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Corporate governance is concerned with set of principles, ethics, values,

morals, rules regulations, & procedures etc. Corporate governance establishes a
system whereby directors are entrusted with duties and responsibilities in relation
to the direction of the companys affairs.

The term governance means control i.e. controlling a company, an

organization etc or a company & corporate governance is governing or controlling
the corporate bodies i.e. ethics, values, principles, morals. For corporate
governance to be good the manager needs to meet its responsibilities towards its
owners (shareholders), creditors, employees, customers, government and the
society at large. Corporate governance helps in establishing a system where a
director is showered with duties and responsibilities of the affairs of the company.
For effective corporate governance, its policies need to be such that the directors
of the company should not abuse their power and instead should understand their
duties and responsibilities towards the company and should act in the best
interests of the company in the broadest sense.

The concept of corporate governance is not an end; its just a beginning

towards growth of company for long term prosperity.

What is Corporate Governance?

Corporate governance is typically perceived by academic literature as dealing with
problems that result from the separation of ownership and control. From this
perspective, corporate governance would focus on: The internal structure and rules
of the board of directors; the creation of independent audit committees; rules for
disclosure of information to shareholders and creditors; and, control of the

Definitions of Corporate Governance

The concept of corporate governance sounds simple and unambiguous, but when
one attempts to define it and scan available literature to look for precedence, one
comes across a bewildering variety of perceptions behind available definitions.
The definition varies according to the sensitivity of the analyst, the context of
varying degrees of development and from the standpoint of academics versus
corporate managements. However, there is an underlying uniformity in the
thinking of all analysts that there is a definite need to eradicate corporate
misgovernance and promote corporate governance at all costs. It is not only the
stakeholders who are keenly interested in ensuring adoption of best governance
practices by corporates, but all societies and countries worldwide.

Principles of Corporate Governance

Contemporary discussions of corporate governance tend to refer to principles
raised in three documents released since 1990: The Cadbury Report (UK, 1992),
the Principles of Corporate Governance (OECD, 1999, 2004 and 2015),
the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and Organisation for
Economic Co-operation and Development(OECD) reports present general
principles around which businesses are expected to operate to assure proper
governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is
an attempt by the federal government in the United States to legislate several of
the principles recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders: Organizations should

respect the rights of shareholders and help shareholders to exercise those
rights. They can help shareholders exercise their rights by openly and
effectively communicating information and by encouraging shareholders to
participate in general meetings.
Interests of other stakeholders: Organizations should recognize that they
have legal, contractual, social, and market driven obligations to nonshareholder stakeholders, including employees, investors, creditors, suppliers,
local communities, customers, and policy makers.
Role and responsibilities of the board: The board needs sufficient relevant
skills and understanding to review and challenge management performance. It
also needs adequate size and appropriate levels of independence and
Integrity and ethical behavior: Integrity should be a fundamental requirement
in choosing corporate officers and board members. Organizations should
develop a code of conduct for their directors and executives that promotes
ethical and responsible decision making.
Disclosure and transparency: Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide
stakeholders with a level of accountability. They should also implement
procedures to independently verify and safeguard the integrity of the
company's financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors have
access to clear, factual information.



Good corporate governance in the changing business environment has emerged as

powerful tool of competitiveness and sustainability. It is very important at this
point and it needs corporation for one and all i.e. from CEO of company to the
ordinary staff for the maximization of the stakeholders value and also for
maximization of pleasure and minimization of pain for the long term business.
Global competitions in the market need best planning, management, innovative
ideas, compliance with laws, good relation between directors, shareholders,
employees and customers of companies, value based corporate governance in
order to grow, prosper and compete in international markets by strengthen their
strength overcoming their weaknesses and running them effectively and efficiently
in an efficient and transparent manner by adopting the best practices.
Corporate India must commit itself as reliable, innovative and prompt service
provider to their customers and should also become reliable business partners in
order to prosper and to have all round growth.
Corporate Governance is nothing more than a set of ideas, innovation, creativity,
thinking having certain ethics, values, principles etc which gives direction and
shape to its people, employees and owners of companies and help them to flourish
in global market.
Indian Corporate Bodies having adopted good corporate governance will reach
themselves to a benchmark for rest of the world; it brings laurels as a way of
appreciation. Corporate governance lays down ethics, values, and principles,
management policies of a corporation which are inculcated and brought into
practice. The importance of corporate governance lies in promoting and maintains
integrity, transparency and accountability throughout the organization.

