1) Introduction:

Corporate governance:

Corporate governance is the set of processes, customs, policies, laws, and

institutions affecting the way a corporation is directed, administered or
controlled. Corporate governance also includes the relationships among
the many stakeholders involved and the goals for which the corporation is
governed.

The principal stakeholders are the shareholders/members, management,

and the board of directors. Other stakeholders include labour (employees),
customers, creditors (e.g., banks, bond holders), suppliers, regulators, and
the community at large.

An important theme of corporate governance is to ensure the

accountability of certain individuals in an organization through
mechanisms that try to reduce or eliminate the principal-agent problem.

It is a system of structuring, operating and controlling a company with a

view to achieve long term strategic goals to satisfy shareholders,
creditors, employees, customers and suppliers, and complying with the
legal and regulatory requirements, apart from meeting environmental and
local community needs.

Report of SEBI committee (India) on Corporate Governance defines

corporate governance as the acceptance by management of the
inalienable rights of shareholders as the true owners of the corporation
and of their own role as trustees on behalf of the shareholders. It is about
commitment to values, about ethical business conduct and about making
a distinction between personal & corporate funds in the management of a
company.

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 of the preparation of the entity's financial statements
• Review of the compensation arrangements for the chief executive
officer and other senior executives
 Chapter 2
Introduction of Corporate
Governance

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1. Introduction to corporate governance

The need for corporate governance is not something typical to our country
or economy. Even in the countries where regulatory mechanisms are more
demanding in their content and more vigilant in their implementation,
flagrant violations under the veil of corporate impenetrability have
generated a strident demand for better governance. The advent of the
information age has created an awakened shareholder, vigilant public and
an almost predatory journalistic fervour. Depending upon the model of
corporate disclosure followed by different legal frameworks, the right to
information has forced corporate to divulge more than they ever did.

The following definition should help us to understand the concept better:

“Corporate Governance is not just corporate management; it is something
much broader to include a fair efficient and transparent administration to
meet certain well defined objectives. It is a system of structuring,
operating and controlling a company with a view to achieve long term
strategic goals to satisfy shareholders, creditors employees customers
and suppliers, and comply with the legal and regulatory requirements,
apart from meeting environmental and local community needs. When it is
practiced under a well laid out system, it leads to building of a legal,
commercial and institutional framework and democrats the boundaries
within which these functions are performed.

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 Why Corporate Governance?

In the beginning of the new millennium, several companies in the USA and
elsewhere faced collapse because of corporate misgovernance and
unethical practices they indulged in. the then existing regulatory
framework seemed to be inadequate to deal with the gigantic business
conglomerates that committed deliberate frauds.

In the year 2000, several American mega corporations collapsed like a

pack of cards. The federal administration of President Bush was quick to
slap punitive measures on erring corporations and initiated preventive
steps to avoid corporate frauds in future. The Sarbanes-Oxley Act made it
mandatory for senior executives to certify reports under oath with the
pain of severe penalties if proved wrong.

In India, the governance of most of the country’s industrial and business

organizations thrived on unethical practices at the market place and
showed scant regard for the timeless human and organizational values
while dealing with their shareholders, employees and other stakeholders.

An overwhelmingly large number of Indian corporations used several

illegal tactics such as cornering of industrial licenses with a view to
keeping away competitors, using import licenses to make a quick profit,
illegally holding money aboard, and indulging into bribery, corruption and
other unethical practices with impunity.

The reasons for the corporate misgovernance in India were many: A

closed economy, a sheltered market, limited need and access to global
business, lack of competitive spirit and an inefficient regulatory
framework. These were responsible for poor governance of companies in
India for well over 40 years, between 1951 and 1991.

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What is “good” Corporate Governance?

