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"No one pretends that democracy is perfect or all-wise, indeed it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time."
WINSTON CHURCHILL to the house of `commons'
This is an interesting & thoroughly worthwhile project. Its basic messages are relevant to any organization & any manager. This project is not encyclopedic (as Corporate Governance itself is a very large issue), although it is hoped that answers to meet question will be found, or that at least a pointer may be given as to where the answers are to be found.
This project is prepared for those who are either involved in Corporate Governance or interested in its principles & practice, & who are concerned with the human side of it. This project is based on mechanism of corporate governance, dimensions of corporate governance, and mastering corporate governance.
Corporate Governance brings power; and power corrupts. The antidotes to that power are transparency, objectivity and accountability. All three requires a stead fort and clear appreciation of oneself as seen by others. The pay -offs for conducting in the way this project recommends can be enormous. This is more easily perceived by those who have jumped in & learnt to swim after their own fashion than by those who have avoided the plunge. There are always admirable reasons for avoiding the plunge, off course. But this project is not one of them.
Corporate Governance: Indian Banking Sector
Corporate Governance: Indian Banking Sector
Introduction to Corporate Governance
Corporate governance while not a new concept, has, in the 1990's, become an issue of global importance. 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 players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. Corporate Governance is typically perceived by academic literature as dealing with “problems that results 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 committee‘s rules for disclosure of information to shareholders and creditors; and control of the management. The following illustration explains how a corporation is structured:
Shareholders Board Management Employees
Corporate governance is a multi-faceted subject. An important part of corporate governance deals with accountability, fiduciary duty and mechanisms of auditing and control. In this sense, corporate governance players should comply with codes to the overall good of all constituents. Another important focus is economic efficiency, both within the
How did India get here? Many years ago. hedge funds. Quality of governance determines the growth and future of the business. buyers and sellers are largely institutions (e. and banks). state corporation law enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights. in order to make corporate governance more efficient. investor groups. The rise of the institutional investor has brought with it some increase of professional diligence which has tended to improved regulation of the stock market (but not necessarily in the interest of the small investor or even of the naïve institutions. the rights of individual owners and shareholders have become increasingly derivative and dissipated. directed and controlled in a corporate form of business organization.g. the corporate governance system should be designed in such a way as to optimize results. worldwide. such as wealthy businessmen. and because America's wealth has been increasingly securitized into various corporate entities and institutions. Corporate Governance is a set of methods or practices by which business is carried on. In this "economic view". but also of all the other stakeholders. Over time. Since that time. and because most large publicly traded corporations in America are incorporated under corporate administration friendly Delaware law. mutual funds. buyers and sellers of corporation stocks were individual investors. of which there are many). The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for Corporate Governance reforms.Corporate Governance: Indian Banking Sector corporation (such as the best practice guidelines) as well as externally (national institutional frameworks). Board of Directors is primarily responsible for governance.. pension funds. insurance companies. -4- . History of Corporate Governance In the 19th century. Some argue that the firm should act not only in the interest of shareholders. markets have become more institutionalized.
and the Board diligently (thoroughly) kept an eye on the company and its principal executives (they usually hired and fired the President. at least. a lot of the attention fell upon the corporate governance systems of the developing world. Korean chaebol 'groups'). they will simply sell out their interest. Since the (institutional) shareholders rarely object. the President/CEO generally takes the Chairman of the Board position for himself (which makes it much more difficult for the institutional owners to "fire" him).] -5- . there has been a concurrent lapse in the oversight of large corporations. Also. officers of the corporation.g.. exchange-traded funds (ETFs). who usually had an emotional as well as monetary investment in the company (think Ford). or Chief executive officer— CEO). whereas stock in the USA or the UK and Europe are much more broadly owned. Stock market ) has soared. which are now almost all owned by large institutions. who owe their jobs to him or fellow CEOs from other corporations). the interests of most investors are now increasingly rarely tied to the fortunes of individual corporations. nowadays. for example. often still by large individual investors. and may be made up primarily of his cronies (or. So. both individual and professional stock investors around the world have emerged as a potential new kind of major (short term) force in the ownership of corporations and in the markets: the casual participant. But. Nowadays. the sale of derivatives (e. Even as the purchase of individual shares in any one corporation by individual investors diminishes. In the later half of the 1990's.Corporate Governance: Indian Banking Sector Unfortunately. during the Asian financial crisis. Since the marked rise in the use of Internet transactions in the 1990s. the majority of the shares in the Japanese market are held by financial companies and industrial corporations (there is a large amount of cross-holding among Japanese keiretsu corporations and within S. if the owning institutions don't like what the President/CEO is doing and they feel that firing him will be costly (think "golden handshake") and/or time consuming. the Board is mostly chosen by the President/CEO. which tend to be heavily into cronyism and nepotism. the ownership of stocks in markets around the world varies. The Board of Directors of large corporations used to be chosen by the principal shareholders.
more recently. there is an underlying uniformity in the thinking of all analysts that there is definite need to eradicate corporate misgovernance and promote corporate governance at all costs. the issue of corporate governance in the U. This is often limited to the question of improving financial performance. as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors. -6- . and shareholder zeal has waned accordingly. CALPERS led a wave of institutional shareholder activism (something only very rarely seen before). the massive bankruptcies (and criminal malfeasance) of Enron and WorldCom. such as contracts. but when one attempts to define it and scan available literature to look for precedence (priority). one comes across a bewildering (confusing) variety of perceptions behind available definitions.S. such as Adelphia Communications.Corporate Governance: Indian Banking Sector In the first half of the 1990's.g.com. organizational designs and legislation. Definition of Corporate Governance The concept of corporate governance sounds simple and unambiguous (decided). Since then. as well as lesser corporate debacles. Honeywell) by their boards. Global Crossing. for example. In the early 2000s.: IBM. received considerable press attention due to the wave of (belated?) CEO dismissals (e. Tyco. the stock market has greatly recovered. the context of varying degrees of development and from the standpoint of academics versus corporate managements. The definition varies according to the sensitivity of the analyst. Mathiesen . However. led to increased shareholder and governmental interest in corporate governance. It is not only the stakeholders who are keenly interested in ensuring adoption of best governance practices by corporates. www. "Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms. and. but all societies and countries worldwide. Arthur Andersen. how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return". Freddie Mac and Fannie Mae. AOL.encycogov. Kodak. culminating in the passage of the Sarbanes-Oxley Act in 2002.
which can be defined narrowly as the relationship of a company to its shareholders or. especially concerning actual or apparent conflicts of interest. as yet ill-defined. openness. customers. and disclosure in financial reports.Corporate Governance: Indian Banking Sector “Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment”. "Corporate governance . senior executives should conduct themselves honestly and ethically. The Journal of Finance. and commitment to the organisation.” From an article in Financial Times . In particular. trust and integrity. responsibility and accountability. and say it (corporate governance) is the fancy term for the way in which directors and auditors handle their responsibilities towards shareholders. as its relationship to society -…. page 737]. Principles of Corporate Governance Key elements of good corporate governance principles include honesty. as an objective. more broadly. “Some commentators take too narrow a view. Others use the expression as if it were synonymous with shareholder democracy. or as a regime to be followed for the good of shareholders. and consequently blurred (unclear) at the edges…corporate governance as a subject. employees. mutual respect. Shleifer and Vishny [1997. performance orientation. -7- . Corporate governance is a topic recently conceived. bankers and indeed for the reputation and standing of our nation and its economy‖ Maw et al. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness.
Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It is important to understand. There are issues about the appropriate mix of executive and nonexecutive directors. 3. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. 2. factual information.Corporate Governance: Indian Banking Sector Commonly accepted principles of Corporate Governance include: 1. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. The key roles of chairperson and CEO should not be held by the same person. Disclosure and transparency: Organisations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. -8- . They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. Disclosure of material matters concerning the organisation should be timely and balanced to ensure that all investors have access to clear. Rights and equitable treatment of shareholders: Organisations should respect the rights of shareholders and help shareholders to exercise those rights. that systemic reliance on integrity and ethics is bound to eventual failure. 5. though. Interests of other stakeholders: Organisations should recognise that they have legal and other obligations to all legitimate stakeholders. Integrity and ethical behaviour: Organisations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. 4.
given that most of you are company directors. However. In particular. the way in which the struggle is carried on to achieve effective corporate governance is set on the differences of political framework. the primary way of ensuring effective corporate governance is through the promotion of shareholders‘ participation in general meetings. it has nonetheless had beneficial effects. social and enterprise history and attitude. corporate governance was not a topic that attracted much public attention. in the United Kingdom where the shareholder model is practiced. -9- . Until fairly recently. It is obviously of fundamental importance to this audience. then. with particular emphasis on the important role it plays in promoting a sound financial system.Corporate Governance: Indian Banking Sector Importance of Corporate Governance Corporate governance is now a topic of considerable interest to a large and expanding cross-section of the community. and the board carrying on the daily affairs of the corporation primarily in the long run for the economic interest of the share holders. And it has strengthened the incentives for directors and policy-makers alike to reassess the structures needed to produce high quality corporate governance. have put corporate governance on the front pages of our main newspapers. Although none of us welcomes this kind of adverse publicity. Elements for effective Corporate Governance The ownership and control of corporation has been the focus of struggle for the determination of effective corporate governance. It means. In this speech. For example. It is also of interest to the serve Bank. that one basic element of effective corporate governance is the participation of shareholders and the transparency and accountability of the Board of Directors for the maximization of shareholders values. However. such as the Enron scandal and other corporate governance failures. recent events. in its capacity as supervisor of the banking system. it has highlighted the important role that corporate governance plays in a modern economy and the consequences of getting it wrong. It was a topic reserved for discussion in the Board room or in academic environments. I will discuss a number of themes relating to corporate governance.
address the . as a mark of good corporate management. at least not more than state participation. effective corporate governance is measured by the extent to which the inside commercial enterprise performance of the corporation is monitored and or participated in by all interested stakeholders-managers. it is not intended to suggest that companies will engage in all social and political responsibilities. It is vital to the well being and the welfare of not only the ‗owners‘ and ‗shareholders‘ of the companies. It is in this direction that the OECD principles (1999) of corporate governance provide that good corporate governance is a matter of concern of and for the people. personality and disposition of the president director-general to direct the affairs of the company. effective corporate governance in France is measured by the ability. suppliers. By marriage of the above differences on the procedure of attaining effective corporate governance it is suggested (without claiming to be all exhaustive) that the elements of effective corporate governance will include the following: The board and management of companies should. but the workers and the people of the society as a whole. By so doing. companies should engage in legitimate social responsibilities. such as ensuring that the health and safety of their employees and customers are ―respected and not recklessly jeopardized‖. as the bearer share procedure does not give access to a defined individual share ownership. companies will avert (prevent) the destructive campaigns and demonstrations of a civil society. but since their products are directed at civil society (customers). Shareholder participation is not of primary importance.Corporate Governance: Indian Banking Sector In contrast. creditors. Likewise in Germany.10 - . pilot the affairs of the company within the legal corporate framework prevalent in any particular state and promote accountability to the shareholders but ―properly concerns of other legitimate stakeholders‖. take into account the realities of the contemporary multilateral governance relationships between firms. notable for its concentration of corporation ownership. employees. and customers. However. state and civil society and as such.
cannot. the investors. operating in developing countries. the board and the shareholders. and the strategy and business managers. Much as well. withstand the present global civil society volatility. This has been the bane of social unrest of civil society against most companies of developed countries‘ origin. It is therefore suggested that good corporate governance should be that which the management structure is designed to run in a transparent way to enhance the trust of the stakeholders. transparency. the corporation should be run to support society. So the system whereby the shareholders‘ interest and profit maximization are the primary concern of the company and keeps everybody else out. that ―effective governance for Mr. There should be a way of enhancing good corporate practice. as emphasized by the OECD principle. so to gain a better understanding of management‘s aims…[thereby] making a better fist of building long-term shareholder value than the bidding company. it is considered. Board and management should ensure the confidence of investors without which the reputation of the corporation will soil. Corporate Governance should not be run to exploit the community. ensuring moderation between the company corporate objectives with the ‗necessary‘ social realities of the community. and promote external takeover bidders. . As Sheriden T and Kendall N succinctly describe. it must be geared toward the heart and mind of society. There should be an open and equitable relationship between the management.Corporate Governance: Indian Banking Sector Secondly.… involves him improving communications between himself.11 - . effective communication and accountability should be the underlying value within the strategies of corporate governance. All shareholders of the same share-weight must be accorded the same treatment.
teaching and the youth of India. 7% of India‟s GDP and 100% of our market capitalization. All companies suffer from corporate scandals. A good corporate governance framework has the potential for these benefits: Enhancing overall company performance. We have received positive responses from Indian citizens in politics. business capability. unorganized sector and even NGOs. In 2001. Increasing the company's ability to identify and mitigate risks. programs and projects is inline with regulatory and corporate governance requirements. practice and accountability of „Corporate Governance‟.000 booklets. and so helping to secure new business opportunities when they arise. . management. and loss to the citizens and the nation. as it affects all the 1090 million people and 100% of India‘s GDP! It covers all activities of the Nation. and its members have mailed and distributed about 6.Corporate Governance: Indian Banking Sector Advantages of Corporate Governance ‗Corporate Governance‘ is only a small part of ‗Governance‘. which covers about. We are therefore very positive about INDIA. business. Corporate Governance – Benefits: With corporate responsibility and the need for governance high in the public and medias eye there has been much discussion regarding how the management of the corporate resource and skills pool needs to reflect. manage crises and respond to changing market trends. Good Governance of India should be an A1 priority. the public sector. private sector. Increasing attractiveness to investors and lenders. which enables faster growth. about the advantages of good governance. contemporary business needs and to deliver the services required supporting line of business activities including key projects. With this in mind business need to credibly provide evidence that their management of resources. accurately. which scare potential investors away from the market. Preparing a small enterprise for growth. government. Increasing market confidence as a whole. that is.00.12 - . Indian listed companies on our stock exchanges embraced the culture. in the absence of good governance and effective administration.
13 - .Corporate Governance: Indian Banking Sector .
The composition of board of directors refers to the number of directors of different kinds that participate in the work of the board.Corporate Governance: Indian Banking Sector Issues in Corporate Governance Corporate Governance has been defined in different ways by different writers and organizations. These are: 1. the board occupies a key position between the shareholders (owners) and the company‟s management (day-to-day managers of the company‘s resources). at least half . each being responsible for some particular branch of the firm‘s work. Distinguishing the roles of board and management: Constitutions of more and more companies stress and underline that the business is to be managed “by or under the direction of the board”. full-time functional directors are appointed. They identify some governance issues being crucial and critical to achieve these objectives. the end being long term shareholder. Composition of the board and related issues: A board of directors is a “committee elected by the shareholders of a limited company to be responsible for the company”. Some talk about corporate governance being an important instrument for a country to achieve sustainable economic development. while some others consider it as corporate strategy to achieve ling tenure and a healthy image. who in turn delegates the responsibility to other senior executives. Thus. In case of executive‘s chairman. In such a practice. Some define it in a narrow perspective to include on it only the shareholders. 2.: The SEBI appointed Kumar Mangalam Birla‘s Committee Report defined the composition of Board thus: ―the BOD‘s of the company shall have an optimum combination of the executives and non-executives directors with not less than 50% of the BOD‘s to be non-executive directors. corporate governance has different meaning to different people. Thus. while others want it to address the concerns of all stake holders. Sometimes. E. the responsibility fir managing the business is delegated by the board to the CEO. Over a period of time there has been a change as to the number and proportion of different types of directors in the board in recent times in most of the countries. and more importantly stakeholder value.14 - . But to all corporate governance is a means to an end.g.
