UNIT 1

CORPORATE GOVERNANCE
• Corporate governance is the system of rules, practices and processes by which
a firm is directed and controlled. Corporate governance essentially involves
balancing the interests of a company's many stakeholders, such as
shareholders, management, customers, suppliers, financiers, government and
the community. Since corporate governance also provides the framework for
attaining a company's objectives.
• Corporate governance is the set of processes, customs, policies, laws, and
institutions affecting the way a corporation (or company) is directed,
administered or controlled.
• Corporate governance also includes the relationships among the many
stakeholders involved and the goals for which the corporation is governed.

• Relationships among various participants in determining the direction and

performance of a corporation.
• Effective management of relationships among
– Shareholders
– Managers
– Board of directors
– employees
– Customers
– Creditors
– Suppliers
– community
Why Corporate Governance?
▪ Better access to external finance
▪ Lower costs of capital – interest rates on loans
▪ Improved company performance – sustainability
▪ Higher firm valuation and share performance
▪ Reduced risk of corporate crisis and scandals
Principles of Corporate Governance
 ▪ Sustainable development of all stake holders- to ensure growth of all
individuals associated with or effected by the enterprise on sustainable basis
▪ Effective management and distribution of wealth- to ensue that enterprise
creates maximum wealth and judiciously uses the wealth so created for
providing maximum benefits to all stake holders and enhancing its wealth
creation capabilities to maintain sustainability.
▪ Discharge of social responsibility- to ensure that enterprise is acceptable to
the society in which it is functioning
▪ Application of best management practices- to ensure excellence in functioning
of enterprise and optimum creation of wealth on sustainable basis
▪ Compliance of law in letter & spirit- to ensure value enhancement for all
stakeholders guaranteed by the law for maintaining socio-economic balance
▪ Adherence to ethical standards- to ensure integrity, transparency,
independence and accountability in dealings with all stakeholders
Four Pillars of Corporate Governance
• Accountability
• Fairness
• Transparency
• Independence

➢ Accountability
• Ensure that management is accountable to the Board
• Ensure that the Board is accountable to shareholders
➢ Fairness
• Protect Shareholders rights
• Treat all shareholders including minorities, equitably
• Provide effective redress for violations
➢ Transparency
• Ensure timely, accurate disclosure on all material matters, including the
financial situation, performance, ownership and corporate governance
➢ Independence
• Procedures and structures are in place so as to minimise, or avoid
completely conflicts of interest
• Independent Directors and Advisers i.e. free from the influence of
others

Issues in corporate governance

1- Distinguishing the roles of board and management

▪ By or under the direction of board.

▪ Board occupies key position between shareholders (owners) and company’s
management
▪ Select, decide the remuneration and evaluate on a regular basis, when
necessary the CEO.
▪ Oversee the conduct of company business.
▪ Review and where necessary, approve the company financial objectives and
major corporate plan and objectives.
▪ Render advice and counsel.
▪ Identify and recommend candidates for board of directors.
▪ Comply with laws and regulations.
▪ All other functions required by law to be performed.

2- Composition of the board and related issues

No. of directors of diff kinds.
-BORAD OF DIRECTORS
-EXECUTIVE DIRECTORS
-NON EXECUTIVE DIRECTOS
-AFFILATED DIRECTORS
-INDEPENDENT DIRECTORS
-NOMINEE

3- Should the board of directors have committees.

▪ Appointment of special committees
▪ Nomination
▪ Remuneration
▪ auditing
4- Separation of the roles of the CEO and chairperson

5- Appointment of the board and director’s re-election.

6- Directors and executive’s remuneration.

 7- Discloser and audit.

8- Protection of shareholder rights and their expectation.

9- Dialog with institutional shareholders.

10- Should investor have a say in making a company “socially responsible

corporate citizen”?.

Benefits Of Good Corporate Governance To A Corporation

▪ Creation and enhancement of a corporation’s competitive advantage
▪ Enabling a corporation perform efficiently by preventing fraud and
malpractices.
▪ Providing protection to shareholders interest.
▪ Enhancing the valuation of an enterprise.
▪ Ensuring compliance with laws and regulations.

How to achieve good corporate governance

Good corporate governance is about having the correct policies and procedures in
place. It is also about maintaining a culture where good relationships between
stakeholders provide positive contributions to the long-term goals of the
organisation.
▪ Build a strong, qualified board of directors and evaluate
performance. Boards should be comprised of directors who are
knowledgeable and have expertise relevant to the business and are qualified
and competent, and have strong ethics and integrity, diverse backgrounds and
skill sets, and sufficient time to commit to their duties.
▪ Define roles and responsibilities. Establish clear lines of accountability
among the Board, Chair, CEO, Executive Officers and management:
▪ Emphasize integrity and ethical dealing. Not only must directors declare
conflicts of interest and refrain from voting on matters in which they have an
interest, but a general culture of integrity in business dealing and of respect
and compliance with laws and policies without fear of recrimination is critical.
▪ Evaluate performance and make principled compensation decisions.
 ▪ Engage in effective risk management. Companies should regularly identify
and assess the risks they face, including financial, operational, reputational,
environmental, industry-related, and legal risks
▪ Ensure the directors have the information they need. Better information
means better decisions. Regular board papers will provide directors with
information that the CEO or management team has decided they need.

▪ Build and maintain an effective governance infrastructure. Since the

board is ultimately responsible for all the actions and decisions of an
organisation, it will need to have in place specific policies to guide
organisational behaviour. To ensure that the line of responsibility between
board and management is clearly delineated, it is particularly important for
the board to develop policies in relation to delegations.

▪ Appoint a competent chairperson. As the “leader” of the board, the

chairperson should demonstrate strong and acknowledged leadership ability,
the ability to establish a sound relationship with the CEO, and have the
capacity to conduct meetings and lead group decision-making processes.

THEORIES OF CORPORATE GOVERNANCE

1- AGENCY THEORY

Agency theory is one of the most widely used theories in management. Broadly,
agency theory is about the relationship between two parties, the principal (owner)
and the agent. More specifically, it examines this relationship from a behavioral and
a structural perspective. Theory suggests that given the chance, agents will behave
in a self-interested manner, behavior that may conflict with the principal’s interest.
As such, principals will enact structural mechanisms that monitor the agent in order
to curb the opportunistic behavior and better align the parties’ interests.
• Adam smith who identified an agency problem(managerial negligence and
profusion).
• Shareholders (owners)- principals-they define objective of the company.
• Agents-management who pursue such objectives.
• Chief executive desire and shareholders long term investment.
• Mismatch objective leads to agency problem.
• Cost inflicted by such dissonance is the agency cost.
Two broad mechanism that reduce agency cost and improve performance are:
• Fair and accurate financial disclosures
• Efficient and independent board of directors

2- STEWARDSHIP THEORY
• Left alone management will act in best interest of firms and shareholders
• Don’t believe in the pessimistic view of human nature (e.g. self-interest), they hold
that this view re-enforces and influences such negative behavior.
• No principal- agent problem exists.
• Agents are stewards for the company’s assets and not agents of owners. They are
a necessary component of this relationship.
• Managers are trustworthy and attach significant value to their personal reputation
• Managers are steward whose motives are aligned with the objectives of principles.
• Steward behavior will not depart from the interests of his/her organization.
• Control can be counterproductive, because it undermines the pro-organisational
behavior of the steward by lowering his/her motivation.

DIFFERENCE BETWEEN AGENCY AND STEWARDSHIP THEORY

▪ Agency theory concentrates primarily on the association between the principal
and the agents in corporations, having a formal and contractual nature of
relationship however with the presumed goal indifference and incongruence
of interest. Meanwhile, Stewardship theory is involved mainly in analyzing
the importance of the co-existence of trust-based relationships along with
agency relations in firms.
 ▪ In an agency type, the manager is motivated by personal interests and extrinsic
rewards. In the stewardship, the manager is motivated by the human need for
intellectual growth, achievement, and self-actualization, and by intrinsic
rewards.
▪ In an agency theory, the power is institutionally directed while in the
stewardship, it is based on personal ability and power to run the particular
organization.
▪ Owner’s attitude regarding risk is negative (avoid) in agency but risk taking
in stewardship.
▪ Attachment towards company is low in agency but high in stewardship.
▪ Time frame for achieving goal is short in agency but high in stewardship.

What are 'Agency Costs'

Agency costs are a type of internal cost that arises from, or must be paid to, an agent
acting on behalf of a principal. These costs arise because of core problems, such
as conflicts of interest, between shareholders and management. Shareholders wish
for management to run the company in a way that increases shareholder value, while
management may wish to grow the company in ways that maximize their personal
power and wealth that may not be in the best interests of shareholders.
 3- STAKEHOLDER THEORY

• Firms should recognize the interests of stakeholders that have a vested interest in
the corporation.
• Research indicate that the country environment or political-economic climate
affect corporate performance
• Interest of all groups- employees, customers, dealers, government and society.
• Ethics of cares
• Ethics of fiduciary relationship
• Theory of property rights
• Criticised mainly because not applicable in practice by corporations

4- SOCIOLOGICAL THEORY
• Focus on board composition
• Implication of power and wealth distribution
• Financial reporting
• Problems of interlocking dictatorship and concentration in privilege class to equity
and social progress
• Socio-economic objective of corporations

MODELS OF CORPORATE GOVERNANCE

1- ANGLO-AMERICAN MODEL ( UNITARY BOARD/ OUTSIDER
MODEL)
▪ This model is also called an ‘Anglo-Saxon model’ and is used as basis of
corporate governance in U.S.A, U.K, Canada, Australia, and some common
wealth countries.
▪ The shareholders appoint directors who in turn appoint the managers to
manage the business. Thus there is separation of ownership and control.
▪ The board usually consist of executive directors and few independent
directors. The board often has limited ownership stakes in the company.
Moreover, a single individual holds both the position of CEO and chairman
of the board.
▪ This system (model) relies on effective communication between shareholders,
board and management with all important decisions taken after getting
approval of shareholders (by voting).
▪ The ownership of company is more or less equally divided between individual
and institutional shareholders.
▪ Most institutional investor acts as an outsider or observer.
▪ Company are generally allowed to managed by professional who have
minimal stake in the company.
2- GERMAN MODEL(CONTINENTAL EUROPEAN MODEL)

▪ This is also called as 2 tier board model as there are 2 boards viz.
-The supervisory board
-The management board.
▪ It is used in countries like Germany, Holland, France, etc.
▪ Usually a large majority of shareholders are banks and financial institutions.
▪ The shareholder can appoint only 50% of members to constitute the
supervisory board. The rest is appointed by employees and labour unions.
▪ Works on Co-determination principle.
3- JAPANESE MODEL (BUSINESS NETWORK/ INSIDER MODEL)

▪ This model is also called as the business network model, usually

shareholders are banks/financial institutions, shareholders, corporate with
cross-shareholding. large family
▪ There is supervisory board which is made up of board of directors and a
president, who are jointly appointed by shareholder and banks/financial
institutions. This is rejection of the Japanese ‘keiretsu’- a form of cultural
relationship among family controlled corporate and groups of complex
interlocking business relationship, where cross shareholding is common
most of the directors are heads of different divisions of the company.
Outside director or independent directors are rarely found of the board.
▪ Disclosure norms are not strict, checks on insider trading are not so
comprehensive and effective.
▪ Merger & Acquisition are rare
▪ Banks and FIs plays important role in providing equity
▪ Composition of board is majority executive
 4- INDIAN MODEL

▪ The model of corporate governances found in India is a mix of the Anglo-

American and German models. This is because in India, there are three types
of Corporation viz. private companies, public companies and public sectors
undertakings (which includes statutory companies, government companies,
banks and other kinds of financial institutions).
▪ Each of these corporation have a distinct pattern of shareholding. For e.g. In
case of companies, the promoter and his family have almost complete control
over the company. They depend less on outside equity capital. Hence in
private companies the German model of corporate governance is followed.

CORPORATE EXCELLENCE

The term Excellence literally means the quality of being outstanding or extremely
good. The achievement of corporate excellence is the most important objective of
every organization. Corporate governance is the one and only route to achieve
corporate excellence. Corporate excellence refers to a transformation from the status
of a good company to the status of a great company. The essence of corporate
excellence is to have a competitive advantage over other firms in the industry.
Corporate excellence is about developing and strengthening the management system
and process of a company to improve performance and create value for stakeholders.

The key elements of corporate excellence is transparency projected through a code

of good governance which incorporate a system of checks and balances between key
players boards, management, auditors, shareholders and others. Good Corporate
Governance is a source of competitive advantage and a critical input for achieving
excellence in all productive, economic and social pursuits. A company’s most
valuable asset is the goodwill it enjoys with its stakeholders, which can only be
earned by actions, not demanded.
The European Foundation for Quality management (EFQM) defines excellence in
business as “outstanding practices in managing the organization and achieving
results, all based on a set of eight fundamental concepts. These concepts are value
addition for customers, creating sustainable future, developing organizational
capability, harnessing creativity and innovation, leading with vision, inspiration and
integrity, managing with ability, succeeding through the talent of the people and
sustain outstanding results.”

CORPORATE EXCELLENCE THROUGH CORPORATE GOVERNANCE

Corporate governance plays most important role in every organization. It provides a

structure through which the objectives of a company are set and how they are
achieved and monitored. A good governance practice enhances the efficiency of
corporate sector and helps achieving excellence in all areas in the organization. The
following are the key points for achieving and maintaining corporate excellence in
an organization with the help of good corporate practices.

1. Monitoring the Performance

Excellent companies adopt effective and consistent strategies for monitoring and
evaluating performance of the organization. Corporate governance is sets of rules
and guidelines for monitoring and evaluating performance of the organization.
Monitoring of governances by the broad also includes continuous review of the
internal structure of the company to ensure that there are clear lines of accountability
and responsibility for management throughout the organization.

2. Inculcate Moral Values and Principles in Business

Corporate governance regulations are based on moral values and principles than law
and it helps to the business identify, analysis the different moral issues involved. It
is essential that the organization’s guiding ethics and code of conduct are clearly
understood and followed by each and every members of the organization and
communicated to all stakeholders. These moral values, principles and code of
conduct help the organization to become an excellent company.

3. Fair and Equitable Treatment of Shareholders

Corporate governance frameworks ensure the fair and equitable treatment of all
shareholders including minority shareholders. There should be no discrimination
between shareholders. All shareholders have opportunity to obtain effective redress
for violation of their rights. Fair and equitable treatment of shareholders helps an
organization to excell in all functional areas.
 4. Transparency and Full Disclosures
Transparency and full disclosures are the basic principles of corporate governance
and essential ingredients for achieving excellence in an organization. Corporate
governance aims at ensuring a higher degree of transparency in an organization by
ensuring full disclosure of all material matters regarding the business ,including the
financial statement ,performance, ownership, and governance of the company.

