Association of Corporate Directors (NACD), some

commissioners regularly vilied the old dragons who haunted successors by serving on boards. In certain cases, this can be a problem; one can only imagine board meetings at Warnaco, where deposed CEO Linda Wachner voted her 9% of the companys equity for several months after her November 2001 termination. Alternately, a retired CEO can play an invaluable internal role as a mentor, sounding board, and link to critical outside parties. Its hard to imagine anyone arguing that Intel, Southwest Airlines, or Home Depot would be better off if their legendary retired CEOs Andy Grove, Herb Kelleher, or Bernie Marcus had just gone home to play golf. Independence. Good-governance and stock exchange heavyweights alike have argued that boards with too many insiders are less clean and less accountable. Some argue that Tycos confusing spiral of acquisitions and the apparent selfdealing of the CEO at Adelphia Communications might have been less likely if their boards hadnt been dominated by insiders. Indeed, the New York Stock Exchanges Corporate Accountability and Standards Committee recently proposed requiring that the majority of a NYSE-listed corporations directors be independentthis in response to the recent governance disasters. Governance reform proposals are also being developed by such business groups as the Conference Board and the Business Roundtable. Yet again, if you judge the most- and leastadmired companies on Fortunes 2001 list against this standard, no meaningful distinction emerges. Least-admired companies like LTV Steel, CKE Restaurants, Kmart, Warnaco, Trump Hotels and Casino Resorts, FederalMogul, and US Airways had only one or two inside directors on their boards; Enron had only two. By contrast, at various times in their histories, Home Depot had ve insider directors on its 11-person board, Intel had three on a nineperson board, and Southwest Airlines had three on an eightperson board. Typically, half of Microsofts board are insiders. Currently, three of Warren Buffetts seven Berkshire Hathaway board members have the Buffett name, and another is his long-term vice chairman. Board Size and Committees. A host of other issues that goodgovernance advocates propose turn out to be either not truly important or already in place at both good and bad companies. Take board size. Smalls considered good, bigs considered bad. But big boards exist at some great and admired companiesGE, Wal-Mart,

and Schwabalong with some poorly performing companies like US Airways and AT&T. At the same time, small boards are part of the landscape at good companies like Berkshire Hathaway and Microsoft and some not-so-good companies like Trump. Another area where good companies dont necessarily conform to the advice of goodgovernance advocates: executive sessions, which give boards the chance to evaluate their CEOs without interference. Executive sessions are also sometimes coupled with a designated lead director. But GE, the mostadmired company in the country in 2001, didnt allow executive sessions in Jack Welchs day. Said Ken Langone, who serves on the boards of both GE and Home Depot, Jack will give you all the time in the world to raise any issue you want, but he wants to be there during the discussion. GEs not alone; many good boards never have meetings that exclude the CEO The Importance of the Human Element So if following good-governance regulatory recipes doesnt produce good boards, what does? The key isnt structural, its social. The most involved, diligent, value-adding boards may or may not follow every recommendation in the good-governance handbook. What distinguishes exemplary boards is that they are robust, effective social systems. Lets see what that means. A Virtuous Cycle of Respect, Trust, and Candor. Its difcult to tease out the factors that make one group of people an effective team and another, equally talented group of people a dysfunctional one; well-functioning, successful teams usually have chemistry that cant be quantied. They seem to get into a virtuous cycle in which one good quality builds on another. Team members develop mutual respect; because they respect one another, they develop trust; because they trust one another, they share difcult information; because they all have the same, reasonably complete information, they can challenge one anothers conclusions coherently; because a spirited give-and-take becomes the norm, they learn to adjust their own interpretations in response to intelligent questions. The UPS board of directors has just that kind of chemistry, and as a result members have debated strategic decisions openly and constructively for years. The companys 1991 move from Connecticut to Georgia was hotly debated within the management committee, for example, but once the plan to move was agreed upon, the board chose a new location unanimously and never looked back. In the mid-1980s, after forging partnerships with delivery businesses around the world, a revolutionary concept at the time, the company

decided to reverse course and become truly global itself. In just two years, UPS was running operations in more countries than are members of the United Nations. This strategic reversal is generally considered a brilliant move, one that might never have happened had board members not respected and trusted one another enough to consider that a smart move could be trumped by an even smarter one. The board even tolerated an open debate in 1992, led by a former CEO, over the companys widely recognized corporate color, brownthe hallmark of UPSs current advertising campaign A virtuous cycle of respect, trust, and candor can be broken at any point. One of the most common breaks occurs when the CEO doesnt trust the board enough to share information. What kind of CEO waits until the night before the board meeting to dump on the directors a phone-book-size report that includes, buried in a thicket of subclauses and footnotes, the news that earnings are off for the second consecutive quarter? Surely not a CEO who trusts his or her board. Yet this destructive, dangerous pattern happens all the time. Sometimes a CEOs lack of trust takes even more dramatic forms. Its stunning that Enrons chairman and CEO never told the board that whistle-blower Sherron Watkins had raised major questions about nancial irregularities. It is impossible for a board to monitor performance and oversee a company if complete, timely information isnt available to the board. It is, I should note, the responsibility of the board to insist that it receive adequate information. The degree to which this doesnt happen is astonishing. Consider Tyco. In recent quarters, its suffered some of the worst strategic confusion Ive ever witnessed: Seemingly every single public statement by the companys senior management has been contradicted by subsequent statements. For example, in January 2002, then CEO Dennis Kozlowski announced a plan to split the company into four pieces, only to reverse that plan a few months later. On a single day, senior managers announced rst that a nancial unit would be IPOed, next that it would be sold to an investment house, and nally that neither would oc ? Why didnt directors demand a better accounting of the companys direction and well-being? What brought down the CEO eventually was an apparently private nancial matterthe board seemed content to keep him on indenitely. Another sign that trust is lacking is when board members begin to develop back channels to line managers within the company. This can occur because the CEO hasnt provided sufcient, timely information, but it can also

happen because board members are excessively political and are pursuing agendas they dont want the CEO to know about. If a board is healthy, the CEO provides sufcient information on time and trusts the board not to medWhat distinguishes exemplary boards is that they are robust, effective social systems. Performance Evaluation. I cant think of a single work group whose performance gets assessed less rigorously than corporate boards. In 2001, the NACD surveyed 200 CEOs serving as outside directors of public rms. Sixty-three percent said those boards had never been subjected to a performance evaluation. Forty-two percent acknowledged that their own companies had never done a board evaluation. A 2001 Korn/Ferry study of board directors found that only 42% regularly assess board performance, and only 67% regularly evaluate the CEO. This lack of feedback is self-destructive. psychologists and organizational Behavioral

learning experts agree that people and organizations cannot learn without feedback. No matter how good a board is, its bound to get better if its reviewed intelligently. A performance review can include a full board evaluation, individual directors selfassessments, and directors peer reviews of one another. Most often, the nominating or governance committee drives these evaluations. A full board review can include an evaluation of such dimensions as its understanding and development of strategy, its composition, its access to information, and its levels of candor and energy. In individual self-assessments, board members can review the use of their time, the appropriate use of their skills, their knowledge of the company and its industry, their awareness of key personnel, and their general level of preparation. the constructive and less constructive roles individual directors play in discussions, the value and use of various board members skill sets, interpersonal styles, individuals preparedness and availability, and directors initiative and links to critical stakeholders. This process is often best driven by a board committee such as a nominating or governance committee, which is assigned the execution and follow-through responsibilities for this process. Annual evaluations led PepsiCo and Target to change their processes for reviewing strategy with their boards.

Evolution of Corporate Governance.

To understand the evolving perspectives and behaviour of directors and institutional investors, field research was conducted in 20042005 by way of a survey with corporate directors in four countries (Australia, Canada, New Zealand and the United States; n = 658) and institutional investors in Canada (n = 34). Reported changes in directors' views and practices are substantial and consistent across countries, the defining characteristic of which is a fundamental shift in the positioning of the board toward becoming a strategic partner to management. The role of institutional investors also shifted in ways that are complementary to this new role of directors (e.g., toward increased monitoring). While most research has focused on agency concepts of the board as monitors of management, our research suggests that the board is evolving towards a more collaborative role with management, consistent with stewardship theory. Our findings also suggest that directors are seeking a balance between collaboration and their role as monitors of management, rejecting the notion of the board as primarily a monitoring body. An evolutionary model is offered to explain these changes and implications are discussed.

Governments are faced with the task of reining them in by enacting regulations. Investors are faced with the task of preserving their individual assets. Corporate governance remains the core issue in these battles. This paper examines the origins of corporate governance and the events during the twentieth century that have failed to align the interests of management and shareholders.

Whistle Blower Mechanism A whistleblower (whistle-blower or whistle blower)[1] is a person who exposes misconduct, alleged dishonest or illegal activity occurring in an organization. The alleged misconduct may be classified in many ways; for example, a violation of a law, rule, regulation and/or a direct threat to public interest, such as fraud, health and safety violations, and corruption. Whistleblowers may make their allegations internally (for example, to other people within the accused organization) or externally (to regulators, law enforcement agencies, to the media or to groups concerned with the issues). The Continental Congress enacted the first whistleblower protection law in the United States on July 30, 1778 by a unanimous vote. [2] The Continental Congress was moved to act after an incident in 1777, when Richard Marven and Samuel Shaw blew the whistle and suffered severe retaliation by Esek Hopkins, the commander-in-chief of the Continental Navy.[3][4] Congress declared that the United States would defend the two whistleblowers against a libel suit filed against them by Hopkins. The Continental Congress also declared it the duty of "all persons in the service of the United States, as well as all other the inhabitants thereof" to inform the Continental Congress or proper authorities of "misconduct, frauds or misdemeanors committed by any officers in the service of these states, which may come to their knowledge." [5] Seventy-five years after the ratification of the Constitution, as the Civil War rended the United States, Congress enacted one of the first laws that protected whistleblowers, the 1863 United States False Claims Act (revised in 1986), which tried to combat fraud by military suppliers. The act encourages whistleblowers by promising them a percentage of the money recovered or damages won by the government and protects them from wrongful dismissal.[6] Whistleblowers frequently face reprisal, sometimes at the hands of the organization or group which they have accused, sometimes from related organizations, and sometimes under law.

