Professional Documents
Culture Documents
Corporate Governance Project
Corporate Governance Project
GOVERNANCE AN IDEA
WHOSE TIME HAS COME
Submitted in Partial Fulfillment of the
requirements for Masters in Financial
Management (MFM)
2008-2011.
By
CERTIFICATE
I, NADIRSHAW K. DHONDY, ADVOCATE SUPREME COURT,
have examined the thesis of Suresh Shama Devadiga who
is enrolled in LALA LAJPATRAI INSTITUTE OF
MANAGEMENT of Unique Roll No. 9 for the academic
year 2008-2011 in the course content Good Corporate
Governance an Idea whose time has come.
Signature
Nadirshaw K. Dhondy
Advocate Supreme Court
ACKNOWLEDGEMENTS
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Last but not certainly the least, I would like to extend my gratitude to the
faculty of Lala Lajpat Rai Institute of Management (LLIM), Mumbai and the
Library staff for equipping me with the basics that helped me throughout the
making of this project.
I am also thankful to Vidya my friend and my sister and all those seen and
unseen hands & heads, which have been of direct or indirect, help in the
completion of this project.
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PROLOGUE
Corporate Governance (CG) has emerged as one of the key elements of public
policy reforms individuals. It is still in its infancy; it has been around only for the
last three to four years. It is however not a foolproof concept as it relies heavily on
data available from insiders. But it has specific and special role to play to enhance
the strength of a particular unit and of the entire corporate sector. Corporate
Governance is to be maintained or observed as effective tool to assure the
stakeholders of their long-term interests without prejudice to public interest.
Corporate Governance is the term given to the management practices followed by
the business organizations. We believe that good business practices, transparency
in corporate financial reporting and the highest levels of corporate governance
must be maintained. These channels in turn are activated through several structural
and institutional factors pertaining to the corporation. They are as follows:
[1] The ownership structure of the organization.
[2] The financial structure of the corporation.
[3] The structure and functioning of the company boards and the associated
internal control systems.
[4] The legal, political and regulatory environment within which the Corporate
functions
Thus Corporate Governance (CG) is the way the firm ought to be run, managed
and controlled. It is related with supervision and holding the responsibility of those
who direct and control the management.
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It is known fact that vital needs of success of any organization lingers on its ability
to mobilize and utilize all kinds of resources to meet the objectives clearly set as
part of the planning process. Managing well depends on internal and external
factors, the latter include availability, cost effectiveness; technological
advancement. Increasingly, revelations of deterioration in quality and transparency,
have called for adoption of internationally accepted Best Practices. The
acceptance of the concept gave rise to Corporate Governance. Corporate
Governance encompasses commitment to values and to ethical business conduct to
maximize shareholder values on a sustainable basis, while ensuring fairness to all
stakeholders including customers, employees, and investors, vendors, Government
and society at large. Corporate Governance is the system by which companies are
directed and managed. It influences how the objectives of the company are set and
achieved, how risk is monitored and assessed and how performance is optimized.
Sound Corporate Governance is therefore critical to enhance and retain investors
trust.
Corporate governance is about ethical conduct in business. Ethics is concerned
with the code of values and principles that enables a person to choose between
right and wrong, and therefore, select from alternative courses of action. Further,
ethical dilemmas arise from conflicting interests of the parties involved. In this
regard, managers make decisions based on a set of principles influenced by the
values, context and culture of the organisation. Ethical leadership is good for
business as the organization is seen to conduct its business in line with the
expectations of all stakeholders. What constitutes good Corporate Governance will
evolve with the changing circumstances of a company and must be tailored to meet
these circumstances.
The very definition of corporate governance stems from its organic link with the
entire gamut of activities having a direct or indirect influence on the financial
health of corporate entities. The Cadbury Report (1992) simply describes
Corporate Governance as the system by which companies are directed and
controlled. So far as corporate governance is concerned, it is financial integrity
that assumes tremendous importance. This would mean that the directors and all
concerned should be open and straight/forthright about issues where there is
conflict of interest involved in financial decision making. When it comes to even
the purchase/procurement procedures, there is need for greater transparency.