while the role of the chairperson is to lead the board. the board or its specially constituted committees selects and appoints the prospective director and get the person formally “elected” by the shareholders at the ensuring Annual General body Meeting. Appointments the board and directors re-election: As per the Indian company law. Therefore. When these committees are peopled with independent directors selected for their competence. The role of CEO is to lead the senior management team in managing the enterprise.Corporate Governance: Indian Banking Sector of the board should be independent directors and in case of non-executive chairman. It is now increasingly being realized that the practice of combining the role of the chairperson and with that of the CEO as is done in countries like US and India leads to conflicts in decision-making and too much concentration of power in one person resulting in unsavory consequences.15 - . shareholders are a legion in large companies and also scattered and to have them together to elect the directors will be expensive and time-consuming. in actual practice. professional expertise in their chosen fields and long years of work experience would help the respective committees decide issues objectively and in a manner that would promote the long term interests of the organization. shareholders elect directors to the board. Separation of the roles of the CEO and chairperson: The composition of the board is a major issue in corporate governance as the board acts as a link between the shareholders and the management and it decisions affect the performance of the company. remuneration and for auditing. However. 3. 5. . These committees would lessen the burden of the board and enhance its effectiveness. at least one-third of the board should compromise independent directors. in most cases. Shareholders in fact only endorse the board‘s nominees and it is only in rarest of rare cases that shareholders refuse to ratify the board‘s nominees for directorship. 4. Should the board have committees: Many committees on corporate governance have recommended in one voice the appointment of special committees for nomination.
Corporate practices and policies vary from country to country. The Cadbury Report termed the annual audit as “one of the cornerstones of corporate governance”. Directors and executives remuneration: This is one of the mixed and vexed issues of corporate governance that came to the center stage during the massive corporate failures in the US between 2000 and 2002. These questions have elicited answers with different emphasis from various committees that have addressed these issues. appointment of remuneration committee and so on… 7. heavy severance payments. to place together before shareholders for approval a resolution that contains more than one discrete issue. Other committees on corporate governance have also laid emphasis on other related issues such as “pay-for performance”. 8.. Executive compensation has also in recent times become the most visible and politically sensitive issue relating to corporate governance. Both the Cadbury Report and the Bosch Report stressed that the stake in the BOD‘s has a bounden responsibility to present the shareholders a lucid and balanced assessment of the company‘s financial position through audited financial statements. .e. pension for non-executive directors. Audit also provides a basis for reassurance for everyone who has a financial stake in the company. Protection of shareholders right and their expectation: This is an important governance issue which has considerable impact on the rights and expectations of shareholders. Disclosure and audit: The OECD (Organization for Economic Corporation and Development) lays down a number of provisions for the disclosure and communication of key facts about the company to its shareholders. and how they have been determined‖. According to Cadbury Report: ―the over-hiding principle in respect of board remuneration is that shareholders are entitled to a full and clear statement of directors present and future benefits.Corporate Governance: Indian Banking Sector 6. There are a number of questions relating to the issue such as: Should companies always adhere to one-share-one-vote principle? Should companies retain voting‘s by show of hands or by a poll? Can shareholders resolution be ―bundled‖? i. This has been covered in later part of this project.16 - .
Corporate Governance: Indian Banking Sector .17 - .
in the work environment and the community. fair. the regulators. responsibility. rules and regulations of federal. . Proactively promote and be an example of ethical behaviour as a responsible partner among peers.Share knowledge and maintain skills important and relevant to stakeholders' needs. without misrepresenting material facts or allowing one's independent judgment to be subordinated.Comply with applicable laws.18 - .Respect the confidentiality of information acquired in the place of one's work except when authorised or otherwise legally obligated to disclose. 6. objective." As a public company. 1. competence and diligence.Act with honesty and integrity. Confidential information required in the course of one‘s work will not be used for personal advantage.Corporate Governance: Indian Banking Sector Corporate Governance Ethics: Ethics and Corporate Governance Though the concept of Corporate Governance may sound a novelty in the Indian business context and may be linked to the era of liberalisation. understandable disclosure in reports and documents that companies file with. with due care. timely and understandable to ensure full. 5.Act in good faith. it should not be ignored that the ancient Indian texts are the true originators of good business governance as one important sloka from the Rugveda says: "A businessman should benefit from business like a honeybee which suckles honey from the flower without affecting its charm and beauty. avoiding actual or apparent conflict of interest in personal and professional relationships. 3. 4. timely.Provide information that is accurate. with responsibilities to stakeholders both inside and outside of companies. relevant. complete. 2. accurate. and local governments. The chief executive officer and the senior leadership of the finance department bear a special responsibility for prompting integrity throughout the organisation. it is of critical importance that companies' information reporting with the regulators be accurate and timely. and other appropriate public and private regulatory agencies in all material respects. or submit to. state.
(c) Changing situations require ethical education: During turbulent times. the values reflected will be different from that of the organisation. This image would lead to strong and continued loyalty. There was a time when discriminations and exploitation of employees were high. the fight for equality and fairness at workplace ended up in establishing certain laws which benefited the society. It is because of this ethical perception that the employees of TISCO and the general public protested in 1977 when the then Minister for Industries in the Janata Government. (d) Ethical practices create strong public image: Organisations with strong ethical practices will possess a strong image among the public. attempted to nationalise the company. it would benefit if the organisation is equipped to withstand the competition. Ethical training will be of great help in those situations. unions. Constant check and dialogue will ensure that the employee matches to the values of the organisation which will in turn result in better co-operation and increased productivity.19 - . one must have clear ethical guidelines to take right decisions. and other regulatory bodies has contributed to the development of the society. .Corporate Governance: Indian Banking Sector Benefits from Managing Ethics in Workplace: (a) Attention to business ethics has substantially improved society: Establishment of anti-trust laws. In the long run. where chaos becomes the order of the day. (e) Strong ethical practices act as insurance & strong ethical practices of the organisation are an added advantage for the future function of the business. Conscious implementation of ethics in organisations becomes the cornerstone for the success and image of the organisation. (b) Ethical practice has contributed towards high productivity and strong team works: Organisations being a collection of individuals.
the society at large and governments are dealt in a fair manner. (b) Good corporate governance should look at all stakeholders and not just shareholders alone. a chemical company. (c) Corporate governance is not something which regulators have impose on a management. There is no point in making statutory provisions for enforcing ethical conduct. can maximize the profit of shareholders. Members of the board and top management should ensure that these are followed both in letter and spirit. for example. customers. the courts recognise that new forms of fraud may arise. leather tanneries in South. For example. it should come from within. distributors. but not in spirit. Arco and hosiery units in Tirupur. But most of these may be observed in letter. for instance. which are manipulated by unscrupulous persons like Ketan Parikh and Harshad Mehta. employees. creditors. near Arantangi in Tamil Nadu. (d) There is a lot of provisions in the Companies Act. and (iii) statutory protection to auditors who are supposed to go into the details of the financial management of the company and report the same to the shareholders of the company. Ship-breaking in Valinokkam. which may not be covered technically under any existing law and cannot be interpreted as violating any of the existing laws. a clever conman can try to sell a piece of . for example.Corporate Governance: Indian Banking Sector How Ethics Can Make Corporate Governance more Meaningful? (a) Corporate governance is meant to run companies ethically in a manner such that all stakeholders. have brought about too much of environmental degradation that has unleashed untold miseries to people in and around their locations. (e) There are a number of grey areas where the law is silent or where regulatory framework is weak.20 - . (i) disclosing the interest of directors in contracts in which they are interested. but completely violate all environment laws and make it impossible for the people around the area to lead a normal life. In the US. (ii) abstaining from exercising voting rights in matters they are interested. Otherwise.