Bad governance is being recognized now as one of the root causes of

corrupt practices in our societies. Major donors, institutional investors and
international financial institutions provide their aid and loans in condition
that reforms that ensure “good governance” are put in place by the
recipient nations. As with nations, corporations too are expected to
provide good governance to benefit all their stakeholders. At the same
time, good corporate are not born, but are made by the combined efforts
of al stakeholders, which include shareholders, board of directors,
employees, customers, dealers, government and the society at large. Law
and regulation alone cannot bring about changes in corporate to behave
better to benefit all concerned. Directors and management, as goaded by
stakeholders and inspired by societal values, have a very important role to
play. The company and its officers, who, inter alia, include the board of
directors and the officials, especially the senior management, should
strictly follow a code of conduct.

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Obligation to society at large

A corporation is a creation of law as an association of persons forming part

of a society in which it operates. Its activities are bound to impact the
society as the society’s value would have an impact on the corporation.
Therefore, they have mutual rights and obligations to discharge for the
benefit of each other.

• National interest: A company (and its management) should ne

committed in all its actions to benefit the economic development of
the countries in which it operates and should not engage in any
activity that would militate against such an objective.

• Political non-alignment: A company should be committed to and

support a functioning democratic constitution and system with a
transparent and fair electoral system and should not support directly
or indirectly any specific political party or candidate for political
office.

• Legal compliances: The management of a company should

comply with all applicable government laws, rules and regulations.
Legal compliance will also mean that corporations should abide by
the tax laws of the nations in which they operate and these should
be paid on time and as per the required amount.

• Rule of law: Good governance requires fair, legal frameworks that

are enforced impartially. It also requires full protection of rights,
particularly those of minority shareholders. Impartial enforcement of
laws requires an independent judiciary and regulatory authorities.

• Honest and ethical conduct: Every officer of the company

including its directors, executives and non executive directors,
managing director, CEO, CFO and CCO should deal on behalf of the
company with professionalism, honesty, commitment and sincerity
as well as high moral and ethical standards.

• Corporate citizenship: A corporate should be committed to be a

good corporate citizen not only in compliance with all relevant laws
and regulations but also by actively assisting in the improvement of
the quality of life of the people in the communities in which it
operates with the objective of making them self reliant and enjoy a
better quality of life.

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 • Ethical behaviour: Corporations have a responsibility to set
exemplary standards of ethical behaviour, both internally within the
organizations, as well as in their external relationships.

• Social concern: The Company should have concerns towards the

society. It can help the needy people & show its concern by not
polluting the water, air & land. The waste disposal should not affect
any human or other living creatures.

• Healthy and safe working environment: A company should be

able to provide a safe and healthy working environment and comply
with the conduct of its business affairs with all regulations regarding
the preservations of environment of the territory it operates in.

• Competition: A company should market its products & services on

its own merits & should not resort to unethical advertisements or
include unfair & misleading pronouncements on competitors’
products & services.

• Timely responsiveness: Good governance requires that

institutions & processes try to serve all stakeholders within a
reasonable time frame.

• Corporations should uphold the fair name of the country.

Obligation to investors

The investors as shareholders and providers of capital are of paramount

importance to a corporation. A company has following obligations to
investors:

• Towards shareholders: A company should be committed to

enhance shareholder value and comply with all regulations and laws
that govern shareholders rights. The boa5rd of directors of the
company shall and fairly inform its shareholders about all relevant
aspects of the company’s business and disclose such information in
accordance with the respective regulations and agreements. Every
employee shall strive for the implementation of and compliance with
this in his professional environment. Failure to adhere to the code
could attract the most severe consequences including termination of
employment or directorship as the case may be.

• Measures promoting transparency and informed shareholder

participation: A related issue of equal importance is the need to

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 bring about greater levels of informed attendance and meaningful
participation by shareholders in matters relating to their companies
without such freedom being abused to interfere with management
decision. An ideal corporate should address this issue and relate it to
more meaningful and transparent accounting and reporting.
Transparency 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.

