Corporate Governance

Corporate Governance is a system of structuring, operating and controlling a company

with a view to achieving long term strategic goals to satisfy it's shareholders, creditors,
employees, customers and suppliers.
It sets a framework of effective accountibility to the stakeholders.
Therefore, a good governance demands that a company must have a responsibility to
set exemplary standards of ethical behaviour both within the organization and in their
external relationships by virtue of which the company can achieve *value addition* in
terms of stability and growth, confidence, reduction of perceived risks, reduction of cost
of capital, stability and long term sustainance of stakeholder's relationship, position of
pride and exemplary governance credentials.

Benefits of Corporate Governance

(1) Good Governance ensures corporate success and economic growth.
(2) Strong Corporate Governance maintains investors confidence, as a result of which
Company can raise capital effectively and efficiently.
(3) It lowers the capital cost or the cost of capital
(4) There is a positive impact on the share prices.
(5) It provides proper inducement to the Owners as well as Managers to achieve
objectives that are in interest of the share holders and the organization.
(6) Good Corporate Governance also minimizes wastages, corruptions, risks and
mismanagement.
(7) It helps in brand formation and development.
(8) It ensures organization is managed in a manner that fits the best interest of all.

The SEBI's core of conduct of Corporate Governance

To promote good Corporate Governance SEBI constituted a committee on Corporate
Governance under the Chairmanship of Kumar Manglam Birla.
On the basis of recommendations of this committee SEBI issued certain guidelines on
Corporate Governance, which are required to be incorporated in the listing agreement
between the Company and the Stock Exchange and overview of SEBI guidelines on
Corporate Governance are given under appropriate heads.
(A) Board of Directors

The Board of Directors of the Company shall have an optimum combination of

executive and non executive directors.
The number of independent directors would depend on whether the Chairman is
executive or non executive.
In case of non executive Chairman atleast one third of the board should comprise of
independent director.
Incase of an executive Chairman atleast half of the board should comprise of
independent director.
The expression independent director means directors who apart from receiving
director's remuneration do not have any other material pecuniary(monetary related)
relationship within the company.

Audit Committee
(1) The company shall form an independent audit committee whose constitutions
will be as followed

(a) It shall have minimum three members all being non executive directors with the
majority of them being independent and atleast one director must have financial and
accounting knowledge.
(b) The chairman of the audit committee will be an independent director.
(c) The chairman shall be present at the annual general meeting to answer
shareholders queries.

(2) The Audit Committee shall have powers which should include the following

(a) To investigate any activity within it's terms of reference.

(b) To seek information from any employee.
(c) To obtain legal or other professional advices from outside.
(d) To secure attendance of outsiders with relevant expertise if considered necessary.
(3) *The role of audit committee should include the following

(a) Overseeing the company's financial reporting process and the disclosure of it's
financial information to ensure that the financial statement is correct, sufficient and
credible.
(b) Recommending the appointment and removal of external auditors.
(c) Reviewing the adequacy of internal audit function the audit committee has the full
right to review.
(d) Discussing with external auditors before the audit commences, the nature and scope
of audit, as well as to have post audit discussions to ascertain any area of concern.
(e) Reviewing the company's financial and risk management policies.

(4) Remuneration of Directors

The following disclosure on remuneration of directors shall be made in section on

Corporate Governance of the annual report

(a) All elements of remuneration package of all the directors, that is, salary, bonus
and pension.
(b) Details of fixed components and performance linked incentives along with
performance criteria.

(5) *Board Procedure

(a) Board meeting shall be held atleast four times a year with a maximum gap of four
months between any two meetings.
(b) A director shall not be a member of more than ten committees or act as chairman
of more than five committees across all companies in which he is a director.
(6) Management

A management discussion and Analysis decision should form as a part of annual report
to the shareholders.

It must contain discussions on following matters

(a) Opportunities and Threats
(b) Segment wise or product wise performance
(c) Risk and concern
(d) Discussion on financial performance with respect to operational performance.
(e) Material development in Human Resource and Industrial Relations front.