What about the shareholders and others of other unlisted Limited companies? (g) The Serious Fraud Investigation Office (SIFO) in the Department of Company Affairs (DCA) has been investigating several "Vanishing Companies". 800 crores from the public and subsequently became untraceable. (f) The Securities and Exchange Board of India (SEBI) has jurisdiction only in cases of limited and listed companies and are concerned only with their protection.21 - . However. thousands of investors have lost their hard-earned money and no agency has come to their rescue so far. In order to check such crooks. By 2003. there is the concept of the "blue sky" law. collected more than Rs. However. . SEBI has identified 229 as "vanishing companies"— which tapped the capital market. such wide-ranging processes are not available to courts in developing countries.Corporate Governance: Indian Banking Sector the blue sky.
Corporate Governance: Indian Banking Sector
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Corporate Governance: Indian Banking Sector
Corporate Governance in India
India ranked as one of the top most countries in Corporate Governance as per the recent study. Study by Grant Thornton – The International Business Owner Survey conducted in 16 countries in January 2003.
More then 71% of the loosely held companies tightened up internal control computed to
25% of Indian businesses have got Independent Directors in place and 46% have
formed Audit Committees.
Many Indian Independent businesses have pre-empted the imposition of legal corporate
governance by taking steps to reduce the risk of corporate or financial malpractice.
Indian businesses along with Mexico, Singapore and US are in the forefront in forming
can we change the present practice and improve the Corporate
Governance in India?
To bring the change in the present practice and improve the Corporate Governance in India we have to follow the following points:
1. Number of non-executive directors should be increased. 2. They should be encouraged to assert their right. Today they are not passive and inactive,
nor they have time.
3. Non-executive directors should be made accountable for the decisions taken by board
and for the affairs of the company.
4. Board should meet at least once a month to be effective and Directors should attend
most of the meetings.
5. There should be structured performance appraisal of MD and other executive directors
by a committee of the board.
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Corporate Governance: Indian Banking Sector
6. In India shareholders never make the board accountable for the performance of the
company. Both executive and non-executive directors should pay for the failure to meet the goals of the company.
7. No law can imbibe (absorb) ethics in unwilling board. Law cannot be sustained for code
of best practices, it can only supplement and support as it is sought to be done by Companies Act.
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Corporate Governance: Indian Banking Sector .25 - .
else at least 30%.Corporate Governance: Indian Banking Sector Recommendations of Various Committees on Corporate Governance in India CII Code Recommendation (1997) No need for German style two-tiered board. For a listed company with turnover exceeding Rs. Audit committee should comprise entirely of ―financial literate‖ non-executive members with at least one member having accounting or related financial management expertise. Independent directors* should be treated the same way as nonexecutive directors. There shall be no nominee directors. Its chairman should attend AGM to answer shareholders queries. It should review a mandatory list of documents including information relating to subsidiary companies. A board must have a qualified and independent audit committee. Non-executive director compensation to be fixed by board and ratified by shareholders and reported. Non-executive Chairman should have an office and should be paid for job related expenses. Narayana Murthy Committee (SEBI) Recommendations (2003) Training of board members suggested.26 - . Attendance record of directors should be made explicit (open) at the time of reappointment. else at least one-third. . at least half of the board should be independent directors. Birla Committee (SEBI) Recommendations (2000) At least 50% non-executive members. at least half of the board should be independent directors. The board should be informed every quarter of the business risk management strategies. For a company with an executive chairman. Maximum ten directorships and five chairmanships per person. 100 Crores. Non-executive directors should be competent and active and have clearly defined responsibilities like in the Audit committee. It should have at least three directors. of minimum three members. No single person should hold directorships in more than ten listed companies. Stock options should be vested at least a year after their retirement. Directors should be paid a commission not exceeding 1% (3%) of net profits for a company with (out) an MD over and above sitting fees. Stock options may be considered too. majority and chair independent with at least one having financial and accounting knowledge. all nonexecutive. if the chairman is also the MD. Those with less than 50% attendance The remuneration committee should decide remuneration packages for executive directors. All directors to be elected by shareholders with same responsibilities and accountabilities. all non-executive and be Board of subsidiaries should follow similar composition rules as that parent and should have at least one independent director‘s parent of the company.
Listed companies with turnover over Rs. Disclosure and Transparency Companies should inform their shareholders about the high and low monthly averages of their share prices and about share. 20crores should have an audit committee of at least three members.27 - . Companies should provide consolidated accounts for subsidiaries where they have majority shareholding. Management should explain and justify any deviation from accounting standards in financial statements. A mandatory management discussion and analysis of annual report that includes discussion of industry structure and Companies should move towards a regime of unqualified financial statements. they may be held responsible of the legal compliance in the company‘s affairs. 100crores or paid-up capital of Rs. At least four board meetings a year with a maximum gap of four months between any two meetings. If a company consolidates. all nonexecutive. competent and willing to work more than other non-executive directors. of each material contingent liability and . chaired by an independent directors. Minimum information available boards stipulated. Disclosure list pertaining to ―related party‖ transactions provided by committee till ICAI‘s norm is established. Stock exchanges should require compliance certificate from CEOs and CFOs on company accounts. The board should decide on the remuneration of non-executive directors and all remuneration information should be disclosed in annual report. Key information that must be presented to the board listed in the code. -------------------- -------------------- -------------------- While independent and nonexecutive directors should enjoy some protection from civil and criminal litigation. Code of conduct for board members and annual affirmation of compliance to it. followed by auditor‘s comments. performance and prospects of major business segments (exceeding 10% of turnover). no need to annex subsidiary accounts but the definition of ―GROUP‖ should include parent and subsidiaries. Management should provide a clear description. Performance evaluation of nonexecutive directors by all his fellow board members should inform a reappointment decision. -------------------- The board report of a parent company should have access to minutes of board meeting in subsidiaries and should affirm reviewing its affairs.Corporate Governance: Indian Banking Sector should no be reappointed.
Security analysts must disclose the relationship of their employees with the client company as wall as their actual or intended shareholding in the client company.. Company should delegate share transfer power to an officer/committees/registrar/share transfer agents. opportunities. A board committee headed by non-executive director look into shareholder complaints and grievances. Source: The ICFAI Journal of Corporate Governance. 20 crores. threats.28 - . The audit committee should advise the board for action in this matter. It should get non-pre-specified uses approved by auditors on an annual basis. veracity (reality) and comprehensiveness of financial statements and director‘s reports and affirmation of maintaining proper internal control. Companies defaulting on fixed deposits should not be permitted to accept further deposits and make intercorporate loans or investments or declare dividends until the default is made good.Corporate Governance: Indian Banking Sector development. Management should inform board of all potential conflict of interest situations. Same disclosure norms for foreign and domestic creditors. disclosure norms for domestic issues should be same as those for GDR issues. Half yearly financial results and significant event reports be mailed to shareholders. The delegated authority should attend to share transfer formalities at least once in a fortnight. (Oct. Shareholder‘s Rights Quarterly results. possibly over the internet. its risks. In case of multiple credit ratings. IV . outlooks etc…as well as financial and operational performance in HR front. CEO/CFO certification of knowledge. should be communicated to investors. presentation to analysts etc. For companies with paid-up capital exceeding Rs.2005) Vol. Special disclosure for IPO‘s Companies making Initial Public Offering (―IPO‖) should inform the audit committee of categorywise uses of funds every quarter. they should all be reported in a format showing relative position of the company. Other issues Creditor‘s Rights FIs should rewrite loan covenants eliminating nominee directors except in case of serious and systematic debt default or provision of insufficient information..
Corporate Governance: Indian Banking Sector .29 - .
guidelines etc. The pattern of private companies is mostly that of closely held or dominated by a founder. Corporate culture. mission. The figure drawn below indicates how the corporate governance system works in India. policies. influences Internal environment Company vision.30 - . customers and other external stakeholders CORPORATE GOVERNANCE SYSTEM Proper governance Shareholder value Corporate governance outcomes/ Benefits to society Transparency Investor position Concern for customer Healthy corporate sector development Available literature on corporate governance and the way companies structured and run indicate that India shares many features of the German/ Japanese model. borrowers. Indian Corporate governance Model External environment Government regulations. his family and associates. policies.Corporate Governance: Indian Banking Sector Indian Model of Corporate Governance The Indian corporates are governed by the Company‟s Act of 1956 that follows more or less the UK model. but recent recommendations of various committees and consequent legislative measures are driving the . structure. norms Company Act SEBI Stock exchanges Internal stakeholders Auditors BOD‘s Depositors. characteristics.