5. Fair and Equitable Treatment of Employees and Workers

Fair and equitable treatment of employees and workers is the important tool for
excellence in an organization. It ensures equal opportunity in all aspects of
employment regardless of race, colour, religion, sex, nationality, age, marital status,
disability, etc. The goal of corporate governance is to avoid all kinds of
discrimination, harassment, and ill-treatment of the workforce.

6. Strong Internal Control

Excellent companies built a concrete and strong internal control system for its
outstanding performance and it is the mechanism for reducing mismanagement and
fraud. Internal control procedures are policies implemented by an entity's board of
directors, audit committee, management, and other personnel to provide reasonable
assurance of the entity in achieving its objectives related to reliable financial
reporting, operating efficiency, and compliance with laws and regulations.

7. Safeguard the Interest of All the Stakeholders

Corporate governance framework adopts effective, consistent, friendly measurers
and strategies to safeguard the interest of all the stakeholders. It protects and respects
the rights of all stakeholders. Corporate governance mechanisms are usually
established for safeguarding and protecting interest of all the stakeholders

8. Reduce Misconduct and Frauds

Strong corporate framework reduces misconduct and fraud and it is the path way to
corporate excellence. The corporate misconduct stretches beyond malpractices in
accounting, reporting, operations etc. Corporate governance attempts to implant
moral values and principles in business

9. Satisfied Customers
Customer satisfaction is one of the most important aspects of organizational
performance. Through good governance, companies can gain valuable insights into
the priorities and understanding of customer needs and respond with modified
product offering. The satisfied customer helps companies in achieving its excellence
in all areas.
 10.Corporate Reputation
Corporate reputation plays most prominent role in corporate excellence. Good
governance system boosts the reputation of the company by adhering to the principle
of reliability, credibility, responsibility, accountability and trustworthiness. It is the
overall estimation in which an organization is held by internal and external
stakeholders based on its past action and probability of its future behaviour.
Corporate governance framework is the best to achieve corporate reputation..

11.Risk Management
Risk is an important element of corporate governance. There should be clearly
established process of identifying, analyzing and treating risk, the absence of which
could prevent the company from effectively achieving its objectives. An efficient
risk management system will increase confidence, growth, goodwill etc to the
investors, creditors and other stakeholders.
 UNIT 2

Purpose of Corporate Governance Committee The purpose of the Corporate

Governance Committee is to (a) identify and recommend to the Board appropriate
candidates who could serve as director nominees for the next annual meeting of
shareholders; (b) advise the Board with respect to the Board composition, procedures
and committees; and (c) develop and recommend to the Chief Executive Officer and
the Board a set of corporate governance guidelines applicable to the Issuer and
monitor such governance guidelines.

CADBURY COMMITTEE
• The Cadbury Committee was set-up in May 1991 by the Financial Reporting
Council of the London Stock Exchange.
• The committee published its report in December 1992.
• Adrian Cadbury the chairman of the Cadbury committee.
The code of best practices has been divided into four sections. They are:
• Role of Board of Directors, duties of the board and its compositions.
• Role of Non-Executive Directors.
• Dealing with their Remunerations.
• Addressing questions of financial reporting and financial controls.

➢ Role of Board of Director, duties of the board and its compositions

• The board should meet regularly, retain full and effective control over
the company and monitor the executive management.
• The board should include non-executive directors of sufficient caliber
and number for their views to carry significant weight in the board’s
decisions.
• All directors should have access to the advice and services of the
company secretary, who is responsible to the board for ensuring that
board procedures are followed and that applicable rules and regulations
are complied with. Any question of the removal of the company
secretary should be a matter for the board as a whole.
➢ Role of Non-Executive Directors
• Non-executive directors should bring an independent judgment to bear
on issues of strategy, performance, resources, including key
appointments, and standards of conduct.
• Non-executive directors should be appointed for specified terms and
reappointment should not be automatic.
• Non-executive directors should be selected through a formal process
and both this process and their appointment should be a matter for the
board as a whole.

➢ Dealing with remuneration

• we recommend that future service contracts should not exceed three
years without shareholders’ approval and that the Companies Act
should be amended inline with this recommendation.
• Shareholders require that the remuneration of directors should be both
fair and competitive.
• The Annual General Meeting provides the opportunity for shareholders
to make their views on such matters as director’s benefit known to their
boards.

➢ Reporting and control

• It is the board’s duty to present a balanced and understandable
assessment of the company’s position.
• The board should ensure that an objective and professional relationship
is maintained with the auditors.
• The board should establish an audit committee of at least three non-
executive directors with written terms of reference which deal clearly
with its authority and duties.
• The directors should explain their responsibility for preparing the
accounts next to a statement by the auditors about their reporting
responsibilities.
• The directors should report on the effectiveness of the company’s
system of internal control.
• The directors should report that the business is a going concern, with
supporting assumptions or qualifications as necessary.
Recommendations
• A single person should not be vested with the decision-making power. i.e., the
role of chairman and chief executive should be separated clearly.
• The Non-executive directors should act independently while giving their
judgment on issue of strategy, performance, allocation of resources, and
designing the code of conduct.
• A majority of directors should be independent non- executive directors, i.e.,
they should not have any financial interests in the company.
• The term of the Directors can be extended beyond three years only after the
prior approval of the shareholders.
• A remuneration committee with majority of non- executive directors should
decide on the pay of the executive directors.
• The interim company report should give the balance sheet information and
reviewed by the auditor.
• The information regarding the audit fee should be made public and there
should be regular rotation of the auditors.
• An objective and professional relationship with the auditors must be ensured.
• It must be reported that a business is a growing concern.

GREENBURY COMMITTEE 1995

The Greenbury Report released in 1995 was the product of a committee established
by the United Kingdom Confederation of Business and Industry on corporate
governance. It followed in the tradition of the Cadbury Report and addressed a
growing concern about the level of director remuneration.
Recommendations
• Remuneration committee.
• Disclosure and Approval provision.
• Remuneration policy.
• Service contracts and compensation

➢ Remuneration committee.
• set remuneration committee of non-executive director.
• Articles of Association should be amended.
• Non-Executive Directors with no personal financial interest.
• Board is determine remuneration of non executive director.
 • R.C chairman should meet AGM.

➢ Disclosure and Approval provision.

• The remuneration committee should make a report each year
• Company’s policy on executive remuneration, performance criteria and
measurement, pension provision, contracts of service and
compensation commitments on early termination.
• Full consideration to the best practice.
• The report should also include full details of all elements in the
remuneration package of each individual Director.

➢ Remuneration policy
• Remuneration committees must provide the packages
• Remuneration committees should be sensitive
• Eligible for annual bonuses
• Executive share options should never be issued at a discount

➢ Service contracts and compensation

• Remuneration committees should consider what compensation
commitments.
• Remuneration committees should, however, be sensitive and flexible,
especially over timing.
• Periods should reduce after the initial period.
• Remuneration committees should take a robust line on payment of
compensation

HAMPEL COMMITTEE
The Hampel Report is a UK Corporate Governance Report. The Hampel
Committee was set up in November 1995 to review the implementation of the
Cadbury and Greenbury recommendations. While the Cadbury Report was the
first report to look into issues of corporate governance in the UK, the Greenbury
Report focused specifically on the issue of executive remuneration. The Hampel
Committee reported in January 1998. It was chaired by Sir Ronald Hampel, the
then chairman of ICI (Imperial Chemical Industries) PLC.
Hampel committee report
• Corporate governance and its principle
• Role of Directors
• Director’s remuneration
• The role of shareholder
• Accountability and audit

➢ Recommendations for the principle of corporate governance

• Statement to be involved in annual report and account

• Statement should include:
▪ Ways in which principle are applied in various circumstances
▪ Description of the way in which the board has applied the principle of
corporate governance

➢ Role of director
• Executive director
▪ To act in good faith in the interest of the company and for a proper
purpose
▪ To exercise utmost care, due diligence and skill in their duties
▪ Leadership and control of company
• Non-executive director
▪ have both a strategic and monitoring function
▪ may contribute valuable expertise not otherwise available to
management
▪ act as mentor to relatively inexperienced executive

➢ Director’s remuneration
Director remuneration is of legitimate concern to the shareholder
➢ Role of shareholder

➢ Accountability and Audit

COMBINED CODE ON CORPORATE GOVERNANCE

1- Directors
2- Remuneration
3- Accountability and audit
4- Relations with shareholders

1- Directors

➢ The Board
Every company should be headed by an effective board, which is collectively
responsible for the success of the company.
Role of the board: -
▪ Provide entrepreneurial leadership.
▪ Enable risks to be assessed and managed
▪ Establish prudent and effective ICS
▪ Set the Co’s strategic aims
 ▪ Review performance of mgmt.
▪ Set Co’s values and standards
▪ Ensure proper financial and human resource in place
▪ Ensure Co meet obligations to shareholders & stakeholders.
➢ Chairman and Chief executive
▪ Division of responsibility at the head of the Co, between the running of
the board and the executive responsibility of running the operations.
▪ Separation of the role of Chairman and CEO should be in writing and
agreed by the board
Chairman
▪ responsible for leadership of the board.
▪ Ensure effective communications with shareholders
▪ Ensure directors receive timely, accurate & clear info.
▪ Ensure constructive relations between ED and NED.
▪ Chairman should be independent
➢ Board balance and independence
▪ Balance of ED and NED on the B.O.D, mainly NED
▪ Avoid the hijacking of the Board by a small group of persons. No power
and info concentrated in few hands.
▪ Balance of skills & expertise needed
▪ Board members should be independent in charater and judgement.
▪ At least 50 % of board should be NED, excl Chairman
➢ Appointments to the board
▪ Appointment should be formal , rigorous, transparent.
▪ Should be based on meritocracy and objective criteria.
▪ Board should ensure there are plans for succession to the BOD and
senior mgmt.
▪ A nomination committee will lead the appointment process
▪ For FTSE CO , board wont approve NED being on several BODs
▪ section of the annual report should be dedicated to the nomination
committee and their work in the appointment process
➢ Information and professional development
➢ Performance evaluation
▪ Annually Board will evaluate the performance of
▪ The board itself
▪ All committees
 ▪ All directors- to see if they contribute effectively and show
commitment.
Board will state , in the annual report, how performance evaluation has been
conducted.
➢ Re-election

2- Remuneration
➢ Level and make up of remuneration
▪ Remuneration should be sufficient – to attract, retain, motivate quality
directors to run the company
▪ Remuneration of ED , should be structured and link rewards to
performance
▪ BOD should regularly benchmark with industry’s average
remuneration
▪ Performance related remuneration will help to align directors interests
with those of s/h
▪ The code provide guidelines for designing schemes of performance
related remuneration
▪ Ned’s remuneration should reflect time commitment and
responsibilities attached to the role.
▪ NEDs shouldn’t receive share options , unless approved by s/h.
▪ Remuneration comm to determine termination benefits of directors.
➢ Procedure
▪ Board should have a formal procedure to determine policy on executive
remuneration and to fix remuneration package of individual directors.
▪ No director should be involved in fixing their own remuneration.
▪ Remuneration committee decides of remuneration of Chairman and ED
▪ The board or the s/h will determine the remuneration of NED.

3- Accountability and Audit

Financial reporting
▪ The board should present a comprehensive and balanced assessment of
the Co’s position and prospects.
 ▪ In the annual report, the directors explain their responsibility for
preparing the accounts.
▪ The directors report that the business is a going concern, and if needed
qualifications should be included.
Internal control
▪ The board should maintain a sound system of internal control to
safeguard shareholders’ investment and the company’s assets.
Audit committee and auditors
▪ The board should establish formal and transparent mechanisms to
convey financial reporting and internal control principles.
▪ Also maintaining an appropriate relationship with the company’s
auditors.
▪ An audit committee should be set up comprised mainly of NEDs, with
recent financial experience
Roles and responsibilities of the Audit comm:
▪ Monitor integrity of FS, review ICS, monitor effectiveness of Internal
audit function, recommend about appointment/remuneration/removal
of ext auditors, to review and monitor the external auditor’s
independence, monitor non-audit services offered by external auditor
in line with ethical guidelines.

4- Relations with Shareholders

➢ Dialogue with institutional shareholders
▪ There should be a dialogue with shareholders based on the mutual
understanding of objectives. The board as a whole has responsibility
for ensuring that a satisfactory dialogue with shareholders takes place
➢ Constructive use of AGM
▪ The board should use the AGM to communicate with investors and to
encourage their participation.
BLUE RIBBON COMMITTEE
*Also known as Philippine Senate Blue Ribbon Committee. It is the committee on
accountability of Public officers and investigation of the senate of the Philippines.
The Blue Ribbon committee, tasked to investigate the wrongdoings of the
government, its official and its attached agencies.
*It was set up in 1998 by SEC (Securities Exchange Commission), the NYSE. Most
of the recommendations were adopted by the NYSE, AMEX(the American Stock
Exchange) and the Nasdaq(National Association of Securities Dealers Automated
Quotations)

Recommendations:
1) Mandate annual public disclosure of audit committee activities-
The audit committee for each reporting company to disclose in a proxy
statement whether the audit committee has adopted a formal written charter
and, if so, whether the audit committee satisfied its responsibilities under he
charter.

2) Clarify oversight responsibility for outside auditors-

Audit committee charter for every listed company specify that the outside auditor is
ultimately accountable to the board of directors and the audit committee as
representatives of shareholders.
3) Require audit committee annual letter to shareholders disclosing whether
▪ Management has reviewed the audited financial statements with the
audit committee and discussed the quality of the accounting principles
affecting the company’s financial statements;
▪ The outside auditors have discussed with the audit committee their
judgments of the quality of those principles.
▪ The audit committee believes that the companies financial statements
are fairly presented in conformity with GAAP (generally accepted
accounting principles).

4) Revise the Definition of Independent Director:

Members of the audit committee shall be considered independent if they have no
relationship to the corporation that may interfere with the exercise of their
independence from management and the corporation.
5) Require an Independent Audit Committee:
Listed companies over a certain size to have an audit committee comprised solely of
Independent directors.
6) Mandate Minimum Audit Committee Size and Increased Financial Literacy:
Audit committee to comprise of a minimum of three directors, each of whom is
financially literate. Furthermore, atleast one member of the audit committee should
have accounting or related financial management expertise.
7) Mandate Written Charter Detailing Responsibilities and Duties:
The NYSE and the NASD should require that the audit committee of each listed
company:
▪ adopt a formal written charter, approved by the full board of directors, that
specifies the scope of the committee's responsibilities and how it carries out
those responsibilities.
▪ review and reassess the adequacy of the audit committee charter on an annual
basis.

8) Mandate Discussion with Outside Auditor Regarding Independence.

The listing rules for both the NYSE and the NASD should require that a registrant's
audit committee charter specify that:
▪ the audit committee is responsible for ensuring the receipt from the outside
auditor of a formal written statement delineating all relationships between the
auditor and the company, consistent with Independence Standards Board
Standard no. 1
▪ the audit committee is also responsible for actively engaging in a dialogue
with the auditor with respect to any disclosed relationships or services that
may impact the objectivity and independence of the auditor and for taking, or
recommending that the full board take, appropriate action to ensure it.

