Introduction to Governance

❖ Corporate Governance: It is a system of Rules, Procedures and Practices by which the

company is Directed and Controlled.
➢ Governance is a set of Rules, Controls, Policies and Resolutions to determine
and regulate a company's Policies and Behaviours.
➢ It is a balancing act to be effective and balance the interests of all stakeholders,
that is - shareholders, senior management, employees, customers, suppliers,
trade unions, government and community.
➢ It covers all aspects of the company management and provides a framework for
achieving goals or objectives of the company within accepted norms in
accordance with regulations and the law.
➢ A corporate governance framework contains all elements to define the
company’s - Structure, Performance and Relationship with the stakeholders. It
comprises - Vision and Mission, Corporate Structure, Plans and Objectives,
Control and Monitoring Mechanisms, Compliance Procedures, Performance
Measurement, Corporate Disclosure and Board of Directors’ responsibilities.

❖ Fundamentals of Corporate Governance:

➢ Accountability
➢ Transparency
➢ Fairness
➢ Responsibility

❖ Domains of Consideration:
➢ Corporate Strategy
➢ Compensation
➢ Risk Management
➢ Ethical Behaviour
➢ Environmental Policy
➢ Regulations and Compliance

❖ Consequence of inadequate Corporate Governance:

➢ Occurs when governance is not applied correctly or is not efficient enough
➢ This will lead companies to experience,
■ Decreased Profitability
■ Reputational Damage
■ Lack of confidence from stakeholders

❖ Corporate Governance importance to investors:

➢ The corporate governance manifesto represents the Integrity, Accountability and
Direction of the company
➢ This builds Trust and Confidence in the investors
➢ Thus, providing financial stability and growth opportunities to the company
❖ The Board of Directors:
➢ Directors are,
■ Elected by Shareholders
■ Appointed by other Board members
➢ Directors have a legal responsibility to represent the shareholders
➢ The Board of Directors has the most important role of Implementing and
Sustaining the company’s Corporate Governance Policies
➢ Key Purpose of Board of Directors,
■ To ensure the company’s prosperity by collectively directing the
company’s affairs, while meeting the appropriate interest of its
shareholders and other relevant stakeholders.
➢ Other Roles of Board of Directors,
■ Drive the business forward
■ Maintain prudent control, ie, being cautious for future
■ Knowledgeable about day to day operations
■ Retain an objective and long term view
■ Respond to short term challenges
■ Take into account broader long term trends
■ Understand local issues
■ Be aware of wider market trends
■ Focus on commercial needs
■ Act responsibly towards employees, stakeholders, society and
environment

Governance of an Enterprise

❖ Building a robust Governance Model

➢ Many companies strengthen their corporate governance structures and
operations.
➢ In absence of good corporate governance, companies experience negative
outcomes and the risks.
➢ Globalization of the businesses now demands requirement of a good corporate
governance to develop confidence in the international business partnerships
➢ Since every company is unique, it requires a Customized Corporate Governance
Model on the basis of,
■ Product or Service
■ Operating Environment
■ Size
■ Corporate Structure
■ Size and Scope of market
■ Strength of brand
➢ In recent years, companies have made an effort to improve their corporate
governance policies and activities to commit to a more resource enhancing
governance. The developments include,
 ■ Stronger governance framework and policies
■ Clearer definition of governance roles and responsibilities
■ Broad level risk committees
■ Appointment of Chief Risk Officer (CRO)

❖ Stakeholder Expectation:
➢ To hold executive boards accountable
➢ Effective Corporate Governance
➢ Active involvement of the Board of Directors
➢ Governance policy and implementation
➢ Active oversight of the Governance of the company

❖ Board of Directors vs Executive Management

Board of Directors Executive Management

Accountable for oversight of governance Responsible for implementing policies

and procedures

Responsible for understanding Responsible for Governance Processes

governance processes and Activities

Responsible for advising management -

Accountable for the results Responsible for Results

➢ Synergy between Board and Management:

■ Good and effective governance structure and operating model
■ Creates synergy and mutual understanding of roles and responsibilities
■ Enables the board and management to organize the governance structure
and implementation mechanisms
■ Converting framework into working governance model
■ Board of directors and senior management work together
■ Evaluate each component of governance framework and steer their
implementation

❖ Risks of having a bad governance model:

➢ Incomplete or Faulty governance structure
➢ Occurrence of inconsistencies, overlaps and gaps in governance mechanism
➢ Eventually, leading to failure to enact governance policies

❖ Drivers to Improve Governance:

➢ Economic Growth
➢ Corporate Size and Complexity
➢ Increased number and complexity of of regulations
➢ High Profile Governance Failures
❖ Regulator and Stakeholder expectations
➢ Increased requirements for robust Corporate Governance
➢ New and substantial expectation of Board of Directors,
■ An expanded governance role
It is responsible for,
● Reviewing corporate strategies
● Shaping corporate culture
● Establishing a spirit of good governance
● Promoting company’s vision, values and beliefs
■ Oversight on the performance of senior management
Oversees senior management’s,
● Collective Ownership and Individual Accountability
FOR
● Regulatory Compliance and Risk Management
■ Responsibility to become involved with business operations
● Board of Directors should be sufficiently engaged in company’s -
Operations, Processes and Risks
● To understand - Risks undertaken by management and How risks
are managed
■ Accountability for all aspects of governance
● The Board is accountable for Decision making authority and other
organizational structural responsibilities like - Operations, Control
and Reporting
● Organizational design understood by all parties - Managers,
Employees and External Stakeholders

❖ Corporate Governance Guidance:

➢ International companies like Deloitte provide guidance for companies in setting
up and operating the most appropriate corporate governance structure
➢ Components of Corporate Governance,
There are four main components -
● Structure
- Corporate structure
- Responsibility Assignment Matrix
- Lines of authority and reporting
- Structure and function of board committees
● Talent and Culture
- Performance management and incentive
- Corporate culture and operating principles
- Leadership development, capacity building and skills development
programmes
● Oversight Responsibilities
- Board oversight and responsibilities of the company’s activities
 - Management accountability and authority
- Oversight and responsibility identified in the responsibility
assignment matrix
● Infrastructure
- Information infrastructure and technology
- Reporting and communicating structures
- Policies and procedures

❖ Process flows, procedures and reporting mechanisms:

➢ Previous four elements of components of corporate governance
➢ These provide corporate governance framework of through,
■ Process Flows
■ Procedures
■ Reporting Mechanisms
➢ Convert framework into working governance structure
➢ Implement governance in job roles and responsibilities

❖ Governance operating model:

➢ Organization of the management of,
■ Operations
■ Finances
■ Risk
■ Reporting
➢ Provides the Board sufficient amount of information to achieve good governance
➢ Management and employees can comply with governance requirements
➢ Defining the governance framework in terms of,
■ Roles
■ Responsibility
■ Lines of Reporting
■ Communication
➢ Bridges the gap between - Governance and Operational Realities
➢ Sustaining governance by creating a feedback loop
➢ Through which, Board and Management can identify and respond to the new
needs of,
■ Business
■ Operational
■ Competition
■ Regulatory

Corporate Governance in India and Western Nations

❖ Origin of J J Irani Report on Corporate Governance - 2005

➢ Government of India consulted the Confederation of Indian Industry (CII)
 ➢ Need for more rigorous requirement for Corporate governance in Indian
companies
➢ Standards in India did not meet international standards

❖ Dr JJ Irani:
➢ Began his career with Tata Steel and later became director of Tata sons under
Ratan Tata
➢ Appointed as Chairman of Expert Committee for new Companies Act in 2004
➢ The committee was charged responsibility of creating new framework for
companies in India
➢ Indian Economy opened up in 1991
➢ Indian companies entered into global markets and were expected to operate
according to international standards
➢ The resulting report, published in 2005, was referred to as the JJ Irani report

❖ Background to the work of Irani Committee:

➢ Irani Committee was briefed to consider specific issues in Corporate Governance
in India
➢ These included
■ Respond to submission by various stakeholders
■ Consider revisions of Companies Act 1956
■ Reduce the size of legislation
■ Remove redundant provisions
■ Ensure easy and unambiguous interpretation
■ Provide greater flexibility in rulemaking to respond to new conditions
■ Protect the interest of stakeholders and investors

❖ Irani Committee Recommendations

➢ Company must notify the authority of its accounting standards early after the
formation of the company
➢ Consolidation of Financial Statements is mandatory
➢ Format of Financial Statements prescribed by the Companies Act
➢ Cash Flow Statement to be included on mandatory basis
➢ Company financial year to end on 31 March
➢ Company to be given option to maintain their books in electronic form
➢ Company accounts to be kept for 7 years
➢ Small companies given some exemptions and the disclosures they provide
➢ Financial statements to be signed by senior company officers, that is,
MD/CEO/CFO/Company Secretary
➢ Dissenting directors must sign the statements including dissent note
➢ Listed companies to display full financial statements on their websites
➢ Circulation of financial statements can be done electronically
➢ Investors to be educated to understand the financial statements
➢ Measures to protect interest of stakeholders and investors
 ■ Including small investors
■ Setting up and enforcing sound corporate governance practices
➢ Increased importance of shareholder democracy so that the total control does not
lie in the hands of the most powerful shareholders
➢ Implementation of measures to ensure that promoters are not able to misuse the
system
➢ No requirement of Government Approvals
■ Prevent time consumption, confusion and complexity
■ Preventing corruption
➢ No distinction for the rules governing Public Financial Institutions
➢ Regulatory measures recommended to deal strictly with the companies that did
not file required documents or submitted incorrect disclosures
■ Random scrutiny of company filings by company registration authorities
■ Heavy penalties for inadequate or incorrect filing of statutory documents
■ Inter agency coordination, so that companies cannot hide illegal or
improper document filing
■ Law amendment to enforce fraudulent parties to surrender illegal financial
gains
➢ More comprehensive definition of roles and responsibilities of directors

❖ Vanishing Companies
➢ Companies which are registered but do not file the required documents
➢ The committee recommended mandatory submission of statutory documents
facilitated through electronic filing, which is of benefit to companies and as well
as to their stakeholders, including investors.