• Financial reporting and records: A company should prepare and

maintain accounts of its business affairs fairly and accurately in
accordance with the financial and accounting reporting standards,
laws and regulations of the country in which it conducts the
business affairs.
Wilful material misrepresentation of and/or misinformation on the
financial accounts and reports shall be regarded as the violation of
the firm’s ethical conduct and also will invite appropriate civil or
criminal action under the relevant laws.

Obligation to employees

In the context of enhanced awareness of better governance practices,

managements should realize that they have their obligations towards their
workers too.

• Fair employment practices: An ideal corporate should provide

equal access and fair treatment to all employees on the basis of
merit; the success of the company will be improved while enhancing
the progress of individuals and companies. The applicable labour
and employment laws should be followed wherever it operates.

• Equal opportunities: A company should provide equal opportunity

to all its employees and all qualified applicants for employment
without regard to their race, caste, religion, colour, marital status,
sex, age, nationality and disability.

• Humane treatment: Companies should treat employees as their

first customers and above all as human. They have to meet the
basic needs of all employees in the organization. There should be a
friendly, healthy and competitive environment for the workers to
prove their ability.

• Participation: Participation of both men and women is a key

cornerstone of corporate governance. Participation could be either

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 direct or through representatives. It needs to be informed and
organized. This means freedom of association and expression on
one hand and an organized civil society on the other.

• Empowerment: Empowerment unleashes creativity and innovation

throughout the organization by truly vesting decision making powers
at the most appropriate levels in the organizational hierarchy.

• Equity and inclusiveness: A corporation is a miniature of a

society whose well being depends on ensuring that all its employees
feel that they have a stake in it and do not feel excluded from the
main stream. This requires all groups, particularly the most
vulnerable, have opportunities to improve or maintain their well
being.

• Participative and collaborative environment: There should not

be any form of human exploitation in the company. There should be
equal opportunities for all levels of management in any decision-
making. The management should cultivate the culture where
employees should feel they are secure and are being well taken
care of. Collaborative environment would bring peace and harmony
between the working community and the management, which in
turn, brings higher productivity, higher profits and higher market
share.

Obligation to customers

A company’s existence cannot be justified without its catering to he needs

of its customers. The companies have an obligation to its employees,
without whose assistance they cannot realize their objectives.

• Quality of products and services: The Company should be

committed to supply goods and services of the highest quality
standards, backed by efficient after sales service consistent with the
requirements of the customers to ensure their total satisfaction. The
quality standards of company’s goods and services should meet not
only the required national standards but also should endeavour to
achieve international standards.

• Products at affordable prices: Companies should ensure that

they make available to their customers quality goods at affordable
prices while making normal profit is justifiable, profiteering and
fattening on the miseries of the poor consumers is unacceptable.

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 Companies must constantly endeavour to update their expertise,
technology and skills of manpower to cut down costs and pass on
such benefits to customers. They should not create a scare in the
midst of scarcity or by themselves create an artificial scarcity to
make undue profits.

• Unwavering commitment to customer satisfaction: Companies

should be fully committed to satisfy their customers and earn their
goodwill to stay long in the business. They should encourage the
warranties and guarantees given on their products and in case of
harmful or sub-standard products should replace them with good
ones.

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Managerial obligations

• Protecting company’s assets: The assets of the company should

not be dissipated or misused but invested for the purpose of
conducting the business for which they are duly authorized. These
include tangible as well as intangible assets.

• Behaviour toward government agencies: A company’s

employees should not offer or give any of the firm’s funds or
property as donation to any government agencies or their
representatives directly or through intermediaries in order to obtain
any favourable performance of official duties.

• Control: control is a necessary principal of governance that the

freedom of management should be exercised within a framework of
appropriate checks and balances. Control should prevent misuse of
power, facilitate timely management response to change and
ensure that business risks are pre-emptively and effectively
managed.

