SUBJECT:- BECG MODULE:-6

INTRODUCTION
Corporate governance is basically a creation which reinforces the long term supportable value
for the stakeholders through socially driven business process. Corporate governance covers a
wide range of disciplines and it is also known as multidisciplinary field of study. Law,
management, finance, ethics, consulting, economics and accounting. The main function to be
performed by it is to provide the description of the advantages and duty of the shareholders and
organizations. In case if failure (disagreements) occurs due to conflict among members, it is the
authority of corporate governance to bring everyone again together. It also contains the basic
purpose of setting the standards against which the work can be administrated. Good corporate
governance provides the maximization of the value of shareholders ethically, legally and on a
sustainable basis.

In ancient times the theory was given in two contexts, the Anglo American and the continental
European context. Anglo American was known to be as dispersed ownership, short term equity
finance, strong shareholders rights, flexible labor markets and active markets for capital control.
Second is continental European which is known to be as concentrated block holder ownership,
inactive markets for capital control, weak shareholders rights, long term debt financing and rigid
labor markets. No country around the whole world can adopt either fully Anglo American
policies or purely continental European system. To follow the policies of any one of the ancient
system of corporate governance, we should go through from the various factors such as world
presence, globalization, deregulation, competition etc. Which basically decides to what extent
any country should adopt any of the two systems.

The TATA group and Infosys limited were the best illustration of corporate governance in past,
which had ill-famed its reputation in society due to recent issues. The board room issues of high
profile of two large corporate companies in India have evaluated the desire for transparency and
ensuring that the interest of minority of the shareholders should be safeguard. In the case of
Infosys Company limited, the so called founders of that company fall for the values which were
already established and were not considered and followed in a certain remarkable decisions. The
case of TATA company is of basically interrogating or we can say change the decisions of the
erstwhile chairman of the company who carry’s on to be as the controller of the shareholding
trusts, and seems to have a lack of clear board processes to the issues reasonably and
addressment of situations that will consider the reversal of decisions or even criteria of changing
decisions between its economic and social part.

LEGAL FRAMEWORK AND REGULATORY LAWS OF CORPORATE

GOVERNANCE IN INDIA
The concept of corporate governance in India, mainly arrived from the time period of economic
liberalization and also from the de-regularization of business and industries. The development of
corporate laws in India had been marked by the interesting contracts. The securities and
exchange board of India and the ministry of corporate affairs laid on emphasis on each and every
subject of importance by setting up various committees by the industry and by the examination
of the reports and recommendations to the corporate governance.

The years since the time period of liberalization, it had proved the wide ranging of changes in
rules, regulations and laws of driving corporate governance. It is noticeable from the various
regulatory and legal frameworks and also from the committees which were set up for the
corporate performance. Such regulatory frameworks, laws and guidance of the committees are as
provided below:-
1. The corporate affair in India is basically regulated through the companies’ act 1956 and
the companies’ act 2013 and even other allied acts, rules and bill. It also provides or we
can say renders many important services to shareholders and stakeholders. It also plays a
crucial role in protecting the investors. The MCA (ministry of corporate affairs),
government of India performs this crucial task. It also prohibits the adverse competition
through competition act, 2002 and also elevates and sustains competition.
2. The company's law board is a quasi-judicial body which was established under
company’s act 1956. It regulates its own procedures and it also has power to do that.
3. The fraud investigation department: - it is an interdisciplinary organization which
investigates financial serious frauds. It also investigates mainly those investigations,
which involves public interest, and are multidisciplinary in nature and consists many
other factors too.
4. The securities contract regulation act 1956:- it basically refers all types of government
documents (tradable papers), stocks, bonds, shares, debentures and other marketable
instruments or we can say securities issued by the companies. The code and conduct of
stock exchange including its powers and parameters is defined by the securities contract
regulation act 1956.
5. The securities exchange and board of India: - it encourages to the expansion of the
securities in the market. It also even exhibits the unfair and fraudulent trade practices
relating to the securities of market and even also manages the securities market and
related conflicts with it. The main and basic function of securities and exchange board of
India is to secure the interest of investors in securities.
6. The registrar of companies: - it basically serves with the primary objective of registration
of companies and it also ensures that such kind of companies should comply with the
statutory specifications under the act. It basically formed or we can say comes under the
company’s act 1956nsparently. There doesn’t seems to have been an agreed formula at
the top board level for the
7. Enforcement directorate: - It basically falls under the ministry of finance. It is very
specialized investigating agency which helps in the implementation of foreign exchange
and management act (FEMA) and also helps in the elimination of money laundering act
(PMCA). The PMCA is a criminal law, where the empowerment of offices are done in
order to conduct queries to find out the location of attach assets.
SIGNIFICANCE
• The objectives are set through the enhancement of structures which is done when there is
better corporate governance or by the help of a good corporate governance structure. The
means of achieving such objectives are checked properly and the production is basically
monitored.
• The corporate governance also maintains a link between the company's financial
reporting systems with the company’s management.
• It also helps in shaping the future and the growth of capital markets of the economy.
• It makes management creative in order to take innovative and creative decisions which
help in the efficient functioning of the corporation within its legal frame work.
• Safe and sound governance practices also used to make a contribution to the investor's
self confidence in corporations and motivate them to stimulate long term capital.
• Good governance also improves the international reputation of the corporate sector and
also helps to raise the global capital with the help of home companies.
• It also adds to the wealth of the economy and also enhances the effectiveness and the
efficiency of the company .Thus, corporate governance is also known as the instrument
of economic growth.
• Good corporate governance also supplies sufficient and timely disclosure of reporting
requisites, and code of conduct to the companies. Along with this it also helps to avoid
the insider trading. Insider trading refers to when companies used to present material and
price sensitive details to outsiders and also ensures that till this detail is made social, the
insiders and the employees present in the organization abstains from dealing in corporate
securities.
• It also provides good support system to investors by allowing all the corporate accounting
practices clear to them. A corporate enterprise also reveals the financial reporting
structures in order to do that.

