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Definition of Corporate Governance

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include labor(employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large. The OECD Principles of Corporate Governance states: "Corporate governance involves a set of relationships between a companys 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 and monitoring performance are determined." While the conventional definition of corporate governance and acknowledges the existence and importance of 'other stakeholders' they still focus on the traditional debate on the relationship between disconnected owners (shareholders) and often self-serving managers. Indeed it has been said, rather ponderously, that corporate governance consists of two elements: 1. The long term relationship which has to deal with checks and balances, incentives for manager and communications between management and investors; 2. The transactional relationship which involves dealing with disclosure and authority. As fundamentally important as these traits are, we prefer to take a rather broader view, which places the Cadbury Code and other codes developed since (Combined Code, Sarbanes-Oxley, King, etc) in a wider context and shows its recommendations emerging naturally in the course of a companys evolution. In an early book on corporate governance, also published in 1992, one of the creators of this website developed a definition of corporate governance as consisting of five elements which the board must consider:

Long term strategic goals Employees: past, present and future Environment/community Customers/suppliers Compliance (legal/regulatory)

Corporate Governance Under Company Act, BAFIA and NRB Directive 6 Corporations in Nepal can be grouped into three categories family owned business private companies, public companies and banks and financial institutions. The private and public companies are incorporated as per the provision of Sec 3 while a company not distributing profit is incorporated under Sec 166. The banks and financial institutions are governed by Banks and Financial Institutions Act 2063 (BAFIA 2063). The corporate governance guidelines in Company Act 2063 can be presented in the following bases: Accountability of Directors, Officials and Substantial Shareholders Personal liability of directors for any loss sustained due to maliciously and deliberately made false statements in prospectus of the company. [Sec 24(3)] Personal liability of directors for any loss or damages suffered by an investor due to discriminatorily share allotment backed up by an willful intention to cause a loss to the investor. [Sec 28 (5) and (6)] The directors' obligation to prepare strategy to address substantial reduction (50%) in net worth of the company. [Sec 60(1)]. Their obligation to convene a special meeting and present a resolution, if necessary. [Sec 60(2)]. Punishment and personal liability if they fail to prepare such a strategy and call a meeting or if such reduction has resulted from their mala fide intention or malicious. Personal liability of the officer who has given false financial statement in a general meeting about the company's financial position provided such information affects the capital of the company due to higher dividend distribution.[Sec 102] Directors have fiduciary duty to act in the best interest of the company [Sec 99] Directors are specific duty not to exceed their powers [Sec 103]

Transparency in Transaction and Conflict of Interest Valuation by an engineer or an accountant of in-kind contribution for shares by promoters or purchase of assets by the company from promoters. [Section 18.3] Duties of directors to disclose necessary matters to the company within 7 days of assuming the office. [Sec 92] No transaction to be concluded between the directors, his close relatives, substantial shareholder and subsidiary company and the company unless approved by the general meeting. [Sec 93] Disclosure by directors of securities held in the company or subsidiary or holding company [Sec 94]

Prohibition on loan and any financial assistance by the company to officer, substantial shareholders, shareholder of a holding company or a close relative of such person. [Sec 101] Requirement to give beneficial interest on the shares [Sec 47] Information required to be given on becoming substantial shareholder [Sec 50] Shareholders having conflict are not qualified to vote in general meetings [Sec 70]

