Ethics is a body of principles or standards of human conduct that govern the

behavior of individuals and groups. Ethics arise not simply from man's
creation but from human nature itself making it a natural body of laws from
which man's laws follow.

The word ‘ethics’ is derived from the Greek word “ethikos” meaning
custom or character. It is the science of morals describing a set of rules of
behavior. Business ethics itself is an offshoot of applied ethics. The study of
business ethics essentially deals with understanding what is right and
morally good in business. Ethics can be defined as “a set of moral
principles or values,”

Ethics is a branch of philosophy and is concerned a normative science

because it is concerned with the norms of human conduct, as distinguished
from formal sciences such as mathematics and logic, physical sciences such
as chemistry and physics, and empirical sciences such as economics and
psychology. The principal of ethical reasoning are useful tools for sorting
out the good and bad components within complex human interactions.

1.1 Business Ethics

Ethics is a conception of right and wrong behavior, defining for us when

our actions are moral and when immoral. Business ethics is the applications
of general ethical ideas to business behavior.

1
“Business ethics is the art and discipline of applying ethical principles to

examine and solve complex moral dilemmas.”

“Business ethics is that set of principles of reasons which should govern

the conduct of business whether at individual or collective level.”

Business ethics proves that business can be and have been ethical and still
make profits. Till the last decade, business ethics was thought of as being a
contradiction in terms. But things have changed; today more and more
interest is being shown to the applications of ethical practices in business
dealings and the ethical implications of the business.

Companies, led by top management, are increasingly adopting ethical codes

of conduct. Modern ethics codes aren't just some simple platitudes set in a
break-room plaque. Companies now commit considerable time and money
to illustrate their reliance on ethical behavior.

Ethical behavior starts at the top. Before a company can expect to be

viewed as ethical in the business community, ethical behavior within its
own walls-to and by employees-is a must, and top management dictates the
mood. Ethical behavior by the leaders of an organization will inevitably set
the tone for the rest of the company-values will remain consistent. Further,
a well communicated commitment to ethics sends a powerful message that
ethical behavior is considered to be a business imperative.

2
A ‘Code of Ethics’ goes beyond separate values to become a set of
principles that makes a clear statement of what the business corporation is
willing to do, or not do, like forbidding staff to take bribes. Many different
Codes of Ethics, or Conduct, now exist, ranging from those issued by
international bodies, such as the Organization for economic Co-operation
and Development (OECD) Guidelines for Multinational Enterprises, to
individual Codes adopted by different business corporations around the
world.

To define ‘Business Ethics’, then, it is made up of three main components:-

 Ethical values;
 a Code of Ethics, and
 Good Corporate Governance

Need for Business Ethics

Ethics is closely related to trust. Most of the people would agree on the fact
that to develop trust, behavior must be ethical. Ethical Behavior is necessity
to gain trust.
Trust leads to predictability and efficiency of business. Ethics is all about
developing trust and maintain it fruitfully so that the firm flourishes
profitably and maintains good reputation. Lack of ethics would lead to

3
unethical practices in organization and personal life. There are number of
examples of companies whose top management are involved in unethical
practices, to name a few, Enron, WorldCom, etc.

Earlier it was said that-“business of business is business”- now there is a

sudden change in the slogan. In the contemporary scenario where has got
due importance, the slogan has taken the form-“business of business is
ethical business”.

There are number of companies which have succeeded in profit making and
public esteem by following ethical practices in their realm of business.
Some of such companies are: Infosys, Larsen and Turbo, Wipro, Ford and
Tata steel. They have gained trusts of public through ethical practices.

Ethics make Corporate Governance more Meaningful

Though the concept of corporate governance may sound a novelty in the

Indian business context and may be linked to the era of liberalization, it
should not be ignored that the ancient Indian texts are true originators of
good business governance.
 Corporate governance is meant to run companies ethically in a manner
such that all stakeholders-creditors, depositors, distributors, customers,
4
 employees, the society at large and government-are dealt in a fair
manner.
 Good governance should look at all stakeholders and not just
shareholders alone.
 Corporate Governance is not something which regulators have to
impose on a management, it should come from within. There is no point
in making statutory provisions for enforcing ethical conduct.
 There are number of grey areas where regulatory frame work is weak,
which are manipulated by unscrupulous persons.
 The Securities and Exchange Board of India (SEBI) has jurisdiction
only in cases of limited companies and are concerned only with their
protection.

1.2 Introduction to Corporate Governance

Corporate Governance is generally understood as the framework of rules,

relationships, systems and processes within and by which authority is
exercised and controlled in corporations. Before going into more details let
us understand some terms.

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“Corporate” is the adjective meaning “of or relating to a corporation”
derived from the noun corporation. A corporation is an organization created
(Incorporated) by a group of shareholders who have ownership of the
corporation.

“Governance” has Latin origins that suggest the notion of 'steering'. It deals
with the processes and systems by which an organization or society
operates.

In a narrow sense, corporate governance involves a set of relationship

amongst the company’s management, its board of directors, shareholders
and other stakeholders. These relationships, which involve various rules and
incentives, provide the structure through which the objectives of the
company are set, and the means of attaining those objectives and
monitoring performance are determined.

In a broader sense, however, good corporate governance is the extent to

which companies are run in an open and honest manner- is important for
overall market confidence, the efficiency of international capital allocation,
the renewal of countries’ industrial bases, and ultimately the nations’
overall wealth and welfare.

Definitions

Corporate Governance is a broad concept and has been defined and

understood differently by different groups and at different points of time.

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The earliest definition of Corporate Governance is from the Economist
and Noble laureate Milton Friedman. According to him “Corporate
Governance is to conduct the business in accordance with owner or
shareholders’ desires, which generally will be to make as much money as
possible, while conforming to the basic rules of the society embodied in law
and local customs”.

This definition is based on the economic concept of market value

maximization that underpins shareholder capitalism. Apparently, in the
present day context, Friedman’s governance has been widened. It now
encompasses the interest of not only the shareholders but also many
stakeholders.