Good corporate governance and transparency are fundamental to achieving our vision of becoming the premier packaging solutions provider in every market in which we operate. We strive for excellence in our products and in the way we do business throughout all our global operations and this process commences within Amcor Limited, the parent company based in Melbourne, Australia; its Board of Directors; the senior management team and all our employees regardless of location. At all times we strive to achieve the highest standards and we promote this rigorously throughout the group. This applies equally to transparency in reporting and meeting the expectations of regulators, shareholders and the public - regardless of whether this relates to accounting procedures, our manufacturing and product standards, ethics in all our dealings with customers, co-workers and the public, or behaving in a safe and environmentally responsible manner. 1. India has the largest number of listed companies in the world, and therefore efficiency and well being of the financial markets is critical for the economy in particular and the society as a whole. According to a report prepared by Pune-based Indiaforensic Consultancy Services (ICS), at least 1,200 companies listed on domestic stock exchanges have forged their financial results. The figure included 20-25 firms on benchmark sensex and Nifty indices. The study called Early Warning Signals of Corporate Frauds' had alleged that such improper accounting included deferring revenue and inflating expenses. 2. The survey examined 4,867 companies listed on the BSE and 1,288 companies listed on the NSE. Now with the Satyam Fraud unfolding the report does not seem improbable. Infact putting it in Mayur Joshi's (the founder of Indiaforensic Consultancy Firm) words; Satyam is just one component of all those companies which are indulging in such frauds. More than 73% of respondents in our report named Early Warning Signals of Corporate Frauds said companies are indulging into financial statement frauds with the objective to beat the analysts expectation. 3. The present times are in need of standards of corporate governance more than ever for despite the dominance of organizational actors in contemporary social life, law is desperately short of doctrines, institutions, and regulatory techniques that adequately control corporate entities. It has now become imperative to design and implement a dynamic mechanism of corporate governance, which protects the interests of relevant stakeholders without hindering the growth of enterprises because the corporate veil frequently deflects the penetration of legal values into and, indeed, the imposition of legal sanctions upon the corporate entity. Adversarially-trained lawyers often facilitate avoidance and evasion of corporate liability through creative compliance' with legal requirements. A commonly proffered solution to the problem of ensuring that legal values permeate the internal workings of the corporation is to require large institutions to regulate themselves in a way that is responsive to social concerns

On the other hand it has been an argument against corporate governance that not all well governed companies do well in the market place nor do the badly governed ones always sink. Counter to that is the fact that modern day corporations raise capital through investment by stakeholders whose interests are to be protected by the company management. Corporate governance is thus concerned with ways of bringing the interests of investors and manager into line and ensuring that firms are run for the benefit of investors'. The Birla Committee on corporate governance sums up the principles in the following manner: the fundamental objective of corporate governance is the enhancement of shareholder value, keeping in view the interests of other stakeholder. Fundamental to this examination and permeating throughout this exercise is the recognition of the three key aspects of corporate governance, namely; accountability, transparency and equality of treatment for all stakeholders. 5. The Cadbury Committee on Financial Aspects of Corporate Governance further elaborated on the principles of Corporate Governance, by the often and ubiquitously quoted words: Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company's strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board's actions are subject to laws, regulations and the shareholders in general meeting The very basic premise of corporate governance is accountability to share holders as the directors always stand in a fiduciary relationship with the company and the shareholders, the welfare of the company is welfare of the shareholders. Various safeguard mechanisms as regards the accountability to shareholders are already a part of our Companies Act as well as various common law doctrines. However the controversy that was aroused by the Caparo's Case exposed two widely held misconceptions: 7. It was held in this case; No duty was owed at all, either to existing shareholders or to future investors by a negligent auditor. The purpose of the statutory requirement for an audit of public companies under the Companies Act 1985 was the making of a report to enable shareholders to exercise their class rights in general meeting. It did not extend to the provision of information to assist shareholders in the making of decisions as to future investment in the company.

8. Lord Denning quoting the the famous phrase given by Cardozo, CJ in the case of Ultramares Corp v. Touche held that there could not be a duty owed in respect of liability in an indeterminate amount for an indeterminate time to an indeterminate class. 9. Following the legal implications of this case, where an auditor's liability for negligence is indeterminate, what was the remedy available to the shareholders? Such a conundrum demanded a proper intra organisational complaint mechanism, whereby any mal practice of the company or any of its organ which may potentially harm the shareholder or any third party, or even be prejudicial to public interest could be duly reported and acted upon. Hence in such a situation an Independent Complaint Mechanism becomes one of the basic tenets of Corporate Governance. However it is indeed a matter of great embarrasment that the Indian Corporate World still argues in sharp contrast. 10. The concept of Whistle Blower as it gained much recognition owing to two of the biggest known Corporate Scandals Enron and Worldcom, Sheron Watkins and Cynthia Coopers came to be known as th two most gutsy women of the century to uncover the fraud and misstatements in the accounts of two the very well known Corporations of the United States. As a counterpart to the U.S. corporate fraud, in Inida protection of Whistle Blowers gathered policy attention due the much controversial murder of Satyendra Dubey who tried to expose the corruption in the Golden Quadilateral Highway Construction Project by writing a letter to the Prime Minister. 11. The term whistleblower was first discussed by Doggett, J., in the case of Winters v. Houston Chronicle Pub. Co., The word is derived from the practice of English bobbies, who would blow their whistles when they noticed the commission of a crime. The whistle would alert both law enforcement officers and the general public of danger. 12. Whistle blowing can be defined in a number of ways. In its simplest form, whistle blowing involves the act of reporting wrongdoing within an organization to internal or external parties. Internal whistle blowing entails reporting the information to a source within the organization. External whistle blowing occurs when the whistleblower takes the information outside the organization, such as to the media or regulators. 13. Whistle blowing is an important organizational behavior that can cause quantum change in modern organizations. In the public sector, whistle blowing also can trigger fundamental reforms in the nature and role of government in society. 14. Research has shown that most whistle blowers are not dis- gruntled employees. In sharp contrast, they rank among the most productive, valued, and committed members of their organizations . A number of studies show that most whistle blowers are normal people who have a strong conscience Empirical evidence shows that most whistle blowers are committed to the formal goals of their organization, they identify with the organization, and they have a strong sense of professional responsibility. These employees report feeling an extended sense of responsibility when they are confronted with moral or ethical dilemmas. Whistle blowers act on attitudes akin to the public-

service ethic in another way, for it is well known that whistle blowing involves selfsacrifice. Since employees who report wrongdoing threaten the authority structure of organizations, whistle blowing can result in swift punishment. Such behavior is difficult to explain in utilitarian terms because self- sacrifice is irrational from a narrow meansends perspective. Whistle blowers are often ostracized, fired, and humiliated. Even so, most employees expect retaliation to be more frequent and severe than it is. It appears that many whistle blowers willingly put them- selves at risk to preserve the common good. 15. To cite one example, days before the launch of Reliance Infocomm's overseas service in the US, Akhil Gupta, the then CEO Corporate Development, had warned the management that the idea of disguising overseas calls coming into India as local ones, to avoid paying charges to state-owned BSNL and MTNL, would run foul of regulators. The communication proved to be prescient. Lately the communications ministry began an investigation into Infocom's call re-routing activities and subsequently penalties worth about Rs. 500 crore were imposed on the Company, preceding a case of criminal conspiracy against the senior officials of the company including Akhil Gupat. In such cases a need for Whistle Blower Policy becomes apparent.
The Process of Whistle Blowing

16. The process of Whistle-blowing can be understood by the diagram given hereinabove. It basiclly involves five steps, at first when a concern is raised by an empoloyee, it is communicated to the the Ombudsperson, who could be any person alegal adviser, audit committee or a compliance officer. This would result in initial enquiry , wich could be dismissed when it is found that the complain is frivolous or insignificant and the proceedings can be stopped. On the other hand if the complaint turns out to be a genuine one an enquiry committee can be appointed and which may take up further investigations and based on the results of the investigation appropriate action may be taken agains the wrongdoer as the case may be.
The US Scenario

17. Whistle blowing arose almost a century ago in the False Claims Act of 1863 which was established to offer incentives to individuals who reported companies or individuals defrauding the government. The Act also specifies that the whistleblower can share in up to 30% of the proceeds of the lawsuit. This Act has resulted in more than $17 billion dollars of recoveries for the U.S. government since 1986. Financial rewards to whistleblowers can, however, create an incentive to report bogus false claims. The Act imposes monetary penalties on bogus whistleblowers. 18. Then came the Whistle Blower Protection Act, 1989 amended in 1994, under this act federal employees are protected from workplace retaliation when disclosing waste and fraud. The purpose of the Act and subsequent amendments was to strengthen the protections available to federal employees. In 2007 the House of Representative approved the Whistle Blower Enhanced Protection Act.

