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HELLEN DENYA MOTHER

BUSINESS ETHICS AND CORPORATE GOVERNANCE (4TH SEM)
UNIT-2 CORPORATE GOVERNANCE
CONCEPT OF CORPORATE GOVERNANCE
 Corporate Governance refers to the way a corporation is governed. It is the
technique by which companies are directed and managed. It means carrying the
business as per the stakeholders’ desires.
 CORPORATE- Relating to a large company or group
 GOVERNANCE- The action or manner of governing a state ,
Organisation(Rule/Control)
 It is actually conducted by the board of Directors and the concerned committees for
the company’s stakeholder’s benefit.
 It is all about balancing individual and societal goals, as well as, economic and social
goals.
 Corporate Governance is the interaction between various participants (shareholders,
board of directors, and company’s management) in shaping corporation’s
performance and the way it is proceeding towards.
 The relationship between the owners and the managers in an organization must be
healthy and there should be no conflict between the two.
 The owners must see that individual’s actual performance is according to the
standard performance. These dimensions of corporate governance should not be
overlooked.
 Corporate Governance deals with the manner the providers of finance guarantee
themselves of getting a fair return on their investment.
 Corporate Governance clearly distinguishes between the owners and the managers.
The managers are the deciding authority.
 In modern corporations, the functions/ tasks of owners and managers should be
clearly defined, rather, harmonizing.
 Corporate Governance deals with determining ways to take effective strategic
decisions.
 It gives ultimate authority and complete responsibility to the Board of Directors. In
today’s market- oriented economy, the need for corporate governance arises. Also,
efficiency as well as globalization are significant factors urging corporate governance.
 Corporate Governance is essential to develop added value to the stakeholders.
 Corporate Governance ensures transparency which ensures strong and balanced
economic development.
 This also ensures that the interests of all shareholders (majority as well as minority
shareholders) are safeguarded. It ensures that all shareholders fully exercise their
rights and that the organization fully recognizes their rights.

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SCOPE OF CORPORATE GOVERNANCE
Corporate Governance has a broad scope. It includes both social and institutional aspects.
Corporate Governance encourages a trustworthy, moral, as well as ethical environment.

FEATURES OF CORPORATE GOVERNANCE:

1) Discipline : Corporate discipline is a commitment by a company’s senior
management to adhere to behaviour that is universally recognized and accepted to
be correct and proper. This encompasses a company’s awareness of, and
commitment to, the underlying principles of good governance, particularly at senior
management level.
2) Transparency : Transparency is the ease with which an outsider is able to make
meaningful analysis of a company’s actions, its economic fundamentals and the non-
financial aspects pertinent to that business. This is a measure of how good
management is at making necessary information available in a candid, accurate and
timely manner – not only the audit data but also general reports and press releases.
It reflects whether or not investors obtain a true picture of what is happening inside
the company.
3) Independence : Independence is the extent to which mechanisms have been put in
place to minimize or avoid potential conflicts of interest that may exist, such as
dominance by a strong chief executive or large share owner. These mechanisms
range from the composition of the board, to appointments to committees of the
board, and external parties such as the auditors. The decisions made, and internal
processes established, should be objective and not allow for undue influences.
4) Accountability : Individuals or groups in a company, who make decisions and take
actions on specific issues, need to be accountable for their decisions and actions.
Mechanisms must exist and be effective to allow for accountability. These provide
investors with the means to query and assess the actions of the board and its
committees.
5) Responsibility : With regard to management, responsibility pertains to behavior that
allows for corrective action and for penalizing mismanagement. Responsible
management would, when necessary, put in place what it would take to set the
company on the right path. While the board is accountable to the company, it must
act responsively to and with responsibility towards all stakeholders of the company.
6) Fairness : The systems that exist within the company must be balanced in taking into
account all those that have an interest in the company and its future. The rights of
various groups have to be acknowledged and respected. For example, minority share
owner interests must receive equal consideration to those of the dominant share
owner(s).
7) Social responsibility : A well-managed company will be aware of, and respond to,
social issues, placing a high priority on ethical standards. A good corporate citizen is
increasingly seen as one that is non-discriminatory, non-exploitative, and responsible

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with regard to environmental and human rights issues. A company is likely to
experience indirect economic benefits such as improved productivity and corporate
reputation by taking those factors into consideration.