The thrust of legislative reforms suggested by these committees and subsequent legislative actions adopted. land) of the legislative framework where Indian policy-makers have taken their cue from UK and US committees and their recommendations. including a strengthening of oversight committees and the development of serious fraud office.” .the SEBI –appointed Kumar Mangalam Birla Committee (2000). a greater role for Non-executive directors (NED‟s) and the curtailment of interlocking directorates”. This is in line with the AngloAmerican model where shareholders influence through the exit option which is contingent upon reliable and accurate information provided by companies. Significantly. in the wake of economic liberalization and its integration into the global economy. “A key area here includes grater transparency and independent scrutiny of corporate accounts that are made available to investors. in terms of their approaches and recommendations. Institutional reforms. ―This is evident especially in the realm (kingdom. are further evidence of the drive to seek for external monitoring of corporate affairs. namely. Further experts point out that India has adopted the key-tenants of the AngloAmerican external and internal control mechanisms. it is notable that again the recommendations are centered on Anglo-American practice.Corporate Governance: Indian Banking Sector country to adopt increasingly the Anglo-American model.31 - . most of the recommendations of the three committees. Indian government and industry constituted three committees to study corporate governance practices in the country and suggest measures for improvement based on what has globally recognized as best practices. the government-appointed Naresh Chandra Committee (2003) and the SEBI‘s Narayana Murthy Committee are remarkably similar to those of England‘s Cadbury Committee and America‘s Sarbanes-Oxley Act. In terms of the legislative mechanisms. In terms of reforms to internal mechanisms such as board of directors. centre around the strengthening of external governance mechanisms.
It is vital to see the package as a whole.Corporate Governance: Indian Banking Sector These various governance systems form a package of overall corporate control in each company law jurisdiction. the overall corporate governance package has to be consistent with the way the business is done and the reality of relationship in that culture. stock market regulation and corporate self-regulation. There has to be an integrated harmony between state legislation and regulatory infrastructure.32 - . Moreover. .
Corporate Governance: Indian Banking Sector .33 - .
Physical capital. Control of corporates. Linked with ownership. Decision making. High. foreign investors. nonfinancial corporates. 4. Directors and relatives other . Not important. Short-term gains. Indian CG. 9. 10. Shareholding. important in difficult times. corporate value. due to close ties with banks. Features Corporate objective. hostile takeovers rare.Corporate Governance: Indian Banking Sector Corporate Governance practices. Institutional shareholders. 2. Banks. 11. important in difficult times. Within the networkincludes business associates and banks as stakeholders. Return on financial capital. Directors and relatives. other corporates. Within the network of stakeholders including employees local community. promoter families. Less important. R&D human capital. 5. Government focus. Corporate body. Important. hostile takeovers rare. frequent hostile takeovers possible. Separated from ownership. 7. Long term. individual 12. Not important. Keriestu or business network. Short-term driven by market prices. Not important. Government. Japanese CG. Return on human capital. Checks and balances between voice and exit options. Plant and equipment. Management. Anglo-American German CG. CG. Less important. Banks. employee training. Other corporates. Capital market (secondary). 3. success. High. Shareholder value. Long-term investment in Capital market (primary). Capital Market. 6. hostile takeovers rare.An International comparison Sr. Shareholder Long-term value. Linked with ownership. Maximize surplus. Return on Measure of financial capital. Orientation. 8. Long term. outside stakeholders excluded. Low. Investor commitment. Less important due o institutional funding. Linked with ownership. Low. employee training. 1. no. Liquid. Major investors.34 - . R&D. Long-term corporate value. Physical capital. due to close ties with banks. Diffused institutional investors. significant block holders. Financial. Government. Return on social capital.
strong overseas investment. internalization non-problematic.124 and 125. vulnerable to global capital market. To promote long tem organizational health. Little. Weakness. Executive composition. Low. shorttermism. 13. employees. (government approval). Instability. Lack of proper disclosure.35 - . stable capital. Low. Strength. Long-term industrial strategy. 16. Long-term industrial strategy. To promote long tem organizational health. Low. 19. Source: Corporate Governance. shareholders and Institutional shareholders. Two-tier boards (supervisory board and management board). Little. growth in institutional activism and financial speculation in recent times. Shot0term gains. Executive and non-executive directors (representing outside finance institutions). secretive corrupt practices. Dividend. corporates. instabilities. Pg. The Indian Scenario by Vasudha Joshi. Internationalization difficult. . Little formally. Board independence over management. uncertain. High. more formally. Moderate. 15. Moderate. Recent government and organizational activism (CII) towards corporate governance practices. Executive and non-executive directors. 18. 14. Secretive. individual shareholders and Institutional shareholders. Board composition. Executive and non-executive directors. Low. corrupt practices. High. No. Dynamic. High. business network. Goal of the board. liquid capital. 17. To promote shareholder wealth.Corporate Governance: Indian Banking Sector individual shareholders. stable capital. market-based. Institutional investors (UTI). main bank. foreign investors.
36 - .Corporate Governance: Indian Banking Sector .
Accounting Quality. . Communication. Effective Governing Board and Reliability.Corporate Governance: Indian Banking Sector G-cube model of Corporate Governance ACCOUNTING QUALITY VALUE CREATION COMMUNICATION FAIR POLICY & ACTIONS RELIABILITY EFFECTIVE GOVERNING BOARD The model measures 6 parameters of corporate governance. Value Creation.37 - . Fair Policies and Actions.
for “Value Creation Focus” business strategy (driven by value creation focus). disclosure standards. internal audit and control mechanisms for addressing auditor‘s queries. effective use of cash surplus. transparency of trades by top management and ethical behavior with customers. capital structure. proactive adoption of accounting policy improvements. . Similarly.Corporate Governance: Indian Banking Sector For Accounting Quality the fund managers look at all or any of the following variables: company accounting policies. shareholder friendliness are among the key variables. For „Fair policies among actions”. the fund managers take the cue from fair treatment of minority shareholders.38 - . tax authorities and government. suppliers. The top companies were ranked accordingly. Similar variables were used for ranking companies based on other parameters. usage of IPO funds.
39 - .Corporate Governance: Indian Banking Sector .
According to the former SEBI Chairman. In looking at the decision making process. Besides these two.) Shareholding structure: A transparent shareholding structures where the key shareholders are clearly identifiable and where an absence of opaque cross holdings is considered positive feature. management and distribution of investors' wealth. where assigning it is still very much a learning process. 2. The Securities and Exchange Board of India has sought the services of two of the leading credit rating agencies in the country—Credit Rating Information Services of India Ltd.40 - . G. lenders and the public. there are two other credit rating agencies (CRAs). These are CARE and FITCH India. a view is taken of not just what is laid down in procedures but what is actually practiced. N. (CRISIL) and Investment Information and Credit Rating Agency (ICRA) to prepare a comprehensive instrument for rating the good corporate governance practices of listed companies. In order to evaluate corporate governance. CRAs would enable the securities market regulator judge the compliance status of corporates on parameters such as effective creation. As to the quality of . how responsibility is delegated and how accountability is ensured.) Governance structure and management process: This focuses on the internal decision making process and the quality and nature of information presented to a company's board. Mr. ICRA has decided to look at the following: 1.Corporate Governance: Indian Banking Sector Corporate Governance Rating The Department of Company Affairs has set up an institute to rate corporate excellence similar to credit rating agencies such as CRISIL. ICRA’s Rating Methodology: Corporate governance rating is being done by ICRA. Individual corporate excellence ratings will be made available to investors. Bajpai. This institute will undertake research in the area of corporate governance to be able to improve the overall legal framework and to advise companies and directors on how they can take corporate excellence forward. CRAs are normally expected to carry out periodic reviews of the ratings given. The institute will be funded from the penalties paid by companies for violating the provisions of the Companies Act.
