Project Assignment on

CORPORATE GOVERNANCE

Submitted to: Submitted By :

Mr.Sushil Kumar Yash Dang

Assistant Professor University roll no.

210281401020

BBA LLB 2nd Semester

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 DECLARATION

I hereby declare that the project work entitled “Corporate governance” submitted to the
SIDDHARTHA LAW COLLEGE, is a record of an original work done by me under the
guidance of Mr.Sushil Kumar Assistant professor in law department and this project work is
submitted in the partial fulfillment of the requirements for the award of the degree of BBA
LLB.

The results embodied in this thesis have not been submitted to any other University or
Institute for the award of any degree or diploma

Yash Dang

Roll No. 210281401020

This is to certify that the above statement made by the candidate is correct to the best of my
knowledge.

MR. SUSHIL KUMAR

ASSISTANT PROFESSOR IN LAW DEPARTMENT

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 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my law Professor “Mr

Sushil Kumar” for their able guidance and support in completing my project

I would also like to my gratitude to the principal sir “Mr. Sharafat Ali” For
providing me all facility that was required

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Index

Particulars Page no.

Abstract 5

Introduction 6

Objectives 8

Needs 9

Importance 11

Roadmap 14

Framework 16

Examples of corporate 17
governance at different
levels

Conclusion 19

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Abstract

Governance, the root of the word Governance is from ‘gubernate’, which means to steer.
Corporate governance would mean to steer an organization in the desired direction. The
responsibility to steer lies with the board of directors/ governing board.
Corporate or a Corporation is derived from Latin term “corpus” which means a “body”.
Governance means administering the processes and systems placed for satisfying stakeholder
expectation.
When combined, Corporate Governance means a set of systems procedures, policies,
and practices, standards put in place by a corporate to ensure that relationship with various
stakeholders is maintained in transparent and honest manner.
Corporate Governance is concerned with the intrinsic nature, purpose, integrity and
identity of an organization with primary focus on the entity’s relevance, continuity and
fiduciary aspects.
“Corporate Governance is the application of best management practices, compliance of law
in true letter and spirit and adherence to ethical standards for effective management”

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Introduction to Corporate Governance:

What is corporate governance?

Corporate Governance is concerned with holding the balance between economic and social
goals and between individual and communal goals.
The corporate governance framework is there to encourage the efficient use of resources and
equally to require accountability for the stewardship of those resources.
The concept of governance has been known in both political and academic circles for a long
time, referring generally to the task of running a government, or any other appropriate entity
for that matter.
Corporate governance is therefore the process whereby people in power direct, monitor and
lead corporations, and thereby either create, modify or destroy the structures and systems
under which they operate.
The primary purpose of corporate leadership is to create wealth legally and ethically.
This translates to bringing a high level of satisfaction to five constituencies -- customers,
employees, investors, vendors and the society-at-large.

Definitions of Corporate Governance 1

There is no universal definition of corporate governance.

Some good definitions are given hereunder for your better understanding:-

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Anderson, R., Mansi, S. and Reeb, D. (2004).

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Noble laureate Milton Friedman defined Corporate Governance as “the conduct of business
in accordance with shareholders’ desires, which generally is to make as much money as
possible, while conforming to the basic rules of the society embodied in law and local
customs.”

“Corporate Governance is concerned with the way corporate entities are governed, as distinct
from the way business within those companies are managed.
Corporate governance addresses the issues facing Board of Directors, such as the interaction
with top management and relationships with the owners and others interested in the affairs of
the company.” Robert Ian (Bob) Tricker (who introduced the words corporate governance
for the first time in his book in 1984) 2
“Corporate Governance is about promoting corporate fairness, transparency and
accountability”.

James D. Wolfensohn (Ninth President World Bank) OECD Corporate governance

structure specifies the distribution of rights and responsibilities among different participants
in the company such as board, management, shareholders and other stakeholders; and spells
out the rules and procedures for corporate decision-making. By doing this, it provides the
structure through which the company’s objectives are set along with the means of attaining
these objectives as well as for monitoring performance. “A system by which business
Corporations are directed and controlled” Cadbury Committee, U.K

“Corporate governance deals with laws, procedures, practices and implicit rules that
determine A Company’s ability to take informed managerial decisions visà-vis its claimants -
in particular, its shareholders, creditors, customers, the State and employees.

