Corporate Governance

SOME THOUGHTS ON
CORPORATE GOVERNANCE
 CORPORATE GOVERNANCE

1) INTRODUCTION

Corporate Governance is a phenomenon of recent

origin.
The concept of Corporate Governance hinges on
total transparency, integrity and accountability of
Management.
 CORPORATE GOVERNANCE

2) CORPORATE FAILURES

The Origin of Corporate Governance lies in

Corporate failures and Corporate Scams.
The Corporate failures/Scams have occurred in
some of the following areas and for some of
the following reasons :
 Corporate Governance
• A) Areas
i) Transgression of Law / Legal System .
ii) Large scale Diversion of Funds to Risky
ventures .
iii) Diversion of Funds to associate
concerns

 AREAS

iv) Preferential allotment of Shares at low prices to

promoters / associates .

v) Spinning off profitable business operations to
subsidiary Companies and charging royalty for
use of Brand name by parent Company .

vi) Insider Trading .
 
 Areas
vii) Big Public Issues - Address of
Registered office non - traceable.
 
viii) Projections in Prospectus and actuals
never close .
 ix)Rubber Stamp Boards .
 
x) Accounting & Audit lacunae.
 Areas
xi)Auditor / Consultant relationship with Company.
 
xii)Financial Reporting, Wrong Accounting practices.
 
xiii)Corporate Disclosure.
 
xiv)Shareholder Protection.
 
xv)Social Responsibility.
 b) REASONS

i) Out dated Company Law .

ii) Small % Shareholding but full control
of Management .
iii) Ignorant Investors .
iv) Family Management .
v) Lack of Professionalisation .
 b) Reasons
vi) Institutions holding larger % of shares but
effecting least control .
 
vii) Politically motivated appointments of CEOS

viii) Stock Market Scams .

ix) Weak Stock exchanges regulations,

Regulators .
 b) Reasons
x) No Protection to Shareholders - No
returns to Shareholders .

xi) Lack of Transparency .

xii) Lack of Accountability . 

xiii) Lack of Business Ethics .

 b) Reasons

xiv) Lack of Integrity .

 
xv) Lack of Business Plans / Strategy .

xvi) Changes in Ownership .

xvii)Lack of Commitment to values.

 b) Reasons
xviii)Lack of Benchmarks.
 
xix)Political Intervention.
 
xx) No shareholder participation .
 
xxi) Human side of Business ignored .
 b) Reasons
xxii) Lack of information to Shareholders .
 
xxiii) Corporate Arrogance .

xxiv) Poor Structure of the Board of Directors. 

xxv) No Legislation on Corporate Governance.

 Corporate Governance

3. CORPORATE GOVERNANCE
 
Corporate Governance is a Voluntary ethical
Code of business of Companies. It is a System, a
process by which companies are directed and
controlled and managed in the best interests of all.
 
 Corporate Governance

Corporate Governance is concerned with the establishment

of a system whereby the Directors are entrusted with
responsibilities and duties in relation to the directions of
Corporate affairs . It is concerned with accountability of
who are managing it. It is concerned with morals, ethics,
values, parameters, conduct and behaviour of the Company
and its management .
 
It is an interplay between Companies, Shareholders,
Creditors, Capital Markets, Financial Sector,
Institutions and Company Law .
4. MODERN CORPORATES

Modern Corporates have been forced into good

Governance, whether they like it or not
because of the following reasons :
 
i) Globalisation and international Exposure /
Pressure .

ii) Global Competition and drastic changes in

Management approach .
4. MODERN CORPORATES

iii) Global Market driven economy stipulating

transparency and business ethics.

iv) Need of the present day Corporate World .

v) Arrival of FIIs and FDI inflows.

vi) Clause 49 of Listing Agreement.

5) Corporate Manifesto
• Every Corporate body is expected to develop its
own manifesto in the following areas :

i) Corporate Excellence .

ii) Corporate Performance .

 
iii) Centre for Corporate Excellence .
5) Corporate Manifesto

iv) Corporate Democracy .

 
v) Corporate Integrity .
 
vi) Corporate Strength .

vii) Corporate Transparency .