19. Subsequent to this was the Sarbanes-Oxley (SOX) Act of 2002, in which Congress introduced a series of corporate governance initiatives into the federal securities laws. The federal regime had until then consisted primarily of disclosure requirements rather than substantive corporate governance mandates, which were traditionally left to state corporate law. Federal courts had, moreover, enforced such a view of the regime's strictures, by characterizing efforts of the Stock Exchanges to extend its domain into substantive corporate governance as beyond its jurisdiction. SOX altered this division of authority by providing explicit legislative directives for SEC regulation of what was previously perceived as the states' exclusive jurisdiction. 20. SOX by providing for the substantive corporate governance provisions tried to change the attitude of corporation towards work place crimes. For the first time Whistle Blowing was included as a legislative precept of corporate governance norms. Sections 806, 301, and 1107 of SOX provided additional guidance for whistleblowing. 21. Section 806 states that whistleblowers who provide information or assist in an investigation of violations of any federal law relating to fraud against shareholders or any SEC rule or regulation are protected from any form of retaliation by any officer, employee, contractor, subcontractor, or agent of the company. Employees who are retaliated against will be entitled to all relief necessary to make the employee whole (SOX section 806), including compensatory damages of back pay, reinstatement of proper position, and compensation for litigation costs, expert witness fees, and attorney fees. SOX also requires audit committees to take a role in whistleblowing and reducing corporate fraud. Section 301, amending the Securities Exchange Act of 1934, compels audit committees to develop reporting mechanisms for the recording, tracking, and acting on information provided by employees anonymously and confidentially. By mandating policies and protection for reporting wrongdoing, the SOX standards go beyond merely encouraging companies to be more responsive to employee whistleblowers. In SOX Section 1107, the reach of whistleblowing policies extends beyond public corporations. This section extends protection to any person who reports to a law enforcement officer information related to a violation of a federal law. These whistleblowers are protected from any retaliation by the offender. A violator may be fined and imprisoned for up to 10 years. 22. There is no rigorous theory of how policy proposals come to the forefront of the legislative agenda, but the political science literature identifies shifts in national mood and turnover of elected officials, coupled with focusing events, as key determinants that open policy windows for policy entrepreneurs to link their proposed solutions to a problem. The evolution Corporate Governance Policy in India somewhat conforms to this political theory. With globalization, the New Economic Policies became almost unavoidable and hence the decade of 1990s saw the era of privatization and liberalisation. With a need for greater Foreign Direct Investment, the entry of transnational and multinationals to the country, a need for greater accountability and investor protection arose.

23. The first step taken in this regard was in 1996, when the Confederation of Indian Industries took a special initiative on Corporate Governance - the first institutional initiative in Indian industry. The objective was to develop and promote a code for Corporate Governance to be adopted and followed by Indian companies, be these in the Private Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate entities. The code however focused on listed companies for the simple reason that these are financed largely by public money (be it equity or debt) and, hence, need to follow codes and policies that make them more accountable and value oriented to their investing public. The preference was given to the shareholders and the creditors for instead of the employees, local communities, suppliers or ancillary units for the simple reason that;

Firstly corpus of Indian labour laws is strong enough to protect the interest of workers in the organised sector, and employees as well as trade unions are well aware of their legal rights. In contrast, there is very little in terms of the implementation of law and of corporate practices that protects the rights of creditors and shareholders. Secondly there is much to recommend in law, procedures and practices to make companies more attuned to the needs of properly servicing debt and equity.

24. There was no material provision as regards the policy of Whistle blowers in the Code, however the code in substance talked about the reporting of internal audit reports, including cases of theft and dishonesty of a material nature to the Board and an Independent Audit committee consisting of non-executive directors. A major break through was achieved by the amendment to clause 49 of Listing Agreement to include the recommendations of the Narayan Murthy Report on Corporate Governance, 2003. Owing to the controversy raised by of Satyendra Dubey, the policy of Whistle Blower was given as a recommendation. The Recomemdation involved the following dimensions: a. Personnel who observe an unethical or improper practice (not necessarily a violation of law) shall be able to approach the audit committee without necessarily informing their supervisors. b. Companies shall take measures to ensure that this right of access is communicated to all employees through means of internal circulars, etc. The employment and other personnel policies of the company shall contain provisions protecting whistle blowers from unfair termination and other unfair prejudicial employment practices. c. Company shall annually affirm that it has not denied any personnel access to the audit committee of the company (in respect of matters involving alleged misconduct) and that it has provided protection to whistle blowers from unfair termination and other unfair or prejudicial employment practices. the SEBI's Committee the murder mandatory

d. Such affirmation shall form a part of the Board report on Corporate Governance that is required to be prepared and submitted together with the annual report. 26. However, owing to the lobbying by the corporate world many of the mandatory recommendations were made non mandatory in the amendment to the Clause 49 of the Listing Agreement, which was to be enforced by April, 2005. 27. At present clause 49 recommends the company to establish a mechanism for employees to report to the management concerns about unethical behavior, actual or suspected fraud or violation of the company's code of conduct or ethics policy. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization. This is a mere recommendation and not a mandatory provision which is to be complied with. 28. Corruption as it has permeated to every nerve and vein of the country, the central government following the gruesome murder of Satyendra Dubey, on recommendation of the Law Commission Report, which came up with a draft bill on Whistle Blower Protection, designated the Vigilance Commissioner with an authority to take up complains about corruption and mismanagement in government, which subsequently adopted the Whistle-Blowers Resolution. In 2006 finally the draft bill Whistle blowers (Protection in Public Interest Disclosures) Bill recommended by the Law Commission was presented in Rajya Sabha and till date it is pending. 29. There is certain lacuna quite apparent in the bill. Firstly the term whistle blower' has been given an ambiguous definition. According to the Bill, whistle blower' means any individual making a public interest disclosure. However, as discussed before in this article, a whistle blower is an employee, former employee or member of an organization who reports misconduct. Thus, a whistle blower is essentially a worker'. A more specific definition with reference to various labour legislations needs to be incorporated in the Bill. 30. The second question is with regard to the jurisdiction. The question as to offences committed outside the territory of India by the companies, could that be brought under preview of this act? To solve this, Clause 43B(2) of the UK Public Interest Disclosure Act, which gives sweeping jurisdiction: ... it is immaterial whether the relevant failure occurred, occurs or would occur in the United Kingdom or elsewhere, and whether the law applying to it is that of the United Kingdom or of any other country or territory can be adopted. 31. Also Section 6(1) of the Bill, which supplies emphasis to the source of the complaint as anonymous complaints are not admissible, can act as potential deterrents to Whistleblowers for there is a great degree of difference in legislative purpose and legislative compliance in our nation.

32. Even the Limited Liability Partnership Act, 2008 has brought in corporate governance by including the concept of whistle blowing'. Any applicable penalties against the partner or an employee who provides useful information may be reduced or waived. The whistle blower may not be penalised by the LLP for providing such information. 33. One of the reason for dilution of the Whistleblower Clause was that if such a mechanism comes into force audit committee would be flooded with frivolous complaints and that the clause was silent on aspects of evidence and other procedural technicalities. This contention can easily be disregarded because legally and economically speaking shareholder/creditor's interest is certainly more important than not burdening the audit committee with complaints. In any case the encumbrance of frivolous complaints can be taken care of adopting adequately procedures like imposing penalty on any malicious or insignificant complaint. In absence of such a policy the legitimate concerns of the employees would never be brought to the notice of the appropriate authorities and hence preventive actions could not be taken. 34. The arguments of frivolous complaints can be summarily dismissed if one draws an analogy with the mechanism of public interest litigation where though frivolous and malicious petitions have been made before the Apex court, yet certain petitions have genuinely addressed issues pertaining to malpractices in the government etc. 35. Secondly, the doctrine of indoor management' assumes that if a Director or other officers are entering into transactions, they would have obtained necessary permission. Further in a Madras High Court case, the learned judge opined that lenders to a company cannot be expected to embark upon an investigation as to the legality, propriety and regularity of acts of director. In view of the above, the doctrine of indoor management would aid corporate directors and other personnel in indulging in economic offences and crippling investor interest. Thus in order that the doctrine remains true in letter and spirit the Whistleblower Policy should be made an indispensable tenet of clause 49. 36. Thirdly, a non mandatory Whistle-blower clause recognizes the principle enshrined in the case of Garcetti v. Ceballos that whistleblowers who make statements while performing their jobs may not be constitutionally protected. This judgment is however is invalidated by the the Whistle-blower Protection Enhancement Act, 2007, in the United States, which has been approved by the Congress. India on the other hand lacks such a legislation and hence the ration of the above quoted judgement can be used in pari materia for defending the discriminatory actions of the Companies towards their Whistleblowers. 37. The other argument that whistle blower protection would only empower disgruntled employees to harass the management also stands invalidated as statistics tell us that most whistle blowers rank among the most productive, highly valued and committed members of the organization.
Corporate Social Responsibility Reporting.