Some other Definitions

The Cadbury Committee report defines it as “the system by which

companies are directed and controlled. It is generally understood as the
framework of rules, relationships, systems and processes within and by
which authority is exercised and controlled in corporations.”

The Kumar Mangalam Birla Committee report defines it as “…

fundamental objective of corporate governance is the ‘enhancement of the
long-term shareholder value while at the same time protecting the interests
of other stakeholders.”

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The OECD, 1999 defines “Corporate Governance is the system by
business corporations are directed and controlled. The Corporate
Governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as,
the board, managed shareholders and other stakeholders, and spells out
the rules and procedures for making decisions on corporate affairs. By
doing this, provides the structure through which the company objectives
are set and also provides the means of attaining those objectives and
monitoring performance.”

Hence, Corporate Governance can be understood to be a systematic process

by which Companies are directed & controlled to ensure that they are
managed in the manner that meets stakeholders’ aspirations & societal
expectation. This leads to the corporate governance philosophies of:
Trusteeship; Transparency; Empowerment & Accountability; Control and
Ethical Corporate Behavior

Significance of Corporate Governance

 It lays down the frame work for creating long term trust between
companies and the external providers of capital.
 It improves strategic thinking at the top by inducting independent
directors who bring in a wealth of experience and host of new ideas.

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  It limits the liability at the top management and directors by carefully
articulating the decision making reports
 It helps to provide a degree of confidence that is necessary for the
proper funding of a market economy.
 It ensures integrity of financial reports.

Objectives of Corporate Governance

 To build an environment of trust and confidence amongst these having
competition and conflicting interest.
 To enhance shareholders value and protect the interest of stakeholders
by enhancing the corporate performance and accountability.
 To have system and procedures which are transparent and which inform
the stakeholders about the working of corporations.

1.3 Historical Perspective of Corporate Governance

Internationally

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The seeds of modern corporate governance were probably sown by the
Water gate scandal in the United States. As a result of subsequent
investigations, US regulatory and legislative bodies were able to highlight
control failures that had allowed several major corporations to make illegal
political contribution and to bribe the government officials. This led to the
development of Foreign and Corrupt Practices Act of 1997 in USA that
contained provisions regarding the establishment, maintains and review of
systems of internal control.

This was followed on 1970 by the Securities and Exchange Commission of

USA’s proposals for mandatory reporting on internal financial controls. In
1985, following a series of high profile business failures in the USA, the
most notable one of which being in Savings and Loan collapse, the
Treadway Commission was formed. Its primary role was to identify the
main causes of misrepresentation in financial reports and to recommend
ways of reducing incidence thereof.
Accordingly COSO (Committee on Sponsoring Organizations) was born.
The report produced by it in 1992 stipulated a control framework, which
has been endorsed and refined in the four subsequent UK reports: Cadbury,
Rutteman, Hampel and Turnbull. While developments in the US stimulate
debate in the UK, a spate of scandals and collapses in that country in the
late 1080’s and early 1990’s led shareholders and banks to worry about
investments. These also led Government in UK to recognize that then
legislation and self regulation were not working.
Manny big companies in UK were all victims of the boom to bust decade of
the 1980’s. Several companies, which saw explosive growth in earnings,
ended the decade in a disastrous manner.
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It was in an attempt to prevent the recurrence of such business failure that
the Cadbury Committee, under the chairmanship of Sir Adrian Cadbury,
was set up nu the London Stock Exchange in May 1991.

Thus, the report of the Cadbury Committee is a pioneer in the field of

corporate governance and it serves as the foundation for the reports
prepared by many other countries on corporate governance.

Indian Context

It is strange but true that early initiatives for better corporate governance in
India came from the more enlightened listed companies and an industry
association. When India embarked on its corporate governance movement,
the country faced no financial or balance of payment crisis.

The corporate governance movement began on 1997-98, with

Confederation of Indian Industries (CII) coming out with the “Code of
Desirable Corporate Governance” which was voluntary in nature. In the
next three years about 30 listed companies voluntarily accepted the code
issued by CII.

The Securities Exchange Board of India (SEBI), as the custodian of

investors’ interests, did not lag behind. On May 7, 1999, it constituted an 18
member committee, chaired by the young and forward looking industrialist,
Mr. Kumar Mangalam Birla on the Corporate Governance, mainly with the
view to protecting the interest of investors.
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The Reserve Bank of India (RBI) also constituted its own committee to
view corporate governance from the perspective of the banking sector.

The desirable Code of corporate governance, which was drafted by CII and
were voluntary in nature, did not produce the expected improvement on
corporate governance.

It is in this context that the Kumar Mangalam Committee felt that under the
Indian condition statutory rather than a voluntary code would be far more
purposive and meaningful. The committee report has been well received
and SEBI has given effect to recommendations by a direction to all the
stock exchanges to amend the listing agreement.

Fundamental Principles of Corporate governance

Governance styles may be as different as the nature of companies. It was
for this reason that Adrian Cadbury had cautioned against there being any
simple style suiting all types of companies. Every company may have a

12
unique governance style of its own. Despite uniqueness of styles, there are
some fundamental principles noted below that permeate all kinds of
governance styles:

 Transparency: It involves the explaining of company’s policies and

action to those whom it owes responsibilities. It should lead to the
making of appropriate disclosures without which endanger company’s’
strategic interest. Internally transparency means openness in a
company’s relationship with its employees as well as the conduct of its
business in a manner of its business in a manner that will bear scrutiny.
Unfortunately, total transparency is not the dominant culture in
corporations.

 Accountability: It signifies that the boards of Directors are accountable

to the shareholders and the management is accountable to the Board of
Directors. Both the board and management must be accountable to the
shareholders for the performance of tasks assigned to them. It is thrust
is to ensure effective management of resources and achievement of
results with efficiency coupled with empowerment. Accountability
provides impetus to performance.