• Consensus oriented: Good governance requires mediation of the

different interests in society to reach a broad consensus on what is
in the best interest of the whole community and how this can be
achieved.

• Gifts and donations: The Company’s employees should neither

receive nor make directly or indirectly any illegal payments,
remuneration, gifts, donations or comparable benefits which are
intended to or perceived to obtain business or uncompetitive
favours for the conduct of its business.

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3. Landmarks in emergence of corporate governance

OECD Principles

The Organization for Economic Co-operation and Development (OECD)

was one of the earliest non-governmental organizations to work on and
spell out principles and practices that should govern corporate in their
goal to attain long-term shareholder value. The OECD Principles were oft-
quoted and have won universal acclaim, especially of the authorities on
the subject of corporate governance. Because of the ubiquitous approval,
the OECD Principles are as much trendsetters as the Codes of Best
Practices associated to the Cadbury Report. A useful first step in creating
or reforming the corporate governance system is to look at the principles
laid out by the OECD and adopted by its member governments. They
include the following elements:

• The rights of shareholders: The rights of shareholders include a

set of rights to secure ownership of their shares, the right to full
disclosure of information, voting rights, participation in decisions on
sales or modification of corporate assets, merger and new share
issues. The guidelines go on to specify a host of other issues
connected to the basic concern of protecting the value of the
corporation.
• Equitable treatment of shareholders: The OECD is concerned
with protecting minority shareholders’ rights by setting up systems
that keep insiders, including managers and directors, from taking
advantage of their roles. Insider trading, for example, is explicitly
prohibited and directors should disclose any material interest
regarding transactions.

• The role of stakeholders in corporate governance: the OECD

recognizes that there are other stakeholders in companies’ ion
addition to shareholders. Banks, bondholders and workers, for
example, are important stakeholders in the way in which companies
perform and make decision. The OECD guidelines lay out several
general provisions for protecting stake holder’s interests.
• Disclosure and transparency; The OECD lays down a number of
provisions for the disclosure and communication of key facts about
the company ranging from financial details to governance structures
including the board of directors and their remuneration. The
guidelines also specify that independent auditors in accordance with
high quality standards should perform annual audits.
• The responsibilities of the board: The OECD guideline provides a
great deal of details about the functions of the board in protecting
the company and its shareholders. These include concerns about
corporate strategy, risk, executive compensation and performance
as well as accounting and reporting systems.

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The OECD guidelines are somewhat general, however, there is growing
pressure to put more enforcement mechanisms into those guidelines. The
challenge will be to do this in a way consistent with market oriented
procedures by creating self enforcing procedures that do not impose large
new costs on firms. The following are some ways to introduce more
explicit standards:

• Countries should be required to establish independent share

registries. All too often, newly privatized or partially privatized firms
dilute stock or simply fail to register shares purchased through
foreign direct investment.
• Standards for transparency and reporting of the sales of underlying
assets need to be spelled out along with enforcement mechanisms
and procedures by which investors can seek to recover damages.
• The discussion of stakeholder participation in the OECD guidelines
needs to be balanced by discussion of conflict of interest and insider
trading issues. Standards or guidelines are needed in both areas.
• Property rights and their protection.
• Internationally accepted accounting standards should be explicitly
required and national standards should be brought into alignment
with international standards.
• Internal company audit functions and the inclusion of outside
directors on audit committees need to be made explicit. The best
practice would be to require that only outside, independent directors
be allowed to serve on audit committees.

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SEBI Guidelines

All companies are required to submit a quarterly compliance report to the

stock exchanges within 15 days from the end of a financial reporting
quarter. The report has to be submitted either by the Compliance Officer
or by the Chief Executive Officer of the company after obtaining due
approvals. SEBI has prescribed a format in which the information shall be
obtained by the Stock Exchanges from the companies. The companies
have to submit compliance status on eight sub-clauses namely:

• Board of Directors;
• Audit Committee;
• Shareholders / Investors Grievance Committee;
• Remuneration of directors;
• Board procedures;
• Management;
• Shareholders; and
• Report on Corporate Governance.
Stock exchanges are required to set up a separate monitoring cell with
identified personnel, to monitor compliance with the provisions of the
recommendations. Stock exchanges are also required to submit a
quarterly compliance report from the companies as per the Schedule of
Implementation. The stock exchanges are required to submit a
consolidated compliance report within 30 days of the end of the quarter to
SEBI.