Corporate social responsibility (CSR, also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business/ Responsible Business)[1] is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. In some models, a firm's implementation of CSR goes beyond compliance and engages in "actions that appear to further some social good, beyond the interests of the firm and that which is required by law."[2][3] CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders. The term "corporate social responsibility" came into common use in the late 1960s and early 1970s after many multinational corporations formed the term stakeholder, meaning those on whom an organization's activities have an impact. It was used to describe corporate owners beyond shareholders as a result of an influential book by R. Edward Freeman, Strategic management: a stakeholder approach in 1984.[4] Proponents argue that corporations make more long term profits by operating with a perspective, while critics argue that CSR distracts from the economic role of businesses. McWilliams and Siegel's article (2000) published in Strategic Management Journal, cited by over 1000 academics, compared existing econometric studies of the relationship between social and financial performance. They concluded that the contradictory results of previous studies reporting positive, negative, and neutral financial impact, were due to flawed empirical analysis. McWilliams and Siegel demonstrated that when the model is properly specified; that is, when you control for investment in Research and Development, an important determinant of financial performance, CSR has a neutral impact on financial outcomes.[5] In his widely-cited book[6][7] entitled Misguided Virtue: False Notions of Corporate Social Responsibility (2001) David Henderson argued forcefully against the way in which CSR broke from traditional corporate value-setting. He questioned the "lofty" and sometimes "unrealistic expectations" in CSR.[8] Some argue that CSR is merely window-dressing, or an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations. CSR is titled to aid an organization's mission as well as a guide to what the company stands for and will uphold to its consumers. Development business ethics is one of the forms of applied ethics that examines ethical principles and moral or ethical problems that can arise in a business environment. ISO 26000 is the recognized international standard for CSR. Public sector organizations (the United Nations for example) adhere to the triple bottom line (TBL). It is widely accepted that CSR adheres to similar principles but with no formal act of legislation. The UN has developed the Principles for Responsible Investment as guidelines for investing entities.

Some commentators have identified a difference between the Canadian (Montreal school of CSR), the Continental European and the Anglo-Saxon approaches to CSR.[9] And even within Europe the discussion about CSR is very heterogeneous.[10] A more common approach to CSR is corporate philanthropy. This includes monetary donations and aid given to local and non-local nonprofit organizations and communities, including donations in areas such as the arts, education, housing, health, social welfare, and the environment, among others, but excluding political contributions and commercial sponsorship of events.[11] Some organizations[who?] do not like a philanthropy-based approach as it might not help build on the skills of local populations, whereas community-based development generally leads to more sustainable development.[clarification
needed Difference between local org& community-dev? Cite]

Another approach to CSR is to incorporate the CSR strategy directly into the business strategy of an organization. For instance, procurement of Fair Trade tea and coffee has been adopted by various businesses including KPMG. Its CSR manager commented, "Fairtrade fits very strongly into our commitment to our communities."[12] Another approach is garnering increasing corporate responsibility interest. This is called Creating Shared Value, or CSV. The shared value model is based on the idea that

corporate success and social welfare are interdependent. A business needs a healthy, educated workforce, sustainable resources and adept government to compete effectively. For society to thrive, profitable and competitive businesses must be developed and supported to create income, wealth, tax revenues, and opportunities for philanthropy. CSV received global attention in the Harvard Business Review article Strategy & Society: The Link between Competitive Advantage and Corporate Social Responsibility [1] by Michael E. Porter, a leading authority on competitive strategy and head of the Institute for Strategy and Competitiveness at Harvard Business School; and Mark R. Kramer, Senior Fellow at the Kennedy School at Harvard University and co-founder of FSG Social Impact Advisors. The article provides insights and relevant examples of companies that have developed deep linkages between their business strategies and corporate social responsibility. Many approaches to CSR pit businesses against society, emphasizing the costs and limitations of compliance with externally imposed social and environmental standards. CSV acknowledges trade-offs between short-term profitability and social or environmental goals, but focuses more on the opportunities for competitive advantage from building a social value proposition into corporate strategy. CSV has a limitation in that it gives the impression that only two stakeholders are important shareholders and consumers - and belies the multi-stakeholder approach of most CSR advocates. Many companies use the strategy of benchmarking to compete within their respective industries in CSR policy, implementation, and effectiveness. Benchmarking involves reviewing competitor CSR initiatives, as well as measuring and evaluating the impact that those policies have on society and the environment, and how customers perceive competitor CSR strategy. After a comprehensive study of competitor strategy and an internal policy review performed, a comparison can be drawn and a strategy developed for competition with CSR initiatives.

Potential business benefits

The scale and nature of the benefits of CSR for an organization can vary depending on the nature of the enterprise, and are difficult to quantify, though there is a large body of literature exhorting business to adopt measures beyond financial ones (e.g., Deming's Fourteen Points, balanced scorecards). Orlitzky, Schmidt, and Rynes[24] found a correlation between social/environmental performance and financial performance. However, businesses may not be looking at short-run financial returns when developing their CSR strategy. Intel employs a 5-year CSR planning cycle.[25] The definition of CSR used within an organization can vary from the strict "stakeholder impacts" definition used by many CSR advocates and will often include charitable efforts and volunteering. CSR may be based within the human resources, business development or public relations departments of an organisation,[26] or may be given a separate unit reporting to the CEO or in some cases directly to the board. Some companies may implement CSR-type values without a clearly defined team or programme.

The Four Phases of CSR Development in India

The history of CSR in India has its four phases which run parallel to India's historical development and has resulted in different approaches towards CSR. However the phases are not static and the features of each phase may overlap other phases.
The First Phase

In the first phase charity and philanthropy were the main drivers of CSR. Culture, religion, family values and tradition and industrialization had an influential effect on CSR. In the pre-industrialization period, which lasted till 1850, wealthy merchants shared a part of their wealth with the wider society by way of setting up temples for a religious cause[citation needed]. Moreover, these merchants helped the society in getting over phases of famine and epidemics by providing food from their godowns and money and thus securing an integral position in the society.[citation needed] With the arrival of colonial rule in India from 1850s onwards, the approach towards CSR changed. The industrial families of the 19th century such as Tata, Godrej, Bajaj, Modi, Birla, Singhania were strongly inclined towards economic as well as social considerations. However it has been observed that their efforts towards social as well as industrial development were not only driven by selfless and religious motives but also influenced by caste groups and political objectives.[3]
The Second Phase

In the second phase, during the independence movement, there was increased stress on Indian Industrialists to demonstrate their dedication towards the progress of the society. This was when Mahatma Gandhi introduced the notion of "trusteeship", according to which the industry leaders had to manage their wealth so as to benefit the common man. "I desire to end capitalism almost, if not quite, as much as the most advanced socialist. But our methods differ. My theory of trusteeship is no make-shift, certainly no camouflage. I am confident that it will survive all other theories." This was Gandhi's words which highlights his argument towards his concept of "trusteeship". Gandhi's influence put pressure on various Industrialists to act towards building the nation and its socio-economic development.[4] According to Gandhi, Indian companies were supposed to be the "temples of modern India". Under his influence businesses established trusts for schools and colleges and also helped in setting up training and scientific institutions. The operations of the trusts were largely in line with Gandhi's reforms which sought to abolish untouchability, encourage empowerment of women and rural development.
The Third Phase

The third phase of CSR (196080) had its relation to the element of "mixed economy", emergence of Public Sector Undertakings (PSUs) and laws relating labour and environmental standards. During this period the private sector was forced to take a backseat.[citation needed] The public sector was seen as the prime mover of development.[citation needed] Because of the stringent legal rules and regulations surrounding the activities of the

private sector, the period was described as an "era of command and control". The policy of industrial licensing, high taxes and restrictions on the private sector led to corporate malpractices.[citation needed] This led to enactment of legislation regarding corporate governance, labour and environmental issues. PSUs were set up by the state to ensure suitable distribution of resources (wealth, food etc.) to the needy. However the public sector was effective only to a certain limited extent. This led to shift of expectation from the public to the private sector and their active involvement in the socio-economic development of the country became absolutely necessary.[citation needed] In 1965 Indian academicians, politicians and businessmen set up a national workshop on CSR aimed at reconciliation.[citation needed] They emphasized upon transparency, social accountability and regular stakeholder dialogues. In spite of such attempts the CSR failed to catch steam.
The Fourth Phase

In the fourth phase (1980 until the present) Indian companies started abandoning their traditional engagement with CSR and integrated it into a sustainable business strategy. In 1990s the first initiation towards globalization and economic liberalization were undertaken. Controls and licensing system were partly done away with which gave a boost to the economy the signs of which are very evident today. Increased growth momentum of the economy helped Indian companies grow rapidly and this made them more willing[citation needed] and able to contribute towards social cause. Globalization has transformed India into an important destination in terms of production and manufacturing bases of TNCs are concerned. As Western markets are becoming more and more concerned about and labour and environmental standards in the developing countries, Indian companies who export and produce goods for the developed world need to pay a close attention to compliance with the international standards. As discussed above, CSR is not a new concept in India. Ever since their inception, corporates like the Tata Group, the Aditya Birla Group, and Indian Oil Corporation, to name a few, have been involved in serving the community. Through donations and charity events, many other organizations have been doing their part for the society. The basic objective of CSR in these days is to maximize the company's overall impact on the society and stakeholders. CSR policies, practices and programs are being comprehensively integrated by an increasing number of companies throughout their business operations and processes. A growing number of corporates feel that CSR is not just another form of indirect expense but is important for protecting the goodwill and reputation, defending attacks and increasing business competitiveness.[6] Companies have specialised CSR teams that formulate policies, strategies and goals for their CSR programs and set aside budgets to fund them. These programs are often determined by social philosophy which have clear objectives and are well defined and are aligned with the mainsteeam business. The programs are put into practice by the employees who are crucial to this process. CSR programs ranges from community development to development in education, environment and healthcare etc.[7]

