Salient features of Kumar Mangalam Report:

The Board of a company should have an optimum combination of executive and nonexecutive Directors with not less than 50% of the Board comprising the non-executive Directors. The Board of a company should set up a qualified and an independent Audit Committee. The Audit Committee should have minimum three members, all being non-executive Directors, with the majority being independent, and with at least one Director having financial and accounting knowledge. The Chairman of the Audit Committee should be an independent Director. The Chairman of the Audit Committee should be present at Annual General Meeting to answer shareholder-queries. The Company Secretary should act as the secretary to the Audit Committee. The Audit Committee should meet at least thrice a year. The quorum should be either two members or one-third of the members of the Audit Committee. The Audit Committee should have powers to investigate any activity within its terms of reference, to seek information from any employee; to obtain outside legal or professional advice, and to secure attendance of outsiders if necessary. The Audit committee should discharge various roles such as, reviewing any change in accounting policies and practices; compliance with Accounting Standards; compliance with Stock Exchange and legal requirements concerning financial statements; the adequacy of internal control systems; the company's financial and risk management policies etc. The Board of Directors should decide the remuneration of the non-executive Directors. Full disclosure should be made to the shareholders regarding the remuneration package of all the Directors. The Board meetings should be held at least four times a year. A Director should not be a member in more than ten committees or act as the chairman of more than five committees across all companies in which he is a Director. This is done to ensure that the members of the Board give due importance and commitment of the meetings of the Board and its committees. The management must make disclosures to the Board relating to all material, financial and commercial transactions, where they have personal interest. In case of the appointment of a new Director or re-appointment of a Director, the shareholders must be provided with a brief resume of the Director, his expertise and the names of companies in which the person also holds Directorship and the membership of committees of the Board. A Board committee should be formed to look into the redressal of shareholders' complaints like transfer of shares, non-receipt of balance sheet, dividend etc. There should be a separate section on Corporate Governance in the annual reports of the companies with a detailed compliance report. The Board should set up a Remuneration Committee to determine the company's policy on specific remuneration packages for executive Directors. Half-yearly declaration of financial performance including summary of the significant events in the last six months should be sent to each shareholder. Non-executive chairman should be entitled to maintain a chairman's office at the company's expense. This will enable him to discharge the responsibilities effectively.

Need of Corporate Governance: Share our ministry or sector transformation planning commitments and focus our strategies based on common needs Discuss ministry-specific and government-wide business challenges and find collaborative solutions Coordinate and standardize our efforts within different web functional areas with other ministries and groups across government Collaborate and share resources for common needs and activities Provide input into the prioritization of corporate spending toward common needs Provide input into the development of phase two of the corporate Internet Strategy.

Importance of Corporate Governance:

Changing Ownership Structure: In recent years, the ownership structure of companies has changed a lot. Public financial institutions, mutual funds, etc. are the single largest shareholder in most of the large companies. So, they have effective control on the management of the companies. They force the management to use corporate governance. That is, they put pressure on the management to become more efficient, transparent, accountable, etc. The also ask the management to make consumer-friendly policies, to protect all social groups and to protect the environment. So, the changing ownership structure has resulted in corporate governance. Importance of Social Responsibility: Today, social responsibility is given a lot of importance. The Board of Directors has to protect the rights of the customers, employees, shareholders, suppliers, local communities, etc. This is possible only if they use corporate governance.