NEED TO IMPROVE CORPORATE GOVERNANCE:

1) Wide Spread of Shareholders: Today a company has a very large number of
shareholders spread all over the nation and even the world; and a majority of
shareholders being unorganised and having an indifferent attitude towards
corporate affairs. The idea of shareholders’ democracy remains confined only to the
law and the Articles of Association; which requires a practical implementation
through a code of conduct of corporate governance.
2) Changing Ownership Structure: The pattern of corporate ownership has changed
considerably, in the present-day-times; with institutional investors (foreign as well
Indian) and mutual funds becoming largest shareholders in large corporate private
sector. These investors have become the greatest challenge to corporate
managements, forcing the latter to abide by some established code of corporate
governance to build up its image in society.
3) Corporate Scams or Scandals: Corporate scams (or frauds) in the recent years of
the past have shaken public confidence in corporate management. The event of
Harshad Mehta scandal, which is perhaps, one biggest scandal, is in the heart and
mind of all, connected with corporate shareholding or otherwise being educated
and socially conscious.
4) Greater Expectations of Society of the Corporate Sector:Society of today holds
greater expectations of the corporate sector in terms of reasonable price, better
quality, pollution control, best utilisation of resources etc. To meet social
expectations, there is a need for a code of corporate governance, for the best
management of company in economic and social terms.
5) Hostile Take-Overs: Hostile take-overs of corporations witnessed in several
countries, put a question mark on the efficiency of managements of take-over
companies. This factors also points out to the need for corporate governance, in the
form of an efficient code of conduct for corporate managements.
6) Huge Increase in Top Management Compensation: It has been observed in both
developing and developed economies that there has been a great increase in the
monetary payments (compensation) packages of top level corporate executives.
There is no justification for exorbitant payments to top ranking managers, out of
corporate funds, which are a property of shareholders and society.
7) Globalisation: Desire of more and more Indian companies to get listed on
international stock exchanges also focuses on a need for corporate governance. In
fact, corporate governance has become a buzzword in the corporate sector. There is
no doubt that international capital market recognises only companies well-managed
according to standard codes of corporate governance.

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PRINCIPLES OF CORPORATE GOVERNANCE:

1) Transparency: Transparency means the quality of something which enables one to
understand the truth easily. In the context of corporate governance, it implies an
accurate, adequate and timely disclosure of relevant information about the
operating results etc. of the corporate enterprise to the stakeholders.
2) Accountability: Accountability is a liability to explain the results of one’s decisions
taken in the interest of others. In the context of corporate governance,
accountability implies the responsibility of the Chairman, the Board of Directors and
the chief executive for the use of company’s resources (over which they have
authority) in the best interest of company and its stakeholders.
3) Independence: Good corporate governance requires independence on the part of
the top management of the corporation i.e. the Board of Directors must be strong
non-partisan body; so that it can take all corporate decisions based on business
prudence. Without the top management of the company being independent; good
corporate governance is only a mere dream.

FEATURES OF GOOD GOVERNANCE :

1) Participation : All men and women should have a voice in decision-making, either
directly or through legitimate intermediate institutions that represent their interests.
Such broad participation is built on freedom of association and speech, as well as
capacities to participate constructively.
2) Rule of law: Legal frameworks should be fair and enforced impartially, particularly
the laws on human rights.
3) Transparency : Transparency is built on the free flow of information. Processes,
institutions and information are directly accessible to those concerned with them,
and enough information is provided to understand and monitor them.
4) Responsiveness : Institutions and processes try to serve all stakeholders.
5) Consensus orientation: Good governance mediates differing interests to reach a
broad consensus on what is in the best interests of the group and,. where possible,
on policies and procedures.
6) Equity : All men and women have opportunities to improve or maintain their well-
being.
7) Effectiveness and efficiency: Processes and institutions produce results that meet
needs while making the best use of resources.
8) Accountability : Decision-makers in government, the private sector and civil society
organisations are accountable to the public, as well as to institutional stakeholders.
This accountability differs depending on the organisations and whether the decision
is internal or external to an organisation.