Prof. Kenneth Scott of Stanford Law School described, corporate governance as
to include every force that bears on the decision-making of the firm, that would
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encompass not only the control rights of stockholders, but also the contractual
covenants and insolvency powers of the debt holders, the commitments towards
employees, customers and suppliers, the regulations and the statutes. In addition,
the firms decisions are powerfully affected by competitive conditions in the
various markets in which it operates. Despite the various attempts to define
corporate governance and its elements, there is no single model of good corporate
governance. Although the general principles are widely accepted, they are not set
in concrete and must be adjusted to reflect the specific circumstances and needs of
individual organizations.
The Business Roundtable states:
Good corporate governance is not a one size fits all proposition, and a wide
diversity of approaches to corporate governance should be expected and entirely
appropriate. Moreover, a corporations practices will evolve as it adapts to
changing situations.
The one size fits all approach has also been rejected by the OECD, which,
instead, has advocated the need for pluralism, flexibility and adaptability in
corporate governance.
The OECD has recently reinforced this view and stated that to remain competitive
in a changing world, corporations must innovate and adapt their corporate
governance practices so that they can meet new demands and grasp new
opportunities.
The Corporate system and diverse ownership did contribute in a substantial
measure to prosperity, employment potential and living standards of the subjects
across the globe. Notwithstanding the contributions, the failures too caused
concerns among the regulators. Existing laws, rules and controls did not adequately
address the issues related to the failures caused by deficient or intentional
fraudulent managements. In USA, the Sarbanes-Oxley Act 2002 was passed to
address the issues associated with corporate failures, achieve quality governance
and restoring investor confidence. The Securities and Exchange Commission of
USA initiated action against multinational accounting firms for failure to detect
blatant violation of accounting standards, and penalities running to several million
dollars were recovered, from certain multinational consultancy firms.
(ii) Board controls are laid down code of conduct and accountable to
shareholders for creating, protecting and enhancing wealth and resources 5 of
the Company reporting promptly in transparent manner while not involving in
day to day management.
(iii) Classification of non-executive directors into those who are independent
and those who are not.
(iv) Independent directors not to have material or pecuniary relations with the
Company / subsidiaries and if had, to disclose in Annual Report.
(v) Laying emphasis on calibre of non-executive directors especially
independent directors.
(vi) Sufficient compensation package to attract talented non-executive directors.
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(vii) Optimum combination of not less than 50% of non-executive directors and
of which companies with non-executive Chairman to have at least one third of
independent directors and under executive Chairman at least one half of
independent directors.
(viii) Nominee directors to be treated on par with any other director,
(ix) Qualified independent Audit committee to be setup with minimum of three
all being non-executive directors with one having financial and accounting
knowledge.
(x) Corporate governance report to be part of Annual Report and disclosure on
directors remuneration etc., to be included.
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DIRECTORS RESPONSIBILITY
The following major responsibilities of the board of directors reflect the broad
purposes of governance:
Define and uphold the mission and purpose of the MFI.
Develop and approve strategic directions (with management); monitor
achievement of strategic goals.
Oversee management performance, including selection, support and
evaluation of CEO.
Ensure that the MFI manages risks effectively; assume fiduciary
responsibility.
Foster effective organizational planning, including succession planning.
Ensure adequate resources to achieve the mission, including assisting in
raising of equity and debt.
Represent the MFI to the community and the public; ensure that organization
fulfills its responsibilities to the larger community.
Ensure that the organization changes to meet emerging conditions;
particularly in times of distress, temporarily assume management
responsibilities.
The further responsibilities address board and board member conduct:
Uphold the ethical standards of the organization, with transparency and
avoidance of conflicts of interest.
Represent the interests of the MFI as a whole and not those of one
shareholder or group of shareholders.
Evaluation and commitment for improving their performance.
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INSIDER TRADING
The basic rights of the shareholders include right to transfer and registration of
shares, obtaining relevant information on the company on a timely and regular
basis, participating and voting in shareholder meetings, electing members of the
board and sharing in the residual profits of the corporation.
The Committee therefore recommends that as shareholders have a right to
participate in, and be sufficiently informed on decisions concerning fundamental
corporate changes, they should not only be provided information as under the
Companies Act, but also in respect of other decisions relating to material changes
such as takeovers, sale of assets or divisions of the company and changes in capital
structure which will lead to change in control or may result in certain shareholders
obtaining control disproportionate to the equity ownership.