❖ CII conference on Corporate Governance - 2006

➢ The conference briefed Indian industrialists and company directors on new
requirement of Corporate Governance by the Irani Report
➢ It discussed consequences and benefits
➢ Aimed Indian companies to meet global standards

❖ The Companies Act 2013

➢ Taken by Ministry of Corporate Affairs
■ Included Companies Bill of 2009
➢ Changes assisted to bringing company law and corporate governance in India
with more alignment with international practices
➢ Although, some difference remained, which created challenged with international
partnership

❖ Corporate Governance in UK
➢ First version of UK Corporate Governance Code published in 1992 by Cadbury
Committee
➢ It is defined as - The system by which companies are directed and controlled.
Boards of directors are not responsible for governance of their companies. The
shareholders’ role in governance is to appoint the directors and the auditors adn
to satisfy themselves that an appropriate governance structure is in place.
➢ UK corporate environment included,
■ Companies
■ Shareholders
■ Other stakeholders
➢ Substantially evolved since 1992
➢ Corporate governance in UK is responsible for Financial Reporting Council (FRC)
➢ In 2018, FRC published a new Corporate Governance Code, which had the view
that -
■ Companies do not exist in isolation
■ Successful and sustainable business underpin the economy
■ By providing employment and creating prosperity
■ Companies and their directors must build and maintain successful
relationships with wide range of stakeholders, that must be based on
Respect, Trust and Mutual Benefit
■ Company’s culture should -
● Promote integrity and openness
● Value diversity
● Be responsible to shareholders and stakeholders
➢ Foundation of 2018 UK Corporate governance code is
■ Emphasised to value the worth of good corporate governance to achieve
long term sustainable success
■ Companies that follow the detailed provisions and use the associated
guidance to demonstrate through their reporting how the governance of
the company contributes to its long term sustainable success and achieve
wider objectives
➢ 2018 UK Code offered flexibility through the application of its - Principles,
Provisions and Supporting Guidance
➢ 5 Areas of consideration of 2018 Corporate Governance Code,
■ Board Leadership and Company Purpose
● A successful company is led by an effective and entrepreneurial
board, whose role is to promote the long-term sustainable success
of the company, generating value for shareholders and
contributing to wider society.
● The board should establish the company’s purpose, values and
strategy, and satisfy itself that these and its culture are aligned. All
directors must act with integrity, lead by example and promote the
desired culture.
● The board should ensure that the necessary resources are in
place for the company to meet its objectives and measure
performance against them. The board should also establish a
 framework of prudent and effective controls, which enable risk to
be assessed and managed.
● In order for the company to meet its responsibilities to
shareholders and stakeholders, the board should ensure effective
engagement with, and encourage participation from, these parties.
● The board should ensure that workforce policies and practices are
consistent with the company’s values and support its long-term
sustainable success. The workforce should be able to raise any
matters of concern.
■ Divisions of Responsibility
● The chair leads the board and is responsible for its overall
effectiveness in directing the company. They should demonstrate
objective judgement throughout their tenure and promote a culture
of openness and debate. In addition, the chair facilitates
constructive board relations and the effective contribution of all
nonexecutive directors, and ensures that directors receive
accurate, timely and clear information.
● The board should include an appropriate combination of executive
and non-executive directors, such that no one individual or small
group of individuals dominates the board’s decision-making. There
should be a clear division of responsibilities between the
leadership of the board and the executive leadership of the
company’s business.
● Non-executive directors should have sufficient time to meet their
board responsibilities. They should provide constructive challenge,
strategic guidance, offer specialist advice and hold management
to account.
● The board, supported by the company secretary, should ensure
that it has the policies, processes, information, time and resources
it needs in order to function effectively and efficiently.
■ Composition, Succession and Evaluation
● Appointments to the board should be subject to a formal, rigorous
and transparent procedure, and an effective succession plan
should be maintained for board and senior management. Both
appointments and succession plans should be based on merit and
objective criteria and, within this context, should promote diversity
of gender, social and ethnic backgrounds, cognitive and personal
strengths.
● The board and its committees should have a combination of skills,
experience and knowledge. Consideration should be given to the
length of service of the board as a whole and membership
regularly refreshed.
● Annual evaluation of the board should consider its composition,
diversity and how effectively members work together to achieve
 objectives. Individual evaluation should demonstrate whether each
director continues to contribute effectively.
■ Audit, Risk and Internal Control
● The board should establish formal and transparent policies and
procedures to ensure the independence and effectiveness of
internal and external audit functions and satisfy itself on the
integrity of financial and narrative statements.
● The board should present a fair, balanced and understandable
assessment of the company’s position and prospects.
● The board should establish procedures to manage risk, oversee
the internal control framework, and determine the nature and
extent of the principal risks the company is willing to take in order
to achieve its long-term strategic objectives.
■ Remuneration
● Remuneration policies and practices should be designed to
support strategy and promote long-term sustainable success.
Executive remuneration should be aligned to company purpose
and values, and be clearly linked to the successful delivery of the
company’s long-term strategy.
● A formal and transparent procedure for developing policy on
executive remuneration and determining director and senior
management remuneration should be established. No director
should be involved in deciding their own remuneration outcome.
● Directors should exercise independent judgement and discretion
when authorising remuneration outcomes, taking account of
company and individual performance, and wider circumstances.

❖ USA Corporate Governance:

➢ The USA has not adopted a corporate governance code for US companies.
Corporate governance matters are provided at state and federal level to follow
Laws, Regulations and Listing rules.
➢ A body of best practice literature on Corporate Governance has been compiled
with various groups contributing to it like,
■ National Association of Corporate Directors (NACD)
■ Business Roundtable
■ Council of Institutional Investors (CII)
➢ It includes proxy voting policies of,
■ Key institutional investors
■ Proxy Advisory firms
➢ The main forms of corporate entity in the USA are,
■ Corporations
■ Limited Liability Companies
➢ Most large businesses in the USA are corporations trading on,
■ New York Stock Exchange (NYSE)
 ■ Nasdaq Stock Market (Nasdaq)
➢ Corporate governance guidelines and codes of best practice,
■ Companies should focus more on long-term value creation for
shareholders rather than short-term profits
■ Corporate governance practices and structures must be tailored to the
requirements of the company
➢ Quality Score Rating
■ Institutional Shareholder Services (ISS) assign a Quality Score Rating to
companies
■ Indicating a company's relative risk across specified categories including
● Corporate Governance
● Environment
● Social issues
■ Investors can make informed choices on Shareholding and Voting
decisions based on a company’s climate-related practices

Corporate Governance Case Studies

❖ Good Corporate Governance

Good Corporate Governance leads to positive results and broader impact
➢ Sustainable company performance
➢ Good brand image and reputation
➢ Good financial health
➢ Employee satisfaction
➢ Positive contribution to society and environment
➢ Absence of legal threats and regulatory enforcement

❖ Bad Corporate Governance

Bad Corporate Governance leads to negative results and broader impact
➢ Unsustainable company performance
➢ Bad brand image and reputation
➢ Poor financial health and bankruptcy
➢ Poor employee satisfaction
➢ Negative contribution to society and environment
➢ Legal threats and regulatory enforcement

❖ PepsiCo Case Study - Good Corporate Governance

➢ In 2020 the company sought input from investors in 8 strategic areas,
■ Board composition – including diversity
■ Turnover of board members
■ Leadership structure
■ Good governance practices
■ Ethical corporate culture
■ Executive compensation
 ■ Shareholder engagement
➢ Proxy Statement
■ A proxy statement is an official document relating to a company's future
plans which is sent to shareholders before a meeting so that they can
decide whether or not to give someone else the power to vote for them at
the meeting. The proxy statement is an example of good governance as it
facilitates informed decision making by the shareholders.
■ PepsiCo’s Proxy Statement;
● The current leadership structure
● The relationship between performance and executive
compensation

❖ Volkswagen Case Study - Bad Corporate Governance

➢ This included tolerance of bad practice or illegal activities which could have a
serious negative impact on a company by damaging its financial health and
reputation.
➢ The German company Volkswagen had built up a good reputation over many
decades. They were renowned for the quality of their cars and commercial
vehicles. Their reputation was severely damaged in 2015 by a scandal that has
been named “Dieselgate”
➢ Dieselgate;
■ There are strict controls in Europe and North America on the level of toxic
emissions from diesel vehicle engines. Volkswagen had a good reputation
for the emission levels from its engines. However, it became known that
for years Volkswagen had systematically and deliberately falsified the
emission results by manipulating the test equipment to give false or lower
readings than the actual emission caused. Their prices fell by almost 50%
and the sales in the month were followed by a fall of 4.5%
■ Causes of Dieselgate;
Volkswagen’s board structure was the main reason for Dieselgate, which
is a two tier board system;
● Supervisory Board
- The board intended to Monitor management and Approve
corporate decisions
- They locked independence and authority to perform the
same effectively
- An inappropriate structure was made as,
○ 90% shareholder rights were controlled by the
members of the supervisory board.
○ This was done to nullify the role and purpose to
oversee management, employees and standards of
operations.
○ This also included supervision of emission
standards testing procedures
 ● Management Board
■ The tests turned out to be rigged and falsified with no check or balances.
This was continued for many years
➢ Dieselgate uncovered,
■ This was brought to light by a US co-lead of the International Council on
Clean Transportation (ICCT), John German.
■ ICCT began their investigation on Volkswagen in the USA in 2013 by
conducting road condition emission tests on diesel versions of their
manufactured cars.
■ Some of the cars showed lower than expected emissions making it
suspicious that the company might have installed a “Defeating Device”
software to indicate varied emission levels.
➢ Actions against Dieselgate,
■ ICCT gave their observations to California Air Resources Board (CARB)
and Environmental Protection Agency (EPA) to conduct a thorough
investigation
■ In December 2014, EPA announced that Volkswagen was issuing a
software to indicate varied emission levels on their vehicles, to which, an
amendment was made to fix this problem
■ In May 2015, CARB tested some vehicles with the software installed and
the emissions were still very high, to which Volkswagen tried to put up
multiple explanations.
■ In September 2015, Volkswagen finally admitted the installation of defeat
devices on their cars
■ John German’s outcome statement - “This is the part that I find to be
completely inexplicable. Volkswagen had a chance to fix it, and yet they
continued to try and hide the fact they had a defeat device.”
➢ Hence, Bad Corporate Governance leads to bad results like - Poor Oversight,
Consequences of illegal action, which lasts a deteriorated reputation and
financial damage

