9 Eijmms May12 Vol2 Issue5

EXCEL International Journal of Multidisciplinary Management Studies
Vol.2 Issue 5, May 2012, ISSN 2249 8834

Online available at http://zenithresearch.org.in/
CORPORATE GOVERNANCE IN INDIA:

EVOLUTION AND CHALLENGES
DR. ANSHUL SHARMA*; MS. POOJA GUPTA**
*Assistant Professor,
S.D.College of Management,
Israna, Panipat.
**Lecturer,
S.D.College of Management,
Israna, Panipat, Haryana.
ABSTRACT
INTRODUCTION
Corporate Governance in its most simplified iteration refers to the manner in which corporate
bodies are managed and operated. Until the latter part of the 1900s the expression good
corporate governance was invariably used to describe how well a business was directed and
managed from the perspective of its controllers or managers. This was no doubt a truism in the
context of privately owned companies in which the operators and shareholders were usually one
and the same persons and there was no conflict between the persons managing or controlling the
company and the ultimate beneficiaries. However the same could not be said in respect of
publicly owned enterprises in which the managers and controllers are not the sole beneficiaries
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KEYWORDS: Corporate Governance, Compliance, Government Policy, Natural Law Ethics,

Regulation and Virtue Ethics.
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www.zenithresearch.org.in
Good governance means that processes and institutions produce results that meet the needs of
society while making the best use of resources at their disposal. Good corporate governance
(GCG) is a mandatory requirement in todays corporate world by every stakeholder groups.
Failure of giant corporate groups in last two-three decade strengthens the demand further. And
surprisingly, in some of such failures, accounting as a discipline is held liable. The way
accounting is practiced or the interpretations that may give different prescriptions in similar
situations are some dark areas that may open some scope for the corrupted accountants. Still, the
author believes that such claim against accounting is undue and unfounded. The paper is an
earnest effort to uncover the issue and to protect it from such unfounded critics. It covers the
concept of corporate governance, its legal framework, its current status and how accounting may
be practiced to protect corporate from corruption by establishing governance. This study
describes the Indian corporate governance system and examines how the system has both
supported and held back Indias ascent to the top ranks of the worlds economies. While on
paper the countrys legal system provides some of the best investor protection in the world,
enforcement is a major problem with slow, over-burdened courts and significant corruption. It
finds that better corporate frameworks benefit firms through greater access to financing, lower
cost of capital, better firm performance, and more favourable treatment of all stakeholders

of the enterprise. In such circumstances situations do arise wherein the objectives of the
controllers or managers of the enterprise and the shareholders as a whole regarding the manner in
which a company is directed and managed does not necessarily coincide.
This impasse invariably gives rise to tensions between the controllers/managers and
shareholders, which can sometimes have disastrous consequences not only for the company itself
but also the commercial and economic environment the company, operate in. These tensions are
sometimes aggravated through the lack of transparency and communication between the parties.
In this background good corporate governance in modern terminology has been often described
as the mechanism of addressing and easing the tensions which arise between the controllers or
managers and other stakeholders of a company. The expression stakeholders being an indication
of the development that has been witnessed in corporate cultures wherein a corporate citizen is
deemed to owe obligations not only to its owners but to its employees, creditors and in some
instances generally to society at large.
Corporate governance in the context of a modern corporation has become synonymous with the
practices and processes used to direct and manage the affairs of a corporate body with the object
of balancing the attainment of corporate objectives with the alignment of corporate behaviour to
the expectations of society and accountability to shareholders and other stakeholders.
Corporate governance encapsulates The management of the relationships between a corporate bodys management, its board, its
shareholders and other stakeholders.
The provision of the structure through which the objectives of the company are identified and
the monitoring of the means used to attain these objectives including the monitoring of
performance in this regard.
Bringing more transparency to bear on the decision-making processes of the company.
The management of risk and the minimisation of the effects of commercial misadventure.
Corporate governance covers a large number of distinct concepts and phenomenon as we can see
from the definition adopted by Organization for Economic Cooperation and Development
(OECD) Corporate governance is the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as, the board, managers,
shareholders and other stakeholders and spells out the rules and procedures for making decisions
in corporate affairs. By doing this, it also provides the structure through which the company
objectives are set and the means of attaining those objectives and monitoring performance.
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Encouraging the use of resources in a more efficient manner.
The provision of proper incentives for the board and management to pursue objectives that is in
the interests of the corporate body and shareholders.

