Professional Documents
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In
CORPORATE GOVERNANCE
Study Materials
Index
I. Introduction
II. Ownership vs. Management.
III. Principles of Good Governance.
IV. Ethics in Governance
V. Corporate Governance
VI. Parties to Corporate Governance.
VII. Board of Directors
VIII. Audit Committee.
IX. Disclosures
X. Company law Provisions-
Corporate Governance
XI. Recent Developments in Corporate Governance in India
XII. Case Study
XIII. Conclusion
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Certificate Course in Corporate Governance
Study Materials
I. Introduction
Business of selling goods and services has always been
carried on in different business forms in the society.
The change in the form of business from Sole Trader to
Partner-ships and Partner-ships to Limited companies
was basically necessary to meet the need for increasing
investment to meet the growth prospects of the
business. The expansion of the business had also
resulted in ownership of the business moving away
from the Business Management. As the size of the
business started increasing, the need to look after
business in a serious way was felt very much. Along
with this, the need for experienced persons handling
the management of the business was also felt. Slowly,
over a period of time the management of business
started getting into the hands of experienced or
specially qualified hands in the respective fields. The
more severe the competition in the business became,
the more and more specialised persons started getting
employed to run business and such people have not
been having any ownership stake in such business.
II. Ownership vs. Management.
With employment of specialised persons to look after
running the business, the Owners’ interest in the
business was mainly restricted to investing money to
reap returns. As the owners/investors are mostly
persons with sufficient resources, they were happy to
leave the task of running the business in the hands of
competent and experienced persons, willing to manage
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the business for a suitable remuneration. The managers
have been given required freedom to run the business
they deem fit and had to be accountable for their
actions to the owners of the business. The
Management’s view of the business will be to run
successful business under competition and earn a
reasonable return for the owners in the long range.
The relationship between the Managers and the Owners is
defined by the following factors:
1. Powers: Managers need power to run business and the
owners have to delegate powers to Managers to the
extent required for successful running of business. This
means that owners should trust and delegate sufficient
powers to managers–sufficient enough to allow the
managers to perform well using their expertise in
running the business. The delegation of powers should
be clearly expressed to managers and others in the
organisation, so that managers are truly empowered
and can be accepted as leaders by others.
2. Accountability- The delegation of powers comes with
accountability. The managers are accountable to the
owners for the results. They managers have obligation
to owners to use the powers delegated to them and
achieve good working results for the benefit of the
owners. They have to ensure that investors’ wealth
grows due to their efforts and the business follows all
the legal procedures and investors’ interests are well
protected.
3. Remuneration- The managers have to be paid
remuneration to match with the powers delegated and
tasks assigned to them. If remuneration does not
commensurate with the tasks assigned to managers,
there will be no motivation for the managers to perform
well. Remuneration, should match the position, powers
delegated and tasks assigned to Managers.
4. Reports- Reporting is an important part of the managers’
responsibilities. Not only doing the job, but informing
the concerned about what is being done is equally
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important. Other wise, the owners will be ignorant
about their position, either relating to the status of their
investment or the protection of their business. The
Reporting covering all important aspects of business
should be done in a systematic manner and with a fixed
periodicity.
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working result can never show the desired results to the owners and
owners will have no trust and confidence in those governing the
organisation.
Key elements of good governance principles include
a. Honesty,
b. Trust and integrity,
c. Openness/ Transparency,
d. Performance orientation,
e. Responsibility and accountability,
f. Mutual respect between the owners and Managers, and
commitment to causes of the organisation.
It is a matter of great importance to know as to how directors and
management develop a model of governance that aligns the values of
the business participants and then evaluate this model periodically
for its effectiveness.
In particular, senior executives should conduct themselves honestly
and ethically, especially concerning actual or apparent conflicts of
interest, and disclosure in financial reports.
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2. Every juncture of action, has side effects of ethical as well as
unethical behavior wherein the existence of the business is justified
by ethical behavior, it responsibly chooses.
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1. Global governance
2. Corporate governance
3. Project governance
4. Information Technology Governance
5. Participatory Governance
6. Non-Profit Governance
7. Islamic Governance
V. Corporate Governance
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corporation and of their own role as trustees on behalf of the
shareholders.
Hence Corporate Governance can be understood as 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.
A Healthy Corporate Governance assures to take care of interests of
different stakeholders, which ultimately results in a strengthened
economy, and hence good corporate governance is a tool for socio-
economic development.
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responsibilities and duties. There are issues about the appropriate
mix of executive and non-executive directors.
2. Internal audit.
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4. Management of Risk
5. Managerial Remuneration.
6. Dividend policy.
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employees, creditors or customers; they may act on their own or in
collusion with other including insiders. Regular review and revision
of the internal checks and controls, where ever found necessary is a
part of the Company managements function.