Corporate governance has existed since past but it was in different form. During
Vedic times kings used to have their ministers and used to have ethics, values,
principles and laws to run their state but today it is in the form corporate
governance having same rules, laws, ethics, values, and morals etc which helps in
running corporate bodies in the more effective ways so that they in the age of
globalization become global giants.
Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance
are some of the global giants which have their flag of success flying high in the
sky due to good corporate governance.
Today, even law has a great role to play in successful and growing economy.
Government and judiciary have enacted several laws and regulations like SEBI,
FEMA, Cyber laws, Competition laws etc and have brought several amendments
and repeal the laws in order that they dont act as barrier for these corporate
bodies and developing India. Judiciary has also helped in great way by solving the
corporate disputes in speedy way.
Corporate bodies have their aim, values, motto, ethics and principles etc which
guide them to the ladder of success. Big and small organizations have their
magazines annual reports which reflect their achievements, failure, their profit and
loss, their current position in the market. A few companies have also shown
awareness of environment protection, social responsibilities and the cause of
upliftment and social development and they have deeply committed themselves to
it. The big example of such a company can be of Deepak Fertilizers and
Petrochemicals Corporation Limited which also bagged 2nd runner up award for
the corporate social responsibility by business world in 2005.

Under the present scenario, stakeholders are given more importance as to

shareholders, they even get chance to attend, vote at general meetings, make
observations and comments on the performance of the company.
Corporate governance from the futuristic point of view has great role to play. The
corporate bodies in their corporate have much futuristic approach. They have
vision for their company, on which they work for the future success. They take
risk and adopt innovative ideas, have futuristic goals, motto, and future objectives
to achieve.
With increase in interdependent and free trade among countries and citizens across
the globe, internationally accepted corporate governance standards are of
paramount importance for Indian Companies seeking to distinguish themselves in
global footprint. The companies should always keep improving, enhancing and
upgrading themselves by bringing more reliable integrated product and service
quality. They should be more transparent in their conduct.
Corporate governance should also have approach of holistic view, value based
governance, should be committed towards corporate social upliftment and social
responsibility and environment protection. It also involves creative, generative and
positive things that add value to the various stakeholders that are served as
customers. Be it finance, taxation, banking or legal framework each and every
place requires good corporate governance.
Hence corporate governance is a means and not an end, corporate excellence
should be end.

What is the purpose of doing this methodology? What are there needs?
The main purpose of doing this investigation in corporate governance is to
understand the objectives and its importances and their Drawbacks:

Corporate governance provides a structure that, at least in theory, works for
the benefit of everyone concerned by ensuring that the enterprise adheres to
accepted ethical standards and best practices as well as to formal laws. To that
end, organizations have been formed at the regional, national, and global levels.
In recent times, corporate governance has received increased attention because of
high-profile scandals involving abuse of corporate power and, in some cases,
alleged criminal activity by corporate officers. An integral part of an effective

corporate governance regime includes provisions for civil or criminal prosecution

of individuals who conduct unethical or illegal acts in the name of the enterprise.
Aims and objectives:
It is said that good corporate governance helps an organization achieve
several objectives and some of the more important ones include:
Developing appropriate strategies that result in the achievement of
stakeholder objectives.
Attracting, motivating and retaining talent.
Creating a secure and prosperous operating environment and improving
operational performance.
Managing and mitigating risk and protecting and enhancing the companys
Some aspects covered in the poll include:
Corporate governance regulations in India.
Corporate governance concerns in India and role of independent directors
and audit committees in addressing these concerns.
Board practices, board oversight of risk management and the importance
given to integrity and ethical values.
Practices that are fundamental to improved corporate governance. In
comparison with developed countries that impose stringent penal and
criminal consequences for poor corporate governance, penalty levels in
India are considered to be inadequate to enforce good governance. 71
percent of the respondents considered penalty levels to discipline poor and
unethical governance to be low. 22 percent of the respondents were either
undecided or did not know if the penalty levels are low.


Corporate governance concept emerged in India after the second half of
1996 due to economic liberalization and deregulation of industry and
business. With the changing times, there was also need for greater
accountability of companies to their shareholders and customers. The report
of Cadbury Committee on the financial aspects of corporate Governance in
the U.K. has given rise to the debate of Corporate Governance in India.
Need for corporate governance arises due to separation of management
from the ownership. For a firm success, it needs to concentrate on both
economical and social aspect. It needs to be fair with producers,
shareholders, customers etc. It has various responsibilities towards
employees, customers, communities and at last towards governance and it
needs to serve its responsibilities at the best at all aspects.
The corporate governance concept dwells in India from the Arthshastra
time instead of CEO at that time there were kings and subjects. Today,
corporate and shareholders replace them but the principles still remain
same, unchanged i.e. good governance.
20th century witnessed the glossy of Indian Economy due to liberalization,
globalization, and privatization. Indian economy for the 1st time here was
together with world economy for product, capital and lab our market and
which resulted into world of capitalization, corporate culture, business
ethics which was found important for the existence of corporation in the
world market place.


The Data sources mainly collected from secondary sources
through the use of Internet search. It is an External sources i.e through
the Google, Safari etc.. Attempt to make a Descriptive study method
used to understand the performance Principle, objectives, weakness of
corporate governance in India. By Analysing this we understand the
concept of corporate governance in past, present future, law and
framework of our India.


There are several important issues in corporate governance and they play a great
role, all the issues are inter related, interdependent to deal with each other. Each
issues connected with corporate governance have different priorities in each of the
corporate bodies.
The issues are listed as below:

Value based corporate culture


Holistic view


Compliance with laws


Disclosure, transparency, & accountability



Corporate governance and human resource management




Necessity of judicial reforms


Globalization helping Indian companies to become global giants based on

good corporate governance.