For example, a more comprehensive method of development is adopted by some corporations such as Bharat Petroleum Corporation Limited, Maruti Suzuki India Limited, and Hindustan Unilever Limited. Provision of improved medical and sanitation facilities, building schools and houses, and empowering the villagers and in process making them more self-reliant by providing vocational training and a knowledge of business operations are the facilities that these corporations focus on.Many of the companies are helping other peoples by providing them good standard of living. On the other hand, the CSR programs of corporations like GlaxoSmithKline Pharmaceuticals focus on the health aspect of the community. They set up health camps in tribal villages which offer medical check-ups and treatment and undertake health awareness programs. Some of the non-profit organizations which carry out health and education programs in backward areas are to a certain extent funded by such corporations. Also Corporates increasingly join hands with Non-governmental organizations (NGOs) and use their expertise in devising programs which address wider social problems. For example, a lot of work is being undertaken to rebuild the lives of the tsunami affected victims. This is exclusively undertaken by SAP India in partnership with Hope Foundation, an NGO that focuses mainly on bringing about improvement in the lives of the poor and needy . The SAP Labs Center of HOPE in Bangalore was started by this venture which looks after the food, clothing, shelter and medical care of street children. CSR has gone through many phases in India. The ability to make a significant difference in the society and improve the overall quality of life has clearly been proven by the corporates. Not one but all corporates should try and bring about a change in the current social situation in India in order to have an effective and lasting solution to the social woes . Partnerships between companies, NGOs and the government should be facilitated so that a combination of their skills such as expertise, strategic thinking, manpower and money to initiate extensive social change will put the socio-economic development of India on a fast track.[8]
Social awareness and education

The role among corporate stakeholders is to work collectively to pressure corporations that are changing. Shareholders and investors themselves, through socially responsible investing are exerting pressure on corporations to behave responsibly. The extension of SRI bodies driving corporations to include an element of ethical investment into their corporate agendas generates socially embedded issues. The main issue correlates to the development and overall idea of ethical investing or SRI, a concept that is constructed as a general social perspective.[46] The problem becomes defining what is classified as ethical investing. The ethics or values of one SRI body will likely different from the next since ethical opinions are inherently paradoxical. For example, some religious investors in the US have withdrawn investment from companies that fail to fulfill their ethical expectations.[46] The Non-governmental organizations are also taking an

increasing role, leveraging the power of the media and the Internet to increase their scrutiny and collective activism around corporate behavior. Through education and dialogue, the development of community awareness in holding businesses responsible for their actions is growing.[47] In recent years[when?], the traditional conception of CSR is being challenged by the more community-conscious Creating Shared Value concept (CSV), and several companies are refining their collaboration with stakeholders accordingly.
Ethics training

The rise of ethics training inside corporations, some of it required by government regulation, is another driver credited with changing the behavior and culture of corporations. The aim of such training is to help employees make ethical decisions when the answers are unclear. Tullberg believes that humans are built with the capacity to cheat and manipulate, a view taken from Trivers (1971, 1985), hence the need for learning normative values and rules in human behavior.[48] The most direct benefit is reducing the likelihood of "dirty hands" (Grace and Cohen 2005), fines and damaged reputations for breaching laws or moral norms. Organizations also see secondary benefit in increasing employee loyalty and pride in the organization[citation needed]. Caterpillar and Best Buy are examples of organizations that have taken such steps.[49] Increasingly, companies are becoming interested in processes that can add visibility to their CSR policies and activities. One method that is gaining increasing popularity is the use of well-grounded training programs, where CSR is a major issue, and business simulations can play a part in this.[citation needed] One relevant documentary is The Corporation, the history of organizations and their growth in power is discussed. Corporate social responsibility, what a company does in trying to benefit society, versus corporate moral responsibility (CMR), what a company should morally do, are both important topics to consider when looking at ethics in CSR. For example, Ray Anderson, in The Corporation, takes a CMR perspective in order to do what is moral and he begins to shift his company's focus towards the biosphere by utilizing carpets in sections so that they will sustain for longer periods. This is Anderson thinking in terms of Garret Hardin's "The Tragedy of the Commons," where if people do not pay attention to the private ways in which we use public resources, people will eventually lose those public resources.
Geography

In a geographical context, CSR is fundamentally an intangible populist idea without a conclusive definition.[50] Corporations who employ CSR behaviors are empirically dissimilar in various parts of the world.[51] The issue of CSR diversity is produced through the perpetual differences embedded in the social, political, cultural, and economic structures within individual countries.[51] The immense geographical separations feasibly contribute to the loosely defined concept of CSR and difficulty for corporate regulation.

Public policies

CSR has inspired national governments to include CSR issues into their national public policy agendas. The increased importance driven by CSR, has prompted governments to promote socially and environmentally responsible corporate practices.[52] Over the past decade governments have considered CSR as a public issue that requires national governmental involvement to address the very issues relevant to CSR. The heightened role of government in CSR has facilitated the development of numerous CSR programs and policies.[52] Specifically, various European governments have implemented public policies on CSR enhancing their competence to develop sustainable corporate practices. [53] CSR critics such as Robert Reich argue that governments should set the agenda for social responsibility by the way of laws and regulation that will allow a business to conduct themselves responsibly. Actors engaged in CSR:

governments corporations civil societies

Recently[when?], 15 European Union countries have actively engaged in CSR regulation and public policy development.[53] Recognizably, the CSR efforts and policies are vastly different amongst countries resultant to the complexity and diversity of governments, corporations, and civil societies roles. Scholars have analyzed each body that promotes CSR based policies and programs concluding that the role and effectiveness of these actors are case-specific.[52] Global issues so broadly defined such as CSR generate numerous relationships between the different socio-geographic players. A key debate in CSR is determining what actors are responsible to ensure that corporations are behaving in a socio-economic and environmentally sustainable manner.

Sustainability Reporting.

A sustainability report is an organizational report that gives information about economic, environmental, social and governance performance.[1] Sustainability reporting [2] is not just report generation of collected data it is a method to internalize and improve an organizations commitment to sustainable development in a way that can be demonstrated to both internal and external stakeholders. Organizations must ensure a robust system for sustainability management and reporting with regard to:

Transparency Traceability

Compliance

Corporate sustainability reporting has a long history going back to environmental reporting. The first environmental reports were published in the late 1980s by companies in the chemical industry which had serious image problems. The other group of early reporters was a group of committed small and medium-sized businesses with very advanced environmental management systems. Non-financial reporting, such as sustainability and CSR reporting, is a fairly recent trend which has expanded over the last twenty years. Many companies now produce an annual sustainability report and there are a wide array of ratings and standards around. There are a variety of reasons that companies choose to produce these reports, but at their core they are intended to be "vessels of transparency and accountability". Often they also intended to improve internal processes, engage stakeholders and persuade investors.[3] Organizations can improve their sustainability performance by measuring, monitoring and reporting on it, helping them have a positive impact on society, the economy, and a sustainable future. The key drivers for the quality of sustainability reports are the guidelines of the Global Reporting Initiative (GRI),[4] (ACCA) award schemes or rankings. The GRI Sustainability Reporting Guidelines enable all organizations worldwide to assess their sustainability performance and disclose the results in a similar way to financial reporting.[5] The largest database of corporate sustainability reports can be found on the website of the United Nations Global Compact initiative.

Discussion and Conclusion Most corporate governance reforms involve increased transparency. Yet, discussions of disclosure generally focus on issues other than governance, such as the cost of capital and product-market competition. The logic of how transparency potentially aects governance is absent from the academic literature. We provide such analysis in this paper. We show that the level of transparency can be understood as deriving from the governance relation between the ceo and the board of directors. The directors set the level of transparency (e.g., amount and quality of disclosure) and it is, thus, part of an endogenously chosen governance arrangement.17 Increasing transparency provides benets to the rm, but entails costs as well. Better transparency improves the boards monitoring of the CEO by providing it with an improved signal about his quality. But better transparency is not free: The better able the market is to learn about the ceos ability, the greater the risk to which the ceo is exposed. In our setting, the protmaximizing level of transparency requires balancing these two factors. Our model implies that there can be an optimal level of transparency. Consequently, attempts to mandate levels beyond this optimum decrease prots. Prots decrease both because managers will have to be paid higher salaries to compensate them for the increased career risk they face, and because greater transparency increases managerial incentives to engage in costly and counterproductive eorts to distort information. We emphasize that these eects occur in a model in which all other things equal, better information disclosure increases rm value One key assumption we make throughout the paper is that the board relies on the same information that is released to the public in making its monitoring decisions. Undoubtedly, this assumption is literally false in most rms, as the board has access to better information than the public. Nonetheless, ceos do have incentives to manipulate information transfers to improve the boards perception of them, and this idea has been an important factor in a number of recent studies (see, e.g., Adams and Ferriera, in press). In addition, in a number of publicized cases, boards have been kept in the dark except through their ability to access publicly disclosed documents; the circumstances in which boards must rely publicly available information are likely the cases in which the board-ceo relationship is most adversarial, and hence are the cases in which board monitoring is likely most important. Certainly, our basic assumption that the quality of public disclosure has a large impact on the boards ability to monitor management is plausible. Our model is set in the context of a board that is perfectly aligned with shareholders interests. One could equally well apply it to direct monitoring by shareholders. If there were an increase in the quality of

available information either due to more stringent reporting requirements or because of better analysis (e.g., of the sort performed by institutional investors or a more attentive press), then our model contains clear empirical predictions. In particular, it suggests that consequences of improved information would be increases in ceo salaries and the rate of ceo turnover. In fact, both ceo salaries and ceo turnover have increased substantially starting in the 1990s, with at least some scholars attributing the increase to the higher level of press scrutiny and investor activism (see Kaplan and Minton, 2006). This pattern of ceo salaries and turnover is consistent with our model; moreover, it is consistent with the idea that better information has both costs and benets through its impact on corporate governance. As discussed above, we have only scratched the surface with respect to issues of managerial concealment of information. We have abstracted away from any of the concerns about revealing information to rivals or regulators that earlier work has raised. We have also ignored other competing demands for better information, such as to help better resolve the principal-agent problem through incentive contracts (see e.g., Grossman and Hart, 1983, Singh, 2004). Finally, we have ignored the mechanics of how the rm actually makes information more or less informative (e.g., what accounting rules are used, what organizational structures, such as reporting lines and oce organization, are employed, etc.). While future attention to such details will, we believe, shed additional light on the subject, we remain condent that our general results will continue to hold.

Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders.[1][2][3] There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 2001 2002, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).

Other definitions[edit source | editbeta]

Corporate governance has also been defined as "a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby mitigating agency risks which may stem from the misdeeds of corporate officers. In contemporary business corporations, the main external stakeholder groups are shareholders, debtholders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees. Much of the contemporary interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders.[5] Ways of mitigating or preventing these conflicts of interests include the processes, customs, policies, laws, and institutions which have an impact on the way a company is controlled.[6][7] An important theme of governance is the nature and extent of corporate accountability. A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare.[8][9] In large firms where there is a separation of ownership and management and no controlling shareholder, the principalagent issue arises between upper-management (the "agent") which may have very different interests, and by definition considerably more information, than shareholders (the "principals"). The danger arises that rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management.[10] This aspect is particularly present in contemporary public debates and developments in regulatory policy.(seeregulation and policy regulation).[1] Economic analysis has resulted in a literature on the subject. [11] One source defines corporate governance as "the set of conditions that shapes the ex post bargaining over the quasi-rentsgenerated by a firm."[12] The

firm itself is modelled as a governance structure acting through the mechanisms of contract. [13][9] Here corporate governance may include its relation to corporate finance.[14]

Principles of corporate governance[edit source | editbeta]

Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD reports present general principles 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 principles recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders :[15][16][17] 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:[18] Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board :[19][20] 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 :[21][22] 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:[23][24] 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.

Corporate governance models around the world[edit source | editbeta]

There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The coordinated or Multistakeholder Model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. A related distinction is between market-orientated and network-orientated models of corporate governance.[25]

Continental Europe[edit source | editbeta]

Some continental European countries, including Germany and the Netherlands, require a two-tiered Board of Directors as a means of improving corporate governance.[26] In the two-tiered board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions. [27] See also Aktiengesellschaft.

India[edit source | editbeta]

India's SEBI Committee on Corporate Governance defines corporate governance as 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."[28] It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.

United States, United Kingdom[edit source | editbeta]

The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by shareholders. Because of this, it is also known as "the unitary system".[29][30] Within this system, many boards include some executives from the company (who are ex officio members of the board). Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. The United States and the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance.[31] In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation. Many US states have adopted the Model Business Corporation Act, but the dominant state law for publicly traded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly traded corporations.[32] Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws.[32] Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.[32]

Legal environment General[edit source | editbeta]

Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. These may vary in many respects between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation (which is the general case) or from a statute to create a specific corporation, which was the only method prior to the 19th century.[citation needed] In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries, and various laws and regulations affecting business practices. In most jurisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum] and Articles of Association. The capacity of shareholders to modify the constitution of their corporation can vary substantially.[citation needed] The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with subsequent modifications. This law made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. It is enforced by the U.S. Department of Justice and the Securities and Exchange Commission (SEC). Substantial civil and criminal penalties have been levied on corporations and executives convicted of bribery.[33]

The UK passed the Bribery Act in 2010. This law made it illegal to bribe either government or private citizens or make facilitating payments (i.e., payment to a government official to perform their routine duties more quickly). It also required corporations to establish controls to prevent bribery.

Sarbanes-Oxley Act of 2002[edit source | editbeta]

Main article: Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 was enacted in the wake of a series of high profile corporate scandals. It established a series of requirements that affect corporate governance in the U.S. and influenced similar laws in many other countries. The law required, along with many other elements, that:

The Public Company Accounting Oversight Board (PCAOB) be established to regulate the auditing profession, which had been self-regulated prior to the law. Auditors are responsible for reviewing the financial statements of corporations and issuing an opinion as to their reliability. The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) attest to the financial statements. Prior to the law, CEO's had claimed in court they hadn't reviewed the information as part of their defense.

Board audit committees have members that are independent and disclose whether or not at least one is a financial expert, or reasons why no such expert is on the audit committee. External audit firms not provide certain types of consulting services and must rotate their lead partner every 5 years. Further, an audit firm cannot audit a company if those in specified senior management roles worked for the auditor in the past year. Prior to the law, there was the real or perceived conflict of interest between providing an independent opinion on the accuracy and reliability of financial statements when the same firm was also providing lucrative consulting services.[34]

Codes and guidelines[edit source | editbeta]

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect.

OECD principles[edit source | editbeta]

One of the most influential guidelines has been the OECD Principles of Corporate Governancepublished in 1999 and revised in 2004.[1] The OECD guidelines are often referenced by countries developing local codes or guidelines. Building on the work of the OECD, other international organizations, private sector associations and more than 20 national corporate governance codes formed the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) to produce their Guidance on Good Practices in Corporate Governance Disclosure. [35] This internationally agreed[36] benchmark consists of more than fifty distinct disclosure items across five broad categories:[37]

Auditing Board and management structure and process Corporate responsibility and compliance

Financial transparency and information disclosure Ownership structure and exercise of control rights

Stock exchange listing standards[edit source | editbeta]

Companies listed on the New York Stock Exchange (NYSE) and other stock exchanges are required to meet certain governance standards. For example, the NYSE Listed Company Manual requires, among many other elements:

Independent directors: "Listed companies must have a majority of independent directors...Effective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest." (Section 303A.01) An independent director is not part of management and has no "material financial relationship" with the company. Board meetings that exclude management: "To empower non-management directors to serve as a more effective check on management, the non-management directors of each listed company must meet at regularly scheduled executive sessions without management." (Section 303A.03)

Boards organize their members into committees with specific responsibilities per defined charters. "Listed companies must have a nominating/corporate governance committee composed entirely of independent directors." This committee is responsible for nominating new members for the board of directors. Compensation and Audit Committees are also specified, with the latter subject to a variety of listing standards as well as outside regulations. (Section 303A.04 and others)[38]

Other guidelines[edit source | editbeta]

The investor-led organisation International Corporate Governance Network (ICGN) was set up by individuals centered around the ten largest pension funds in the world 1995. The aim is to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars and members are located in fifty different countries. ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics.[citation needed] The World Business Council for Sustainable Development (WBCSD) has done work on corporate governance, particularly on accountability and reporting, and in 2004 released Issue Management Tool: Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. This document offers general information and a perspective from a business association/think-tank on a few key codes, standards and frameworks relevant to the sustainability agenda. In 2009, the International Finance Corporation and the UN Global Compact released a report, Corporate Governance - the Foundation for Corporate Citizenship and Sustainable Business, linking the environmental, social and governance responsibilities of a company to its financial performance and longterm sustainability. Most codes are largely voluntary. An issue raised in the U.S. since the 2005 Disney decision [39] is the degree to which companies manage their governance responsibilities; in other words, do they merely try to supersede the legal threshold, or should they create governance guidelines that ascend to the level of best practice. For example, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting other companies to adopt similar practices.[citation needed]

History[edit source | editbeta]

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.[40] From the Chicago school of economics, Ronald Coase[41] introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave.[42] US expansion after World War II through the emergence of multinational corporations saw the establishment of the managerial class. Studying and writing about the new class were severalHarvard Business School management professors: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior). According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors."[citation needed] In the 1980s, Eugene Fama and Michael Jensen[43] established the principalagent problem as a way of understanding corporate governance: the firm is seen as a series of contracts.[44] Over the past three decades, corporate directors duties in the U.S. have expanded beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareholders.[45][vague] 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 (CalPERS) 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 the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and Worldcom, as well as lesser corporate scandals, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, led to increased political interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002. Other triggers for continued interest in the corporate governance of organizations included the financial crisis of 2008/9 and the level of CEO pay [46]

East Asia[edit source | editbeta]

In 1997, the East Asian Financial Crisis severely affected the economies of Thailand, Indonesia, South Korea, Malaysia, and the Philippines through 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.[citation needed]

Parties to corporate governance[edit source | editbeta]

Key parties involved in corporate governance include stakeholders such as the board of directors, management and shareholders. External stakeholders such as creditors, auditors, customers, suppliers, government agencies, and the community at large also exert influence. 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.[citation needed]

Responsibilities of the board of directors [edit source | editbeta]

Former Chairman of the Board of General Motors John G. Smale wrote in 1995: "The board is responsible for the successful perpetuation of the corporation. That responsibility cannot be relegated to management."[47] A board of directors is expected to play a key role in corporate governance. The board has responsibility for: CEO selection and succession; providing feedback to management on the organization's

strategy; compensating senior executives; monitoring financial health, performance and risk; and ensuring accountability of the organization to its investors and authorities. Boards typically have several committees (e.g., Compensation, Nominating and Audit) to perform their work.[48] The OECD Principles of Corporate Governance (2004) describe the responsibilities of the board; some of these are summarized below:[1]

Board members should be informed and act ethically and in good faith, with due diligence and care, in the best interest of the company and the shareholders. Review and guide corporate strategy, objective setting, major plans of action, risk policy, capital plans, and annual budgets. Oversee major acquisitions and divestitures. Select, compensate, monitor and replace key executives and oversee succession planning. Align key executive and board remuneration (pay) with the longer-term interests of the company and its shareholders. Ensure a formal and transparent board member nomination and election process. Ensure the integrity of the corporations accounting and financial reporting systems, including their independent audit. Ensure appropriate systems of internal control are established. Oversee the process of disclosure and communications. Where committees of the board are established, their mandate, composition and working procedures should be well-defined and disclosed.