Minority shareholders protection Restriction on board's authority to sale, transfer, lease or surrender of 70% or more of any undertaking; to make excessive credit utilization (i.e. more than paid up capital and free reserves) and excessive charity, except for staff and promotional activities. [Sec 105] Disclosure of related party transactions including inter-corporate guarantees, loans among any company, its holding company or its and its holding companys subsidiary. [Sec 175] Restriction on lending in excess of more than 60% of paid up capital and free reserves or 100% of reserves to another company and providing guarantee for the same or buying debentures at the same level. [Sec 176] subject to certain exceptions. Shareholders' agreement to be void if any provision of such agreement is prejudicial to the interest of the minority shareholders. [Sec 187] Court can intervene if minority (5% or more) feels its rights are infringed by a change in the objectives clause of the incorporation documents; within 21 days of the decision; the court can require the company to buy out the minority. [Section 21.4] Creditors Protection Reduction of share capital requires court permission, sufficient safeguards, and discretion to the court, to ensure that the reduction does not adversely affect the creditors. [Sections 58 and 59] Financial Reporting Discipline Accounts of the company to be maintained according to double entry book keeping system and in consonance with the accounting standards enforced under the prevailing law. [Sec 108] BoD's responsibility to prepare the annual final statements giving the true and fair view of the state of affairs, before annual general meeting. [Sec 109] Auditor to be appointed to carry out audit. [Sec 111] An audit committee to be formed in a listed company with paid up capital of thirty million rupees or more or a company which is fully or partly owned by the Government of Nepal. [Sec 164]

Reason of Corporate Governance Failure in Enron


Chairman and CEO As part of the good governance, it is a good practice to separate the roles and responsibilities of the Chairman of the Board and the CEO. This is due to the fact that the Chairman is considered as the head of the Board, who is selected from among the BOD while the CEO is in charge of the entire management. If the same individual holds both the position, there will be too much concentration of power that will result to the dilution of the board. In Enron, after the resignation of as a CEO, Kenneth Lay holds both the Chairman and CEO positions. Audit Committee Boards work through sub-committees and the audit committee is considered as one of the most important aspects. It overseas the work of the auditor as well as independently inquires into the different workings of the organization. Furthermore, it also brings lapses to the attention of the full board. This is considered as one of the fault of Enron. The audit committee failed to focus in the said roles and responsibilities. The Board assigned the Audit as well as the Compliance Committee the additional duty in reviewing the transactions, however, the Committee carried out the entire reviews only in a cursory manner. Independence and Conflicts of Interest It is important to consider that good governance plays an important role in any company and organization, due to the fact that it can help the organization to become open to all the stakeholders. In connection to that, good governance entails that the outside directors must maintain their independence and must not benefit from their membership in the board, other than the remuneration, or else, it can lead to the presence of the conflict of interest. If we are going to analyze the condition of Enron, it can be said that the company had created a good practice, but in the way that the board had behaved, they compromised their independence. This can be seen in the situation and behavior of six out of 14 outside directors, where in they have suffered from serious conflict of interest.

Flow of Information The flow of information is very important aspect of the organization, and it is considered as one of the most important factors in terms of good governance. The board needs to be provided and showed with different important information and data in timely manner, in order for them to perform their roles and responsibilities. In the situation of Enron, the directors are pleading

ignorance of the murky deals as a way of excusing themselves of the liability. The board had been denied the important information that will serve as a key to the reason of the action, but the Board did not fully understand and appreciate the vitality of some of the information that have came before it. Too Many Directorships There is a great need for time and effort in order to become the director of a given company. Even though a board only needs to meet for 4 to 5 times in a year, the directors must make time to read and reflect over all of the materials that have been provided and make final decisions. In terms of good governance, it suggests that an individual sitting on too many boards looks upon it only as a sinecure for he or she will not have the time to do a good. In the case of Enron, one of its Directors, , is a Director of 11 other public companies ( 2002). It shows that the time, effort and ability of the Director will be divided to different other companies.

Reasons for Parmalat Failure


Lack of Information to Investor Parmalat's founder and now former CEO Calisto Tanzi engaged the firm in several exotic enterprises, such as a tourism agency called Parmatour, and the purchase of the local soccer club Parma. Huge sums were poured into these two enterprises, which have been a loss from the very beginning. It has been reported that Parmatour, now closed, has a loss of at least EU 2 billion, an incredibly high figure for a tourist agency Ineffective Auditing The auditing companies were unable to find out the real scene within the company. It was unable to find out about 4 billion dollars in BOA fake account. Lack of BOD Power The company owners were illegally channeling the money of the company into their accounts. This was due to the lack of power balancing within the company. There was no one to oppose such actions.