Growing Number of Scams: In recent years, many scams, frauds and corrupt practices have taken place. Misuse and misappropriation of public money are happening everyday in India and worldwide. It is happening in the stock market, banks, financial institutions, companies and government offices. In order to avoid these scams and financial irregularities, many companies have started corporate governance. Indifference on the part of Shareholders: In general, shareholders are inactive in the management of their companies. They only attend the Annual general meeting. Postal ballot is still absent in India. Proxies are not allowed to speak in the meetings. Shareholders associations are not strong. Therefore, directors misuse their power for their own benefits. So, there is a need for corporate governance to protect all the stakeholders of the company. Globalization: Today most big companies are selling their goods in the global market. So, they have to attract foreign investor and foreign customers. They also have to follow foreign rules and regulations. All this requires corporate governance. Without Corporate governance, it is impossible to enter, survive and succeed the global market. Takeovers and Mergers: Today, there are many takeovers and mergers in the business world. Corporate governance is required to protect the interest of all the parties during takeovers and mergers. SEBI: SEBI has made corporate governance compulsory for certain companies. This is done to protect the interest of the investors and other stakeholders.

Corporate Governance Tools: The CG Methodology includes a set of tools matrices, checklists and others tailored for each of these models. These tools help examine structural features based on five key elements or risks areas of CG. 1. Progression Matrix This is the main tool to take a snap shot of the companys current governance framework and identify how the company is performing in each of the five areas of governance (Commitment to Good Corporate Governance, the Board of Directors, Control Environment and Processes, Transparency and Disclosure, and Shareholders Rights) to four levels of achievement. This tool helps you and your client understand their CG, providing guidance in rating how well they are doing in the five CG risk areas. There are criteria:

A quality score card based on clients CG that is along four levels, from minimum (level 1) to leadership (level 4). A separate matrix is available for each client type. If your project straddles a mix of client types, you can apply multiple matrices in your analysis and your discussion with your client.

2. Information Request List This list of questions forms the basis for the corporate governance analysis of an IFC client company. 3. Document Request List This list of corporate governance-related documents, policies and procedures of the company is meant to be used in conjunction with Information Request List to help analyze the companys corporate governance framework. 4. Independent Director Definition - This definition is often used during discussions with the client to clarify the assessment of the current Board and its future needs.

Evolution of Corporate Governance in India:

The history of the development of Indian corporate laws has been marked by interesting contrasts. At independence, India inherited one of the worlds poorest economies but one which had a factory sector accounting for a tenth of the national product; four functioning stock markets with clearly defined rules governing listing, trading and settlements; a well-developed equity culture if only among the urban rich; and a banking system replete with well-developed lending norms and recovery procedures. In terms of corporate laws and financial system, therefore, India emerged far better endowed than most other colonies. The years since liberalization, have witnessed wide-ranging changes in both laws and regulations driving corporate governance as well as general consciousness about it. Perhaps the single most important development in the field of corporate governance and investor protection in India has been the establishment of the Securities and Exchange Board of India (SEBI) in 1992 and its gradual empowerment since then4. Established primarily to regulate and monitor stock trading, it has played a crucial role in establishing the basic minimum ground rules of corporate conduct in the country. Concerns about corporate governance in India were, however, largely triggered by a spate of crises in the early 90s the Harshad Mehta stock market scam of 1992 followed by incidents of companies allotting preferential shares to their promoters at deeply discounted prices as well as those of companies simply disappearing with investors money. Corporate governance in India is evident from the various legal and regulatory frameworks and Committees set relating to corporate functioning comprising of the following: 1. The Companies Act, 1956 2. Monopolies and Restrictive Trade Practices Act, 1969 (replaced by new Competition Law) 3. Foreign Exchange Management Act, 2000 4. Securities and Exchange Board of India Act, 1992 5. Securities Contract Regulation Act, 1956 6. The Depositories Act, 1996 7. Arbitration and Conciliation Act, 1996 8. SEBI Code on Corporate Governance