9) Require Outside Auditor to Discuss Quality of Financial Reporting:

Generally Accepted Auditing Standards (GAAS) should require that a company's
outside auditor discuss with the audit committee the auditor's judgments about the
quality, not just the acceptability, of the company's accounting principles as applied
in its financial reporting.

10) Mandate Interim Review of Quarterly Financial Reporting:

The SEC should require that a reporting company's outside auditor conduct an SAS
71 Interim Financial Review prior to the company's filing of its Form 10-Q.
Furthermore, SAS 71 should be amended to require that a reporting company's
outside auditor discuss with the audit committee, or at least its chair, and a
representative of financial management the matters described in AU Section 380,
Communications with the Audit Committee, prior to the filing of the Form 10-Q
(and preferably prior to any public announcement of financial results).

OECD (ORGANISATION FOR ECONOMIC COOPERATION AND

DEVELOPMENT) PRINCIPLE OF CORPORATE GOVERNANCE
The OECD Principles of Corporate Governance were originally developed in
response to a call by the OECD Council Meeting at Ministerial level on 27-28 April
1998, to develop, in conjunction with national governments, other relevant
international organisations and the private sector, a set of corporate governance
standards and guidelines. Since the Principles were agreed in 1999, they have formed
the basis for corporate governance initiatives in both OECD and non-OECD
countries alike.
1. Ensuring the Basis for an Effective Corporate Governance Framework
The corporate governance framework should promote transparent and efficient
markets, be consistent with the rule of law and clearly articulate the division of
responsibilities among different supervisory, regulatory and enforcement
authorities.
2. The Rights of Shareholders and Key Ownership Functions
The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights. A. Basic shareholder rights should include the right to:
 ▪ secure methods of ownership registration;
▪ convey or transfer shares;
▪ obtain relevant and material information on the corporation on a timely and
regular basis;
▪ participate and vote in general shareholder meetings;
▪ elect and remove members of the board; and
▪ share in the profits of the corporation.

3. The Equitable Treatment of Shareholders

The corporate governance framework should ensure the equitable treatment of all
shareholders, including minority and foreign shareholders. All shareholders should
have the opportunity to obtain effective redress for violation of their rights.

The principles also state that:

• All shareholders of the same series of a class should be treated equally

• Insider trading and abusive self-dealing should be prohibited
• Members of the board and key executives should be required to disclose to
the board whether they, directly, indirectly or on behalf of third parties, have
a material interest in any transaction or matter directly affecting the
corporation.

4. The role of stakeholders in corporate governance

The corporate governance framework should recognize the rights of stakeholders

established by law or through mutual agreements and encourage active co-operation
between corporations and stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.

5. Disclosure and transparency

The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the
financial situation, performance, ownership, and governance of the company.

6. The responsibilities of the board

The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and the board’s
accountability to the company and the shareholders.

COMMONWEALTH ASSOCIATION FOR CG GUIDELINES/ PRINCIPLE

The Commonwealth is one of the oldest groupings of the nations in the world 1. In
the decades since it rose from its 19th century Imperial roots, the Commonwealth has
gone through significant changes; from an instrument of Imperial power in the early
decades, to a free association of independent countries. These 54 member countries,
ranging from the developed nations through to a diverse mix of emerging and
transitional economies, have developed beyond their roots, to form a unique
platform for business growth on a global scale. CW countries account for nearly 25
per cent of world trade, and consist of the type of networks that can promote trade
and investment among member countries.
The CW approach to corporate governance is an attempt to achieve the optimum
combination of the fundamental imperatives of performance, conformance and
consensus in the circumstances of a particular country.
Objectives of the Commonwealth Association for Corporate Governance (CACG)
The main objectives of the CACG are:
• To promote good standards of corporate governance and business practices in the
public and private sectors of the Commonwealth as a means to achieve global
standards of efficiency, commercial probity and effective economic and social
development;
• To facilitate the development of appropriate institutions that will advance, teach
and disseminate such standards; and
• To strengthen the capacities of all member countries to maintain and extend good
practice in corporate governance.
CACG Guidelines

In addition to the activities for promoting corporate governance, the CACG also
issues Guidelines. The development of the CACG Guidelines, “Principles of
Corporate Governance in the Commonwealth”, and its adoption2 in 1999 constitute
an important aspect of the Commonwealth corporate governance initiatives. These
Guidelines are intended to facilitate best business practice and behaviour, whether
in the private or the public sector. They are neither mandatory nor prescriptive, and
have been designed to be evolutionary in concept in order to be able to respond to
further developments in corporate governance in the global arena.

The CACG Guidelines comprise 15 principles of corporate governance, which have

been structured to accommodate the needs of emerging and transitional economies,
which make up a large part of the CW, as well as those of the more advanced
economies and their international investors. The Guidelines are aimed primarily at
boards of directors with a unitary board structure, most common in CW countries.
Thus they apply to boards of directors (executive and non-executive) of all forms of
business enterprises, including non-governmental organisations and agencies. The
Guidelines were prepared because the work on national capacity building had
demonstrated the need for an indicative code, which could be readily adapted by the
national task forces to develop their own guidelines. Following the adoption of the
main Guideline in 1999, others have been issued dealing with the functions of
boards, a case study of the national corporate governance programme in Kenya, a
personal code for company directors, and guidelines for state enterprises.
SARBANES-OXLEY (SOX) ACT 2002
Also known as
▪ “Public Company Accounting Reform and Investor Protection Act” in the
Senate.
▪ “Corporate and Auditing Accountability and Responsibility Act” in the
House.
Commonly called as Sarbanes-Oxley, Sarbox or SOX.
Enacted on July 30, 2002 and named after sponsors, U.S. Senator Paul Sarbanes and
U.S. Representative Michael G. Oxley.

Sarbanes – Oxley Act

Contains 11 Titles:
▪ Public Company Accounting Oversight Board (PCAOB)
▪ Auditor Independence
▪ Corporate Responsibility
▪ Enhanced Financial Disclosures
▪ Analyst Conflicts of Interest
▪ Commission Resources and Authority
▪ Studies and Reports
▪ Corporate and Criminal Fraud Accountability
▪ White-Collar Crime Penalty Enhancements
▪ Corporate Tax Returns
▪ Corporate Fraud and Accountability
SOX Affects…
▪ External Auditors
▪ Internal Auditors
▪ Board of directors and Committees
▪ Top Executives
▪ Senior Managers
▪ Attorneys, both internal and external
 ▪ Regulators

Major Provisions of SOX

▪ Chief executives and financial officers are held responsible for their
companies’ financial reports.
▪ Executive officers and directors may not solicit or accept loans from their
companies.
▪ Insider trades are reported more quickly.
▪ Insider trades are prohibited during pension-fund blackout periods.
▪ Disclosure of executive compensation and profits is mandatory.
▪ Internal audits and review and certification of audits by outside auditors
are mandatory.
▪ There will be criminal and civil penalties for securities violations.
▪ There will be longer jail sentences and larger fines for executives who
intentionally misstate financial statements.
▪ Audit firms may no longer provide actuarial, legal, or consulting services
to firms they audit.

The Act Applies to…

All public companies in the U.S. And international companies that have registered
equity or debt securities with the SEC and the accounting firms that provide auditing
services to them.

SEBI and CORPORATE GOVERNANCE

Securities and Exchange Board of India (SEBI) was established on April 12, 1992
in accordance with the provisions of the Securities and Exchange Board of India Act,
1992. It monitors and regulates corporate governance of listed companies in India
through Clause 49 of the Listing Agreement. This clause is incorporated in the listing
agreement of stock exchanges and it is compulsory for them to comply with its
provisions. It was first introduced in the financial year 2000-01 based on the
recommendations of Kumar Mangalam Birla committee. provisions of
Clause 49 of the Listing Agreement
Board of Directors
Board of directors of a company shall have an optimum combination of executive
and non-executive directors with not less than fifty percent of the board of directors
comprising of non-executive directors. The number of independent directors would
depend whether the Chairman is executive or non-executive. In case of a non-
executive chairman, at least one-third of board should comprise of independent
directors and in case of an executive chairman, at least half of board should comprise
of independent directors. All pecuniary relationship or transactions of the non-
executive director’s viz-a-viz. the company should be disclosed in the Annual
Report.
Audit Committee
➢ A qualified and independent audit committee shall be set up and that:
1. Audit committee shall have minimum three members, all being non-executive
directors, with the majority of them being independent, and with at least one director
having financial and accounting knowledge;
2. Chairman of the committee shall be an independent director;
3. Chairman shall be present at Annual General Meeting to answer shareholder
queries;
4. Audit committee should invite such of the executives, as it considers appropriate
(and particularly the head of the finance function) to be present at the meetings of
the committee, but on occasions it may also meet without the presence of any
executives of the company. The finance director, head of internal audit and when
required, a representative of the external auditor shall be present as invitees for the
meetings of the audit committee;
5. Company secretary shall act as the secretary to the committee.
➢ The audit committee shall meet at least thrice a year. One meeting shall be
held before finalization of annual accounts and one every six months. The
quorum shall be either two members or one third of the members of the audit
committee, whichever is higher and minimum of two independent directors.

➢ The audit committee shall have powers, which should include the following
to:

1. Investigate any activity within its terms of reference.

2. Seek information from any employee.
3. Obtain outside legal or other professional advice.
4. Secure attendance of outsiders with relevant expertise, if it considers necessary.

➢ The role of the audit committee shall include the following.

1. Oversight of the company's financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.
2. Recommending the appointment and removal of external auditor, fixation of audit
fee and also approval for payment for any other services.
3. Reviewing with management the annual financial statements before submission
to the board, focusing primarily on;
• Any changes in accounting policies and practices.
• Major accounting entries based on exercise of judgment by management.
• Qualifications in draft audit report.
• Significant adjustments arising out of audit.
• The going concern assumption.
• Compliance with accounting standards.
• Compliance with stock exchange and legal requirements concerning financial
statements
• Any related party transactions i.e. transactions of the company of material
nature, with promoters or the management, their subsidiaries or relatives etc.
that may have potential conflict with the interests of company at large.
4. Reviewing with the management, external and internal auditors, and the adequacy
of internal control systems.
5. Reviewing the adequacy of internal audit function, including the structure of the
internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.
6. Discussion with internal auditors any significant findings and follow up there on.
7. Reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control
systems of a material nature and reporting the matter to the board.
8. Discussion with external auditors before the audit commences nature and scope
of audit as well as have post-audit discussion to ascertain any area of concern.
9. Reviewing the company's financial and risk management policies.
10.To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non-payment of declared dividends) and
creditors.
➢ If the company has set up an audit committee pursuant to provision of the
Companies Act, the said audit committee shall have such additional functions
/ features as is contained in the Listing Agreement.

Remuneration of Directors
• The remuneration of non-executive directors shall be decided by the board of
directors.
• The following disclosures on the remuneration of directors shall be made in
the section on the corporate governance of the annual report.
• All elements of remuneration package of all the directors i.e. salary, benefits,
bonuses, stock options, pension etc.
• Details of fixed component and performance linked incentives, along with the
performance criteria.
• Service contracts, notice period, severance fees.
• Stock option details, if any – and whether issued at a discount as well as the
period over which accrued and over which exercisable.
• Board Procedure
• The board meeting shall be held at least four times a year, with a maximum
time gap of four months between any two meetings.
• The director shall not be a member in more than 10 committees or act as
Chairman of more than five committees across all companies in which he is a
director. Furthermore it should be a mandatory annual requirement for every
director to inform the company about the committee positions he occupies in
other companies and notify changes as and when they take place.
Management
• As part of the directors' report or as an addition there to, a Management
Discussion and Analysis report should form part of the annual report to the
shareholders. This Management Discussion & Analysis should include
discussion on the following matters within the limits set by the company's
competitive position:
1. Industry structure and developments.
2. Opportunities and Threats.
3. Segment–wise or product-wise performance.
4. Outlook
5. Risks and concerns.
6. Internal control systems and their adequacy.
7. Discussion on financial performance with respect to operational
performance.
8. Material developments in Human Resources / Industrial Relations front,
including number of people employed.

• Disclosures must be made by the management to the board relating to all

material financial and commercial transactions, where they have personal
interest that may have a potential conflict with the interest of the company at
large (for e.g. dealing in company shares, commercial dealings with bodies,
which have shareholding of management and their relatives etc.)

Shareholders
• In case of the appointment of a new director or re-appointment of a director
the shareholders must be provided with the following information:
1. A brief resume of the director;
2. Nature of his expertise in specific functional areas; and
3. Names of companies in which the person also holds the directorship and
the membership of Committees of the board.

• The information like quarterly results, presentation made by companies to

analysts shall be put on company's web-site, or shall be sent in such a form so
as to enable the stock exchange on which the company is listed to put it on its
own web-site.
 ▪ A board committee under the chairmanship of a non-executive director
shall be formed to specifically look into the redressing of shareholder
and investors complaints like transfer of shares, non-receipt of balance
sheet, non-receipt of declared dividends etc. This Committee shall be
designated as ‘Shareholders/Investors Grievance Committee'.
▪ To expedite the process of share transfers the board of the company
shall delegate the power of share transfer to an officer or a committee
or to the registrar and share transfer agents. The delegated authority
shall attend to share transfer formalities at least once in a fortnight.

Report on Corporate Governance

There shall be a separate section on Corporate Governance in the annual reports of
company, with a detailed compliance report on Corporate Governance. Non-
compliance of any mandatory requirement i.e. which is part of the listing agreement
with reasons thereof and the extent to which the non-mandatory requirements have
been adopted should be specifically highlighted. Compliance A company shall
obtain a certificate from the auditors of the company regarding compliance of
conditions of corporate governance as stipulated in this clause and annexed the
certificate with the directors' report, which is sent annually to all the shareholders of
the company. The same certificate shall also be sent to the Stock Exchanges along
with the annual returns filed by the company.