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4. Rights and privileges of shareholders

Rights of shareholders

The members of the company enjoy various rights in relation to the

company. These rights are conferred on the members of the company
either by the Indian Companies Act 1956 or by the Memorandum and
articles of Association of the company or by the general law, especially
those relating to contracts under the Indian Contract Act, 1872.

Some of the more important rights of the shareholders as stressed by

these acts are the following:

• He has the right to obtain copies of the Memorandum of Association,

Article of Association and certain resolutions and agreements on
request, on payment of prescribed fees.
• He has the right to have the certificate of shares held by him within
3 months of the allotment.
• He has the right to transfer his share or other interests in the
company subject to the manner provided by the articles of the
company.
• He has a right to appeal to the Company Law Board if the company
refuses or fails to register the transfer of shares.
• He has the right to apply to the Company Law Board for the
rectification of the register of members.
• He has the right to apply to the court to have any variation or
abrogation to his rights set aside by the court.
• He has a right to inspect the register and the index of members,
annual returns, register of charges and register of investments not
held by the company in its own name without any charge.
• He is entitled to receive notices of general meetings and to attend
such meetings and vote either in person or by proxy.
• He is entitled to receive a copy of the statutory report.
• He is entitled to receive copies of the annual report of directors,
annual accounts and auditors’ report.
• He has the right to participate in the appointment of auditors and
the election of directors at the annual general meeting of the
company.
• He has the rights to make an application to Company Law board for
calling annual general meeting, if the company fails to call such a
meeting within the prescribed time limits.
• He is entitled to obtain and inspect the copies of minutes of
proceedings of general meetings.
• He has the right to participate in the declaration of dividends and
receive his dividends duly.
• He has a right to demand poll.

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• He has a right to apply for investigation of the affairs of the
company.
• He has a right to remove the director before the expiry of the term
of his office.
• He has a right to make an application to company Law Board for
relief in case of oppression and mismanagement.
• He can make a petition to the High Court for the winding up of the
company under certain circumstances.

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Guidelines for investors/shareholders

The Securities and Exchange Board of India (SEBI), the Indian capital
market regulator in its guidelines to investors/shareholders, titled “Quick
reference Guide for Investors” published recently makes it known that a
shareholder of a company enjoys the following rights:

Rights of shareholder, as an individual:

• To receive the share certificates on allotment or transfer, as the

case may be, in due time.
• To receive copies of abridged annual report, the balance sheet and
the Profit & Loss account and the auditors’ report.
• To participate and vote in general meetings either personally or
through proxies.
• To receive dividends in due time once approved in general meeting.
• To receive corporate benefits such as rights, bonus etc. once
approved.
• To apply to Company Law board (CLB) to call or direct the
convening the annual general meeting.
• To inspect the minute books of the general meetings and to receive
copies thereof.
• To proceed against the company by way of civil or criminal
proceedings.
• To apply for the winding up of the company.
• To demand a poll on any resolution.
• To requisition and extraordinary general meeting.

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 Rights of a Debenture holder:

• To receive interest/redemption in due time.

• To receive a copy of the trust deed on request.
• To apply for winding up of the company if the company fails to
pay its debts.
• To approach the debenture trustee with the debenture holder’s
grievance.