Lessons from Corporate failure

1. Value based corporate culture: For any organization to run in effective way,
it needs to have certain ethics, values. Long run business needs to have based
corporate culture. Value based corporate culture is good practice for corporate
governance. It is a set of beliefs, ethics, principles which are inviolable. It can be a
motto i.e. A short phrase which is unique and helps in running organization, there
can be vision i.e. dream to be fulfilled, mission and purpose, objective, goal,
2. Holistic view: This holistic view is more or less godly, religious attitude which
helps in running organization. It is not easier to adopt it, it needs special efforts
and once adopted it leads to developing qualities of nobility, tolerance and
3. Compliance with laws: Those companies which really need progress, have
high ethical values and need to run long run business they abide and comply with
laws of Securities Exchange Board Of India (SEBI), Foreign Exchange Regulation
Act, Competition Act 2002, Cyber Laws, Banking Laws etc.
4. Disclosure, transparency, and accountability: Disclosure, transparency and
accountability are important aspect for good governance. Timely and accurate

information should be disclosed on the matters like the financial position,

performance etc. Transparency is needed in order that government has faith in
corporate bodies and consequently it has reduced corporate tax rates from 30%
today as against 97% during the late 1970s. Transparency is needed towards
corporate bodies so that due to tremendous competition in the market place the
customers having choices dont shift to other corporate bodies.
5. Corporate Governance and Human Resource Management: For any
corporate body, the employees and staff are just like family. For a company to be
perfect the role of Human Resource Management becomes very vital, they both
are directly linked. Every individual should be treated with individual respect, his
achievements should be recognized. Each individual staff and employee should be
given best opportunities to prove their worth and these can be done by Human
Resource Department. Thus in Corporate Governance, Human Resource has a
great role.
6. Innovation: Every Corporate body needs to take risk of innovation i.e.
innovation in products, in services and it plays a pivotal role in corporate
7. Necessity of Judicial Reform: There is necessity of judicial reform for a good
economy and also in todays changing time of globalization and liberalization.
Our judicial system though having performed salutary role all these years,
certainly are becoming obsolete and outdated over the years. The delay in
judiciary is due to several interests involved in it. But then with changing scenario
and fast growing competition, the judiciary needs to bring reforms accordingly. It
needs to speedily resolve disputes in cost effective manner.


8. Globalization helping Indian Companies to become global giants based on

good governance: In todays age of competition and due to globalization our
several Indian Corporate bodies are becoming global giants which are possible
only due to good corporate governance.
9. Lessons from Corporate Failure: Every story has a moral to learn from,
every failure has success to learn from, in the same way, corporate body have
certain policies which if goes as a failure they need to learn from it. Failure can be
both internal as well as external whatever it may be, in good governance,
corporate bodies need to learn from their failures and need to move to the path of


1. No Proper Structure:
It is true that the corporate governance has no unique structure or design
and is largely considered ambiguous. There is still lack of awareness about its
various issues, like, quality and frequency of financial and managerial disclosure,
compliance with the code of best practice, roles and responsibilities of Board of
Directories, shareholders rights, etc. There have been many instances of failure
and scams in the corporate sector, like collusion between companies and their
accounting firms, presence of weak or ineffective internal audits, lack of required
skills by managers, lack of proper disclosures, non-compliance with standards,
etc. As a result, both management and auditors have come under greater scrutiny.


But, with the integration of Indian economy with global markets, industrialists and
corporate in the country are being increasingly asked to adopt better and
transparent corporate practices. The degree to which corporations observe basic
principles of good corporate governance is an increasingly important factor for
taking key investment decisions. If companies are to reap the full benefits of the
global capital market, capture efficiency gains, benefit by economies of scale and
attract long term capital, adoption of corporate governance standards must be
credible, consistent, coherent and inspiring. Individual shareholders, who usually
do not exercise governance rights, are highly concerned about getting fair
treatment from controlling shareholders and management. Creditors, especially
banks, play a key role in governance systems, and serve as external monitors over
corporate performance. Employees and other stakeholders also play an important
role in contributing to the long term success and performance of the corporation.
Thus, it is necessary to apply governance practices in a right manner for better
growth of a company. There are two types of mechanism that resolve the conflicts
among different corporate claim-holders, especially, the conflicts between owners
and managers, and those between controlling shareholders and minority
shareholders. The first type consists of various internal variables, e.g.
(1) the ownership structure,
(2) Board of directors
(3) Executive compensation and
(4) Financial disclosure.
The second includes external mechanism with variables, e.g.
(1) Effective takeover market,