COMMITTEES ON CORPORATE GOVERNANCE IN INDIA

NATIONAL TASK FORCE CHAIRED BY RAHUL BAJAJ

In 1996, CII took a special initiative on Corporate Governance – the first institutional
initiative in Indian industry. The objective was to develop and promote a code for
Corporate Governance to be adopted and followed by Indian companies, be these in
the Private Sector, the Public Sector, Banks or Financial Institutions, all of which
are corporate entities. This initiative by CII flowed from public concerns regarding
the protection of investor interest, especially the small investor; the promotion of
transparency within business and industry; the need to move towards international
standards in terms of disclosure of information by the corporate sector and, through
all of this, to develop a high level of public confidence in business and industry.
A National Task Force set up with Mr. Rahul Bajaj , Past President ,CII and
Chairman & Managing Director, Bajaj Auto Limited, as the Chairman included
membership from industry, the legal profession, media and academia.
This Task Force presented the draft guidelines and the code of Corporate
Governance in April 1997 at the National Conference and Annual Session of CII.
This draft was then publicly debated in workshops and Seminars and a number of
suggestions were received for the consideration of the Task Force.
Desirable Code of Corporate Governance
1. No need for German style two-tiered board.
2. In case of listed company with turnover exceeding Rs.100 crores, independent
directors should consist of: (a). 30% if Chairman is non-executive director, (b).50%
if Chairman & MD is the same person.
3. No single person should hold directorships in more than 10 listed companies.
4. Non-executive directors should be competent and active.
5. Commission not exceeding 1% (3%) of net profits for a company with (out) a
MD.
6. Attendance record of directors should be made explicit at the time of
reappointment; less than 50% no re-appointment.
7. Key information that must be reported to and placed before the board.
8. Listed companies with turnover over Rs. 100 crores or paid-up capital of Rs. 20
crores should have an audit committee.
9. Additional Shareholders’ Information of Listed Companies.
10. Compliance certificate signed by CEO & CFO.
11. Credit Rating.
12. Companies that default on fixed deposits should not be permitted to:-
▪ Accept further deposits and make inter-corporate loans or investments until
the default is made good
▪ Declare dividends until the default is made good.
KUMAR MANGALAM BIRLA COMMITTEE REPORT (2000)
In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee
under Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the
standards of good corporate governance. The report submitted by the committee is
the first formal and comprehensive attempt to evolve a ‘Code of Corporate
Governance', in the context of prevailing conditions of governance in Indian
companies, as well as the state of capital markets.
The Committee's terms of the reference were to:
▪ suggest suitable amendments to the listing agreement executed by the stock
exchanges with the companies and any other measures to improve the
standards of corporate governance in the listed companies, in areas such as
continuous disclosure of material information, both financial and non-
financial, manner and frequency of such disclosures, responsibilities of
independent and outside directors;
▪ draft a code of corporate best practices; and
▪ suggest safeguards to be instituted within the companies to deal with insider
information and insider trading.
The primary objective of the committee was to view corporate governance from the
perspective of the investors and shareholders and to prepare a ‘Code' to suit the
Indian corporate environment.
The committee had identified the Shareholders, the Board of Directors and the
Management as the three key constituents of corporate governance and attempted to
identify in respect of each of these constituents, their roles and responsibilities as
also their rights in the context of good corporate governance.
Corporate governance has several claimants –shareholders and other stakeholders -
which include suppliers, customers, creditors, and the bankers, the employees of the
company, the government and the society at large. The Report had been prepared by
the committee, keeping in view primarily the interests of a particular class of
stakeholders, namely, the shareholders, who together with the investors form the
principal constituency of SEBI while not ignoring the needs of other stakeholders.
Mandatory and non-mandatory recommendations
The committee divided the recommendations into two categories, namely,
mandatory and non- mandatory. The recommendations which are absolutely
essential for corporate governance can be defined with precision and which can be
enforced through the amendment of the listing agreement could be classified as
mandatory. Others, which are either desirable or which may require change of laws,
may, for the time being, be classified as non-mandatory.
A. Mandatory Recommendations:
• Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And
Above
• Composition Of Board Of Directors – Optimum Combination Of Executive
& Non- Executive Directors
• Audit Committee – With 3 Independent Directors With One Having Financial
And Accounting Knowledge.
• Remuneration Committee
• Board Procedures – At least 4 Meetings of the Board in a Year with Maximum
Gap of 4 Months between 2 Meetings. To Review Operational Plans, Capital
Budgets, Quarterly Results, Minutes Of Committee's Meeting. Director Shall
Not Be A Member Of More Than 10 Committee And Shall Not Act As
Chairman Of More Than 5 Committees Across All Companies
• Management Discussion And Analysis Report Covering Industry Structure,
Opportunities, Threats, Risks, Outlook, Internal Control System
• Information Sharing With Shareholders

B. Non-Mandatory Recommendations:
• Role Of Chairman
• Remuneration Committee Of Board
• Shareholders' Right For Receiving Half Yearly Financial Performance Postal
Ballot Covering Critical Matters Like Alteration In Memorandum Etc.
• Sale Of Whole Or Substantial Part Of The Undertaking
• Corporate Restructuring
• Further Issue Of Capital
• Venturing Into New Businesses
NARESH CHANDRA COMMITTEE REPORT ON CORPORATE AUDIT
AND GOVERNANCE (2002)
The Ministry of Corporate Affairs had appointed a high level committee in August
2002 to examine various corporate governance issues. The committee had been
entrusted to analyse and recommend changes, if necessary, in diverse areas such as:
 The statutory auditor-company relationship so as to further strengthen the
professional nature of this interface;
 The need, if any, for rotation of statutory audit firms or partners;
 The procedure for appointment of auditors and determination of audit fees;
 Restrictions, if necessary, on non-audit fees;
 Independence of auditing functions;
 Measures required to ensure that the management and companies actually present
'true and fair' statement of the financial affairs of companies;
 The need to consider measures such as certification of accounts and financial
statements by the management and directors;
 The necessity of having a transparent system of random scrutiny of audited
accounts;
 Adequacy of regulation of chartered accountants, company secretaries and other
similar statutory oversight functionaries;
 Advantages, if any, of setting up an independent regulator similar to the Public
Company Accounting Oversight Board in the Sarbanes Oaxley Act (SOX Act), and
if so, its constitution; and
 Role of independent directors, and how their independence and effectiveness can
be ensured.
The Committee's recommendations relate to:
 Disqualifications for audit assignments;
 List of prohibited non-audit services;
 Independence Standards for Consulting, Other Entities that are Affiliated to Audit
Firms;
 Compulsory Audit Partner Rotation;
 Auditor's disclosure of contingent liabilities;
 Auditor's disclosure of qualifications and consequent action;
 Management's certification in the event of auditor's replacement;
 Auditor's annual certification of independence;
 Appointment of auditors;
 Setting up of Independent Quality Review Board;
 Proposed disciplinary mechanism for auditors;
 Defining an independent director;
 Percentage of independent directors;
 Minimum board size of listed companies;
 Disclosure on duration of board meetings/committee meetings;
 Additional disclosure to directors;
 Independent directors on Audit Committees of listed companies;
 Audit Committee charter;
 Remuneration of non-executive directors;
 Exempting non-executive directors from certain liabilities;
 Training of independent directors;
 SEBI and Subordinate Legislation;
 Corporate Serious Fraud Office; etc.

NATIONAL FOUNDATION FOR CORPORATE GOVERNANCE (NFCG)

Ministry of Corporate Affairs has set up a National Foundation for Corporate
Governance (NFCG) in association with CII, ICAI and ICSI, as a not-for-profit trust.
It provides a platform to deliberate on issues relating to good corporate governance,
to sensitise corporate leaders on importance of good corporate governance practices
as well as facilitate exchange of experiences and ideas amongst corporate leaders,
policy makers, regulators, law enforcing agencies and non- government
organizations.
The NFCG has a three-tier structure for its management, viz, the Governing Council
under the Chairmanship of Minister of Corporate Affairs, the Board of Trustees and
the Executive Directorate.
NFCG had framed an action plan, which includes development of good corporate
governance principles on identified themes i.e. (i) corporate governance norms for
institutional investors, (ii) corporate governance norms for independent directors,
and (iii) corporate governance norms for audit.

N R NARAYANA MURTHY COMMITTEE REPORT (2003)

With the belief that the efforts to improve corporate governance standards in India
must continue because these standards themselves were evolving in keeping with
the market dynamics, the Securities and Exchange Board of India (SEBI) had
constituted a Committee on Corporate Governance in 2002 , in order to evaluate the
adequacy of existing corporate governance practices and further improve these
practices. It was set up to review Clause 49, and suggest measures to improve
corporate governance standards.
The SEBI Committee was constituted under the Chairmanship of Shri N. R.
Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited.
The Committee comprised members from various walks of public and professional
life. This included captains of industry, academicians, public accountants and people
from financial press and industry forums.
The terms of reference of the committee were to:
 Review the performance of corporate governance; and
 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 issues discussed by the committee primarily related to audit committees, audit
reports, independent directors, related parties, risk management, directorships and
director compensation, codes of conduct and financial disclosures. The committee's
recommendations in the final report were selected based on parameters including
their relative importance, fairness, accountability and transparency, ease of
implementation, verifiability and enforceability.
The key mandatory recommendations focused on:
• Strengthening the responsibilities of audit committees;
• Improving the quality of financial disclosures, including those related to
related party transactions and proceeds from initial public offerings;
• Requiring corporate executive boards to assess and disclose business risks in
the annual reports of companies;
• Introducing responsibilities on boards to adopt formal codes of conduct; the
position of nominee directors; and
• Stock holder approval and improved disclosures relating to compensation paid
to non-executive directors.
Non-mandatory recommendations included:
• Moving to a regime where corporate financial statements are not qualified;
• Instituting a system of training of board members; and
• Evaluation of performance of board members.
As per the committee, these recommendations codify certain standards of 'good
governance' into specific requirements, since certain corporate responsibilities are
too important to be left to loose concepts of fiduciary responsibility. Their
implementation through SEBI's regulatory framework will strengthen existing
governance practices and also provide a strong incentive to avoid corporate failures.
The Committee noted that the recommendations contained in their report can be
implemented by means of an amendment to the Listing Agreement, with changes
made to the existing clause 49.
NARESH CHANDRA COMMITTEE REPORT (2009)
The Naresh Chandra committee was appointed in August 2002 by the Department
of Company Affairs (DCA) under the Ministry of Finance and Company Affairs to
examine various corporate governance issues. The Committee submitted its report
in December 2002. It made recommendations in two key aspects of corporate
governance: financial and non-financial disclosures: and independent auditing and
board oversight of management. The committee submitted its report on various
aspects concerning corporate governance such as role, remuneration, and training
etc. of independent directors, audit committee, the auditors and then relationship
with the company and how their roles can be regulated as improved. The committee
stingily believes that “a good accounting system is a strong indication of the
management commitment to governance.
The salient recommendations are as follows:
• Creation of a new post of Intelligence Advisor to assist the NSA and the
National Intelligence Board on matters relating to coordination in the
functioning of intelligence committee.
• Amendment to Prevention of Corruption Act to reassure honest officers, who
take important decisions about defense equipment acquisition, so that they are
not harassed for errors of judgment or decision taken in good faith.
• A permanent Chairman of the Chiefs of Staff Committee
• Expediting the creation of new instruments for counter-terrorism, such as the
National Intelligence Grid and National Counter Terrorism Centre.
• Deputation of officers from services up to director's level in Ministry of
Defense
• Measures to augment the flow of foreign language experts into the intelligence
and security agencies, which face a severe shortage of trained linguists
• Promotion of synergy in civil-military functioning to ensure integration. To
begin with, the deputation of armed services officers up to director level in
the Ministry of Defence should be considered.
• Early establishment of a National Defense University (NDU) and the creation
of a separate think-tank on internal security.

WHISTLE BLOWING
▪ Whistle blowing in its most general form involves calling(public)attention to
wrong doing, typically in order to avert harm.
▪ Whistle blowing is an attempt by a member or former member of an
organization to disclose wrong doing in or by the organization.
▪ Whistle Blowing is something that can be done only by a member or former
member of an organisation. It must be an Information that is not available for
 public. It should be an evidence of some significant kind of misconduct on the
part of an organisation. Information must be outside normal channel of
communication. Release of Information must be something that is done
voluntarily as opposed to being legally required. Whistle Blowing must be
undertaken as moral protest. The motive must be correct some wrong not to
seek vigilance or personal advancement.
Kinds of Whistle blowing:
▪ Internal Whistle blowing is made to someone within the organization.
▪ Personal Whistle blowing is blowing the whistle on the offender, here the
charge is not against the organization or system but against one individual.
▪ The impersonal, External Whistle Blowing.
Rarely whistleblower are honored as heroes by their fellow workers, for the
following reasons:
• Those did not blow the whistle guilty of immorality.
• They doubt the loyalty of the whistle blower to the employer.
• The whistleblower is perceived as a traitor, as someone who has damage the
firm - the working family to which he/she belongs.
CRITERIA FOR JUSTIFIABLE WHISTLEBLOWING:
▪ According to Richard T De George there are three conditions that must hold
for whistleblowing to be morally permissible, and two additional conditions
that must hold for it to be morally obligatory. The three conditions that must
hold for it to be morally permissible are:
1. The firm through its product or policy will do serious and considerable harm to
the public, whether in the person of the user of its product, an innocent bystander, or
the general public.
2. Once an employee identifies a serious threat to the user of a product or to the
general public, he or she should report it to his or her immediate superior and make
his or her moral concern known. Unless he or she does so, the act of Whistle blowing
is not justifiable.
3. If one's immediate superior does nothing effective about the concern or complaint,
the employee should exhaust the internal procedures and possibilities within the
firm. This usually will involve taking the matter up the managerial ladder, and if
necessary and possible to the board of directors.
The two additional conditions for Whistle blowing to be morally obligatory:
4. Whistleblower must have accessible documented evidence that would convince a
reasonable, impartial observer that one's view of the situation is correct, and that the
company's product or practice posses a serious and likely danger to the public or to
the user of the product.
5. The employee must have good reason to believe that by going public the necessary
changes will be brought about. The chance of being successful must be worth the
risk one takes and danger to which one is exposed.

WHISTLE BLOWERS PROTECTION ACT 2011

Act of the Parliament of India which provides a mechanism to investigate alleged
corruption and misuse of power by public servants and also protect anyone who
exposes alleged wrongdoing in government bodies, projects and offices.
Arguments against Whistle Blower Protection
Firstly, Law recognises whistle blowing as a right is open to abuse: Employees might
find an excuse to blow the whistle in order to cover up their own incompetency or
inadequate performance.
Secondly, Legislation to protect whistle blowers could add on rights to employees
and make an environment difficult for managers to run company effectively.
Arguments for Whistle Blower Protection
Firstly, Defence of the Law protect whistle blowers to provide best contributions to
the society.
Secondly, Defence of the Law supports the right of an employee on his freedom to
speech.

BENEFITS AND DANGER OF COMPANY WHISTLE BLOWING POLICY

Benefit
1. Benefit in learning mistakes and problems in early stage itself.
2. Shows companies commitment towards good ethics and ethical corporate climate.
Danger
1. Legitimate complaints sends wrong signal to other employees to whistle blow in
case of tension or strike.
2. Employee may go outside of normal communication channel which is
undesirable.

