The customers, banks, the environment and the community at large are the other stakeholders. Accountability of individuals and economic efficiency of the corporation are the important aspects of corporate governance. The stakeholder view and the corporate governance models are also the topics of concern of corporate governance. Thus corporate governance is a multifaceted subject. Donovan defines corporate governance as "an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and Corporate governance refers to the set of processes, customs, policies, laws and institutions influencing the administration of a corporation. Corporate governance includes the relationships among the many players and the goals of the corporation. The shareholders, management and the board of directors are the principal players. The employees, suppliers controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external market place commitment and legislation, plus a healthy broad culture which safeguards policies and processes". According to SEBI, corporate governance is the acceptance by the management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. Corporate governance is considered as ethics and a valuable duty

Honesty, trust, openness, performance orientation, responsibility, accountability, mutual respect and commitment are the key elements of corporate governance. The important principles of corporate governance can be stated as follows: (1) Rights of shareholders: Corporations should respect the rights of shareholders and help the shareholders to exercise their rights. (2) Equal treatment for shareholders: Equal treatment should be given to all the shareholders. All the shareholders are to be equal Encouraged The interests of all the stakeholders have to be protected. (4) Role of the Board of Directors: The Board of Directors should be dynamic, efficient and capable of developing a range of skills. It should be capable of meeting all the challenges. It should be sufficient in size and a good level of commitment to fulfill its responsibilities and duties. There should be a good mix of executive and non-executive directors. The key positions of chairman and CEO should not be held by the same person. (5) Ethical behavior : Corporations should develop a code of conduct for the directors and executives to organization promote ethical and responsible decision making. Many corporations have established Compliance and Ethics Programmes to minimize the risk that the firm steps outside of ethical and legal boundaries. (6) Disclosure and transparency: There should be the timely and balanced disclosure of matters related to the

• Correct preparation of financial statements arrangements for CEO and other Directors. The companies have to be evaluated on the basis of commitment to good corporate governance. Rights of corporation: A corporation is a legal Corporate governance with the following rights: (i) The ability to sue and be sued. (ii) The ability to hold assets in its own name. (iii) The ability to hire agents. Need for corporate governance: (1) It is reducing the risk of the investor. . (2) It increases the mobilization of capital. (iv) The ability to sign contracts. shareholders' rights.all investors have access to clear and factual information. Issues involved in corporate governance principles: • Effective internal controls and independence of auditors. • Nomination of members of the Board. (3) It enhances the value of the companies. • Management of risk. nature of Board of Directors as well as transparency and disclosure. (v) The ability to make by-laws to govern its internal affairs.

.Most of the Indian companies are a hybrid of family owned and publicly listed companies with the following problems: (a) Ownership and management are not separated. (e) The rights of shareholders are not fully protected. (f) Absence of adequate transparency and disclosure. (b) Governance policies are informal. (c) The controls are inadequate. (d) Absence of professional management.

Tata Business Excellence Model is a framework which helps Tata companies to achieve their business objectives through specific process. The 'leadership with trust' is the philosophy of Tatas. financial. Jamsetji Tata gave importance to the means and ends. fulfilling its duties to the stakeholders. Tata group has the appreciation of GRI. but we think we started on sound and straightforward business principles. considering the interests of the shareholders our own. Tata wrote: "We do not claim to be more unselfish. .TATA GROUP Corporate governance in Tata group is fair and civic minded. more generous or more philanthropic than other people. Global Reporting Initiative (GRI) is an independent body affiliated to UNO. Integrity is an article of faith across all its operations. social and environmental. and the health and welfare of the employees the sure foundation of our success. GRI has a triple bottom approach.

The agent has to work for the principal. One party. There is a drive for effective shareholders. the managers must be monitored and checks and balances have to be implemented. Agency theory: This theory is based on the principal-agent framework. namely. the agent. The managers are supposed to be the agents of a corporation's owners. Both should have correct access to information.THEORIES OF CORPORATE GOVERNANCE I. at the same time. There is the separation of ownership and control. Both the principal and manager should have a clear and correct understanding. The need for improved transparency and disclosure are also emphasized. . All the shareholders. The costs resulting from managers are called 'agency costs'. the principal delegates work to another party. including minority Shareholders have to be protected.

there is a justification for the growth of large firms and conglomerates. The firm is considered as a governance structure. In terms of this theory. The ideas of economies of scale and scope have to be introduced. A mere operation of incentives is not good in the long run. Transaction cost economics: This theory was developed by Williamson and is closely related to agency theory.II. Good governance can reduce the cost and increase the profit. it states that the costs may be reduced by judicious choice of governance. The marketing costs have to be saved. .

local communities and government. suppliers. Stakeholder theory: Good governance should take care of the interests of all the stakeholders. The corporate governance should recognize the rights of the stakeholders established through mutual agreements and encourage active co-operation between corporations and stakeholders. The managers should be empowered to take autonomous executive action. .III. Stewarding theory: There should be a unity of command in the corporate governance. The share holders should facilitate. IV. There are many Stakeholders like shareholders. A good corporate governance should increase the long-term enhancement of the various stakeholders. employees. customers. This will result in the good co-operation of all the stakeholders. The authority to exercise managerial opportunism by the board.