(2) Legal infrastructure and

(3) Product market competition.
2. No Government Support
Strong governance standards focusing on fairness, transparency, accountability
and responsibility are vital not only for the healthy and vibrant corporate sector
growth, as well as inclusive growth of the economy. Recent corporate
scandals have led to public pressure to reform business practices and increase
regulation. The public outcry over the recent scandals has made it clear that the
status quo is no longer acceptable: the public is demanding accountability and
responsibility in corporate behavior. It is widely believed that it will take more
than just leadership by the corporate sector to restore public confidence in our
capital markets and ensure their ongoing vitality. It will also take effective
government action, in the form of reformed regulatory systems, improved
auditing, and stepped up law enforcement. These responses make clear that the
governance of corporations has become a central item on the public policy agenda.
The recent scandals themselves demonstrate that lax regulatory institutions,
standards, and enforcement can have huge implications for the economy and for
the public. Of course, government responses to scandals should be well considered
and effective.
3. Insider Trading
Corporate insiders like officers, directors and employees by the virtue of their
position have access to confidential information about the corporation and may
misappropriate that information to reap profits. In most countries, trading by
corporate insiders such as officers, key employees, directors, and large

shareholders may be legal, if this trading is done in a way that does not take
advantage of non-public information. However, the term is frequently used to refer
to a practice in which an insider or a related party trades based on material nonpublic information obtained during the performance of the insiders duties at the
corporation, or otherwise in breach of a fiduciary or other relationship of trust and
confidence or where the non-public information was misappropriated from the
company. Such corporate insiders use these information in such a way to reap
profits or avoid losses on the stock market, to the detriment of the source of the
information and to the typical investors who buy or sell their stock without the
advantage of inside information. The term insider trading is popularly used in
the negative sense as it is perceived that the persons having access to the price
sensitive and unpublished information used the same for their personal gains.
However insider trading per se does not mean any illegal conduct. It encompasses
both legal as well as illegal conduct. The legal version is when corporate insiders
officers, directors, and employees buy and sell stock in their own companies. In
order to legalize their transactions, the directors and employees of the company
should inform about their dealing with the securities to the SEBI. Insider trading is
defined as-The use of material non public information in trading the shares of the
company by a corporate insider or any other person who owes a fiduciary duty to
the company. SEBI is the watchdog of all the stock exchanges in India. It has
been obligated to protect the interest of the investors in the securities market and
to regulate the stock market through such other regulations as it deems fit. It is due
to the very fact that the investors invest on the shares being speculative, but when
the prices of the shares could be predicted well before in hand then they may take
a decision accordingly. Hence, pre determined price may result in undesired
consequences as people may buy huge amount of shares whose value may

Section 17 Securities Exchange Act, 1933 contained prohibitions to deal with the
fraud in the sale of the securities in the most stringent manner possible. The Act
addressed insider trading directly through Section 16(b) and indirectly through
Section 10(b). Section 16(b) of the Securities Exchange Act, 1934 prohibits the
purchase and sale of the shares within six month period involving the directors,
officers, stock holders owning more than 10% of the shares of the company. The
rationale behind the incorporation of this provision is that it is only the substantial
shareholders and the persons concerned with the decision and management of the
company who can have access to the price sensitive information and therefore
there should be bar upon them to transact in securities.
In the case of Samir.C.Arora vs. SEBI Mr. Arora was prohibited by the SEBI in its
order not to buy, sell or deal in securities, in any manner, directly or indirectly, for
a period of five years. Also, if Mr. Arora desired to sell the securities held by him,
he required a prior permission of SEBI. Mr. Arora contested this order of SEBI in
the Securities Appellate Tribunal. SAT set aside the order of SEBI on grounds of
insufficient evidence to prove the charges of insider trading and professional
misconduct against Mr. Arora.
This case testifies the fact that the SEBI lacks the thorough investigative
mechanism and a vigilant approach due to which the culprits are able to escape
from the clutches of law. In most of the cases, SEBI failed to adduce evidence and
corroborate its stance before the court. Unlike the balance of probabilities that is
required in proving a civil liability, a case involving criminal liability requires the
allegations to be proved beyond reasonable doubts. Therefore there should be
thread bare investigation and all the loopholes if any should be properly plugged


4. Basis of Indian Model

The problem in the Indian corporate sector is that of disciplining the dominant
shareholder and protecting the minority shareholders. Clearly, the problem of
corporate governance abuses by the dominant shareholder can be solved only by
forces outside the company itself. In an environment in which ownership and
management have become widely separated, the owners are unable to exercise
effective control over the management or the Board.
The central problem in Indian corporate governance is not a conflict between
management and owners as in the US and the UK, but a conflict between the
dominant shareholders and the minority shareholders. The problem of the
dominant shareholder arises in three large categories of Indian companies. First
are the public sector units (PSUs) where the government is the dominant (in fact,
majority) shareholder and the general public holds a minority stake. Second are
the multinational companies (MNCs) where the foreign parent is the dominant (in
most cases, majority) shareholder. Third are the Indian business groups where the
promoters (together with their friends and relatives) are the dominant shareholders
with large minority stakes, government owned financial institutions hold a
comparable stake, and the balance is held by the general public. It is important to
bear in mind that the relation between the company and its shareholders and the
relation between the shareholders inter-se is primarily contractual in nature.
The memorandum and articles of association of the company constitute the core of
this contract and the corporate law provides the framework within which the
contracts operate. The essence of this contractual relationship is that each
shareholder is entitled to a share in the profits and assets of the company in
proportion to his shareholding. Flowing from this is the fact that the Board and the