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9) Strategic vision : Leaders and the public have a broad and long-term perspective on
good governance and human development, along with a sense of what is needed for
such development. There is also an understanding of the historical, cultural and
social complexities in which that perspective is grounded.

ROLE PLAYED BY REGULATORS TO IMPROVE CORPORATE GOVERNANCE

The role played by regulators to improve Corporate Governance in India includes

 Company Law
 Security Law
 Financial Institutions
 Credit-Rating agencies

1) COMPANY LAW :
The companies Act, 1956 was enacted on the recommendations of the Bhaba Committee
that was setup in 1950 with the object to consolidate the existing corporate laws and to
provide a new basis for the corporate operations.
The changes made are related to the following:
a) The Directors’ responsibility statement.
b) Formation of audit committee
c) Guidelines from the Department of Public Enterprises on the corporate governance
of central public sector enterprise.
d) SEBI’s guidelines on corporate governance for listed companies
e) Independent directors on the board of listed government companies.
f) Non-official directors on the board of listed government companies,
g) Corporate Governance in statutory corporations.

2) SECURITIES LAW :
SEBI initiative for strengthening Corporate Governance.
The Committee shall make recommendations to SEBI on the following issues with the aim of
improving standards of corporate governance of listed companies in India:
1.Ensuring independence in spirit of Independent Directors and their active participation in
functioning of the company;
2.Improving safeguards and disclosures pertaining to Related Party Transactions;
3.Issues in accounting and auditing practices by listed companies;
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4.Improving effectiveness of Board Evaluation practices;
5.Addressing issues faced by investors on voting and participation in general meetings;
6.Disclosure and transparency related issues;
7.Any other matter, as the Committee deems fit pertaining to corporate governance in
India.

3) CORPORATE GOVERNANCE THROUGH LISTING AGREEMENT

 SEBI, as part of its endeavour to continuously improve the standards of

corporate governance in line with the needs of a dynamic market,
constituted another Committee on Corporate Governance under the
Chairmanship of Shri N. R. Narayana Murthy to review the performance of
Corporate Governance and to determine the role of companies in responding
to rumour and other price sensitive information circulating in the market in
order to enhance the transparency and integrity of the market.
 The Committee in its Report observed that “the effectiveness of a system of
Corporate Governance cannot be legislated by law, nor can any system of
Corporate Governance be static. In a dynamic environment, system of
Corporate Governance need to be continually evolved.”
 Based on the recommendations of the Committee and also with a view to
promote and raise the standards of Corporate Governance, SEBI revised
clause 49 of the Listing agreement vide its circular dated August 26, 2003, the
implementation of which was deffered later. The Securities and Exchange
Board of India on October 29, 2004 again revised the Clause 49 of the Listing
Agreement.
The provisions of the revised Clause 49 were required to be implemented as per the
schedule of implementation
given below:
(a) For entities seeking listing for the first time, at the time of seeking in-principle
approval for such listing.
(b) For existing listed entities which were required to comply with Clause 49 which is
being revised i.e. those having a paid up share capital of Rs. 3 crores and above or
net worth of Rs. 25 crores or more at any time in the history of the company, by April
1, 2005.

4) GOVERNANCE BY FINANCIAL INSTITUTIONS :

The financial institutions have also taken responsibility in enforcing corporate governance in
the companies where they have substantial stakes.
 Making adequate disclosures,
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 Moving towards internationally accepted accounting standards.
 Maintaining distinction between the CEO and chairman, wherever applicable
and
 Holding regular meetings with proper recording and dissemination of
proceedings.
5) ROLE PLAYED BY CREDIT- RATING AGENCIES :

Two of the leading credit- rating agencies – Credit Rating Information Services of
India Limited (CRISIL) and ICRA have prepared a comprehensive instrument for rating
the good governance practices for the listed companies.