COMPONENTS OF WHISTLEBLOWING POLICY

1. An effective communicated statement of responsibility
2. A clear defined procedure of reporting
3. Well trained personal to receive and investigate reports.
4. A commitment to take appropriate action.
5. A guarantee against retaliation-reports in good faith.
 UNIT 3

TYPES OF BOARD OF DIRECTOR

1) By nature of task
▪ Executive
▪ Non-executive
2) By type
▪ Chairman
▪ Nominee
▪ Alternate
3) By nature
▪ De facto
▪ Shadow

➢ Executive Director
An executive director is involved in the daily running of the organisation. He or she
is involved in making decisions that affect daily operations.
➢ Non-Executive Director
A non-executive director is not involved in the daily running of the firm. The director
is tasked with bringing an independent third-party perspective in the decision-
making process. Usually, the non-executive directors are experts in the industry.
They offer advice on various aspects of the business.
➢ Alternative Director
A temporary substitute
Alternate director refers to a personnel appointed by the Board, to fill in for a director
who might be absent from the country, for more than 3 months.
➢ Shadow Director
A person who is not validly appointed as a director but the directors of the company
are accustomed to act in accordance with the person’s instructions or directions.
A shadow director is similar to a de facto director in that he or she does not have an
official title. However, he or she has some influence on the decisions of the board of
directors.
A person can be a shadow director quite openly.
➢ De Facto Director
Section 4:
• is appointed to the position of a director but is not described as a director; and
• acts in the position of a director but who is not validly appointed as a director.
A de facto director has not been formally appointed as a director but acts in place of
a director. He or she has similar responsibilities and liabilities as an official director.

➢ Nominee Director
Nominee directors could be appointed by a specific class of shareholders, banks or
lending financial institutions, third parties through contracts, or by Union
Government in case of oppression or mismanagement.
ND represents the interest of employees, a particular group of shareholders or a
creditor.
Must avoid conflicts of interest (Scottish cooperative wholesale society v Meyer.
The interest of the company prevail over interest of the nominator)
Where nominee director has allowed his duty to conflict, he breached his fiduciary
duty to the company

Duties of Director
Based on the principle that the directors must act with honesty, diligence, and
prudence, these duties include duty of
(1) Avoidance of conflict of interest: directors must declare their interest in any
transaction in which the firm is involved, and follow the instructions of the board of
directors in this regard.
(2) Care and skill: directors must exercise caution and competence in all situations
as reasonable persons would under the circumstances.
(3) Confidentiality: directors must not make improper use of the privileged
information obtained as a board member.
(4) Fairness: directors must deal with other directors and stakeholders without bias
or favor.
(5) Honor: directors must not engage in any conduct that may bring disrepute to the
firm and/or other directors.
(6) Independence: directors must not compromise on the right to exercise an
independent judgment but, at the same time, must restrict their independence in good
faith to favor a collective decision that will benefit the firm.
(7) Loyalty: directors must act in good faith in the best interest of the firm and whole
heartedly assist the chief executive in achieving the firm's success.

TYPES OF BOARD STRUCTURE

A board is statutory requirement of corporate. The duty of this body is to represent
and protect primarily the interest of shareholders who have taken the risk of
investing their hard earned saving in the share of the corporate and interest of other
stakeholders.
The all executive board
An all executive board is made up entirely of executive (full time) directors.
In such board every director is also a full time employee of the company and is paid
for his full time service for the company. The potential issue that can arise is that the
board is monitoring and supervising its own performance. In effect, the board
member are evaluating their own answer sheets written by them as a manager. While
this can have advantage of less or no communication gap and information blocks, it
can give rise to conflict of interest.
The majority executive board
A majority executive board will have its membership dominated by whole time
directors. While there may be few NEDs, members of the executive clan will far
outnumber the NEDs.
The NEDs get appointed because there is a need- a need for certain expertise which
is not available within the company. Or they may come in as nominees of few major
investor to protect their interests or may be appointed to take care of strategic
suppliers, customers, or government bodies.

The majority outside board

It will have more outside director than executive directors.
The member of boards (Eds, NEDs) have to be elected by the shareholders at a
general meeting. While theoretically the law requires that the member have to be
elected by the shareholders, shareholders usually end up ratifying the nominations
made by the board or the nomination committee of the board.

The two-tier board

European countries like Germany, Austria and Scandinavian countries like Denmark
and Netherlands require a two tier board or dual board system consisting of a
supervisory board and a management board.
The management board is responsible for managing the enterprise, with its member
jointly accountable for the management of the enterprise. All of a company’s major
functions shall be represented on the management board. It is the chairman of the
management board who co-ordinates the work of management board.
The supervisory board appoints, supervises and advises the management board and
is responsible for decision of fundamental importance to the enterprise. The
supervisory board will have a chairman appointed to co-ordinate the work of
supervisory board. The board consist of representatives of shareholders and
employees. The member of supervisory board are appointed by shareholders
(shareholder representative) at a general meeting and employee representative are
nominated by the employees of enterprise. Representative elected by the shareholder
as well as employees are equally obligated to act in company’s interests. The
supervisory board can never have more than two former member of the management
board so as to maintain its independence from management board.

The advisory board

An advisory board is a body that provides non-binding strategic advice to
the management of a corporation, organization, or foundation. The informal nature
of an advisory board gives greater flexibility in structure and management compared
to the board of directors. Unlike the board of directors, the advisory board does not
have authority to vote on corporate matters or bear legal fiduciary responsibilities.
Many new or small businesses choose to have advisory boards in order to benefit
from the knowledge of others, without the expense or formality of the board of
directors.
ISSUES IN DESIGNING A BOARD
➢ Regarding composition of board
▪ Balancing inside and outsider
▪ Type of directors
 ▪ Age, experience
➢ Board size
➢ Defining skill requirement
▪ Evaluating strategic risk and option/choice
▪ Evaluate the strength and weakness of company
➢ Separating role of CEO and Chairman

STYLE OF FUNCTIONING OF BOARD

Rubber stamp board

The director have little concern for either the tasks of the board or relationships
among directors. The meeting of board is usually a formality. They even get minuted
without the meetings actually taking place. Even if the board meets, the promoter
CEOs or the dominant CEOs take decision and other directors usually give their
unconditional assent.
Country club board
Since board are more concerned about their interpersonal relationships between
board members, the major task related to the business gets relegated to low priority.
Harmony in the boardrooms becomes the primary focus and business related issue
are usually given a go-by.
Representative board
Here the emphasis is on business related task at hand with the director representing
different shareholder or stakeholder trying to drive for the accomplishment of task
which might affect the shareholder/stakeholder they represent. Since selfish interest
are at the forefront, discussion can turn out to be adversarial. It function like a
parliament with representative from different parties each trying to push for their
interests.
A variation of the advisory board is the representative board often used by
constituency-serving associations or civil service organizations. In this type of
board, members are chosen for their ability to represent the interests of a constituent
class. This type of board is helpful when the organization is serving many different
or distinct constituents, all of whom need to be represented. Each board member
spends time with their constituent class so that they know their needs and desires
and brings that information back to the board, advocating for their interests. The
value of this type of board is the sense of support and advocacy that each constituent
class feels because of their representative. The challenge for a representative board
is for the collective board to act and speak as one rather than as a diverse group of
special interest members. Another weakness is that board members may to be chosen
by default instead of for the skills they bring. With frequently changing
representatives can also come changing expectations, vision and strategies.
Professional board
Professional boards show concern for both tasks and interpersonal relationships
between directors. The board chairman generally shows enormous depth of
leadership. The member indulge in heated discussion and debates with the interest
of the company at the top of their minds. They even dissent while showing mutual
understanding and respect for each other.
 UNIT 4

ROLE OF BOARD OF DIRECTOR

The roles of the board of directors include :-
1. It acts as the Trustee of Shareholders – The director’s act as representatives of
shareholders and work with utmost faith and degree of honesty in protecting
long term aims of wealth maximization of company.

2. Determining the fundamental objectives and policies – The board of directors

play vital role in long range planning and set the overall goal of the company
within the framework.

3. Determining the organization structure and selecting the top executives – It is

the prerogative of the board to select the CEO and other top level managers.

4. Approving financial matters – These financial matters relate to two things

namely, approval of budgets and distribution of the corporate earnings.

5. Maintaining adequate checks and controls – In the final analysis, the board of
directors is held responsible for the result of the company.

6. Statutory functions – Directors are to perform certain legal functions which

are mandatory on their part.

7. Establish vision, mission and values

• Determine the company's vision and mission to guide and set the pace
for its current operations and future development.
• Determine the values to be promoted throughout the company.
• Determine and review company goals.
• Determine company policies

8. Set strategy and structure

 • Review and evaluate present and future opportunities, threats and risks
in the external environment and current and future strengths,
weaknesses and risks relating to the company.
• Determine strategic options, select those to be pursued, and decide the
means to implement and support them.
• Determine the business strategies and plans that underpin the corporate
strategy.
• Ensure that the company's organisational structure and capability are
appropriate for implementing the chosen strategies.

9. Delegate to management
• Delegate authority to management, and monitor and evaluate the
implementation of policies, strategies and business plans.
• Determine monitoring criteria to be used by the board.
• Ensure that internal controls are effective.
• Communicate with senior management

10.Exercise accountability to shareholders and be responsible to relevant

stakeholders
• Ensure that communications both to and from shareholders and relevant
stakeholders are effective.
• Understand and take into account the interests of shareholders and relevant
stakeholders.
• Monitor relations with shareholders and relevant stakeholders by gathering
and evaluation of appropriate information.
• Promote the goodwill and support of shareholders and relevant
stakeholders.

11.Other roles
• Selecting, compensating, monitoring and, when necessary, replacing key
executives and overseeing succession planning.
• Aligning key executive and board remuneration with the longer term
interests of the company and its shareholders.
• Ensuring a formal and transparent board nomination and election process.
• Monitoring and managing potential conflicts of interest of management,
board Members and shareholders, including misuse of corporate assets and
abuse in related party transactions.
• Overseeing the process of disclosure and communications.
 • Monitoring the effectiveness of the company’s governance practices and
making changes as needed.

RESPONSIBILITY OF BOARD OF DIRECTORS

▪ Directors look after the affairs of the company, and are in a position of trust.
They might abuse their position in order to profit at the expense of their
company, and, therefore, at the expense of the shareholders of the company.
▪ Directors are responsible for ensuring that proper books of account are kept.
▪ The directors must always exercise their powers for a 'proper purpose' – that
is, in furtherance of the reason for which they were given those powers by the
shareholders.
▪ Directors must act in good faith in what they honestly believe to be the best
interests of the company, and not for any collateral purpose. This means that,
particularly in the event of a conflict of interest between the company's
interests and their own, the directors must always favour the company.
▪ Directors must act with due skill and care.
▪ Directors must consider the interests of employees of the company.
▪ Monitoring:
• Return on Investment
• Security of Investment
• Dividend Policy
• Social Accountability
▪ Select and elect CEO (usually the president) and delegate to him all the duties
to manage the company not specifically reserved to the board.
▪ Evaluate the performance of the CEOs and division presidents for
performance and compensation.
▪ Evaluate performance of CEOs and division presidents quarterly in
comparison with competitors.
▪ Review and approve major corporate objectives, policies, budgets and
strategies as initiated by the CEO. In reviewing the strategic plan, confirm its
directors, or propose changes of direction.
▪ Monitor, review and appraise management
▪ Monitor, review and approve employee relations.
▪ Monitor company’s performance.
▪ Management of the board.
▪ Compliance with all laws affecting the business.
ROLE OF CHAIRMAN
1. Running the board, chairing all its meeting, setting its agenda, conducting its
proceeding, and leading all discussions at board and Shareholder meeting.
2. Ensuring that directors get adequate and timely information.
3. Acting a bridge between the board and shareholders
4. Evaluating the performance of the board as a whole and of each of its
individual members
5. Act as an arbiter for any issues between different members of the board or
management.
6. To promote and oversee the highest standards of corporate governance within
the Board and the Company.
7. To lead the Board and in particular discussions on all proposals put forward
by the executive team.
8. To set an agenda for the Board which is:
▪ focused on strategic matters;
▪ forward looking;
▪ evaluates and oversees current business.
9. To maintain a proper process to ensure compliance with Board policy on
matters reserved to the Board for consideration.
10.To ensure that Board members receive accurate, timely and clear information
to enable them to monitor performance, make sound decisions and give
appropriate advice to promote the success of the Company.
11.To manage Board meetings so that sufficient time is allowed for the discussion
of complex or contentious issues and that all members' contributions are
encouraged and valued.
12.To chair, serve on or attend Committees of the Board.
13.To maintain an effective and balanced team, initiate change and, supported by
the Nomination and Governance Committee, plan non-executive director
succession.
14.To encourage active engagement by all members of the Board.
15.To create the conditions for overall Board and individual director
effectiveness including promotion of an appropriate induction programme for
new directors, creating the opportunity for maintenance of the relevant skills
and knowledge required to fulfil the director role on the Board and its
committees and ensuring the Board undertakes an annual evaluation of its own
performance, that of its committees and that of individual directors, including
the Chairman.
 16.To take the lead in identifying and meeting the development needs of
individual directors and to address the development needs of the Board as a
whole with a view to enhancing its overall effectiveness as a team.
17.To ensure effective communication with Association Members and ensure
that members of the Board develop an understanding of the views of
Association Members.
18.To propose, in conjunction with colleagues, new candidates for Association
Membership.
19.To be a sounding board and mentor to the Group CEO.
20.If a new Group CEO is required, to lead the process for identifying suitable
successors and to chair the Nomination and Governance Committee
recommending a candidate or candidates to the Board.
21.To provide independent advice and counsel to the CEO;
22.To ensure that the Directors are properly informed and that sufficient
information is provided to enable the Directors to form appropriate
judgments;

ROLE OF CEO
Leader

• Advises the Board

• Advocates / promotes organization and stakeholder change related to
organization mission
• Supports motivation of employees in organization products/programs and
operations

Visionary / Information Bearer

• Ensures staff and Board have sufficient and up-to-date information

• Looks to the future for change opportunities
• Interfaces between Board and employees
• Interfaces between organization and community

Decision Maker

• Formulates policies and planning recommendations to the Board

• Decides or guides courses of action in operations by staff
Manager

• Oversees operations of organization

• Implements plans
• Manages human resources of organization
• Manages financial and physical resources

Board Developer

• Assists in the selection and evaluation of board members

• Makes recommendations, supports Board during orientation and self-
evaluation
• Supports Board's evaluation of Chief Executive

RESPONSIBILITIES OF CHIEF EXECUTIVE OFFICER

There is no standardized list of the major functions and responsibilities carried out
by position of chief executive officer. The following list is one perspective and
includes the major functions of chief executive officers.

