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Unit 1: Philosophy of Corporate Governance Intro, Meaning, Objectives, Importance (need) & Role Frame work of CG Internal, External (Shareholders) reputation agents (Regulatory authorities & rating agencies) Business ethics (Meaning, Importance, Objectives & Ethical Dimension to CG) Fair & unfair Business Practices Unit 2: Genesis of CG I n India Principles of CG CG from Arthashastra (Arthashastra & CG) Role of CG in Customer/Investor Protection Corruption (Definition, Causes, Effects, Preventive measure to control corruption) Zero Tolerance of Corruption MRTP Act & MRTP Commission Unfair Trade Practices Restrictive Trade Practices Scams in Indian Financial Market Unit 3: Evolution of Corporate Governance Various Committees on CG & their recommendations (Cadbury, K.M. Birla & Narayan Murthy) The CII Code Clause 49 of the Listing Agreement (in detail) Audit committee Shareholder Committee Directors Committee (Independent Directors) Whistle Blowing Policy CG in Globalised Economy Sarbanes Oxley Act. (SOX) MNC’s/TNC’s & Business Ethics Unit 4: Governance in Family Owned Business Governance in Family-Owned Business Future of CG in India Professionalism and transparency in family owned business
Prof. Abdul Kadir Khan
Pa g e 1
Corporate Governance [TY-BFM (Sem-6)] 1. Philosophy of CG
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Corporate Governance philosophy stems from the belief that corporate governance is a key element in improving efficiency and growth as well as enhancing investor confidence. The Corporate Governance philosophy is scripted as: “As a good corporate citizen, the Company is committed to sound corporate practices based on conscience, openness, fairness, professionalism and accountability in building confidence of its various stakeholders in it thereby paving the way for its long term success.” Corporate Governance is not just a business matter. It concerns the well-being of whole economies and populations too, and is a partnership question par excellence. Corporate = Association of persons who come together to achieve a common objective Governance = To Regulate 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. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.
Corporate governance is a multi-faceted subject.
An important theme of corporate governance is to ensure transparency,
accountability and integrity in a corporation.
Transparency, Accountability and Integrity are main constituents of good governance. Transparency and Accountability are interrelated concepts and mutually reinforcing. Without transparency there couldn't be any accountability. Unless there is accountability, transparency would be of no value. The existence of both conditions contributes to an effective, efficient and equitable management in public and private institutions. Integrity not only represents the well-functioning of the corporation, but also a virtuous form of human behaviour.
Prof. Abdul Kadir Khan
Pa g e 2
Corporate Governance [TY-BFM (Sem-6)]
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2. Frame work of CG [Internal, External (Shareholders) reputational agents (Regulatory authorities & rating agencies)]
Corporate governance is most often viewed as both the structure and the relationships which determine corporate direction and performance. The board of directors is typically central to corporate governance. Its relationship to the other primary participants, typically shareholders and management, is critical. Additional participants include employees, customers, suppliers, and creditors. The corporate governance framework also depends on the legal, regulatory, institutional and ethical environment of the community. Whereas the 20th century might be viewed as the age of management, the early 21st century is predicted to be more focused on governance.
Prof. Abdul Kadir Khan
Pa g e 3
Some of these resources are obtained by direct contracts with suppliers but others are not. There is also the argument that corporations exist within society and are dependent upon it for the resources they use. group or possibly non-human entity) that can affect or can be affected by the actions or policies of an organization. They may use their purchasing power or market share to impose unequal contracts on suppliers and customers alike. other species. and their impact on society being so significant that they cannot just be responsible to their stakeholders. It is based on companies being so large. The legitimacy of each stake holder's will depend on your ethical and political perspective on whether certain groups should be considered as stakeholders. Corporate Governance framework will help you to improve your corporate governance systems and processes. socially. In this regard stakeholders' theory proposes corporate accountability to a broad range of stakeholders. economically and politically. the natural environment in general or future generations be considered as legitimate stake holders. Governance reports have emphasized the role of institutional investors (insurance companies. For example they may blight an entire community by closing a major factory. being provided by government expenditure. that unrestrained use of their power will inevitably damage other people's rights.” Corporate Governance framework links seven essential and interrelated components. pension funds. Abdul Kadir Khan Pa g e 4 . however their responsibility towards them is judged. This scorecard helps company leaders see where their organization stands – from “compliant” to “developed” to “advanced” – in various areas to see where improvements will benefit the organization and its stakeholders. Modern corporations have seen as so powerful. It is a bidirectional relationship. Prof. There is considerable dispute about whose interests should be taken into account. Corporate Governance and Stakeholders’ interest Directors and manager need to be aware of the interests of stakeholders in governance. Each stakeholder group has different expectations about what it wants and different claims upon the organization. investment houses) in directing companies towards good corporate governance. They may exercise undesirable influence over government through their investment decisions. For example should distant (developing world) communities. thus enforcing long term unemployment on a large proportion of major workforce. Stakeholders are any entity (person.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Corporate Governance can be defined as “the systems and processes an organization has in place to protect and enhance the interests of its diverse stakeholder groups.
lenders. The rating measures the balanced creation of value among all stakeholders using a judicious mix of qualitative and quantitative parameters. and society. and the society at large) 3. and responsible interactions among a company's management. Takes into account the perspectives of all stakeholders (shareholders. suppliers. thereby going much beyond the scope of audit of regulatory compliance 2. while adopting sound corporate governance practices. It also indicates the capability of the entity with respect to creating wealth for all its stakeholders. shareholders. Quantifies the value created on account of good governance practice 4. Looks at actual practices through an interactive process. and other stakeholders. Ratings assess corporate governance practices at a company with respect to their impact on all stakeholders who deal with the company. Recognizes crucial role of stakeholders in value creation for shareholders 5. transparent. debt holders. Good corporate governance is reflected in fair. suppliers. Distinctive features of Corporate Governance Ratings Corporate Governance Rating offers a reliable and independent view of the corporate governance practices 1. Provides an appropriate balance of quantitative and qualitative factor Prof. Abdul Kadir Khan Pa g e 5 . customers. shareholders. board of directors.Corporate Governance [TY-BFM (Sem-6)] Corporate Governance Rating: For Private Circulation only Corporate governance is about commitment to values and ethical business conduct. employees. such as employees.