PRIME FUNDAMENTALS OF CORPORATE GOVERNANCE

After the major discussions held on the topic of corporate governance, it tends to refer the three
principles raised in the important documents published since 1990:-
• The principles of corporate governance (OECD, 1998 and 2004)
• The Cadbury report (UK, 1992)
• The sarbanes-oxley act (2002)
The Sarbanes - Oxley act is attempts by the legislative asembly of United States in order to
regulate several principles provided in the Cadbury and OECD reports. The OECD and Cadbury
report basically represents the general principles through which the business operates to
guarantee proper good corporate governance. Some of the principles are laid down below
1. The proper role and authority of the board: - The board requires appropriate level and
adequate size of commitment and independence. It also needs applicable skills and
sufficient comprehension to challenge the management performances.
2. Ethical behavior and integrity: - institutions should establish a basic code of conduct for
their executive and director employees those who promotes in the responsible and ethical
 decision making And there should always be one factor present in mind to appointing the
board members and corporate officers that is ' integrity ‘.
3. Equitable and right treatment of the shareholders: - Organizations can provide help to the
shareholders in order to use their indemnity by openly communicating information and
also by the encouragement of shareholders so that they can involve in the general
convocations.
4. The interest of other stakeholders :- institutions should understand and acknowledge that
they do contains legitimate , social , legal , and market driven accountability to non -
shareholder and stakeholders which also includes investors , employees , local
communities , benificiary , suppliers , policy makers and clients.
5. Transparency and disclosure: - There should be proper disclosure of matters to
concerning the organization and should also be balanced and timely in order to ensure
that each and every investors has an access to clear, factual information.

THE NEED AND THE REQUIRMENT OF CORPORATE GOVERNENCE IN INDIA

In this era the rapid pace of globalization had made more need for the emergence of corporate
governance in India. Due to this the national governments and firms requires some fundamental
changes because corporate governance is clearly very effective and beneficiary for the firms and
countries .corporations must have to change the scenario and the way in which they operate .
Even the national government must also maintain and establish the proper institutional code and
conduct for it. Even there are no longer restrictions are made to the activities that are public
listed in the organizations present in advanced industrial economies.

Through the means of high profile corporate scandals and public attention, the board of
corporations and regulatory framework has forced governments to strictly consider the
fundamental issues regarding the corporate governance as an essential element for the public
monetary interest. Eventually the violate and instable experience of the emergence of markets in
recent times have made an observation to the corrupt maladministration and practices in the
international and national systems on public expenditure.

It has been clearly seen that inefficient management practices can leads to various business
collapses and financial crisis around the world .these financial crisis and business collapses have
made the business world to basically think and even to make a pressure upon the importance of
safe and sound perspective of corporate governance practices. It has also been seen that the
investors who invests in the organization are even ready to pay the higher amount of premiums
for those companies who have safe and sound corporate governance structure and practices.
Recently it could be seen that the international or global lenders have understand the importance
of corporate governance practices as on the economic production of the companies and even also
felt that the issues regarding corporate governance bears more significance and Importance while
regarding taking the investment decisions into the account . A safe and sound and an effective
corporate governance practice also provides an edge to the companies to raise funds at low level
cost of capital , prevents any financial collapses and potential to overcome from it , enhances the
standing position in the market and also helps in improving the liquidity position and financial
soundness of a company .

A good corporate governance practice also improves the country’s reputation and image by
preventing the outflow of funds and by increasing the foreign capital flow. It also helps in
increasing the strengthens and competitive power of the capital markets and finally increasing
the chances of more prosperity by reducing and preventing the occurrence of any kind of
financial crisis’ and along with that it also helps in leading of the efficient allocation of resources
. Various professors and by studying at an large extent have recommended that there is no single
model of the corporate governance which could be compatible to each and every country in the
world has constructed on the principles of equality , responsibility , transparency, and
accountability which may be accepted widely and internationally for the corporate governance
structure .The term know as equality could be defined as the equal treatment of stakeholders and
shareholders by the management of a company to prevent the conflicts regarding their interests .
similarly the word transparency can be defined as or can be expressed as providing all the non-
financial information and financial material within a durable time and at low rate cost so that it
could be reliable , accurate and should be valid for the decision making process of a company.
Responsibility word can be related with the compliance of all the rules and regulations which
were drafted under the articles and are in the audit process and operations. On the other hand we
can define the word accountability as laying down the powers of boards so that the board of
directors could answer to the shareholders and stakeholders as regarding a corporate entity
.Hence, to establish the corporate governance framework, various corporations such as
organization for economic cooperation and development and global corporate governance forum,
world bank had been assigned the task to discuss the issue regarding corporate governance. Thus,
a huge number of countries in the developing and developed economy are still in the process for
the reconstruction of their legislation and also reviewing them and even some of them came out
of whole new law, rules and regulations.

A corporation is basically known to be various combinations of stakeholders and shareholders

named as employees, customers, directors, vendor partners, society, government and investors.
In such kind of situation and in the changing scenario, a corporation should be just and equitable
to its shareholders in all the transactions. This is becoming very important in today's pace of
globalization where organizations need to capture and preserve the best human capital and even
to access the global pools of capital market. Unless and until any organization demonstrates and
embraces such kind of ethical conduct, it will not be able to get success in future. Corporations
also needs to acknowledge the it’s growth, and such cooperation will be enhanced by the
adherence of the best governance practices.