management of the company have a fiduciary responsibility towards each and

every shareholder and not just towards the majority or dominant shareholder.
Shareholder democracy is not the essence of the corporate form of business at all.
Shares are first and foremost ownership rights rights to profits and assets. In
other cases, shares also carry some secondary rights including the control rights
rights to appoint the Board and approve certain major decisions. The term
shareholder democracy focuses on the secondary and less important part of
shareholder rights. Corporate governance ought to be concerned more about
ownership rights. If a shareholders ownership rights have been trampled upon, it
is no answer to say that his control rights have been fully respected.
Family-owned business- Family-owned companies are characterized as
organizations in which the shareholders belong to the same family and
participate substantially in the management, direction, and operation of the
company. A family business refers to a company where the voting majority
is in the hands of the controlling family; including the founder(s) who
intend to pass the business on to their descendants. Many Indian businesses
are old family establishments and while controlling shareholders may
welcome cash infusions by outside investors, but they may hesitate to
relinquish control. It becomes difficult for outsiders to track the business
realities of individual companies. As the family and its business grow larger,
this situation can lead to many inefficiencies and internal conflicts that
could threaten the continuity of the business. Family control also brings
governance problems not least of which are a lack of checks and balances
over executive decision making and behavior, and a lack of transparent
reporting to the outside world.

Noncompliance with disclosure norms and even the failure of auditors

reports to conform to the law attract nominal fines with hardly any punitive
action. The Institute of Chartered Accountants in India has not been known
to take action against erring auditors.
While the Companies Act provides clear instructions for maintaining and
updating share registers, in reality minority shareholders have often suffered
from irregularities in share transfers and registrations deliberate or
Sometimes non-voting preferential shares are used by promoters to channel
funds and deprive minority shareholders of their dues.
Minority shareholders have sometimes been defrauded by the management
undertaking clandestine side deals with the acquirers in the relatively scarce
events of corporate takeovers and mergers.
Misleading financial statements- There are many ways to present factually
accurate information on a financial statement in a manner that is misleading
to investors . By, for example, selling property from a parent company to a
subsidiary to maximize parent company revenues.
The Harshad Mehta stock market scam of 1992 followed by incidents of
companies allotting preferential shares to their promoters at deeply
discounted prices as well as those of companies simply disappearing with
investors money. These concerns about corporate governance stemming
from the corporate scandals as well as opening up to the forces of
competition and globalization gave rise to several investigations into the
ways to fix the corporate governance situation in India.

One of the big problems with Indian corporate governance is that too many
listed companies and directors follow the letter of the law, rather than the
spirit. Clause 49 of the countrys listing rules sets out a series of corporate
governance regulations. For example, a listed company must have a nonexecutive and one-third of its board should be non-executive directors. The
nonexecutives should be on the board to challenge management, but in
reality they tend not to.
Good people are very few partly because there is a legal limit on the
amount companies can pay non-executives. They are not allowed to receive
a salary and can only be paid for attendance at board meetings That gives
the non-executives little incentive to fulfill their obligations properly.
Directors remuneration needs a rethink, as does the process of appointing
directors. Currently, non-executives are generally selected by the board,
with little input from shareholders they should become more active. An
independent agency should also rate the standards of corporate governance
at listed companies.


Corporate Governance Framework In India

Ever since India's biggest-ever corporate fraud and governance failure unearthed
at Satyam Computer Services Limited, the concerns about good Corporate
Governance have increased phenomenally.
Internationally, there has been a great deal of debate going on for quite some time.
The famous Cadbury Committee defined "Corporate Governance" in its Report
(Financial Aspects of Corporate Governance, published in 1992) as "the system by
which companies are directed and controlled".

The Organisation for Economic Cooperation and Development (OECD), which, in



its Principles



Governance gives


comprehensive definition of corporate governance, as under:

"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 and monitoring performance are determined. Good
corporate governance should provide proper incentives for the board and
management to pursue objectives that are in the interests of the company and
shareholders, and should facilitate effective monitoring, thereby encouraging
firms to use recourses more efficiently."
Generally, Corporate Governance refers to practices by which organisations are
controlled, directed and governed. The fundamental concern of Corporate
Governance is to ensure the conditions whereby organisation's directors and
managers act in the interest of the organisation and its stakeholders and to ensure
the means by which managers are held accountable to capital providers for the use
of assets. To achieve the objectives of ensuring fair corporate governance, the
Government of India has put in place a statutory framework.


