The formal system of accountability and control for organisational decisions and resources.

Accountability and control refer to how well the content of workplace decisions is alligned with the organisations stated strategic decisions and the process of auditing and improving organisational decisions and actions. It is concerned with processes for decision making, accountability, control and behaviour at the top level of organisations.

Corporate governance is characterized by a firm commitment and adoption of ethical practices by an organization across its entire value chain and in all of its dealings with a wide group of stakeholders encompassing employees, customers, regulators and shareholders (including the minority shareholders)

CEO Board of Directors Management Shareholders Auditors It is therefore the process whereby the people in power direct, monitor and lead corporations, and thereby either create or modify the structure and systems under which they operate.

Agency Theory An agency relationship exists when:

Shareholders

(Principals)

Agency Relationship
Risk Bearing Specialist (Principal)
Managerial DecisionMaking Specialist (Agent)

Firm Owners

Hire

Managers (Agents) Decision Makers

which creates

Agency Theory The agency problem occurs when: - The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately Example: Over-diversification because increased product diversification leads to lower employment risk for managers and greater compensation

Inadequacies and failures of the prevalent system. Need for better accounting standards. Equity allotment at discount rates to the controlling groups. Greater accountability to the share-holders.

CORPORATE GOVERNANCE
Governance External Focus Governance assumes an open system Management Strategy- oriented

CORPORATE MANAGEMENT
Internal Focus Management assumes a closed system Task-oriented

Concerned with where the company is going

Concerned with getting the company there

Issues in Corporate Governance

Distinguishing the role of board of directors and management. Composition of the Board. Separation of the role of CEO and Chairman Shareholders and investors Internal control and risk management: Executive compensation

Year
1992

Name of Committee/Body
Sir Adrian Cadbury Committee, UK

Areas/Aspects Covered
Financial Aspects of Corporate Governance, remuneration of executive to be decided by the committee, nomination, service term of directors, Code of best practice. Directors Remuneration, nomination of BoD. Combined Code of Best Practices, auditors must report to directors independently Improving the Effectiveness of Corporate Audit Committees Principles of Corporate Governance

1995 1998 1999 1999

Greenbury Committee , UK Hampel Committee, UK Blue Ribbon Committee, US OECD

1999
2002 2003 2010

Turnbull Committee
Sarbanes Oxley Act Derek Higgs Committee, UK Dodd-Frank Reforms Bill

Focus on internal functions, especially audit.

Manipulation of accounts a criminal offence Disclosure of all known control deficiencies Review of role of effectiveness of Non-executive Directors Share-holder vote for setting directors remuneration

The DoddFrank Wall Street Reform and Consumer Protection Act is a federal statute in the United States that was signed into law by President Barack Obama on July 21, 2010 shareholders of public companies will be given the opportunity to cast an advisory vote, commonly referred to as a "Say on Pay," as to whether they approve of their company's executive compensation practices

The Act provides that the SEC shall require disclosure in a company's statement of the relationship between executive compensation actually paid and the company's financial performance, taking into account any change in the value of the company's shares and dividends and any distributions. This information may be disclosed by graphical representation. Companies will also be required to disclose in their statements: (i) the median annual total compensation for all employees, not including the CEO, (ii) the CEO's annual total compensation and (iii) the ratio of the median employee compensation to that of the CEO.

Initiative driven by CII- Confederation of Indian Industry. In 1995 CII setup a taskforce to design a voluntary code of corporate governance. The draft was released in 1998 and was called Desirable Corporate Governance: A Code Professionally competent independent nonexecutive directors. Directorship for independent directors should not be for more than 10 companies Thrust on independent directors to become more partcipative. Key information must be placed before the directors.

Kumar Mangalam Birla Committee, 1999 Naresh Chandra Committee 2002 Narayan Murthy Committee 2003 Between 1998 and 2000, over 25 major companies of India like Dr. Reddys Laboratories, Bajaj Auto, Hindalco, HDFC, voluntarily followed the code developed by Kumar Manglam Committee Report.

MANDATORY Applicable to listed companies with a paid-up share capital of 3 crore and above. Board of directors must have an optimum combination of executive and non-executive directors. Qualified independent audit committee of three members all being non-executive with majority as independent directors. Chairman of audit committee must be an independent director present at AGM.

Board should decide the remuneration of non-executive members. Board meetings must be held at least 4 times a year with a maximum gap of 4 months between any two meetings. Director should not be a member of more than 10 committees and chairman of more than 5 committees. Analysts must receive quarterly reports. Appointment and re-appointment of directors must be made transparent.

