Corporate Governance Write Up R N Zhasa

School of Management Studies, Nagaland University
MGT 301 Strategic Management

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CORPORATE GOVERNANCE

By
Rokov N. Zhasa
NU/MN-22/11
NU reg. no. 111291 of 2011-2012

Keyword: Corporate Governance, Cadbury Committee, Governance, Birla Committee, CII, SEBI

Content
1.1 Introduction
1.2 Corporate Governance vs Corporate Management
1.3 Reasons for the Growing Demand for Corporate Governance
1.4 Importance of Corporate Governance
1.5 CORPORATE GOVERNANCE IN THE INDIAN CONTEXT
2.1 TOP MANAGEMENT AND CORPORATE GOVERNANCE
2.2 Role of Board of directors
2.3 Responsibilities of BoDs
2.4 Strategic Management: Role of the Board
2.5 Board Committees
2.6 The Role of a Chairman
2.7 Functions of the Chairman
2.8 The Role of CEO
2.9 Functions of the CEO
2.10 Non-Executive Directors
2.11 Creating an Effective Board
3.1 Code and Laws for Corporate Governance
3.2 Reports of Committees on Corporate governance
3.3 Kumara Mangalam Birla Committee Report
3.4 Recent developments in other markets
4.1 Conclusion
Reference

1.1 INTRODUCTION
Governance is the process whereby people in power make decisions that create,
destroy or maintain social systems, structures and processes. Corporate
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governance is therefore the process whereby people in power direct, monitor and
lead corporations, and thereby either create, modify or destroy the structures and
systems under which they operate. Corporate governors are both potential agents
for change and also guardians of existing ways of working. As such, they are
therefore a significant part of the fabric of our society.
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In the narrowest sense, the term may describe the formal system of
accountability of senior management to the shareholders. At its most expansive,
the term is stretched to include the entire network of formal and informal relations
involving the corporate sector and their consequences for the society in general.
Corporate governance, however, as generally understood, includes the structure,
process, cultures and systems that engender the successful operation of the
organisations.
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The concept of Corporate Governance is to some extent similar to the
quality practices adopted under the ISO Standard. The key question is to ensure
how effectively organizations are managed. This would also include defining of the
powers of Directors, particularly non-executive ones, making available information
on the Companys current state of affairs to all the Directors, and systems control
to ensure the authencity, timeliness and effectiveness of the information.
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1.2 CORPORATE GOVERNANCE VS CORPORATE MANAGEMENT
Corporate governance is concerned with the values, vision and visibility. It is
about the value orientation of the organization, ethical norms for its performance,
the direction of development and social accomplishment of the organization and
the visibility of its performance and practices. Corporate management is
concerned with the efficiency of the resource use, value addition and wealth
creation within the broad parameters of the corporate philosophy established by
corporate governance.
In short, the concept of good corporate governance connotes that ethics is
as important as economics, fair play as crucial as financial success, morals as
vital as market share.

