CORPORATE GOVERNANCE, VALUES & ETHICS Unit-1 Corporate GovernanceCorporate Governance is concerned with holding the balance between

economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. - Sir Adrian Cadbury Corporate Governance is about promoting corporate fairness, Transparency, and Accountability (J. Wolfensohn)

Benefits of CG a) Good corporate governance ensures corporate success and economic growth. b) Strong corporate governance maintains investors confidence, as a result of which, company can raise capital efficiently and effectively. c) It lowers the capital cost. d) There is a positive impact on the share price. e) It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. f) Good corporate governance also minimizes wastages, corruption, risks and mismanagement. g) It helps in brand formation and development. h) It ensures organization in managed in a manner that fits the best interests of all. Need for Corporate Governance Separation of Ownership with Management Global Capital Investor Protection Foreign Investments Financial Reporting & Accountability Banks & Financial Institutions Globalization of Economy Importance of Corporate Governance Shapes growth & future of Capital markets of the economy.

Helps in raising funds from capital markets. It links management with its financial reporting system. Enables management to take innovative decisions for effective functioning of the enterprise within the legal framework of accountability. Good Corporate Governance enhances the structures t hrough which objectives the corporations are set, means of attaining such objectives are determined & performance is monitored. Supports investors by making corporate accounting practices transparent. Provides adequate & timely disclosure reporting requirements, code of conduct etc. Provides efficiency & effectiveness of the enterprise & adds to wealth of the economy. Improves International image of the corporate sector & enables home companies to raise global capital.

Business Environment of CG-

Internal Environment Board of Directors Internal Stakeholders Companys mission, values & norms

Shareholders value Concern for customers Investor Protection Corporate Governance Transparency Management Developed Corporate Sector

External Environment

Government Regulations SEBI Guidelines External Stakeholders Corporate Sector Influences

Principles of CG Oversight of preparation of the Entitys Financial Statements. Internal Controls & Independence of the entitys auditors. Review of the compensation arrangements for the chief executive officer & other senior executives. The way in which individuals are nominated for positions on the board The resources made available to directors in carrying out their duties. Oversight & management of risk Dividend Policy Principles of CG Transparency Accountability Independence Reporting Code of Corporate PracticesCode of Practice The CEO & Chairperson of the board of directors should be separate. The CEO is responsible for managing day-to-day operations of the company& Chairman should manage the affairs of the board.

The day-to-day activities include Planning, Organizing & implementing strategies approved by the board. The Organization should have non executive directors to the advantage of their experience & expertise.

Combined Code of Practice There should be a fool proof system of internal control to safeguard the investment of shareholders& assets of the company. Directors hold a fiduciary relationship with their stakeholders, i.e., relationship of trust & faith. The directors should annually conduct a review of internal control system of the firm. The review should be disclosed to the shareholders as it is important for the company to satisfy its shareholders. Most of the shareholders are small investors who invest their life time savings in companies in order to earn regular dividends & capital gains.

Corporate Governance in India Birla Committee Report Board of Directors Audit Committee Remuneration Committee Accounting Standards & Financial Reporting Management Shareholders

SEBI Code on Corporate Governance Board of Directors Audit Committee Remuneration to Directors Board Procedure Management Shareholders Report on Corporate Governance Compliance CII Code on Corporate Governance The key to good corporate governance is well functioning, informed board of directors. The board should meet a minimum of 6 times a year, preferably at an interval of 2 months Any listed companies with a turnover of Rs. 100 crore & above should have p rofessionally competent, independent, non executive directors who should constitute At least 30 % of the board if the chairman of the company is a non executive director or At least 50 % of the board if the chairman & managing director is the same person. No single person should hold directorships in more than 10 listed companies. For non executive directors to play a material role in corporate decision making & maximizing long term shareholder values. To secure better efforts from non executive directors While re-appointing members of the board, companies should give the attendance record of the concerned directors. Key information that must be reported to, & placed before the board must contain a) Annual operating plans & budgets together with updated long term plans. b) Capital budgets, manpower & overhead budgets