 Trusteeship: Large Corporations have both a social and economic

purpose. They represent a coalition of interests of shareholders, lenders
of capital as well as business associates and employees. It casts a
responsibility of trusteeship on the Board of Directors who must act to
protect and enhance shareholder value. The Board must ensure that the
company fulfills its obligation and responsibility to its other
13
 stakeholders. Inherent in the concept of trusteeship is the responsibility
to ensure equity, namely, that the rights of all shareholders, large or
small, are protected.

 Empowerment: It signifies that management must have the freedom to

drive the enterprise forward. It is a process of actualizing the potential
of its employees. Empowerment unleashes creativity and innovation
throughout the organization by truly vesting decision-making powers at
the most appropriate levels in the organizational hierarchy.

 Ethics: A corporation must set exemplary standards of ethical behavior

both within the organization and in its external relationships. Deviation
from ethical principles corrupts organizational culture and undermines
stakeholder value.

 Oversight: It means the existence of a system of checks and balances.

It should prevent misuse of power and facilitate timely management
response to change and risks.

 Fairness to all stakeholders: It involves a fair and equitable treatment

of all participants in the corporate governance structure.

“Good” Governance

A good governance system generates ideas through participation of all

stakeholders and harmonizes different viewpoints while protecting interests

14
of the interest of the minority stakeholders. Good corporate governance
relates to transparency and fairness that maximizes long term shareholder
value of a company and also addresses the interest of all other stakeholders
in the enterprise.

Recently the terms “governance” and “good governance” are being

increasingly used in development literature. 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 on the conditions 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 combined efforts of all stakeholders, board of directors,
employees, customers, dealers, government and the society at large.

Good Corporate Governance also deals with building trust with customer,
suppliers’ creditors and diverse investors-trust that the company will be
managed properly, will increase corporate value for its share.

Need of Corporate governance in India

If corporate governance has to take root in a country it will, to a large extent

depend on the economic and business environment that has been created by

15
public governance in the country, there cannot be good governance if public
governance is weak.

The legal and administrative environment in India provides greater scope

for corrupt practices in business. For more than five decades since
independence, lack of transparency and financial disclosures, corruptions
and mismanagement have been accepted as a way of life in a stride in a
license ridden and non-competitive economic environment. We should
approach the issue of corporate governance in India not merely from the
point of view of the Companies Act or the SEBI guidelines or the codes
evolved out of recommendations of Kumar Mangalam Birla Committee, but
also look at the entire network of various rules and regulations impinging
on business so that there is an integrated holistic system, created for
ensuring that transparency and good corporate governance prevails.

1.4 Corporate Misgovernance in India

Industrial growth in India along with the development of corporate culture

started only after the country became free in 1947. However, with the
characteristics of the country’s governance continuing to be feudalistic, and
its political system degenerating to be pseudo-democratic, the governance
of the most of the country’s industrial and business organizations thrived on
unethical practices at the market place while the showing scant regard for
the timeless human and organizational values in dealing with their
employees, shareholders and customers. The increasing corruption in the

16
government and its various services had kept the managements of country’s
industrial and business organizations above accountability for their
misdeeds, encouraging them to indulge in more unethical practices. The
state owned organizations occupying a dominant position in the country’s
economy and being monopolistic, passed on the costs of the misgovernance
to the helpless consumers of their products and services. Organizations in
the private sector barring a few, indulged in all possible unethical practices
to fleece their customers on the one hand and demand the state its due on
the other. In India one could see a large number of privately owned
business organizations too indulging in rampant corporate misgovernance.
The difference is that while in state owned organizations employees at all
levels are seen to indulge in, or contribute to corporate misgovernance, in
privately owned business organizations employees at the lower levels of the
corporation are better controlled. The scams committed in a number of
large privately owned corporations during the last one decade clearly
indicate the nature and extent of corporate misgovernance that exists in
privately owned business organizations.

Series of Scams That Shook Investor Confidence

The need of corporate governance was first realized in the country with
“Big Bull”, Harshad Mehta’s securities scam that was uncovered in April
1992 involving a large number of banks and resulting in the stock market
nose diving for the first time since the advent of reforms in 1991. This was
followed by a sudden growth of cases in 1993 when the transnational
companies started consolidating their ownership by issuing equity
allotments to their respective controlling groups at steep discounts to their
17
market price. In this preferential allotment scam alone investors lost
roughly Rs. 5000 crore. The third scandal of the decade was the
disappearance of the companies during 1993-94. Due to this vanishing
companies scam, gullible investors lost a lot of money because during the
artificial boom hundreds of obscure companies were allowed to make
public issues at large share premium through high sales pitch of
questionable investment banks and misleading prospectus.

The non-banking finance companies scam took place in 1995-97 also saw
more than Rs. 50000 crore mopped up from the pubic promising them high
returns but vanished. The mutual fund scam saw public sector banks raising
between 1995-98 nearly Rs. 15000 crore by promising huge fixed returns
but all of them flopped.

1.5 Sound Corporate Governance Practices

1. Established strategic objectives and a set of corporate values that are

communicated throughout the banking organizations:
It is difficult to conduct the activities of an organization when there are no
strategic objectives or guiding corporate values. Therefore the board should
establish strategies that will direct the ongoing activities of the bank. It
should also take the lead in establishing the “tone at the top” and approving
corporate values for itself, senior management employees.
The board of Directors should ensure that the senior management
implements policies that prohibit activities and relationships that diminish
the quality of corporate governance, such as

18
 Conflicts of interest
 Lending to officers and employees and other forms of self dealing
 Providing preferential treatment to related parties and other favored
entities

2. Setting and enforcing clear lines of responsibility and accountability

throughout the organization:
Effective boards of directors clearly define the authorities and key
responsibilities for themselves, as well as senior management. They also
recognize that unspecified lines of accountability or confusing multiple
lines of responsibility may exacerbate a problem through slow or diluted
responses. Senior management is responsible for creating an accountability
hierarchy the staff and must be aware of the fact that they are ultimately
responsible to the board for the performance of the bank.