1.3 REASONS FOR THE GROWING DEMAND FOR CORPORATE
GOVERNANCE
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Inadequacies and failures of an existing system often bring to the fore the need for
norms and codes, to remedy them. This is true for corporate governance too. The
demand for good corporate governance arose in response to loop holes and how
they were exploited by companies with disastrous consequences. These were:
a) Falling Standards of Financial Reporting and Accountability
In the UK, deficiencies in the Accounting Standards became more evident after
many companies, in their eagerness to increase earnings and accelerate growth,
exploited the weaknesses in the accounting standards to show inflated profits and
understate liabilities, While companies grew phenomenally, accounting standards
went haywire. The tendency to combine the roles of chairman and chief executive
in one person and Board structures that were not conductive tended to make
matters very undesirable. The resultant failure of several companies raised
serious concerns regarding corporate governance and this eventually led to the
appointment of the Sir Adrian Cadbury Committees on Corporate Governance by
the London Stock Exchange and the Financial Reporting Council in Britain in
1991.
There was an increasing concern about standards of financial reporting and
accountability, especially after losses suffered by investors which could have been
avoided, with better and more transparent reporting practices. Investors suffered
on account of unscrupulous management of the companies, which have raised
capital from market at high valuations and have performed much worse than the
past reported figures, leave alone the future projections at the time of raising
money.
There were also many companies, which are not paying adequate attention
to the basic procedures for shareholders service; for example, many of these
companies do not pay adequate attention to redress investors grievances such as
delay in transfer of shares, delay in dispatch of share certificates and dividend
warrants and non-receipt of dividend warrants; companies also pay sufficient
attention to timely dissemination of information to investors as also to the quality
of such information. While enough laws existed to take care of many of these
investor grievances, the implementation and inadequacy of penal provisions left a
lot to be desired.
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Confronted with the above problems and enlightened by the developments
in the sphere of corporate governance in other countries, there has been an all
round eagerness in corporate India to adopt good Corporate Governance. Two
sets of factors have contributed to this trend. There is a necessitating set of
factors and a facilitating set of factors. One important necessaiting factor is the
mandatory requirement resulting from the recommendations of the Birla
Commission on Corporate Governance set up by the SEBI. Another necessaiting
factor has something to do with the liberalization. The foreign investors,
collaborators and buyers have been demanding more transparency in respect of
the functioning of the Indian Corporates. Thirdly, the Indian investors have
become more keen on good corporate governance. An important facilitating factor
is that there is a growing awareness and enthusiasm in the corporate India to
embrace good corporate governance. Many captains of industry, corporate
leaders and top executives are keen to usher in good corporate governance.

1.4 IMPORTANCE OF CORPORATE GOVERNANCE
Studies of firms in India and abroad have shown that markets and investors take
notice of well-managed companies, respond positively to them, and reward such
companies, with higher valuations. A common feature of such companies is that
they haves systems in place, which allow sufficient freedom to the boards and
management to take decisions towards the progress of their companies and to
innovate, while remaining within a framework of effective accountability. In other
words they have a system of good corporate governance.
Strong corporate governance is thus indispensable to resilient and vibrant
capital markets and is an important instrument of investor protection. It is the
blood that fills the veins of transparent corporate disclosure and high-quality
accounting practices. It is the muscle that moves a viable and accessible financial
reporting structure. Without financial reporting premised on sound, honest
numbers, capital markets will collapse upon themselves.
Another important aspect of corporate governance relates to issues of
insider trading. It is important that insiders do not use their position of knowledge
and access to inside information about the company, and take unfair advantage of
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the resulting information asymmetry. To prevent this from happening, corporates
are expected to disseminate the material price senstitive information.