GOVERNANCE STYLES LINKED TO EVOLVING PERFORMANCE PRIORITIES

Formation Phase
(Sales Growth)
Investment Phase
(Valuation)
Production Phase
(Profitability)
Harvest Phase
(Distribution)
Rationalization
Growt
h
Performance
Revenues
Expense
s
Sovereign Board
Time
Influenced Board
Trusted Board
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Controlled Board

The concept of "governance" is not new. It is as old as human civilization. Simply put
"governance" means: the process of decision-making and the process by which decisions are
implemented (or not implemented). Governance can be used in several contexts such as
corporate governance, international governance, national governance and local governance.
Since governance is the process of decision-making and the process by which decisions are
implemented, an analysis of governance focuses on the formal and informal actors involved in
decision-making and implementing the decisions made and the formal and informal structures
that have been set in place to arrive at and implement the decision. Government is one of the
actors in governance. Other actors involved in governance vary depending on the level of
government that is under discussion. In rural areas, for example, other actors may include
influential land lords, associations of peasant farmers, cooperatives, NGOs, research institutes,
religious leaders, finance institutions political parties, the military etc. The situation in urban
areas is much more complex.
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Recently the terms "governance" and "good governance" are being increasingly used in
development literature. Bad governance is being increasingly regarded as one of the root causes
of all evil within our societies. Major donors and international financial institutions are
increasingly basing their aid and loans on the condition that reforms that ensure "good
governance" are undertaken. It is participatory, consensus oriented, accountable, transparent,
responsive, effective and efficient, equitable and inclusive and follows the rule of law. It assures
that corruption is minimized, the views of minorities are taken into account and that the voices of
the most vulnerable in society are heard in decision-making. It is also responsive to the present
and future needs of society.

CHARACTERISTICS OF GOOD GOVERNANCE

PARTICIPATION
Participation by both men and women is a key cornerstone of good governance.
Participation could be either direct or through legitimate intermediate institutions or
representatives. It is important to point out that representative democracy does not
necessarily mean that the concerns of the most vulnerable in society would be taken into
consideration in decision making.
RULE OF LAW
Good governance requires fair legal frameworks that are enforced impartially. It also
requires full protection of human rights, particularly those of minorities. Impartial
enforcement of laws requires an independent judiciary and an impartial and incorruptible
police force.
TRANSPARENCY
Transparency means that decisions taken and their enforcement are done in a manner that
follows rules and regulations. It also means that information is freely available and
directly accessible to those who will be affected by such decisions and their enforcement.
It also means that enough information is provided and that it is provided in easily
understandable forms and media.
RESPONSIVENESS
Good governance requires that institutions and processes try to serve all stakeholders
within a reasonable timeframe.
EQUITY AND INCLUSIVENESS

A societys well being depends on ensuring that all its members feel that they have a
stake in it and do not feel excluded from the mainstream of society. This requires all
groups, but particularly the most vulnerable, have opportunities to improve or maintain
their well being.
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There are several actors and as many view points in a given society. Good governance
requires mediation of the different interests in society to reach a broad consensus in
society on what is in the best interest of the whole community and how this can be
achieved.
CONSENSUS oriented

EFFECTIVENESS AND EFFICIENCY

The concept of efficiency in the context of good governance also covers the sustainable
use of natural resources and the protection of the environment.
ACCOUNTABILITY
Accountability is a key requirement of good governance. Not only governmental
institutions but also the private sector and civil society organizations must be accountable
to the public and to their institutional stakeholders.
THE IMPORTANCE OF CORPORATE GOVERNANCE
The subject of corporate governance commenced attracting attention at national level in more
developed markets in the late 1900s. This was in the wake of some spectacular business
collapses, which appeared to be largely attributable to the lack of proper corporate governance.
The above coupled with the globalisation of economies and financial and investment markets in
the 1990s lead to the convergence of national initiatives on the subject. This development was
accelerated with the onset of the Asian crisis in mid 1997 after which the subject attracted
significant attention internationally especially in the context of emerging markets. Whilst the
causes of the crisis are still the subject of contention and debate there is an overall consensus that
the lack of proper corporate governance in companies operating in the affected economies
contributed significantly to the onset and spread of the contagion.
In this background a concerted international effort was initiated to improve the levels of
corporate governance especially in emerging market economies. This initiative was no doubt
spurred on amongst other factors by the recognition that the degree to which corporations
observe basic principles of good corporate governance will be an increasingly important factor
for investment decisions in the future.
The principles advocated in these codes are essentially non-binding and embody the experience
and views of member countries of these organisations on the subject. While a multiplicity of
factors affect the governance and decision-making processes of firms, and are important to their
long-term success, the principles focus primarily on governance problems that result from the
separation of ownership and control.
The principles of corporate governance cover the following areas:
1. The rights of shareholders;
2. The equitable treatment of shareholders;
3. The role of stakeholders;
THE PRINCIPLES OF CORPORATE GOVERNANCE
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4. Disclosure and transparency;