Confederation of Indian Industry (CII) – Desirable Corporate Governance Code (1998)

“Strong corporate governance is indispensable to resilient and vibrant capital markets and is
an important instrument of investor protection. It is the blood that fills the veins of

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Anderson, R., Mansi, S. and Reeb, D. (2004).
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transparent corporate disclosure and high quality accounting practices. It is the muscle that
moves a viable and accessible financial reporting structure.”
Report of Kumar Mangalam Birla Committee on Corporate Governance constituted by
SEBI (1999)
“Corporate Governance is the acceptance by management of the inalienable rights of
shareholders as the true owners of the corporation and of their own role as trustees on behalf
of the shareholders.
“Corporate Governance is the application of best management practices, compliance of law in
true letter and spirit and adherence to ethical standards for effective management and
Objectives of Corporate Governance 3

• To align corporate goals of its stakeholders (society,shareholders,etc.)

Corporate governance a way of Life rather than a Code
• To strengthen corporate functioning and discourage mismanagement
• To achieve corporate goals by making investment in profitable investment outlets.
• To specify responsibility of the B.O.D and managers in order to ensure good
corporate performance.

There is a global consensus about the objective of ‘good’ corporate governance: maximising
long-term shareholder value.”

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

the following specific aims:—
(i) Fulfilling long-term strategic goals of owners;
(ii) Taking care of the interests of employees;
(iii) A consideration for the environment and local community;
(iv) Maintaining excellent relations with customers and suppliers;

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Anderson, R., Mansi, S. and Reeb, D. (2004).
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(v) Proper compliance with all the applicable legal and regulatory requirements.

NEED for Corporate Governance:

Corporate Governance is needed to create a corporate culture of Transparency, accountability

and disclosure. It refers to compliance with all the moral & ethical values, legal framework
and voluntary adopted practices. This enhances customer satisfaction, shareholder value and
wealth.

Corporate Performance: Improved governance structures and processes help ensure quality
decision-making, encourage effective succession planning for senior management and
enhance the long-term prosperity of companies, independent of the type of company and its
sources of finance. This can be linked with improved corporate performance- either in terms
of share price or profitability.

Enhanced Investor Trust: Investors consider corporate Governance as important as financial

performance when evaluating companies for investment. Investors who are provided 4 with

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Corporate governance and the board of directors: ww.oecd.org
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high levels of disclosure & transparency are likely to invest openly in those companies. The
consulting firm McKinsey surveyed and determined that global institutional investors are
prepared to pay a premium of upto 40 percent for shares in companies with superior
corporate governance practices.

Better Access to Global Market: Good corporate governance systems attracts investment
from global investors, which subsequently leads to greater efficiencies in the financial sector.

Combating Corruption: Companies that are transparent, and have sound system that provide
full disclosure of accounting and auditing procedures, allow transparency in all business
transactions, provide environment where corruption will certainly fade out. Corporate
Governance enables a corporation to compete more efficiently and prevent fraud and
malpractices within the organization. Easy Finance from Institutions: Several structural
changes like increased role of financial intermediaries and institutional investors, size of the
enterprises, investment choices available to investors, increased competition, and increased
risk exposure have made monitoring the use of capital more complex thereby increasing the
need of Good Corporate Governance. Evidence indicates that well-governed companies
receive higher market valuations. The credit worthines 5s of a company can be trusted on the
basis of corporate governance practiced in the company.

Enhancing Enterprise Valuation: Improved management accountability and operational

transparency fulfill investors’ expectations and confidence on management and corporations,
and return, increase the value of corporations.

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Corporate governance and the board of directors: ww.oecd.org
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Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures
efficient risk mitigation system in place. The transparent and accountable system that
Corporate Governance makes the Board of a company aware of all the risks involved in
particular strategy, thereby, placing various control systems to monitor the related issues.
Accountability: Investor relations’ is essential part of good corporate governance.
Investors have directly/ indirectly entrusted management of the company for the creating
enhanced value for their investment. The company is hence obliged to make timely
disclosures on regular basis to all its shareholders in order to maintain good investor’s
relation. Good Corporate Governance practices create the environment where Boards cannot
ignore their accountability to these stakeholders.

Importance of Corporate Governance 6

It shapes the growth and future of capital markets of the economy

It helps in raising funds from capitals markets

It links company’s management with its financial reporting system.

It improves efficiency and effectiveness of the enterprise and wealth of the economy

It improves international image of the corporate sector and enables home companies to
raise global

It help management to take innovative decisions for effective functioning of the

enterprise

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Journal of Accounting and Economics, 37, 315- 342.
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A roadmap for improving corporate governance infrastructure 7