3. Ensuring that board members are qualified for their position, have
a clear understanding of their role in corporate governance and are not
subject to undue influence from management or outside concerns:
The board of directors is ultimately responsible for the operations and
financial soundness of the bank. The Board of Directors must receive on
timely basis sufficient information to judge the performance of
management.
An effective number of board members should be capable of exercising
judgment, independent of the views of management, large shareholders or
government.

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4. Ensuring that there is appropriate oversight by senior management
Senior management is a key component of corporate governance. While the
board of directors provides checks and balances to senior managers,
similarly senior managers should assume that oversight role with respect to
line mangers, in specific business areas and activities.

5. Effectively utilizing the work conducted by internal and external

auditors in recognition of the important control function they provide
The role of auditors is vital for corporate governance process. The board
should also recognize and acknowledge that the internal and external
auditors are their critically important agents. In particular, the board should
utilize the work of the auditors as an independent check on the information
received from management on the operations and performance of the bank.
6. Ensuring that compensation approaches are consistent with the
banks ethical values, objectives, strategies and control environment.
Failure to link incentive compensations to the business strategy can cause or
encourage managers to book business based upon volume and/or short term
profitability to the bank with little regard to short or long term profitability
to the banks with traders and loan officers, but can also adversely affect the
performance of other support staff.

7. Conducting corporate governance in a transparent manner:

It is difficult to hold the board of directors and senior management properly
accountable for their actions and performance when there is lack of
transparency. This happens in situations where stakeholders, market
participants and general public do not receive sufficient information on the

20
structure and objectives of bank with which to judge the effectiveness of the
board and senior management in governing bank.
Transparency can reinforce sound corporate governance. Therefore, public
disclosure is desirable into the following areas:
 Board structures
 Basic organizational structures
 Information about the incentive structure of the bank
 Nature and extent of transactions with affiliates and related parties

21
Governance initiatives through regulations have also made significant
strides in the country. The securities and Exchange Board of India (SEBI)
has an ongoing program of reforming the primary and secondary capital
markets. SEBI was set up by the government in 1992 to counter the
shortcomings found in the functioning of stock exchange. SEBI, which has
been made into statutory body, is authorized to regulate all merchant banks
on issue of activity lay guidelines, supervise and regulate the working of
mutual funds and oversee the working of stock exchanges in the country. In
consultation with the government, SEBI has initiated a number of steps to
introduce improved practices and greater transparency in the capital
markets in the interest of the investing public.

The Institute of Charted Accountants of India (ICAI) has emerged as a

responsible body regulating the profession of public auditors and counts
among its achievements the issue of number of accounting and auditing
standards.

The Institute of Company Secretaries of India (ICSI) have helped in

promoting and regulating a well trained and disciplined body of
professional who could add value to corporations in improving their
management practices. It has taken major initiatives to formulate secretarial
standards and best secretarial practices and develop guidance notes in order
to integrate, consolidate, harmonize and standardize the prevalent diverse
practices with the ultimate objectives of promoting better corporate
practices and improved corporate governance.

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2.1 Role of RBI in Corporate Governance

The RBI has been making continuous endeavor to bring clarity to the role
of board and senior management in the risk management architecture of
banks. Bank boards are required to lay down policies on credit, investment,
forex, and recovery and asset liability management. They have to exercise
prudence in management of affairs of banks and ensure that proper and
functioning control systems exist. Capital requirement for market risks has
been specified. Further, RBI has brought out several guidelines on best
practices in asset liability management, management of credit and market
risk etc.
Banks, too, are gradually improving their risk management capabilities.
Data and reports on maturity of assets and liabilities are now part of regular
ALCO meetings. Banks are now better equipped to anticipate changes in
their net interest income for any given change in market variables and
respond proactively to also getting reduced- thanks to extensive use of
technology.
Taking cognizance of crucial role of Board of Directors, the RBI has
directed banks to set up Audit Committee of the board chaired by non-
executive chairman and consist of non executive directors. The Audit
Committee should be responsible for ensuring the efficiency of the entire
internal control system and audit functions of the banks besides
compliances with the inspection report of the RBI and internal and
concurrent auditors
RBI approach to regulations of operations of commercial banks in the
recent past has some features that would enhance the need for and

23
usefulness of good corporate governance in financial information,
timeliness of such information and analytical content.

2.2 OECD Principles

The Organisation for Economic Cooperation 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 have won universal acclaim, especially of the
authorities on the subject of corporate governance.

1. The rights of shareholders: The right of shareholders includes a set of

rights to secure ownership of their shares, the right to full disclosures of
information, voting rights, participation in decisions on sale or
modifications of corporate assets, mergers and new share issues.

2. 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.

3. Role of stakeholders in corporate governance: The OECD recognizes

that there are other stakeholders in companies in addition to stakeholders.

24
 The guidelines lay out several general provisions for protecting
stakeholder’s interest.

4. Disclosures and transparency: The OECD lays down a number of

provisions for the disclosures and communications 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

5. The responsibility of the board: The OECD Guidelines provide a great

deal of details about the functions of the board in protecting the company
and its shareholder. These include concerns about corporate strategy,
risk, executive compensation and performance as well as accounting and
reporting systems.

2.3 The Kumar Mangalam Birla Committee on Corporate

Governance, SEBI
The Securities and Exchange Board of India monitors and regulates
corporate governance of listed companies through Clause 49. This Clause is
25
incorporated in the Listing Agreement (LA) of stock exchanges with
companies and it is compulsory for them to comply with its provisions.
Stock Exchanges endeavor to bring in corporate governance standards
among companies by the introduction of Clause 49 in the listing agreement
they enter into with them before they are being listed. SEBI issued the
Clause 49 in February 2000.

Recommendations
The recommendations were made by the Committee keeping in view the
fact that; any code of corporate governance should be dynamic and should
change with changing context and times. This code was the first formal and
comprehensive attempt, in the context of prevailing conditions of
governance in Indian Companies, as well as the state of capital markets.