5. The responsibilities of the board.

COLLECTIVE RESPONSIBILITY TO MONITOR CORPORATE GOVERNANCE
The Commission envisages the ensuring of proper corporate governance practices as a collective
responsibility cast upon all persons involved in the operations of a corporate body.
For instance controlling shareholders, who may be individuals, family holdings, bloc alliances,
or other corporations acting through a holding company or cross shareholdings, can significantly
influence corporate behaviour. In the same vein institutional investors are in a position to
demand acceptable standards of corporate governance in the companies they invest in.
Individual shareholders usually do not seek to exercise governance rights but can be concerned
about obtaining fair treatment from controlling shareholders and management. Creditors too can
play an important role in governance and have the potential to serve as external monitors over
corporate performance. Employees and other stakeholders play an important role in contributing
to the long-term success and performance of the corporation, while governments establish the
overall institutional and legal framework for corporate governance.
Consequently all these persons in a position to influence a corporate body should endeavour to
encourage compliance with corporate governance practices. In this context there are three
important groupings of persons whose co-operation the Commission considers integral to
achieving acceptable corporate governance practices. They are the directors and managers of a
corporate body and its shareholders and other stakeholders and auditors.
THE BOARD OF DIRECTORS
Investors in equity have certain property rights over which they must have control and which
should be protected. However a corporation cannot be managed practically on a day to day basis
by shareholder referendum. In the light of these realities the responsibility for corporate strategy
and operations is placed in the hands of the board of directors of the corporation and a
management team that is selected, motivated and, when necessary, replaced by the board.
Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets
and business plans; setting performance objectives; monitoring implementation and corporate
performance; and overseeing major capital expenditures, acquisitions and divestitures.
Selecting, compensating, monitoring and, when necessary, replacing key executives and
overseeing succession planning.
Reviewing key executive and board remuneration, and ensuring a formal and transparent board
nomination process.
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The board is required to fulfil certain key functions, including:
In the above context the implementation of good corporate governance hinges on the competence
and integrity of the board of the body corporate.

Monitoring and managing potential conflicts of interest that may arise amongst management
board members and shareholders.
Curtailing the misuse of corporate assets and abuse in related party transactions.
Ensuring the integrity of the corporations accounting and financial reporting systems.
Ensuring the credibility of the independent audit and the existence of appropriate internal
control systems.
Ensuring the monitoring and management of risk
Ensuring compliance with the law.
Monitoring the effectiveness of the governance practices under which the body corporate
operates and making changes as needed.
Overseeing the process of disclosure and communications.
INDEPENDENCE FROM MANAGEMENT
In order for boards to effectively fulfil their responsibilities they must have some degree of
independence from management. Board independence usually requires that a sufficient number
of board members should not be employed by the company or be closely related to the company
or its management through significant economic, family or other ties. It does not mean though
that shareholders are discouraged from being board members. However it does imply that a
balance must be maintained between controlling shareholders and managers and other persons
with ownership or proprietary interests in the company.
The chairman as the head of the board can play a central role in ensuring the effective
governance of the corporate body and functioning of the board. The separation of the roles of the
chairman and the chief executive is advocated as a mechanism of ensuring an appropriate
balance of power, increasing accountability and enhancing the capacity of the board for
independent decision making.
GENERAL RESPONSIBILITIES OF DIRECTORS
Directors should devote sufficient time to their responsibilities. Service on too many boards can
interfere with the performance of board members. Companies must consider whether excessive
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THE ROLE OF THE CHAIRMAN
Independent or non-executive board members can contribute significantly to the decision-making

processes of the board by bringing an objective view to bear on the evaluation of the
performance of the board and management in particular. In addition, they can play an important
role in areas where the interests of management and shareholders may diverge such as executive
remuneration, succession planning, changes of corporate control and the audit function.