(7) Shareholders

Incase of appointment of a new Director or re appointment of a Director, shareholders

must be provided with the following information

(a) A brief resume of the director

(b) Nature of his expertise
(c) Number of companies, in which he or she holds the director ship and membership of
committees of the Board.
(d) * A Board committee under Chairmanship of non executive director shall be formed
to specifically look into the redressing of shareholders and investors complain, like,
transfer of share and non receipt of declared dividend.
(e) This committee has be designated as Shareholders/ Investors Grievance
Committee.

(8) Report on Corporate Governance

(a) There shall be a seperate section on Corporate Governance in the annual report of
the company.

(9) Compliance

(a) The company shall obtain a certificate from the Auditors of the company regarding
the compliance of conditions of Corporate Governance.
This Certificate shall be annexed with Director's report, send to the shareholders and
also to the stock exchange.

Perspective and Important Issues in Corporate Governance

(1) Disclosure, Transperency and Accountability

(2) Value based Corporate Culture

(3) Holistic view

(4) Compliance with law

(5) Corporate Governance and Human Resource Management

(6) Innovation

(7) Necessity of Judicial Reforms

Disclosure Transperency and Accountability are important for good governance, timely
and accurate information should be disclosed on the matters like financial position,
performance, etc.

Transparency is needed in order that government has faith in corporate bodies.

*Transparency is needed towards corporate bodies so that due to tremendous

competition in the market place the consumers having
choices doesn't or don't shift to other corporate bodies.

Value based Corporate Culture, for any organisation to run in an effective way it needs
to have certain ethics, certain values.

Long run business needs to have value based Corporate Governance. It is a good
practice for Corporate Governance. It is a set of beliefs, ethics and principles which are
inviolable.

Holistic attitude is more or less godly it is like a religious attitude which helps in running
the organization.

It is not easy to adapt it, it needs special efforts and once adapted it leads to developing
qualities of mobility, tolerance and empathy.

Those companies which really needs progress must have high ethical values and for
running the business for a long term period, they must abide by and comply with laws of
SEBI, Foreign Exchange Regulations Act FERA, Competition Act 2002, Cyber Law,
Banking law OECD principles, etc.

What is an Agency?

An agent is a person who works for or on behalf of another.

Thus, an employee is an agent of a company.
But agency extends beyond the employee relationship.
Independent contractors are also agents.
Advertising firms, Lawyers and Accountants are agents of their clients.

The CEO of a company is an agent of the BOD of the company.

Thus the agency relationship extends beyond the employee into many different
economic relationships.

The entity_ person or corporation on whose behalf an agent works is called a principal.

Agency theory is the study of incentives provided to agents.

Incentives are an issue because agents need not have the same interest and goals as
the principal.

Employees spent many hours every year browsing the web, emailing friends or playing
computer games while they are supposed to work.

Attorney's hire to defend a corporation in a law suit have an incentive not to settle to
keep the bill flowing (such behaviour would violate the Attorney's ethics requirement)

These are few examples of conflicts in the incentives of the agents and the goals of the
principal.

Agency theory focuses on cost of providing incentives.

Agency theory arises from the distinction between the owners of a company or an
organization designated as * the principals* and the executives hired to manage the
organization called the * agent*.
Agency theory argues that the goal of the agent is different from that of the principals
and they are conflicting.

The assumption is that the principal suffers an agency loss( agent loss) which is a
lesser return on investment because they do not directly manage the company.

Part of the return that they could have had of they were managing the company directly
goes to the agent.

Consequently, agency theory suggests financial rewards that can help incentivize
executives to maximize the profit of the owner.

Function

Purpose of agency theory

The purpose of agency theory is to identify points of conflict among corporate interest
group.

The agency model of Corporate Governance holds that firms are basically units of
conflicts rather than unitary profit seeking machines.

Agency theory is used to understand the relationship between the agents and the
principal.

The different interest of principals and agents may become a source of conflict.

The resulting miscommunication and this agreement may result in various problems
within companies.
Incompatible desires may create a rift between every stake holders and cause
inefficieny and financial losses, this leads to principal agent problem.

Corporate Governance can be used to change the rules under which the agent
operates and restore the principal's interest.