❖ Enron Case Study - Bad Corporate Governance

➢ At the beginning of the 21st century, fraudulent practices bankrupted high profile
USA companies, including Enron and WorldCom. These fraudulent practices
were the result of poor Corporate Governance.
➢ Conflict of Interest
■ Poor Corporate Governance allowed the board of directors to overlook
many rules related to conflict of interest
■ The Chief Financial Officer (CFO) created independent private
partnerships to conduct business with Enron, which should not have been
permitted with a good governance in such case
➢ Ramification / Consequence / Outcome
 ■ The private partnerships were used to hide Enron’s debts and liabilities.
This created a false and overly high impression in the accounts of Enron’s
profitability. The occurrence of the same was due to,
● Bad Corporate Governance
● Dishonest personnel at the top of the company
● Traders who made illegal moves in the market on the basis of the
false showing of profitability
■ These Scandals led to the establishment of Sarbanes Oxley Act, 2002 to
respond to the public confidence in public companies for how they
operate. This included,
● More stringent record-keeping requirements
● Stiff criminal penalties for violations
● Additional laws for securities

Theoretical Approaches to Corporate Governance

❖ Agency Theory
➢ Agency Theory defines the relationship between the Principals of a company (for
eg, the shareholders), and the Agents (usually the Directors).
➢ The Agents are held accountable to the Principals for their tasks, actions and
responsibilities

❖ Stewardship Theory
➢ In Stewardship Theory, the Steward (company executives) maximise shareholder
wealth through optimising the performance of the company. The Stewards are
motivated through organisational success. Executives have more autonomy or
self governance than in Agency Theory.

❖ Resource Dependency Theory

➢ Resource Dependency Theory defines the role of the directors of a company in
defining, locating and accessing resources needed by the company to fulfil its
objectives. The directors bring their capabilities to the company, including sector
experience, information, skills and access to external resources. They use these
capabilities to optimize resources for the company’s activities.

❖ Stakeholder Theory
➢ Stakeholder Theory expands the responsibilities of company directors and
executives to all key stakeholders, including investors, suppliers, customers,
employees, trade associations, and in some cases government departments.
Executive decisions take into account the interests of all stakeholders.

❖ Transaction Cost Theory

➢ Transaction Cost Theory is based on the principle that costs arise when
someone is engaged to perform any tasks associated with running the company.
 These costs can be internal or external. Transaction cost is the net result of all
internal and external transactions.

❖ Political Theory
➢ Political Theory develops voting support from shareholders, rather than
purchasing voting power. Political influence can drive Corporate Governance
within the organisation.

❖ Dynamical Capability Theory

➢ Dynamical Capability is the capability of an organisation to adapt purposefully to
an organisation’s resource base. Dynamic capability is defined as an
organisation’s ability to integrate, build and reconfigure internal and external
competences to address rapidly changing environments.

Agency Theory

❖ Definition
➢ Agency Theory defines the relationship between the Principals of a company (for
eg, the shareholders), and the Agents (usually the Directors).
➢ The Agents are held accountable to the Principals for their tasks, actions and
responsibilities
➢ Companies act as agents of their shareholders
➢ Shareholders invest in corporate ownership of the company. They entrust the
resources of the company to the management, that is, the directors and
executives of the company. This includes the prudent management of their
investment.
➢ The Agency Theory of Corporate Governance creates a framework for alignment
between the interest of shareholders and the Actions of Agents, that is, Directors
and Executives
➢ There is a divergence of interest between short and long term interests, and, that
of shareholders and agents
➢ This theory is most often the case of large corporations having complexity in
factors, which include,
■ Business structure
■ Specialist knowledge
■ Technology
■ Supply chain
■ Manufacturing processes
■ Service delivery
■ Directors, executives and project managers that have more specialist
knowledge than the shareholders
■ The decisions and actions of the directors and executives which can
diverge from the interests of the shareholders
 ➢ The Agency Theory of Corporate Governance creates rules to define and
establish a legal structure for the relationship between Principal, that is, the
shareholders, and Agents, that is, the Directors and Executives. This is done to
align the actions of the directors with the intentions of the shareholders.
➢ OBJECTIVE
■ Define duties and obligations of the directors and executives (or, the
agents) to the company, which is, Action without self interest
● Action without Self Interest: Directors and executives are expected
to act without self interest. Divergent interests between Principal
and Agent can lead to Miscommunication and Disagreement,
which may lead to - Corporate problems, Discord and further
differences among stakeholders.

❖ The Principal - Agent Problem

➢ The principal-agent problem is a conflict in priorities and agenda between a
person or group and the representative authorised to act on their behalf. This
may result in the Agent’s actions being contrary to the interests of the Principal.
➢ The Principal-Agent problem can occur whenever the owner of an asset
delegates the control to another party or agent. This develops a conflict of
priorities between the owner of the asset and the person to whom the
responsibility and the control is being delegated.
➢ Resolution:
■ The problem can occur in a spectrum of cases. Eg, a lawyer and client;
shareholder and director
■ The risk that the Agent will act in divergence from or against the interests
of the Principal is defined as Agency cost
■ The Principal-Agent problem can be resolved by,
● Changing the system of rewards and penalties
● Making the communication and reporting system more rigorous
➢ Origin:
■ Agency Theory was developed in the 1970s by Jensen and Meckling in
Harvard Business School and University of Rochester.
■ They outlined a theory of ownership structure which was designed to
avoid agency cost.
■ They identified that the cause of agency cost was the separation of
ownership and control.
■ Reason / Process of how separation of ownership and control,
● Principal engages an agent
● Principal delegates control and decision making to agent
● Principal retains ownership of assets and liability for losses
➢ Reason for conflict of interest,
■ Investors require increase in share value and dividends
■ While, the Company directors spend on enhancing equipment and
company facilities
❖ Sources of Agency Costs
➢ Additional costs can arise from rectifying or reversing the consequences of the
actions of the Agent
➢ The Principal may also need to set up financial or other incentives to ensure or
encourage the Agent to act in accordance with the objectives of the Principal

❖ Solutions to Principal Agent problem

➢ The solution to the Principal-Agent problem must be provided by the Principal,
and not the Agent
➢ Corporate policy should be constructed in a way that avoids these conflicts
➢ Corporate policy should be Rigorous and Unambiguous, thereby minimizing the
risk of conflict of interest
➢ The Agent’s contract can include clauses to align the Agent’s incentives with the
Principal’s objectives
➢ The Agent can be required to submit regular reports to the Principal including
clauses that demonstrate alignment with the Principal’s conditions
➢ The Agent’s actions and results can be monitored and reported by an
independent auditor (this will decrease mutual trust between Principal and Agent)
➢ As a last resort, the Agent can be replaced, but the problem may repeat itself
with a new Agent unless adequate procedures are put in place

❖ Elements of Corporate Governance in Principal - Agent relationship

➢ A robust Corporate Governance structure can,
■ Restore the interests of the Principal
■ Create balance and alignment between Principal and Agent
➢ Good Corporate Governance provides the basis for a thorough communication of
information from the Agent

❖ Incentives and Agency Theory

➢ The Agent must be given incentives to act in alignment with the interests of the
Principal
➢ Agency Theory is used to design such incentives by evaluating the motivating
factors for the Agent
➢ Incentives that encourage divergent behaviour are removed
➢ The Corporate Governance of the company must actively discourage or prevent
inappropriate or illegal action and the activities that are contrary to the mission
and objectives of the company

❖ Metrics of Agency Theory

➢ Agency Theory has developed measures to determine the degree of alignment of
the Agent’s activities with the interests of the Principal
➢ Agency Loss is one commonly-used metric
➢ Agency Loss:
 ■ This is the difference between the optimal results for the Principal and the
outcomes of the actions of the Agent
■ Variations of Agency Loss:
● If the Agent performs in alignment with the interests of the
Principal - Agency Loss is zero
● The greater the divergence of the Agent’s actions - The greater is
the Agency Loss
■ Factors influencing Agency Loss:
It can be minimised when
● The interests of the Principal and Agent are aligned
● The Principal is well-informed of the service provided by the Agent
● The Principal has a good understanding of the Agent’s actions
● Principal and Agent desire the same outcome

Stewardship Theory

❖ Definition
➢ In Stewardship Theory, the Steward (company executives) maximise shareholder
wealth through optimising the performance of the company. The Stewards are
motivated through organisational success. Executives have more autonomy than
in Agency Theory.
➢ Company executives protect the interests of the owners or shareholders and they
make decisions on their behalf
➢ An executive board is under one Chief Executive which usually consists mainly of
in-house members to facilitate decision making based on,
■ Detailed understanding of the company’s operations, and
■ Profound commitment to corporate success

❖ Main Objective
➢ Shareholder satisfaction
➢ Define clear leadership to,
■ Avoid confusion and ambiguity, and
■ Create clear leadership for challenging situations

❖ One voice of the Company

➢ The Chief Executive is appointed as the single leader of the company which
creates a well defined single channel for two way communication between,
■ Business operations to the shareholders, and
■ Shareholders’ objectives to the business
 Agency Theory Stakeholder Theory Stewardship Theory

Focuses on control. Seeks to represent the In this approach, the steward

interests of all parties, optimises the performance of
including shareholders, the company to maximise
executives, employees, shareholder wealth
suppliers, business partners

The roles of Chairman and No party has more

CEO are separate. importance than another

The board of directors has

mainly independent
members. They monitor
management to identify
problems.