Law can only provide a minimum code of conduct for proper regulation of
human being or company.[4] Law is made not to stop any act but to ensure that if
you do that act, you will face such consequences i.e. good for good and bad for
bad. Thus, in the same manner, role of law in corporate governance is to
supplement and not to supplant. It cannot be only way to govern corporate
governance but instead it provides a minimum code of conduct for good corporate

governance. Law provides certain ethics to govern one and all so as to have
maximum satisfaction and minimum friction. It plays a complementary role. Role
of law in corporate governance is in Companies Act which imposes certain
restrictions on Directors so that there is no misrepresentation of documents, there
is no excessive of power, so that it imposes duty not to make secret profit and
make good losses due to breach of duty, negligence, etc, duty to act in the best
interest of the company etc.
Before dealing with perspectives of corporate governance lets understand what is
meant by the term perspective. Oxford Advanced Learner Dictionary defines the
term perspective as:1.

The Art of drawing solid objects on a flat surface so as to give the right

impression of their relative height, width, depth, distance, etc.

2. Apparent relation between different aspects of a problem.
In simple terms it means the right impression.
Mainly we will deal with the perspectives of corporate governance from three
points of view:
1. Shareholders (Capital Market) Control perspective
2. Organization (Management) Control perspective
3. Stakeholders Control perspective

1. Shareholders: as providers of a risk capital have final control on resource

allocation decisions.
2. Organization: have the main purpose is to control i.e. through skills,
intelligence, innovation, ideas, professionalism etc. Therefore, here in this
perspective, resource allocation decision should rest with them.

3. Stakeholders: here, it says that for long term business, only shareholders value
maximization should not be seen as sole goal but it should be for well being of all
groups with stake of long run of business and it should be goal of corporate

Regulatory framework on corporate governance

The Indian statutory framework has, by and large, been in consonance with the
international best practices of corporate governance. Broadly speaking, the
corporate governance mechanism for companies in India is enumerated in the
following enactments/ regulations/ guidelines/ listing agreement:
1. The Companies Act, 2013 inter alia contains provisions relating to board
constitution, board meetings, board processes, independent directors, general
meetings, audit committees, related party transactions, disclosure requirements in
financial statements, etc.
2. Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a
regulatory authority having jurisdiction over listed companies and which issues
regulations, rules and guidelines to companies to ensure protection of investors.
3. Standard Listing Agreement of Stock Exchanges: For companies whose
shares are listed on the stock exchanges.
4. Accounting Standards issued by the Institute of Chartered Accountants of
India (ICAI): ICAI is an autonomous body, which issues accounting standards
providing guidelines for disclosures of financial information. Section 129 of the
New Companies Act inter alia provides that the financial statements shall give a

true and fair view of the state of affairs of the company or companies, comply
with the accounting standards notified under s 133 of the New Companies Act. It
is further provided that items contained in such financial statements shall be in
accordance with the accounting standards.
5. Secretarial Standards issued by the Institute of Company Secretaries of
India (ICSI): ICSI is an autonomous body, which issues secretarial standards in
terms of the provisions of the New Companies Act. So far, the ICSI has issued
Secretarial Standard on "Meetings of the Board of Directors" (SS-1) and
Secretarial Standards on "General Meetings" (SS-2). These Secretarial Standards
have come into force w.e.f. July 1, 2015. Section 118(10) of the New Companies
Act provide that every company (other than one person company) shall observe
Secretarial Standards specified as such by the ICSI with respect to general and
board meetings.
Key legal framework for corporate governance in India
The Companies Act, 2013
The Government of India has recently notified Companies Act, 2013 ("New
Companies Act"), which replaces the erstwhile Companies Act, 1956. The New
Act has greater emphasis on corporate governance through the board and board
processes. The New Act covers corporate governance through its following
New Companies Act introduces significant changes to the composition of
the boards of directors.
Every company is required to appoint 1 (one) resident director on its board.

Nominee directors shall no longer be treated as independent directors.

Listed companies and specified classes of public companies are required to
appoint independent directors and women directors on their boards.
New Companies Act for the first time codifies the duties of directors.
Listed companies and certain other public companies shall be required to
appoint at least 1 (one) woman director on its board.
New Companies Act mandates following committees to be constituted by
the board for prescribed class of companies:
o Audit committee
o Nomination and remuneration committee
o Stakeholders relationship committee
o Corporate social responsibility committee
Listing agreement Applicable to the listed companies
SEBI has amended the Listing Agreement with effect from October 1, 2014 to
align it with New Companies Act.
Clause 49 of the Listing Agreement can be said to be a bold initiative towards
strengthening corporate governance amongst the listed companies. This Clause
intends to put a check over the activities of companies in order to save the interest
of the shareholders. Broadly, cl 49 provides for the following:


1. Board of Directors
The Board of Directors shall comprise of such number of minimum independent
directors, as prescribed. In case where the Chairman of the Board is a nonexecutive director, at least one-third of the Board shall comprise of independent
directors and where the Chairman of the Board is an executive director, at least
half of the Board shall comprise of independent directors. A relative of a promoter
or an executive director shall not be regarded as an independent director.
2. Audit Committee
The Audit Committee to be set up shall comprise of minimum three directors as
members, two-thirds of which shall be independent.
3. Disclosure Requirements
Periodical disclosures relating to the financial and commercial transactions,
remuneration of directors, etc, to ensure transparency.
4. CEO/ CFO Certification
To certify to the Board that they have reviewed the financial statements and the
same are fair and in compliance with the laws/ regulations and accept
responsibility for internal control systems.
5. Report and Compliance
A separate section in the annual report on compliance with Corporate Governance,
quarterly compliance report to stock exchange signed by the compliance officer or
CEO, company to disclose compliance with non-mandatory requirements in
annual reports.