Thus, management is required to act as trustees of the shareholders and prevent the asymmetry
assistance between various sections, especially between the owner - managers and the rest of the
shareholders. Effective corporate governance structure needs to be flexible according to market
dynamics, so that it responds and yet it should be unwavering regarding its values and ethics.
FACTORS AFFECTING THE QUALITY OF CORPORATE GOVERNENCE
Corporate governance is an essential factor which influences the long term economic health of
the companies and it resides only in the part of larger economic context in which organizations
operates. The structure depends upon the regulatory and intuitional environment, legal,
awareness and business ethics of the environmental and societal interests of the constituents in
which they operates. The quality of corporate governance mainly depends upon the factors
mentioned below:-
1. Ability of the Board
2. Adequacy of the process
3. Integrity of the management
4. Standard of corporate reporting
5. Involvement of shareholders in the management
6. Commitment level of individual board members

If organizations requires full benefits of the global capital market , benefit by the economies of
scale , capture efficiency gains and attract long term capital the assumption of the corporate
governance standards must be consistent , credible , inspiring and coherent . The amount to
which organizations should observe the basic proposition of a good corporate governance is very
important factor for taking the major investment decisions. The global flow of capital helps to
enable companies in seeking financial help from the larger and bigger pool of investors.

RELATIONSHIP BETWEEN INDIA AND THE SCENARIO OF CORPORATE

GOVERNANCE
In 1991, India eventually established its progress in the direction of welcoming and open
economy. Presently the role of corporate governance has very essential significance towards the
economic condition of our country. From the time of 1991 onwards it was seen that there was a
great trend in the dimension of the stock exchange i.e., aggregate of registered firms was
intensifying consistently. It tends to emphasize more focus on transparency and shareholders
value expansion because if India draws more nations for foreign direct investment, then they
have to pay more focus towards it.

The concept of corporate governance in India established until 1991, only after the period when
liberalization takes place. India was lagging behind. The most important startup was taken by
India to improve the securities and exchange board of India in 1992. Earlier the main motive of
the SEBI was to oversee and systematize stock exchange, but slowly and slowly many
regulations was formed by it. The next big change happened in India was the creation of
confederation of Indian industry (CII) in 1996 .which helps initially to evolve the set of certain
laws rules and regulations towards corporate governance as to begin the act towards it for the
Indian companies . Then afterwards clause 49 came into existence as a part of agreement for the
companies listed on Indian stock exchange because of the two main leading groups Kumar
mangalam Birla and Narayan murthy. As these two committees starts putting the best work
practices on corporate governance. However clause 49 was forced to be amended due to some
scandals done by the companies like Enron, Satyam, and World com etc. And to overcome the
issues that was happened to these organizations to fall down and shatter the economies of their
nation.

Clause 49 of the Indian stock exchange agreement came into existence from 2000 to 2003 .it
accommodates all the set of laws , rules and regulations and even the requirements of minimum
and maximum numbers of liberated directors , different necessary committees , audit committee
rules , board members , and limits etc. . Those firms who were not adapting these principles
mentioned in clause 49 were given financial penalties and were removed from the list.

We can differentiate here the clause 49 and sarbens –oxley act of 2002. The sarbens – oxley act
of 2002 was came into existence for the corporations or companies that are listed in the US stock
exchange. Clause 49 was primarily based on the concept of sarbens- oxley act of 2002. When it
comes to the point of number of directors and responsibilities of management they both are
similar to each other. They even also depict the same rule for the refusal of loan to directors,
regarding insider trading and etc. The main and the basic difference between the two is mainly in
the sarbens –oxeyl law. If fraud or any such kind of activity takes place then the person could be
charges up to 20 years of imprisonment, but when it comes to clause 49 it basically lacks in the
matter. There is no such legislation and condition for it but in case of clause 49 the SEBI has a
right to file a criminal proceeding or punishment for not following the rules and not agreeing
with clause 49 exhibits the company with the list.

Corporate governance paid emphasis not only on corporations but also to the countries in various
ways as well. Unemployment can also be reduced by this as it attracts more and more firms and
also directs to growth. Wealth can be generated by adapting good management practices and by
much better distribution of resources. This is because of the better operational performances. By
the adaption of better corporate governance it also helps in the reduction of financial crisis. As
these financial crises would have been very adverse effects on the company’s economy. If the
corporate governance practices are performed properly, then this will also help to create better
links with the respective stakeholders and shareholders.

Corporate governance has become a major problem for all the countries around the world due to
the fraudulent behavior of the corporations that had caused countries to go through the financial
crisis. The pattern of following this structure is more or less the same. As we can compare also
starting from the Satyam computers limited of India to Enron of the US. Failure in the
performance of companies in a big amount has created a havoc in the corporate industry and also
have cause the economic meltdown in ours. The Indian government felt to promote good
corporate governance practices amongst the country as an intermediate action to reveal the
scandals. Else for the executives of foreign multinational companies understanding corporate
governance issues was also very important to execute their business and trading with India.
Role of Directors in Corporate Governance:-

The new Companies Act, 2013 makes a laudable contribution towards stipulation and elucidation
of the duties and responsibilities of the directors of a company, more so of public limited
companies.[i] It removed the deficiencies of the old Companies Act, 1956 and improves the
growth and prosperity of the corporate world in India. It increased the ambit of director's duties
and responsibilities and explicitly clarifies (for providing a greater certainty to the directors with
regards to their responsibilities and conduct) them and thus, ensures a better corporate
governance and management.

