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Smriti Sharma
Research Scholar,
Dept. of Accountancy and Law, Faculty of Commerce,
Dayalbagh Educational Institute, Dayalbagh Agra 282110
(smriti.sharma077@gmail.com )
The scope of economic reform and development in India over the past two decades has been
impressive. The country has opened up large parts of its economy and capital markets which has led
in making their presence felt outside India through global mergers and acquisitions. The
overwhelming majority of corporate India is well run, regulated and operates business in a sound and
legal manner with an objective to establish higher standards of probity and corporate governance in
the country.
The Ministry of Corporate Affairs, (MCA) in India published a new set of "Corporate Governance
Voluntary Guidelines 2009", designed to encourage companies to adopt better practices in the
running of boards and board committees, the appointment and rotation of external auditors, and
creating a whistle blowing mechanism. .These guidelines are being adopted as a set of good
corporate governance practices which are being adopted by the companies in India on a continuous
basis .The corporate governance practices as laid down by SEBI though being followed by the Indian
companies on the regular basis cannot be considered as a benchmark at global level. Therefore it is
utmost important to evaluate the effectiveness of corporate governance practices of the Indian
companies on a set of principles which has widely gained acceptance all around the world. Hence in
this paper an attempt has been made to analyze to what extent the corporate governance practice
being followed by Indian corporate sector meet the principles of corporate governance principles as
laid down by Organization for Economic Cooperation and Development (OECD) which are
considered to be non-binding and intended to assist member and non-member government to
evaluate and improve the legal, institutional and regulatory framework for corporate governance.
In order to examine, measure and evaluate the current corporate governance practices of Indian
corporate on the principles of OECD to find out as to what extent or level these principles are being
adhered in their corporate governance disclosure practice the 10 companies listed on BSE Sensex
as on 1 April 2010 has been randomly selected. The data for the period 2010-11 has been taken into
consideration which has been collected from secondary sources.
The adherence of OECD principles of corporate governance in Indian companies was examined with
the help of a scorecard which was developed on the basis of survey questions based on the five
basic principles of corporate governance of OECD. The Table 1 depicts the number of survey
questions in each of the five principles and each of these principles were assigned individual
weightage to determine the score.
Table 1
Questionnaire Topic Area and Score Allocation
5. Board Responsibility 33 25
Each survey questions of the various principles were then examined to find out the level of fulfilment
or information disclosed in the corporate governance report or in other reports or information provided
by the company. For this purpose each question was examined on the basis of information provided
into three categories as Adequate, Better and Best. These categories were allotted marks as ‘0’ for
only adequate information.’0.5’ marks for better information and ‘1’ for best available information in
respect to the survey questions. Each survey question in the respective principle were assigned
some weight (see annexure) out of the total weight assigned to the basic principle. The individual
weight of the respective question was multiplied by the marks gained by the question on the basis of
disclosure to arrive at the corporate governance score. The corporate governance score attained by
each question of the respective principle was then summed up to arrive at the total corporate
governance score of the basic principle. This process was followed for each of the basic principle.
The corporate governance score thus arrived for each company has been used to analyse to what
level the OECD principles are being fulfilled by the Indian Companies to check the level of disclosure
in global perspective. Each of these principles have been analysed in detail herewith.
1. Rights of Shareholders- The corporate governance framework should protect shareholders’ right.
These rights are as follows:
4. Disclosure and Transparency-.A corporate governance framework should ensure that timely and
accurate disclosure is made about all material matters regarding the corporation such as financial
situation, performance, ownership and governance of companies. Features of an acceptable system
of corporate disclosure and transparency include the provision of an annual report that includes
general information on the company and its main business, audited annual financial and accounts,
the basis of remuneration of board members, consolidated financial reports, and information on the
structure and practice of corporate governance within the firm. In addition, director’s shareholdings
and transactions in the company’s stock need to be disclosed, and the company’s financial
statements must be audited externally.
· Strategic guidance,
v Rights of Shareholders
The Rights of Shareholders have been analyzed by considering 22 questions in the areas of rights
defined, rights disclosed, participation in AGM and takeover rules.
Table 2
LEVEL OF DISCLOSURE AS REGARD TO
THE RIGHTS OF SHAREHOLDERS
SNo. Survey Question 1 2 3 4 5 6 7 8 9 10
Does the company offer
1. other ownership rights 0.8335 0.8335 0.8335 0.8335 0.8335 0.8335 0.8335 0.8335 0.8335 0.8335
beyond voting?
Is the policy on the
directors' remuneration
2. 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
disclosed to the
shareholders?
How is the directors'
remuneration
3. 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
presented to the
shareholders?
Does the company allow
shareholders to elect
4. 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
board members
individually?