The principal by employing the agent to represent the principal's interest must
overcome a lack of information about the agent's performance of the task.

Agents must have incentives encouraging them to act in union with the principal's
interest.

Agency theory may be used to *design these incentives appropriately by

considering what interest motivates the agent act*.

Incentives encouraging the wrong behaviour must be removed and rules discouraging
moral hazards must be in place.

Understanding the mechanism that creates problem helps business to develop better
corporate policies.

Stewardship Theory

It argues that the managers or executives of a company are stewards of the owners.
And both groups share the common goal.Therefore, as the agency theory would
suggest the Board should not be too controlling.

The Board should play a supportive role by empowering executives and in turn increase
the potential for higher performance.

This theory argues for relationship between boards and executives that involve training,
mentoring and shared decision making.This theory rejects self interest.
Agency theory begins from self interested behaviour and rests on dealing with the cost
associated with seperating ownership from control.

But stewardship theory seeks to include a sense of work, a good reputation, a sense of
well done job, a feeling of satisfaction and altruism.

Stewardship Theory holds that individuals in management position do not primarily

consider themselves as isolated inviduals instead they consider themself part of the
firm.

Shareholder Theory

The Shareholder Theory was originally proposed by Milton Friedman and it states that
the sole responsibility of the business is to increase profit.

It is based on the premise that management are hired as the agent of the shareholders
to run the company for their benifit.

And therefore, they are legally and morally obligated to serve their interest.
This theory is now seen as the historic way of doing business with companies that there
are disadvantages to concentrating solely on the interest of the shareholders.

*A focus on short term strategy and greater risk taking are just two of the inherit
danger in all.

Stakeholder Theory

This theory on the other hand states that a company owes a responsibility to a wider
group of stakeholders other than shareholders.
A stakeholder is defined as any person or group which can effect or be effected by an
business, includes customer, creditors and the wider community and competitors.

Edward Freeman is the original proposal of stakeholder theory and recognised it as a

important element of corporate social responsibility, a concept which recognises the
responsibilities of corporations in the world today, whether they be economic, legal,
ethical or even philanthropic.

Now a days large organisations around the globe claim to have CSR at the center of the
corporate strategy.

Corporate Governance, it's Obligations to Stakeholders

(1) Obligation towards owners or shareholders

In the case of sole proprietorship and partnership concerns, the owners can look after
their interest themselves.

Whereas in the case of a company the directors have the following responsibilities
towards the shareholders,

(a) Reasonable dividend

Shareholders are source of fund for the company, they expect a high rate of dividend
on the money invested by them and also the maximization of the values of their
investment in the company

(b) Protection of Assets

The assets of the company are purchased with the shareholders fund. Therefore, the
company is responsible to safeguard these assets.
(c) Proper information

It is the responsibility of the management to keep the shareholders informed about the
financial position as well as the progress of the company.

(2) Obligation towards Customers

Customer's satisfaction is the ultimate aim of all economic activity.

Obligations are mentioned below

(a) To produce goods of appropriate quality, at the right time, at right place and at
reasonable(competitive) price.

(b) Business should not indulge into unfair practices such as black marketing.

(c) To provide prompt and courteous service to the customers.

(d) To handle customer grievances carefully.

(e) To produce goods and services which meets the needs of the customer, who
belongs to different classes, tastes and with different purchasing power.

(3) Obligations towards Employee

Employee should be treated as a valuable resource and their cooperation should be

achieved for realisation of organisational goals.
The business must fullfill following obligations

(a) Fare wages

(b) Adequate benefits

(c) Good working conditions

(d) Opportunity for growth

(e) Recognition of worker's rights.

(f) Establishing cooperation with employees.

(5) Responsibility towards suppliers

The Business must create healthy relating with supplier the management should deal
with them judicially.

They should be provided with fair terms and conditions with respect to delivery of goods
and payment system.

(6) Obligation towards Government and Society

It is the duty of every business to deal according to laws affecting it , it should not
encourage corruption and black marketing.
Should encourage tax and fair payment.This creates a bridge between the company
and the society through corporate social responsibility.