The functioning of the corporate governance is concerned mainly with the Board of Directors.
Directors are appointed by the shareholders, who sets the overall policy for the company and
they appoint some persons to be the managing director/ executive director/ whole time director
by the prior approval of shareholders.

In Indian States Bank Ltd. v Sardar Singh[ii], it was held that the management of the
companies should be in proper hands and hence, the appointment of directors is strictly regulated
by the said Act. The success of the company depends upon the competence of its directors.

The board's chief function is to monitor management on behalf of the shareholders. Thus,
directors and shareholders are influenced by each other and for quality governance, there must be
an interface between them. The directors have to maintain a balance between the conflicting
interests of shareholders, promoters, customers and directors. Therefore, they are the heart and
soul of a company.

Section 2(34) of Indian Companies Act, 2013 defines director as �a person appointed to the
board of a company�.[iii] This definition not only included de jure directors but also de facto
and shadow directors. A director is defined by the role he performs and his duties, rather than by
title. Thus, a director (in the eyes of law) could also be a person who controls the management,
direction, conduct or affairs of the company.

As per the Companies Act, 2013, Section 2(10) �Board of Directors� or �Board�, in relation
to a company, means the collective body of the directors of the company.[iv] A director can be a
full time working director i.e. managing or whole time director. These directors look after the
day to day affairs of the company and are collectively known as �management' directors.

A company also have non-executive directors who attend the board meetings and have no link
with company's daily activities. As per Clause 49 of the listing agreement, there are independent
directors also who are non-executive and they don't have a material relationship with the
company other than sitting in the board. There is another category of directors known as shadow
directors who are not officially appointed as directors but in accordance with whose directions,
the directors of a company are accustomed to act.[v] Thus, directors are the key managerial
persons of the company and plays a crucial role in corporate governance.

The Board of Director- Roles and Responsibilities

The Board of Directors key function is to ensure the company's prosperity whilst meeting the
appropriate interests of the shareholders. However, the authority of the board is subject to the
limitations imposed by the Memorandum of Association, Articles of Association of the company
and the relevant provisions of the Companies Act, 2013.[vi] When it comes to public listed
companies, securities are traded publically and various other provisions like SEBI regulations
and guidelines in the listing agreement deserve consideration.

While private limited companies are closely held and run by the directors. Annual general
meetings in such companies are actually conducted as there are certain directions which can only
be given by a discussion in AGM. Rest day to day affairs of the company are taken care of by the
directors according to the provision of Companies Act, 2013 as it is not possible for AGM to
direct company in every matter.

Let us examine the role and responsibilities of Board of Directors in terms of Companies Act,
2013 and other legal provisions. Company is a legal personality and BOD's are its body and
mind.

The Board of Directors focuses on four key areas:

i. by establishing vision, mission and values;

ii. by setting strategy and structure;
iii. by delegating authority and responsibility to management; and,
iv. by exercising accountability to shareholders and be responsible to relevant stakeholders.
[vii]

As per Section 166 of the Companies Act, 2013 the duties of the director are:

i. They should act in accordance with the Articles of a company.

ii. A director of the company shall act in good faith in order to promote the objects of the
company for the benefits of its members as a whole. It was also held in Bank of Poona
Ltd. v Narayandas that the good faith would require that all the endeavours of the
directors must be directed to the benefit of the company. [viii]

iii. A due and reasonable care, skill and diligence shall be exercised which performing duties
of a director. The Supreme Court in the case of Official Liquidator v. P.A. Tendolkar,
held that a director could be held liable for dereliction of duties if his negligence is of
such character as to enable frauds to be committed and losses thereby incurred by the
company.[ix]

iv. A director should never involve into a situation which directly or indirectly collides with
the interests of the company. In Walchandnagar Industries v Ratan chand, it was held
that the director's other duties would include duty to disclose interest to the company and
 to ensure that his personal interest as an agent of the company do not conflict with
company's principal interest. [x]

v. A director shall not attempt to achieve an undue gain for himself or his relatives and if he
is found guilty of making such undue advantage then he has to pay a sum equal to that
gain to the company. It was held in the case of Guinness plc v. Saunders that director in
question is bound to hand over the benefits , if any, that he might have secured under the
transaction and he cannot ask for set off for any claim that he may have against the
company. [xi]

vi. A director shall not assign his office and any assignment so made is void.]

For better governance, the board should function as follows- the directors must be totally
committed to the company, should meet regularly and steer discussions properly. They
should set up their priorities and then acted upon them. They must have the courage to
look to any deteriorating situation related to stock market, finance and especially moral
issues. They should not exercise the powers for their own or in a fiduciary capacity but
for a proper purpose, for which they are given to them by the shareholders.

The Supreme Court in Eclairs Group Ltd and Glengary Overseas Ltd v JKX specified
that the proper purpose rule is not concerned with excess of power by doing an act which
is beyond the scope of the instrument creating it as a matter of construction or
implication. It is concerned with abuse of power, by doing acts which are within its scope
but done for an improper purpose

The directors must always look for the best interests of the company and should work
honestly and in good faith and if there is a conflict between their own interests and
company's then they must go in favour of the company's interest. The Board has a great
responsibility of recruiting the CEO of the company based on the market reports. They
have to ensure that processes are in place in order to maintain the integrity of the
company and should also look upon the company's compliance with all legal
requirements.

Role of Independent Directors

The revised clause 49 of the listing agreement states that if a company has executive chairman
then the Board requires to have at least 50 percent of independent directors and if a company has
non- executive chairman then the independent directors required are one-third of the board.