This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. safeguards invested capital. employees) outside the three groups are being met. Whilst non-executive directors are thought to be more independent. fire and compensate top management. require that the President be a different person from the Treasurer. with its legal authority to hire. Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors. and a third group check that the interests of people (customers. Prof. Examples include: Monitoring by the board of directors: The board of directors. operating efficiency. they may not always result in more effective corporate governance and may not increase performance. discussed and avoided. are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour. One group may propose company-wide administrative changes. Corporate governance controls: Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. Abdul Kadir Khan Pa g e 6 . Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. and can elicit myopic behaviour. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting Balance of power: The simplest balance of power is very common. and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting. however. For example.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Mechanisms and controls Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. An ideal control system should regulate both motivation and ability. and compliance with laws and regulations. It may be in the form of cash or noncash payments such as shares and share options. another group review and can veto the changes. management. audit committee. Such incentive schemes. an independent third party (the external auditor) attests the accuracy of information provided by management to investors. to monitor managers' behaviour. Regular board meetings allow potential problems to be identified. shareholders. superannuation or other benefits.
customers.. business ethics are moral principles that define right and wrong behavior in the world of business. as well as individual’s moral values and principles. customers. Increasingly. According to International Ethical Business Registry. production. global." Ethics refers to a code of conduct that guides an individual in dealing with others. government. social. natural. What constitutes right and wrong behavior in business is determined by the public interest groups. Prof. political. sales and marketing.. clients and employees are deliberately seeking out those who define the basic ground. Importance. Ethics is important not only in business but in all aspects of life because it is the vital part and the foundation on which the society is build. rules of their operations on a day today. Business Ethics (also known as corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It deals with issues regarding the moral and ethical rights. but won't taste good. media.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Business Ethics (Meaning. In the simplest terms. In business world the organization's culture sets standards for determining the difference between good or bad. A business/society that lacks ethical principles is bound to fail sooner or later. intellectual property knowledge and skill. Business Ethics is a form of the art of applied ethics that examines ethical principles and moral or ethical problems that can arise in business environment. international business and economic system. The ethical issues in business have become more complicated because of the global and diversified nature of many large corporation and because of the complexity of economic. which is concerned with the principles of behavior that distinguishes right from the wrong. suppliers and dealers. duties and corporate governance between a company and its shareholders. Abdul Kadir Khan Pa g e 7 . fair or unfair. right or wrong. Ethics is related to all disciplines of management like accounting information. As said by Joe Paterno once that success without honor is an unseasoned dish. legal and government regulations and environment. employees. "Business that makes noting but money is a poor kind of business".. "there has been a dramatic increase in the ethical expectation of businesses and professionals over the past 10 years. It is the study of morals and moral choices. Objectives & Ethical Dimension to CG) Ethics is that branch of philosophy. Henry Ford said. hence the company must decide whether to adhere to constant ethical principles or to adjust to domestic standards and culture. and business organizations. It will satisfy your hunger. human resource management.
The only 'reality' is that comprised of the people who work within or interact with the corporation and by the social and physical environments that provide the context for its operations. It is easy to forget this fact. The board is ultimately responsible for all that the company does. A list of the key relationships to be considered includes: Competitors Creditors Customers Employees Government Shareholders Society (as a whole) Suppliers The environment (internal & external) A number of different dimensions relating to ethics and corporate governance are: How do our attitudes about human nature shape the framework for corporate governance? What is the purpose of the board and how do we go about evaluating its performance? What are the basic obligations of directors when it comes to creating an ethical culture? Prof. Abdul Kadir Khan Pa g e 8 . legal 'person'. Finally. we should recognize that corporations are entirely artificial entities.Corporate Governance [TY-BFM (Sem-6)] Ethical Dimension to CG For Private Circulation only Business ethic is that aspect of corporate governance that has to do with the moral values of managers encouraging them to be transparent in business dealings. questions about relationships – within the company and beyond. This may be to state the obvious. the board is also ultimately responsible for what each corporation is. It also takes into account the interest of other stakeholders. Business ethics takes into consideration the feelings of customers in fashioning out the services or goods that is given to our customers. at a fundamental level. Given that it is only through the actions of a corporation that we might come to know it. that corporations are inventions of the human mind – existing under the guise of the fictional. However it helps to emphasize the point that corporate governance is ultimately about relationships. The key issues in corporate governance involve.
paid by boards. So a much greater extent than before. as recent research makes clear corporate performance ultimately depends on the consistent application of a founding set of values and principles. it could be argued that an over-emphasis on law (in which the correct course of action has been prescribed by others) has been at the expense of ethical reflection. As such. Prof. is bound to fail. For example. However. 'Old' solutions lose their currency at such times and new thinking is then required. common sense. boards have been comprised of people with a broad range of experience and. boards have overcome by the need to ensure that they comply with their legal obligations. to whom do I owe a duty of care: myself. It is not uncommon to hear mention of the fact that the increased level of regulation and surveillance. ultimately concerned about relationships. as seems likely.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only It is important to note that the whole focus of ethical thinking is to establish a series of practical responses to the issues that people face. In addition to the vast majority of directors were recruited at a time when there was broad consensus about the founding values and principles of our society. government and so on. directors are on their own when trying to determine how best to proceed. This focus on legal requirements has not necessarily led to any increase in the level of attention. then it is difficult to see how they are going to be able to manage the task of corporate governance without significantly improving their level of skill in ethical reasoning. has caused a corresponding decline in attention to corporate performance. Finally. all creation? Traditionally. my immediate family. The contemporary environment in which directors work is very different. However. the professions. This used to be adequate preparation for the challenges faced by directors. to the ethical dimension of their activities. paradoxically. ethical thinking is an indispensable tool for those who encounter a constant stream of new challenges in a rapidly changing world. There were also a number of reasonably authoritative institutions able to offer guidance: the church. my community. to a fair degree. all humanity. The benefits of ethical behaviour only flow to those who choose to act in this way because of a sincere (and not merely tactical) commitment. Indeed. If. Abdul Kadir Khan Pa g e 9 . this is a naive view that. boards of directors continue to operate in a world of rapid and profound change. coupled with an extension of the liability of directors. Instead. at heart. it should be noted that ethics is also. This may seem to suggest that there is something to be said for the view that "good ethics is good business".
Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Unit 2: Genesis of CG in India (Roots of CG) Principles of Corporate Governance Key elements of good corporate governance principles include honesty. 3. Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries. Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders. Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. senior executives should conduct themselves honestly and ethically. 4. There are issues about the appropriate mix of executive and non-executive directors. Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. though. that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. especially concerning actual or apparent conflicts of interest. Commonly accepted principles of corporate governance include: 1. mutual respect. openness. Abdul Kadir Khan Page 10 . Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. 2. Because of this. In particular. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. and disclosure in financial reports. and commitment to the organization. trust and integrity. It is important to understand. performance orientation. but it is also a necessary element in risk management and avoiding lawsuits. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. responsibility and accountability. Prof.