2. Internal Audit
Internal Auditing profession has since changed significantly in the
recent times starting from a “watchdog” function, to a prominent role
in the essential domain and component of corporate governance.
Internal audit function when carried out by an outside agency will
assure the stake holders about genuine concern of the management in
ensuring transparency of operations of the Organisation.
Internal Audit reporting directly to Board of Directors will ensure
impartial reporting about weak points in the Systems and procedures
and also about inefficient working of the employees in operations ,
causing losses to the Organisation. Internal auditing should be
considered as important subsets of corporate governance.
In the last decade, following repeated financial scandals, together
with the development and widespread perception of risk as an
integral aspect of corporate governance, the concept of internal Audit
has become central to various Corporate Governance Codes, and the
intervention of the internal audit function is explicitly recommended.
As a consequence, these events have raised the importance of internal
audit as a key component of good corporate governance practices.
Non interference of executives in the appointment of Internal
Auditors and conduct of Internal Audit and timely, submission of
replies to points raised by the internal auditors in their reports,
indicate healthy state of affairs of Corporate Governance.
3. External Audit.
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The independence of External Auditors, in conducting audit of
accounts of the organisation and reporting on the affairs of the
corporate will assure stakeholder about effective conducting of
business operations by the management.
The external Auditors will be required to not only comment on the
accuracy of recording and presenting the financial data, but also on
the compliance to various statutory regulations relating running of
companies as applicable to the client’s company-such as Accounting
standards, energy conservation, pollution control measures etc.
The external auditors by, concentrating on verifying and reporting on
the legal and statutory compliances in addition to verifying the
accuracy of accounting data, will provide sufficient information to
stakeholders, since in most of the countries, the law has covered
governance provisions as a part of Audit Programs, which have to be
verified and reported up on by the statutory auditors. The Annual
Report to shareholders will contain, report of the Auditors in addition
to the report of the board of directors to the shareholders. In this
report External Auditors will express their comments on Accounts of
the completed period and other related matters. This report will give
much of the information, needed by the shareholders, on Corporate
Governance.
The External Auditors should be competent and experienced and
independent in their examination of data available. They should be
unbiased and impartial in their approach and reporting.
4. Management of Risk.
Business involves risks. The risk and returns are directly
proportional. Risks should be properly identified, assessed and
addressed to restrict, the adverse effects of such risks on business.
Shareholders have to be informed about the possible risks in the
operations and how the management is assessing the risks and
managing such risks by taking steps to measures the risks, share the
risks and contain the risks in the business. As owners, they should not
only know as what major risks are being faced by business and also
how these risks will affect the earning capacity of their investment as
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well as how the management is planning to mitigate the adverse
effects of these risky activities. As a part of regular review and
information to shareholders, company may post in its annual report,
comments such as”
“The Board regularly discusses the significant business risks identified by the management
and the mitigation process being taken up.
A detailed note on the risk identification and mitigation is included in Management Discussion
and Analysis annexed to the Directors Report.”
5. Managerial Remuneration.
This is one of the sensitive areas, in the management of the company
affairs, the shareholders should be informed. Unless, the market price
is paid, the competent and best persons will not be available to
manage the affairs of the company. If remuneration is not good
enough, company can not attract and retain the competent persons to
manage the affairs of the company. But at the same time, the mangers
should be held responsible for achieving the targets fixed for the
company- accountability should be fixed on them for performance.
The remuneration of the senior persons, is fixed and approved by the
Shareholders, or at least ratified, based on the recommendations of
the Board of Directors. Many times the senior most executive in a
company is offered a percentage of the profits payable as part of the
remuneration and some times company’s stock is also offered as a
part of the remuneration package, in order to motivate them for
improvement in performance. Offering stock options (EOS) to
employee as followed elsewhere is now becoming a regular feature in
Indian Companies.
6. Dividend Policy.
Dividend is the return paid to the owners of the company-
Shareholders on the amount invested in the business. This dividend
may be paid, when the company earns profit. But at the same time,
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paying dividend to shareholders means outflow of Cash from
Business operations. Cash outflow represents lower liquidity in
business. Hence how much dividend to be paid to shareholders has to
be decided very carefully and companies generally formulate a
dividend policy to ensure transparency to shareholders and
recommendation for paying dividend will be made by Board but has
to be approved by the shareholders themselves.
Hence we can understand that a Dividend Policy is a Policy used by
companies to decide as to how much dividend should be paid to
Shareholders.
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A Director is a person who directs the operations of the corporate. A
Director is a representative of the owners or stake holders, who are
interested in ensuring that organisation operates in systematic
fashion and protects the interests of the owners and stake holders.
Board of Directors is a collective group of Directors.
Directors must be individuals.
Directors can be owners, managers, or any other individual elected by
the owners of the business entity.
Directors who manage the operations are Called Managing
Directors.