what is examined is whether it is told enough to know what is going on and whether its quality is satisfactory. 5. The bottom line is whether a company is board-managed or its board is a rubber stamping body whose members hold their positions at the pleasure of the effective owner. 4.) Board structure and process: The board structure and process of decision making is all very important.) Transparency and disclosures: It is found that better-run companies disclose more than they are required by the law. it says . Emphasis is laid on matters such as inter-corporate loans. mergers and acquisitions. selection criteria for directors. While discussing financial discipline. but from its corporate governance rating. 6. diversification. For this. the size of the board. large capital expenditure. But in assessing a company's performance in this regard.) Financial discipline: Considerations under this criterion would broadly overlap with the determinants governing financial rating. 3. and of course. There is a passing reference to other financial stakeholders such as banks. Here again.Corporate Governance: Indian Banking Sector information submitted to the board. are important. "related-party" transactions. the conceptual scope of corporate governance and the way ICRA sees the idea may be a little divergent.) Examine stakeholder relations: ICRA's methodology on this matter relates almost wholly to the rights of shareholders and the duty of the company to service them well. financial institutions and fixed-deposit holders. But it is emphasized that a financial rating says nothing about the nature of corporate governance prevailing in a company and similarly. attendance record of the directors and frequency of board meetings are all taken into consideration.41 - . compensation policy for (directors. a company's customers and the society at large. number and nature of board committees. a governance rating says nothing about the financial position of a company. proportion of independent directors and the expertise they can command. But the whole idea of stakeholder is that it goes far beyond the shareholder and includes the workers. emphasis is laid on how materialistic the disclosures are and whether they really shed any light or hide more than they reveal. The risk of governance failure will not be apparent from the financial rating of a company.
Eventually. But what if a company's shareholders are happy with it but its workers or society at large are not. will mean nothing. so that investors have a comprehensive understanding of the companies where they are putting their money. SEBI. which can legitimately take credit for spearheading the movement for corporate governance ratings in India. Similarly. market pressures will force more and more corporates in India to go in for corporate governance ratings. must make such ratings mandatory for issuers of equity. Credit ratings for debt paper.Corporate Governance: Indian Banking Sector that the ultimate objective of corporate governance is to maximize shareholder value to the extent that if the company goes down in its governance record. then the conflict of interest needs to be dealt with and a mutually beneficial situation needs to be arrived at. . later picked up thanks to the pressures of the market which forced issuers of debt to get them rated in order to raise money. but one should remember that shareholders are also members of the society.42 - . which did not start off very well. no matter how excellent otherwise.
Corporate Governance: Indian Banking Sector .43 - .
It is their responsibility to endorse the organisation's strategy. the Chief Executive Officer. through providing financial capital or expertise or labor) is trust that they will receive a fair share of the organisational returns. in the effective performance of the organisation. A board of directors often plays a key role in corporate governance. supervise and remunerate senior executives and to ensure accountability of the organisation to its owners and authorities. social and other forms of capital.44 - . benefits and reputation. All parties to corporate governance have an interest. the Securities and Exchange Commission in the United States). A key factor in an individual's decision to participate in an organisation (e. develop directional policy. suppliers receive compensation for their goods or services. whilst shareholders receive capital return.Corporate Governance: Indian Banking Sector Parties to Corporate Governance Parties involved in corporate governance include the governing or regulatory body (e. exorbitant executive remuneration). employees. appoint. In return these individuals provide value in the form of natural. workers and management receive salaries. In corporations. If some parties are receiving more than their fair return (e. . management and shareholders. in order to limit the self-satisfying opportunities for managers. Other stakeholders who take part include suppliers. Corporate governance is the key mechanism through which this trust is maintained across all stakeholders. the board of directors. Directors. Partly as a result of this separation between the main two parties. a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. whether direct or indirect. human. the principal (shareholder) delegates decision rights to the agent (manager) to act in the principal's best interests. customers and the community at large.g. then participants may choose to not continue participating. there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. creditors.g. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Customers receive goods and services.g. With the significant increase in equity holdings of institutional investors.
Corporate Governance: Indian Banking Sector .45 - .
Role of the board in the dynamics of Corporate Governance: Shareholders Market forces and competition Depositors. when necessary. securities and exchange board and other regulatory bodies. borrowers and other customers Customer service and satisfaction Accountability Disclosures Board of Director‘s Policy. This is achieved through voluntary actions on the part of board of directors and through regulatory framework such as stock exchanges. The following diagram clearly illustrates how board of directors and top management are placed in the structure of corporates to interface. These principles are codifies as principles of corporate governance. to carry on the running of the company efficiently. Directors and Organization‘s Welfare Compliance and Accounttability Continuing relationship Top managements Providers of supplies and services Career advancement and job satisfaction Employees Transparency and fairness in dealings Environmental preservation Social Responsibility All other stakeholders Regulatory compliance Compliance of business ethics . interact and intervene.Corporate Governance: Indian Banking Sector Board of Directors and Corporate Governance There is an increasing awareness that corporates owe their existence to shareholders and the long-term sustainability of companies depends upon winning their confidence through disclosures and transparency in accountability for their actions to them.46 - .
47 - .Corporate Governance: Indian Banking Sector .
project counseling and appraisal. with the rapid pace of financial innovation and globalization.48 - . two reasons stand out: (I) Banks exist because they are willing to take on and manage risks. the OECD has issued a set of corporate governance standards and guidelines to help governments “in their efforts to evaluate and improve the legal. Banking business is becoming more complex and diversified. Thus. . These are more particularly institutions that deal directly with the general public. corporations. Sometimes banks are setup to handled specialized functions for particular industries such as the IDBI (Industrial Development bank of India). portfolio management. and (EXIM bank) Export-Import bank. in a broad sense. A merchant banker is thus a financial intermediary who helps in transferring capital from those who posses it to from those who need it. Besides. a merchant banker renders a host of services to corporates and promotes industrial development in the country. These banks specialize in business connected with bills of exchange. etc. the face of banking business is undergoing a sea-change. an opposed to the merchant banks and other institutions more concerned with trade and industry. investors. and to provide guidance and suggestions for stock exchanges. also known as commercial bank. Merchant banking includes a wide range of activities management of customer‘s securities. NABARD (National Bank for Agriculture and Rural Development). There has been a great deal of attention given recently to the issue of corporate governance in various national and international forums. are institutions whose business is handling other people‟s money. institutional and regulatory framework for corporate governance in their countries. especially the acceptance of foreign bills. underwriting of shares and debentures. handling interest and dividend warrants. In particular.Corporate Governance: Indian Banking Sector Banks and Corporate Governance Banks. acting as banker for refund orders. and other parties that have a role in the process of developing good corporate governance. A joint stock bank.” Why Corporate Governance in banks? If we examine the need for improving corporate governance in banks. is a company whose business is banking.