Smale. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. and the commitment to run a transparent organization. oversight and management of risk 4. the way in which individuals are nominated for positions on the board 8. factual information. Prof. For Private Circulation only Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. Perpetuation for its own sake may be counterproductive . a former member of the General Motors board of directors. dividend policy Nevertheless "corporate governance. Corporate governance must go well beyond law. is emerging." However it should be noted that a corporation should cease to exist if that is in the best interests of its stakeholders. remains an ambiguous and often misunderstood phrase.these should be constantly evolving due to interplay of many factors and the roles played by the more progressive/responsible elements within the corporate sector. the independence of the entity's external auditors and the quality of their audits 3. quality and frequency of financial and managerial disclosure. John G." despite some feeble attempts from various quarters.Corporate Governance [TY-BFM (Sem-6)] 5. The quantity. review of the compensation arrangements for the chief executive officer and other senior executives 6. written objectives. a strident demand for evolving a code of good practices by the corporation. efficient and transparent administration and strive to meet certain well defined. the resources made available to directors in carrying out their duties 7. Abdul Kadir Khan Page 11 . written by each corporation management. for it must include a fair. oversight of the preparation of the entity's financial statements 5. For quite some time it was confined only to corporate management. the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities (largely an ethical commitment). In India. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear. 1. wrote: "The Board is responsible for the successful perpetuation of the corporation.” That responsibility cannot be relegated to management. It is something much broader. That is not so. Issues involving corporate governance principles include: internal controls and internal auditors 2.
have simmered back to the surface and been joined by new accusations against the wealthy. in particular the provision of 'safety net' arrangements to protect depositors and investors if a bank or broker goes bankrupt. But the size of the formal Indian economy is now such that estimates of the underground economy at 40-50% of GDP generate very large numbers. The tools to achieve the objective of protecting the customer therefore include appropriate insolvency law and a code of sales practices. Prof. That culprit is the Indian state. particularly non-professional customers must have a high level of confidence in the markets in which they participate. or else they will not entrust their funds to the financial intermediaries which deal in these markets. The biggest culprit. Long-standing issues. Crimes have been committed and the guilty should face justice. Customer protection in turn is part of the bigger objective of promoting market integrity. This includes illegal activities but also legal activities that are not declared. Zero tolerance of corruption Zero tolerance means that certain actions will absolutely not be tolerated under any circumstances. major companies. and are afforded appropriate protection if things go wrong. such as broad attempts to avoid taxes. spurs outrage at black marketers supposedly robbing the Indian people. and telecom. Zero tolerance of corruption refers to corruption of any type wont be tolerated. and the government.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Role of CG in Customer/Investor Protection Protection of interest of Customer & Investor: Customers of financial markets. faces no punishment and. Corruption is again dominating the news in India. indeed. Earlier this year. It is generally used in reference to policies that spell out exactly which actions are forbidden. property. Abdul Kadir Khan Page 12 . in turn. To achieve this aim. criticism began to be leveled in India at the underground or “black” economy. This includes. rules must be drawn up to ensure that customers are dealt with fairly. in the neighborhood of $600 billion. The focus of this policy is to eradicate corruption totally. is looking to further recent gains. This. Scandals have crossed finance. All economies have black markets and developing economies tend to have bigger ones. so the dividing line between these key risk concepts is blurred and it is impossible to categorically divide the relevant on-line documents into the different key risk concepts. however.
and freedom from corruption. Abdul Kadir Khan Page 13 . State-run financials have made loans in exchange for bribes. Improprieties in the government’s auction of second-generation (2G) telecom spectrum may have cost as much as $40 billion in fiscal revenue. In several particular incidents of corruption. since the idea is that it shouldn’t occur at all. Rather. India retains among the tightest controls on capital movement among emerging markets. anyway. people followed their self-interest and invested abroad. Indian entrepreneurs cannot start a business freely and cannot invest freely. And the ones being “robbed” are only the federal and state governments. Grabbing headlines this month was a similar story about how India has “lost” over $450 billion due to illegal capital flows. What would count in most countries merely as citizens and companies investing overseas — and bringing much of the benefits back home in terms of financial returns. Despite progress in the reform era. due to the state’s jealous protection of its prerogatives. it’s often the governments’ own fault. resources. Banned activity doesn’t represent lost revenue for the government. Indeed. It is hardly a surprise that corruption is rampant. At the general level. Prof. Where revenue is lost is in legal activity that is hidden. The other funds are deemed lost only because the Indian federal government tries to restrict capital movement. only no benefits flowed back to India because the investment has been deemed illegal by the interventionist Indian state. The Commonwealth Games were plagued by overspending. As happened in all economies throughout history. This black market activity is due to a predatory state which seeks to control Indian entrepreneurship. it’s the difficulty of setting up a business. and this is actually an improvement over previous years. which was illegally earned and ideally would never have existed in the first place. corporate assets and so on — is not permitted in India. the Heritage Index of Economic Freedom scores India highly in a number of important categories but very low in the connected areas of business freedom. Moreover. tens of millions of them. a problem which would be eased if the state did not dominate the banking system. the government’s guilt is directly apparent. due to lack of transparency and competition in state contract awards. But avoiding taxes isn’t the only or even the main reason for individuals to hide activities from the government. many ordinary Indians decide to proceed without the necessary authorization and then must hide their businesses. The big one is telecom. India ranks an awful 165th out of 183 countries in the World Bank’s measure of the difficulty of starting a business. investment freedom. Rather than face endless delays and high costs. Some of this is again money raised in crimes.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Except the black marketers *are* the Indian people.
guarantee of performance that is not based on an adequate test or making to public a representation which purports to be such a guarantee or warranty. In most cases. deteriorating product quality or by adopting unfair or deceptive trade practices. Unfair Trade Practice: Misleading advertisement and False Representation Falsely representing that goods and services are of a particular standard. 1969. But lost in the outrage is the point of a telecom industry. The answer is plain: Zero tolerance of Corruption. aims to prevent concentration of economic power to the common detriment. Monopolistic trade practice: Monopolistic trade practice is that which represents abuse of market power in the production and marketing of goods and services by eliminating potential competitors from market and taking advantage of the control over the market by charging unreasonably high prices. restrictive and unfair trade practice. Representing that goods or services. Making a false or misleading representation concerning need for. And even there the unwarranted cheapness of 2G spectrum contributed to a far more dynamic industry and thus led directly to the government’s windfall at this year’s 3G spectrum auction. the problem is harm to the state. limiting technical development. composition or style. And the Indian telecom industry has done just that. preventing or reducing competition. approval or affiliation which they do not have. Abdul Kadir Khan Page 14 . seller or supplier has a sponsorship. Falsely representing any second hand renovated or old goods as new. There’s no telecom failure or betrayal here. Giving to public any warranty. In others. quality. It is not supposed to be a money-making tool for the government. both directly and indirectly through strengthening the economy. from medicine to farming.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Those government and corporate officials who did not follow the law must be punished. Prof. India is now wrestling with how to deal a decisive blow against corruption. There’s only a failure and betrayal of federal coffers. It has outperformed expectations in its transformation of Indian society. not the people. quite the opposite. MRTP Act & MRTP Commission The Monopolies and Restrictive Trade Practices Act. It is supposed to improve people’s lives. the state is causing the problem. or usefulness of goods or services. grade. It is a major part of the Indian success story. provide for control of monopolies and probation of monopolistic. and protect consumer interest.