c) Quarterly results for the company as a whole & its operating divisions or business segments. Listed companies with either a turnover of over 100 crore or a paid of Rs. 20 crore should set up audit committees within 2 hrs. Major Indian stock exchanges should gradually insist upon a compliance certificate signed by the CEO & CFO which clearly states that The management is responsible for the preparation, integrity & fair presentation of the financial statements & other information in the annual report, & which also suggests that the company will continue in business in the course of the following year The accounting policies & principles conform to standard practice & where they do not, full disclosure has been made of any material departures. For all companies with paid up capitals of Rs. 20 crore or more, the quality & quantity of disclosure that accompanies a GDR issue should be the norm for any domestic managing diversity issue. Government must allow for greater funding to the corporate sector against the security of shares & other paper. If any company goes to more than one credit rating agency , then it must divulge in the prospectus & issue document the rating of all the agencies that did such an exercise. Companies that default on fixed deposits should not be permitted to Accept further deposits & make inter corporate loans or investments until the default is made good Declare dividends until the default is made good.

Corporate Governance & Social Responsibility Corporate Social Reporting Objectives of Corporate Social Reporting To measure contribution of firm to the society To determine whether firms social activities are consistent with the wider social priorities persistent in the society. To provide information on firms goals, policies, & contribution to social goals. To establish meaningful communication with the firms stakeholders which will demonstrate its performance & plans for future improvement. To improving firms reputation by demonstrating its concern about environmental & social issues & by fostering transparency & accountability. To improve firms environmental & social risk management by identifying its risks & their management

Corporate Social Responsibility Social Responsibility is an organizations obligation to benefit society in ways that transcend the primary business objective of maximizing profit. CSR is the continuing commitment by the business to behave ethically & contribute to economic development while improving the quality of life of the workforce & their families as well as as of the local community & society at large. Nature of SR Focus on Business Firms Deals with Moral Issues It is commensurate with the objective of Profit Maximization Pervasive Activity Continuous activity

Levels of SR

Obeyance of Law Catering to Public Expectations Anticipation of Public Expectations Creation of Public Expectations

Historical Perspective of CSR

Profit Maximization Trusteeship Management Quality of Life Management

Philosophical Perspective of SR

Traditional Philosophy Stakeholder Philosophy Affirmative Philosophy Models of CSRA. Philanthropic Model It assert that CSR is about companies making profits and donating a part of it for charitable causes. Companies should also pay their taxes regularly. The model is not against companies making profit but also should use a part of it for philanthropic or social use. B. European Model This model believes that companies should operate their business in a socially responsible way and invest in communities for social reason that will benefit the companies in the long run. Social responsibility is viewed as part of companys wealth creation process. It enhance competitiveness of business houses and maximizes their contribution to the society. Indian Modela. Trusteeship Model This model is towards social responsibility brings corporate management quite close to Mahatma Gandhis Philosophy of trusteeship.Acc. to this model even the supplier of capital should not treat the wealth as exclusively their own but, as something which they are holding in trust for the society. The trustee not only of shareholders but also of other broader interest like labour, consumers, government and society at large. b. Stakeholder Model According to this model company should look after the interests of all affected by their policies and operations. All those who are affected are known as stakeholders. Stakeholders are taking increasing interest in the activities of business. Theories of CSR Feminist Theory Stakeholder Theory Social Contract Theory Ethics & Nature Pragmatism

Dimensions of CSR a)Shareholders Dividends

Value of Investment Safety of Investment Disclosure

b) Employees Working Conditions Financial Gains Participation in Decision Making Training & Motivation Recognition of their Rights Obey the labor laws Job Security c) Customers Quality Goods Complete Information Customer Service Need based Products Regular Supply of Goods Safety of Products d) Organizations Healthy Competition Sharing of Resources e) Government Payment of Taxes Obeyance of Law Contribution to national Goals f) Community Pollution free environment Promote artistic & cultural activities Assistance in Rural & Urban Planning & Development Support Local Health Care Programmes Employment Opportunities Optimum Utilization of Resources Social Programmes Solve Social Problems Conform to Business Ethics