1.5 CORPORATE GOVERNANCE IN THE INDIAN CONTEXT
As it was briefly stated earlier, corporate governance has been much talked about
in India particularly after 1993. Liberalization brought mixed results for Indian
economy. Noticeably, it brought in its wake a spate of corporate scandals. Later
on scores of companies made public issues with large premium and then
disappeared; prospectus misled the public. The management of most of these
companies diverted funds and investors had no option but to repent their lost
money. Primary market literally collapsed in the after math of these failures.
Slowly, many a family owned businesses moved to become widely held limited
companies. The question, how to function in a corporate setup overriding family
interest and obligations called for a code of governance. Similarly, corporate
banks also came under strain due to scams; governance failure was total. The
story of UTI is also well known where millions of small investors lost their capital
due to inadequate management practices and weak supervision.
Auditors were following questionable accounting practices on behest of the
management and often advising on how doubtful accounting choices might be
made so as to remain on the right side of law and at the same time, escape
detection by users of financial information. All these factors put strong pressure on
many corporates to evolve a good governance practice.
Over the period of time in India companies like Tata Group, Infosys, Wipro
have evolved sound principles of governance, intertwining corporate governance
with social responsibility. These companies have become global and it is common
to find global norms of accounting and disclosure being followed in these
corporate houses. Rights of employees, stock options, independent directors,
meeting quality norms, price warranty and guarantee- all these have made room
for quality governance. Managers have indeed become trustees of shareholders.
It began in 1998 with the Desirable Code of Governance- a voluntary code
published by CII, and the first formal regulatory framework for listed companies,
established by the SEBI in February 2000, following the guidelines enunciated by
the Kumar Mangalam Birla Committee Report. On 21
st
August, 2002, the
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Department of Company Affairs under the Ministry of Finance appointed Naresh
Chandra Committee to examine issues pertinent to governance. The committee
looked into financial and non-financial disclosure and independent auditing and
board oversight of management.
Apart from financial compliance or disclosure, the independent oversight of
management is also important. Many companies have disappeared, vanished
either due to fraud or poor quality of board resulting in lack of independent
oversight. The Kumar Mangalam Birla Committee focused on the role of
independent and statutory auditors and also the role of the board of directors.
SEBI constituted a committee on corporate governance under the
chairmanship of Sri N. R. Narayana Murthy. The committee included
representatives from the stock exchange, chamber of commerce and industry,
investor associations and professional bodies, which debated on key issues
related to corporate governance. Findings and recommendations of these
committees are discussed in the later chapter.
Thus we find that the corporate India is going through a great churning
phase. New aggressive companies are doing business with global ambitions,
placing a lot of emphasis on governance and transparency. FIIs are very serious
about good governance and disclosures. Liberalization brought great challenges,
after initial jolts and pain of restructuring, companies are seeing profits more than
before.