Parameter Stewardship Theory Agency Theory

Role of Directors Steward Agent

Interests of Owner Converge May diverge

and Directors

Conceptual basis Organisational dynamics Economics

Evaluation of Development of the company and Shareholder value

performance shareholder value

Owner-Director Alignment of goals and objectives Minimise conflict of interest and

relationship goals

Director stimulus Internally-driven Externally-driven

for action

Director motivation Aligned with Owner’s objectives Divergent from Owner’s objectives

Management Empower and facilitate Monitor and control

structure

Basis of Trust Control

Owner-Director
relationship
 Shareholder vs Stakeholder Theory

Shareholder Stakeholder

is a part owner of a company has interest in the performance and success

of the company

Through ownership of shares For reasons distinct from ownership of shares

The level of ownership is determined by the -

number / proportion of shares held

Shareholders are always stakeholders Stakeholders are not always shareholders

Shareholders have partial ownership in the Stakeholders have an intrinsic interest in the
company and are primarily interested in ROI success of the company

Shareholders may have only a short term Stakeholders may have a longer term interest
interest in the company. They can choose to in the company. Their livelihood and income
sell their shares and buy elsewhere, unless depend on the success of the company.
the shareholder is an executive or
non-executive director in the company, or has
another interest in the longer term success of
the company.

❖ Shareholder
➢ A person or an institution that owns stock in private or a public company.
➢ Rights and Activities,
■ Buy and sell shares
■ Attend shareholder meetings
■ Nominate directors
■ Vote on nominations for the board
■ Receive dividends
■ Receive company reports
■ Vote on relevant company policies
■ Vote on mergers and acquisitions
➢ Motivation of shareholders,
■ The main motivation of shareholders is the profitability of the company
reflected in the value of their shares
■ Shareholders will maximise the value of their interest and buy and sell
shares accordingly
■ They may sell shares in the company and buy shares in a competing
company
■ They can be an owner of the company regardless of having the
company’s interest as a priority
❖ Stakeholder
➢ Individual, Group, Organisation or Section of the community with an interest in
the performance and activities of the company, who may be impacted by the
success or failure of the company.
➢ Stakeholders can be,
■ Senior management
■ Project leaders and team members
■ Suppliers
■ Customers
■ Subcontractors
■ Consultants
■ Community groups
■ Government
■ Trade organisations
■ Trade Unions
➢ Types of Stakeholders,
■ Internal Stakeholders
● Owners
● Directors
● Executives
● Employees
■ External Stakeholders
● Suppliers and contractors
● Vendors
● Logistics companies
● Customers Clients
● Communities
● Trade unions
● Government
● Trade bodies

❖ Contrasting System of USA

➢ Countries vary in their approach to the shareholder / stakeholder balance.
➢ In the United States there is predominant focus on the shareholders.
➢ Company profitability is the main determinant of business performance
➢ Executive performance is evaluated in terms of market based rewards and
penalties, and Senior executive remuneration is linked to profitability.
➢ Management may opt to reduce the workforce to sustain profitability
➢ Employees tend to not trust their employers as their jobs are at risk
➢ This model also applies to varying degrees in - UK, Canada, Australia

❖ Contrasting System of Japan and Germany

➢ Other stakeholders are given more importance, including employees
 ➢ Job security is a major corporate objective. Eg - The company Canon has never
laid off employees
➢ Employees are considered influential stakeholders
➢ They are included in co-determination systems of governance
➢ Employees hold a small percentage of the company’s shares
➢ Executive compensation is less focused on profitability compared to the USA

❖ Internal Comparisons
➢ Corporate Governance is determined by the following elements,
■ Shareholders
■ Other stakeholders
■ Employees
■ Senior management
■ Accountability
■ Trade Unions
■ Legal system
■ Relationship between Chairperson and CEO

❖ Predominant Governance Structures

➢ Shareholder centred - Outsider view
■ Transactions and their value are given prominence
■ Strength and weaknesses of Capital and Labour market are used to
determine the optimum allocation of resources
■ These parameters are used to calculate and drive best performance
■ Isolated from the day to day realities in the company
■ Incentives and External Control Systems are deployed to control
company performance and align the directors’ interest
■ Outsider Model recognizes
● Directors and executives have opportunistic motivation
● Divergence between goals of shareholders and management
● External control systems to monitor and impose constraints on the
directors and executives
■ Control Mechanism
● To ensure alignment of the management’s actions with the
company’s objectives including,
- Board of directors including non executive directors
- Legally binding contracts
- Union representation
■ Incentives
● Managers can be given incentives to make them more
accountable and to align their actions with the objectives of the
company.
● Executive Compensation is provided as performance based
bonuses and stock options for performance based dismissal.
 ● These measures create externally verifiable control mechanisms
for the management and board of directors
➢ Stockholder centered - Insider View
■ Procedures are defined by - Formal rules and Informal rules
■ Developed over a period of time of the company’s activities
■ Characteristics,
● Debt - Equity ratio is higher
● Lower levels of staff turnover
● Lower levels of layoffs
● Stronger worker displacement policies
● Higher levels of firm specific training for employees
● Higher employee firm fit
● Higher internal knowledge sharing
● Higher joint organizational learning

Stakeholder Theory and Corporate Social Responsibility

❖ Stakeholder approach to CSR

➢ The stakeholder approach assumes responsibility for - Employees, Supply chain,
Customers and Community
➢ The stakeholder approach has a long term view, in contrast to the shareholder
approach
➢ Including External Parties
■ In the stakeholder approach, the owners and executives include external
parties in their strategies and objectives for the company, and in the
company’s Corporate Governance. This creates a link between Corporate
Governance and CSR.
➢ The stakeholder approach links Corporate Social Responsibility to the company’s
Mission, Goals and Objectives.

❖ CSR Functions in Board of a Company

➢ Enhances stakeholder engagement to improve the company’s performance
➢ Strengthens corporate brand image to contribute to the community development

❖ CSR and Corporate Governance

➢ CSR has a long history in India with prominent Indian companies introduced to
social responsibility measures long before it became a requirement.
➢ Companies like - Tata and Godrej were some of them.

❖ CSR’s Benefits
➢ Improved resolution of employee grievances
➢ Increased participation of external stakeholders in meetings
➢ More long-term partnerships
➢ Improved financial performance (Return on Equity)
 Dynamic Capability Theory

❖ Definition
➢ Dynamic capability is the firm’s ability to integrate, build, and reconfigure internal
and external competences to address rapidly changing environments Corporate
Governance.
➢ It is the ability to react effectively to external changes requires multiple
capabilities
➢ Purpose:
■ In order to achieve a short term competitive position to achieve future
long term competitive advantage.

❖ Resource based and Dynamic Capabilities Approach

➢ The dynamic capabilities approach is often compared to and linked to the
resource based approach to corporate management
➢ Resource based approach emphasises sustainable competitive advantage
➢ Whereas, Dynamic capabilities approach focuses on competitive survival in
rapidly changing conditions
➢ Evolution of Resource based approach
■ The dynamic capabilities approach is an extension of the resource-based
approach
■ The resource based view is static in nature
■ Firms in the same sector perform differently because they have different
resources and different capabilities
■ According to the resource based view, a company’s unique resources
create its competitive advantage and corporate advantage
■ A company must develop its capabilities and engage in continuous
learning in order to remain competitive.
➢ These build the foundation of the Dynamic Capabilities Approach

❖ Adapting to discontinuous change

➢ Companies in many industries face discontinuous change
➢ Such changes often lead to game changing innovations
➢ Companies that fail to adapt to these changes,
■ May lose their competitive advantage
■ May fail completely

❖ Continuous and Discontinuous Change

Many changes that occur in a given sector are continuous, like,
➢ Progressive development of a technology
➢ Steady decrease in price of resources with increasing efficiency of production
➢ Incremental improvements in software
➢ Economies of scale
Discontinuous or abrupt changes also occur in most sectors at some stage, like,
 ➢ Redundant technology
➢ Non availability of resources
➢ Sudden change in market trends
➢ Changes in international supply chains
➢ New competing technology or products

❖ Dealing with Continuous Change

➢ A company can often accommodate to continuous changes within a certain range
➢ It can make steady modifications to factors including,
■ Production processes
■ Supply chains
■ Pricing
■ Marketing
➢ Introducing new models or variants of a product which can also reduce or reverse
the impact of continuous change

❖ Dealing with Discontinuous Change

➢ A company must be more resourceful to deal successfully with discontinuous
change
➢ They must have more - Creativity, Foresight and Adaptability
➢ These are all features of dynamic capabilities

❖ Failure to adapt to discontinuous change

There are prominent examples of companies that failed to adapt to discontinuous
change;
➢ Kodak - Failed to adapt to digital photography
➢ Xerox - Failed to commercialise its own inventions and did not take advantage of
the shift to digital documents
➢ Nokia - Failed to adapt to smartphone innovations

❖ Common features of Failure

➢ Kodak, Xerox and Nokia were all brand leaders in their respective sectors. They
commanded the market, but their inability to adapt to substantial changes in their
sector combined with lack of foresight led to catastrophic failure. The companies
lacked dynamic capability.