Philanthropy Vs CSR Philanthropy Narrower Perspective Focus more on financial activities Deals with humanitarian cause Focus on Profit Max. for shareholders Starts with top Mgt values Does not require outside expertise Focus on short run viability of companies

CSR Wider Perspective Focus on profits, people & planet Deals with business basics & ethics Focus on Employee, shareholders, customers Involves entire co organization & culture Requires Outside expertise Focus on long run sustainability of business firms

Corporate Governance & Role of Board of Directors

CG is a systematic process by which it is directed & controlled to enhance its wealth generating capacity . Basic principles that govern CG:Management should have the power to take decisions in the interest of the company Management should be accountable for its decisions. Governance at the level of BOD-

To align the interests of management with those of the shareholders & also protect the interests of other stakeholders like creditors, customers, suppliers etc. To define cos mission & goals To establish or approve strategic plans & ways to achieve goals framed in the plans. To set pace for the cos current operations & its future development. To determine the values to be promoted in the co. To appoint senior executives to manage the co. according to established plans, policies, and strategies. To determine strategic options, business strategies & plans & ensure that organization structure is appropriate to implement these plans & strategies. To delegate authority to managers & determine the monitoring criteria to evaluate the Implementation of plans, policies & strategies. To ensure effective communication with senior management, shareholders & other stakeholders& maintain effective internal control systems. To maintain & monitor relations with stakeholders by gathering relevant information.

Roles/Responsibilities of BOD

To maintain proper books of account To pay cos debts To act in the best interest of the co. as they are in a position of trust & faith. In case of conflict b/w the cos interest & their own, they should favour the co. To support the Executive & review his or her performance. To ensure availability of adequate resources To manage resources effectively To determine & monitor organizations programmes & services. To enhance the organizations public image

Powers of the BOD

a) Entry or exit from any business or product line except those which are delegated to CMC b) Making business plans , annual operating plans, budgets, long term business plans including strategies, budgets, revenues & profits. c) Promoting or closing divisions, subsidiaries, cos in India & abroad. d) Invest/divest in equity or preference capital of any co. e) Recommendations on the boards of subsidiary& associate cos of chairman, managing director & other directors.

Governance by the corporate management committee (CMC)

Roles of CMC To provide leadership to the board & CMC To work for cos goal according to the chapter approved by the board. To ensure that issues discussed in the meetings are on the agenda. To ensure that all directors & CMC members are enabled to participate in activities of the board CMC. To keep the board & CMC informed on all matter of importance Responsibilities of CMC To formulate business plans, objectives & strategies of the co. To formulate policies & processes of the organization. To formulate risk management systems. To formulate personnel policies regarding recruitment, selection, compensation & development of the human resource. To review the implementation of plans & obtain feedback. To review compliance to statutory requirements. Responsibilities of Executive Chairman

To preside at he meeting of shareholders, board &CMC. To help the board in formulating & achieving the co. objectives. To initiate the process of change for organizational growth. To ensure healthy corporate communication. To appraise the performance of executive directors & functional heads. To maintain healthy relationships with shareholders, government, regulatory bodies & other sections of the society. To sustain & enhance cos image as a responsible corporate citizen by catering to socially responsible activities To work for strategic goals of the cos business & be responsible to the board & CMC for the same. To guide the divisional head in management of his business

Responsibilities of Executive Directors

To work for strategic goals of the cos business & be responsible to the board & CMC for the same. To guide the divisional head in management of his business. To focus on development of human resource through career planning processes. To intermediate b/w divisional business & CMC/Board. To ensure conformity to effective to effective management processes at the divisional level. To attend divisional management committee meetings when required