The Committee recommends that information like quarterly results, presentation
made by companies to analysts may be put on companys web-site or may be sent
in such a form so as to enable the stock exchange on which the company is listed to
put it on its own web-site. The Committee recommends that the half-yearly
declaration of financial performance including summary of the significant events
in last six-months, should be sent to each household of shareholders.
A company must have appropriate systems in place which will enable the
shareholders to participate effectively and vote in the shareholders meetings. The
company should also keep the shareholders informed of the rules and voting
procedures, which govern the general shareholder meetings. The annual general
meetings of the company should not be deliberately held at venues or the timing
should not be such which makes it difficult for most of the shareholders to attend.
The company must also ensure that it is not inconvenient or expensive for
shareholders to cast their vote.
Currently, although the formality of holding the general meeting is gone through,
in actual practice only a small fraction of the shareholders of that company do or
can really participate therein. This virtually makes the concept of corporate
democracy illusory. It is imperative that this situation which has lasted too long
needs an early correction. In this context, for shareholders who are unable to attend
the meetings, there should be a requirement which will enable them to vote by
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postal ballot for key decisions. This would require changes in the Companies Act.
The Committee was informed that SEBI has already made recommendations in this
regard to the Department of Company Affairs. The Committee believes that the
General Body Meetings provide an opportunity to the shareholders to address their
concerns to the board of directors and comment on and demand any explanation on
the annual report or on the overall functioning of the company. It is important that
the shareholders use the forum of general body meetings for ensuring that the
company is being properly stewarded for maximising the interests of the
shareholders. This is important especially in the Indian context. It follows from the
above that for effective participation shareholders must maintain decorum during
the General Body Meetings.
The effectiveness of the board is determined by the quality of the directors and the
quality of the financial information is dependent to an extent on the efficiency with
which the auditors carry on their duties. The shareholders must therefore show a
greater degree of interest and involvement in the appointment of the directors and
the auditors. Indeed, they should demand complete information about the directors
before approving their directorship.
The Committee recommends that in case of the appointment of a new director or
re-appointment of a director the shareholders must be provided with the following
information:
A company should:
1. Lay solid foundations for management and oversight, recognise and publish the
respective roles and responsibilities of board and management.
2. Structure the board to add value - Have a board of an effective composition, size
and commitment to adequately discharge its responsibilities and duties.
3. Promote ethical and responsible decision-making
- Actively promote ethical and responsible decision-making.
4. Safeguard integrity in financial reporting
- Have a structure to independently verify and safeguard the integrity of the
companys financial reporting.
5. Make timely and balanced disclosure
- Promote timely and balanced disclosure of all material matters concerning the
company.
6. Respect the rights of shareholders
- Respect the rights of shareholders and facilitate the effective exercise of those
rights.
7. Recognise and manage risk
- Establish a sound system of risk oversight and management and internal control.
8. Encourage enhanced performance
9. Remunerate fairly and responsibly
10. Recognise the legitimate interests of stakeholders
11. Corporate Governance Rating be made mandatory for listed companies.
Traditionally the matters with corporate sector were involved with esoteric branch
of commercial law. Limited generally to a narrow view of how to ensure the
managers follow the interests of shareholders. Basic standards of Corporate
Governance structure and processes have been slowly evolving over last two
decades. Traditionally it was observed only in respect of the operation of market
pressure.
Looking beyond India the scenario in general is different. In the country like U.S.
and U.K. there is an active market for corporate control to discipline managers, if
they fail to maximize shareholders wealth. They largely adopted three main
instruments they are- "Proxy Contests". Friendly mergers and Hostile takeover.
The first among the above said there is considered more effective Friendly mergers
have hardly succeeded to solve the "agency problem". While takeover is not
appealing strongly on the ground of heavy cost incurred in it and also for want of
political will conducive to the policy. In Germany and Japan the system that
prevails in U.K. and U.S. is absent. Unlike that system there is "Banking
Supervision". The main bank financing the corporate unit acts as an external
control mechanism. In such case very least intervention is found and that only
when financial problem arises. It is in light of these experiences that innovative
approach to the concept is formed. Several credit rating agencies have stepped in
the market and they are offering services of the kind, which meets with the Quality
of Governance in corporate entities.