Stakeholder interests[edit source | editbeta]

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.[citation needed] 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.[citation needed]

Control and ownership structures[edit source | editbeta]

Control and ownership structure refers to the types and composition of shareholders in a corporation. In some countries such as most of Continental Europe, ownership is not necessarily equivalent to control due

to the existence of e.g. dual-class shares, ownership pyramids, voting coalitions, proxy votes and clauses in the articles of association that confer additional voting rights to long-term shareholders.[49] Ownership is typically defined as the ownership of cash flow rights whereas control refers to ownership of control or voting rights. [49] Researchers often "measure" control and ownership structures by using some observable measures of control and ownership concentration or the extent of inside control and ownership. Some features or types of control and 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 family-controlled) are corporate groups which consist of complex interlocking business relationships and shareholdings. Cross-shareholding are an essential feature of keiretsu and chaebol groups [4]. Corporate engagement with shareholders and other stakeholders can differ substantially across different control and ownership structures.

Family control[edit

source | editbeta]

Family interests dominate ownership and control structures of some corporations, and it has been suggested the oversight of family controlled corporation is superior to that of 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. [50] Forget the celebrity CEO. "Look beyond Six Sigma and the latest technology fad. One of the biggest strategic advantages a company can have is blood ties," according to a Business Week study[51][52]

Diffuse shareholders[edit

source | editbeta]

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 withon group.[citation needed] 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.[citation needed]

Mechanisms and controls[edit source | editbeta]

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. There are both internal monitoring systems and external monitoring systems.[53] Internal monitoring can be done, for example, by one (or a few) large shareholder(s) in the case of privately held companies or a firm belonging to a business group. Furthermore, the various board mechanisms provide for internal monitoring. External monitoring of managers' behavior, occurs when an independent third party (e.g. the external auditor) attests the accuracy of information provided by management to investors. Stock analysts and debt holders may also conduct such external monitoring. An ideal monitoring and control system should regulate both motivation and ability, while providing incentive alignment toward corporate goals and objectives. Care should be taken that incentives are not so strong that some individuals are tempted to cross lines of ethical behavior, for example by manipulating revenue and profit figures to drive the share price of the company up.[42]

Internal corporate governance controls[edit source | editbeta]

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.[54] 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.[citation needed] 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[citation needed]

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.[citation needed]

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 asshares 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.[citation needed]

Monitoring by large shareholders and/or monitoring by banks and other large creditors : Given their large investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power, to monitor the management.[55]

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. In the U.K., successive codes of best practice have recommended against duality.[citation needed]

External corporate governance controls[edit source | editbeta]

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

Financial reporting and the independent auditor[edit source | editbeta]

The board of directors has primary responsibility for the corporation's external financial reporting functions. The Chief Executive Officer and Chief Financial Officer are crucial participants and boards usually have a high degree of reliance on them for the integrity and supply of accounting information. They oversee the internal accounting systems, and are dependent on the corporation'saccountants and internal auditors. Current accounting rules under International Accounting Standards and U.S. GAAP allow managers some choice in determining the methods of measurement and criteria for recognition of various financial reporting elements. The potential exercise of this choice to improve apparent performance (see creative accounting and earnings management) increases the information risk for users. Financial reporting fraud, including non-disclosure and deliberate falsification of values also contributes to users' information risk. To reduce this risk and to enhance the perceived integrity of financial reports, corporation financial reports must be audited by an independent external auditor who issues a report that accompanies the financial statements (see financial audit). One area of concern is whether the auditing firm acts as both the independent auditor and management consultant to the firm they are auditing. This may result in a conflict of interest which places the integrity of financial reports in doubt due to client pressure to appease management. The power of the corporate client to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the Sarbanes-Oxley Act(following numerous corporate scandals, culminating with the Enron scandal) prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of Standard Listing Agreement in India.

Systemic problems of corporate governance[edit source | editbeta]

Demand for information: In order to influence the directors, the shareholders must combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.[56] 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.[56]

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.[56]

Debates in corporate governance[edit source | editbeta]

Executive pay[edit source | editbeta]
Main article: Say on pay Increasing attention and regulation (as under the Swiss referendum "against corporate Rip-offs" of 2013) has been brought to executive pay levels since the financial crisis of 20072008. Research on the relationship between firm performance and executive compensation does not identify consistent and significant relationships between executives' remuneration and firm performance. Not all firms experience the same levels of agency conflict, and external and internal monitoring devices may be more effective for some than for others.[46][57] 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.[57] 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 shortterm, 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 [58] and reported by James Blander and Charles Forelle of the Wall Street Journal.[57][59] Even before the negative influence on public opinion caused by the 2006 backdating scandal, use of options faced various criticisms. A particularly forceful and long running argument concerned the interaction of executive options with corporate stock repurchase programs. Numerous authorities (including U.S. Federal Reserve Board economist Weisbenner) determined options may be employed in concert with stock buybacks in a manner contrary to shareholder interests. These authors argued that, in part, corporate stock buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion annual rate in late 2006 because of the impact of options. A compendium of academic works on the option/buyback issue is included in the study Scandal by author M. Gumport issued in 2006. A combination of accounting changes and governance issues led options to become a less popular means of remuneration as 2006 progressed, and various alternative implementations of buybacks surfaced to challenge the dominance of "open market" cash buybacks as the preferred means of implementing a share repurchase plan.

Separation of Chief Executive Officer and Chairman of the Board roles [edit source | editbeta]
Shareholders elect a board of directors, who in turn hire a Chief Executive Officer (CEO) to lead management. The primary responsibility of the board relates to the selection and retention of the CEO. However, in many U.S. corporations the CEO and Chairman of the Board roles are held by the same person. This creates an inherent conflict of interest between management and the board. Critics of combined roles argue the two roles should be separated to avoid the conflict of interest. Advocates argue that empirical studies do not indicate that separation of the roles improves stock market performance and that it should be up to shareholders to determine what corporate governance model is appropriate for the firm.[60] In 2004, 73.4% of U.S. companies had combined roles; this fell to 57.2% by May 2012. Many U.S. companies with combined roles have appointed a "Lead Director" to improve independence of the board from management. German and UK companies have generally split the roles in nearly 100% of listed

companies. Empirical evidence does not indicate one model is superior to the other in terms of performance. However, one study indicated that poorly performing firms tend to remove separate CEO's more frequently than when the CEO/Chair roles are combined.[61]

Although India has been rather slow in establishing corporate governance principles over the last two decades, 2012 was a positive year for progression in the Indian corporate governance arena. The Companies Bill 2012, passed by Lok Sabha (the lower house) on 18 December 2012, includes a number of new provisions aimed at improving the governance of public companies. Interestingly, despite the structure of Indian businesses differing significantly from those in the UK, the foundations of the new Indian corporate governance model are drawn from the Anglo-Saxon governance model. The investor base in the Indian corporate market, for instance, largely consists of the company founders, their respective family members and the government. In contrast, shareholders in UK companies are less concentrated towards a certain group of people, are geographically dispersed and largely held by professional investors. However, despite significant differences in the corporate structure in the two markets, the corporate governance proposals recently published in India are similar to those adopted in the UK. The question therefore arises as to whether it is appropriate for a closed market to base its corporate governance model on practices developed for and in a market fundamentally different from its own. The Indian market regulator, the Securities and Exchange Board of India ( SEBI), recently issued a consultative paper on the "Review of Corporate Governance" encouraging a wider debate on governance. The paper calls for, inter alia, the splitting of the roles of chairman and chief executive, disclosure of the reasons for an independent director's resignation from office, a limit on the term of appointment of independent directors and greater involvement of institutional investors. SEBI goes on to propose making radical changes which seek to ensure that these corporate governance proposals are implemented in a market which is generally viewed as weak in the implementation of rules and regulations. These changes include:

the appointment of independent directors by minority shareholders, independent directors to receive compulsory training and pass examinations; and the adoption of a principle-based approach for certain principles.

Although it is clear that the proposals stem from the Anglo-Saxon corporate model, in some instances they go further and introduce new initiatives which recognise the need for certain obligatory requirements and the need for training in a market that has for centuries been based on a closed board structure and investor base. There has been a clear move in India to develop the corporate market to attract foreign investment. Foreign investment is slowly increasing shareholder diversity in some companies. This in turn pushes the agenda for the introduction of a regulated and universal corporate governance model. It appears from the recent SEBI proposals that the adoption of a corporate governance model based on the Anglo-Saxon model will be a useful starting point but the adoption of certain UK-based concepts such as 'comply or explain' should be adopted cautiously given the radical nature of certain proposals and significant effects they will have on the structure of Indian businesses. New regulatory institutions may need to be created, existing institutions strengthened and hybrid approaches adopted but, on the whole, the Anglo-Saxon model may well be a useful foundation.