board service interferes with board performance and this should be a fact taken into account at
the time of nomination.
Specific limitations on the size of the board of a corporate body are not advocated. However it is
necessary to emphasise the need to ensure that members of the board enjoy legitimacy and
confidence in the eyes of shareholders as regards their commitment to discharge the functions
and obligations imposed on them.
SHAREHOLDERS AND STAKEHOLDERS
Shareholders must have the right to influence the corporate body on certain fundamental issues,
such as:
The election of board members;
Changes in capital;
Amendments to the regulations of the company;
Approval of extraordinary transactions; and
Other issues as specified in corporate law and the regulations of the corporate body.
Additional rights accruing to shareholders include the approval or election of auditors and the
approval of the distributions of profits.
AUDITORS
Financial and annual reports are increasingly becoming the most extensively used methods for
the conveyance and dissemination of corporate information to shareholder and investors. These
reports are a medium for disclosing not only the financial status of a company and its
performance but also information pertaining to ownership, governance, and business ethics and
in some instances the environment and other public policy commitments.
Commonly accepted principles of corporate governance include:

RIGHTS AND EQUITABLE TREATMENT OF SHAREHOLDERS: Organizations
should respect the rights of shareholders and help shareholders to exercise those rights.
They can help shareholders exercise their rights by effectively communicating
information that is understandable and accessible and encouraging shareholders to
participate in general meetings.
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Key elements of good corporate governance principles include honesty, trust and integrity,
openness, performance orientation, responsibility and accountability, mutual respect, and
commitment to the organization.
PRINCIPLES

INTERESTS OF OTHER STAKEHOLDERS: Organizations should recognize that

they have legal and other obligations to all legitimate stakeholders.
ROLE AND RESPONSIBILITIES OF THE BOARD: The board needs a range of
skills and understanding to be able to deal with various business issues and have the
ability to review and challenge management performance.
INTEGRITY AND ETHICAL BEHAVIOUR: Ethical and responsible decision
making is not only important for public relations, but it is also a necessary element in risk
management and avoiding lawsuits. Organizations should develop a code of conduct for
their directors and executives that promotes ethical and responsible decision making.
DISCLOSURE AND TRANSPARENCY: Organizations should clarify and make
publicly known the roles and responsibilities of board and management to provide
shareholders with a level of accountability. They should also implement procedures to
independently verify and safeguard the integrity of the company's financial reporting.
ISSUES INVOLVING CORPORATE GOVERNANCE PRINCIPLES INCLUDE
internal controls and internal auditors
the independence of the entity's external auditors and the quality of their audits
oversight and management of risk
oversight of the preparation of the entity's financial statements
review of the compensation arrangements for the chief executive officer and other senior
executives
the resources made available to directors in carrying out their duties
the way in which individuals are nominated for positions on the board
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 judgements of larger professional investors.
Supply of accounting information: Financial accounts form a crucial link in enabling
providers of finance to monitor directors. Imperfections in the financial reporting process
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Demand for information: In order to influence the directors, the shareholders must
combine with others to form a significant voting group which can pose a real threat of
carrying resolutions or appointing directors at a general meeting.
SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE

will cause imperfections in the effectiveness of corporate governance. This should,

ideally, be corrected by the working of the external auditing process.
INTERNAL CORPORATE GOVERNANCE CONTROLS
Internal corporate governance controls monitor activities and then take corrective action to
accomplish organizational 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.
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
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.
REMUNERATION: Performance-based remuneration is designed to relate some
proportion of salary to individual performance. Such incentive schemes, however, are
reactive in the sense that they provide no mechanism for preventing mistakes or
opportunistic behaviour, and can elicit myopic behaviour.
EXTERNAL CORPORATE GOVERNANCE CONTROLS
competition
debt covenants
demand for and assessment of performance information (especially financial statements)
government regulations
managerial labour market
External corporate governance controls encompass the controls external stakeholders exercise
over the organization. Examples include:
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media pressure