Applicability of Recommendations
The code is to be followed by listed companies, their directors,
management, employees and professional with the companies. They should
be responsible for complying with the code in letter and spirit and
interpreting it always in a manner that always gives precedence to substance
over form. The ultimate responsibility for putting the practice however lies
directly with board of Directors.
Mandatory Recommendations

The Committee recognized, that it would be difficult to immediately

implement and this code to the last letter by relatively smaller companies.

26
Equally, implementation of the recommendations will require in existing
law.

The committee has the following mandatory recommendations:

Composition of Board of Directors

A) The board of directors of the company shall have an optimum
combination of executive directors with not less than 50% of the board
directors comprising of non-executive directors.
B) All the pecuniary relationship or transaction of non executive directors
– the company should disclose on the Annual Report.

Audit Committee
A. A qualified and independent audit committee shall be set up
B. The audit committee shall meet at least thrice a year
C. The Committee shall all the powers relate to investigate, seek
information from employee, obtain outside legal or other
professional advice.
D. Role of audit committee shall include reviewing the financial
reporting process appointment and removal of auditors etc
E. If the Company has set up an audit committee pursuant to provision
of the Companies Act, the said audit committee shall have such
additional features as is contained in the listing agreement.

Remuneration of Directors

27
The remuneration of non-executive directors shall be decided by the Board
of Directors. The following disclosures on the remuneration of directors
shall be made in the section on the corporate governance of the annual
report.
a) Remuneration package of all directors i.e. salary, benefits, bonuses,
stock options, pensions
b) Service contracts, notice period, severance fees
c) Stock option, if any

Board Procedure

The board meeting shall be held at least 4 times a year with a maximum
time of four months between any two meetings. A director shall not be a
member in more than 10 committees or act as Chairman of more than five
committees across companies in which he is director.\

Management

A. Management discussion and analysis report should form part of the

annual report to the shareholders.
B. Disclosures must be made by the management to the board relating to
all material financial and commercial transactions, where they have
personal interest, that have potential conflict with the interest of the
company at large.

Shareholders

28
 A. In case of the appointment of new director or re-appointment of a
director the shareholder must be provided with the information
B. Information like quarterly results, presentation made by companies to
analyst shall be put on company’s web site or shall be sent in such a
form so as to enable the stock exchanges on which the company is
listed to put on its own web site.
C. A board committee shall be formed to specifically look into the
redressing the shareholder and investor complaint.

Report on Corporate Governance

There shall be a separate section on corporate governance in the annual

report company, with a detailed compliance on corporate governance. The
compliance of any mandatory requirement i.e. which is part of the listing
agreement with reasons thereof and the extent to which non-mandatory
requirement have been adopted should be specifically highlighted.
Subsequently, on 29th October 2004, SEBI amended the original clause 49
and issued a new Clause 49. All existing listed companies will have to
comply worth provisions of new clause by 1st April 2005. However, it has
already come into force for companies that have been listed on the stock
exchanges after 29 October 2004.

Provisions and Requirements of Clause 49

29
1) Composition of Board: The board should be composed of in the
following manner: In case of full time chairman, 50% non-executive
directors and 50% executive directors.

2) Constitution of Audit Committee: The Audit Committee should have 3

independent Directors with the chairman having sound financial
background. The finance Director and the head of the internal audit
should be special invitees and minimum of three meetings should be
convened every year.
3) The Audit Committee: The audit committee is responsible for review of
financial performance on half yearly / annually basis, appointment/
removal/ remuneration of auditors, review of internal control system and
its adequacy.

4) Remuneration of Directors: Remuneration of non-executive directors is

to be decided by the board. Details of remuneration package, stock
options, and performance incentives of Directors should be disclosed to
the shareholders.

5) Board Procedures: The Board should have at least four meetings a year.
A director should not be a member of more than 10 committees and
chairman of more than 5 committees across all companies.

Management discussions and analysis report should include the following

points:

 Company structure and development

30
  Opportunities and threats
 Segment wise or product wise performance
 Outlook on the business
 Risk and concerns
 Internal control systems and its adequacy
 Discussions on financial performance
 Disclosure by Directors on Material, Financial Commercials
transactions with the company

6) Shareholders Information: The Company should provide a brief resume of

new and reappointed directors. Quarterly results should be submitted to
stock exchanges, placed on the company web site and presented to analysis.
The shareholders/ investors grievances should have minimum of 2 meetings
a year, under the chairmanship of independent director.
A report on corporate governance and a certificate from auditors on
compliance of provisions of corporate governance, as per Clause 49 in the
Listing Agreement, should be provided.

2.4 Basel Committee of Corporate Governance

In 1988, the bank for International Settlement (BIS)-based Basel

Committee on Banking Supervision came out with regulations regarding the
capital requirements for banks. Although these were essentially intended for
internationally operating banks, in due course, almost all countries adopted
these regulations for their banks.

31
The crux of the Basel I requirements is the assignments of risk weights for
different assets in a bank’s book and aggregating the risk-weighted assets of
which 8per cent was recommended as the capital of the bank. The
committee’s recommendations were not mandatory, but the world’s central
banks speeded up the process of compliance, particularly following the East
Asian Crisis and the collapse of certain hedge funds in New York which
threatened to bring down in 1992 closely following the inception of
economic reforms.

Basel Committee published a paper on corporate governance for banking

organizations in September1999. The committee felt that it was the
responsibility of the banking supervisors to ensure that there was effective
corporate governance in the banking industry. Supervisory experience
underscores the need for having appropriate accountability and checks and
balances within each bank to ensure sound corporate governance, which in
turn leads to effective and more meaningful supervision. Sound corporate
governance could also contribute to a collaborative working relationship
between bank managements and a bank supervisor.