1. Board Administration and Support

Supports operations and administration of Board by advising and informing Board

members, interfacing between Board and staff, and supporting Board's evaluation of
chief executive

2. Program, Product and Service Delivery

Oversees design, marketing, promotion, delivery and quality of programs, products

and services

3. Financial, Tax, Risk and Facilities Management

Recommends yearly budget for Board approval and prudently manages

organization's resources within those budget guidelines according to current laws
and regulations
4. Human Resource Management

Effectively manages the human resources of the organization according to

authorized personnel policies and procedures that fully conform to current laws and
regulations

5. Community and Public Relations

Assures the organization and its mission, programs, products and services are
consistently presented in strong, positive image to relevant stakeholders

6. Fundraising (nonprofit-specific)

Oversees fundraising planning and implementation, including identifying resource

requirements, researching funding sources, establishing strategies to approach
funders, submitting proposals and administrating fundraising records and
documentation

FUNCTIONS OF THE BOARD

▪ Defining the board function
▪ Setting values, mission and vision
▪ Responsibility to prepare strategy plan and budget
▪ Responsibility to ensure adequate resource
▪ Monitor the progress
▪ Preparation of work plan
▪ Mentoring, monitoring and evaluating performance of CEOs
▪ Ensuring compliance and disclosure
▪ Corporate communication

COMMITTEES OF BOARD
Committees appointed by the Board focus on specific areas and take informed
decisions within the framework of delegated authority, and make specific
recommendations to the Board on matters in their areas or purview. All decisions
and recommendations of the committees are placed before the Board for information
or for approval.
 1- AUDIT COMMITTEE

The Audit Committee shall assist the Board of Directors in the oversight of

▪ The integrity of the financial statements of the Company,

▪ The effectiveness of the internal control over financial reporting,
▪ The independent registered public accounting firm’s qualifications and
independence,
▪ The performance of the Company’s internal audit function and independent
registered public accounting firms,
▪ The Company’s compliance with legal and regulatory requirements,
▪ The performance of the Company’s compliance function.
Organization and Membership:

The Committee shall be appointed by the Board and consist of at least three
Directors, each of whom are independent of management and the Company as
defined by the Bylaws of the Company, the SEC and the New York Stock Exchange
as well as Clause 49 of the Listing Agreement. Two thirds of the members shall be
independent directors.

All Committee members shall be financially literate, or shall become financially

literate within a reasonable period of time after appointment to the Committee. The
Committee shall aspire to have at least one member who is an “audit committee
financial expert” as such term is defined by the SEC.

The Chairman of the Committee shall be an independent director. No Director may

serve as a member of the Committee if such Director serves on the audit committees
of more than two other public companies unless the Board determines that such
simultaneous service would not impair such Director’s ability to serve effectively on
the Committee. The Board shall designate one member of the Committee as its
Chairman. Directors will serve the Committee at the pleasure of the Board and for
such terms as the Board may determine. The Committee shall meet at least quarterly
and otherwise as the members of the Committee deem appropriate. Minutes shall be
kept of each meeting of the Committee.
Meeting of Audit Committee:

The audit committee shall meet at least thrice a year. One meeting shall be held
before finalization of annual accounts and one every six months. The quorum shall
be either two members or one third of the members of the audit committee,
whichever is higher and minimum of two independent directors
Powers of Audit Committee:

The audit committee shall have powers which should include the following:

• To investigate any activity within its terms of reference.

• To seek information from any employee.
• To obtain outside legal or other professional advice.
• To secure attendance of outsiders with relevant expertise, if it considers
necessary.

Role of Audit Committee:

The role of the audit committee shall include the following:

• Oversight of the company’s financial reporting process and the disclosure of

its financial information to ensure that the financial statement is correct,
sufficient and credible.
• Recommending the appointment and removal of external auditor, fixation of
audit fee and also approval for payment for any other services.
• Reviewing with management the annual financial statements before
submission to the board, focusing primarily on;
• Any changes in accounting policies and practices.
• Major accounting entries based on exercise of judgment by management.
• Qualifications in draft audit report.
• Significant adjustments arising out of audit.
• The going concern assumption.
• Compliance with accounting standards.
• Compliance with stock exchange and legal requirements concerning financial
statements
• Any related party transactions
• Reviewing with the management, external and internal auditors, the adequacy
of internal control systems.
 • Reviewing the adequacy of internal audit function, including the structure of
the internal audit department, staffing and seniority of the official heading the
department, reporting structure coverage and frequency of internal audit.
• Discussion with internal auditors any significant findings and follow up there
on.
• Reviewing the findings of any internal investigations by the internal auditors
into matters where there is suspected fraud or irregularity or a failure of
internal control systems of a material nature and reporting the matter to the
board.
• Discussion with external auditors before the audit commences about nature
and scope of audit as well as post-audit discussion to ascertain any area of
concern.
• Reviewing the company’s financial and risk management policies.
• To look into the reasons for substantial defaults in the payment to the
depositors, debenture holders, shareholders (in case of nonpayment of
declared dividends) and creditors.

Review of information by Audit Committee:

The Audit Committee shall mandatorily review the following information:

• Financial statements and draft audit report, including quarterly / half-yearly

financial information;
• Management discussion and analysis of financial condition and results of
operations;
• Reports relating to compliance with laws and to risk management;
• Management letters / letters of internal control weaknesses issued by statutory
/ internal auditors; and
• Records of related party transactions
• The appointment, removal and terms of remuneration of the Chief internal
auditor shall be subject to review by the Audit Committee.

2- REMUNERATION COMMITTEE

The role of a Remuneration Committee is:

• To decide and approve the terms and conditions for appointment of executive
directors and/ or whole time Directors and Remuneration payable to other
Directors and matters related thereto.
 • To recommend to the Board, the remuneration packages of the Company’s
Managing/Joint Managing/ Deputy Managing/Whole time / Executive
Directors, including all elements of remuneration package (i.e. salary,
benefits, bonuses, perquisites, commission, incentives, stock options, pension,
retirement benefits, details of fixed component and performance linked
incentives along with the performance criteria, service contracts, notice
period, severance fees etc.);
• To be authorized at its duly constituted meeting to determine on behalf of the
Board of Directors and on behalf of the shareholders with agreed terms of
reference, the Company’s policy on specific remuneration packages for
Company’s Managing/Joint Managing/ Deputy Managing/ Whole-time/
Executive Directors, including pension rights and any compensation payment;
• To implement, supervise and administer any share or stock option scheme of
the Company.
• to review the overall compensation policy, service agreements and other
employment conditions to Executive Directors and senior executives just
below the Board of Directors and make appropriate recommendations to the
Board of Directors;
• to review the overall compensation policy for Non-Executive Directors and
Independent Directors and make appropriate recommendations to the Board
of Directors;
• to make recommendations to the Board of Directors on the increments in the
remuneration of the Directors;
• to assist the Board in developing and evaluating potential candidates for senior
executive positions and to oversee the development of executive succession
plans;
• to review and approve on annual basis the corporate goals and objectives with
respect to compensation for the senior executives and make appropriate
recommendations to the Board of Directors;
• to review and make appropriate recommendations to the Board of Directors
on an annual basis the evaluation process and compensation structure for our
Company’s officers just below the level of the Board of Directors;
• to provide oversight of the management’s decisions concerning the
performance and compensation of other officers of our Company.

3- NOMINATION COMMITTEE

The primary role of the Nomination Committee of the board is to assist the board by
identifying prospective directors and make recommendations on appointments to the
board and the senior most level of executive management below the board. The
committee also clears succession plans for these levels. The Nomination Committee
is responsible for making recommendations on board appointments and on
maintaining a balance of skills and experience on the board and its committees.

Succession planning for the board is a matter which is devolved primarily to the
Nomination Committee, although the committee’s deliberations are reported to and
debated by the full board. The board itself also regularly reviews more general
succession planning for the senior management of the group.

4- SHAREHOLDERS GRIEVANCE COMMITTEE

In terms of Clause 49-IV(G)(iii) of the Listing Agreement, a board committee under

the chairmanship of a non-executive director shall be formed to specifically look
into the redressal of shareholder and investors complaints like transfer of shares, non
receipt of balance sheet, non receipt of declared dividends etc. This committee shall
be designated as “Shareholders/ Investors Grievance Committee”.

The terms of reference of our Shareholders’/ Investors Grievance Committee are

given below:

“To allot the Equity Shares of the Company, and to supervise and ensure:

• Efficient transfer of shares; including review of cases for refusal of transfer

transmission of shares and debentures;
• Redressal of shareholder and investor complaints like transfer of shares, non-
receipt of balance sheet, non-receipt of declared dividends etc;
• Issue of duplicate / split / consolidated share certificates;
• Allotment and listing of shares;
• Review of cases for refusal of transfer / transmission of shares and debentures;
• Reference to statutory and regulatory authorities regarding investor
grievances; and to otherwise ensure proper and timely attendance and
redressal of investor queries and grievances.”

The Shareholders/ Investor Grievances Committee looks into redressal of

shareholder and investor complaints, issue of Duplicate/ Consolidated Share
Certificates, Allotment and Listing of shares and review of cases for refusal of
Transfer/ Transmission of shares and debentures and reference to Statutory and
Regulatory Authorities. The scope and functions of the Shareholders/Investor
Grievances Committee are as per Clause 49 of the Listing Agreement.
 5- CSR COMMITTEE

Purposes, Resources and General Considerations

The Corporate Social Responsibility Committee is appointed by the Board of

Directors to promote a culture that emphasizes and sets high standards for corporate
social responsibility and reviews corporate performance against those standards. The
Committee will consider the impact of the Corporation’s businesses, operations and
programs from a social responsibility perspective, taking into account the interests
of shareholders, clients, employees, communities and regulators.

In carrying out their responsibilities, Committee members are entitled to rely on the
accuracy and completeness of information provided by employees and consultants
and on their expertise, where applicable, absent their actual knowledge to the
contrary.

The Committee will have the appropriate resources and authority to discharge its
responsibilities, including the authority to retain and terminate the engagement of
such consultants and counsel to advise it as the Committee may deem necessary or
helpful in carrying out its responsibilities and to establish the fees and other terms
for the retention of such consultants and counsel, such fees to be borne by the
Corporation.

Composition, Meetings and Procedures

The Committee will consist of three or more Directors, each of whom shall have
been determined to be independent in accordance with the Corporation's Corporate
Governance Guidelines. Committee members and the Committee Chairman will be
appointed annually by the Board on the recommendation of the Corporate
Governance and Nominating Committee and serve at the pleasure of the Board.
The Committee may form subcommittees for any purpose and may delegate to such
subcommittees or to members of the Corporation's management such powers and
authority as it deems appropriate.

The Committee shall meet as frequently as necessary to fulfill its duties and
responsibilities, but not less than three times per year. A meeting of the Committee
may be called by its Chairman or any two members. Minutes of its meetings will be
approved by the Committee and maintained by the Corporation on behalf of the
Committee. The Committee will report its activities to the Board.

Responsibilities and Duties

The Committee shall provide oversight of the Corporation's operations and programs
regarding:

• strategic philanthropy and employee community involvement;

• public policy and advocacy, including lobbying and political contributions;
• environmental management;
• corporate social responsibility of suppliers;
• human rights, as reflected in the Corporation’s policies and actions toward
employees, suppliers, clients and communities;
• compliance with Community Reinvestment Act (CRA) and Fair Lending
laws, including review of CRA examination reports, Fair Lending reports
provided by federal and state examiners and related internal reports
provided by management; and
• corporate social responsibility governance and reporting
INTERNAL CONTROL MECHANISM

Internal Control at the Company

The Company`s management aims to conduct appropriate business activities and
achieve its management targets in accordance with the corporate governance set out
in these principles. To do this it shall develop and appropriately operate autonomous
mechanisms (internal control) that will help it manage and regulate the running of
the entire consolidated group.
The Company shall make it a principle to create an appropriate and effective control
environment in accordance with all laws and regulations, beginning with the
Companies Act and the Financial Instruments and Exchange Act.
Objectives of and Basic Factors for Internal Control
The Company shall strive to establish an appropriate system for internal control and
operate and continuously improve it through the use of the six key factors described
in (2) below in order to achieve the objectives of internal control stipulated in (1).
Objectives of Internal Control
▪ Improving Operational Effectiveness and Efficiency
▪ Ensuring the Reliability of Financial Reports
▪ Compliance with Laws and Regulations pertaining to Business Activities
▪ Preservation of company Assets (Risk Management)
Basic Factors for Internal Control
▪ Control Environment
This is an important factor which decides the Company`s character and impacts the
understanding of all individuals in the organization concerning the governance of
the Company, and shall form the basis of other key factors.
▪ Assessment of Risk and Response
There are events that may impact the achievement of organizational targets. The
Company shall identify, analyze and assess those events which would prevent those
organizational targets from being achieved, and select an appropriate response based
on that assessment.
 ▪ Control Activities
The Company shall establish policies and procedures in order to ensure appropriate
implementation of orders and directions from management.
▪ Information and Communication
The Company shall ensure that all information required is recognized, understood
and processed, and correctly transmitted both within and outside the organization to
all parties concerned.
▪ Monitoring
The Company shall continually monitor and asses how effectively internal control
is functioning, and make corrections as necessary.
▪ Interaction with IT (Information Technology)
The Company shall use IT effectively and efficiently in order to ensure the
effectiveness of other basic factors of internal control.

Necessary Systems to Ensure Appropriate Operations

The Company acting through its Board of Directors of the Company shall decide
policies concerning the system necessary to ensure the properness of operations in
accordance with the Companies Act, and shall establish and operate such system and
improve it as appropriate.
▪ Systems to ensure that the performance by the directors and employees of
their professional duties complies with all laws and regulations and the
Company`s articles of incorporation
▪ Systems to store and control information relating to directors` duties
▪ Regulations and systems relating to managing the risk of loss
▪ Systems to ensure efficient execution by directors of their duties
▪ Systems to ensure the properness of operations in the Company and its group
companies
▪ Items relating to employees assigned to assist auditors, the independence of
such employees from directors, and ensuring the practicality of instructions
given by auditors to employees assigned to them
▪ Systems for reporting to auditors
▪ Other systems to ensure effective auditing by auditors
CORPORATE COMMUNICATION
Corporate communication refers to a process of communication through which the
managers, supervisors and executives exchange their views, opinions, feelings, etc.
with the subordinates and employees in any corporate organisation and negotiate
with the outside world with a view to fulfilling the objectives of the organisation.
Corporate Communication is a total communication activity generated by a
company, body, institute to its public in order to achieve its planned objective.
Corporate Communications
Internal- Employees, Stakeholders, i.e. Share and Stock holders
External- Agencies, Channel Partners, Media, Government, Industry Bodies,
Educational Institutes and General Public
Corporate communication is managing an organizations internal and external
communications. Its includes:
▪ Advertising
▪ Marketing Communications
▪ Marketing
▪ Public Relations
→ Advertising is paid and controlled mass communication with a purpose to
impart.
→ Marketing Communication is the branding of products, services, and
organizations including such areas as consistency, differentiation, equity,
identity, imaging, loyalty, positioning, publicity, promotion, relationships, and
reputation.
→ Marketing is the management function which creates products or services to
fill public needs and then persuades the public to buy the products or services.
→ Public Relations is the management function which creates policies and
actions to fill public demands and then persuades the public to approve the
policies and actions.