Nomination of directors
providing
5 0.417 0.417 0.417 0.417 0.417 0.417 0.417 0.417 0.417 0.417
their names and
background
Is there adequate
information on
the external auditor? Are
their name(s), profile,
6. 0.2085 0.2085 0.2085 0.2085 0.2085 0.2085 0 0.2085 0.2085 0
detail of fees and other
engagements with the
company (tax, consulting,
etc.) provided?
Dividend policy, in
7. providing the amount and 0.417 0.417 0.417 0.417 0.417 0.417 0.417 0.417 0.417 0.417
explanation.
Does the information
8. statement have an 0.417 0.417 0.417 0.417 0.417 0.417 0.417 0.417 0.417 0.417
executive summary?
Voting method and vote
9. counting system 0.417 0.417 0 0 0 0 0 0 0 0
Agreements arrived at
11. during the meeting; 0 0 0 0 0 0 0 0 0 0
Is there a record of
17. resolutions in the 0.833 0.833 0.833 0.833 0.833 0.833 0 0.833 0.833 0
minutes?
Did the Chairman of the
18. Audit Committee attend 0.556 0.278 0.278 0.278 0.278 0.278 0.556 0.278 0.278 0.556
the last two AGMs?
Did the Chairman of the
Compensation
/Remuneration /
19. 0.556 0.556 0.556 0.556 0.556 0.556 0.278 0.556 0.556 0.278
Governance Committee
attends the last two
AGMs?
Did the Chairman of the
20. Nomination Committee 0.278 0 0 0 0 0 0.278 0 0 0.278
attend the last two AGMs?
Do Board members
collectively own more
21. 0.833 0.833 0 0 0 0 0.833 0 0 0.833
than 25% of outstanding
shares?
What is the proportion of
outstanding shares that
22. are considered "free 0.833 0.833 0.833 0.833 0.833 0.833 0.833 0.833 0.833 0.833
float"?
TOTAL
17.851 16.4615 15.2115 15.2115 15.2115 15.2115 15.2815 15.2115 15.211 15.2815
(out of 20)
The Table 2 highlights that there were full disclosures by all the companies as regard to ownerships
rights beyond voting, director’s remuneration, election of board members, explanation of dividend
policy, attendance of Chairman and CEO in the last AGM, nomination of directors providing their
names and background. Partial disclosures have been made in the area of vote method and counting
system, adequate information on the external auditors, attendance of chairman of nomination
committee and compensation committee, outstanding shares. There was no disclosure by any of the
company as regard to corporate acts and agreements arrived at the meetings, agreements arrived at
the meeting. The score for this principle ranges between 15.2115 to17.851.
The 12 survey questions in this section were related to voting rights for shareholders,
shareholders conflicts, proxy voting and AGM procedures.
Table 3
LEVEL OF DISCLOSURE AS REGARD TO
EQUITABLE TREATMENT OF SHAREHOLDERS
S.
Survey Question 1 2 3 4 5 6 7 8 9 10
NO
For the same class of
1. 0 0 0 0 0 0 0 0 0 0
shares, does the
principle of one share
one vote apply?
Does the company have
any mechanism that
2. allows minority 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
shareholders to influence
board composition?
Has there been any case
of insider trading
involving company
3. 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
directors and
management in the past
two years?
Has the company
established a system to
prevent the use of
material inside
4. 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
information and inform
all employees,
management, and board
members of this system?
Has there been any
complaint/dispute/
5. problem regarding 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
related-party transaction
in the past two years?
Does the company have a
policy that requires
6. management to disclose 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
related-party
transaction?
Are the nature and extent
of transactions with
7. affiliated and related 0 0 0 0 0 0 0 0 0 0
parties communicated to
shareholders annually?
Is the company a part of
an economic group
where the parent /
controlling shareholder
8. 0 0 0 0 0 0 0 0 0 0
also controls key
suppliers, customers,
and/or similar
businesses?
Does the company
9. facilitate voting by 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
proxy?
Does the notice to
shareholders specify the
10. 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
documents required to
give proxy?
Is there any requirement
11. for a proxy appointment 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667 1.667
to be Notarized?
How many days in
advance does the
0.833 0.833 0.833 0.833 0.833 0.833
12. company send out notice 1.667 1.667 1.667 1.667
5 5 5 5 5 5
of general shareholder
meetings?
TOTAL 15.003 14.169 15.003 14.169 14.169 14.169 15.003 15.003 14.169 14.169
(out of 20)
Table above shows that all the selected companies have provided full disclosures by giving material
information to the board, information related to proxy voting and proxy forms, insider trading,
management to disclose related-party transactions and disclosure of general shareholders meeting.