which is yet to be implemented in full. It may also bring manipulation of prices or conditions of delivery or affect the flow of supplies in the market so as to impose unjustified costs. 1969. services or trade of another person or concern. It hinges on complete transparency. does not deal with UTP directly. The MRTP Commission established under Section 5 of the Monopolies and Restrictive Trade Practices Act. MRTP Commission: Monopolies and Restrictive Trade Practices Commission (MRTPC) MRTPC is an important organ of the Department of Company Affairs. The Competition Act. traders often attempt to indulge in certain trade practices which tend to obstruct the flow of capital into the stream of production. Abdul Kadir Khan Page 15 .Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only False and misleading claims with respect to the price of goods or services. The main function of the MRTP Commission is to enquire into and take appropriate action in respect of unfair trade practices and restrictive trade practices. Its genesis can be traced to the internal audit function and its importance was enhanced after the Stock Market Crash of 1987. integrity and accountability of management that includes executive and non-executive directors. in the best interest of the company and shareholders along with concern for ethics and values. Prof. Various Committees on Corporate Governance Corporate Governance when used in the context of business organizations is a system of making directors accountable to share holders for effective management of the companies. much of the litigation in both forums centres around it. Restrictive Trade Practice: To maximize profits and market power. It is a management of companies by the board of directors. this phrase will remain only in the consumer law. discharge functions as per the provisions of the Act. It is a quasi-judicial body. When the MRTP Commission fades away. The expression 'unfair trade practice' is one which is elaborately defined in the Consumer Protection Act and the Monopolies and Restrictive Trade Practices Act. Giving false or misleading facts disparaging the goods. In regard to monopolistic trade practices the Commission is empowered under section 10(b) to inquire into such practices (i) upon a reference made to it by the Central Government or (ii) upon its own knowledge or information and submit its findings to Central Government for further action. However.
The report was mainly divided into three parts:Reviewing the structure and responsibilities of Boards of Directors and recommending a Code of Best Practice The boards of all listed companies should comply with the Code of Best Practice. Non-Executive Directors . There should be a clearly accepted division of responsibilities at the head of a company. Keeping this in view. who is responsible to the Board for ensuring that board procedures are followed and that applicable rules and regulations are complied with. retain full and effective control over the company and monitor the executive management. the Committee published its final report on 1st December 1992. resources. The Code of Best Practice is segregated into four sections and their respective recommendations are:1. Besides. (iv) raise the standard of corporate governance. such that no one individual has unfettered powers of decision. all directors should have access to the advice and services of the company secretary. it has moved into other areas of the organization but unfortunately restricts itself to the management and control of funds. Mervyn King in South Africa and Kumarmangalam Birla in India the subject was reduced to controlling shareholder operations and ensure ethical practices in the financial sector. which will ensure a balance of power and authority.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only With the CG reports of Adrian Cadbury in the United Kingdom. the London Stock of Exchange and the accountancy profession. Board of Directors . (ii) review the structure. Cadbury Committee Report (1992) The 'Cadbury Committee' was set up in May 1991 with a view to overcome the huge problems of scams and failures occurring in the corporate sector worldwide in the late 1980s and the early 1990s. All listed companies should make a statement about their compliance with the Code in their report and accounts as well as give reasons for any areas of noncompliance.The non-executive directors should bring an independent judgement to bear on issues of strategy. etc. Where the chairman is also the chief executive. Prof. The ambit of significance of CG lies far beyond this. Other objectives include: (i) uplift the low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company's reports sought and expected. wherever necessary. with the main aim of addressing the financial aspects of Corporate Governance. shareholders and auditors by making them more effective and accountable. From there. with a recognised senior member. including key 2. it is essential that there should be a strong and independent element on the board.The board should meet regularly. rights and roles of board of directors. Abdul Kadir Khan Page 16 . (iii) address various aspects of accountancy profession and make appropriate recommendations. performance. It was formed by the Financial Reporting Council.
The board should ensure that an objective and professional relationship is maintained with the auditors. which provide important reference points against which auditors exercise their professional judgement. It also recommended for disclosure of payments to the auditors for non-audit services to the company. and standards of conduct. It provides an external and objective check on the way in which the financial statements have been prepared and presented by the directors of the company.There should be full and clear disclosure of directors’ total emoluments and those of the chairman and highest-paid directors. every listed company should form an audit committee which gives the auditors direct access to the non-executive members of the board. Considering the role of Auditors and addressing a number of recommendations to the Accountancy Profession The annual audit is one of the cornerstones of corporate governance. there is a need to develop more effective accounting standards. should take the lead in:. Abdul Kadir Khan Page 17 . The directors should report that the business is a going concern. in the company's annual report. Secondly. in reporting of financial statements. it should continue to improve its standards and procedures. Auditors' role is to design audit in such a manner so that it provide a reasonable assurance that the financial statements are free of material misstatements. 4. including separate figures for salary and performance-related pay. Executive Directors . apart from their fees and shareholding. However. Dealing with the Rights and Responsibilities of Shareholders Prof. in conjunction with representatives of preparers of accounts. with supporting assumptions or qualifications as necessary. (ii) developing guidance for companies on the form in which directors should report.It is the duty of the board to present a balanced and understandable assessment of their company’s position. Further. including pension contributions and stock options. so as to provide to all a true and fair view of company's financial statements. Financial Reporting and Controls .Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only appointments. and (iii) developing guidance for auditors on relevant audit procedures and the form in which auditors should report.(i) developing a set of criteria for assessing effectiveness. The majority of non-executive directors should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgment. The Cadbury Committee recommended that a professional and objective relationship between the board of directors and auditors should be maintained. The Committee further recommended for a regular rotation of audit partners to prevent unhealthy relationship between auditors and the management. for providing true and fair picture of financial reporting. 3. The Accountancy Profession.
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. Securities and Exchange Board of India (SEBI) had set up a committee under Shri Kumar Mangalam Birla. and suggest safeguards to be instituted within the companies to deal with insider information and insider trading. elect the directors to run the business on their behalf and hold them accountable for its progress. It is encouraged that the institutional investors/shareholders to make greater use of their voting rights and take positive interest in the board functioning.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only The shareholders. Abdul Kadir Khan Page 18 . 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. as owners of the company. The Committee's report places particular emphasis on the need for fair and accurate reporting of a company's progress to its shareholders. Both shareholders and boards of directors should consider how the effectiveness of general meetings could be increased as well as how to strengthen the accountability of boards of directors to shareholders. responsibilities of independent and outside directors. They appoint the auditors to provide an external check on the directors’ financial statements. to promote and raise the standards of good corporate governance. their roles and responsibilities as also their rights in the context of good corporate governance. in the context of prevailing conditions of governance in Indian companies. in areas such as continuous disclosure of material information. member SEBI Board. manner and frequency of such disclosures. The Kumar Mangalam Birla Committee Report: In early 1999. Prof. which is the responsibility of the board. 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. The committee had identified the Shareholders. as well as the state of capital markets. The report submitted by the committee is the first formal and comprehensive attempt to evolve a ‘Code of Corporate Governance'. both financial and non-financial. draft a code of corporate best practices.
Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Corporate governance has several claimants –shareholders and other stakeholders which include suppliers. Minutes Of Committee's Meeting. namely. Outlook. Mandatory and non-mandatory recommendations The committee divided the recommendations into two categories. Internal Control System Information Sharing With Shareholders 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 Prof. customers. the government and the society at large. may. 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. Threats. Opportunities.3 Crore And Above Composition Of Board Of Directors – Optimum Combination Of Executive & NonExecutive Directors Audit Committee – With 3 Independent Directors with One Having Financial and Accounting Knowledge. keeping in view primarily the interests of a particular class of stakeholders.mandatory. mandatory and non. creditors. Remuneration Committee Board Procedures – At least 4 Meetings Of The Board In A Year With Maximum Gap Of 4 Months Between 2 Meetings. who together with the investors form the principal constituency of SEBI while not ignoring the needs of other stakeholders. which are either desirable or which may require change of laws. for the time being. To Review Operational Plans. the shareholders. Capital Budgets. Abdul Kadir Khan Page 19 . Mandatory Recommendations: Applies To Listed Companies With Paid Up Capital Of Rs. The Report had been prepared by the committee. namely. and the bankers. Others. Risks. 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. Quarterly Results. the employees of the company. be classified as non-mandatory.
but body corporate (e. As for listed entities.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only As per the committee. reports relating to compliance with laws and risk management among others. the recommendations should be made applicable to the listed companies. January 7. employees and professionals associated with such companies. especially the smaller ones. The Narayan Murthy Committee The Narayana Murthy Committee report on corporate governance has made a number of recommendations in its draft report to Securities and Exchange Board of India. which are not companies. 2003 and February 2003. in accordance with the time table proposed in the schedule given later in this section. financial institutions. The Committee recognizes that compliance with the recommendations would involve restructuring the existing boards of companies. The committee has recommended that the audit committees of publicly listed companies should be required to review the following mandatory information financial statements. The ultimate responsibility for putting the recommendations into practice lies directly with the board of directors and the management of the company. Compliance with the code should be both in letter and spirit and should always be in a manner that gives precedence to substance over form. Prof. may have difficulty in immediately complying with these conditions. their directors. management. management discussion and analysis of financial condition and results of operations. The recommendations will apply to all the listed private and public sector companies.g. and guidelines or directives issued by the relevant regulatory authorities. the recommendations will apply to the extent that they do not violate their respective statutes.) incorporated under other statutes. in accordance with the schedule of implementation. It also recognizes that some companies. The committee has also said that all audit committee members should be "financially literate" and at least one member should have accounting or related financial management expertise. The committee met thrice on December 7. 2002. insurance companies etc. private and public sector banks. Abdul Kadir Khan Page 20 . to deliberate the issues related to corporate governance and finalize its recommendations to SEBI. in a phased manner by SEBI. The recommendations were implemented through Clause 49 of the Listing Agreements.
This document should be formally approved by the board. The auditor may draw reference to this footnote without necessarily making it the subject matter of an audit qualification. Companies should be encouraged to move towards a regime of unqualified financial statements. This statement should include transactions of a non arm's-length nature also.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only In case a company has followed a treatment different from that prescribed in an accounting standard. it was suggested that procedures should be in place to inform board members about the risk assessment and minimization procedures. A statement of all transactions with related parties including their bases should be placed before the independent audit committee at each board meeting for formal approval. Management should be required to explain to the audit committee the reasons for the non-arm's length nature of the transaction. measures to address and minimize such risks and any limitations to the risk taking capacity of the corporation. This recommendation should be reviewed at an appropriate juncture to determine whether the financial reporting climate is conducive towards a system of filing unqualified financial statements. Management should also clearly explain the alternative accounting treatment in the footnotes to the financial statements. This document should be formally approved by the board. These procedures should be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. management should justify why they believe such alternative treatment is more representative of the underlying business transaction. Procedures should be in place to inform board members about the risk assessment and minimization procedures. The committee believes that it is important for corporate boards to be fully aware of the risks facing the business and that it is important for shareholders to know about the process by which companies manage their business risks. These procedures should be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. In light of this. It was also suggested that management should place a report before the board every quarter documenting any limitations to the risk taking capacity of the corporation. Prof. Management should place a report before the entire board of directors every quarter documenting the business risks faced by the company. Abdul Kadir Khan Page 21 .
On an annual basis. The terms of reference of the committee are to review the performance of corporate governance and to determine the role of companies in responding to rumour and other price sensitive information circulating in the market.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Companies should be encouraged to train their board members in the business model of the company as well as the risk profile of the business parameters of the company. It is important for corporate boards to be fully aware of the risks facing the business and that it is important for shareholders to know about the process by which companies manage their business risks. Prof. the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus. Companies raising money through an IPO should disclose the uses and application of funds by major category on a quarterly basis as part of their quarterly declaration of un-audited financial results. Companies should train their board members in the business model of the company as well as the risk profile of the business parameters of the company. This statement should be certified by the independent auditors of the company and formally approved by the audit committee. Points to ponder All audit committee members should be "financially literate" and at least one member should have accounting or related financial management expertise. Abdul Kadir Khan Page 22 . This disclosure should distinguish between specified and unspecified uses of IPO proceeds and should be approved by the audit committee. to enhance the transparency and integrity of the market.
enhancing efficiency. Moreover. it is India's premier business association. Innovation and Entrepreneurship. and an indirect membership of over 90. CII catalyses change by working closely with government on policy issues. the CII Code was the first and probably a unique instance where an industry association took the lead in prescribing corporate governance standards for listed companies. Prof. industry led and industry managed organisation. Businesses are part of civil society and creating livelihoods is the best act of corporate social responsibility. Major emphasis is laid on projecting a positive image of business.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only OBJECTIVE OF CORPORATE GOVERNANCE CONFEDERATION OF INDIAN INDUSTRY (CII)? CODE SET UP BY the cii code (1895) The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India. diversity management. For over a decade. including SMEs and MNCs. the Confederation of Indian Industry (CII) has been at the forefront of the corporate governance movement in India. assisting industry to identify and execute corporate citizenship programmes. education. Looking ahead. Abdul Kadir Khan Page 23 . It is worth noting that most of the CII Code was subsequently incorporated in SEBI’s Kumar Mangalam Birla Committee Report and thereafter in Clause 49 of the Listing Agreement. partnering industry and government alike through advisory and consultative processes. Innovation and Entrepreneurship would drive growth and employment generation. playing a proactive role in India's development process. It also provides a platform for sectoral consensus building and networking. In April 1998. Partnerships with over 120 NGOs across the country carry forward our initiatives in integrated and inclusive development. While Education and Employability help create a qualified and skilled workforce. skill development and environment. not-for-profit. to name a few. which outlined a series of voluntary recommendations regarding best-in class practices of corporate governance for listed companies.000 companies from around 400 national and regional sectoral associations. Employability. it released a Task Force report entitled “Desirable Corporate Governance: A Code”. CII has taken up the agenda of “Business for Livelihood” for the year 2010-11. with a direct membership of over 8100 organisations from the private as well as public sectors. competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. the focus for 2010-11 would be on the four key Enablers for Sustainable Enterprises: Education. livelihood. CII is a non-government. Founded over 115 years ago. which include health.