❖ Current success stories

➢ Companies that have demonstrated - Adaptability, Foresight and Dynamic
capabilities have become amongst the world’s largest corporations
➢ Their future success will depend on maintaining these attributes
➢ Examples - Google, Facebook, Microsoft, Apple, Amazon, Tata, Reliance
Industries, Alibaba, Ebay

Board of Directors – Role and Responsibilities

❖ OECD’s Definition of Role of Board of Directors
➢ “The corporate governance framework should ensure the strategic guidance of
the company, the effective monitoring of management by the board, and the
board’s accountability to the company and the shareholders.”
➢ OECD: the Organisation for Economic Co-operation and Development is an
intergovernmental economic organisation
■ Founded in 1961
■ To stimulate economic progress and world trade
■ It has 38 member countries
■ Objective - To create better policies for better lives

❖ Dual mandate of a board of directors

➢ Advisory
■ Consult with management with regard to the direction of the company
■ To improve Strategic capabilities and Operations
➢ Oversight
■ Monitor company performance
■ To improve Efficiency and Compliance

❖ The Board of Directors and Company Management

➢ The responsibilities of the board of directors are separate and distinct from those
of the management
➢ The Board does not manage the company
➢ Board Responsibilities,
The following is a summary of the advisory and oversight responsibilities of the
board of directors
■ Design, approve and monitor corporate strategy
■ Agree the business model with management
■ Identify and monitor key performance measures (KPIs)
■ Identify risk areas and agree a risk management plan with senior
management
■ Oversee risk management implementation and effectiveness
■ Create the management structure
■ Define management roles
■ Select executives for senior management positions
■ Design executive compensation packages
■ Oversee the published financial statements and other statutory reports
■ Vouch for the integrity and accuracy of financial and other statements
■ Design an asset acquisition policy and framework
■ Approve major asset purchases
■ Protect company assets
■ Uphold and protect the company’s reputation
■ Represent the interests of all shareholders
 ■ Ensure that the company complies with laws, regulations, standards and
codes
■ Set the corporate tone and guide its implementation by senior
management

❖ Independence of the board of directors

➢ Ability to act solely in the interests of the company
➢ Freedom from conflicts of interest that would compromise judgement and
decision making
➢ Ability to act in disagreement or opposition to decisions and actions of senior
management

❖ Meaning of Independence
➢ “Independence” of directors will be defined by statute and regulations
➢ The board of directors must additionally ensure that they are truly independent -
Both, in principle and practice
➢ To ensure the independence of each individual director they should be carefully
evaluated before appointment. These are evaluated on the basis of,
■ Biography
■ Experience
■ Former professional behaviour
■ Previous relations to management in other board positions

❖ Board of Directors’ activities and operations

➢ The typical function and activities of the board of directors includes,
■ The board of directors is presided over by the Chair
■ Led by the Chair, the board
■ Sets the agenda for board meetings
● Schedules meetings
● Coordinates activities of board committees
➢ Selected members of the management team attend board meetings by invitation
➢ Some board sessions are held without management members present to
preserve the independent role of the board
➢ Board Decisions
■ Decisions are decided by majority or consensus
■ The board is informed by briefings and reports prepared by the
management

❖ Board Members involvement

➢ 20 hours per month on board activities
➢ 8 full board meetings per year, in person or by virtual meetings
➢ A meeting may have the duration of a working day

❖ Board committees
➢ Committees may be set up for detailed discussion of some board matters
especially for large and complex companies
➢ The composition of the committees will be decided by the whole board as well as
the remit of their responsibilities
➢ The deliberations and decisions of the committees are reported to the full board
➢ On important issues the full board will vote on the recommendations of the
committee
➢ There are two main categories of board committees
■ Standing committees - These are permanent
■ Ad Hoc committees - Formed to consider specific topics with a specified
time period
➢ Large companies are required by law to have certain key committees
➢ This requirement varies from one country to another
➢ These committees usually include
■ Audit:
● Oversight of financial reporting and disclosure
● Monitor adherence to accounting policies
● Oversight of external auditor
● Oversight of regulatory compliance
● Monitor internal control processes
● Oversight of performance of internal audit function
● Supervision of risk management policies and procedures
■ Compensation:
● Set the compensation for the CEO - fixed salary and bonuses
● Set the compensation for the other senior management executives
- fixed salary and bonuses
● Advise the CEO on compensation for other executive officers
● Set performance related goals for the CEO
● Determine the appropriate structure of compensation
● Monitor the performance of the CEO relative to targets
● Hire consultants as necessary and set their compensation levels
■ Nomination and Governance:
● Identification of qualified individuals to serve on the board
● Selection of nominees to be voted on by shareholders
● Hire consultants as necessary
● Determine and monitor governance standards for the company
● Manage the board evaluation process
● Manage the CEO evaluation process
➢ Other committees
■ These can be developed depending on the,
● The size of the company
● Sector
● Jurisdiction
● Corporate values
 ■ Some of these committees are,
● Executive
● Finance
● Investment
● Corporate responsibility
● CSR
● Strategic planning
● Risk
● Environmental policy
● Science and technology
● Legal
● Ethics / compliance
● Mergers and acquisitions
● Human resources
● Management development

❖ Length of appointment of directors

➢ There are various regimes for the length of appointment of directors
➢ In some smaller companies directors may have a longer term of office depending
on their commitment, unique contribution and value to the company
➢ Where directors are elected, there are varying lengths of appointment. Eg. one
year or three years

❖ Staggered board elections

➢ Many companies prefer to have staggered board elections, like,
■ Directors are elected for three-year terms
■ One third of the board stand for election each year
➢ This can be a useful measure to avoid takeovers

❖ Environment, society and governance

➢ Responsibilities of the board of directors encompass a broader remit than the
business affairs of the company
➢ Directors should consider stakeholder interests with regard to,
■ Environment
■ Society
■ Governance

Selection of Directors

❖ The importance of appointing a good board of directors

➢ Each company will set its own criteria for selection of directors
➢ An intelligent and wise selection process will lead to,
■ Business success
■ Future growth
 ■ Development of brand identity
■ Financial strength

❖ Criteria for selection of board members

➢ The detailed criteria for selection of directors will depend on the attributes of the
company, including,
■ Sector
■ Country
■ Brand strength
■ International outreach
■ Size
➢ General board members criteria include,
■ Relevant industry experience
■ Strategic thinkers
■ Capital raising experience
■ Practical marketing and sales experience
■ Leadership experience
■ Innovators
■ Challengers
■ Diverse backgrounds and expertise
■ Financial experience
■ Passion

❖ Relevant Industry experience

➢ The progress and prosperity of a company depend increasingly on relevant
industry experience
➢ Most sectors require sophisticated understanding of factors including
■ Technology
■ Market
■ Competition
■ Innovations
■ Supply chains
■ Industry structure
■ Regulations
■ Manufacturing processes
➢ Board members with relevant experience of the specific sector and related sector
will ensure the strategies, processes and innovations to create the best results
for the company.

❖ Strategic Thinkers
➢ Companies in all sectors need to have a forward looking corporate strategy
➢ Companies failing to think strategically and understand the future trends usually
end up losing the market advantage and might also fail.
 ➢ Directors with strategic thinking capabilities safeguard the prosperity and
sustainability of the company.
➢ Since they are not involved in the day to day running of the company, they are
able to understand the position from a broader perspective and foster a more
comprehensive strategic direction for the company

❖ Capital Raising Experience

➢ Mid and large companies have periodical requirements to raise capital
➢ A badly planned and executed capital drive usually result in,
■ Unnecessary indebtedness
■ Poor corporate performance
■ Restrictions for future growth
➢ Directors with capital raising experience can steer a company towards,
■ Productive capital injection
■ Prudent decision making
■ Effective deployment of capital in productive and sustainable growth

❖ Practical Marketing and Sales Experience

➢ The prosperity and sustainability of a company depends on,
■ Penetrating the market
■ Selling goods and services
➢ A board requires directors with hands on experience in ,
■ Creating effective marketing campaigns
■ Driving growth in sales

❖ Leadership Experience
➢ Every company requires,
■ Direction
■ Purpose
■ Conviction
■ Commitment
➢ A strong management team is well positioned to maximise outcomes from
opportunities
➢ Management that displays leadership encourages the development of talent in
the whole company
➢ The senior management provide leadership on a day to day basis
➢ When these qualities are supported by the board of directors, the management
has greater momentum and energy to fulfil the goals of the company

❖ Innovators and Creative thinkers

➢ All companies face competition
➢ A company that develops an innovative product quickly finds that other
companies will attempt to - Copy and Outdo its products
➢ The company must always seek to continue to innovate
 ➢ Innovative directors strengthen this process
➢ Creative directors will introduce concepts and ideas that may not have occurred
to the management, and will introduce new innovative directions for the company

❖ Challengers
➢ Uniformity of thinking and approach
➢ Can inhibit the growth of a company
➢ Threaten its sustainability
➢ A “challenger” on the board
➢ Can challenge embedded thinking
➢ Bring a fresh approach
➢ Drive the company forward to greater success