SUGGESTIONs to Improve Overall Structure Of Corporate

Current norms of corporate governance are efficient but at Initial level.

There must be improvement in terms of code of conduct of corporate
More and more development programmes should be conduct to improve the

awareness level of Investors.

Implementation of current norms should be made efficient.
Company should appoint more internal auditor for audit committee.
Cross check step should be implemented for betterment of investors.
Stakeholders value enhancement steps should be considered at large.


More and more programmes should be arranged to educate shareholder

about corporate governance.


CITIC PACIFIC: Foreign Exchange Scandal Case Overview

In February 2008, CITIC Pacifics (CP) stock

price sat at a high of HK$43. But within a mere 8 months, it plunged by 92 per
cent to HK$3.66 after a foreign exchange scandal which led to a loss of some
US$2 billion. This loss was attributed to the unauthorised betting on foreign
exchange derivative contracts that were supposedly hedges against currency risks.
The objective of this case is to allow a discussion of issues such as board
composition, risk management, executive compensation and other corporate
governance practices.

1) Unauthorised Bets on Foreign Exchange Derivative Contracts:

CPs investment in a Western Australia iron ore mining project involved an
estimated capital commitment of a$1.6 billion and 85 million1 . In addition,
annual operating expenditure of at least a$1 billion for up to 25 years was
CPs cash projections were denominated in USD, but these expenses were paid in
Australian dollars and Euros, thus exposing CP to fluctuations in foreign exchange
rates. To hedge against these risks, CP entered into contracts to deliver USD in

return for AUD and EUR. These actions were common to mitigate business risks.
The unique problem faced by CP, however, arose from its use of foreign
exchange accumulators.
Accumulators, including currency target redemption forward contracts and daily
accrual contracts, were employed by CP. Unlike regular derivatives, accumulators
have a unique characteristic: the knock-out clause. The knock-out feature causes
the contracts to expire once CP achieves a stipulated profit from the contracts.
While the upside gain of the hedging instrument was confined, losses could be
unlimited, thus resulting in an asymmetrical payoff.
This wasnt a hedge, this was an outright bet, said David Webb, a well known
corporate governance activist in Hong Kong. CPs transactions involved
substantial risks that far exceeded its actual hedging needs. The mining project
required only an initial capital expenditure of a$1.6 billion, yet it entered into
contracts for over a$9 billion. 90 per cent of these hedging contracts were entered
into when the Australian Dollar hit a high of 87 cents against the USD in October
2008. Hence, when the Australian dollar fell by 20 percent to 70 cents against the
USD, a loss of HK$15.5 billion was expected.
This news alarmed investors, who were unaware of the extent of exposure to
these leveraged Australian Dollar contracts . It also became clear that the company
knew of the exposure as early as 7 September 2008, six weeks before giving a
profit warning.
The profit warning caused a 74.8 per cent plunge in CPs share price from
HK$14.52 to a record low of HK$3.66, compared with its HK$43 peak in
February 2008.


2) CPs Board of Directors:

CP had 19 directors on the board. The board was led by the Chairman, Larry Yung
Chi-Kin, who is also an executive director. There were 12 executive directors and
seven non-executive directors, four of whom CITIC Pacific: Foreign Exchange
Scandal 92 are deemed independent pursuant to the Listing Rules. Two of the
independent directors were brothers.
CPs board appeared to comprise qualified and competent individuals. Their
competencies and industry expertise indicated that they should be familiar with
Hong Kongs regulations. Despite this, the board failed to announce CPs loss
immediately, violating Listing Rule 13.09 that requires prompt disclosure of pricesensitive information .

3) Executive Compensation
CPs compensation strategy was set to cultivate a pay-for-performance culture .
CPs senior management personnel had a substantial portion of cash compensation
linked to performance-based variables to reflect their contribution to the firms
financial performance. Yungs total remuneration was made up of 94 per cent of
discretionary bonuses and share-based payment, while for Managing Director
Henry Fan Hung Ling, it was 95 per cent. On top of his compensation, Yung
received an additional HK$569 million in dividends from his 19 per cent stake in
4) Amalgamation of Ownership and Management
Control of the company rested in the hands of Yung and CPs major corporate
shareholder, CITIC Group . This was a situation where the major shareholders
held both ownership and management control over the company.