2.1 TOP MANAGEMENT AND CORPORATE GOVERNANCE
The major players in the area of corporate governance, within the corporation
are corporate board, shareholders and employees. Externally, the pace for
corporate governance is set by the government as the regulator, customer, and
lenders of finance and social ethos of our times. The scope and extent of
corporate governance are set by the legal, financial and business framework.
In essence, corporate governance is the system by which companies are
directed and controlled. Board of directors are responsible for the governance of
their enterprises. -Corporate Governance: A Multi-faced Issue; The Chartered
Secretary, May97.
2.2 Role of Board of directors
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2.2.1 Law Related Expectations
The Indian Companies Act does not define the Board of Directors (BoDs). Even
Director is simply defined as it includes any person occupying the position of
Director, by whatever name called [sec.2 (13)]. With the help of this open
definition of Director, we may infer that a Board of Directors is a group of
individuals each of whom is labeled as Director (or by any other title with identical
substantive intention). No person is to hold more than 20 directorships.
Section 269 says that, the commencement of the Companies (Amendment)
Act, 1988, certain specified public companies or private companies which are
subsidiaries of public companies, shall have a Managing or Wholetime Director, a
Manager, and each such appointment must be made with prior approval of the
central Government.
What is a BoDs suppose to do? This again we can know inferentially by
referring to a definition of Manager and Managing Director in section 2 of the
Act, and also Sections 291-93. Both these incumbents have to exercise their
powers of managements subject to the superintendence, control and direction of
the Board. Thus, the BoDs, in broad terms, is expected to perform the role of
overseeing the running of the enterprise by its chief executive.
On whose behalf does the BoDs perform this role of overseeing? It is
expected to do this on behalf of the shareholder. It is they who elect the directors
on the board. And it is the BoDs, which, in turn, selects the Chief Executive.
The directors individually have no powers in the eyes of law. It is only the
collective body of directors, i.e., the board, which has a superior total power over
the Chief Executive. The intent of the Indian Companies Act appears to include
only outside non-employee directors on the board. Otherwise, if internal
Wholetime Executive, say the MD were to be the directors on the board, how
could they exercise superintendence, control and direction over themselves?
Section 291 stipulates that the BoDs shall be entitled to exercise all such
powers, and to do all such acts and things as the company authorizes to exercise
and do, except those things which can be done in a general meeting of the
company. The powers exclusive to the BoDs (sec. 292) are:
To make calls on shareholders in respect of money unpaid on their shares
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To issue debentures
To borrow money otherwise than through debentures
To invest the funds of the company
To make loans
Correspondingly, section 293 restricts the powers of the BoDs, by making them
subject to the consent of general meeting of the company, in respect of selling,
leasing or disposing of the property of the company; remitting debt due by the
director; borrowing money to an extent which exceeds the net worth of the
company etc.
The Board of Directors is expected to meet once in a quarter and the
quorum for a valid meeting of the board is one third of the total strength or two
directors, which is higher. The power to declare dividends is exclusive to the
BoDs.
Section322 of the companies Act allows memorandum of association of
a limited company to provide for a director or directors with unlimited liability.
2.2.2 Managerially Derived Expectations
The dimension relating to the managerially derived expectations of the Board of
Directors role seems to be of relatively recent origin. In more than two decades or
so, industrial development had been marked by far-reaching technological
changes, leading to equally fundamental competitive reorientation at the global
level. As a result, many erstwhile great names in the industry have been humbled.
With such rapidly mounting changes and uncertainties, the role of BoDs has
begun to be viewed from much wider and long term perspective beyond the
minimum requirements of the law. Probably, upto 1970s, the duty of BoDs to
superintend, control and direct had gone by defaults. Stable environment had
helped this key role to remain dormant. What is then the renewed ramifications of
this role at present? These are meant to ensure that.
The enterprise continues to remain effective on the standpoint of
technology parameter.
The enterprise continues to achieve healthy market growth in competitive
conditions.
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Divestments and diversification take place on sound lines.
Long-term productivity and quality are never sacrificed at the alter of short
term profitability
Judicious earnings retention policy is adopted for financing growth,
modernization, etc.
Serious and sustained attention is adopted towards building a sound
system of human values and exalted corporate culture.
It is a common observation that BoDs function rather passively. Often the
members are selected not because of their knowledge and competence but
because of their compatibility, prestige or esteem in the community. Usually, the
Chief Executive Officer or the group of promoters has free reign in choosing the
directors and in having them elected by the shareholder. The directors thus
selected often feels that they should go along with any proposal made by the CEO
and his group. Interestingly, the board members find themselves accountable to
the very management they are expected to oversee.
Over the recent past, however, lending institutions, financial media and
corporate analysts have seriously questioned the role of BoDs. The investors and
government in general are better aware of the role of the BoDs. Though the
Companies Act throws some light on the powers of the BoDs and the restrictions
placed on those powers, it does not specify to whom they are responsible and
what for. However, there is a broad agreement that BoDs appointed or elected by
the shareholders are expected to:
Oversee the management of the companys assets
Establish or approve the companys mission, objective, strategy and
policies
Review management actions and financial performance of the company
Hire and fire the principal executive and operating officers of the company
An important issue in this context is: should BoDs merely direct or may
they manage also? Many experts and practicing top managers say that BoDs
should only oversee and direct, and never get involved with the detailed
management. There are others who feel that, for direction to be realistic and
sensible, some in-depth involvement with details is necessary. The majority view,
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however, is in favour of directors directing the affairs of the company and not
managing them.
2.3 RESPONSIBILITIES OF BODs
The board is expected to act with due care. That is, they must act with that
degree of diligence, care, and skill which ordinarily prudent men would exercise
under similar circumstances in like positions. If a director or the Board as a whole
fails to act with due care and, as a result, the company in some way, is harmed,
the careless director or directors may be held personally liable for the harm done.
Further, they may be held personally responsible not only for their own actions but
also for the actions of the company as a whole.
In addition, directors must make certain that the company is managed in
accordance with the laws and regulations of the land. They must also be aware of
the needs and demands of the constituent groups so that they can bring about a
judicious balance between the interest of these diverse groups, while ensuring at
the same time that the company continues to function.
2.4 STRATEGIC MANAGEMENT: ROLE OF THE BOARD
According to Bacon and Brown, BoDs, in terms of strategic management, have
three basic tasks.
To initiate and determine: A board can delineate an organisations
mission and specify strategic options to its management.
To evaluate and influence: A board can examine management proposals,
decisions and actions; agree or disagree with them; give advice and offer
suggestions; develop alternatives.
To monitor: By acting through its committees, a board can keep abreast of
developments, both inside and outside the organization. It can thus bring
new developments to the attention of the management, which it might have
overlooked.
While the BoDs are not expected to involve itself in day-to-day operating