2. To sum up. This is bound to be much more now. had adversely impacted investors' confidence. therefore. as it was in India prior to 1991. along with the massive failures of non-banking financial Companies (NBFCs). It is found that in India. In other corporates. This.49 - . protecting the interests of depositors becomes a matter of paramount importance to banks. corporate governance makes the work of supervisors infinitely easier. Banks deal in people's funds and should. Put plainly. Moreover. Sound corporate governance can contribute to a collaborative working relationship between bank management and bank supervisors. (II) Even in a regulated set-up.5 times the shareholders' stake in banks as early as in March 2001. act as trustees of the depositors. the lenders' stake in them might not exceed 2 or 3 times the owners' stake. . The depositors collectively entrust a very large sum of their hard-earned money to the care of banks.Corporate Governance: Indian Banking Sector Risk taking and management in a less regulated competitive market will have to be done in such a way that investors' confidence is not eroded. In any case. has been regulating banks more tightly than other corporates. Supervisory experience underscores the necessity of having the appropriate levels of accountability and checks and balances within each bank. big lenders do exercise the right to direct the management. banking supervisors have a strong interest in ensuring that there is effective corporate governance at every banking organisation. sound. therefore. In other corporates. The depositors are very large in number and are scattered and have little say in the administration of banks. some big banks in the public sector and a few in the private sector had incurred substantial losses. Banking supervision cannot function effectively if sound corporate governance is not in place and. this is not and need not be so for two reasons: 1. consequently. Regulators the world over has recognised the vulnerability of depositors to the whims of managerial misadventures in banks and. the depositor's Contribution was well over 15. All other considerations would fall in place once these two are achieved. the objective of governance in banks should first be protection of depositors' interests and then be to "optimise" the shareholders' interests.
It deals with the exercise of power over the directions of enterprise. other constituencies and the society at large. therefore. the more soundly based will be their governance structures. focuses on the principles on which it is based. corporations and society.Corporate Governance: Indian Banking Sector Corporate Governance and the World Bank: The World Bank report on corporate governance is a landmark in the evolution of the theory and its application of this concept of best corporate behaviour. board of directors. The aim is to align as nearly as possible the interests of individuals. socioeconomic and cultural context. It involves monitoring and overseeing strategic direction. purpose. the supervision of executive actions. Hence. accountability. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. borrowers. The World Bank report points the way to the establishment of trust and the encouragement of enterprise. corporate governance may be called as an umbrella term encompassing specific issues arising from interactions among senior management personnel. governance initiatives win most support when driven from the bottom up rather than from the top down. acceptance of a duty to be accountable and regulation of the affairs of the corporation. integrity and identity of the organisation and focuses primarily on the relevance. The way they are put into practice has to be determined by those with the responsibility for implementing them. . shareholders. externalities and constituencies of the organisation. depositors. Corporate governance is concerned with holding the balance between economic and social goals and between individual and community goals. Governance in relation to a business organisation concerns with the intrinsic nature. Equally. fairness and responsibility are universal in their application. These principles such as transparency. as the report emphasizes. The stronger the partnership between the public and private sectors.50 - . continuity and fiduciary aspects of the organisation. The World Bank report on corporate governance recognises the complexity of the very concept of corporate governance and. It marks an important milestone in the development of corporate governances.
The question of corporate governance in banks is important for several reasons. There is hardly a company which has not at sometime or the other been either involved or suspected of some foul play. corporate governance issues and practices by Indian banks have received only a scanty notice. and 2. Fourth.Corporate Governance: Indian Banking Sector Corporate Governance in Indian Banks: Although the subject of corporate governance has received a lot of attention in recent times in India. as the country's financial markets are underdeveloped. First. India has recently liberalised its banking system through privatisation. Administrative corruption. When questioned about unethical practices. owned. Even the majority of banks and financial institutions. banks in India are the most significant source of finance for a majority of firms in Indian industry. Political corruption in which money is paid for favours done. banks have an overwhelmingly dominant position in developing the economy's financial system. banks are also the channels through which the country's savings are collected and used for investments. Even companies that started off with intentions to do business in an ethical manner have had to compromise their principles due to the highly politicised and bureaucratic business environment in the country. Thousands of underhand deals are struck everyday and go unreported. Third. companies had to grease the palms of bureaucrats to make them do things they were not supposed to do.51 - . disinvestments and has reduced the role of economic regulation and consequently managers of banks have obtained greater autonomy and freedom with regard to running of banks. many companies claim that the conditions in India are not conducive to allow them the luxury of being completely ethical. In the early days of Independence. but now . Corporate governance in banks has assumed importance in India post-1991 reforms because competition compelled banks to improve their performance. This would necessitate their observing best corporate practices to regain the investors' confidence now that the government authority does not protect them anymore. and are extremely important engines of growth. managed and influenced by the government with neither high quality management nor any exemplary record of practicing corporate governance have realised the importance of adopting better practices to protect their depositors and the banking public. Indian companies face two types of corrupt practices: 1. Second.
and get reinforced because of the sense of frustration and helplessness that comes from the prevalent and all pervading unethical environment. Examples of this sort of corruption include "gifts" to the Factory Inspector. Bajpai. namely: (i) Company policies. income tax. The issuers complying with the eligibility criteria now have freedom to issue the securities at market-determined rates. enhancing transparency. which made trading system accessible to everybody anywhere in the Indian sub-continent. former Chairman. The Securities and Exchange Board of India have been focusing on the following areas to improve corporate governance: . the Indian securities market stands shoulder to shoulder with most developed markets in North America. The trading cycle shortened to a day and trades settled within two working days while all deferral products are banned. It is the administrative corruption. Boiler Inspector. claimed in an international conference in 2003: "With the objective of improving market efficiency. sales tax and Octroi. The secondary market overcame the geographical barriers by moving to screen-based trading. Securities and Exchance Board of India." According to SEBl's former chairman. regulate and develop the securities market was introduced in the 1990s. Pollution Control Board Inspectors.52 - . excise.Today. A study on the ethical attitudes of Indian managers conducted by Arun Monappa (1977) reported that business executives listed three major obstacles to ethical behaviour. preventing unfair trade practices and bringing the Indian market up to international standards. (ii) Unethical industry climate and (iv) Corruption in government. N. SEBI and Corporate Governance SEBI's Role in Promoting Corporate Governance: G. and assessors for customs. Trades enjoy counter-party guarantee. Company policies tend to be unethical due to socio-cultural environment. a package of reforms consisting of measures to liberalise. which most companies find unavoidable most of the times. Western Europe and Far East. The practice of allocation of resources among different competing entities as well as its terms by a central authority was discontinued.Corporate Governance: Indian Banking Sector corruption has graduated to such an extent that companies have to bribe bureaucrats to make them do things they are supposed to do.
Not only the numbers are gigantic (huge) but also the systems and infrastructure are equally atlantean and sophisticated.000 sub-brokers.53 - . Demonstrating reliable and effective enforcement. medium and time of disclosures have been specified in the Companies Act. Bajpai. G. 40 mutual funds offering over 450 schemes. SEBI has ensured that a company is required to make specified disclosures at the time of issue and make continuous disclosures as long as its securities are listed on exchanges. It has a comprehensive risk management system. there is only one regulator. 150 merchant bankers. In addition to creating . accuracy and security.000 listed companies. 500 foreign institutional investors. Efficient and effective market system: In the opinion of the Chairman of SEBI. The standards for these disclosures including the content. These disclosures are made through various documents such as prospectus. the Indian securities market has a large infrastructure to meet the demands of a sub-continental market.Corporate Governance: Indian Banking Sector Ensuring timely disclosure of relevant information. and 20 million investors. claims quoting academicians and researchers that disclosure standard in the Indian regulatory jurisdiction are at par with the best in the world. Further. The depository‘s legislation ensures free transferability of securities with speed. 400 depository participants. Indian accounting standards follow international accounting standards (principle based) and are by and large aligned. 15. Yet. Providing an efficient and effective market system. 2. annual reports etc. The securities are transferred electronically in demat form. Listing Agreement Regulations relating to insider trading and takeover etc. order-driven screen based trading system. fully automated. Enabling the highest standards of governance. nation. Disclosure and Investor Protection Guidelines. All stock exchanges in India offer on line. N. According to him this is a feedback from several global organisations. Presently. Disclosure standards: The erstwhile (previous) SEBI Chairman. both regulatory and market participants. there are 25 stock exchanges and about 10.wide anonymous. more than 10.000 brokers. 1. quarterly statements.