Apart from these Acts many committees have been set up over the years to legislate the concept called corporate governance. 1) Desirable Code of Corporate Governance (1998) Corporate governance has been a buzzword in India since 1998. On account of the interest generated by Cadbury Committee Report (1992) in UK corporate governance initiatives in India began in 1998 with the Desirable Code of Corporate Governance a voluntary code published by the Confederation of Indian Industry (CII), and the first formal regulatory framework for listed companies specifically for corporate governance, established by the SEBI6. The CII Code on corporate governance recommended that the key information to be reported, listed companies to have audit committees, corporate to give a statement on value addition, consolidation of accounts to be optional. Main emphasis was on transparency. 2) Committee on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Birla (1999). The Kumar Mangalam Committee made mandatory and nonmandatory recommendations. Based on the recommendations of the Committee, the SEBI had specified principles of Corporate Governance and introduced a new clause 49 in the Listing agreement of the Stock Exchanges in the year 2000. 3) Naresh Chandra Committee (2002) The Enron debacle in July 2002, involving the hand-in-glove relationship between the auditor and the corporate client and various other scams in the United States, and the consequent enactment of the stringent Sarbanes Oxley Act in the United States were some important factors, which led the Indian government to wake up. The Department of Company Affairs in the Ministry of Finance on 21 August 2002, appointed a high level committee, popularly known as the Naresh Chandra Committee, to examine various corporate governance issues and to recommend changes in the diverse areas involving the auditorclient relationships and the role of independent directors. The Committee submitted its Report on 23 December 2002. Naresh Chandra Committee recommendations relate to the Auditor-Company relationship and the role of Auditors. Report of the SEBI Committee on Corporate Governance recommended that the mandatory recommendations on matters of disclosure of contingent liabilities, CEO/CFO Certification, definition of Independent Director, independence of Audit Committee and independent director exemptions in the report of the Naresh Chandra Committee, relating to corporate governance, be implemented by SEBI. 4) Committee on Corporate Governance under the Chairmanship of Shri N. R. Narayana Murthy (2002) Narayana Murthy Committee recommendations to clause 49 of the Listing Agreement, include role of Audit Committee, Related party transactions, Risk management, compensation to Non-Executive Directors, Whistle Blower Policy, Affairs of Subsidiary Companies, Analyst Reports and other non mandatory recommendations. Corporate Governance under Clause 49 of the Listing Agreement Clause 49 of the Listing Agreement, which deals with Corporate Governance norms that a listed entity should follow, was first introduced in the financial year 2000-01 based on recommendations of Kumar Mangalam Birla committee. After these recommendations were in place for about two years, SEBI, in order to evaluate the adequacy of the existing practices and to further improve the existing practices set up a committee under the Chairmanship of Mr Narayana Murthy during 2002-03.

The Murthy committee, after holding three meetings, had submitted the draft recommendations on corporate governance norms7. After deliberations, SEBI accepted the recommendations in August 2003 and asked the Stock Exchanges to revise Clause 49 of the Listing Agreement based on Murthy committee recommendations. This led to widespread protests and representations from the Industry thereby forcing the Murthy committee to meet again to consider the objections. The committee, thereafter, considerably revised the earlier recommendations and the same was put up on SEBI website on 15th December 2003 for public comments. It was only on 29th October 2004 that SEBI finally announced revised Clause 49, which had to be implemented by the end of financial year 2004- 05. These revised recommendations have also considerably diluted the original Murthy Committee recommendations. Areas where major changes were made include: 1. Independence of Directors 2. Whistle Blower policy 3. Performance evaluation of nonexecutive directors 4. Mandatory training of non-executive directors, etc. Failure to comply with clause 49 (corporate governance) of SEBIs listing agreement is punishable with imprisonment of up to 10 years or a fine of up to Rs 25 crore or both. Besides, stock exchanges can suspend the dealing/trading of securities. With over 6000 listed companies, monitoring and enforcement are significant challenges in the immediate term. While SEBIs ultimate sanction in cases of serial non-compliance is delisting, this is unpopular as delisting penalises the non-controlling dispersed shareholders and closes their exit options. Hence, SEBI has tended to enforce the recommendations through dialog and in some cases monetary penalties 8. Corporate Governance under Companies Act, 1956 The Companies Act, 1956 is the central legislation in India that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. It applies to whole of India and to all types of companies9. The Companies Act, 1956 has elaborate provisions relating to the Governance of Companies, which deals with management and administration of companies. It contains special provisions with respect to the accounts and audit, directors remuneration, other financial and nonfinancial disclosures, corporate democracy, prevention of mismanagement, etc. (1) Disclosures on Remuneration of Directors The specific disclosures on the remuneration of directors regarding all elements of remuneration package of all the directors should be made as a part of Corporate Governance. Section 299 of the Act requires every director of a company to make disclosure, at the Board meeting, of the nature of his concern or interest in a contract or arrangement (present or proposed) entered by or on behalf of the company10. The company is also required to record such transactions in the Register of Contract under section 301 of the Act. (2) Requirements of the Audit Committee Audit Committee has a critical role to play in ensuring the integrity of financial management of the company. This Committee add assurance to the shareholders that the auditors, who act on their behalf, are in a position to safeguard their interests. Besides the requirements of Clause 49, section