Shareholder’s responsibilities:

While a shareholder may be happy to note that one has so many rights as
a stakeholder in the company, it should not lead one to complacency
because one also has certain responsibilities to discharge, such as

• To remain informed
• To be vigilant
• To participate and vote in general meetings
• To exercise one’s rights on one’s own or as a group

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5. Corporate governance and other stakeholders

Corporate governance and employees

An organization needs capital and labour to create wealth. Earlier, the

most important need for an organization to be a success was capital. But
today the growing recognition that human capital is a source of
competitive advantage has led to the understanding that labour is more
important than capital. The interest of the employees can be protected
through the following:

• Trade unions: Trade unions alone can represent the collective

interests of employees and fight for what is rightly due to them from
the organization. They could use this as a platform to negotiate
agreements between the organization and labour.
• Co-determination: It a situation where there is employee
representation on the board of directors of the organization.
• Profit sharing: Profit sharing motivates the individual worker to
put in his best as his efforts are directly related to the profits of the
organization, in which he gets a share. Profit sharing could be done
in many ways, such as
- cash based sharing of annual profits where the annual cash
profits of the organization are shared among the employees,
- Deferred profit sharing where the deferred profits of the
organization are shared among the employees.
The objective of such profit sharing is to encourage employee
involvement in the organization and improve their motivation and
distribution of wealth among all the factors of production.

• Equity sharing: Under equity sharing, employees are given an

option to buy the companies shares, identify themselves with, and thus
become the owners of the organization. There are various way sin
which equity sharing could be done: employees share
1) Ownership plans, 2) stock bonus plans, 3) stock option plans, 4)
employee buyout, and 5) worker cooperatives.
• Team production solution: Team production solution is a situation
where the boards of directors must balance competing interests of
various stakeholders and then arrive at decisions that are in the best
interest of the organization.

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Corporate Governance and Customers

On 15th March 1962, President John F. Kennedy declared four rights of

consumers- the right to satisfaction of basic needs, the right to safety, the
right to be informed, and the right to choose. In 1983, the United Nations
recommended that world governments develop, strengthen and
implement a coherent consumer protection policy. In India, the Consumer
Protection Act 1986 was passed and the country embarked on
strengthening the consumer protection regime.

The explosion of interest in consumer matters is a very recent

phenomenon. The reason is twofold- a combination of new business
methods and changing attitudes. The all pervasive exaggerated and often
false claims, made for services and goods, emphasize the imperative need
for Consumer Protection Legislation and creation of awareness about it
among the general public.

The rights of the consumer are as follows:

• The right to safety: The rights to be protected against the

marketing of goods and services which are hazardous to life and
property.
• The right to be informed: The consumer has the right to be
informed about the quality, quantity, potency, purity, standard and
price of goods or services so as to protect them against unfair trade
practices.
• The right to choose: The right to be assured, wherever possible,
access to variety of goods and services at competitive prices.
• The right to be heard: The right to be assured that consumer’s
interests will receive due consideration at appropriate forums.
• The right to seek redressed: the right against unfair trade
practices or restrictive trade practices or unscrupulous exploitation
of consumers.

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Corporate Governance and Institutional Investors

Most of the reports on corporate governance have emphasized the role

which institutional investors play in corporate governance. In India, there
are broadly four types of institutional investors:

• The financial institutions, such as IFCI, ICICI, IDBI, the State

Financial Corporation, etc.
• Insurance companies such as LIC, GIC, and their subsidiaries.
• All banks
• All Mutual funds (MF) including UTI.
While an investor decision is under consideration, the key factors to be
taken into consideration are