decisions, they are nonetheless expected to consider and give their views on all
such matters that have long-term connotations. In fact, such matters by
convention are referred to the board. These relate to issues such as introduction
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of new product, new technology, collaboration agreements, senior management
appointments and major decisions regarding industrial relations.
The directing function of the board has internal and external components.
Internal components relates to various actions taken by the executives and their
implications for the organization, including R&D, capital budgeting, new projects,
new competitive thrust, relationship with financial institutions and banks, foreign
collaborators, major customers and suppliers. External component relates to
identifying broad emerging opportunities and threats in the environment and
feeding them to the management so that strategic mismatch do not occur. The
board should see that the organization always remains in alignment with the
social, economic and political milieu.
2.5 BOARD COMMITTEES
The provision of section 292 of the Companies Act provides for delegation of
powers by the BoD to the Committee of Directors of the powers regarding (a)
borrowing money for the company otherwise than for debentures, (b) investing the
funds of the company, and (c) making loans by the company.
In practice, however, Boards do appoint specific committees for in-depth
exploration of certain matters e.g., diversification project, shutting down a plant.
These committees work for a specified period and submit their views to the full
board. There are standing committees, which meet in the interval between the
board meetings, and are expected to devote greater attention to details in
important matters arising from those functions. It is the outside directors who
officially comprise such committees. Some important committees usually set up
by the board, comprising outside directors are as follows:
Audit committee: It consists of independent directors who report to the
board. Usually the committee acts as a link between the board and the
external auditors. They look into the issues raised by the external auditors
in greater details. Some of the functions of the audit committee are:
To review the interim and final accounts in Toto.
To solve any problem they come across while completing the audit with
due consultation with the independent auditor.
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To make recommendations regarding the audit fees, selection and
replacement of the auditors.
Remuneration committee: This committee reviews the remuneration
packages of the executive directors and other top-level managers. It
consists of independent directors and drafts the remuneration policy of the
company, which checks the unreasonable increase in the executive
compensations.
Nomination Committee: Nomination committee is usually set up to select
new non-executive directors. The chairman of the board heads the
committee.
2.6 THE ROLE OF A CHAIRMAN
The role of the Chairman is to manage the board and ensure that its policies are
put into practice by the management. He must have a good knowledge of
companys financial position and closely monitor its performance. The chairman
has to work closely with the company secretary to address legal issues.
With the knowledge of the way in which the company is managed and its
financial standings, the chairman has to play a proactive role. He should be in a
position to identify the short comings and see that the board discusses these. By
being proactive the chairman can help the CEO take corrective action before
things get out of hand. Since the chairman leads the board, its for him to maintain
good relation between the board and the companys shareholders. In the process
of maintaining such relationship he ensures that the board makes decision in
accordance with the interest of the shareholder and all other stakeholders of the
company. Primarily the chairman has to cater to the internal needs of the board
and its conduct. He also should maintain good relation with the CEO and
executive and non-executive directors.
2.7 FUNCTIONS OF THE CHAIRMAN
Some of the other important functions of the chairman include:
To act as a representative of the company
To ensure that policies and practices are in place
To see to it that directors make good decision
To act firmly in times of crisis
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To upgrade the competence of director so as to meet the current and future
needs of the company.
2.8 THE ROLE OF CEO
The role of a CEO is to achieve the organizational objective, by efficiently running
the organization. He also needs to maintain close working relation with chairman
and the directors. His relation with the chairman requires a high degree of trust,
respect and an ability to communicate openly. On the other hand he should
maintain cordial relationship with the executive directors to ensure that they act in
the interest of the whole organization. He needs to motivate the directors in
improving the performance of the organization.
2.9 FUNCTIONS OF THE CEO
Apart for the above roles, a CEO should;
Present the company to major investors, media and the government
Provide leadership and direction to all executive directors
Assist the executive directors in formulating strategies proposals that have
to be endorsed by the board.
Be a source of inspiration , leadership and direction to all the employees,
customers and suppliers
Take firm decision when situation demands.
2.10 NON-EXECUTIVE DIRECTORS
These are the directors, who do not hold an executive position in the organization.
They are also known as outside directors. These directors play a very important
role in the governance of the company. As these directors do not have any other
(than remuneration) material pecuniary relation or transaction with the company,
its promoters, its management or its subsidiary, they will have unbiased judgment
on the workings of the board and the company.
2.11 CREATING AN EFFECTIVE BOARD
The function of a board is very comprehensive. In practice, it could be said that
the board is responsible for laying down matters of principle and of accounting,
statistical and management procedures. It is also responsible for the decision of
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what product to make, which market to penetrate, determination of manufacturing
capacity, investment decision, cash flow, liquidity etc. In summary, the directors
are responsible for ensuring that the top management functions effectively and
that through the information system, proper reports are generated and information
is made available for both control and planning purposes.
Ideally, the board of directors should be the heart and soul of a company.
Whether a company grows or declines depends very much upon the sense of
purpose and direction, the values, the will to generate customer satisfaction, and
the desire to achieve, develop and learn, that emanates from the board and the
extent to which it is visibly committed to them.
The efficient board should be the one which is willing to identify, discuss
and tackle barriers to its own contribution. The board can be constrained or
enhanced by the limitations or strengths of its individual members.
While effectiveness may be influenced by a number of factors, the following
provide a model checklist:
Do the board members share a common, clear and compelling vision? Are
they committed to an agreed and realistic strategy to the achievement of
the vision?
Have the necessary resources, processes, role, competencies, enabling
technology and learning capabilities for successful implementation been
assembled?
Whether special responsibilities for projects that stretch beyond a financial
year, such as strategic business developments, entrusted to select
directors?
When the company expands into a international network, whether the
governance needs of the new style entity are given a fresh look?
When the role of chairman and the CEO are separated, whether there is
mutual trust and respect to supplement and complement each others
responsibilities and contributions?
3.1 CODE AND LAWS FOR CORPORATE GOVERNANCE
For any concept or idea to form a part of our existence or business needs to be
put in papers in distinct terms, so that they are understood and followed by all in a
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similar fashion. These are called rules or codes of conduct. These are principles
and standards that are intended to control, guide or manage behaviour or the
conduct of individuals. However, codes are self-imposed and regulations are
imposed by the states.
There are many corporate governance codes developed by non-governmental
organizations, stock exchanges, investor groups and professional associations.