Corporate Governance of Indian Companies

ITC
Preamble
Over the years, ITC has evolved from a single product company to a multi-business corporation. Its businesses are spread over a wide spectrum, ranging from cigarettes and tobacco to hotels, packaging, paper and paperboards and international commodities trading. Each of these businesses is vastly different from the others in its type, the state of its evolution and the basic nature of its activity, all of which influence the choice of the form of governance. The challenge of governance for ITC therefore lies in fashioning a model that addresses the uniqueness of each of its businesses and yet strengthens the unity of purpose of the Company as a whole. Since the commencement of the liberalisation process, India's economic scenario has begun to alter radically. Globalisation will not only significantly heighten business risks, but will also compel Indian companies to adopt international norms of transparency and good governance. Equally, in the resultant competitive context, freedom of executive management and its ability to respond to the dynamics of a fast changing business environment will be the new success factors. ITC's governance policy recognises the challenge of this new business reality in India.

Definition and Purpose

ITC defines Corporate Governance as a systemic process by which companies are directed and controlled to enhance their wealth generating capacity. Since large corporations employ vast quantum of societal resources, we believe that the governance process should ensure that these companies are managed in a manner that meets stakeholders aspirations and societal expectations.

Core Principles
ITC's Corporate Governance initiative is based on two core principles. These are :

Management must have the executive freedom to drive the enterprise forward without undue restraints; and this freedom of management should be exercised within a framework of effective accountability. ITC believes that any meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations.

Cornerstones
From the above definition and core principles of Corporate Governance emerge the cornerstones of ITC's governance philosophy, namely trusteeship, transparency, empowerment and accountability, control and ethical corporate citizenship. ITC believes that the practice of each of these leads to the creation of the right corporate culture in which the company is managed in a manner that fulfils the purpose of Corporate Governance.

Trusteeship: ITC believes that large corporations like itself have both a social and economic purpose. They represent a coalition of interests, namely those of the shareholders, other providers of capital, business associates and employees. This belief therefore casts a responsibility of trusteeship on the Company's Board of Directors. They are to act as trustees to protect and enhance shareholder value, as well as to ensure that the Company fulfils its obligations and responsibilities to its other stakeholders. Inherent in the concept of trusteeship is the responsibility to ensure equity, namely, that the rights of all shareholders, large or small, are protected. Transparency: ITC believes that transparency means explaining Company's policies and actions to those to whom it has responsibilities. Therefore transparency must lead to maximum appropriate disclosures without jeopardising the Company's strategic interests. Internally, transparency means openness in Company's relationship with its employees, as well as the conduct of its business in a manner that will bear scrutiny. We believe transparency enhances accountability. Empowerment and Accountability: Empowerment is an essential concomitant of ITC's first core principle of governance that management must have the freedom to drive the enterprise forward. ITC believes that empowerment is a process of actualising the potential of its employees. Empowerment unleashes creativity and innovation throughout the organisation by truly vesting decisionmaking powers at the most appropriate levels in the organisational hierarchy. ITC believes that the Board of Directors are accountable to the shareholders, and the management is accountable to the Board of Directors. We believe that empowerment, combined with accountability, provides an impetus to performance and improves effectiveness, thereby enhancing shareholder value. Control: ITC believes that control is a necessary concomitant of its second core principle of governance that the freedom of management should be exercised within a framework of appropriate checks and balances. Control should prevent misuse of power, facilitate timely management response to change, and ensure that business risks are pre-emptively and effectively managed. Ethical Corporate Citizenship: ITC believes that corporations like itself have a responsibility to set exemplary standards of ethical behaviour, both internally within the organisation, as well as in their external relationships. We believe that unethical behaviour corrupts organisational culture and undermines stakeholder value.

HCL

CORPORATE GOVERNANCE AT HCL

Good governance facilitates efficient, effective and entrepreneurial management that can deliver stakeholders value over the longer term. It is about commitment to values and ethical business conduct. It is a set of laws, regulations, processes and customs affecting the way a company is directed, administrated, controlled or managed. Good corporate governance underpins the success and integrity of the organizations, institutions and markets. It is one of the essential pillar for building efficient and sustainable environment. Corporate Governance is based on the principles of integrity, fairness, equity, transparency, accountability and commitment to values. Good governance practices stem from the culture and mindset of the organization. Effectiveness of the Corporate Governance in our Company depends on regular review, preferably regular independent review. As stakeholders across the globe evince keen interest in the practices and performance of companies, Corporate Governance has emerged on the centre stage.

HCL Technologies - Philosophy on Code of Governance

Satisfy the spirit of the law and not just the letter of the law. Corporate Governance standards should go beyond the law. Be transparent and maintain a high degree of disclosures levels. When in doubt, disclose it. Make a clear distinction between personal convenience and corporate resources. Communicate externally, in a truthful manner, about how the Company is run internally. Have a simple and transparent corporate structure driven solely by business needs. Comply with the laws in all the countries in which we operate. Management is the trustee of the shareholders capital and not the owner.

Corporate Governance A Snapshot

Corporate Governance is prepared under Clause 49 of Listing Agreement with Indian Stock Exchanges. Some of the important sections of the Corporate Governance are:

Board of Directors Board Committees Code of Conduct Anti Bribery and Anti Corruption Policy Code for Prevention of Insider Trading Sexual Harassment Policy Whistle Blower Policy Investors Satisfaction Survey

The Company received the coveted Certificate of Recognition from the ICSI under the ICSI National Award for Excellence in Corporate Governance for adopting good practices in Corporate Governance.

Reliance Industries

Growth

through

Governance

Reliance is in the forefront of implementation of Corporate Governance best practices

Corporate Governance at Reliance is based on the following main principles:

Constitution of a Board of Directors of appropriate composition, size, varied expertise and commitment to discharge its responsibilities and duties. Ensuring timely flow of information to the Board and its Committees to enable them to discharge their functions effectively. Independent verification and safeguarding integrity of the Companys financial reporting. A sound system of risk management and internal control. Timely and balanced disclosure of all material information concerning the Company to all stakeholders. Transparency and accountability. Compliance with all the applicable rules and regulations. Fair and equitable treatment of all its stakeholders including employees, customers, shareholders and investors.

TATA Group

Values and purpose

Purpose At the Tata group we are committed to improving the quality of life of the communities we serve. We do this by striving for leadership and global competitiveness in the business sectors in which we operate. Our practice of returning to society what we earn evokes trust among consumers, employees, shareholders and the community. We are committed to protecting this heritage of leadership with trust through the manner in which we conduct our business. Core five core Tata values underpinning the way we do business are: values

Tata has always been values-driven. These values continue to direct the growth and business of Tata companies. The

Integrity: We must conduct our business fairly, with honesty and transparency. Everything we do must stand the test of public scrutiny. Understanding: We must be caring, show respect, compassion and humanity for our colleagues and customers around the world, and always work for the benefit of the communities we serve. Excellence: We must constantly strive to achieve the highest possible standards in our day-to-day work and in the quality of the goods and services we provide. Unity: We must work cohesively with our colleagues across the group and with our customers and partners around the world, building strong relationships based on tolerance, understanding and mutual cooperation.

Responsibility: We must continue to be responsible, sensitive to the countries, communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over.

Infosys
Corporate Governance Corporate governance is about maximizing shareholder value legally, ethically and on a sustainable basis, while ensuring fairness to every stakeholder - our customers, employees, investors, vendorpartners, the governments of the countries in which we operate, and the community. Thus, corporate governance is a reflection of our culture, policies, our relationship with stakeholders and our commitment to values. We believe that sound corporate governance is critical to enhance and retain investor trust. Accordingly, we always seek to ensure that we attain our performance rules with integrity. Our Board exercises its fiduciary responsibilities in the widest sense of the term. Our disclosures always seek to attain the best practices in international corporate governance. We also endeavor to enhance long-term shareholder value and respect minority rights in all our business decisions. We continue to be a pioneer in benchmarking our corporate governance policies with the best in the world. Our efforts are widely recognized by investors in India and abroad. We have undergone the corporate governance audit by ICRA and CRISIL. ICRA has rated our corporate governance practices at CGR 1. CRISIL has assigned CRISIL GVC Level 1 rating to us. We have complied with the recommendations of the Narayana Murthy Committee on Corporate Governance constituted by the Securities and Exchange Board of India (SEBI). Corporate Governance Philosophy Our corporate governance philosophy is based on the following principles:

Satisfy the spirit of the law and not just the letter of the law Corporate governance standards should go beyond the law Be transparent and maintain a high degree of disclosure levels When in doubt, disclose Make a clear distinction between personal conveniences and corporate resources Communicate externally, in a truthful manner, about how the Company is run internally Comply with the laws in all the countries in which the Company operates Have a simple and transparent corporate structure driven solely by business needs Management is the trustee of the shareholders' capital and not the owner

Board composition At the core of our corporate governance practice is the Board, which oversees how the management serves and protects the long-term interests of all our stakeholders. We believe that an active, wellinformed and independent Board is necessary to ensure the highest standards of corporate governance. The majority of the Board, nine out of 16, are independent members. Further, we have audit, compensation, investor grievance, nominations and risk management committees, which comprise independent directors. As a part of our commitment to follow global best practices, we comply with the Euroshareholders Corporate Governance Guidelines 2000, and the recommendations of the Conference Board Commission on Public Trusts and Private Enterprises in the U.S. We also adhere to the UN Global Compact Program.