takeovers
CORPORATE GOVERNANCE INITIATIVES IN INDIA
Soon after independence, India, like most underdeveloped economies, was caught in a lowincome-level trap, which occurred at low levels of physical capital, both productive and
infrastructural, and was maintained by low levels of accumulation and by Malthusian population
growth. That implied a powerful case for government activism as a way of breaking out of the
trap. Accordingly, the Government of India adopted a model of economic development that
could be best described as mixed economy. The state operated from the commanding heights
and aimed at the highest level of socio-economic good for the largest number (Dewan, 2004a).
This development paradigm, a big push of sorts, accorded a strategic position to the public
sector in the economy. It was in line with the first Industrial Policy Resolution of 1956 which
sought to achieve a self-reliant economic and social growth. The private sector was also
encouraged to prosper, but played second fiddle to the public sector.
It was the policy of mixed economy that initiated the creation of large number of SOEs. The
policy was to address the aspiration of a new nation towards quick industrialization. The basic
argument has been that Indian industrialization has to be anchored on the core sectors that were
highly capital intensive with long gestation periods.
Realizing that good governance plays a crucial role in developing an efficient economy, the
Indian government embarked on a course that put emphasis on corporate behavior. A 2004 study
of the World Bank recognized this effort and acknowledged a marked improvement in corporate
governance in India (Economic Times, 16 May 2005). Several major corporate governance
initiatives have been launched in India since the mid-nineties. The first was by the Confederation
of Indian Industries (CII), Indias largest industry and business association, which came up with
the first voluntary Code of Corporate Governance in 1998. The confederation was driven by the
conviction that good corporate governance was essential for Indian companies to access
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The average growth rate during the five-year period 1997-02 was only 5.4 percent as against the
targeted 6.5 percent (Nair, 2003). However, economic growth rate picked up later, to more than 8
percent during the years 2004-05 and was expected to slow down to around 6.5 percent
beginning 2006. The erratic economic behavior suggested that the reform was not simply about
getting the price right but getting the institutions right.
Since the private sector of the nascent economy was not strong enough to invest in such sectors,
state initiative was imperative. Later, the policy got mixed up with trade union pressure for
nationalization of many enterprises. By the last decade of the last century SOEs in India were
spread over from core sectors like steel, power, and machinery to many consumer goods that
included even bakery products (Nath, 2004). The reversal of fortunes for SOEs occurred in the
eighties, which saw a gradual opening up of the Indian economy. But it was in 1991 when the
Government of India decided to give a further impetus to accelerate the process of liberalization
and opening up of the economy, which boosted the chances of private enterprises. Yet, according
to Nair, although Indias growth accelerated, this performance could not be sustained in later
years.

domestic as well as global capital at competitive rates. The code focused on listed companies.
While this code was well received and some progressive companies adopted it, it was felt that
under Indian conditions a statutory rather than a voluntary code would be more purposeful.
Consequently, the second major initiative in the country was undertaken by the Securities and
Exchange Board of India (SEBI) which envisaged that corporate norms would be enforced
through listing agreements between companies and the stock exchanges. In early
2000, the SEBI board incorporated new regulations into Clause 49 of the Listing Agreement of
the Stock Exchanges. This clause has been further revised in 2002, and again, in 2004. Clause 49
lays down guidelines for composition of the board including the number and qualities of
independent directors, remuneration of board members, code of conduct, and the constitution of
various committees (including audit), disclosures, and suggested contents of annual reports.
THE VALUE OF GOOD CORPORATE GOVERNANCE
Many institutional investors perceive corporate governance as a tool for extracting value for
shareholders from under-performing, undervalued companies. This approach has been very
successful for Lens Inc., California Public Employees' Retirement System (CalPERS), Hermes
and Active Value Advisors, to name but a few. Targeting companies that are under performing
according to one of the main market indices, and analysing those companies corporate
governance practices, can lead to improvements that unlock a company's hidden value. These
improvements often include replacing poorly performing directors and ensuring that the
companies comply with perceived best practice in corporate governance.
Dalton, Daily, Ellstrand and Johnson (1998) showed that board composition had virtually no
effect on firm performance, and that there was no relationship between leadership structure and
firm performance. Patterson (2000) of The Conference Board produced a comprehensive review
of the literature relating to the link between corporate governance and performance, and states
that the survey does not present conclusive evidence of such a link.
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While many studies have examined the possible link between corporate governance and
corporate performance, the evidence appears to be fairly mixed. In an early, much-quoted study,
Nesbitt (1994) reported positive long-term stock price returns for firms targeted by CalPERS.
Nesbitts later studies show similar findings. More recently, Millstein and MacAvoy (1998)
studied 154 largely publicly traded United States corporations over a five-year period and found
that corporations with active and independent boards appeared to perform much better in the
1990s than those with passive, non-independent boards. However the work of
Corporate governance can also be used to help restore investor confidence in markets that have
experienced financial crises. This has happened in the last few years in Japan, Malaysia and the
Russian Federation, for example. In these countries, as in a number of other countries that have
similarly been affected by a lack of investor confidence, particularly overseas investor
confidence, new or improved corporate governance practices have been introduced. Key features
of these changes include improving transparency and accountability.