SEBI passed 561 orders. which compared very well with the recommendations of the Cadbury Committee and the OECD codes. Every market participant. Following the implementation of the Birla Committee recommendations. Reliable and Effective Enforcement: SEBI aims at ensuring that no misconduct goes unnoticed or unpunished.54 - . substantial developments took place in the corporate world and securities market. irrespective of his size and influence in the market or in the policy. which required revisit of the issue. The Narayana Murthy Committee has refined the corporate governance norms. (b) Maintenance of high quality of services and fair conduct for market participants. The code was operationalised by inserting a new clause (Clause 49) to the Listing Agreement (LA) and has been made applicable to all the listed companies in India in a phased manner. 3. The proactive approach of the regulator in enforcement can be gauged from the fact that during the financial year 2002-2003.Corporate Governance: Indian Banking Sector an efficient trading platform and settlement mechanism. It keeps an eye on the happenings in the market and identifies anything unusual or undesirable which may adversely affect the efficacy of the market. (c) Ensuring that the market is fair. The Kumar Mangalam Birla Committee of the Indian jurisdiction outlined a code of good corporate governance. transparent and safe so that issuers and investors are at ease to carry out transactions. which are proposed to be implemented through modification in the listing agreement. is held accountable for his misdeeds. The regulations specify high standards to become market intermediaries and require them to abide by a code of conduct. SEBI's focus is substantially directed towards the following: (a) Provision of timely availability of high quality price sensitive information to the market participants to enable them to take informed decision and ensure efficient price discovery. Highest Standards of Governance: SEBI has avowed (stated) that its regulation and guidance of the country's securities market would spell success in the area of corporate governance. . out of which over 350 were punitive. 4.
regulator and the legislature. which encourage and insist on the management's improving the quality of corporate governance. come mainly from three sources. and Value Creation Rating". which according to SEBI chairman is quite unique in the world and is sought after voluntarily by companies. The most important initiative comes from market forces and mechanisms. the market. N. Bajpai. Indian market has formalized such forces in the form of a rating called "Corporate Governance. The initiatives for improvement in corporate governance. according to G.55 - . government is trying to provide statutory backup to corporate governance standards. Based on their recommendations. . namely.Corporate Governance: Indian Banking Sector Government also appointed few committees.
Corporate Governance: Indian Banking Sector .56 - .
To make matters worse. Failure in Corporate Governance is a real threat to the future of every corporation. what was good is becoming bad and what was considered bad is now good.5 million different people have visited his site. ranked as one of the 50 most influential business thinkers alive today (Thinkers50). In business ethics. Standards for corporate governance that have worked for decades are looking old fashioned or immoral while other practices that raised questions are becoming totally acceptable. with unquestionable business ethics and risk management? Ensuring corporate governance compliance .board duties of care and responsibility in the future? . More than 8.Corporate Governance: Indian Banking Sector Future of Corporate Governance Taking personal responsibility for economic and ethical performance of corporations . fraud or corruption of senior executives or directors – and how to protect business ethics reputation using robust corporate governance? Why goalposts for corporate governance will go on changing. Corporate governance as a business ethics issue is a hundred times more powerful than the internet or globalization and can destroy your business in a week. So what is going to happen next in corporate governance? How can corporations use corporate governance to restore confidence and protect themselves against tomorrow’s headlines? What will be the new “Gold Standard” for corporate governance and business ethics? How much further than legal minimum requirements for corporate governance should corporations go to ensure sustainable success? When corporate governance goes wrong who gets blamed? Impact of media allegations of dishonesty.57 - . and how to get ready? Urgent need for all corporate governance to be whiter than white.Corporate governance and business ethics articles by Dr Patrick Dixon. standards of corporate governance are changing rapidly in response to random events which capture public imagination.
“Bad” corporations were punished by selling. Globalization and e-technology are making reliable audits extremely difficult. seen in share price. This ideology weakened the idea of corporate governance and accountability. . “Good” corporations” were rewarded by buying. Why we still can’t trust the numbers? Conflicts of interest remain in all audits even where consulting links are abolished: Concerns that some auditors are looking for jobs in the companies they audit. Auditors under pressure to get next year‘s audit business. nomination and remuneration committees? ―Duty of curiosity‖ by directors to ask very awkward and sensitive questions? Improving quality and flow of information within a corporation‘s governing structure? Why India got in such a mess? Free market ideology was that corporations were kept responsible to customers. “Market forces will sort it all out”.58 - . shareholders. Millions of individual “voters” in the market place ensured they behaved. workers and society by customer and investor behavior. Old accounting standards do not always give fullest picture.Corporate Governance: Indian Banking Sector Defining clear areas of corporate governance responsibility of boards and directors? Using corporate governance to balancing interests of different constituencies and stakeholders? Why we have to separate board scrutiny role from management power? Ethical / society responsibilities of directors and large investor ―owners‖? Independence of audit.
Responsible – clearly acting in the broader and longer term interests of all. Expect future accusations of breaks in ―Chinese walls‖. Conflicts of interest are growing rapidly – made worse by the collapse of Arthur Andersen. Hiding how much the CEO takes .59 - . going beyond current requirements or expectations.non-recording of stock options as an expense. made worse by the large stock options given and other triggered incentives. Trust takes years to win and hours to lose: System of corporate governance must win trust of the international community and the steps to rebuilding trust in the corporation are: Transparent – totally open. with companies in danger of representing the interests of more than one party. overlycomplex complex reporting.Corporate Governance: Indian Banking Sector Expect more conflicts of interest among global auditors: Consolidation at top end of professional service organizations means global players are running out of firms to approach to provide independent advice over large complex deals. Accountability conflicts for staff: The fundamental issue at the heart of many recent scandals ―I did what I was told‖ So who do you serve? Your boss? The boss of the boss? CEO? Board? Shareholders? Customer‘s interests? General public? Courts of law? Your own conscience? Extreme pressures on employees to toe the official line Harassment and threats by people representing huge power . Uncompromising – total commitment to highest moral positions. wild decisions and extravagance. Successful – great results combining excellence in all areas with strong values. CEO conflicts of interest must be deal with: Making decisions that benefit the CEO at expense of the future of the company. Temperate – taking care to avoid major risks.
Lobbying budget in US greater than GDP of 57 nations. .60 - . Need for transparency – declaring interests of journalists and editorial team including those of the owner(s). change existing ones. Dangers of alienating big funders of media companies. but media depends on advertising. US Government shell-outs to business are worth more than $300bn a year. create barriers to entry for competitors. change who gets elected. Large corporations have deeper pockets than legal budgets of government. Risk of corruption and danger of distorting free market. Potential for corrupting the democratic purpose. limit corporate liability. They often get better quality representation from huge heavy-weight teams.Corporate Governance: Indian Banking Sector How consultants and advisers get compromised? Who is the consultant or adviser accountable to if things are discovered? To the individual who set up the arrangement and is asking for the advice (who may be part of the problem)? His or her boss? The CEO? The board? The shareholders? The government? Consumers? The public? Who do you tell and when? What are the limits of confidentiality in consultancy? How the media can be compromised? Media investigation should be a powerful corrective force. How government can be compromised? Over 100 lobbyists per Member of Congress. Selective tax breaks. exposing wrong-doing. trade policies and spending programmers are all sensitive areas. How corporations can out-gun government lawyers? Government will increasingly target corporations as well as individuals with legal action. including benefits for journalists writing stories. $5bn a year industry designed to create new laws or regulations. Media is also sensitive to news manipulation and lobbying.
Corporations will be expected in future to “build a better future” – not only for their shareholders but also for their customers. Those with effective corporate governance based on this core value will have an added competitive advantage: attracting and retaining talent and generating positive reactions in the marketplace.61 - . community. . Corporate responsibility will be far more widely interpreted. workers.Corporate Governance: Indian Banking Sector “SUCCESS PLUS” – Doing great things in the right ways: Success itself is being redefined – fundamental rethink about the purpose of corporations. REAL SUCCESS will be everything we have previously taken for granted in high performing companies PLUS the highest ethical standards in all areas. business partners. nation and the wider world.
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