292A of the Act requires every public having paid up capital of Rs 5 crores or more shall constitute a committee of the board to be known as Audit Committee11. As per the Act, the committee shall consist of at least three directors; two-third of the total strength shall be directors other than managing or whole time directors. The Annual Report of the company shall disclose the composition of the Audit Committee12. If the default is made in complying with the said provision of the Act, then the company and every officer in default shall be punishable with imprisonment for a term extending to a year or with fine up to Rs 50000 or both. (3) Number of Directorships Restricted Sections 275, 276 and 277 have been amended to provide that no person shall hold office as director in more than 15 companies (excluding private company, unlimited company, etc., as defined in section 278) instead of 20 companies. This shall enable the director concerned to devote more time to the affairs of company in which he is a director13. (4) Corporate Democracy Wider participation by the shareholders in the decision making process is a pre-condition for democratizing corporate bodies. Due to geographical distance or other practical problems, a substantially large number of shareholders cannot attend the general meetings. To overcome these obstacles and pave way for introduction of real corporate democracy, section 192A of the Act and the Companies (Passing of Resolution by Postal allot), Rules provides for certain resolutions to be approved and passed by the shareholders through postal ballots. (5) Appointment of Nominee Director by Small Shareholders Section 252 has been amended to provide that a public company having paid-up capital of Rs. 5 crore or more and one thousand or more small shareholders can elect a director by small shareholders. Small shareholders means a shareholder holding shares of nominal value of Rs. 20,000 or less in a company14. However, this provision is not mandatory and small shareholders have option to elect a person as their representative for appointment as director on the Board of such company. (6) Directors Responsibility Statement Sub-section (2AA) in section 217A has provided that the Boards report shall include a directors responsibility statement with respect to applicable accounting standards having been followed, consistent application of accounting policies selected so as to give a true and fair view of state of affairs and of the profit and loss of the company, maintenance of adequate accounting records with proper care for safeguarding assets of company and to prevent and detect fraud and other irregularities, and the preparation of annual accounts on a going concern basis.

Stages of Moral development of company: by psychologist Lawrence Kohlberg (1927-1987)

LEVEL
PRECONVENTIONAL CONVENTIONAL POSTCONVENTIONAL

STAGE

SOCIAL ORIENTATION

1............ Punishment and obedience 2............ Instrumental exchange 3............ Interpersonal conformity 4............ Law and order 5............ Prior rights and social contract 6............ Universal moral principles