CORPORATE GOVERNANCE RATING SYSTEMS

With increasing emphasis on corporate governance across the globe, it is perhaps not surprising
that a number of corporate governance rating systems have been developed. Two firms that have
developed such systems are Deminor and Standard & Poors. The rating systems cover several
markets: for example, Deminor has tended to concentrate on European companies, while
Standard & Poors has used its corporate governance rating system in quite different markets,
such as the Russian Federation. These corporate governance rating systems should benefit both
investors (both potential and current ones) as well as the companies themselves. Deminor's
corporate governance ratings are based on four main categories in which each company receives
a rating from 5 to 1, with 5 representing best practice and 1 the most questionable standard. The
categories are:
1. Right s and dut ies of shareholders
2. Absence of takeover d efences
3. Disclosure
4. Board structure.
INVESTORS: OPPORTUNITIES AND TRENDS
For shareholders, effective corporate governance structures have become an important criterion
for selecting the companies in which they wish to invest. Basically there are two approaches. The
first focuses on the analysis of corporate governance structures. As investors interested in the
long term, pension funds examine the extent to which a company has implemented the
recommendations contained in the most important codes. This analysis is the starting point for a
comparison of various companies with respect to good corporate governance. The results
influence investment decisions. Companies with poor structures are avoided.
The long-term success of a company depends on sensible measure of good corporate governance.
However, good corporate governance also requires that all stakeholders, and especially
shareholders, exercise their participatory rights. In particular, shareholders should be aware that
they elect the board of directors who decide on company strategy and monitor the
implementation of that strategy. Being annoyed with the board because of a large financial loss is
of little use if, when electing the board, one did not constructively address the question of
whether the board of directors standing for election had the necessary qualifications,
independence and time to do its job properly.
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GOOD CORPORATE GOVERNANCE AS AN OPPORTUNITY FOR COMPANIES

AND INVESTORS
The second, far more effective approach consists of acting as shareholders who exercise their
proprietary and other rights. Shareholders have the right to demand information from the
company at any time about important questions in connection with management.

CORPORATE GOVERNANCE AND THE ECONOMY

Effective corporate governance is at the core of an efficient market economy. Shareholders and
other financial stakeholders must have access to information and the ability to influence and
control management, through both internal governance procedures and external legal and
regulatory mechanisms, in order to ensure that a companys assets are being utilized in the
interests of all financial stakeholders. This is important in both developed and developing
economies.
In developed markets, large institutional investors pay considerable attention to corporate
governance practices. Some US pension funds, such as the California Public Employees'
Retirement System (CalPERS) and the Teachers Insurance and Annuity Association College
Retirement Equities Fund (TIAA/CREFF), actively pursue corporate reform through their
positions as major shareholders. Every year, for example, CalPERS publishes a list of the best
and worst US corporate boards in an attempt to promote change. As institutional investors own
more than 50 per cent of the equity of US companies, companies are becoming much more
sensitive to the desires of these shareholders.
The market rewards those companies that do change. Some studies have shown that efforts by a
company to improve the quality of its board have a significant and positive effect on share price.
Similarly, companies that continue to engage in activities that place the interests of management
over those of shareholders tend to trade at a discount relative to other companies in their sector.
RECENT DEVELOPMENTS IN CORPORATE GOVERNANCE IN INDIA