None of the companies were disclosing information related to principle of one share one vote, extent
of transactions with affiliated and related-parties and part of an economic group where the parent/
controlling shareholder also controls key suppliers, customers, and similar businesses. The scores of
this principle ranges between 14.1695 to 15.003.
v Role of Stakeholders
In this section 11 questions were considered for evaluating the principle which were related to
recognition of rights of the stakeholders
Table 4
LEVEL OF DISCLOSURE AS REGARD TO
THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE
S.
N Survey Question 1 2 3 4 5 6 7 8 9 10
o
Does the company
explicitly mention the
1. 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909
safety and welfare of its
employees?
Does the company provide
an ESOP (Employee Share
Option Program), or other
2. long-term employee 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909
incentive plan linked to
shareholder value catreion,
to employees?
Does the company provide
a retirement plan/fund or
3. 0.909 0 0.909 0.909 0.909 0 0.909 0.909 0 0
its equivalent for its
employees?
Does the company provide
4. a continuing training 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909
program for its employees?
Does the company
5. explicitly mention the role 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909
of customers?
Does the company
explicitly mention the role
6. 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909
of suppliers/business
partners?
Does the company
explicitly mention its
7. 0.909 0.454 0.909 0.909 0.909 0.454 0.909 0.909 0.454 0.454
obligations to
shareholders?
Does the company
8. explicitly mention its 0.454 0.454 0.454 0.454 0 0.454 0 0 0.454 0.454
obligations to creditors?
Does the company
explicitly mention
9. 0.454 0.454 0.454 0.454 0.454 0.454 0.454 0.454 0.454 0.454
environmental issues in its
public communication?
Does the company
explicitly mention its
10 broader obligations to 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909
.
society and / or the
community?
Does the company disclose
pending legal and tax
proceedings, tax
11 assessment notices and
0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909 0.909
. voluntary assessment
program a ailments that it
considers to be potentially
material to its business?
TOTAL
9.089 7.725 9.089 9.089 8.635 7.725 8.635 8.635 7.725 7.725
(out of 10)
It can be summarized from the table above that full disclosures were made as regard to proper
arrangement of safety and welfare programs for the employees of the companies, employee share
option program given to the employees of the companies, proper training imparted to the employees,
explicitly mention of role of customers and suppliers/business partners and explicitly mention its
obligations to society. Partial disclosures were made in the area of environmental issues and
obligations to creditors and retirement plan for the employees. The score of this principle varies
between 7..725 to 9.089.
33 survey questions in this section were examined which were related to material information
and audit process .
Table 5
LEVEL OF DISCLOSURE AS REGARD TO
DISCLOSURE AND TRANSPARENCY
S
Survey Question 1 2 3 4 5 6 7 8 9 10
No.
Breakdown of
1. 0.481 0.481 0.481 0 0 0.481 0 0 0 0.481
shareholdings
Is it easy to identify
2. 0.24 0 0.24 0 0 0.24 0 0 0 0.24
beneficial ownership?
Are directors'
3. shareholdings 0.481 0.481 0.481 0.481 0.481 0.481 0.481 0.481 0.481 0.481
disclosed?
Are management’s
4. 0 0 0 0 0 0 0 0 0 0
shareholdings disclosed?
Does the company have a
5. dispersed ownership 0 0 0 0 0 0 0 0 0 0
structure?
6. Financial performance 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
Business operations,
competitive position, and
7. 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
other non-financial
Matters
Board member
8. 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
background
Basis of the Board
9. 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
remuneration
10. Operating risks 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
Identification of
11. 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
Independent Directors
Board meeting attendance
12. of 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
individual directors
Does the company have a
policy requiring full
disclosure of details
13. 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
of related-party
transactions in public
communications?
Is there any statement
requesting directors to
14. 0 0 0 0 0 0 0 0 0 0
report their transactions of
the company shares?
Does the company have an
internal audit operation
15. 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923
established as a separate
unit in the company?
Does the internal auditor
16. report to the board audit 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923
committee?
Does the internal audit
function provide an
independent evaluation
17. 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923
of the internal control
processes of the
company?
Does the company perform
an annual audit using SEC
18. 0 0 0 0 0 0 0 0 0 0
accredited external
auditors?
Is the financial report
disclosed in a timely
19. 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923 1.923
manner during the past
year?
Are there any accounting
qualifications in the
audited financial
20. 0 0 0 0 0 0 0 0 0 0
statements apart from the
Qualification on
Uncertainty of Situation?