Much of best-in-class corporate governance is voluntary . financial and non-financial disclosures and information to be shared by the management to stakeholders and the wider public. in South Korea. The report enumerates a set of voluntary recommendations with an objective to establish higher standards of probity and corporate governance in the country. However. Indeed. Large. With this in mind. in France. Satyam is a one-off incident . The Satyam-Maytas Infra-Maytas Properties scandal that has rocked India since 16th December 2008 is another example of a massive fraud . these cannot be anything more than a basic framework. Unfortunately. CII advocates caution against overregulating. in the UK. The overwhelming majority of corporate India is well run. The recommendations outlined in this report are aimed at listed companies and wholly owned subsidiaries of listed companies . in Japan. Abdul Kadir Khan Page 24 .of companies taking conscious decisions of going beyond the mere letter of law. and many other OECD nations. well regulated and does business in a sound and legal manner.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Corporate governance guidelines . Another comment is in order.especially considering the size of the malfeasance. Tyco and. highly visible and publicized corporate scandals often provoke legislative and regulatory actions. history tells us that even the best standards cannot prevent instances of major corporate misconduct. in Italy. The spirit of this Task Force Report is to encourage better practices through voluntary adoption . Naresh Chandra in February 2009 to recommend ways of further improving corporate governance standards and practices both in letter and spirit . And CII is privileged to be a part of this movement . the CII set up a Task Force under Mr. it is fair to say that in terms of norms. guidelines and standards set for the board of directors.both mandated and voluntary . thanks to the efforts of several committees appointed by the Ministry of Corporate Affairs (MCA) and the SEBI.have evolved since 1998. Indian corporate governance standards rank among the best in the world. Worldcom.Enron. The leitmotif of the report is to enunciate additional principles that can improve corporate governance in spirit and in practice. more recently gross miss-selling of collateralised debt obligations. in Germany. Prof. It needs to be recognized that while the super-structure of corporate governance is built on laws and regulations. This has been true in the US .based on a firm conviction that good corporate governance not only comes from within but also generates significantly greater reputation and stakeholder value when perceived to go beyond the rubric of law. The recommendations of the Naresh Chandra Task Force evolved over a series of meetings. the Satyam episode has prompted a relook at our corporate governance norms and how industry can go a step further through some voluntary measures.
its shareholders and its other stakeholders.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Therefore. Often they suggest increasing the number of independent directors on boards. which would define global benchmarks in the medium term. Prof. Governance is more than just board processes and procedures. The framework includes the protection of shareholders through regulation and through requirements for full disclosure of risks. It is the belief of CII that Indian Industry would respond spontaneously and help set standards. If this were all that corporate governance was about. managed and held accountable. The policy framework covers considerations such as the legal rights of shareholders and their ability to obtain redress in case their rights are violated. CG in Globalised Economy… Corporate governance: a basic foundation for the global economy… Most of us. The quality of governance is directly linked to the policy framework. the governance regime is unlikely to be either. These governance codes usually recommend that companies change their board structures and procedures to make the company more accountable to shareholders. such as its employees and the community in which it is located. an intergovernmental organization whose mandate is to advise on public policy matters. is interested in the topic at all. tend to think of codes. There are a great number of other factors that impact the way the company is controlled. introducing new board committees – such as the audit committee – and so on. then one could legitimately ask. Governments play a central role in shaping the legal. These are just two examples. Abdul Kadir Khan Page 25 . If the framework conditions are not in order. as the name implies? No. like the wellknown Cadbury Code. and many of these factors fall squarely in the realm of policymakers. which are being placed before corporate India for adopting voluntarily. It involves the full set of relationships between a company’s management. its board. Isn’t corporate governance something that should be handled by corporations. that have emerged over the past few years. institutional and regulatory framework within which governance systems are developed. why the OECD (Organization for Economic Co-operation and Development). when we hear corporate governance. separating the position of chairman and chief executive officer. it is only natural that this report should focus on recommendations.
these conglomerates had easy access to external debt and equity finance without having to go through the appropriate controls. In the context of countries making the transition from centrally -planned to market economies. setting back the development efforts of entire countries and regions. over-investment and dangerously high corporate indebtedness. The financial crises in Asia. At the end of the day. All countries stand to gain from improving the way their enterprises operate. while privatization succeeded in transferring ownership of enterprises from public to private hands. In Japan. Germany and Sweden. It is also worth noting that the challenge to improve governance is not limited to emerging market and transition economies. Page 26 Prof. Lack of transparency and accountability led. An immediate one is that poor governance can harm national economic performance and ultimately global financial stability. European countries face mounting calls for better treatment of minority shareholders and greater transparency in mergers and acquisitions. even to the state. However. to distorted incentive structures. In Asian countries. corporate governance must respond to the needs of the different stages of reform. In many transition countries. In the United States the separation of the chairman and chief executive – preferred by many investors – is unusual. this poor governance undermined confidence in the markets and held the whole financial system hostage.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Why should we care about the quality of governance? There are several reasons. questioning and working towards better practices. When imbalances became too large to be ignored. interest groups linked to large financial institutions. efforts to rekindle economic dynamism clearly require improvements in areas such as information disclosure and board practices. minority shareholders – domestic and foreign – as well as creditors were given neither the information nor the authority to monitor corporate operations. Even the most advanced economies are discussing. ran vast conglomerates under conditions that prevented external scrutiny. Problems specific to each country were important too. they prompted a rout in financial markets. France. In other words. In Australia. Though circumstances differed. the United Kingdom. Because of their high-level connections and the perception of implicit government guarantees. Abdul Kadir Khan . important long-term efforts have been undertaken in the area of company law and the regulation of take-overs. In many cases the rights of minority shareholders were very poorly protected indeed. Poor disclosure and audit procedures only made the situation worse by preventing early warning of the deteriorating financial conditions of corporations. weak corporate governance has been blamed for the delay in restructuring after privatization. what crisis countries all had in common was distorted governance structures that led to inefficient economic decision-making. Russia and elsewhere have demonstrated this beyond question. ambiguous property rights and an inadequate regulatory and institutional framework resulted in unchecked control by corporate insiders and opaque ownership and control structures. in turn.