The failure to separate ownership and management enabled the controllers to

benefit from the asymmetric information. Before the derivative losses occurred,
CPs two largest individual shareholders frequently raised their stakes in the
company. However, they suddenly stopped these moves in early September.
The Yung family appeared to be influential in CPs management, with founder
Larry Yung helming the Chairman position and his son Carl Yung as the Deputy

Director. Before the foreign exchange CITIC Pacific: Foreign

Exchange Scandal 93 controversy, Frances Yung, the daughter of Larry Yung, also
occupied a senior management position of Director, Group Finance.

5)Regulatory Policies in Place

In the profit warning dated 20 October 2008, the Company indicated that it was
aware of the exposure arising from these contracts on 7 September 2008. That
the company needed six weeks to comprehend the financial parameters and risks
of its derivatives contracts was a nonrealistically long time. The failure to
promptly disclose price-sensitive information violated Listing Rule 13.09.
However, the Hong Kong Stock Exchange (HKSE) does not have the power to
investigate breaches of disclosure requirements. There are no legal penalties for
non-disclosure of price-sensitive information.
In an unrelated circular dated 16 September 2008, the directors expressed a view
that there were no material adverse changes in the company during the year up to
9 September 2008. This contradicts the profit warning which indicated the
Company had known of the losses as early as 7 September 2008. This indicates a
possible false and misleading statement, which may subject directors to liability
under section 298 of the Securities and Futures Ordinance.


6) Failed Internal Controls

The effectiveness of CPs internal control system is reviewed regularly by the
Group Internal Audit Department. The department also conducts systematic
independent evaluations of all business units and subsidiaries in the Group on a
continual basis. However, internal controls can only provide reasonable, but not
absolute, assurance against any material misstatements or elimination of risks, as
seen from the failure of these controls.
The foreign derivatives contracts were made without proper authorisation and
adequate evaluation of its potential risk exposure. Chang, the Groups Finance
Director, did not follow CPs hedging policy: he failed to adhere to CITIC Pacific:
Foreign Exchange Scandal 94 standard procedures of obtaining prior approval of
the Chairman before committing to contracts. Furthermore, monitoring
mechanisms failed to serve their purpose. The Group Financial Controllers
purpose as a check and balance fell through when Group Financial Controller
Chau Chi Yin did not notify the Chairman of any unusual hedging transactions.

7) Steps Taken Towards Recovery

Management reshuffle
On 8 April 2009, CP announced a top management reshuffle. This involved the
resignations of CPs founding chairman, Yung, and Managing Director, Fan. The
resignations came at a time of police investigations. In a statement to the Hong
Kong Stock Exchange, CITIC Pacific said Mr Yung believed that his resignation
would be in the best interests of the company. Chang Zhenming, the vice
chairman and president of CITIC group, took over as chairman of CP. Zhang
Jijing stepped up as the companys managing director. By the end of 2009, CP had
appointed a new financial controller, treasurer and several new executives. In

addition, CP committed itself to appointing more independent board directors in

the long run. Frances Yung, the Director of Group Finance, was not forced to leave
the company but was instead demoted and took a salary cut.

Internal control improvements:

CP underwent a major restructuring of its financial control teams via the
recruitment of seasoned professionals. They took on roles in identifying, reporting
and managing the Groups treasury activities and financial risks.
CITIC Pacific: Foreign Exchange Scandal 95 CP also updated its terms of
reference (TOR) of the audit committee. The updated TOR expanded the
committees oversight function to include the duty to discuss with management
the companys internal control systems and the responsibility to ensure that
management has taken the internal control measures into consideration when
implementing policies and programmes.
These efforts aimed at improving internal control and corporate governance
seemed to have done well in restoring investor confidence, as seen from the 19 per
cent increase in share price a day after the management reshuffle was announced.
Despite suffering losses amounting to HK$10billion and incurring a debt of
HK$9.38billion15 from its unauthorized currency trading bets, CP continued to
show positive results in 2009. These are attributable to profits from its steel
business, property projects in mainland China and the progress of its iron ore mine
in Australia.


One of the challenges faced by both scholars of corporate governance and
by organizations that intend to provide enabling frameworks for good corporate
governance is the complexity of the relationships that exist between companies on
one side and their shareholders, stakeholders and gatekeepers on the other side.
This complexity seems to be one of the main reasons why corporate scandals still
occur, despite the existence of an extensive academic literature on corporate
governance and the sustained efforts by national as well as cross-national
regulators over the last decades to improve corporate governance. The recent
credit crunch is a reminder that corporate governance at company and industry
level, as well as regulation on corporate governance more widely, is deficient in
the sense that it does not properly deal with the complex nature of these
relationships and the potential conflicts of interests therein. Banks over the last
few years have not only failed their shareholders, but also their customers, the
taxpayer and society at large. The fact that bank failures have to a large degree
been concentrated in Anglo-Saxon countries also suggests that no one corporate
governance system is superior, despite the widely accepted view in the academic
literature claiming that investor protection is higher in common law countries
(such as the UK and the US) than in civil law countries (such as France and
Germany). The recent events have included UK banks, such as HBOS, being
rescued by banks (such as the Spanish Santander Group) based in countries with
corporate law.


BIBLIOGRAPHY governance-definition-benefits-quiz.html