3.2 REPORTS OF COMMITTEES ON CORPORATE GOVERNANCE
In recent years, governments and corporates have made sincere efforts in
designing and implementing codes for good corporate governance. Some of the
reports on corporate governance published abroad and in India are:
Cadbury Committee Report
CII Committee Report
Kumara Mangalam Birla Report
Narayana Murthy Committee Report
In our context we shall be discussing the KM Birla Report.

3.3 KUMARA MANGALAM BIRLA COMMITTEE REPORT
Over the years some Indian companies have voluntarily established high
standards of corporate governance, but there are many more, whose practices
are a matter of concern. There is also an increasing concern about standards of
financial reporting and accountability, especially after losses suffered by investors
and lenders in the recent past, which could have been avoided, with better and
more transparent reporting practices. Investors have suffered on account of
unscrupulous management of the companies, which have raised capital from the
market at high valuations and have performed much worse than the reported
figures leave alone the financial projections at the time of raising money. Another
example of bad governance has been the allotment of promoters shares, on
preferential basis at preferential prices, disproportionate to market valuation of
shares, leading to further dilution of wealth of minority shareholders. This practice
however was later contained.
There are also many companies, which are not paying adequate attention
to the basic procedures for shareholders service; for example, many of these
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companies do not pay adequate attention to redress investors grievances such
as delay in transfer of shares, delay in dispatch of share certificates and dividend
warrants and non-receipt of dividend warrants. SEBI has been daily receiving
large number of investor complaints on these matters. While enough laws exist to
take care of many of these investor grievances, the implementation and
inadequacy of penal provisions.
In the above-mentioned context, the Committee on Corporate Governance
was set up on May 7,1999, by the Securities and Exchange Board of India (SEBI)
under the Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to
promote and raise the standards of corporate governance. The purpose of the
committee was;
1. To suggest suitable amendments to the listing agreement executed by the
stock exchanges with the companies and any other measures to improve the
standards of corporate governance in the listed companies, in areas such as
continuous disclosure of material information, both financial and non-financial,
manner and frequency of such disclosures, responsibilities of independent and
outside directors;
2. To draft a code of corporate best practices; and
3. To suggest safeguards to be instituted within the companies to deal with
insider information and insider trading.