Executive Director executes the instructions of Managing Director
and / or Board of Director and is involved in running the day to day
affairs of the company.
The lenders also may nominate their representatives also as Directors
to guide and watch the performance of the borrower company. They
are known as Nominee Directors. Company may also request some
experienced and eminent persons to accept directorship of the
company and make available their expertise to guide and monitor the
performance of the company. Similarly persons acting as directors
who are not owners or managers are sometimes referred to as outside
directors, outsiders, disinterested directors, independent directors, or
non-executive directors.
Generally in most of the companies, the persons investing majority of
the equity nominate themselves or their representatives to the
position of Managing Director.
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VII. Board of Directors
As already indicated Board of Directors is a collective group of
Directors.
Board of Directors is the supreme body guiding the company in
performing and achieving the targets. It would be given access to all
the resources available with the company. However, certain
important matters may have to be brought before the shareholders-
like huge borrowings, changing the objects of the company and
appointment of Directors etc. Role of the Board of Directors with
reference to shareholders can be compared to that of the Guardian in
case of minors. They act like Trustees on behalf of shareholders.
The articles of association of the company indicate the procedure for
functioning of Board of Directors.
Other details regarding procedures for election of directors to the
Board, conducting/holding meetings of Board of Directors are also
indicated in the Articles of Association of the Company.
Typical major duties of boards of directors include
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The legal responsibilities of boards and board members vary with the
nature of the organization, and with the jurisdiction within which it
operates. For public corporations, these responsibilities are typically
much more rigorous and complex than for those of other types.
Typically the board chooses one of its members to be the chairman.
Board should regularly meet and review the functioning of the
company and takes decisions for which it is authorised and
recommend resolutions for consideration and passing the same by
shareholders in Annual General Body Meetings (AGM) or Extra
Ordinary General Body Meetings (EGM) in other cases.
The role and responsibilities of a board of directors vary depending
on the nature and type of business entity and the laws applying to the
entity. For example, the nature of the business entity may be one that
is traded on a public market (public company), not traded on a public
market (a private, limited or closely held company), owned by family
members (a family business), or exempt from income taxes (a non-
profit, not for profit, or tax-exempt entity). There are numerous types
of business entities available throughout the world such as a
corporation, limited liability company, cooperative, business trust,
partnership, private limited company, and public limited company.
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Hence a subcommittee of directors known as Audit Committee is
formed to take more active role in Company affairs than Board of
Directors. The responsibilities of such subcommittee called as Audit
Committee typically include:
IX. Disclosures
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information is important to an investor or lender using the financial
statements, that information should be disclosed within the
statement or in the notes to the statement. It is because of this basic
accounting principle that numerous pages of "footnotes" are often
attached to financial statements.
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The Contents of model Articles of Association in case of a Public
Company limited by Shares is as given in Annexure II.
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punishable with imprisonment for a term extending to a year or with
fine up to Rs 50000 or both.
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business and industry, for understanding and implementation. A
copy of the Guide-lines issued by CII is given in Annexure III.
It can be seen from these Guide lines that suggestions have been
made about inclusion of Independent Directors on the Board of
Directors and restricting the number of directorships to be held by an
Individual to function effectively in managing the companies.
The Guide lines suggest that those directors who are not attending,
even 50 % of meetings of Board of Directors should not be considered
for re- appointment.
Similarly, they also recommend establishing Audit Committees
comprising of Directors of the Board. The guidelines regarding
functioning of Audit Committees have also been indicated. The
matters to be placed before Board have also been indicated so that all
important activities of the company are surely reviewed and revised
by Board, where ever required.
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Indian Companies Act, once approved by Parliament. A copy of the
Voluntary guide lines issued is attached .Annexure IV.
XIII. Conclusion
Nevertheless "corporate governance," despite some feeble attempts
from various quarters, remains an ambiguous and often
misunderstood phrase. For quite some time it was confined only to
corporate management. That is not so. It is something much broader,
for it must include a fair, efficient and transparent administration and
strive to meet certain well defined, written objectives of the
Corporates.
Corporate governance must go well beyond law. The quantity, quality
and frequency of financial and managerial disclosure, the degree and
extent to which the board of Director (BOD) exercise their
trustee responsibilities (largely an ethical commitment), and the
commitment to run a transparent organization- these should be
constantly evolving due to interplay of many factors and the roles
played by the more progressive/responsible elements within the
corporate sector. John G. Smale, a former member of the General
Motors board of directors, wrote: "The Board is responsible for the
successful perpetuation of the corporation. That responsibility cannot
be relegated to management." The Interest of even a smallest
investor should be protected and those in position of power should
conduct business and inform the concerned to this extent. This effort
must go to the extent of ensuring that corporation should cease to
exist if that is in the best interests of its stakeholders.
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Prof. JR Kumar
Faculty Director
FAPCCI,HYD.
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