❖ Diverse Background and Expertise

➢ In today’s global environment, diversity amongst board members is vital. Factors
include,
■ Gender
■ Race
■ Talent and expertise
■ Length and range of experience
■ Industry background
■ International experience
➢ A board of directors with diverse backgrounds and experience can make the
most of opportunities and face challenges more effectively

❖ Financial Experience
➢ Having a board member with finance experience and qualifications adds strength
to the executive capability of the company
➢ The Chief Financial Officer (CFO) can gain the advantage of a finance expert for
key corporate decisions of,
■ Funding sources
■ Reducing costs
■ Optimising project finances
■ Leveraging assets
■ Scaling the business
■ Conducting financial negotiations

❖ Passion
➢ A company’s executives and employees thrive when there is an enthusiastic
board
➢ Directors with Drive, Determination and Passion give support to the management
to achieve goals and accomplish the mission of the company.
 Compensation of Directors

❖ Director compensation
➢ The norms and regulations for compensation of directors vary from one country
to another.
➢ The growth of globalization and the partnership between companies in different
countries have resulted in a trend towards equalisation in the director
remuneration, policies and norms.
➢ This particularly important if an Indian company has subsidiaries overseas or an
Indian company is a subsidiary of an overseas company

❖ Regulation of Directors’ remuneration in India

➢ The Companies Act 2013 has clauses regulating the remuneration of director
➢ The regulation is necessary because,
■ Prevention of diversion of corporate funds for personal use
■ Impact of excessive compensation on society
■ Imbalance between remuneration of directors and executives and
employees
➢ The remuneration payable to the directors of a company are determined by the
provisions of the Companies Act 2013 - Sections 198 and 309, that is, articles of
the company resolution passed in a general meeting of the company
➢ This includes - Managing director and the Other whole time director
➢ The remuneration of a director based on the provisions of the Companies Act is
inclusive of the remuneration for services provided to the company in any other
capacity
➢ Maximum Remuneration
■ Section 198 of the Companies Act specifies the overall maximum
managerial remuneration for a public company or subsidiary of a public
company
■ The total in a financial year should not exceed 11% of net profits
■ In the situation where the profits are inadequate, a minimum remuneration
may be paid with the previous approval of the Central Government

❖ Collateral Benefits
➢ Collateral benefits are included in the definition of total compensation to make the
regulations effective and prevent directors from drawing more income in the form
of benefits.
➢ Benefits in these categories include,
■ Free accommodation
■ Any service that would have been provided in any case
■ Life insurance, pension, annuity or gratuity, including to family members
❖ Remuneration for Full time Directors
➢ The Companies Act specifies the maximum individual remuneration for Managing
Director and the other full time directors.
➢ In terms of net profits, 5% for any one full time director and 10% collectively

❖ Remuneration for Part time Directors

➢ Part time directors who do not receive monthly remuneration may also be
remunerated from the profits of the company
➢ Maximum amounts in terms of net profit is,
■ 1%, if the company has a secretary, treasurer or manager
■ 3%, if the company do not have these officers
➢ Exceptions can be made with
■ Approval of Central Government
■ Sanction of a meeting

❖ Other Considerations
➢ It is important to note that these stipulations and regulations for directors apply
only to their managerial and director duties
➢ They may be paid additional amounts for other duties they perform for the
company
➢ Directors are not permitted to determine their own remuneration or the
remuneration of other directors
➢ Directors’ remuneration is decided by - Articles of the company, General
resolution and Special resolution (if required by the articles)

Removal of Directors

❖ What is Removal of Directors?

➢ A change of directors is possible at any time
➢ The change can be either voluntary or by demand
■ A director resigns voluntarily
■ The death of a director requires the appointment of a new director
■ Developments in the company may require a director with specific
expertise

❖ Procedure for Change of Director

➢ These procedures are set by Companies Act 2013 and Companies (Appointment
and Qualification of Directors) Rules 2014
➢ Adding a Director
■ Notice is sent to existing directors at least 7 days before a meeting
■ Board resolution is issued to call for a General Meeting for the
appointment of a director
■ Notice is given to - Directors, Shareholders and Auditors
■ Usually at least 21 days prior to the date of the General Meeting
 ■ The appointment of the director submitted to the Registrar within 30 days
➢ Resignation of Director
■ The director issues notice to resign in writing to the board including
reasons for resignation
■ Board of directors inform shareholders at a General Meeting
■ After the resignation is confirmed, notice is filed with Registrar within 30
days
➢ Removal of Director
The process of removal of a director only occurs before the expiry of a director’s
term
■ An ordinary resolution is passed at the General Meeting of shareholders
■ This is preceded by giving the director a reasonable opportunity to be
heard
■ Notice is published at least 7 days prior to meeting
■ A copy of the notice sent to the director being removed
■ Director is entitled to be heard at the General Meeting where the
resolution will be passed

❖ Written Representation from the Director

➢ A Representation against removal may be made by the director
➢ The director can request that this representation is circulated to all shareholders
➢ The director may request for the representation to be read at the General
Meeting
➢ If the reasons against removal in the Representation are validated by the
shareholders and the board of directors, the removal procedure can be
terminated

❖ Confirmation of Resignation
➢ The resignation must be filed with the Registrar within 30 days from the date of
resignation
➢ According to the Articles of the company, and any relevant laws, a new director is
appointed to replace the removed director
➢ This may be a temporary appointment before a permanent replacement is found
➢ Once removed, a director cannot be re-appointed

❖ Shareholders demand for the removal of a director

➢ Shareholders holding shares above certain thresholds, that is, Rs. 5,00,000 or
1% of the total voting power, can also issue a special notice to the company for a
director to be removed.

❖ Factors leading to the removal of a director

➢ Director does not attend 3 consecutive board meetings during a 12-month period
➢ Director incurs any of the disqualifications specified in Section 164 of the
Companies Act 2013
 ➢ Additionally, if the concerned director enters into a contract or arrangement
against provisions of Section 184, the director may be convicted by a court of law
➢ Sentence may be imprisonment for a term longer than 6 months
➢ If the Central Government has appointed the director, they may not be removed
by the company

❖ Section 164 of the Companies Act 2013

Disqualifications as a director under Section 164 include
➢ Any criminal conviction leading to imprisonment for a term of more than 6 months
➢ If any Court confirms that the director is not of sound mind
➢ The director has been convicted under Section 188 during the past five years
➢ A director who has an undischarged insolvency

Succession of Directors and Senior Management

❖ Purpose of Succession Planning

➢ A succession plan is designed to ensure that the company and investors do not
suffer due to sudden or unexplained gaps in leadership
➢ Good succession planning ensures that there is sufficient and suitable resources
and expertise to enable the company to fulfill its goals.

❖ Definition
➢ A succession policy defines how new directors will be appointed for Planned
changes in the board of directors or the unplanned changes
➢ Planned changes can be,
■ Retirement of Directors
■ Directors' resignation after a term in the office
➢ Unplanned changes can include contingencies for,
■ Illness
■ Death
■ Other incapacitation
➢ Other reasons could be requirement of new capabilities or to deal with the
unexpected events in the company

❖ Legal Requirements for Succession Planning

➢ The Securities and Exchange Board of India (SEBI) has introduced mandatory
regulations for companies to put in place a succession policy - Section 178 of the
Companies Act, 2013 (Listing Obligations and Disclosure Requirements
Regulations 2015), to form a Nomination and Remuneration Committee.
➢ The development of a succession plan for the board and senior management is
one of the responsibilities of this committee
❖ Review and Approval Process
➢ The policy is reviewed annually and approved by the board of directors, or at
other intervals as required
➢ For any instances where the policy and procedures have not been followed, a
report is given to the Nomination and Remuneration Committee and the
necessary action taken

❖ Further Reviews of Policy Requirement

➢ As required or at set intervals, the Nomination and Remuneration Committee
review the policy to determine whether the policy still fits the leadership
requirements of the company or whether any amendments are required.

❖ Succession plan for the board of directors

➢ A due diligence process is applied to determine the suitability of every person
being considered for Appointment and Reappointment to the board of directors
based on the,
■ Educational and professional qualification
■ Experience
■ Track record
➢ Every person nominated to the board must meet “Fit and proper” criteria as
determined by the company and relevant regulations
➢ The appointment or reappointment of a director is subject to the approval and
recommendation of the Nomination and Remuneration Committee
➢ The Nomination and Remuneration Committee periodically review and consider
the list of senior management personnel due for retirement / renewal of
appointment within one year
➢ The Committee also considers new vacancies and positions from,
■ Business Needs
■ Expansion
■ Technical Requirements
➢ The Committee assesses the availability of suitable candidates for,
■ Stability
■ Growth
■ Development
➢ The appointment or reappointment of senior management personnel is then
decided based on the evaluation by the committee and recommendations from
the MD and CEO

❖ Succession in Family Owned businesses

➢ Family owned businesses are more abundant in India than in many other
countries
➢ There are often expectations that family members will join the business and take
over the management of the company in due course
 ➢ Often successors are chosen from within the family by default rather than based
on competence and experience
➢ There is little or no incentive to look outside the family

❖ Risks for Family Owned Companies

➢ When the succession is determined by family relationships rather than
competence, there are risks for the company for Governance, Sustainability and
Growth.
➢ There is now a trend for family businesses to address these issues more
thoroughly
➢ Especially as they need to compete with more structured corporations

Auditors Roles and Responsibilities

❖ Roles of an External Auditor

➢ An external auditor plays a number of important roles
➢ These roles contribute to robust Corporate Governance to,
■ Represent the interests of shareholders
■ Promote and ensure accountability
■ Risk management and mitigation planning
■ Crisis management
■ Maintain good relationship with regulators