From a banking industry perspective, corporate governance involves the

manner in which the business and affairs of individual institutions are
governed by their boards of directors and senior management affecting how
banks

 Set corporate objectives (including generating economic returns to

owners)

32
 Run the day to day operations of business
 Consider the interest of recognized stakeholders
 Align corporate activities and behavior with the expectations that banks
will operate in a safe and sound manner and in compliance with
applicable laws and regulations
 Protect the interests of depositors

The Indian corporate are governed by the Company’s Act 1956 that
followed more or less the UK model. The pattern of private companies is
mostly that closely held or dominated by a founder, his family and
associates.

In terms of legislative mechanisms, Indian government and industry

constituted three committees to study corporate governance practiced in the
country and suggest measures for measures for improvement based on what
has globally recognized as “best practices”. Significantly, most of the
recommendations of the three committees-SEBI, appointed Kumar
Mangalam Birla Committee (2000), the government appointed Naresh
Chandra (2003) and the SEBI’s Narayana Murthy Committee are
remarkably similar to those of Cadbury Committee and American Sarbanes-
Oxley’s Act, in terms of their approaches and recommendations.

Further India has adopted the key tenets of the Anglo-American external
and internal mechanisms, in the wake of economic liberalization and its
integration into the global economy. Thus corporate governance

33
developments in India in recent years show a paradigm shift from German/
Japanese model to Anglo American models.

There is not a single preferred model or set of corporate governance

mechanisms. Moreover, ideas and practices are evolving fast in many
countries. Moreover, the overall corporate governance package has to be
consistent with the way business is done and the reality of relationship in
that culture.

3.1 Corporate Governance in Financial Institutions

The question of efficiency and accountability of management of financial

institutions has gained prominence due to two major developments. The
first is the report on S.H. Khan Committee on Corporate Governance and
second is the UTIs representation on this Board will be precursor to good
corporate governance. The Khan Committee has recommended that the FIs
should themselves become role models. The FIs need to make several
structural reforms in their governance organs such as the constitution of
board committees, separation of the role of CEO and chairman, putting off
majority of independent directors on credit and investment committees, etc.
Moreover, RBI should be the sole financial regulatory authority over the
Financial Institutions (FIs).

Banks

34
Banks are a critical component of any economy. They provide financing for
commercial enterprises, basic financial services to a broad segment of the
population and access to payment systems. In addition some banks are
expected to make credit and liquidity available in difficult market
conditions. The importance of banks to national economies is underscored
by the fact that banking is virtually universally a regulated industry and that
banks have access to government safety nets. It is of crucial importance,
therefore, that banks have strong corporate governance. There has been a
great deal of attention given recently to the issue of corporate governance in
various national and international forums.

In particular, the OECD has issued a set of corporate governance standards

and guidelines to help governments “in their efforts to evaluate and
improve the legal, institutional and regulatory framework for corporate
governance in their countries and to provide guidance and suggestions for
stock exchanges, investors, corporations and other parties that role in the
process of developing good corporate governance”.

35
3.2 Corporate Governance in Banks

protecting the interests of depositors becomes a matter of paramount

importance to banks. In other corporate, this is not and need not be so for
two reasons:

 The depositors collectively entrust a very large sum of their hard earned
money to the care of banks. It is found that in India, the depositors’
contribution was well over 15.5 times the shareholders stake in banks as
early as in March 2001. This is bound to be much more now.

 The depositors are very large in number and are scattered and have little
say in the administration of banks. In other corporate, big lenders do
exercise the right to direct the management. In any case, the lenders’
stake in them might not exceed 2 or 3 times the owners’ stake.

Banks deal in people’s fund and should, therefore, act as trustees of the
depositors. Regulations the world over has recognized the vulnerability of
depositors to the whims of managerial misadventures in banks and therefore
has been regulating banks more tightly than other corporate.

36
To sum up, the objective of governance in banks should first be protection
of depositors’ interest and then to be “optimize” the shareholders interests.
All other considerations would fall in place once these two are achieved.

As part of its ongoing efforts to address supervisory issues, the Basel

Committee on Banking Supervision (BCBS) has been active in drawing
from the collective supervisory experience of its members and other
supervisors in issuing supervisory guidance to foster safe and sound
banking practices. The committee was set up to reinforce the importance of
for banks of the OECD principles, to draw attention to corporate
governance issues addressed by previous committees and to present some
new topics related to corporate governance for banks and their supervisors
to consider.

Banking supervision cannot function effectively if sound corporate

governance is not in place and consequently, banking supervisors have a
strong interest in ensuring that there is effective corporate governance at
every banking organization. Supervisory experience underscores the
necessity of having the appropriate levels of accountability and checks and
balances within each bank. Put plainly sound corporate governance makes
work of supervisors infinitely easier. Sound corporate governance can
contribute to collaborative working relationship between bank management
and bank supervisors.

Recent sound practices papers issued by Basel Committee underscore the

need for banks to set strategies for their operations and establish
accountability for executing these strategies. In addition, transparency of
37
information related to existing conditions, decisions and actions is
integrally related to accountability in that it gives market participants
sufficient information with which to judge the management of a bank.

According to OECD, corporate governance involves a set of relationships

between a company’s management, its board, its shareholders and other
stakeholders. Corporate Governance also provides the structure through
which the objectives of the company are set, and the means of attaining
those objectives of and monitoring performance are determined. Good
Corporate Governance should provide proper incentives for the board and
the management to pursue objectives that are in the interest of the company
and shareholders should facilitate effective monitoring thereby encouraging
firms to use resources more efficiently.

Banks are a critical component of any economy. They provide finance

commercial enterprises, basic financial services to a broad segment of the
population and access to payment system. In addition, some banks are
expected to make credit and liquidity available in difficult market
conditions. The importance of banks to national economies is underscored
by the fact that banking is virtually universally a regulated underscored by
the fact that banks have access to Government safety nets. It is of crucial
importance, therefore, that banks have strong corporate governance.
From a banking industry perspective, corporate governance involves the
manner in which the business and affaires of individual institutions are
38
governed by their board of directors and senior management affecting in so
far as they:

Need for good governance in the banking sector

Good governance is important for all types of business but more so, for
banks, mutual funds and the financial institutions. The reasons for strict
adoption of corporate governance by them are as follows:

 Crucial role: Banks are the mobilizers and dispensers of funds. They
discharge the crucial role of being an intermediary between those
possessed of surplus funds and those possessed of surplus funds and
those funds. A healthy and stable banking system is necessary for the
health of the economy. The world over financial crisis has been
precipitated due to bungling in the banking sector.