A. PRECONVENTIONAL MORALITY: STAGE 1: PUNISHMENT AND OBEDIENCE ORIENTATION What could be called a "premoral" stage, what an agent will do is determined by calculating the immediate physical consequences that might ensue not the moral value of an action. By deferring to power, the agent's overarching goal is to avoid physical punishment. Thus, at stage one, obedience not moral sentiments or compunction characterizes decision making. STAGE 2: INSTRUMENTAL EXCHANGE (PERSONAL REWARD/PUNISHMENT) ORIENTATION An individual does what is necessary and makes concessions to superiors but only as required to satisfy ones self-interest. Thus, right conduct consists of that which instrumentally satisfies ones self-interest which, in turn, likens moral decision making to a marketplace where a moral agent seeks to maximize personal rewards and minimize punishments. At this stage, an agent is not worried so much about obedience to one's superiors but more so how to accrue rewards from one's superiors. Perhaps the rationale, once again a pre-moral rationale, is best stated by the aphorism. If you scratch my back, Ill scratch yours" and justice is Do unto others as they do unto you. At stage two, a moral agent values people solely in terms of their utility and revenge is viewed as a moral duty.

B. CONVENTIONAL MORALITY: STAGE 3: INTERPERSONAL CONFORMITY ORIENTATION A moral agent acts not from any personal moral sensibility but in order to gain approval from valued others because what is good and right is defined as conformity with the behavioral expectations of ones society or peer group. The moral worth of conduct is irrelevant. What counts, morally speaking, is that one's conduct gratify or help others or simply that Everybody is doing it because the moral agent's goal is to earn approval from these others. A sin or "bad" conduct is a breach of the conventional expectations of the social order. Retribution at this stage is collective for example, the group will shun an individual and punishment is intended to deter other members of the group from engaging in similar

conduct. A failure to punish is believed to be unfair, the rationale being, if she can get away with it, why cant I? STAGE 4: LAW AND ORDER ORIENTATION Morality involves respecting rules, laws, and duly-constituted authority as well as defending the given social and institutional order for its own sake. A moral agent's responsibility is directed toward the welfare of others by upholding the status quo. Right behavior consists of maintaining the social order for its own sake as, for example, one receives a good days pay for a good days work. Authority figures are seldom questioned because, the moral agent asserts, He must be right. After all, he is the Pope (or the President, or the Judge, or God). Consistency and precedent must be maintained because, at this level of moral reasoning, the failure to uphold law and order is viewed a threat to fabric of society if not society itself. At stage four, justice normally refers to criminal or forensic justice, with the demand that wrongdoers be punished by paying a debt to society, what is called "retributive justice." Furthermore, law abiders must be rewarded because of the strict requirements of justice. Injustice, then, is the failure for ones merits to be rewarded or for others demerits to be punished.

C. POSTCONVENTIONAL OR PRINCIPLED MORALITY STAGE 5: PRIOR RIGHTS AND SOCIAL CONTRACT ORIENTATION Moral agents act out of a sense of mutual obligation and the public good and right conduct tends to be defined in terms of general individual rights and in terms of standards critically examined and agreed upon by the whole society (e.g., the U.S. Constitution). While the moral agent's freedom can be limited by society, it can only be limited when one individual's freedom infringes upon another. Moral conduct in a specific situation is not defined by referencing a checklist of rules, policies, or contractual obligations but is dependent upon logical application of universal, abstract, moral principles to the concrete exigencies of the situation at hand. At the same time, moral agents possess natural or inalienable rights and liberties a priori to society and must be protected by society. Because retributive justice does not promote the rights and welfare of the individual, retributive justice is repudiated because it is neither rational nor just. The statement, Justice demands punishment, a self-evident truism to the stage four moral agents, is self-evident nonsense to the stage five moral agents. Thus, justice must be distributed proportionate to circumstances and need. Only legal sanctions which fulfill that specific purpose can be imposed, for example, the protection of future victims, deterrence, and rehabilitation. STAGE 6: UNIVERSAL MORAL PRINCIPLES ORIENTATION An individual who reaches this stage acts out of universal principles based upon the equality and intrinsic worth of all human beings who are never means to an end, but are ends in themselves. Possessing inalienable rights means more than individual liberty; it means that every individual is due consideration of his interests in every situation, those interests being of equal importance with ones own. This is the Golden Rule model of moral decision making. A list of rules inscribed in stone is no longer necessary because the individual is motivated by universal moral principles.