Characteristics of Corporate Communication:

▪ Formal Communication:
▪ Informal Communication:
▪ Internal and External Communication:
▪ Oral and Written Communication:
 ▪ Wide Coverage:
▪ Means of Communication:
▪ Feedback:
▪ Long-term System:
▪ Continuous Flow of Communication:

Importance of Corporate Communication:

Communication has an important role to play in the corporate world. With the
increase in the complexities of activities in modern business, its importance is
growing day-by-day. To achieve the objectives of the organisation, co-ordination
among the persons and departments within the organisation and establishment of
connecting link with the outside world are very much necessary.

Motivating the employees for better and greater performance, facilitating group
performance, controlling their activities, taking corrective measures, wiping out
misunderstanding, maintaining peace, establishing discipline, and, above all,
ensuring the quality of work within the organisation is possible through effective
communication.

Establishing link with the outside world—with the customers, vendors, investors,
bankers, similar business organisations within and outside the country, various
departments of the government, etc. also depends on communication. Corporate
business houses are, in most cases, engaged in international business. Excellence in
communication in such cases is a basic need.

They are required to make corporate presentation of their goods and services, inform
and report, explain change, interact with the colleagues, motivate and support the
staff, supervise, organise and co-ordinate a course of action, build and maintain
relationship with overseas clients, participate in meeting, introduce themselves as
business houses, promote a sales drive, make market research, cope with mixed
language problem interacting with the foreign colleagues and so on. All these
activities require communication skill.

Phone, e-mail, fax, office memos, verbal communication, etc. are the internal means
of corporate communication. External communication depends on phones, letters,
fax, website, internet, video conferencing, etc.

Modern technologies in communication have made the communication process

speedy. It is a boon to corporate communication because a slightest delay in making
decision may place one in a difficult position—behind one’s competitors.

1. Internal Co-ordination:
To fulfill the objectives of the organisation, co-ordination among the employees is
necessary and to co-ordinate various activities communication is essential.
Corporate organisation being large in size, division of work and specialisation in
activities are the characteristics of such organisation. Communication helps to co-
ordinate such activities and to develop co-operation.

2. Connecting Link with the Outside World:

In a corporate organisation, communication with the external people, such as
customers, vendors, investors, competitors, government departments, etc. are
essential. Even connecting links with the foreign counterparts and centres are
necessary for proper functioning of the organisation.

3. Motivation:
Communication helps to motivate the employees to obey the orders and directives
of the management authority. The feedback of the employees also enlightens the
managers. The interaction between the managers and the employees improves the
relation between them and encourages all to devote themselves fully to achieve the
objectives of the organisation.

4. Efficient Management:
George Terry’s remark that communication works as a lubricant to increase the
efficiency of management is applicable to corporate organisations more
appropriately. Communication supplies the managers and employees with the
information, co-ordinates and motivates the employees.

5. Decision-making and Implementation:

The success of any corporate organisation depends largely upon decision-making.
Right decision-making, again, depends upon correct and timely information which
is obtained through communication. Again, implementation of the decision requires
proper communication.

6. Leadership:
The manager communicates orders and instructions to the subordinates, who, in turn,
carry out the instructions and sometimes send feedback in the form of suggestions,
grievances and complaints. The manager tries to remove the inconvenience as far as
possible. The entire process establishes the basis of leadership.

7. Corrective Measures:
In a corporate organisation the number of employees is large. Everybody’s
performance may not achieve required standard and some corrective measures may
become necessary. Such measures against the employees not performing their duties
properly can also be taken through communication. Communication thus protects
the interest of the organisation.
8. Speed:
Speed is the key word of today’s corporate world. Modern technologies have made
communication faster. Now, no one has to wait for weeks or months for a reply
letter. E-mail, fax, internet, etc. have made communication almost instant.
Immediate flow of information helps in taking correct decision in time and
anticipates solution to a probable problem.

9. Discipline and Peace:

Maintenance of discipline in large corporate sector is difficult. Control over a large
number of managers and employees is not an easy task. But regular communication
(Two-way) between the management authority and the workers creates a healthy
human relation and sense of co-operation, assistance and unity. Thus, peace is
established and discipline is maintained within the organisation.

10. Training:
Communication is necessary in imparting training to the managers, supervisors,
executives and general employees to upgrade their knowledge and skill of
performance in order to meet the needs of the changing corporate world.

Guidelines for Effective Corporate Communication

1. It should be simple. Jargon and buzz words create confusion and difficulty in
understanding.

2. It should be concise. Repetition of words and unnecessary explanation are to be

avoided. It should be kept in mind that more communication is not necessarily better
communication.

3. It should be clear in meaning and free from ambiguity.

4. The message should be courteous, no matter whether it is being sent to the
subordinates, to the superiors, or to the peer persons. It is to be remembered that
courtesy begets courtesy.

5. The communication should give correct information in proper time and in right
manner.

6. It should be complete in all respects. Before communicating one should check

whether the following ‘5 Whs’ are answered: Who, What, Where, When and Why.

7. Corporate communication should be consistent to the norms of the organisation.

It should keep track of the previous communication and maintain a continuity.

8. Metaphors, analogy or examples are sometimes necessary to bring out the

meaning of communication easily. So, appropriate use of these is recommended for
better communication.

9. Repetition of the key message is necessary in some cases. To become sure about
the success, the communicator sometimes repeats the key message.

10. An effective communication should have proper feedback. Two-way

communication should be encouraged.

11. Proper planning before communication is necessary. The success of the entire
communication process depends largely on planning in advance.

12. Last but not the least, effective channels should be chosen and established to
make the corporate communication successful.
FINANCIAL REPORTING
The term “financial reporting” incorporates not only financial statements, but also
includes other means of communicating financial and non-financial information, e.g.
management forecast, stock exchange documents, etc.
financial reporting constitutes an important element of the corporate governance
system. In fact, some failures of corporate governance may be reduced by an
adequate financial reporting system. On the other hand, some problems of the
financial reporting system find their origin in deficiencies of the system of corporate
governance
Component of Financial reporting
• Financial statement- B/S, P&L a/c, cash flow statement and statement of
change in stock holder equity.
• The note of financial statement
• Quarterly and annual report (listed company)
• Prospectus (company for IPO)
Objective
• Providing information to the management of an organization
• Providing information to the investor, promoters and debt provider
• Providing information to share and stake holders
• Providing information about economic resources of organization
• Enhancing social welfare by looking into the interest of employee, trade union
and government

ACCOUNTING STANDARD
Accounting Standard may be defined as the accounting principles and rules which
are to be followed for various accounting treatments while preparing financial
statements on uniform basis and which will reveal the same meaning to all the
interested groups who will use the same. Thus, the Standards are considered as a
guide for maintaining and preparing accounts.
NEED FOR AS
Practically speaking, in order to avoid the variance which may arise between the
accounting principles and accounting practice and also to find a uniformity among
diversity among the various underlying principles of accounting. We emphasise the
Accounting Standards framed by the IASC or IAS (Indian Accounting Standard,
based on IASC) for maintaining accounting practice in our country.

However, the reasons for setting the Standards are:

(a) Comparison between two firms is possible if both of them maintain the same
principle, otherwise proper comparison is not possible. For example, if Firm A
follows the FIFO method of valuation of stock whereas Firm B follows the LIFO
method for valuing stock, the comparison between the two firms becomes useless.

(b) The firms are not allowed to maintain and present their accounts according to
their own will or choice or cannot prepare report of financial statements for various
interested groups. The same is possible only when there is some fixed standard for
setting practice.

(c) The Accounting Standards recognise the principle of equity applicable for
different users of accounting information, viz. creditors, investors, shareholders etc.
Thus the purpose of setting Accounting Standards is nothing but to find a uniformity
in accounting practice while formulating financial reports and make consistency and
proper comparison of data which are contained in financial statements for the users
of accounting information.

(d) Practically, Accounting standards have been presented in order to maintain

fairness, consistency and transparency in accounting practice which will satisfy the
users of accounting.
Objectives of Accounting Standards:
The objectives of IASC which are set out in its revised agreement and constitution
are:
(i) To formulate and publish in the public interest Accounting Standards to be
observed in the presentation of financial statements and to promote their worldwide
acceptance and observation.

(ii) To work for the improvement and harmonisation of regulation of Accounting

Standards and procedures relating to the presentation of financial statements.

Benefits of Accounting Standards

1] Attains Uniformity in Accounting

2] Improves Reliability of Financial Statements
3] Prevents Frauds and Accounting Manipulations
4] Assists Auditors
5] Comparability
6] Determining Managerial Accountability

Limitations of Accounting Standards

1] Difficulty between Choosing Alternatives

2] Restricted Scope
Accounting Standards cannot override the laws or the statutes. They have to be framed
within the confines of the laws prevailing at the time. That can limit their scope to
provide the best policies for the situation.

Q: Accounting Standards can sometimes be restrictive. True or False?

Ans: One of the major disadvantages of accounting standards is that they can be
restrictive and inflexible. Each company faces unique situations and financial
transactions. But the company must make these situations fit the guidelines of the
accounting standards even if they are not the best way to represent the financial event
in question.
CORPORATE RATING AGENCY

Credit Rating Agencies (CRA) assess creditworthiness of organisation and different

entities. In simple words, these agencies analyse a debtor’s ability to repay the debt
and also rate their credit risk. All the credit rating agencies in India are regulated by
SEBI (Credit Rating Agencies) Regulations, 1999 of the Securities and Exchange
Board of India Act, 1992. Some credit agencies in India viz, CRISIL, CARE, ICRA,
SMREA, Brickwork Rating, and India Rating and Research Pvt. Ltd.

Importance

• It establish a link between risk and return.

• They provide a yardstick against which to measure the risk inherent in any
instrument.

• An investor uses the rating to asses the risk level and compares the offered
rate of return with his expected rate of return.

Benefits
Benefits to company:
a) Improved corporate image
b) Good for non popular companies
c) Act as a marketing tool
d) Reduced costs of borrowings
e) Easy to raise resource
f) Helps in growth and expansion
Benefits to investors:
a) Helps in investment decision
b) Choice of instruments
c) Easy understandability of investment proposal
d) Dependable credibility of issuer
e) Advantages of continuous monitoring

Objective
 Provide superior and low cost information to investors for taking decision
regarding risk return trade off.
 Encourages greater information disclosure, better accounting standards and
improved financial information.
 May reduce interest costs for highly rated companies.
 Act as a marketing tool.
 Helps merchant bankers, brokers,etc. in discharging their functions related to debt
issues.
Need
 Maintenance of investor’s confidence, since default shatter the confidence of
investors in corporate instruments.
 Protect the interest of investors who can not investigate much into the merits of
the debt instruments of a company.
 Motivate savers to invest in industry and trade

Credit Rating Methodology

a) Business Analysis.
b) Financial Analysis.
c) Management Evaluation.
d) Geographical Analysis.
e) Regulatory & Competitive Environment.
f) Fundamental Analysis.
Business Analysis:
a) Industry Risk
b) Market Position
c) Operating efficiency
d) Legal position
e) Size of business
Financial Analysis:
a) Accounting quality
b) Earning profitability
c) Cash flow analysis
d) Financial Flexibility
Management Evaluation:
•The effects on company’s performance by
a) Management goals
b) Plans and strategies.
c) Capacity to overcome unfavorable conditions.
d) Planning and controlling system.
Geographical Analysis:
a) Multinational Presence
b) Geographical advantages enjoyed by the company.
c) Regional subsidies.
Regulatory and Competitive Environment:
a) Structure of the Financial System
b) Regulatory framework of the financial system
Fundamental Analysis:
a) Liquidity management
b) Asset quality
c) Profitability and financial position
d) Interest and tax sensitivity

How Credit Rating Agencies Work

Credit rating agencies assign ratings to an organization or an entity. The entities that
are rated by credit rating agencies comprise companies, state governments, non-
profit organisations, countries, securities, special purpose entities, and local
governmental bodies. Credit rating agencies take into consideration several factors
like the financial statements, level and type of debt, lending and borrowing history,
ability to repay the debt, and the past debts of the entity before rating their credit.
Once a credit rating agency rates the entities, it provides additional inputs to the
investor following which the investor analyses and takes a sound investment
decision. Poor credit rating indicates that the entity is at a high risk of defaulting.
The credit ratings that are given to the entities serve as a benchmark for financial
market regulations. Credit ratings are published by agencies like Moody’s Investors
Service and Standard and Poor’s (S&P) based on detailed analysis.

The rating process typically takes six to eight weeks, and the steps involved are:
(by Fitch Ratings (In India))

Step – 1 – Initiate Rating Process

Step – 2 – Collect publicly available information

Step – 3 – Perform pre-analysis & request non-public information, if appropriate

Step – 4 – Prepar a detailed questionnaire

Step – 5 – Hold meetings with entity management and other Stakeholders

Step – 6 – Perform in-depth analysis

Step – 7 – Draft report

Step – 8 – Hold ratings Committee

Step – 9 – Assign ratings, write & publish commentary

Step – 10 – Conduct ongoing surveillance

Repeat Step 2 to Step 10 (as required) before giving the final ratings

Some of the Top Credit Rating Agencies in India are:

1. Credit Rating Information Services of India Limited (CRISIL)

CRISIL is one of the oldest credit rating agencies in India. It was launched in the
country in 1987 following which the company went public in 1993. Headquartered
in Mumbai, CRISIL ventured into infrastructure rating in 2016 and completed 30
years in 2017. It launched India's first index to benchmark performance of
investments of foreign portfolio investors (FPI) in the fixed-income market, in the
rupee as well as dollar version in 2018. The company’s portfolio includes, mutual
funds ranking, Unit Linked Insurance Plans (ULIP) rankings, CRISIL coalition
index and so on.
Service offered:
Credit rating service, advisory service, research and information service
2. ICRA Limited
ICRA Limited is a public limited company that was set up in 1991 in Gurugram. The
company was formerly known as Investment Information and Credit Rating Agency
of India Limited. Before going public in April 2007, ICRA was a joint venture
between Moody’s and several Indian financial and banking service organisations.
The ICRA Group currently has four subsidiaries - Consulting and Analytics, Data
Services and KPO, ICRA Lanka and ICRA Nepal. ICRA’s product portfolio
includes rating for - corporate debt, financial rating, structured finance,
infrastructure, insurance, mutual funds, project and public finance, SME, market
linked debentures and so on.
3. Credit Analysis and Research limited (CARE)
Launched in 1993, CARE offers credit rating services to areas such as corporate
governance, debt ratings, financial sector, bank loan ratings, issuer ratings, recovery
ratings, and infrastructure ratings. Headquartered in Mumbai, CARE offers two
different categories of bank loan ratings, long-term and short-term debt instruments.
The company also offers ratings for Initial Public Offerings (IPOs), real estate,
renewable energy service companies (RESCO), financial assessment of shipyards,
Energy service companies (ESCO) grades various courses of educational
institutions. CARE Ratings has also ventured into valuation services and offers
valuation of equity, debt instruments, and market linked debentures. Moreover, the
company has launched a new international credit rating agency ‘ARC Ratings’ by
teaming up with four partners from South Africa Brazil, Portugal, and Malaysia.
ARC Ratings has commenced operations and completed sovereign ratings of
countries, including India.
4. Brickwork Ratings (BWR)
Brickwork Rating was established in 2007 and is promoted by Canara Bank. It offers
ratings for bank loans, SMEs, corporate governance rating, municipal corporation,
capital market instrument, and financial institutions. It also grades NGOs, tourism,
IPOs, real estate investments, hospitals, IREDA, educational institutions, MFI, and
MNRE. Brickwork Ratings is recognised as external credit assessment agency
(ECAI) by Reserve Bank of India (RBI) to carry out credit ratings in India.
5. India Rating and Research Pvt. Ltd.
India Ratings is a wholly-owned subsidiary of the Fitch Group. It offers credit ratings
for insurance companies, banks, corporate issuers, project finance, financial
institutions, finance and leasing companies, managed funds, and urban local bodies.
In addition to SEBI, the company is recognised by the Reserve Bank of India and
National Housing Bank.
6. Small and Medium Enterprises Rating Agency of India (SMERA)
Established in 2005, SMERA is a joint initiative of SIDBI, Dun & Bradstreet India
and leading banks in India. SMERA has joined hands with prominent institutions
such as IIT Madras, The Bangladesh Rating Agency Limited, CAFRAL, CoinTribe,
and SIES. Apart from its shareholder banks, SMERA has also entered into MoUs
with over 30 Banks, Financial Institutions and Trade Associations of the country.
7. ONICRA Credit Rating Agency

ONICRA was established in 1993 by Mr. Sonu Mirchandani as a rating agency. It

analyzes data and provides rating solutions for Individuals and Small and Medium
Enterprises(SMEs). ONICRA has an extensive experience in operating a wide range
of business processes in areas such as Finance, Accounting, Back-end Management,
Application Processing, Analytics, and Customer Relations. It has rated more than
2500 SMEs.