ACCOUNTING STANDARDS AND CORPORATE GOVERNANCE :

 The good Corporate Governance ensures the better corporate performance and
better relationship with stakeholders, where the proper practice of accounting
standards assumes a lot of importance as it leads to the effective disclosure thus,
good Corporate Governance.
 Hence, the practice of proper accounting standards is more relevant issue of good
Corporate Governance. In India, the infancy stage of accounting standards gives
more scope for the personal discretion, hence, the disclosure is ineffective.
 In view of the liberalization and globalization of the Indian economy, the
formulation, development and practice of the proper accounting standards and
reduction of the gap between Indian and International Accounting Standards are
very much needed to ensure a good Corporate Governance.
The amended act requires that :
 Every profit and loss account and the balance sheet of the company should
comply with the accounting standards {Section 211 (3A)}.
 Where the profit and loss and the balance sheet of the company do not comply
with the accounting standards such companies should disclose in its profit and
loss account and balance sheet, the following namely-
a) The deviation from accounting standards,
b) The reasons for such deviation and
c) The financial effect if any, arising due to such deviation{Sec 211)3B)}

CORPORATE DISCLOSURE
Corporate disclosure can be defined as the communication of information by people inside
the public firms towards people outside the main aim of corporate disclosure is “to
communicate firm performance and governance to outside investors” (Haely and Palepu,
2001). This communication is not only called for by shareholders and investors to analyze

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the relevance of their investments, but also by the other stakeholders, particularly for
information about corporate social and environmental policies.
Importance of Corporate Disclosure
 Accounting operates in a socio economic environment as a 'service function'. When
there is a drastic change in the political or economic system of the country, it is
bound to change the objectives of accounting and corporate disclosure.
 In developing countries, the movement toward a market oriented economy has
necessitated a revision of financial reporting system.
 The emergence of joint stock companies together with the divorce of management
and ownership has led to the increasing significance of corporate disclosure.
 The wider recognition of social responsibility of business for the last few decades has
important implications for corporate disclosure practices.
 This has emphasised the efficient allocation of society's resources and wealth.
 The concept of social responsibility has now become broader and includes
employment generation, pollution control, civic amenities etc. Now, groups other
than shareholders such as employees. local communities. social groups and the
general public have interest in the accounting information. They are having vital
influences on accounting and reporting.
 Corporate Disclosure system provides re liable and relevant information to the
interested parties for their decision making. Through disclosure requirements, a
proper recording and classification of economic transactions of the business concern
can be achieved.

INSIDER TRADING
 Insider trading is the trading of a public company's stock or other securities (such as
bonds or stock options) by individuals with access to non-public information about
the company.
 In various countries, some kinds of trading based on insider information is illegal.
 This is because it is seen as unfair to other investors who do not have access to the
information, as the investor with insider information could potentially make larger
profits than a typical investor could make.
 The authors of one study claim that illegal insider trading raises the cost of capital for
securities issuers, thus decreasing overall economic growth. However, some
economists, such as Henry Manne, have argued that insider trading should be
allowed and could, in fact, benefit markets.
 Trading by specific insiders, such as employees, is commonly permitted as long as it
does not rely on material information not in the public domain.
 Many jurisdictions require that such trading be reported so that the transactions can
be monitored
 The rules governing insider trading are complex and vary significantly from country
to country. The extent of enforcement also varies from one country to another.
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 The definition of insider in one jurisdiction can be broad, and may cover not only
insiders themselves but also any persons related to them, such as brokers, associates
and even family members. A person who becomes aware of non-public information
and trades on that basis may be guilty of a crime.

MEASURES TO STOP INSIDER TRADING:

1) Spying
2) Phone tapping
3) Shredding record
4) Electronic surveillance
5) Administrative action
6) Legal measures

BENEFITS OF CORPORATE GOVERNANCE

1) Good corporate governance ensures corporate success and economic growth.
2) Strong corporate governance maintains investors’ confidence, as a result of which,
company can raise capital efficiently and effectively.
3) It lowers the capital cost.
4) There is a positive impact on the share price.
5) It provides proper inducement to the owners as well as managers to achieve
objectives that are in interests of the shareholders and the organization.
6) Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
7) It helps in brand formation and development.
8) It ensures organization in managed in a manner that fits the best interests of all.

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