• Financial results and solvency: This is the most important factor

among the factors such as an upward trend in earnings per share
and profits, a healthy cash flow and a reasonable level of dividend
payment. All these are considered major indicators of a company’s
financial health and are indicated in the financial results. However, a
consistent dividend policy is less significant.
• Financial statements and annual reports: There are two
important aspects under this head.
o Extent of disclosure: The quality of the financial statements is
the next most influential factor when it comes to investment
decisions. Institutional investors consider the level of
disclosure of the company’s strategies, initiatives and quality
of management’s discussion and analysis of the year’s results.
Financial position in the annual report is equally important.
This is a strong indication of the investing public’s emphasis
and preference for clear disclosures in a company’s annual
report, in excess of regulatory requirements.
o Comparability with international GAAP: a significant5
proportion of institutional investors do not invest in a company
if the financial statements are non-comparable to International
Generally Accepted Accounting Principles. Implicitly, this could
mean that comparability of financial statements of companies
with International GAAP is important in the eyes of the
investor.
• Investor communications: Institutional investors value the
willingness of companies to provide additional information to
investors, analysts and other commentators, their prompt release of
information about transactions affecting minority shareholders and
the existence of other transparency mechanisms that help ensure
fair treatment to all shareholders.
• Composition and quality of the board: The most important
aspect within this factor is the quality and experience of the
executive directors on the board. In contrast, investors would
consider investing even though they are dissatisfied with the

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 quality, qualification and experience of independent non-executive
directors and their role in board meetings. In addition, many
investors are not too concerned if there are insufficient independent
non-executive directors on the board.
• Corporate governance practices: Investors consider corporate
governance practices when they make investment decisions. The
company should follow the principles for corporate governance
being- auditing and compliance, disclosure and transparency and
board processes.
• Corporate image: The image of the company in the community is
also considered when an institutional investor is called on to take an
investment decision. The image of the organization should not be
bad.
• Share price: This is the last factor that is considered by an
institutional investor when an investment decision is made. If the
shares of the company enjoy continuously rising prices in the
bourses, investors could be encouraged to invest in them.

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Corporate governance and Creditors

Banks and other creditors have an extremely important role to play in

fostering efficiency in medium and large private firms. Creditors, in turn,
rely for their survival on debt repayment by their borrowers. Without
dependable debt collection, no amount of supervision or competition can
make banks run efficiently. Strong creditors are as critical to the efficient
functioning of enterprises as are strong owners.

Creditor monitoring and control

There are three crucial elements in creditor monitoring and control in

market economies:

• Adequate information: Lenders need information on the

creditworthiness or otherwise of potential borrowers, and depositors
and bank supervisors need information on bank portfolios.
• Creditor incentives: The second requirement for debt to serve a
control function is the existence of appropriate market based
incentives for creditors, be they banks, trade creditors or
government. These incentives may be in the form of higher margin
of profit, high interest charges from customers and sometimes even
reduction in the quantum of Non-Performing Assets.
• Debt collection: without an effective system of debt collection,
debtors lose repayment discipline, the flow of credit is constrained,
and creditors may be forced to come to the state to cover their
losses if they are to survive. Well designed and implemented rules
facilitate rapid and low cost debt recovery in cases of default,
thereby lowering the risk of lending and increasing the availability of
credit to potential borrowers. Poorly designed and implemented
rules make lending more costly and stifle the flow of credit.

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Corporate governance and the Government

The government plays the key role in corporate governance by defining

the legal environment and sometimes by directly influencing managerial
decisions. Beyond defining the rules of the game, the government may
directly influence corporate governance. At one extreme, the government
owns the firm, so that the government is charged with monitoring
managerial decisions and limiting the ability of managers to maximize
private benefits at the cost of society.

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6. Corporate governance: The Indian scenario

In India the real history of corporate governance dates back to the year
1992, following efforts made in many countries of the world to put in place
a system suggested by the Cadbury Committee. The Confederation of
Indian Industry framed a voluntary code of corporate governance for listed
companies in 1998. This was followed by the recommendations of the
Kumar Mangalam Birla Committee set up in 1999 by SEBI culminating in
the introduction of Clause 49 of the standard Listing Agreement to be
complied with all the listed companies in stipulated phases. The Kumar
Mangalam Birla committee divided its recommendations into mandatory
and non-mandatory. Mandatory recommendations included such issues as
the composition of board, appointment and structure of audit committees,
remuneration of directors, board procedures, and additional information
regarding management, discussion and analysis as a part of annual
report. Its non-mandatory recommendations included issues concerning
the chairman of the board, setting up of remuneration committee, half
yearly information to shareholders and appointment of nominee directors.