An independent director is a non-executive director who maintains integrity, sense of

accountability, tracks various activities of the company from failures to achievements, plans
strategically, degree of commitment and possess sense of devotion. Neither they possess any
financial relationship with the company (except the sitting charges) nor can own shares in the
company.
Some of the most significant duties and functions of independent directors as per Schedule IV of
the Companies Act, 2013 are:

i. Help in bringing an independent and equitable judgement to the board;

ii. Safeguard the interests of all stakeholders, particularly the minority shareholder;
iii. balance the conflicting interest of the stakeholders;
iv. Strive to attend all the meetings of the Board;
v. Report concerns about unethical behaviour, actual or suspected fraud or violation of the
company�s code of conduct or ethics policy.[xiv]

Independent directors plays a major role in improving the corporate credibility of the
company and in risk management. They also play a great role in various committees set
up by the company to ensure good governance. They should makeup at least two-thirds
of the directors in the audit committees of listed companies to oversee the financial
reporting process and disclosure of the company's financial information, ensure
compliance with listing and other legal requirements, disclosure of related party
transactions and qualification in the draft audit report, among other things. [xv]

Independent directors are responsible for formulating business strategies on behalf of the
shareholders and have to make sure that all business activities are compatible with all legal
provisions. These directors have power to challenge the decision of management directors and
this protects the interests of shareholders and other stakeholders also.

Role of Board Committees

The committees are incorporated into the company to improve the corporate governance.

The Board (of the company) shall comprise of following committees:

i. Audit committee:
Section 292A of the Companies Act, 1956 states that every public limited company
(whether listed or unlisted) having a paid-up capital of at least Rs.10 crore should
constitute a committee of the board to be known as Audit Committee.[xvi]

The meetings of this committee should happen at least two to three times a year and
preferably before the date of each Board meeting. The act provides that the Audit
Committee shall consist of a minimum of three directors with independent directors
forming a majority.[xvii] The functions of the Audit committee shall include- the
recommendation for appointment, remuneration and terms of appointment of auditors of
the company; review and monitor of the auditor's independence and performance and
effectiveness of audit process; examination of the financial statement and the auditor's
report thereon; Approval of any subsequent modification of transaction of the company
with related parties; Scrutiny of inter-corporate loans and investments; Valuation of
undertakings or assets of the company, wherever it is necessary; Evaluation of internal
 financial controls and risk management systems; Monitoring the end use of funds raised
through public offers and related matters.[xviii]
ii. The committee can also call for the comments of the auditors about the internal control
systems and the review of the financial statement before the submission to the
Board.[xix] Satyam scandal is one of the biggest example of lacuna in internal auditing
process. The auditors work didn't yield any good result and they signed the financial
statements without any prior examination and hence were held responsible for fraud.

iii. Nomination and Remuneration Committee:

the Objective of this committee is to lay down a framework in relation to the
remuneration and appointment of directors, Key Managerial Personnel and senior
management personnel.[xx] This committee consists of three or more non-executive
directors out of which not less than one-half shall be independent directors.[xxi] The
functions of this committee are- it should identify persons who are qualified to become
directors and recommend their appointment to the Board. [xxii]

It shall formulate the criteria for determining the qualifications of a director and
recommend a policy to the Board regarding the remuneration for directors and other
employees.[xxiii] The committee while formulating the policy for remuneration should
take care that it is reasonable and motivate directors of the quality required to run the
company.[xxiv]

iv. Stakeholders' relationship committee:

This committee shall be constituted if BOD of the company consists of more than one
shareholders, debenture-holders, deposit-holders or any other security holder during the
financial year. The said committee shall consist of a chairperson who shall be the non-
executive director and such other persons as may be decided by the Board.[xxv] The
objective of this committee is to solve the grievances of security holders of a company.
v. As per the SEBI regulations, the committee shall meet at least once in year. The key to a
good governance is to conduct business in such a manner that the stakeholder's rights and
interests are protected and the transparency is maintained to ensure that the trust and
confidence of the stakeholder in the company remains unharmed. Thus, this committee
plays a great role in achieving the objective of good corporate governance.

vi. Structure, Size and Composition of Board of Directors

vii. According to Section 149 of the Companies Act, 2013, every company must have a
minimum number of three directors in case of a public company, two in case of a private
company and one in case of a one-person company; and a maximum of fifteen directors
(the number of maximum directors can be increased by passing a special resolution). The
Central government may prescribe the class of companies who are required to have at
least one women director. Every public listed company shall have at least one-third of the
total number of directors as independent directors. [xxvi]

Under LODR (Listing obligation and disclosure requirement), for listed companies, the
members of the board shall have an optimum combination of executive and non-
 executive directors and at least one women director.[xxvii] At least fifty percent of the
board of directors must be non-executive directors. The size of the board should not be
too small or big as small size allows for real strategic decisions, are more cohesive and
productive and monitor the firm more effectively while larger board results in diverse
experience and viewpoints. They involve high coordination cost and thus less effective in
monitoring.

Diversity in case of large boards includes nationality, gender, technical expertise, academic
qualifications and age. Gender diversity is the relevant aspect of board diversity and companies
should have women in the board. The board would be considered effective by its size,
demographics and diversity.

Powers of Board of Directors

As per Section 179 (1) of the Companies Act:
�the Board of Directors of a company shall be entitled to exercise all such powers, and to do all
such acts and things, as the company is authorised to exercise and do unless barred by the
restriction on their power by the memorandum or articles or by the provisions of the Companies
Act.� [xxviii]

It is not in dispute that directors while exercising their powers do not act as agents for the
majority of the members, so the resolution passed by the majority of members cannot supersede
director's power.