Institutional investors in companies based in emerging markets claim to be willing
to pay as much as 30 percent more for shares in companies that are well-governed.
Do these investors mean what they say? The authors examined 188 companies
from India, Korea, Malaysia, Mexico, Taiwan and Turkey to test the link between
market valuation and corporate governance practices. They found that companies
with better corporate governance has higher price-to-book ratios, indicating that
investors do indeed reward good governance, and with quite a large premium:
companies can expect a 10 to 12 percent boost to their market valuations by going
from worst to best on any single element of governance(MC Kinsey survey). One
can relatively easily develop financial market, through a determined effort to
improve corporate governance practices.
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For calculation of corporate governance score the author has used the six major
variables, which are then divided into sub components. Weights are assigned to
each of these components. (As shown in Table 1). The variables and weights have
been taken after careful study of existing literature. The CG Score has been
calculated by assigning to each variable component points on a 5 to 1 Linkers
Point scale.
Table 1
Following Variables are assessed
Weights
6%
5%
2%
4%
3%
6%
b) Remuneration Committee
6%
c) Nominations Committee
5%
3%
3) Transparency (20%)
a) Related Party Transactions
10%
b) Executive Compensation
10%
7%
8%
9%
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b) Takeover Defences
6%
4%
3%
c) Social Responsibility
3%
Total Score
100%
Case I
CORPORATE
GOVERNANCE
TECHNOLOGIES LTD.
PRACTICES
IN
INFOSYS
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Infosys was incorporated in 1981 with the vision of building a globally respected
corporation a vision that has translated into a strong organization commitment
towards discipline, fair play and good corporate governance. Infosys was the first
Indian company to emphasise on strong corporate governance practices in India.
The company expanded its corporate governance practices significantly beyond
what was required by the letter of the law. It voluntarily complied with the US
GAAP accounting requirements, and was the first company to prepare financial
statements in compliance with the GAAP requirements of eight countries. The
company was also among the first in the country to incorporate a number of
innovative disclosures in its financial reporting, including human resources
valuation, brand valuation, value-added statement and EVAR report Integrity,
fairness and transparency across its operations has been the main mantra for
Infosys.
Infosys emphasizes its commitment to a strong value system and corporate
governance practices, by making this and integral part of the training of every
employee. Infosys was a pioneer in inducting independent directors to its Board,
thus greatly strengthening Board oversight of senior management in the company.
Over the years, the management emphasized continuous dialogue with its investors
and placed a high priority on investor relations and feedback. For example, Infosys
early investments in stock markets ended as soon as it was apparent that investors
felt that these added no value. Infosys focus on corporate governance not only
brought global visibility to the company but also created pressure on other Indian
firms to raise their governance standards. This led to an encouragement trend of
companies across industries scaling up their corporate governance standards and
going beyond mandatory requirements.
Infosys believes that good corporate governance must also translate into being a
responsible corporate citizen. The senior executives of Infosys have also served on
various task forces set up by the Indian government to develop meaningful
corporate governance codes and ethical industry practices. Over the last 25 years,
Infosys has remained committed to being ethical, sincere and open in its dealings
with all its stakeholders. It has enabled the company to build an organization that is
trusted and admired not just in India but also by companies across the world. Its
disclosure standards, detailed segmental data, presentation of accounts as per
GAAP of eight countries, detailed cost break-ups are among the best in the
industry. Infosys also provides the most detailed manpower data- very important in
its space. Age profiles, experience, education levels and gender mix are all
elaborated in detail. Infosys is one of the very few companies in India to have a
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4.
5.
6.
7.
Satisfy the spirit of the law and not just the letter of the law. Corporate
governance standards should go beyond the law .
Be transparent and maintain a high degree of disclosure levels. When in
doubt, Disclose.
Make a clear distinction between personal conveniences and corporate
resources.
Communicate externally, in a truthful manner, about how the Company is
run internally.
Comply with the laws in all the countries in which we operate.
Have a simple and transparent corporate structure driven solely by business
needs.
Management is the trustee of the shareholders' capital and not the owner.