These values also link corporate governance to other important elements of governance in a broader sense: the battle against bribery and corruption. The Principles identify those core values or principles that we feel hold true in all countries – principles that underpin the development of a strong governance framework which. The OECD Principles cover five main areas: the rights of shareholders and their protection. and the responsibilities of the board towards the company. Prof. responsibility. They are designed to leave adequate flexibility for implementation according to specific circumstances. shareholders and other stakeholders. investors. the equitable treatment of all categories of shareholders. in turn. cultures and traditions in different countries. transparency and accountability. public sector governance. unfortunately. If companies are to attract and retain long-term capital from a large pool of investors.Corporate Governance [TY-BFM (Sem-6)] IMPATIENT CAPITAL For Private Circulation only One of the implications of the communications revolution and the increasingly integrated global economy is that. by far the most investment in almost all countries comes from home-grown sources. It should not be surprising that studies have shown that countries with weaker investor protection tend to have smaller. it is true that they often sound the initial warning. listing requirements and codes of conduct. the role of employees and other stakeholders. they need credible and recognizable corporate governance arrangements. investors will not hesitate to take their money around the globe. capital is rarely “patient”. The Principles are non-binding. Yes. Strengthening domestic confidence in a country’s own corporations and stock markets matters greatly to the long-term competitiveness of businesses and to the overall health and vitality of national economies. The results represent a collective view of the most important core elements of a good corporate governance framework. supports the development of a sound capital market. In their constant search for investment opportunities. It is in the context of growing awareness of the importance of good corporate governance that the OECD has developed a set of Principles of Corporate Governance. and regulatory reform. timely disclosure and transparency of corporate structures and operations. They also provide guidance for stock exchanges. Of course. However. the Principles can be summarized in terms of four values. private corporations and national commissions on corporate governance as they elaborate best practices. less liquid. Abdul Kadir Khan Page 27 . Companies and governments have to respond. They are intended to serve as a reference point for governments as they review and refine their frameworks for corporate governance. To get to the heart of the matter. capital markets. corporate responsibility and ethics. governance is not simply an issue relevant to foreign investors. These are equitable treatment.
which is basically the CIS countries – except Russia – plus Mongolia and Africa. Prof. which set new or enhanced standards for all U. 2002. It is named after sponsors U.S. Sarbanes Oxley Act. Now that the Principles have been completed. and with the participation of the IMF. The Principles of Corporate Governance can help in the process too. but if adhered to. They might not be able to prevent shocks from occurring completely. dialogue and ultimately change. The OECD’s main responsibility within the context of this co-operative effort is to organize a set of regional corporate governance roundtables. it is important that the momentum for reform of corporate governance regimes be maintained. public company boards. While it is encouraging to see emerging economies rebound from the traumatic financial crises of the last several years. Senator Paul Sarbanes and U. Latin America. 2002 Corporate America has been blotted with many scandals in recent times.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only The pursuit of good governance requires co-ordinated efforts in all of these interconnected areas. 2002). bringing together senior policymakers. and Russia and further roundtables are planned for Eurasia. also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) and commonly called Sarbanes–Oxley. The OECD can work alongside governments. the real work is only just beginning. the main task for the OECD is to encourage a process of examination. Abdul Kadir Khan Page 28 . robust policy. so that nations can reap the full benefits of the globalizing economy.S. Sarbox or SOX. The Sarbanes Oxley Act which codifies certain standards of good governance is meant to prevent these scandals. they could prevent a shock from becoming a crisis. Oxley. We are seeking to promote governance reforms in close cooperation with other international organisations. management and public accounting firms. stock exchanges and other private parties around the world to assist them in their own efforts to strengthen their economies. Sarbanes–Oxley Act of 2002 (enacted July 30. under a joint programme with the World Bank.S. The Act calls for protection to those who have the courage to bring frauds to the attention of those who have to handle frauds. in particular. Roundtables are now in operation for Asia. stability and prosperity will depend on the strengthening of capital markets and the creation of strong corporate governance systems. In the 21st century. regulators and market participants from the region in order to improve their understanding of governance and help them develop reasoned. Representative Michael G. the regional development banks and other bilateral partners. is a United States federal law enacted on July 30. At present.
acting as free moral agents. SOX enhanced corporate transparency: Corporate transparency is measured based on the dispersion and accuracy of analyst earnings forecasts.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron. going global gives the organization to diversify its business risk. Tyco International. It does not apply to privately held companies. improves the position of comparative advantages. To gain the competitive advantage over its competitors MNC’s certainly makes their presence felt across globe and doing so. the risk involved with going global includes credit default risk. or sections. political insecurity. risk of interest rate and inflation variations and above all is the risk of foreign currency fluctuation. Evaluation of Business opportunities and managing risks: Each corporation needs to evaluate the business opportunity and manage the risk so as to compete and stay as leader. shook public confidence in the nation's securities markets. which cost investors billions of dollars when the share prices of affected companies collapsed. These scandals. The force of Globalization Vs Ethical standards: The globalization has taken a giant leap and the international trade and business gave way to globalised world and this has led MNC’s to incorporate global standards and ethical practices in their business so as to make their operations run smoothly. Ethics involves responsibility. There are professional codes of conducts prescribed for each profession. Adelphia. Looking deep in the context. use to make choices to guide their behavior”. MNC’s/TNC’s & Business Ethics. have its advantages and disadvantages. having its operations spread geographically influences the global business markets. 2. The act contains 11 titles. and the Association of Computing Machinery (ACM) etc. accountability and liability. Prof. For example: American Medical Association (AMA). ranging from additional corporate board responsibilities to criminal penalties. Abdul Kadir Khan Page 29 . Although. regulatory risk. “Ethics refers to the principle of right and wrong that individuals. one. two it increases the competitive advantage of the firm. Peregrine Systems and WorldCom. MNCs/TNCs and Business Ethics A multinational corporation (MNC). and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. the one of the most important factor considered for success is the organization’s business ethics. and three. the Association of Information Technology (AITP).
In doing so. it is found that the public sees that the diverse corporation must balance between profits and corporate citizenship. Ethical Business practices: The code of conduct and the ethical practice for the Multinational is very much important to have a competitive advantage and be the leader in their area of specialization. and transparency. Several organizational such as Organizations for Economic cooperation and development (OECD). the international chamber of commerce. These codes of conduct are the criteria for MNC’s to foster business and social interactions around the world.S government controls the illegal practices of bribing the foreign officials to maintain and continuing business in the foreign country. This may conflict the long term strategy of the corporation that had an established objectives and ethical standards of its business. Abdul Kadir Khan Page 30 . Each organization must strive to excel in this so as to be within the business ethical stands and practices . cooperation and better business practices will promote better products for the end customers. Ethical responsibilities are essential on account of appropriative behavior and practices by the corporations. they face with the complexity of changing some of their policies so as to adapt to the local ethical standards. there must be universal bodies that address these issues. This thought has also been accepted by many European communities and is growing exponentially. the wrong doing by big and reputed corporation like Enron. The implementation of global ethic code must be incorporated by the organization into their corporate strategy. The long term view of ethical business practices are quality products. Tyco. the foreign corrupt practices act by the U. as the diversity has increased and will continue to grow – the need is very much required.S. thus influencing the organizations qualifications and competence. services. Arthur Anderson and many like had alarmed the world to adopt for ethical standards and practices. WorldCom. and International labor organization and center for transactional corporation analyses the international code of conducts. To overcome many discrepancies among the ethical issues of nations.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only These professional organizations keep a check on the business practices and take responsibility for the regulations of their profession. Prof. The risk involved with the multinational is that they have to compete more on the basis of ethical standards so as to gain the market share. Corporate Social Responsibility and Business Ethics : There is also an increase need for the corporate social responsibility along with business ethics’. This will not only help the organization to be accepted by the local culture but will be encouraged for its business practices . This will for sure result in more international trade. In early 2000. In U. For example. This is the time for the global economy to have an international code of ethics. The development in the informational technology poses new challenges and the globalization too has its hand .