Powers of Corporate Management Committee

a) b) c) d) e) f) g)

All key projects which require huge capital outlays & execution plans. Issue of bank guarantees for and on belief of the co. Opening & closing of bank accounts & changes in authorized signatories to cos bank a/cs. Appointment of DMC members which are based on the recommendations of the director. Write off & disposal of fixed assets Recruitment & confirmation of managers from a particular grade to a different grade. For giving gratuities, awards, rewards.

h) For all types of systems, policies, control manuals & other types of policy framework, aimed at excising operational & risk management controls. i) If there are some approved plans, it must be approved by CMC. j) For retrenchment , lockout, & layoffs , prior approval of CMC is needed Powers of Executive Chairman a) Executive chairman of the co. has the power to allocate business/ management portfolios among executive directors in relation to macro structuring of business groups. b) He can take any decision listed under the powers of CMC to meet the business exigencies. c) Appoint divisional heads in consultation with CMC. d) He can approve subscription to souvenirs/advertisement in brochures. e) He has the power to approve foreign travel of executive directors, heads of divisions & corporate functional heads of the co. f) He has the power to approve any event/people sponsorship Governance by Divisional Management committee (DMC) Responsibilities of the DMC Helps in formulating & recommending divisional business plans including objectives & strategies to CMC. Monitors effective implementation of approved business plans. Determination & recommendation of business specific policies, systems policies & processes. Monitors business Environment Ensures implementation of approved plans of human resources & policies at empow ered levels. Determines & ensures right implementation of industrial/employee relation policies. Responsibilities of the Divisional Head Effective executive management of the divisional business within CMC/board approved plans. Presides over DMC meetings. Provides effective leadership to the DMC Signs statutory compliance to confirm statutory compliance. International Corporate Governance Practices Monarchy Oligarchy Democracy Legislature Judiciary Executive Media Corporate Governance world Wide 1)Anglo American Model (English Speaking countries) Main Role is played by Chief Executive All cos need to make profits with ethics taken as a statement on corporate governance. Short term action is pervasive in nature Capital markets are active for takeovers & control There is poor management & co. is exposed to takeover threats

Anglo American shareholder centered model

Liberal model used in US, UK and gives priority to interests of shareholders. It encourages radical & cost competition. Strong Legal protection to shareholders.

innovation

Anglo American shareholder and stakeholder model Recognizes interests of workers, managers, suppliers, customers & community. It facilitates innovation & quality competition

2) Non Anglo American Model a) In East Asian countries family owned companies dominate. Pakistan, Indonesia, Malaysia, Philippines, Brazil, Argentina, Italy etc b) Japanese Style of CG is followed where c) (Monitoring by large shareholders & banks) There is inactive capital market More imps given to long term goals Mergers & Acquisitions are very few Firms are able to build a monitoring system of non executive directors as banks & FIs have sizable stakes in the equity capital of the cos.

United Nations Global Compact Policy 10 principles launched in 2000 at UN headquarters in areas of human rights, labour standards and environment by UN General secretary Kofi Annan Support & Respect the protection of internationally proclaimed human rights Ensure that they are not complicit in human rights abuses Uphold the freedom of association & effective recognition of the rights to collective bargaining Support the elimination of all forms of forced & compulsory labour. Support the effective abolition of child labour Eliminate discrimination with respect to employment & occupation Support a precautionary approach to environmental challenges Undertake initiatives to promote greater environmental responsibility Encourage the development & diffusion of Environment friendly technologies Business should work against corruption in all its forms including extortion. Indian Style In order to provide good CG some laws under the lRLF of the country are: Companies Act 1956 (constitution of BOD, appointment, removal of Directors, Acquisitions mergers etc.) Securities contracts regulation Act 1956 (Listing agreement of stock exchange. Competition Act (issues relating to promoting competition & controlling monopolistic trade activities) FEMA (Control activities related with foreign flow of funds) Board of industrial & financial reconstruction (Revival of Industries that have fallen sick) SEBI (Insider trading, unfair trade practices, regulation of stock exchange) The govt has renamed company affairs to corporate affairs vide presidential notification dated 9th May 2007 amending the govt. of India Rules 1961. Setting up of investor education & protection fund. Empowering investors through the medium of education & information with the help of investor associations, NGOs, ect. Launching of Websites- www.investorhelpline.in and www.watchout investors.com Growth through Governance RelianceReliance is in the forefront of implementation of Corporate Governance best practices Corporate Governance at Reliance is based on the following main principles:

Constitution of a Board of Directors of appropriate composition, size, varied expertise and commitment to discharge its responsibilities and duties. Ensuring timely flow of information to the Board and its Committees to enable them to discharge their functions effectively. Independent verification and safeguarding integrity of the Companys financial reporting. A sound system of risk management and internal control. Timely and balanced disclosure of all material information concerning the Company to all stakeholders. Transparency and accountability

Corporate Disclosure Practices & investor Protection Disclosure It is the process through which business enterprise communicates with the external parties. It is the communication of various details regarding activities of the business which are to be disclosed either statutorily or otherwise. Purpose is to convey a true & fair view of the operating results and financial positions to the users of the financial reports. Factors affecting Disclosure a) Increasing complexities & size of corporations b) Growing awareness of public & their interest in the corporate affairs. c) Changing socio-political environment in the country. d) Greater emphasis on rational decision making has enhanced the need for disclosure of information. e) For making sound investment decision f) Helps in assessing the risk of a company Objectives of Disclosure To disclose information in a timely, consistent, & appropriate manner. To protect & prevent the improper use or disclosure of material information & company information. To disseminate material information in accordance with all legal & regula tory requirements. Investor Protection in India Organizational Framework for investor protection -

On April 12 1988 SEBI was established to protect the rights of small investors & regulate & develop the stock market in India. In 1992 BSE Leading stock exchange in India witnessed the first major scam mastermind by Harshad Mehta. It was felt that if more powers would have given to SEBI this scam would have been prevented. As a result govt. of India introduced a separate legislation by the name of SEBI Act 1992 & conferred statutory powers to it. Since then SEBI introduced several stock market reforms which transformed the face of Indian stock markets.

SEBI (Securities and Exchange board of India) Established in April 12, 1992 in accordance with provisions of the securities & exchange board of India act 1992. Primary function is to protect the interests of investors in the security markets in India & to regulate the security market to ensure its orderly operation. It monitors & regulates CG of listed companies in India through clause 49 of the listing agreement

Kumar Mangalam Birla A committee set up by SEBI in 1999 under Shri Kumar Mangalam Birla to promote and raise the standards of good CG.

The primary objective of the committee was to view CG from the perspective of the investors & shareholders and to prepare a code to suit the Indian corporate environment. It identified 3 key constituents of CG as Shareholders, BOD, Management and outlayed their roles & responsibilities in context of good CG. N. R. Narayana Murthy Committee Committee set by SEBI under N. R. Murthy to review clause 49 and suggest measures to improve CG standards. Committee included captions of industry, academicians, public accountants, people from financial press & industry forums. Objectives were Review the performance of CG and Determine the role of companies in respond to rumor and other price sensitive information circulating in the market in order to enhance the transparency & integrity of the market.

SEBI & Clause 49 Kumar Mangalam Committee Mandatory Requirements BOD with respect to their composition, independence, procedure, code of conduct, and disclosure. Audit committee & its composition, power, role & responsibilities. Subsidiary co. to ensure their better control & supervisions. Disclosure in the context of related party transaction, risk mgt & minimization procedure, utilization of proceeds from initial public offering for investor education & protection. CEO/CFO certification regarding the correction of the financial statements & compliance with the prescribed accounting standards.