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As a part of their commitment to follow global best practices, they comply with the
Euro shareholders Corporate Governance Guidelines, 2000, and the
recommendations of The Conference Board Commission on Public Trusts and
Private Enterprises in the U.S. They also adhere to the UN Global Compact
Programme.
CG Score & Company Valuation.
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Taking into account the above variables and studying the corporate governance of
the company in detail we got the following scores for Infosys Technologies Ltd.
( The details of the scores are given in the table below)
Corporate Governance Score of Infosys Technologies (2002-2007)
Period
2007
2006
2005
2004
2003
2002
85%
85%
83%
81%
79%
75%
Following table shows the CG score, Market Capitalization and Enterprise Value of
Infosys Technologies Ltd.
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Period
2007
2006
2005
2004
2003
2002
115307
82154
61073
32909
26847
24654
109657
78375
59390
31070
25208
23627
85%
85%
83%
81%
79%
75%
2006
2005
2004
2003
2002
11.5
15
11.5
29.5
27
20
85%
85%
83%
81%
79%
75%
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2007
2006
2005
2004
2003
2002
3777
2421
1859
1243
958
808
13149
9028
6860
4761
3623
2654
85%
85%
83%
81%
79%
75%
Results of Correlation : Correlation with profit after tax is +0.83 and with
turnover is +0.86.
Turnover proxy of Firm size is positively correlated with good corporate
governance practices. High positive correlation between PAT also suggests that
better corporate governance practices result in better operating performance.
Coefficient of determination confirms the inferences drawn from the coefficient of
correlation. One can argue that even with the highest estimates of financial
fundamentals one can achieve the same growth in value by more than twice sales
growth or 35% increase in financial results demands more efforts compared to
corporate governance practices improvement leading to the same value growth.
But again improving the performance is related with profitability, which in turn is
the return of brand image. Therefore, the brand is the practical reason for
improving the governance.
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Good governance requires a mindset within the corporation, which integrates the
corporate code of ethics into the day-to-day activities of its managers and workers.
As the sociologists Rossouw and van Vuuren note, companies must move from the
reactive and compliance mode of corporate ethics, to the integrity mode,
where the functions of the entire organization are completely aligned with its value
system.
CASE II
CORPORATE GOVERNANCE PRACTICES IN ITC LTD.
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CORE PRINCIPLES
ITC's Corporate Governance initiative is based on two core principles. These are :
i.
Management must have the executive freedom to drive the enterprise
forward without undue restraints; and
ii.
This freedom of management should be exercised within a framework of
effective accountability.
ITC believes that any meaningful policy on Corporate Governance must provide
empowerment to the executive management of the Company, and simultaneously
create a mechanism of checks and balances which ensures that the decision making
powers vested in the executive management is not only not misused, but is used
with care and responsibility to meet stakeholder aspirations and societal
expectations.
Cornerstones
From the above definition and core principles of Corporate Governance emerge the
cornerstones of ITC's governance philosophy, namely trusteeship, transparency,
empowerment and accountability, control and ethical corporate citizenship. ITC
believes that the practice of each of these leads to the creation of the right
corporate culture in which the company is managed in a manner that fulfils the
purpose of Corporate Governance.
Trusteeship :
ITC believes that large corporations like itself have both a social and economic
purpose. They represent a coalition of interests, namely those of the shareholders,
other providers of capital, business associates and employees. This belief therefore
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time the retirement age for both Executive and Non-Executive Directors. The
Board shall specify the maximum number of company Directorships which can be
held by members of the ITC Board.
Non-Executive Directors are expected to play a critical role in imparting balance to
the Board processes by bringing an independent judgement to bear on issues of
strategy, performance, resources, standards of Company conduct, etc.
The Board shall meet at least six times a year and as far as possible meetings will
be held once in two months. The annual calendar of meetings shall be agreed upon
at the beginning of each year. As laid down in the Articles of Association of the
Company, the quorum for meetings shall be one third of members and decisions
shall be taken by simple majority, unless statutorily required otherwise. Meetings
shall be governed by a structured agenda. All major issues included in the agenda
shall be backed by comprehensive background information to enable the Board to
take informed decisions. Agenda papers, as far as practicable, shall be circulated at
least three working days prior to the meeting. Normally items for the Board
Agenda, except those emanating from Board Committees, shall have been
examined by the CMC. Minutes shall be circulated within 15 working days of the
meeting and confirmed at the next meeting. Board decisions shall record the
related logic as far as practicable.