the lack of effective governance is a major cause of organizational problems. the business. the family. passions. Abdul Kadir Khan Page 31 . after all. are at the heart of any enterprise. and the ownership group (see Figure 1). In terms of globalization where many corporations are diversifying their business beyond geographical constraints – An international code of Conduct must be incorporated within the ethical practices of the host country. It is the responsibility of the corporate managers to inculcate a sense of responsibility and accountability in their business dealing that the society gets productive and fruitful benefits. Governance in Family-Owned Business The governance of a family business is more complicated than for non-family owned companies because of the central role of the family that owns and typically leads the business. Prof. and power. In my two decades of working with family enterprises of all kinds. Personalities. Unit 4 Governance in Family-Owned Business Future of CG in India Professionalism and transparency in family owned business 1. If you are in a family enterprise. family and ownership concerns that can make these systems emotionally charged environments for planning and problem solving. A strong alignment between global ethical practices and company’s ethical standards must be addressed.Corporate Governance [TY-BFM (Sem-6)] Conclusion: For Private Circulation only The business needs to be incorporating ethical behaviors and practices. In family businesses (companies whose ownership is controlled by a single family) and other kinds of family enterprises including family foundations and family investment funds. you need to learn the basics of governance and apply the best practices that exist in family business governance. In these systems individuals must manage issues within and across three overlapping groups: the family. it has been clear that every business able to improve governance reaped lasting benefits. Professional organization and government must have a check on all the business practices so as to reduce the unethical behavior from the corporate . and the ownership group all need governance. the business. But even non-family business leaders can benefit from considering how the problems of a family enterprise and nonfamily business are often the same. The world of family enterprise generates a mixture of business. In a family business.
reconciling these diverse concerns can be terribly difficult. such as: Exclusion and secrecy—keeping some family members or shareholders out of conversations and keeping too many secrets from employees. family shareholders not employed in the business often have different views about the proper level of dividends than do their relative owners who work in the business. owners or family members. Prof. Too often. Figure 1: The "3-circle" model of family business Without belaboring an oft-made point about family business. and policies. paying relatives more than they deserve. Both viewpoints are typically legitimate and must be reconciled in a respectful way to set direction for the enterprise and preserve harmony in the family. the business. distributing more funds from the company than is responsible for the sake of preserving family harmony or maintaining certain individuals' power. family and ownership concerns requires communication and decision making within and across the family. and the ownership groups. family firms employ dysfunctional and short-sighted approaches to handle tensions. Effective governance does not eliminate tensions in family enterprise systems. These methods of addressing business-family-ownership tensions can provide some short-term relief but rarely resolve issues and predictably intensify them. For example. But it can reduce tensions and improve the effectiveness and harmony of these systems by clarifying family-business-ownership needs and managing the conversations needed to agree on goals. Divide and conquer—relying on the support of some allies and excluding others from information and decision making. Abdul Kadir Khan Page 32 . values. To effectively manage business.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only The overlap among the three groups often leads to differing points of view among individuals depending on their location in the three circles. Bribery—hiring relatives who do not deserve jobs.
rights. and ownership issues that confront family firms. But most family enterprise systems can be governed by a few structures. business employees. Family assembly and/or family council. and. Now. business. Governance system structures So far. Figure 2: Basic governance structures of the family business system Prof. The structures I recommend for any family-business-ownership system will vary somewhat based on the size and diversity of the business organization. shown in Figure 2: Top management group. Encouraging family members. Shareholders meeting and/or shareholder council. and responsibilities for all members of the three circles.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only Good governance contributes three fundamental ingredients for family businesses to function well: Clarity on roles. we have established the philosophy underpinning family business governance. One type of governance structure does not fit all family enterprise systems. Regulating appropriate family and owner inclusion in business discussions. let's review the structures in a family business governance system. and diversity of the family. generation. Effective governance requires forums for the examination of the complicated and often emotional family. the size and diversity of the ownership group. Abdul Kadir Khan Page 33 . and owners to act responsibly. Board of directors or board of advisors. and the size.
These board and family council will ideally coordinate their work but they should not overstep into each other's domains. It is quite clear that as ownership of the family business becomes more divided over generations. board composition and the role of the family council need to change. or "the separation of church and state. or family assembly to meet your current needs and to periodically discuss how to update these structures to meet the needs of your changing system.Corporate Governance [TY-BFM (Sem-6)] For Private Circulation only The membership and functions of these governance structures need to evolve as the business. family council. Prof. policy about family employment in the business). A third-generation family may need a family assembly to bring together the twenty-two members of the family annually to learn about and discuss the family business. The relationships among the governance structures is depicted in Figure 3 below: Figure 3: Relationships among governance structures This diagram illustrates the principle of the separate functions of the family council and the board of directors. My advice is to create your board. The board of directors sets policy for the business and may also make recommendations to the family council in matters that concern the business. plus a family council to help set policy for the family. Abdul Kadir Khan Page 34 . informal advisory board rather than a board of directors." The family council sets policy for the family and recommends policy that concerns the family to the board (e.g. family. and ownership groups’ change over time. A first-generation family business may only require (or tolerate) a small.
good governance makes all the difference. Sir Adrian Cadbury’s book “Family Firms and Their Governance” has outlined the following characteristics for family owned firms: Importance. compensation and benefits. promotion and compensation policies must be written and respected. Latin America. Keys to Success. Abdul Kadir Khan Page 35 . they grow faster and live longer. they account for 95% of registered companies in India. 2. family relationships have to be managed in addition to business relationships. Family firms with effective governance practices are more likely to carry out strategic and succession planning.Corporate Governance [TY-BFM (Sem-6)] Please Note: For Private Circulation only For the family-owned business. 3. An effective board concentrating on policy and strategy (outside directors are useful in asking the right questions). 2. independent. Distinctiveness. East Asia and the Middle East. 3. On average. A logical management with clear lines of authority and responsibility. outside directors. 4. Prof. promoting. Recruitment. 1. Logical structure of the firm with clear chain of command and decisionmaking process. picking and promoting the right members of the family. 2. Special requirements to manage growth. A clear and understood structure separating governance of the firm and affairs of the family. Formal structure. providing attractive opportunities to managers from outside the family. if family firms are to manage growth successfully. An effective board with competent. they have to adopt a clear organizational structure which would include: 1. demonstrable even-handedness in training. 1.