❖ Represent the interests of shareholders

➢ The company audit carried out by the external auditor is independent
➢ It is carried out and compiled independent of any influence from the management
or directors of the company.
➢ The shareholders can therefore have confidence that the audit is Reliable,
Accurate and Consistent

❖ Auditors, Board of Directors and Shareholders

➢ The external Auditors prepare a full report on the company’s accounts and verify
that the accounts are accurate and complete
➢ The Board may question the Auditors' views and assessment and discuss with
the Auditors whether the most appropriate accounting methods and principles are
being used
➢ The Board of Directors has responsibility to report the status of the company to
the Shareholders including the financial health of the company and a full picture
of the company’s accounts
➢ The external Auditors verify that the accounts are - Accurate, Complete and Valid
➢ Hence, the Directors can report to the shareholders with confidence based on the
confirmation from the Auditors that the accounts are in order
❖ Promote Accountability
➢ External auditors are in a position to improve and promote good standards of
accountability
➢ Auditors can recommend penalties for officers who manipulate financial
statements or enter incorrect figures in the accounts

❖ Penalties
Improper accounting can lead to
➢ Removing the executive from their position
➢ Reducing or stopping their compensation
➢ Reducing annual bonuses
➢ Reducing their pension fund

❖ Risk Assessment and Mitigation Planning

➢ External auditors play a role in strengthening the Corporate Governance of a
company
➢ By improving risk assessment and risk mitigation planning, Auditors review a
company’s measures against Corporate fraud and Corruption
➢ The auditors analyse the company’s risk tolerance and resilience and risk
mitigation procedures
➢ They also evaluate whether the whistle blower system and procedures are
adequate and recommend procedures to make whistleblower policies more
robust

❖ Crisis Management
➢ Companies must be prepared for crisis situations including those created by
internal or external factors
➢ Auditors can recommend and assist management in developing effective and
efficient crisis management policies and procedures
➢ Such plans will allocate responsibilities to members of management and define
an action plan to deal with crisis situations
➢ This strengthens investor confidence
➢ Crisis management may include measures to inform third parties, including Law
enforcement, Regulatory bodies and Media

❖ Maintaining a good relationship with regulators

➢ An important role of external Auditors is to maintain good relationships with,
■ Regulators
■ Tax authorities
■ Other relevant government departments
❖ Importance of a reliable external Auditor
➢ It is an advantage for a company to engage an external Auditor with good
relationships with relevant authorities and good track records as an Auditor
➢ Good Audit firms are,
 ■ Known to be honest and reliable
■ Trusted by the relevant authorities
■ Will give robust and consistent advice to their clients

❖ Trust
➢ Regulators are also more likely to trust company reports that have been
approved and signed off by a trusted auditor
➢ As a result the Auditors will be trusted by the company and shareholders

❖ Audit Committee and Companies Act, 2013

➢ The Board of Directors of every company has various committees. Some of these
committees are mandated by law, while others will be deemed necessary by the
directors, management & shareholders
➢ The Audit Committee is one of the main operating committees of the board of
directors as it is responsible for financial reporting and disclosures
➢ The Companies Act, 2013 stipulates the conditions and terms of reference for a
company’s Audit Committee
➢ Further conditions were given in the Companies (Meetings of Boards and its
Powers) Rules, 2014
➢ These conditions were amended in the Companies (Amendment) Act, 2017

❖ Companies for which an Audit Committee is mandatory

➢ Every Listed Public Company
➢ Companies Prescribed under Rule 6 of Companies Rules, 2014
These companies are determined by following features,
■ They have paid up capital of Rs. 10 Crore of more
■ They have turnover of Rs. 100 Crore or more
■ They have outstanding loans, borrowings, debentures or deposits
exceeding Rs. 50 Crores or more
❖ Composition of the Audit Committee
➢ Audit Committee must have a minimum of 3 directors
➢ Independent directors must form the majority of the Audit Committee
➢ Members of the Audit Committee, including the Chair must have the ability to
read and understand the financial statements and other relevant financial
documents

❖ Audit Committee, Auditors and Senior Management

➢ The Auditors and Key Management Personnel (KMP) are entitled to attend and
speak at Audit Committee meetings, but do not have the right to vote

❖ Functions of Audit Committee

➢ Appointment and reappointment of the Auditor
➢ Determination and agreement of the Auditor’s fees
➢ Valuation of the goodwill and assets of the company
 ➢ Evaluation of any Related Party Transaction
➢ Evaluation of the internal financial control and risk management
➢ Examination and approval of the financial statements
➢ Scrutiny of inter corporate loans and investments
➢ Evaluation of the use of funds raised through public offers

❖ Powers of Audit Committee

➢ The Audit Committee has powers mandated by law
➢ The Audit Committee can call for and review comments from the Auditor
regarding internal control systems and accounting procedures
➢ The Audit Committee reviews the financial statements before they are submitted
to the Board
➢ It has the power to discuss any issues regarding the financial statements with the
Auditor and the senior management
➢ It has the right and power to obtain professional advice from external sources
➢ It has access to all information in and forming the basis for the financial records

SEBI Listing Agreement

❖ Listing Agreement
➢ A Listing Agreement is a document executed between a company and the stock
exchange when the company is listed in the market
➢ The Stock Exchange acts on behalf of the Securities and Exchange Board of
India (SEBI) to ensure that companies follow good corporate governance

❖ Origin of SEBI Clause 49

➢ SEBI added Clause 49 to the Listing Agreement in 2000
➢ Purpose of the clause is to improving Corporate Governance of all companies
listed on the Indian stock exchanges of National Stock Exchange (NSE) and
Bombay Stock Exchange (BSE)
➢ Clause 49 was revised in 2004 to bring it more in line with the Sarbanes-Oxley
Act enacted by the United States government

❖ Background of Clause 49
➢ Clause 49 was added to the Listing Agreement based on the recommendations
to SEBI by the Kumar Mangalam Birla Committee on Corporate Governance
➢ The original Clause 49 recommended Corporate Governance practices for Indian
companies
➢ Clause 49 made important changes in governance and disclosures

❖ Mandatory requirements of Clause 49

➢ The original Clause 49 made certain requirements mandatory for companies,
■ Every company must have a minimum number of Independent Directors
on their boards
 ■ Companies must set up specified committees, like, Audit & Shareholders’
Committees
■ Annual reports must include
● Management Discussion and Analysis
● Corporate Governance report
■ Companies must disclose fees paid to non executive directors
■ The number of committees on which a director can serve is limited

❖ 2004 Amendments to Clause 49

➢ After the introduction of Clause 49, there was a series of Corporate Governance
failures in large companies
➢ Clause 49 was strengthened in 2004 by a series of amendments recommended
by the Narayana Murthy Committee
➢ These amendments also brought Clause 49 more in alignment with the Sarbanes
Oxley Act implemented in the United States
➢ Clause 4 was amended by SEBI in 2004 and came into effect in 2006
➢ The 2004 amendments included,
■ Substantial changes and clarifications in the definition of Independent
Directors
■ Strengthened responsibilities of audit committees
■ More comprehensive financial disclosures including party transactions
and proceeds from public / rights / preferential issues
■ Boards have to adopt formal codes of conduct
■ CEO / CFO to certify financial statements
■ Disclosures to shareholders to include more comprehensive information
■ Non Mandatory Clauses of,
● Whistle blower policy
● Restriction of terms of independent directors

❖ 2008 Amendments to Clause 49

➢ SEBI introduced further amendments to Clause 49 in 2008
➢ Predominantly, at least 50% of a board of directors must be independent
directors, where the non-executive chairman is either,
■ A promoter of the company, or
■ Related to the promoters of the company

❖ Compensation of Non Executive Directors

➢ The compensation of Non Executive Directors, including Independent Directors,
is determined by the Board and approved by Shareholders

❖ Board meetings and Committees

➢ The Board should meet at least 4 times a year with a maximum gap of 3 months
between any 2 meetings
 ➢ A Board director should not be a member of more than 10 committees or act as
Chairman of more than 5 committees across all companies of which they are a
director

❖ Code of Conduct
➢ The Board of Directors must compile a code of conduct for all the board
members and the senior management, who must affirm their compliance with the
code every year.
➢ The company’s annual report must contain a declaration to this effect and be
signed by the CEO

❖ Audit Committee
➢ A company shall comprise of,
■ A minimum of 3 directors
■ Two third of the members should be independent directors
■ All members have to be financially literate
■ At least one member should have accounting or related financial
management expertise
➢ The committee should meet at least 4 times in a year, in which, the interval
between meetings should not exceed 4 months

❖ Certification of the company’s activities by the CEO and CFO

The CEO and CFO must certify to the Board that,
➢ They have reviewed and approved financial statements and cash flow statements
for the year
➢ The company has not entered into fraudulent or illegal transactions to the best of
their knowledge and belief
➢ They accept responsibility for establishing, maintaining and evaluating internal
controls
➢ They have informed the auditors and the audit committee about any significant
changes to internal control and accounting policies as well as instances of fraud
(if this has occurred)

❖ Subsidiary Companies
Clause 49 defines certain regulatory procedures between a parent company and its
subsidiaries. These include,
➢ At least one Independent Board Director of the holding company should be a
Director on the Board of a (non-listed) Indian subsidiary company
➢ The Audit committee of the listed parent company reviews the financial
statements of the subsidiary including any investments made by the subsidiary
company
➢ The management of the subsidiary must present a statement of all significant
transactions to the board of the parent company
❖ Corporate Governance Report
Clause 49 stipulates that the annual report of a listed company must contain a section
on Corporate Governance, which shall comprise of,
➢ A detailed compliance report
➢ Non compliance of mandatory requirements of Clause 49 must be explained and
justified
➢ Adoption of non mandatory requirements must be described
➢ Companies should submit quarterly compliance report to the stock exchanges
signed either by the compliance officer or CEO of the company