Major recommendations of the committee are as follows.
The board should have an optimum combination of executive and non-
executive directors and at least 50% of the board should comprise of non-
executive directors.
No director should be a member in more than 10 committees or act as
chairman of more than five committees in which he is a Director.
The board of the company should set up a qualified and independent Audit
Committee.
Board should set up a remuneration committee to determine the
remuneration packages for the executives.
The corporate governance section of the Annual Report should make
disclosures on remuneration paid to directors in all forms including salary,
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benefits, bonuses, stock options, pensions and other fixed as well as
performance linked incentives .
Management should assist the board in its decision-making process in
respect of companys strategy, policy, code of conduct and performance
targets.
The management should implement the policies and code of conduct of the
board
It should provide timely, accurate, substantive and material information,
including financial matters and exceptions to the board, board committees
and the shareholders.
As a part of the disclosure related to management, in addition to the
Directors report, Management Discussion and Analysis Report should form
part of the Annual Report to the shareholder.
The committees also took note of various steps taken by SEBI for
strengthening corporate governance, some of which are:
Stringent disclosure norms for Initial Public Offers
Providing information in directors reports for utilization of funds and
variation between projected and actual use of funds as per the
requirements of the Companies Act,

Declaration of quarterly results
Mandatory appointment of compliance office for monitoring share transfer
process
Timely disclosure of material and price sensitive information having a
bearing on the performance of the company
Dispatching one copy of complete balance sheet to every household and
abridged balance sheet to all shareholders
Issue of guidelines for preferential allotment at market related process
Issue of regulations providing for a fair and transparent framework for
takeovers and substantial acquisitions.
The recommendations made by Shri Kumar Mangalam Birla Committee were
accepted by SEBI in December 1999, and are now enshrined in Clause 49 of the
Listing Agreement of every Indian stock exchange.
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3.4 RECENT DEVELOPMENTS IN OTHER MARKETS
Implementation of Sabarnes-Oxley Act, 2002 in the U.S. A. In response to the
public outcry against the recent corporate scandals like, Enron, World Com, etc.,
a new legislation viz., the Sarbanes-Oxley Act has been enacted on July30, 2003
in the U.S.A. in order to protect investors by improving the accuracy and reliability
of corporate disclosures made pursuant to the securities laws. The legislation
initiated major reforms in the following areas.
1. Public Company Accounting Oversight Board
2. Auditors independence
3. Conflict of interest
4. Corporate responsibility
5. Enhanced financial disclosures
6. Analyst conflict of interest
7. Corporate and criminal fraud accountability
8. White-collar crime penalty enhancements
9. Corporate fraud and accountability
10. Studies and reports
European Union
The European Commission recently completed a study of 43 different corporate
governance codes and proposed to merge all of them to create a single,
consistent code.
Germany
The German government had announced details of comprehensive new voluntary
guidelines to improve their corporate governance practices. The code aims at
strengthening the rules concerning auditor and supervisory board independence,
gives shareholders a limited role in takeovers, recommends that companies
disclose board remuneration individually, and requires a company to disclose
whether or not they comply with the code.
Ireland
Irish Association of Investment managers revealed a high level of compliance
amongst Irish corporates with the Combined Code on governance implemented
by LSE. 97% of firms allow shareholders to vote on re-election of directors every
19