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 Suggestions to improve overall structure of Corporate
Governance:

• Companies should appoint more internal auditor for audit

committee.

• Cross check step should be implemented for betterment of

investors.

• Stakeholders value enhancement steps should be considered at

large.

• More and More programmes should be arranged to educate

shareholder about corporate governance.

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 Chapter 6
Findings and Suggestions

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Findings:

 We conducted survey of investors with mainly focus on fundamental

analyst as well as of Company Secretaries. In our research we find
following findings.

• Main purpose of investment in stock market is High return and

Safety.

• Though safety is one of the major objectives, awareness level of

corporate governance in general public was not found even at
considerable amount.

• 75% of respondents are investing on delivery basis.

• Out of all other options like, Industry, Price Fluctuations, BOD,

Dividend and Market Capitalization, 70% people prefer to check
Company Name before investing in stock market. Thus Brand
Image of companies is of much important and all functions and
policies by their Board of Directors affects company’s image.

• Satyam Computers- before 1 year, it was one of the most desired

companies for investment according to shareholders viewpoint.
After the Scam occurred, brand image of the same is ruined in
investors’ eyes.

• Investors do not have any specific choice regarding companies

for investment like only specific sector or BSE 30/NSE 50
companies.

• 35% of Fundamental Analysts only regularly analyze the Annual

Reports of the companies.

• Retail investors do not analyze annual report of the companies

because of lack of knowledge, interest and time.

• 55% believe that Indian regulatory system for security of share

holder is efficient.

• 50% of those who analyze the performance of Grievance

Committee believe that it is moderate in terms of efficiency while
40% ranked it Efficient.

• 56% of those who analyze the performance of Remuneration

Committee believe that it is moderate in terms of efficiency while
only 22% ranked it Efficient.

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• 45% of those who analyze the performance of Audit Committee
believe that it is moderate in terms of efficiency while 33%
ranked it Efficient.

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• According to investors efficiency of Indian Companies in context
of:

o Grievance settlement is 16%.

o Transparency is 26%.

o Legal code of Conduct is 10%.

o Ethics is 16%.

• All Company Secretaries are in opinion that current level of

corporate governance in India is at Initial and it must be
improved.

• SEBI has given list of 33 disclosures which are mandatory to be

disclosed in annual report of the all listed companies. We have
analyzed annual reports of BSE-30 companies for five years.
Surprisingly, we found that only TATA Steel has disclosed all
disclosures. Only few companies like TCS, RIL, REL, ONGC, SBI,
Infosys, ACC, NTPC, BHEL and DLF were there which has not
shown one disclosers.

• ICICI, HUL, ITC were companies which are not showing major
disclosures.

• During this research we also came to know that Corporate

Governance of the company is still not consider as one of the
important parameter to be taken into consideration before
investing in it.

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Recommendations:

 From our research and observations we give following

recommendations.

• To improve in current system:

 Current norms of corporate governance are efficient but at

Initial level. There must be improvement in terms of code
of conduct of corporate governance.

 Lack of awareness is found among investors. More and

more development programmes should be conduct to
improve the awareness level of Investors.

 Implementation of current norms should be made efficient.

• To Investors:

 Main purpose of corporate governance is safety of

investors. It must be taken into consideration as parameter
to evaluate before investing.

 Investors should attend Annual General Meetings of the

companies. Independent Directors- who mainly focus on
shareholders and their grievances are being appointed in
AGM only.

 Annual reports of the companies give companies’ details

regarding their functions, governing body, ratio of
independent directors in the Board etc. It must be
evaluated.

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