Corporate Social Responsibility

❖ Evolution of CSR in India

➢ India has one of the richest traditions of Corporate Social Responsibility (CSR)
➢ Long before the term “Corporate Social Responsibility” was used. the cultural
traditions of India lend themselves to social responsibility
➢ This has been formalised in recent years in regulations for CSR created by the
Government of India

❖ 4 Phases of CSR in India

➢ First phase - 19th century
➢ Second phase - first half of the 20th century
➢ Third phase - 1960 to 1980
➢ Fourth phase - 1980 till present
Earlier, there were many instances and records of social responsibility by leaders and
rulers using their wealth and influence for the benefit of their communities

❖ First Phase - 19th Century

➢ Charity and philanthropy were the main drivers of CSR
➢ Although, it should be noted, it wasn’t given the name CSR at this early stage
➢ Wealthy merchants shared part of their wealth with the broader society and also
provided food and money during periods of hardships, like, famine
➢ Large Industrial families in 1850s onwards included,
■ Tata
■ Godrej
■ Bajaj
■ Aditya Birla Group
➢ These participated in programmes of social benefit which also benefited their
companies
➢ In providing healthier, better educated and sustainable communities, companies
such as Godrej have continued this to this day
❖ Second phase - first half of the 20th century
➢ This phase coincided with the independence movement
➢ Indian industrialists were encouraged to demonstrate their dedication to the
progress of society
➢ Mahatma Gandhi introduced the concept of “Trusteeship”
➢ Industry leaders were expected to manage their wealth to benefit the common
man
➢ Industrialists were obliged to act towards building the nation and working towards
socio economic development
➢ Businesses established trusts for schools and colleges to assist in setting up
professional training and scientific institutions

❖ Third phase - 1960 to 1980

➢ The third phase of CSR developed from the emerging economic models at the
time of,
■ Mixed economy
■ Creation of Public Sector Undertakings (PSUs)
■ Labour laws
■ Environmental standards
➢ During this period the public sector was the dominant force in Development,
Industry and Infrastructure
➢ Conversely, there were strict legal rules and regulations
➢ The activities of the private sector was being controlled
➢ The period was called “The era of command & control”
➢ Imposition on the private sector
■ This era of public sector dominance placed impositions on the private
sectors, with,
● Industrial licensing
● High taxes
● Quotas
● Other restrictions
➢ Corporate Malpractice leading to legislation
■ The restrictions on the private sector led to many instances of corporate
malpractice that corporate leaders felt were necessary to survive
■ This led to the Government introducing legislation for Corporate
Governance, Labour and Environmental Issues
➢ Purpose of PSUs
■ These were setup by the government to ensure equitable distribution of
the resources in population, like,
● Wealth
● Food
● Education
● Healthcare
● Opportunities
 ● Infrastructure
➢ Limited Results of PSUs
■ However PSUs had limited effectiveness in practice and suffered from the
typical inefficiencies of the public sector
➢ Shifting expectations towards Private Sector
■ The limited results from public sector enterprises ;ed to a resurgence of
importance of the private sector
■ The active involvement of the private sector became a vital component in
the socio economic development of the nation
➢ National Workshop on CSR - 1965
■ In 1965 a national workshop on CSR was set up by the Academicians,
Politicians and Business leaders that focused on transparency, Social
accountability and Stakeholder dialogue
■ The initiative had limited success

❖ Fourth phase - 1980 till present

➢ At the beginning of this period, companies began to integrate CSR into
sustainable business strategy
➢ The economic revolution of 1991 saw,
■ India’s rapid integration into the global economy
■ Substantial moves towards economic liberalisation
■ Relaxing of controls, quotas and licensing
➢ Progress in these areas continues up to today

❖ Impact on CSR
➢ The economic revolution of 1991 allowed companies to grow more quickly and
contributed to substantial growth in GDP and corporate wealth
➢ This made companies more willing and able to contribute to social and
community development
➢ This facilitated the growth of CSR initiatives

❖ International influence on domestic CSR

➢ The economic liberalisation commencing in 1991 had led to substantial
collaboration between Indian and overseas companies including important
relationships with western corporations
➢ Governments, the private sector and social interest groups in western nations are
paying increasingly close attention to standards in partner countries in the
following areas,
■ Labour
■ Community
■ Environment
■ Healthcare
■ Working conditions
■ Education
❖ International standards and best practice
➢ The growing international exposure means that Indian companies must be seen
to comply with international standards and best practice
➢ Government regulations must also match international best practice

❖ National Voluntary Guidelines (NVG) - 2011

➢ In 2011, the Ministry of Corporate Affairs (MCA) introduced a set of voluntary
guidelines for CSR (NVG) on Social, Environmental and Economic
Responsibilities of Business
➢ The NVGs are applicable to all businesses, irrespective of Size, Sector or
Location
➢ The guidelines were designed to assist companies to fulfil their responsibilities to
society
➢ Principles underlying NVG,
1. Businesses should conduct and govern themselves with ethics,
transparency and accountability
2. Businesses should provide goods and services that are safe and
contribute to sustainability throughout their life cycle.
3. Businesses should promote the wellbeing of all employees
4. Businesses should respect the interests of, and be responsive to, all
stakeholders, especially those who are disadvantaged, vulnerable and
marginalised.
5. Businesses should respect and promote human rights.
6. Businesses should respect, protect, and make efforts to restore the
environment.
7. Businesses, when engaged in influencing public and regulatory policy,
should do so in a responsible manner
8. Businesses should support inclusive growth and equitable development.
9. Businesses should engage with and provide value to their customers and
consumers in a responsible manner.
➢ The NVG led to the mandatory CSR requirements in the Companies Act 2013

❖ CSR legislation
➢ Under the Companies Act 2013, CSR became mandatory on 1 April 2014
➢ Companies with,
■ Turnover of INR 1,000 crore or more
■ Net profit of INR 5 crore or more
■ Or a net worth of INR 500 crore or more
➢ Must spend at least 2% of their 3 year average profit every year on CSR activity
➢ Directive from the Ministry of Corporate Affairs (MCA) mentioned that all the
registered companies must nominate 3 board members for their CSR Committee
➢ Bhaskar Chatterjee, Director General & CEO of the Indian Institute of Corporate
Affairs at MCA said at the time that companies can not do whatever they want
and claim it is a CSR activity according to the new law
 ➢ Companies are encouraged to go “Beyond the rule”

❖ Current CSR Landscape

➢ The objective of CSR activities is to maximise the company’s impact on society
and stakeholders
➢ There is consistent growth in the systematic and comprehensive application of
CSR
➢ Companies understand that CSR is important for,
■ Bringing benefit to society
■ Increasing competitiveness
■ Protecting goodwill and reputation

❖ Conditions for legitimate CSR Activity

➢ CSR activities must be part of a company’s CSR policy
➢ The policy and activities must be published on the company’s website
➢ CSR must be implemented via professional implementation using specialist and
experienced agencies
➢ All CSR activities must have a defined start and end time
➢ All CSR activities must have board approval with a board resolution number.
Otherwise, it cannot count as CSR

❖ In company CSR teams

➢ Many companies have set up specialised in-company CSR teams
➢ They put together Policies, Strategies, Focus areas and Objectives for the
company’s CSR programmes
➢ The company sets aside and allocates budgets for the programmes

❖ CSR and social philosophy

➢ A well formulated and structured CSR programme will have a clear overall goal
and philosophy with social benefit
➢ Individual CSR programmes are designed to fit into this framework

❖ Range and remit of CSR programmes

Following areas are included,
➢ Community development
➢ Local infrastructure
➢ Education
➢ Healthcare
➢ Environment
➢ Local enterprises
➢ Sanitation
➢ Water resources
❖ Corporations and NGOs
➢ There is a growing trend for companies to work with Non Governmental
Organisations (NGOs) in the delivery of their CSR programmes
➢ The NGOs have core skills to deliver the programmes of skills and capabilities
that the company does usually have

❖ In-house and outsourced CSR

➢ According to the Ernst & Young/PHD study, CSR activities were being carried
out as follows in the 50 companies they studied,
■ 40% of companies had set up a not for profit entity
■ 60% of companies were managing CSR activities from within the
company

❖ Partnerships
➢ Partnerships between companies can be effective for CSR initiatives
➢ Some of the benefits are,
■ Economies of scale
■ Greater outreach
■ Sharing of expertise
■ Avoid duplication of resources
➢ Only 28% of the companies studied had established partnerships

❖ Common thematic areas

➢ Most companies cover the same important thematic areas in their CSR projects
■ Education - 100%
■ Healthcare - 80%
■ Environment - 94%
■ Livelihood - 94%
■ Rural Development - 88%

❖ Geographical reach (EAG Study)

➢ The Empowered Action Group (EAG) refers to the 8 least socioeconomically
developed states
■ Bihar
■ Chhattisgarh
■ Jharkhand
■ Madhya Pradesh
■ Orissa
■ Rajasthan
■ Uttaranchal
■ Uttar Pradesh
❖ Benefits of a good CSR
➢ Improved resolution of employee grievances
➢ Increased participation of external stakeholders in meetings
➢ More long term partnerships
➢ Improved financial performance (Return on Equity)
➢ Benefits states at Global CSR Summit 2013,
■ CSR helps in strengthening the relationship between companies and
stakeholders
■ It enables continuous improvement and encourages innovations o
■ Attracts the best industry talent as a socially responsible company
■ Provides additional motivation to employees
■ Mitigates risk as a result of its effective corporate governance framework
■ Enhances ability to manage stakeholder expectations