three years. 85% and 79% of them have remuneration and audit committees
respectively comprised fully of non-executive directors. 79% of them have
separate role for the chairman and the chief executive officer.
Asian and Latin American markets
S&P carried out a survey of 350 Asian and Latin American companies on 10
points based on 98 information attributes grouped into 3 categories: financial
transparency and information is closures; investors relation, and ownership
structure; and board and management structure and practices. 19 out of 43 Indian
companies managed to get score of 4; Infosys scores 7.
Kenya
Kenyas Capital Market Authority has introduced new guidelines to improve
corporate governance practices. The guidelines include: appointment of
independent directors, constitution of nomination committee, the role of CEO and
Chairman to be separated; limiting the term of director on the board subject to
shareholders approval and frequent appraisal of the board.
Thailand
Stock exchange of Thailand is set to introduce a new committee to strengthen
corporate governance and make best corporate practice a national priority. Of the
580000 companies, nearly half do not report balances-sheet and a quarter of
them do not pay even taxes. Thailands SEC has drafted a framework for
corporate governance ratings aimed at protecting shareholders rights, the quality
of directors and the efficiency of internal controls. The Thai SEC will offer highly
rated firms bunch of incentives, including a fast-track review of their corporate
filings to issue new shares.
Russia
Russias Federal Commission for Securities Markets introduced new code of
corporate governance which includes a number of tax incentives and investor
friendly regulations.
Hong Kong
20

Hong Kongs SFC proposed a rule that executives who intentionally or recklessly,
provide false or misleading information in public disclosures, shall face up to two
years in prison and a HKD 1 million fine.
Philippines
Philippines SEC has requested that all listed firms establish an evaluation system
to track performance of their boards and executive management. The recently
approved code of corporate governance recommends that all public entities and
fund raising entities shall
adopt the same. Philippines SEC is likely to extend new corporate governance
code to require even non-listed firms to place at least one independent director on
the board.

4.1 CONCLUSIONS
1. Corporate Governance as a culture: Good corporate governance is good
business because it inspires investors confidence, which is very essential
to attract capital. A few unscrupulous businessmen can, largely undo all the
confidence built through the good work by the good companies over time.
They need to be handled with iron hands. However, corporate governance
goes beyond the realm of law. It comes from the culture, mindset of
management and cannot be regulated by legislation. The watchwords are
openness, integrity and accountability.
Companies need not be myopic with short-term goals, caring only
about quarterly results or immediate stock prices in the bourses, or that
cherished P/E ratio. Good governance maximizes long-term shareholder
value, which in turn takes care of short-term goals too.
2. Corporate Governance and Tope Management: A group of outstanding
individuals do not necessarily make an effective board. Directional
competence and contribution depends upon the interaction of a particular
combination of people and personalities in the boardroom. This sense of
direction and purpose of the board will lead to good governance and that
will determine the growth of the enterprise.
3. Code and Legislations: It would have been very clear by now as to the
importance that has been laid in good corporate governance. Government,
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corporates and the civic societies have been doing their bit to improve upon
the existing level of governance. Corporate governance goes beyond the
realms of law. It comes from the culture, ethos and the mindset of
management. However due emphasis must be given to the role of
legislation also. Need of the hour is to build an atmosphere of mutual trust,
responsibility and accountability that makes the governing team
enthusiastic and makes them aspire for excellence. Procedural refinements
and innovation are no substitute for good men, while good men are never
short of capacity to innovate. Thus, it is men more than measures that
make good corporate governance for that matter the governance give its
true result.

REFERENCE
1. Rao, P. S., Business Policy and Strategic Management (Text and Cases),
Himalayan Publishing House, p 489-500
2. Cherunilam. F, Strategic Management, Himalayan Publishing House
3. MS 91 Advanced Strategic Management, Block 02 Corporate Governance,
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