Remuneration committee Half-yearly declaration to share-holders. Vote of share holders must be recognised through postal ballot.

SEBI Clause 49 of Listing Agreement of Independent Directors, Audit committee, Code of conduct, Disclosures of : 1. Related party transactions, 2. Remunerations, 3. Compliance with accounting standards, 4. Whistle-blower policy (optional);

All audit committee members should be in dependent Auditor must not derive more than 25% of remuneration from a single client. Rotation of 50% of the audit committee members at least once every five years. Review boards to be set up by ICAI. CEO and CFO must both certify annual reports published.

Set up by SEBI under the Chairmanship of Narayana Murthy. Mandatory recommendations focused on strengthening the audit committee Improved quality of financial disclosure relating to proceeds from public offerings Disclosure of business risk in annual reports Doing away with nominee directors if not appointed by shareholders.

Following CII and SEBI, the Department of Company Affairs (DCA) modified the Companies Act, 1956 to incorporate specific corporate governance provisions regarding independent directors and audit committees. In 2001-02, certain accounting standards were modified to further improve financial disclosures.

Reliable and timely information increases confidence among decision-makers. Information also affects decision makers outside the entity-shareholders, investors and lenders- who must decide where and at what risk to place their money. Disclosure helps public understanding of a company's activities, policies and performance with regard to environmental and ethical standards, as well as its relationship with the communities where the company operates. Disclosure and transparency, as well as proper auditing, serve as a deterrent to fraud and corruption, allowing firms to compete on the basis of their best offerings. Disclosure and transparency also enhance stock market liquidity.

Disclosures by whom
Companies Intermediaries Stock exchange

Disclosure for whom

Shareholders &other stake holders Investors Regulators

Analysts & Advisors

Government

(A) Basis of related party transactions

I. A statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the audit committee. II. Details of individual transactions with related parties which are not in the normal course of business shall be placed before the audit committee.

(B) Disclosure of Accounting Treatment

To disclose in the financial statements, if an accounting treatment other than prescribed in Accounting Standard has been followed alongwith explanation.

(C) Board Disclosures Risk management

Internal and external business risks Procedures to inform Board members about the risk assessment and minimization.

(D) Proceeds from public issues, preferential issues etc. To disclose to the Audit Committee, on use/application of funds as and when any issue is made.
(E) Additional disclosures:

In the Annual Report the criteria of making payments to be disclosed or a reference to be made that the same is available on the companys website number of shares and convertible instruments held. shall disclose their shareholding (both own or held by / for other persons on a beneficial basis) in the company in which they are proposed to be appointed as directors, prior to their appointment.

F) Management A Management Discussion and Analysis report to form part of the Annual Report.
G) Shareholders Disclosures to shareholders in case of appointment /reappointment of directors, quarterly results and presentations made, shareholders grievance committee and share transfer committee, shareholding pattern-change.

Basic shareholder's rights should include the right to secure ways of registering ownership, transfer shares, obtain timely and relevant information on the corporation, vote in general shareholder meetings, elect members of the board, and share in the profits. Shareholders should have the right to participate in, and be sufficiently informed on decisions concerning fundamental corporate changes such as amendments to the statutes and extraordinary transactions.

Shareholders should be given:

sufficient and timely information about the date, location and agenda, as well as issues to be decided at the meeting; opportunity to ask questions to the board and to place items on the agenda of general meetings. the right to vote in person or in abstentia with equal treatment of such votes. All shareholders should receive equitable treatment, including minority shareholders and all shareholders should be able to obtain effective redress for violation of their rights

Board responsibilities include: Approve a core philosophy and mission Monitor and evaluate corporate performance Monitor and evaluate corporate strategy Determine executive compensation Evaluate senior management performance Manage Executive Director/CEO succession Maintain legal and ethical practices Communicate with shareholders Evaluate board performance

Auditors ensure that the financial statements comply with established accounting and disclosure standards. The auditor's opinion enhances the credibility of financial information, thus helping management, shareholders and other relevant stakeholders to make sound decisions Audits should be conducted by a qualified and independent auditor. National professional accounting bodies should ensure that their members, as auditors of financial statements, comply with applicable professional standards.

Rights of an Auditor
Right to access books of accounts of the company. Right to information and explanation from the officers of the company Right to visit branches where he is not satisfied with the details furnished. Right to receive notice of Annual General Meeting.