Liberalization of the Indian economy began in 1991. Since then, we have witnessed wideranging changes in both laws and regulations, and a major positive transformation of the
corporate sector and the corporate governance landscape. 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 in 1992 and its gradual and growing
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One of the aims of good governance should be to introduce checks and balances to create the
conditions necessary to facilitate external finance. This view is apparently supported by a
number of studies, including a recent one by Credit Lyonnais Securities (CLSA) Emerging
Markets, which found that the shares prices of companies with high corporate governance
standards have been more resilient during market downturns.
In emerging economies, the quality of corporate governance can vary enormously. Indeed, poor
governance or corrupt governance (crony capitalism) negatively affects the returns on
investment in many countries and also contributes to larger, systemic problems at national and
regional levels. The scarcity and poor quality of publicly available information, along with
limited legal and regulatory recourse, frequently complicates efforts by financial stakeholders to
ensure that management is acting in their interests. The sometimes legal expropriation of outside
investors is a major problem of corporate governance. Although expropriation is not exclusive to
emerging economies, it is certainly much more prevalent there. Examples of expropriation
include cash flow diversion (transfer pricing), dilution of minority shareholders, asset stripping
and delay (or non-payment) of dividends.

empowerment since then. 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 1990sparticularly 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.
These concerns about corporate governance stemming from the corporate scandals, coupled with
a perceived need of opening up the corporate sector to the forces of competition and
globalization, gave rise to several investigations into ways to fix the corporate governance
situation in India. One of the first such endeavors was the Confederation of Indian Industry Code
for Desirable Corporate Governance, developed by a committee chaired by Rahul Bajaj, a
leading industrial magnate. The committee was formed in 1996 and submitted its code in April
1998. Later the SEBI constituted two committees to look into the issue of corporate governance-the first chaired by Kumar Mangalam Birla, another leading industrial magnate, and the second
by Narayana Murthy, one of the major architects of the Indian IT outsourcing success story17.
The first Committee submitted its report in early 2000, and the second three years later. These
two committees have been instrumental in bringing about far reaching changes in corporate
governance in India through the formulation of Clause 49 of Listing Agreements.
LEGAL AND ETHICAL COMPLIANCE MECHANISMS
Although the accounting profession has always had a strong focus on internal controls, recent
spectacular business failures, which have undermined auditors credibility in their reporting
function, have eroded public confidence in the accounting and auditing profession. Brief et al
(1997) found that 87% of accountants surveyed were willing to misrepresent financial statements
115
The difficulty with legal compliance mechanisms is that many abuses that have enraged the
public are entirely legal, for example, companies can file misleading accounting statements that
are in complete compliance with generally accepted accounting principles (GAAP). France et al
(2002) point out that laws regulating companies are ambiguous, that juries have a hard time
grasping abstract and sophisticated financial concepts (for example, special-purpose entities or
complex derivatives), well-counseled executives have plenty of tricks for distancing themselves
from responsibilities (Enron and the individual officers all deny theyve broken any laws), and
the fact that criminal law applies only to extreme cases so violations are hard to enforce. Based
upon in-depth interviews with 30 graduates of Harvard MBA program, Badaracco and Webb
(1995) revealed several disturbing patterns. First, young managers received explicit instructions
from their middle-manager bosses or felt strong organizational pressures to do things that they
believed were sleazy, unethical, or sometimes illegal. Second legal compliance mechanisms
(corporate ethics programs, codes of conduct, mission statements, hot lines, and so on) provided
little help in such environments. Third, many of the young managers believed that their
companys executives were out-of-touch on ethical issues; either they were too busy or because
they sought to avoid responsibility. Finally, the young managers resolve the dilemmas they faced
largely on the basis of personal reflection and individual values, not through reliance on
corporate credos or company loyalty.
LEGAL COMPLIANCE MECHANISMS