The powers of management are confined with the directors and they alone can exercise these
powers. The only way to overrule the BOD's of a company is by altering the articles of
association and refusing to re-elect the directors, whose actions they disapprove.[xxix] The
shareholders also can't take away the powers which are granted to them by the Articles.

Thus, the relationship between Board of Directors and the shareholders is not of subordination
but more of a federation. The powers granted to directors includes the right to ask the
shareholders if money is unpaid on their share, power to issue debentures, power to invest the
funds of the company, to grant loans or provide security in respect of loans, to approve financial
statement, amalgamations and mergers, to diversify the business of the company and the power
to authorize buy back.[xxx] Although, the directors can delegate these powers (by a resolution
passed at the meeting) to any committee of directors but still the principal powers vests with the
Board of directors themselves.

Apart from this, BoD has powers to fill up casual vacancies in the office of directors (Section
161), power to constitute audit committee (Section 177), to make donation to political parties
(Section 182), power to accord sanctions for specified contracts (Section 459), power to receive
notice of disclosure of director's interest (Section 184), power to appoint or employ a person as
Managing Director or Manager (Section 152 (2)), power to make a declaration of solvency,
where it is proposed to wind up the company voluntarily (305), power to approve the text of
advertising for inviting public deposits (Section 73). Some of the powers can only be exercised
by the resolution passed at the meeting by the consent of directors as per Section 180.

Comparison with a foreign jurisdiction (US)

US is seen to be liberal while deciding the role of the Directors as a brief note whereas India has
a detailed role in respective laws.[xxxi] The primary source of rules and regulations in India is
the Companies Act and SEBI regulations while in the US, it is state corporate laws and federal
securities laws. In the United States, at the federal level, the SEC (Securities and Exchange
Commission) has the power to regulate and enforce the securities act while in India, MCA
(Ministry of Corporate Affairs) is the apex body and SEBI is the statutory body which oversees
corporate governance.

At the state level, there is no statutory body. In the US, state corporation laws are indifferent to
maximum or minimum board size and thus, number of directors vary from one company to
another while in India, every public company shall have minimum of three directors and private
company to have at least two directors.

In the US, the NYSE (New York Stock Exchange) listing standards require that the majority of
the listed company's director to be independent. While in India, as per Companies Act, every
listed company should have at least one-third of the total number of directors as independent
directors. In the US, there are no specific provisions which defines the term of directors while in
India, non-executive directors i.e. independent directors shall not serve for more than 5 years. In
the US, the public companies are required to disclose their board leadership structure whether the
same person serves as the CEO or the head of the board.

In India, companies act along with clause 49 is silent on this. Generally listed companies disclose
their corporate governance structure under board composition section which is a part of annual
report.[xxxii] In the US, there is no quota for women on boards but they promote gender
diversity while in India, a company board must consist of at least one female director.

The US corporate governance has three committees i.e. audit, nominating and compensation. On
the other hand, India has audit, shareholders and remuneration committee. Compensation
committee in US and remuneration committee in India both have similar agendas that is to
monitor the remuneration to the executives of the company. Similar to US (directly derived from
state), India also possess the inherent powers of delegation which is not dependent upon
shareholders. Thus, we can say that, in both countries, the difference is the approach of the
regulators and support of the stakeholders in implementing the same.

Duties and responsibilities of auditors:-

Auditor

Begin your auditor job description with a concise paragraph or list of bulleted items designed to
sell your workplace to applicants. Are you a national institution with worldwide reach and lots of
opportunity for advancement, or a small privately owned firm with strong ties to the local
community? Whatever makes your workplace special should be highlighted near the top of your
job post. This is also a great place to talk about your philosophy toward work-life balance, career
development and advancement, or diversity, equity, and inclusion (DEI).

Auditor Duties and Responsibilities:

• Protects assets by ensuring compliance with internal control procedures and regulations.
• Ensures compliance with established internal control procedures by examining records,
reports, operating practices, and documentation.
• Verifies assets and liabilities by comparing items to documentation.
• Completes audit workpapers by documenting audit tests and findings.
• Appraises adequacy of internal control systems by completing audit questionnaires.
• Maintains internal control systems by updating audit programs and questionnaires, and
recommending new policies and procedures.
• Communicates audit findings by preparing a final report and discussing findings with
auditees.
• Complies with federal, state, and local security legal requirements by studying existing
and new security legislation, enforcing adherence to requirements, and advising
management on needed actions.
• Prepares special audit and control reports by collecting, analyzing, and summarizing
operating information and trends.
• Maintains professional and technical knowledge by attending educational workshops,
reviewing professional publications and content, and participating in professional
societies.

In this section you should aim to sell the position to potential applicants, just like the first section
of your auditor job description sold candidates on your workplace. Highlight the salary range and
benefits. To ensure that the salary range you mention is in line with similar salaries for auditors
in your region, use a salary tool that allows you to input job title and location.

Auditor Job Qualifications and Skills: In this section of your auditor job description, you
should use a bullet list to articulate the required and preferred qualifications you are seeking in
an ideal candidate. Since some candidates will apply only if they meet all the requirements, be
sure to differentiate between “required” and “preferred” qualifications. Whether you use one list
or two, begin with the most important skills you are seeking first, as illustrated below:

• Auditing and general accounting practices

• Knowledge of Statement of Financial Accounting Standards (SFAS)
• Legal compliance
• Integrity
• Documentation skills
 • Attention to detail
• Reporting research results
• Thoroughness
• Understanding of applicable accounting and banking laws
• Presentation skills
• Financial software
• Corporate finance
• Objectivity

Education, Experience, & Licensing Requirements:

• Bachelor’s degree in accounting or finance, certified public accountant (CPA) preferred

• Previous experience in finance or accounting in a similar setting or sector

Your auditor job description should finish strong with a call to action (CTA) that urges
applicants to fill out an online application and/or send a resume and cover letter to a designated
recruiter.