 Banks as custodian of money: Banks are the custodians of money of

their depositors and have a moral obligation to make a prudent
application of depositors’ funds. Whenever the banking sector gets
struck into crisis, the government has to act faster to salvage them
before the entire banking system gets engulfed. For this reason banking
is highly regulated industry.

 Government dominance: Government had for long been dominant

owner in the financial sector-whether it be banks or financial
institutions. Gradually, it is disinvesting its equity holdings. As public
participation in the holdings of financial sector entities goes up, good
39
 governance thereof becomes an issue of paramount significance. For
example, in the specific context of banks, good governance signifies
that they must be operated in a safe and sound manner in accordance
with applicable laws so that the interests of depositors are not
jeopardized.

3.3 Corporate Governance in Indian Banks

Although the subject of corporate governance has received a lot of attention

on recent times in India, corporate governance issues and practices by
Indian Banks have received only a scanty notice. The question of corporate
governance in banks is important for several reasons. First, banks have an
overwhelming dominant position in developing the economy’s financial
markets and are extremely important engines of growth. Second, as the
country’s financial system and are underdeveloped banks in India are the
most significant source of finance for majority of firms in Indian industry.
Third, banks are also the channels through which the country’s savings are
collected and are used for investments. Fourth, India has recently
liberalized its banking system through privatization, disinvestments and has
reduced the role of economic regulation and consequently managers of
banks have obtained greater autonomy and freedom with regard to running
of banks. This would necessitate their observing best corporate practices to
regain the investors’ confidence now that the government authority does not

40
protect them anymore. Corporate governance in banks has assumed
importance in India post 1991 reforms because competition compelled
banks to improve their performance. Even the majority of banks and
financial institutions, owned, managed and influenced by the government
with neither high quality management nor any exemplary record by
practicing corporate governance have realized the importance of adopting
better practices to protect their depositors and banking public.

Corporate Governance in Public Sector Banks

A substantial chunk of Indian banking sector still remains under the control
of public sector banks despite the entry of some private banks in the arena.
Major shareholding of public banks is with the Government. The public
banks are new to concept of corporate governance. Basel Committee has
underscored the need for the banks to establish strategies and to become
accountable for executing them. Transparency is vital to accountability so
as to enable market participants to judge the management of a bank. The
existing legal institutional framework of public sector banks is not aligned
with principles of good corporate governance. So far banks have been
burdened more with “social responsibility” and compelled to tow the line of
thinking dictated by the political party in power. Healthy banking policies
had been the last priority. Monopoly of public sector banks in banking
business has protected them from competition and the bank management
has thereby become complacent.

41
Lack of accountability and transparency has led to colossal amounts of non-
performing assets (NPA’s). The scheduled commercial banks in India have
NPAs of over Rs. 70,900 crores which are seriously impacting their
profitability. Steps are being taken to hasten recoveries under the new Act
viz. Securitization and Reconstruction of Financial Assets and Enforcement
of Security. RBI nominees on the boards of banks have been concerned
merely with preventing banks from committing any breach of quantitative
guide-lines than with the framing of strategic policies.

Governance in Private Sector Banks

Entry of private sector banks in the arena has introduced an element of

competition in the banking sector too. Private sector banks have entered
niche areas, listed their scrips and being market driven they have been more
transparent in their functioning. They have also been more tech-savy,
growth oriented and have less of NPAs. But these signals are not a
permanent indication of the future scenario. The involvement of leading
private banks in the stock market scam has dispelled the wrong notion that
private banks are a haven or model of good governance.
The business of banking is unique in its nature since it deals with the money
of others. It is necessary for the banks to adhere to strict ethical standards. It
is the trust of the depositors that drives the industry. The situation as of now
is that the banks have to still inculcate corporate governance principles in
their functioning. The increasing competition is however making the banks
aware of such need. Most of the banks are attempting to fulfill the bare

42
legal requirements about disclosure, transparency and accountability. None
of the banks has shown any initiative to set new standards. The extent to
which the banks actually practice the professed corporate governance norms
is still a debatable question. Standards of good banking Practices which are
of significance to all types of banks are as follows:
 To ensure a fair and transparent relationship between the customer and
the bank
 To institute comprehensive risk management system
 To proactively eliminate customer complaints and evolve a scheme for
redressal of grievances
Corporate Governance in Co-Operative Banks

For the co-operative banks in India these are challenging times. Never
before has the need for restoring customer confidence in the cooperative
sector been felt so much. Never before has the issue of good governance in
the co-operative banks assumed such criticality. The literature on corporate
governance in its wider connotation covers a range of issues such as
protection of shareholders ‘rights, enhancing shareholders ‘value, Board
issues including its composition and role, disclosure requirements, integrity
of accounting practices, the control systems, in particular internal control
systems. Corporate governance especially in the co-operative sector has
come into sharp focus because more and more co-operative banks in India,
both in urban and rural areas, have experienced grave problems in recent
times which have in a way threatened the profile and identity of the entire
co-operative system. These problems include mismanagement, financial
impropriety, poor investment decisions and the growing distance between
members and their co-operative society.
43
The purpose and objectives of co-operatives provide the framework for co-
operative corporate governance. Co- operatives are organized groups of
people and jointly managed and democratically controlled enterprises. They
exist to serve their members and depositors and produce benefits for them.
Co-operative corporate governance is therefore about ensuring co-operative
relevance and performance by connecting members, management and the
employees to the policy, strategy and decision-making processes.

