Principles of CG

Leads to achieve the goals and

the objectives.
For self regulation
 Accepted principles of CG
1. Rights and equitable treatment of shareholders.
2. Interest of other stakeholders.
3. Role and responsibilities-ability to deal with the
business issues diligently.
4. Integrity and ethical behaviour.
5. Disclosure and transparency:
a. Internal control.
b.Management of risk.
c.Transparency of appointments.
d.Clarity of dividend policy.
• CG has to be flexible in accordance to the
external factors
• Task of CG is to not avoid the risk of
business which is always a part of the
business ,but to effectively and intelligently
solve the problems
• Principles of CG are continuously evolving
along with the needs and experiences and
changes of the world order.
 Models of CG
• Essence of CG is to effectively deal with
the issues of corporate world and be truly
accountable to the stakeholders.
• Scope of CG is drastically changing due to
cross listing at stock exchanges ,flow of
international funds, institutional
investments rather than the individual
investments.
 Models
• Two main models: liberal model and coordinated
model.
• Liberal model is common in Anglo-American
countries in US,UK,british colonies like
India,Srilanka.
• This model encourages radical innovation and
continuous improvements.
• Coordinated models –found in Continental
Europe and Japan .it recognizes the roles of
workers ,managers ,suppliers,customers and
sharholders.
 The Anglo-American Model
• Calls for governance by the board of directors, which has
the power to choose CEO.
• CEO needs approval by the Board for the important
decisions.
• Duties of the Board is to include of decision-making,
policy making, and monitoring
• However the individual shareholders are not given much
powers, which makes their interest compromised often.
• On the whole the priority is given to shareholders
interest ,which constantly puts pressure on the
management for innovation and to grow profitably.
 The coordinated model
• Prevalent in Europe and Japan, gives
more priority
managers,employees,customers,suppliers
.this model has less chances of immoral
ethics as it emphasis on general health of
the community.
The family-owned company model
• Found in Asian and Latin American
countries.
• Companies owned by families, dominate
the market.
• This model is more directed towards self
serving gains from business, however do
not harm the interest of shareholders
 History of CG in india
• Corporate Scandals
– The stock market scandal (Harshad Mehta) in
1992.
– Ketan Parekh scandal in 2001
– Tata Finance scandal (Serious financial
irregularities in the amount of rupees 400crores
(86.95 million dollars) were detected )
– Accounting and financial reporting frauds
• Corporate Governance as
– the efficient supervision which encourages
`doing everything better' and
– protects the interest of the company
– while conforming to all established laws and
ethics.
• Corporate governance in any organisation needs
to be principle based and
• SMART- smart, moral, accountable, responsive
and transparent.
• Corporate governance has to be principle-based
not rule-based.
• The corporate governance movement
in India began in 1997 with a
voluntary code framed by the CII
:Desirable Corporate Governance: A Code
– In the next three years, almost 30 large
listed companies accounting for over 25
per cent of India's market capitalisation
voluntarily adopted the CII code
• Several committees on Corporate
Governance
• Kumar Mangalam Birla Committee
report
– the introduction of Clause 49 in the
standard Listing Agreement in 2000,
– All listed companies are mandatorily
required to comply with the clause
 Clause 49
• Clause 49 of the Listing Agreement to the
Indian stock exchange comes into effect
from 31 December 2005. It has been
formulated for the improvement of
corporate governance in all listed
companies .
• Clause 49 requires all companies to
submit a quarterly compliance report to
stock exchange in the prescribed form
 The key aspects of CG
• Composition of the board with optimum number of
independent directors
• Constitution of audit committee with the chairman
being an independent director,
• Laying down a code of conduct for board members,
• Mandatory disclosures on related party transactions,
• Risk management,
• Certification on financial statements and internal
controls by the CFO (chief financial officer),
• Mandatory reporting on corporate governance along
with annual report, etc.
 CG awards in India
• ITC Ltd and Abhishek Industries Ltd
received the Institute of Company Secretaries of
India National Award for Excellence in
Corporate Governance 2006.
• ITC Ltd has won the `Golden Peacock
Award for Excellence in Corporate
Governance 2005
Mahindra & Mahindra Ltd (M&M) has been assigned
`Governance and Value Creation Rating (GVC)
 Negative side
• Indian companies’ disclosure of financial information
is still poor while pressure from Indian investors to
improve corporate transparency remains weak.With the
exception of a handful of large businesses, most
companies do not follow international best practice in
disclosing information to investors, despite reforms to
Indian corporate governance regulations. Aside from
weak enforcement, the World Bank cites a lack of
interest from investors as a major reason for the failure
of these laws to improve disclosure according to a report
from the World Bank.