Corporate governance in developing and transiting Economies:-

INSIDER control is making it difficult for many companies in transition economies to get
management oversight and financing. This article draws on Japan’s experience with the role
of banks in corporate governance.

During the initial phase of transforming the socialist planned economies, people optimistically
assumed that the transition to a market economy could be readily achieved by privatizing state-
owned enterprises (SOEs) combined with introducing an equity market. The latter would serve
as the market for corporate control, that is, as an instrument for corporate governance and, hence,
as an effective mechanism for raising the external finance much needed by privatized enterprises
for their restructuring projects. However, the privatization process has resulted in strong insider
control—by managers in some cases, and by managers and workers in others. Insider control has
virtually blocked the development of an equity market. Managers (and employees) are often
conservative shareholders, reluctant to sell their shares for fear of losing control. On the other
hand, industrial shares in insider-controlled enterprises are no longer attractive to potential
investors because of low dividends and the virtual impossibility of obtaining large blocks of
shares. Hence, the equity market tends to be thin and incapable of providing adequate finance for
enterprise restructuring.

The cash-starved transition economies need, therefore, to develop a workable system of

corporate governance. The experience of Japan immediately after World War II was to use banks
to monitor enterprise performance in transition in a way compatible with insider control. The
history and socioeconomic conditions of Japan and the postwar international environment are
indeed different from those faced today by the transition economies, but the problems that gave
rise to the development of a “control-oriented” banking system are similar: insider control and
the need for large amounts of external financing, while the capital market was underdeveloped.
Insider control
Insider control varies in scope and degree across transition countries, depending on the
independence of the privatization agency from interest groups, management autonomy, and
workers’ power at the time of the fall of the central planning authority. It can be either a de facto
or a de jure capture of the corporate decision making process. In privatized companies, insiders
often hold a substantial block of the share capital. In enterprises still owned by the state, strategic
decision making may reflect insiders’ interests—for example, higher revenues from improved
productivity might be disbursed internally, perhaps as wage increases.

The range of possibilities is illustrated by experiences in different countries. At one end of the
spectrum are Poland and Russia. Even before the fall of socialism, Polish workers’ councils had
attained a position analogous to that of corporate boards of directors in the West. Once transition
began, workers moved quickly to capture control of enterprise assets through liquidation of old
state enterprises and a shift of assets to new enterprises created for the purpose of maintaining
control. Russia, where directors of state enterprises seized control after the planning apparatus
was dismantled, has succeeded in corporatizing and privatizing a majority of its large- and
medium-sized enterprises because the privatization agency has accommodated insiders’
interests—the scheme provided for majority shareholding by managers and workers, whose
support was needed for rapid privatization. Russia lags behind some of the other transition
economies in privatizing small enterprises (Table 1).
At the other end of the spectrum is eastern Germany, where privatization was undertaken by the
centralized privatization authority, the Treuhandanstaldt (THA). Because of its mandate to
complete privatization by the end of 1994, THA was not susceptible to the influence of insiders.
State enterprises have been privatized mostly through the acquisition of assets by companies in
western Germany.

In the middle are the Czech Republic and Hungary. In both countries, insiders were weaker
before the collapse of communism, and the state had less political power during transition than in
the other former centrally planned economies. More than 50 percent of the Czech Republic’s
large and medium-sized enterprises have been privatized through a voucher scheme, but insiders
have not received preferential treatment. Although proposals for “privatization” projects can be
initiated by anyone, including managers, the Ministry of Privatization has the sole authority to
select projects. The tendency toward insider control has thus been curbed.

In 1984, Hungary introduced a self-management system similar to Poland’s, but giving more
authority to managers than to workers. The Government adopted a decentralized scheme that
gave enterprise councils the authority to privatize, subject to approval by the State Property
Agency. In contrast with the Czech approach, this scheme seems to have made it easier for
managers to retain control and fend off “outsider” intervention. Privatized enterprises tend to be
owned by other enterprises, banks, and the state; thus, corporate groups similar to
Japan’s keiretsu may emerge. Fewer large enterprises have been privatized than in Russia or the
Czech Republic, but all small enterprises have been privatized.

Bank-oriented systems
Initial attempts by transition economies to develop equity markets capable of providing external
financing and corporate governance to companies have failed. Because capital markets in these
countries are still shallow, they may not reflect the true value of shares. Because of emergent
insider control, they have not provided effective corporate monitoring through the threat of
takeovers. Thus, strengthening the banking system may be considered an option for the transition
economies. However, banks are unlikely to provide the medium- or long-term financing required
for restructuring enterprises unless they can gain reasonable control over enterprises, not to
mention the fact that most of the banking institutions in transition countries themselves face
serious financial difficulties. To ensure their own viability, banks providing long-term financing
to enterprises will need to perform certain monitoring functions—enterprise and project
appraisal, supervision of day-to-day operations, and corporate restructuring or management
changes in the event of financial distress. If banks were their major source of external financing,
enterprises in difficulty might be forced to submit to banking control, although management may
retain insider control when operations are technically and financially viable.