3.4 Obstacles on the Path of Good Governance in Banking

Sector
There are several reasons for the absence of a sufficient corporate
governance mechanism in the Indian banking sector

 Multiplicity of regulations: Banks are governed by governed by

multiple enactments. For instance, private banks are governed both by
the Companies Act, 1956 and the Banking Companies Regulation Act.
The nationalized banks are governed both by the Banking Companies
Regulation Act and the Bank Nationalization Act, 1969 (amended in
1982). The State Bank of India and its associates are governed by the
State Bank of India Act, 1955 (amended in 1997), The regional Rural
Bank are regulated by RRB Act, 1975, the co-operative Banks by
Cooperative Banking Regulation Act, 1949 and Banking Laws (Co-
operative Societies) Act, 1965. The RBI advisory group has opined that

44
 all the banks should be brought within the purview of a single Act which
prescribes the various practices to be followed by all and one.

 Lack of synchronization among various corporate governance

norms: Three different committees in India have dealt with the subject
of corporate governance. These are: the Kumar Mangalam Birla
Committee Report, 2000 that had been constituted by SEBI; CII Report,
1998 and the RBI advisory Committee Report, 2001. There is no
synchronization of the regulations. Each report has dwelt on specific
issues. It would be better if a common code is prescribed after
harmonizing the recommendations of various committees.

 Qualitative vs. Quantitative: Banking norms are more quantitative that

qualitative. Governance depends more on quality of adherence to the
norms in addition to quantitative benchmark.

 Mix up between ownership role and regulatory role: In most of the

financial institutions, the RBI has been a majority shareholder as well as
the regulator. Narsimhan Committee on Banking Reforms raised the
question as to whether regulators should be owners in the context of
State Bank of India. Recently, RBI vacated its majority ownerships from
Financial Institutions like Securities Trading Corporation of India Ltd.
and Discount and Finance House of India and is in the process of total
disinvestment. There is also no justification for a regulator like RBI to
be represented on the Board of those regulated.

45
 Mismatch between ownership pattern and board level
representation: Previously, when Government used to be the majority
shareholder in many of the financial representation on its board. With
diversified ownership, private shareholders have begun to be given
board level representation. But private shareholder representation is not
commensurate with the extent of their shareholding.

 Lack of transparency in selection of board members: It is anybody’s

guess as to what are the considerations that weigh in making board level
appointments. To have truly professional directors, there should be a
process of transparent search.
 Board Accountability: Accountability of Directors in Public Sector
Banks is another aspect on which processes have to be put in place.
Directors must be made aware as to what they are expected to do on the
boards. Their actual performance should be monitored and kept in view
while reappointing them.

 Lack of timely appointment of Directors: Sometimes it takes a

number of years to reconstitute the board of some of the public sector
banks.

 Political Boards: Very often, board level appointments in the financial

institutions are based on the political consideration. Board appointments
must remain stable and unaffected by political developments.

46
 ICICI Bank

ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00
billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25
billion (US$ 896 million) for the year ended March 31, 2010. The Bank has
a network of 2,035 branches and about 5,518 ATMs in India and presence
in 18 countries. ICICI Bank offers a wide range of banking products and
financial services to corporate and retail customers through a variety of
delivery channels and through its specialized subsidiaries in the areas of
investment banking, life and non-life insurance, venture capital and asset
management.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange
and the National Stock Exchange of India Limited and its American
Depositary Receipts (ADRs) are listed on the New York Stock Exchange
(NYSE).

47
The corporate governance framework in ICICI Bank is based on an
effective independent Board, the separation of the Board’s supervisory role
from the executive management and the constitution of Board Committees,
generally comprising a majority of independent Directors and chaired by an
independent Director, to oversee critical areas.

4.1 Philosophy of Corporate Governance

ICICI Bank’s corporate governance philosophy encompasses not only

regulatory and legal requirements, such as the terms of listing agreements
with stock exchanges, but also several voluntary practices aimed at a high
level of business ethics, effective supervision and enhancement of value for
all stakeholders. The corporate governance framework adopted by the Bank
already encompasses a significant portion of the recommendations
contained in the Corporate Governance Voluntary Guidelines 2009 issued
by the Ministry of Corporate Affairs.

Definition of Corporate Governance by ICICI

ICICI bank has emphasized on the definition of corporate governance given

by OECD which is as follows:
“Corporate Governance is the system by which business corporation are
directed and controlled. The corporate governance structure specifies the

48
distribution of rights and responsibilities among different participants in
the corporation and spells out the rules and procedures for making
decision on corporate affairs.”

In the years to come, the Indian financial system will grow not only in size
but also in complexity as the forces of competition gain further momentum
and financial markets acquire greater depth. The policy environment will
remain supportive of healthy growth and development with accent on more
operational flexibility as well as greater prudential regulation and
supervision.

The real success of our financial sector reforms will however depend
primarily on the organizational effectiveness of the banks, including
cooperative banks, for which initiatives will have to come from the banks
themselves. It is for the co-operative banks themselves to build on the
synergy inherent in the cooperative structure and stand up for their unique
qualities. With elements of good corporate governance, sound investment
policy, appropriate internal control systems, better credit risk management,
focus on newly-emerging business areas like micro finance, commitment to
better customer service, adequate automation and proactive policies on
house-keeping issues, co-operative banks will definitely be able to struggle
with these challenges and convert them into opportunities.

Let’s conclude that the Reserve Bank and Securities Exchange Board of
India (SEBI) is continuously striving to ensure compliance with
international standards and best practices of corporate governance in banks
49
as relevant to India. RBI is also interacting closely with the Government and
the SEBI in this regard. The various committees that have been set up have
helped the banks with a better view of corporate governance. Increasing
regulatory comfort in regard to standards of governance in banks gives
greater confidence to shift from external regulation to internal systems of
controls and risk-management. Each of the directors of the banks has a role
in continually enhancing the standards of governance in banks through a
combination of appropriate knowledge and values.

50