An independent director should be independent of judgment with no pecuniary relationship. approach and actions. judgment and experience to properly complete their tasks. Independent directors are invited to join the board for their specialization and expertise in achieving a balance of knowledge. Iran Committee (2005) has recommended the important advisory role of independent directors. skills and attitudes of other directorial resources. An effective tool is the reinforcement of the institution of audit. audit committees should play an important role through the guidance of independent directors.ROLE OF INDEPENDENT DIRECTORS: There is an urgent need to minimize corporate frauds and scams. It should be noted that independence should be combined with competence. They should meet appropriate independence criteria. The independent directors should be able to offer wise inputs for the companies. They should have required diversity of knowledge. Globalizations require high standards of governance. The independent directors should be independent in their thinking. the remuneration for independent directors should be of decent standards. They should be appointed for specified terms subjected to re-election. family or other relationship with the company. The independent director should be independent from any business. Neutrality of views and the quality of debate at the board level are necessary for good governance. . Naturally. The non-executive or independent directors should have proper competences and enough time. The corporations should appoint competent independent directors to achieve higher standards of governance.

(iii) Power to govern. Power of independent directors: (i) Power to demand the necessary information. One third of company's directors are required to be independent. The corporations should be immensely benefited from their inputs. Duties of independent director: (i) To reduce potential conflict between specific interests of the management and wider interests of the company and shareholders. (v) To make independent assessment of evaluating business plans. the . accounting and corporate strategy. (vi) To make the use of technical and financial expertise and experience for the development of the corporation.An independent director is required because of independent judgement. In fact. law. (iv) To protect the interests and welfare of the employees. management. The independent directors are the only hope to instill some discipline in the murky world of corporate finance. technical expertise and to build investor confidence. (ii) Power to exercise the vote. housing. The independent directors bring to the corporation a wide range of experience. The independent directors should be really independent. (ii) To demand financial transparency. (vii) To make useful communication between management and shareholders. (iii) To safeguard the interests of minority shareholders. Independent directors are the cornerstones of good corporate governance. Their duty is toprovide an independent unbiased and experienced perspective to the Board of Directors. knowledge and judgment from their proficiencies in finance.

audit committee and compensation committee should be consisting of independent directors The independent directors should safeguard the interests of the company during difficult times. Recent . BOARD STRUCTURE An ideal board structure is necessary for good corporate governance.

There should be a balance between executive and non-executive directors. It should be legitimate in the sense that stakeholders perceive the board to represent all significant interests and perspectives. (b) To promote the success of the company. There should be appropriate reporting procedures. The board is the link between managers and shareholders. . The risks have to be assessed and managed. They can also take independent professional advice. (c) Provision of a highly qualified team to manage the company. (a) Strategic guidance for the growth and prosperity of the company. The combined code of best practices was given by Cadbury code. The following are the duties of directors: (a) To act in accordance with the company's constitution. The roles of chair and CEO should preferably be split to ensure that no one individual is too powerful. Decisions have to be taken in an objective way and the interests of the company have to be protected. The boards should have regular meetings with an agenda. The board is essential to good corporate governance and excellent investor relations. Role of duties and responsibilities: The board's role is to provide entrepreneurial leadership of the company within a framework of effective controls. It should also be creditable in the sense the board is viewed as knowledgeable and fair and that the board process is considered rational.research has shown that effective boards must be legitimate and credible. (b) Accountability to all the stakeholders. All the directors should have access to the company secretary.

. The board should be accountable to shareholders and provide them the relevant information. (g) To declare an interest on proposed transactions or arrangements. (f) Not to accept benefits from third parties. (e) To avoid conflicts of interest. (d) To exercise reasonable care. It is not possible for the directors to please all shareholders at all times. CHIEF EXECUTIVE OFFICER The CEO has the executive responsibility of running the business. The CEO should not become the chairman of the company. Directors should have access to reliable information regularly. skill and diligence.(c) To exercise independent judgment.

via the chairman. It provides a bridge between both internal and external auditors . The board should meet frequently and the directors should have access to all information and all the directors should have an opportunity to give their views at board meetings. The company secretary will assist the professional development needs of directors and induction requirements for new directors. Company secretary: The company secretary should facilitate the work of the board by providing the necessary information to all the directors.Chairman: The chairman is responsible for the effective running of the board. The company secretary must act in good faith and avoid conflicts of interest. It should ensure that the objectivity of the auditors is maintained. The dismissal of the company secretary should be a decision of the board as a whole and not the CEOor chairman. Senior Independent Director: There should be an appointment of a Senior Independent Director (SID) who should be one of the independent non-executive directors. on all governance matters. The non-executive directors should meet without the chairman present at least annually in order to appraise the performance of the chairman. It should review the scope and outcome of the audit. Audit committee: It is a most important subcommittee. The SID should be available to the shareholders if they have concerns to be resolved. The SID will lead these meetings. The company secretary can advice the board.