The Board shall have the following Committees whose terms of reference shall be
determined by the Board from time to time :
Audit Committee : To provide assurance to the Board on the adequacy of internal
control systems and financial disclosures. The Head of Internal Audit will act as
coordinator to the Audit Committee, but will be administratively under the control
of the Director accountable to the Board for the Finance function.
Compensation Committee : To recommend to the Board compensation terms for
Executive Directors and the senior most level of management below the Executive
Directors.
Nominations Committee : To recommend to the Board nominations for
membership of the CMC and the Board, and oversee succession for the senior most
level of management below the Executive Directors.
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Committee
Members
Chairman
Audit
Committee
Committee
Executive Directors.
Chairman.
Investor
Services
Committee
Directors of the Company, as may be One of the nondecided by the Board, with the Company Executive Directors,
Secretary as the Secretary.
to be determined by
the Board.
Executive Director :
a) As a member of the CMC, contribute to the strategic management of the
Company's businesses within Board approved direction / framework.
b) As Director accountable to the Board for a business (Line Director), assume
overall responsibility for its strategic management, including its governance
processes and top management effectiveness.
c) As Director accountable to the Board for a wholly owned subsidiary, or its
wholly owned subsidiary (Line Director), act as the custodian of ITC's interest and
be responsible for their governance in accordance with the charter approved by the
Board.
d) As Director accountable to the Board for a particular corporate function (Line
Director), assume overall strategic responsibility for its performance.
Divisional Management Committee (DMC) :
Executive management of the divisional business to realise tactical and strategic
objectives in accordance with CMC / Board approved plan. Composition of the
DMC shall be determined by the Line Director with the approval of the CMC. The
Divisional CEO shall convene and chair the DMC meetings. If the Divisional
CEO, for any reason, is not in a position to convene a required DMC meeting, he
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shall in writing delegate the power to convene and chair the required meeting to
one of the DMC members identified by name. Such delegation should be either for
a specific meeting or for meetings to be held during a specific period of time. It
cannot be a general, open-ended delegation. The key functions of the Division shall
be represented on the DMC. Normally the Divisional Financial Controller, in
addition to being a member, shall act as the Secretary to the DMC and will be
responsible for circulation and custody of agenda notes and minutes. The DMC
shall generally meet at least once a month to review Divisional performance and
related issues. Quorum for meetings shall be 50% of the members subject to a
minimum of three members. Decisions will be taken by simple majority. Minutes
of meetings shall be tabled before the CMC for its information. Agenda items shall
be backed by comprehensive notes from the relevant member / invitee. Agenda
papers, as far as practicable, shall be circulated at least three days prior to the
meeting.
Divisional CEO :
The Divisional CEO shall function as the Chief Operating Officer with executive
responsibility for day-to-day operation of the Divisional business, and shall
provide leadership to the Divisional Management Committee in its task of
executive management of the Divisional business.
CONCLUSION
It is ITC's belief that the right balance between freedom of management and
accountability to shareholders can be achieved by segregating strategic supervision
from strategic and executive management. The Board of Directors (Board) as
trustees of the shareholders will exercise strategic supervision through strategic
direction and control, and seek accountability for effective strategic management
from the Corporate Management Committee (CMC). The CMC will have the
freedom, within Board approved direction and framework, to focus its attention
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and energies on the strategic management of the Company. The Divisional Chief
Executive, assisted by the Divisional Management Committee, will have the
freedom to focus on the executive management of the divisional business.
The 3-tier governance structure thus ensures that :
a.
Strategic supervision (on behalf of the shareholders), being free from
involvement in the task of strategic management of the Company, can be
conducted by the Board with objectivity, thereby sharpening accountability of
management.
b.
Strategic management of the Company, uncluttered by the day-to-day tasks
of executive management, remains focused and energised; and
c.
Executive management of the divisional business, free from collective
strategic responsibilities for ITC as a whole, gets focused on enhancing the quality,
efficiency and effectiveness of its business.