5) Corporate Manifesto
viii) Corporate Ethics .

ix) Corporate Propriety .

 
x) Corporate Mission .
 
xi) Corporate Policy .
 
xii) Code of Governance .
6) Test of Corporate Governance

Several tests have to be adopted to assess

whether there has been effective
corporate governance. Broadly, the test of
corporate governance should cover the
following aspects :
 6) Test of Corporate Governance
(a) Whether the funds of the Company have been
deployed for pursing the main objects of the
Company as enshrined in the Memorandum of
Association .
 
(b) Whether the funds raised from financial
institutions and the capital market have been
utilised for the purposes for which they were
intended ?
 6) Test of Corporate Governance

(c) Whether the Company has the core competence

to effectively manage its diversifications ?
 
(d) Whether there has been diversion of funds by
way of loans and advances or investments to
subsidiary or investment companies ?
 
6) Test of Corporate Governance

(e) Whether the personal properties of

the Directors have been let out at a
fabulous rent to the Company ?
 
(f) Whether the funds of the Company
have been diverted to the promoters
through shell companies to permit the
promoters to shore up their stake in the
company ?
6) Test of Corporate Governance
(g) Whether the provisions of the
Companies Act, FEMA, the Factories
Act and other statutes are complied
with, in letter and in spirit ?
 
(h) Whether the practices adopted by the
Company and its management towards
its shareholders, customers, suppliers,
employees and the public at large are
ethical and fair ?
 6) Test of Corporate Governance

(i) Whether the directors are provided with

information on the working of the
company and whether the institutional and
non-executive directors play an active role
in the functioning of the companies ?
 
(j) Whether the internal controls in place are
effective ?
6) Test of Corporate Governance

(k) Whether there is transparent

financial reporting and audit practices
and the accounting practices adopted
by the company are in accordance with
ICAI accounting standards ?
6) Test of Corporate Governance

The ultimate test of Corporate

Governance is the Capital Market.
The advent of FIIs has brought in
increasing sophistication and
professionalism in the way the Market
judges companies and the quality of
Management .
6) Test of Corporate Governance

Companies which have rewarded

Shareholders, followed accounting
policies and implemented expansion
plans out of internal accruals, struck to
their areas of core competence and
consolidated their market shares have
been winners in the Stock market .
7. CORPORATE GOVERNANCE RATING

Unbiased, dispassionate and neutral

rating by professional bodies is called
for. The parameters on which the rating
could be carried out as indicated in the
monograph published by the WIRC of
ICSI are as below :
7. CORPORATE GOVERNANCE RATING

I. Management (6) Max. Score 30

a) Leadership & Strategy .
b) Competence
c) Decision Making
d) Organisational Climate
7. CORPORATE GOVERNANCE RATING

II. Ethics (5) Max. Score 25

a) Written Code
b) Corporate Social Responsibility
c) Good Business Practices - GBP
7. CORPORATE GOVERNANCE RATING

III. Customers (4) Max. Score 20

a) Good Manufacturing / Service
Practices - GMP / GSP

b) Customer Satisfaction
 7. CORPORATE GOVERNANCE RATING

IV.Creativity and Innovation (3)

Max. Score 15
a) New Products/Services
b) R & D Initiatives
c) Other Innovations
7. CORPORATE GOVERNANCE RATING

V. Financial Performance (2)

Max. Score 10
a) Wealth Creation
b) Wealth Management
c) Wealth Distribution
7. CORPORATE GOVERNANCE RATING

VI. Disclosure Standards (1)

Max. Score 05
a) Adequacy and Compliance
b) Better Standards
8. CONCLUSION :

- Not all well governed corporates do

well in business, nor do the badly
governed ones always sink. Even the
best performers risk stumbling some
day, if they lack strong and
independent Boards of Directors.
8. CONCLUSION :

- Women are effective force both for good

Governance and for business trust. Can we
have more women on boards?
 
- Today Corporates are not lootable
resources any more but Global public goods.
 
- Can we discuss new national and
international financial architecture which
could overcome financial scams.
8. CONCLUSION :

- Can Indian Corporates become models

in Corporate Governance practices?

Whose interests do Corporates serve ?

 
Should there be a Corporate
Governance audit and Corporate
Governance officers ?
THANK YOU