The establishment of a remuneration committee has prevented the executive directors from setting their own remunerations. It should determine remuneration packages for each of the executive directors. knowledge and experience on the board. The remuneration of nonexecutive directors should be decided by the chairman and the executive members of the board. This committee should evaluate the existing balance of skills. A majority of members of the nomination committee should be independent non-executive directors. The competitive advantages have to be analysed. including pension rights and any compensation payments. It should throw its net as wide as possible for the search of suitable candidates. rigorous and transparent procedure for the appointments and recommendations to the board. The board should be fully aware of all relevant issues related to the audit.and the board. Nomination committee: Directors were appointed on the basis of personal contacts in the past. This committee should be consisting of more of non-executive . At present there is a formal. It should be able to assess the financial and non-financial risks of the company. Remuneration committee: This committee should make recommendations to the board on the company's framework of executive remuneration and its cost. Risk committee: Business operations involve risks and this committee should comprehend the risks involved in the business.

The non-executive directors should be independent in the presentation of their views. public life and reputation. Non-executive directors: Non-executive directors are essential for good governance. DIRECTOR'S REMUNERATION The company nor the performance of an individual. resources and standards of conduct.directors. They should scrutinize the performance of the management in meeting agreed goals and objectives. The stock . The added value of a non-executive director may be experience. knowledge. The nonexecutive directors can add to the overall leadership and development of the company. The size of the company and the experience of the individual are the major deciding factors. performance. The bonus is linked to the accounting performance of the firm. They cannot be under the pressure of the Board of Directors as executive directors. The nonexecutive directors should bring an independent judgment to bear on issues of strategy.

The newly inducted directors . It is more than a change of responsibility. It is neither related to the performance of the shares at a specified exercise price over a specified time period.options give the directors to purchase . Performance measures: The following are the important performance measures: • Shareholder return • Share price • Profit related measures • Return on capital • Earnings for share • Performance of individual director Training and development of Directors: The directors who are elevated from managerial roles find it difficult to understand their roles.The following are the six elements in director's remuneration: (1) Basic salary (2) Bonus (3) Stock options (4) Restricted share plans (5) Pension (6) Benefits like car and health care The basic salary is in accordance with terms of contract.

and investors? (c) How to handle the change of status and relationships? The directors should be given training in the following areas: (1) Diversity managing training.should know the answers for the following questions: (a) What are the challenges of the new role? (b) What are the expectations of the company. (10) Effectiveness of the Board. (2) Understanding the basics of economy and industry. (7) Management of HR issues. (5) Marketing strategies. ACCOUNTING STANDARDS Accounting standards regulate accounting policy so as to use the suitable accounting principles and methods. (3) Orientation to the company. (6) Negotiation skills. Accounting standards also ensure adequate disclosures in financial statements. (8) Leadership. (4) Finance for non-financial directors. customers. The use of uniform accounting . (9) Mergers and acquisitions.

At present nearly fifty items of disclosure are available. The nature of business. The following methods were approved for implementation of standards: • Approaching banks and financial institutions to point out that the adoption of accounting standards by their borrowers would be of great use to them. • Approaching authorities for making compliance with the standards as a necessary condition for listing companies at the various stock exchanges in the country.policy improves comparability. • Making request to apex bodies of trade and industry like FICCIand ASSOCHAM to issue directives to their associates to follow the accounting standards. size of the company. In 1977. . strategies and investment pattern are important. profit data. • Purpose and contents of legal documents. Hence the quality of financial report is determined by the quality of accounting standards and the level of compliance. Reserve Bank of India has suggested the following disclosures: • Characteristics of underlying assets. the economic value added (EVA) and the value of human assets are the most popular disclosures. ASB organised a workshop in 1983 to hold a dialogue with the industry on the implementation of the accounting standards. accounting standards. the Institute of Chartered Accountants of India (ICAI) constituted the Accounting Standards Board (ASB). • Procedure for administration and servicing. The value of brand equity.

. policies. customs. (2) Principles of corporate governance. laws and institutions influencing the administration of a corporation.It refers to the set of processes.SUMMARY (1) Meaning of corporate government .

Stewardship theory.Transaction cost economies -Stakeholder theory . (5) Need for corporate governance.(3) Issues involved in corporate governance principles.Agency theory . (9) Training and development of Directors. (8) Board structure. . (6) Theories of corporate governance . (4) Rights of corporation. (7) Role of independent directors. (10) Accounting standards.

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