BIBLIOGRAPHY
http://en.wikipedia.org/wiki/Corporate_governance
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EPILOGUE
When it comes to corporate governance, I think we will have to look at the
hardware as well as the software aspect. So far as the software aspect is concerned,
I would suggest, it depends on the values cherished and practiced by the members
of the Board of Directors as well as the management of an organisation. It is
always possible to mouth very high principles but act in a very lowly manner. If
there is going to be divergence between practice and precept, then we are not going
to achieve good corporate governance. This is the first point to be realised.
The most important aspect for observing corporate governance is the top
management, particularly the board of directors and the senior level management
of an enterprise - walking their talk. It is by walking their talk that the top
management can earn credibility. This also has a direct bearing on the morale of an
organisation.
When it comes to the hardware aspect of corporate governance, we go into the
issue of a code, which becomes a reference point for behaviour. But the sad fact in
our country is that even though there is a lot of talk about corporate governance,
when it comes to reality, nothing much happens.
With the SEBI trying to bring some discipline in the stock market especially in
terms of greater transparency and disclosure norms, corporate governance in the
Indian context at least seems to focus primarily and rightly on the issue of
transparency. It is lack of transparency that leads to corrupt or illegal behaviour. If
corporate governance is concerned with better ethics and principles, it is only
natural that the focus should be on transparency. But how is this transparency to be
achieved? One method of course is the code. Another would be the regulatory
authorities like SEBI, RBI etc. laying down guidelines so that a certain degree of
transparency is automatically ensured. Another legal approach to achieve better
corporate governance may be to look at the whole issue of bringing the corporate
sector under the discipline of debt and equity. Perhaps amendment of the
Companies Act and bringing in this discipline will also help in automatically
ensuring better ethics and corporate governance.
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Perhaps the most important challenge we face towards better corporate governance
is the mindset of the people and the organisational culture. This change will have
to come from within. The government or the regulatory agencies at best can
provide certain environment, which will be conducive for such a mindset taking
place, but the primary
responsibility, is of the people especially the members of the board of directors and
the top management.
Another important aspect is to realise that ultimately the spirit of corporate
governance is more important than the form. Substance is more important than
style. Values are the essence of corporate governance and these will have to be
clearly articulated and systems and procedures devised, so that these values are
practiced.
We then come to a common moral problem in running enterprises. One can have
practices which are legal but which are unethical. In fact, many a time, tax
planning exercises may border on the fine razors edge between the strictly legal
and the patently unethical. A clear understanding of the fundamental values which
govern corporate governance and their explicit articulation in a proper code backed
by well established structures and traditions like the ethics committee and audit
committee may be the best insurance for good corporate governance under the
circumstances.
Corporate governance and ethical behaviour have a number of advantages. Firstly,
they help to build good brand image for the company. Once there is a brand image,
there is greater loyalty, once there is greater loyalty, there is greater commitment to
the employees, and when there is a commitment to employees, the employees will
become more creative. In the current competitive environment, creativity is vital to
get a competitive edge.
Corporate governance extends beyond corporate law. Its objective is not mere
fulfillment of legal requirements but ensuring commitment on managing
transparently for maximising shareholder values. As competition increases,
technology pronounces the deal of distance and speeds up communication,
environment also changes. In this dynamic environment the systems of Corporate
Governance also need to evolve, upgrade in time with the rapidly changing
economic and industrial climate of the country.
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Finally the key lesson for us to learn are that Regulations and Policies are only one
part of improving governance. Existence of a comprehensive system alone cannot
guarantee ethical pursuit of shareholders interest by Directors, officers and
employees. Quality of governance depends upon competence and integrity of
Directors, who have to diligently oversee the management while adhering to
unpeachable ethical standards. Strengthened systems and enhanced transparency
can only further the ability. Transparency about a companys governance process is
critical. Implementing Corporate Governance structures are Important but instilling
the right culture work culture is Most Essential.
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Certificate
Acknowledgements
Prologue
Introduction
Clause 49
6,7,8,9
9,11
Directory Responsibility
12
Insider Trading
13
Shareholders
Governance Principles
13,14,15
15,17
17
19
19 ,21,22,23,24,25,26
26,28,29,30,31,32,34,35,36
36
38,39,40
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