ROLE OF MEDIA IN CORPORATE GOVERNANCE

The term media generally refers to the collective means of mass communication by
which information is communicated to various audiences. Much of the scholarly
research on the media has focused on the mass media and the traditional channels
used to disseminate information to the public including print newspapers and
broadcast television. Studies of the media also tend to focus on the professional
journalists that make up the collective body considered as the media.
India has around 70,000 newspapers and 500 satellite channels in several languages.
India is already the biggest newspaper market in the world - over 100 million copies
sold each day. Advertising revenues have soared. In the past two decades, the
number of channels has grown from one - Doordarshan - to more than 500, of which
more than 80 are news channels.
Even social media (blogs, twitter, facebook, whatsapp) has acquired a major role.
New level of transparency, empowered stakeholders, rise of e-lobbying and e-
advocacy, immediacy of social media are some of favourable outcomes of social
media(Chaher & Spellman).
As mentioned earlier that owing to a number of factors: lack of faith in an
individual’s input into the company decisions, boredom, lack of time, lack of
electronic devices (computers, laptops)required for voting electronically and
inability to comprehend the results and disclosures; investors more or less, remain
unaware about various happenings in the companies. People in society do not take
the pain to collect the information themselves but pay attention when they get it for
free. Role of media is especially important for those countries which face absence
of strong legislation.
There are three ways in which media can promote corporate governance:
1. Can drive political parties to introduce relevant law provisions to remain in power.
2. What law cannot monitor, can be monitored by media; media could trace the
situations when managers cater to their own interests in the times when they are not
monitored.
3. Thanks to the advancements in technology and competition, that everyone is
aware through one or other means as to what is happening in and around the world;
so if something unfavourable about the managers is telecasted or printed; raising
eyebrows of friends, children, family and neighbors would not prove to be a very
comfortable situation for all; deterring managers from doing anything wrong
Media can play role in CG by effecting in three ways;
▪ Pressure on politicians to go for corporate law reforms
▪ Pressure on managers to take care of the shareholders money
▪ Pressure on managers to take care of the societal norms
Importance of media
▪ Can play role even in the absence of legal act
Harms of using advertisement as a media tool.
▪ Misrepresentation of facts
Media and corporate governance
▪ Should be broadened rather than just legal and contractual aspects
▪ Managers focus should be shareholders but also the societal norms

Adverse effects of advertising

 ▪ dishonesty
▪ Fear appeals
▪ Advertising to children
▪ Deception
Positive effects of advertising
▪ Guidance to children in making decisions
▪ Developing skills
▪ Can act as a source of information
▪ Value and lifestyle
▪ Creative experience

ETHICS IN ADVERTISING
Ethics
➢ The term is derived from the Greek word ethos which can mean custom, habit,
character or disposition.
➢ Ethics covers the following dilemmas:
▪ how to live a good life
▪ our rights and responsibilities
▪ the language of right and wrong
▪ moral decisions - what is good and bad?
Advertising
Advertising is the paid, impersonal, one-way marketing of persuasive information
from an identified sponsor disseminated through channels of mass communication
to promote the adoption of goods, services or ideas.
In the advertising communication process there are five key players:
The Advertisers
The Advertising Agencies
The Support Organizations
The Media
The Consumers
Generic Ethical Principles in Advertising
• Principles of the moral order must be applied to the domain of media
• Human freedom has a purpose: making an authentic moral response. All attempts
to inform and persuade must respect the purposes of human freedom if they are to
be moral
• Morally good advertising therefore is that advertising that seeks to move people to
choose and act rationally in morally good ways; morally evil advertising seeks to
move people to do evil deeds that are self-destructive and destructive of authentic
community
• Means and techniques of advertising must also be considered: manipulative,
exploitative, corrupt and corrupting methods of persuasion and motivation

Specific Moral Principles in Advertising

➢ Respect Truthfulness
▪ Never directly intend to deceive
▪ Never use simply untrue advertising
▪ Do not distort the truth by implying things that are not so or withholding
relevant facts
➢ Respect The Dignity Of Each Human Person
▪ Do not exploit our "lower inclinations" to compromise our capacity to
reflect or decide either through its content or through its impact: using
appeals to lust, vanity, envy and greed, and other human weakness.
▪ Give special care to the weak and vulnerable: children, young people,
the elderly, the poor, and the culturally disadvantaged
➢ Respect Social Responsibilities
▪ Example: Concern for the ecology—advertising should not favour a
lavish lifestyle which wastes resources and despoils the environment
Criticisms Concerning The Influence of Advertising on Society
Puffery/ fraudulation (metaphor of idea)
Untruthful or deceptive
Offensive or in bad taste
Creates materialistic demand
Makes people buy the things not needed
Comparative advertising
Stereotype Advertising and sex
Improper language Excessive

Laws & Regulations

• Government Regulation
• Food and Drug Administration
• Advertising Standards Council of India (ASCI)
• Industry self-regulation
• Consumer activism

Advertising Standards Council of India (ASCI)

• To Ensure the Truthfulness and Honesty of representations and claims made by
Advertisements and to safeguard against misleading Advertisements.
• To ensure that Advertisements are not offensive to generally accepted standards of
Public Decency.
• To safeguard against the indiscriminate use of Advertising in situations or for the
promotion of products which are regarded as Hazardous to society or to Individuals
to a degree or of a kind which is unacceptable to society at large.
• To ensure that advertisements observe Fairness in Competition such that the
Consumer’s need to be informed on choices in the market place and the canons of
generally accepted competitive behavior in Business is both served.
 UNIT 5

CORPORATE SOCIAL RESPONSIBILITY

DEFINITION
Corporate social responsibility is a gesture of showing the company’s concern &
commitment towards society’s sustainability & development.
CSR is the ethical behaviour of a company towards society.
“The continuing commitment by business to behave ethically and contribute to
sustainable economic development while improving the quality of life of the
workforce and their families as well as of the local community and society.”
WBCSD (World Business Council for Sustainable Development)

TYPES OF SOCIAL RESPONSIBILITY

Responsibility towards Society

▪ Carrying on business with moral& ethical standards.
▪ Prevention of environmental pollution.
▪ Minimizing ecological imbalance.
▪ Contributing towards the development of social health, education
▪ Making use of appropriate technology.
▪ Overall development of locality.
Responsibility towards Government
▪ Obey rules & regulations.
▪ Regular payment of taxes.
▪ Cooperating with the Govt to promote social values.
▪ Not to take advantage of loopholes in business laws.
▪ Cooperating with the Govt for economic growth & development.
Responsibility towards Shareholders
 ▪ To ensure a reasonable rate of return over time.
▪ To work for the survival & the growth of the concern.
▪ To build reputation & goodwill of the company.
▪ To remain transparent & accountable.
Responsibility towards Employee
▪ To provide a healthy working environment.
▪ To grant regular & fair wages.
▪ To provide welfare services.
▪ To provide training & promotion facilities.
▪ To provide reasonable working standard & norms.
▪ To provide efficient mechanism to redress worker’s grievances.
▪ Proper recognition of efficiency & hard work.
Responsibility towards consumers
▪ Supplying socially harmless products.
▪ Supplying the quality, standards, as promised.
▪ Adopt fair pricing.
▪ Provide after sales services.
▪ Resisting black-marketing & profiteering.
▪ Maintaining consumer’s grievances cell.
▪ Fair competition.

NATURE OF SOCIAL RESPONSIBILITY

➢ CSR is normative in nature.
➢ CSR is a relative concept.
➢ CSR may be started as a proactive or reactive.
➢ All firms do not follow the same patterns of CSR.
▪ Legal & socially responsible.
▪ Legal but socially irresponsible.
▪ Illegal but socially responsible.
▪ Illegal & socially irresponsible.
CSR PRINCIPLES & STRATEGIES.
▪ Respect for human rights.
▪ Respect for the differences of views.
▪ Diversity & non-discrimination should be the guiding principle.
▪ Make some social contribution.
▪ Enter into e dialogue
▪ Self-realization & creativity.
▪ Fair dealings & collaboration.
▪ Feedback from the community.
▪ Positive value- added
▪ Long term economic & social development

MODELS OF CORPORATE SOCIAL RESPONSIBILITY

▪ Friedman model
▪ Ackerman Model
▪ Carroll Model
▪ Environmental Integrity & Community Model.
▪ Corporate Citizenship Model.
▪ Stockholders & Stakeholders Model.
▪ New Model of CSR
Friedman Model(1962-73)
▪ A businessmen should perform his duty well, he is performing a social as well
as a moral duty.
▪ A businessmen has no other social responsibility to perform except to serve
his shareholders & stockholders.

Ackerman Model (1976)

▪ The model has emphasized on the internal policy goals & their relation to the
CSR.
Four stages involved in CSR.
 ▪ Managers of the company get to know the most common social problem &
then express a willingness to take a particular project which will solve some
social problems.
▪ Intensive study of the problem by hiring experts & getting their suggestions
to make it operational.
▪ Managers take up the project actively & work hard.
▪ Evaluating of the project by addressing the issues.
Six Strategies in the adoption of CSR.
▪ Rejection strategy
▪ Adversary strategy
▪ Resistance strategy
▪ Compliance strategy
▪ Accommodation strategy
▪ Proactive strategy

Carroll Model(1991)
▪ Economic responsibility: Maximize the shareholders value by paying good
return.
▪ Legal responsibility: Abiding the laws of the land.
▪ Ethical responsibility: Follow moral & ethical values to deal with all the
stakeholders.
▪ Philanthropic requirements: Donation, gifts, helping the poor. It ensure
goodwill & social welfare.
Environmental Integrity & Community Health Model.
▪ This model developed by Redman.
▪ Many corporate in US adopted this model.
▪ Corporate contribution towards environmental integrity & human health,
there will be greater expansion opportunities.
▪ Healthy people can work more & earn more.
▪ CSR is beneficial for the corporate sector.
▪ CSR in a particular form is welcome.

Corporate Citizenship Model

▪ To be a corporate citizen, a corporate firm has to satisfy four conditions:
▪ Consistently satisfactory
▪ Sustainable economic performance
▪ Ethical actions
▪ Behaviour.
▪ A particular firm’s commitment to corporate citizenship requires the
fulfillment of certain social responsibilty.
Stockholders & Stakeholders Model
 ▪ Productvists believe that the only mission of a firm is to maximize the profit.
▪ Philanthropists who entertain the stockholders. CSR is dominated by moral
obligations & not self-interest.
▪ Progressivists believes the corporate behaviour basically motivated by self
interest & should have ability to transform the society for good.
▪ Ethical Idealism concern with sharing of corporate profits for humanitarian
activities.
New Model of CSR

BEST PRACTICES OF CSR

▪ To set a feasible, Viable & measureable goal.
▪ Build a long lasting relationship with the community.
▪ Retain the community core values.
▪ The impact of the CSR needs to be assessed.
▪ Reporting the impact.
▪ Create community awareness.
NEED FOR CORPORATE SOCIAL RESPONSIBILITY
▪ To reduce the social cost.
▪ To enhance the performance of employees.
▪ It a type of investment.
▪ It leads to industrial peace.
▪ It improves the public image.
▪ Can generate more profit.
▪ To provide moral justification.
▪ It satisfies the stakeholders.
▪ Helps to avoid government regulations & control.
▪ Enhance the health by non polluting measures.
ARGUMENTS FOR & AGAINST THE CSR
FOR-
▪ Corporate should have some moral & social obligations to undertake for the
welfare of the society.
▪ Proper use of resources, capability & competence.
▪ The expenditure on CSR is a sort of investment.
▪ Company can avoid many legal complications.
▪ It create a better impression.
▪ Corporate should return a part of wealth.
Arguments against the CSR
▪ Fundamental principles of business gets violated.
▪ It very expensive for business houses.
▪ CSR projects will not be successful.
▪ There are not the special areas of any business.
▪ CSR is to induce them to steal away the shareholders money.

INDIAN PERSPECTIVE.
▪ The Sachar committee was appointed in 1978 to look into corporate social
responsibility issues concerning Indian companies.
▪ The company must behave & function as a responsible member of society.
▪ Committee suggests openness in corporate affairs & behaviour.
 ▪ Some business houses have established social institutions like Schools,
colleges, charitable hospitals etc.
▪ Corporate sectors have not made significant contributions. (Polluting
Environment).

CSR EXAMPLES
▪ IBM UK - Reinventing Education Partnership programme Interactions and
sharing of knowledge through a web-based technology - the “Learning
Village” software. Culture of openness and sharing of good practice
▪ AVON - a partnership with Breakthrough Breast Cancer, and its Breast
Cancer Crusade has raised over 10 million pounds since its launch 12 years
ago.
▪ TOI’s Lead India campaign, campaign for contribution towards educating the
poor.