21. Business operation 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
22. Financial statements 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
23. Press release 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
24. Shareholding structure 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
25. Organization structure 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24
It can be concluded from the above table that full disclosures were made in the area of meeting of
individual directors, business operations, financial statements, press release, board member
background, board remuneration, operating risks, board meeting attendance, disclosure of details of
related party transactions, shareholding structure, organization structure, timely disclosure of annual
reports, downloadable annual reports etc. Partial disclosures were made as regard to breakdown of
shareholdings, beneficial ownerships. None of the company giving information related to requesting
directors to report their transaction, management shareholdings, dispersed ownership structure,
annual SEC accredited by external auditors, corporate grouping, specific investor relation. The
scores of this section lie between 11.774 to 14.418.
v Board Responsibilities
In this section 33 questions were examined which were related to monitoring and control, conflict
of interest and board composition.
Table 6
LEVEL OF DISCLOSURE AS REGARD TO BOARD RESPONSIBILITY
S
Survey Question 1 2 3 4 5 6 7 8 9 10
No.
Does the company have its own written
Corporate Governance Manual that clearly
1. 1.316 1.316 1.316 1.316 1.316 1.316 1.316 1.316 1.316 1.316
describes its value system and board
responsibilities?
5. Attendance 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263
6. Internal control 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263
7. Proposed auditors 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263
8. Financial report review 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263
9. Legal compliance 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263 0.263
Have board members participated in the
10.
training on Corporate Governance?. 0.658 0.658 0 0.658 0.658 0 0.658 0.658 0.658 0
Have senior management executives attended
11.
training on Corporate Governance? 0.658 0.658 0 0.658 0.658 0 0.658 0.658 0.658 0
What is the attendance performance of the
12.
board members during the past 12 months? 0.658 0.658 0.658 0.658 0.658 0.658 0.658 0.658 0.658 0.658
Does the company provide a risk management
13.
policy? 1.316 1.316 1.316 1.316 1.316 1.316 1.316 1.316 1.316 1.316
Does the company clearly distinguish the
14. roles and responsibilities of the board and
1.316 1.316 1.316 1.316 1.316 1.316 1.316 1.316 1.316 1.316
management?
Does the board conduct an annual self
15. 0 0 0 0 0 0 0 0 0 0
assessment?
Does the company conduct an annual
16. performance assessment of the 0 0 0 0 0 0 0 0 0 0
CEO/President?
19. Charter/ Role and responsibilities 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089
20. Profile / Qualifications 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089
21. Independence 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089
Is the Chairman of the Committee an
22. 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089
independent director?
23. Performance / Meeting Attendance 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089 0.089
29. Performance / Meeting Attendance 0.146 0.146 0.146 0.146 0.146 0.146 0.146 0 0 0
The above table states that full disclosures were made in the area of information related to code of
ethics for directors and employees, disclosure of corporate governance manual, existence of risk
management policy, proper attendance of board meetings, adequate information as regard to audit
committee, compensation committee and nomination committee and provide separate section for
board of director’s report. Partial disclosures were made as regard to board members and senior
executive’s participation in the training on corporate governance; chairman a non-executive director,
charter/ role, performance/meetings of compensation and nomination committee etc. None of the
company making disclosures in the area of need of skills and training of directors, definition of
independence for identifying independent directors in public communication, annual self assessment
of board and CEO/President. The score of the above principle varies between 13.53 to16.162.
On the basis of the above discussion and scores calculated in the proceeding tables the
overall corporate governance scores obtained by the sample companies on the OECD principle has
been summarized and on the basis of the scores determined ranking of the company has been done
which has sincerely adhered to the above principles and also principles has been ranked in order of
significance in respect to which larger disclosure has been made.
TABLE 7
Overall Score of Principles of Corporate Governance
PRINCIPLES OF OECD
The Table 7 summarizes the fact that overall corporate governance score of all the selected
companies lies between 64.61% to 71.33%.It can be observed that among the Indian companies
REL is more significantly compiling with the principles of OECD. The remaining Indian companies are
also making a fair disclosures as regard to Corporate Governance. However on evaluating the
various principles (OECD) it can be seen that the principle on Role of Stakeholders in Corporate
Governance has attained greater significance and principle on Board Responsibilities and Disclosure
and Transparency needs greater attention by all the companies.
_______________________________
· Das, S.C (2009), Corporate Governance in India- An Evaluation, PHI Learning Private
Limited, New Delhi.
· Stephen Y L Cheung and Hasung Jang (2006), Scorecard on Corporate Governance in
East Asia, CIGI Working Papers ( Issue – 13)
· The Cadbury Committee of Corporate Governance , The Report of the Committee of the
Financial Aspects of Corporate Governance.
· Organization for Economic Co- Operation and Development(OECD), White paper on
Corporate Governance in Asia (Paris, OECD)
· Principles of Corporate Governance: A report by OECD Task force on Corporate Governance
(1999)
· www. Icdcenter.org
· www. oecd.org.
Annexure - 1
PART I- PART-II PART-III PART 1V- PART V-