in at least one case when presented with seven financial reporting dilemmas. This has led to new
and more stringent applications of standards3.
The problems of the professions (law, accounting, medicine) we are witnessing today are not
endemic to the industry. They are part of the problems we are witnessing today in the wider
society: sports, business, government and politics, education, and so on. Many of us, however,
are concerned about the lack of ethics in the business world, particularly in the financial system,
since there are greater incentives for unethical conduct. As a result of many scandals, there has
been a renewed interest and focus on legal compliance mechanisms.
ETHICAL COMPLIANCE MECHANISMS
Trevino et al (1999) study found that specific characteristics of legal compliance programs
matter less than broader perceptions of the programs orientation toward values and ethical
aspirations. They found that what helped the most are consistency between policies and actions
as well as dimensions of the organizations ethical climate such as ethical leadership, fair
treatment of employees, and open discussion of ethics. On the other hand, what hurts the most is
an ethical culture that emphasizes self-interest and unquestioning obedience to authority, and the
perception that legal compliance programs exist only to protect top management from blame.
With respect to the issues of ethical leadership, Collins (2001) examined the character traits of
effective business leaders in the culture of eleven companies that transformed themselves from
good solid businesses into great companies that produced phenomenal and sustained returns for
their stockholders. Every one of the companies he profiled during the critical period in which it
was changing from good to great has what he termed Level 5 leadership which was his top
ranking for executive capabilities. Leaders in all companies exhibited the traits of fanatical drive
and workmanlike diligence, but Level 5 leaders were also people of integrity and conscience
who put the interest of their stockholder and their employees ahead of their own self-interest.
116
From the above discussion it should be clear that good governance is an ideal which is difficult
to achieve in its totality. Very few countries and societies have come close to achieving good
governance in its totality. However, to ensure sustainable human development, actions must be
taken to work towards this ideal with the aim of making it a reality. Additionally, the corporate
governance ratings systems discussed in this paper all include disclosure and transparency as
core attributes of good corporate governance and rightly so. Without transparency and
disclosure, shareholders and stakeholders would not be able to assess how the company was
being managed, and hence no meaningful accountability would exist. Failure in corporate
governance is a real threat to the future of every corporation. With effective corporate
governance based on core values of integrity and trust (reputational value)companies will have
competitive advantage in attracting and retaining talent and generating positive reactions in the
marketplace if you have a reputation for ethical behavior in todays marketplace it engenders
not only customer loyalty but employee loyalty. Effective corporate governance can be achieved
by adopting a set of principles and best practices. Even among large companies, shareholdings
remain relatively concentrated with promoters and family business groups continuing to
dominate the corporate sector despite the above corporate governance shortcomings, the Indian
CONCLUSION

economy and its financial markets have started attaining impressive growth rates in recent years,
and display an exceptionally high level of optimism. The reason is that India is now clearly and
strongly committed to sustaining and rapidly furthering the major economic reforms and the
liberalization started in the early nineties.
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EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834

CORPORATE GOVERNANCE IN INDIA:

KEYWORDS: Corporate Governance, Compliance, Government Policy, Natural Law Ethics,

EXCEL International Journal of Multidisciplinary Management Studies

Encouraging the use of resources in a more efficient manner.

EXCEL International Journal of Multidisciplinary Management Studies

GOVERNANCE STYLES LINKED TO EVOLVING PERFORMANCE PRIORITIES

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

CHARACTERISTICS OF GOOD GOVERNANCE

EQUITY AND INCLUSIVENESS

EXCEL International Journal of Multidisciplinary Management Studies

EFFECTIVENESS AND EFFICIENCY

THE PRINCIPLES OF CORPORATE GOVERNANCE

4. Disclosure and transparency;

EXCEL International Journal of Multidisciplinary Management Studies

5. The responsibilities of the board.

The board is required to fulfil certain key functions, including:

EXCEL International Journal of Multidisciplinary Management Studies

THE ROLE OF THE CHAIRMAN

Independent or non-executive board members can contribute significantly to the decision-making

EXCEL International Journal of Multidisciplinary Management Studies

Commonly accepted principles of corporate governance include:

EXCEL International Journal of Multidisciplinary Management Studies

INTERESTS OF OTHER STAKEHOLDERS: Organizations should recognize that

Monitoring costs: A barrier to shareholders using good information is the cost of

SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE

EXCEL International Journal of Multidisciplinary Management Studies

will cause imperfections in the effectiveness of corporate governance. This should,

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

CORPORATE GOVERNANCE RATING SYSTEMS

GOOD CORPORATE GOVERNANCE AS AN OPPORTUNITY FOR COMPANIES

EXCEL International Journal of Multidisciplinary Management Studies

CORPORATE GOVERNANCE AND THE ECONOMY

RECENT DEVELOPMENTS IN CORPORATE GOVERNANCE IN INDIA

EXCEL International Journal of Multidisciplinary Management Studies

LEGAL COMPLIANCE MECHANISMS

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

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