A distinction can be made between two types of banking systems: arm’s-length and control-
oriented. Arm’s-length banking, typical of the United States and the United Kingdom, is
“corporate governance by objective.” Banks do not interfere directly with strategic decisions as
long as they are paid according to contract and do not need to monitor enterprises because their
loans are backed by collateral or security, including the enterprises’ physical assets. This kind of
banking faces two obstacles in transition economies. First, because of ill-defined property rights
and the lack of legal machinery to enforce contracts, a market for enterprises’ physical assets is
unlikely to exist. Second, and more important for the banks, is the question of moral hazard—
enterprises may not provide full information on the risks involved, or may be unwilling to repay
loans, or both. Furthermore, the sums needed for restructuring may be quite large, and
enterprises are not able to raise them in the capital markets..

Since mere reliance on collateral or security to ensure repayment of loans is not possible, the
banks would provide investment finance only on certain strict conditions. These would include
some control over management, particularly in the event of poor performance. To ensure their
own viability, the banks would have to perform certain monitoring functions: ex ante (enterprise
and project appraisal), interim (supervision of actual functioning), and ex post (restructuring or
change in management in the event of poor performance). The banking system may thus evolve
toward a control-oriented system often described as “corporate governance by intervention”—a
system somewhat similar to the German-Japanese model.

The enterprises might cooperate as they have no alternative source of financing for restructuring,
essential for improved profitability. Furthermore, insider control would not be challenged as long
as they are financially viable, for banks would intervene only in the event of financial distress.
Mutual trust may be enhanced for two other reasons. First, if an enterprise were assured of a
long-term relationship with a bank prepared to share some risk in the event of temporary
financial distress or liquidity constraints, the enterprise would have an incentive to provide
information. Second, the assurance of adequate financing could provide the enterprise with an
additional incentive not to cheat or mislead the bank.

Banks, which have an incentive to expand business, particularly with reliable borrowers, may
agree to a long-term relationship if they are satisfied that enterprise management is trustworthy.
They may be willing to share some risk with enterprises if they are assured of participation in
enterprise governance and the right to make changes to management or undertake financial or
technical restructuring when necessary.

The manner in which the performance of the banks in Japan was improved after the war may
have some relevance for the transition economies. The banks were forced to give loans to
munitions industries during the war when Japan had a command economy on the basis of
government guarantees. After the war, the government repudiated these guarantees and they
created a serious bad debt problem for the banks. To tackle this, the balance sheet of the banks
was divided into old and new accounts. The assets of the new accounts include cash and
government bonds, and the liabilities included tax liabilities and a limited amount of deposits,
which were protected from write-offs. The assets of the old accounts included all government-
guaranteed loans, and the liabilities included unprotected deposits and capital. The banks were
allowed to continue their business using the new account, while the losses due to the repudiation
were financed by canceling the liabilities and reducing the capital in the old account. The capital
was subsequently replenished by issuing new shares, which were purchased mostly by
enterprises.

This capital restructuring of the banks enabled the banks to function on sound lines and, later on,
made it possible for them to participate actively in the financial/technical restructuring of loss-
making enterprises. Such participation improved the monitoring expertise and skills of the banks
and thus made it possible for them to provide medium-and long-term finance to enterprises on
the basis of ex ante, interim, and ex post monitoring—involving corporate governance through
intervention in the event of poor performance. Capital markets were underdeveloped and
managers controlled the enterprises (insider control)—a situation similar to the transition
economies. Hence the role of banks.

Banking systems improve

Banks in the transition economies have yet to develop the requisite financial expertise or
monitoring capacity to function as lead banks in loan syndications. Capital-asset ratios remain
weak. And, although the bad-debt problem is improving, it could recur in Hungary and Russia if
the directed credit system is not properly monitored. Despite these and other problems, such as
weak implementation of regulatory standards by central banks, there are indications that in some
countries—for example, the Czech Republic, Poland, and Russia—the banking system is
improving (Table 1). Surveys carried out in 1993 show that the environment in which banks are
operating and the behavior of banks in the Czech Republic, Hungary, and Poland have changed
more than is commonly believed; banks have become more prudent in lending and more profit-
oriented. Surveys by The Russian Economic Barometer in 1994 show similar trends, as well as
competition for deposits and viable borrowers, and less interest in allocating directed centralized
credits.
By 1994, Polish banks had eliminated 80 percent of their nonperforming loans by restructuring
the debts of potentially viable enterprises; the balance has been dealt with by initiating
bankruptcy proceedings or auctioning off the assets of the nonviable enterprises. In the process,
banks have acquired expertise in appraising the soundness of enterprises and monitoring their
performance. Three large Polish banks have already been privatized and, under a World Bank
program, the regulatory and supervisory capacity of the central bank is being strengthened, and
the management capacity and technical skills of banks are being built up through twinning
arrangements between Polish and European commercial banks.

The Czech Republic’s five largest banks have been privatized, and banks have cross-ownership.
They have also acquired substantial shareholdings in privatized state enterprises through bank-
owned funds.

In Russia, some large banks—for example, International Moscow Bank, Tokobank, and
Mosbizinesbank—provide medium-term financing in hard currency to enterprises on strict
conditions. Bank representatives sit on the boards of directors of borrowing enterprises. These
banks have the potential to perform corporate governance functions as well as to arrange
syndicated loans. Enterprises are likely to agree to such governance as long as they obtain the
financing and foreign exchange needed to import equipment and technology. The ownership
structure of 700 former state banks has changed: 75 percent of bank shares are held by the
private sector. The new private banks—more than 1,300 at the end of 1993—are 65 percent
owned by new private enterprises . The biggest banks are competing for household and
enterprise deposits .