After surveying challenges and progress, as well as engaging in an extensive consultation

process among

Roundtable participants, the original 2003 White Paper priorities were updated in 2011 with
the publication of Reform Priorities in Asia – Taking Corporate Governance to a Higher
Level. The 2011 report reflects the changes in the corporate governance landscape since 2003
and is intended to continue to support decisionmakers and practitioners in their efforts to take
corporate governance to a higher level. The updated priorities for reform are:
All jurisdictions should strive for active, visible and effective enforcement of corporate
governance laws and regulations. Regulatory, investigative and enforcement institutions
should be adequately resourced, credible and accountable, and work closely and effectively
with other domestic and external institutions. They should be supported by a credible and
efficient judicial system.
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Journal of Accounting and Economics, 37, 315- 342.
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The quality of disclosure should be enhanced and made in a timely and transparent manner.
Jurisdictions should promote the adoption of emerging good practices for non-financial
disclosure. Asian Roundtable jurisdictions should continue the process of full convergence
with international standards and practices for accounting and audit.
Board performance needs to be improved by appropriate further training and board
evaluations. The board nomination process should be transparent and include full disclosure
about prospective board members, including their qualifications, with emphasis on the
selection of qualified candidates. Boards of directors must improve their participation in
strategic planning, monitoring of internal control and risk oversight systems. Boards should
ensure independent reviews of transactions involving managers, directors, controlling
shareholders and other insiders.

The legal and regulatory framework should ensure that non-controlling shareholders are
adequately protected from expropriation by insiders and controlling shareholders.

Theoretical Framework: 8

Scholars discussed the concept "Corporate Governance" from different perspectives.

According to Magdi and Nadereh (2002), corporate governance is about ensuring that the
business is run well and investors receive a fair return. Organization for Economic Co-
operation and Development (OECD; 1999) offers a wider definition of corporate governance.
OECD defines corporate governance as the system by which business corporations are
directed and controlled. The corporate governance structure specifies the distribution of rights
and responsibilities among different participants in the corporation such as, the board,
managers, shareholders and other stakeholders. It also defines the rules and procedures for
taking decisions on corporate matters. Uche (2004) and Wolfensohn (1999) also discussed
corporate governance in similar perspective. They argued that corporate governance is the
mechanism through which the company’s goals are set, the ways of achieving those goals are
defined and it will monitor performance accordingly.

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Anderson, R., Mansi, S. and Reeb, D. (2004).
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Potential conflicts of interest among participants (stakeholders) in the corporate structure
create the need for corporate governance in a corporate setting. Imam and Malik (2007)
identified two major causes behind this

conflict. Firstly, difference in the participants’ preferences and goals. Secondly, lack of
perfect information among participants about each other’s knowledge, actions and
preferences.
Jensen and Meckling (1976) addressed these conflicts by examining the separation of
corporate ownership from corporate management. They claims that this separation provides
executives with the ability to act in their own self-interest rather than in the interests of
shareholders in absence of other corporate governance mechanisms.

CODE of best Corporate Practices:

The main objective of the Code of Best Corporate Governance Practices is to suggest courses
of action to all types of companies
– Whether listed or privately held corporations, limited liability companies or partnerships
– With a view to: improving their performance facilitating access to capital

The Code is made up of six parts: 9

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Journal of Accounting and Economics, 37, 315- 342.
14
Owners – shareholders, stakeholders or partners
Board of Directors – the body representing the owners
Management – the chief executive officer and top managers
Auditing – the independent auditors
Surveillance – the fiscal council
Ethics/Conflicts of interest

The Code may include issues already covered by legislation or subject to new laws or
regulations, but their application should be voluntary.
Business owners willing to improve performance or gain access to capital are advised to
follow the Code.
Access to capital is not restricted to public offerings of shares, it also involves private equity
operations and funds from a company’s own cash flow generated through improved
performance.

The pillars of this Code of Best Practice of Corporate Governance are

Transparency 10

The Code requires that the CEO and management meet different information and
transparency needs of the owners, the board of directors, the independent auditors, the
supervisory board, the stakeholders, and the public at large.

Accountability

The following agents of corporate governance

Board of directors,
CEO and management,
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Journal of Accounting and Economics, 37, 315- 342.
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Independent auditors
Fiscal council should account for their results and activities to those bodies that elected them.

Fairness
Relations between all agents of corporate governance and the different types of owners must
be based on fair treatment of all the parties involved.

Ethics
Good corporate governance is to comply with the law. In addition every company should
have a statement of values and a code of ethics. The key issue of ethics is the avoidance of
conflict of interests.

Country: India Client: Craftsman 11

In 2011, IFC made a $13.6 million equity investment in Craftsman, a family-owned

firm in India with revenues of about $120 million in fiscal year 2011. As part of IFC’s
$13.6 million equity investment, IFC provided advisory support to the company that
helped improve its corporate governance practices, including reducing the family’s
representation on the board, nominating two independent directors, and hiring a
chief financial officer.

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Anderson, R., Mansi, S. and Reeb, D. (2004).

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Craftsman also had to form an audit committee comprised solely of independent
directors. The only recommendation pending is formation of the audit committee.
Standard Chartered PE invested about Rs 850 million 18 months ago.

IFC corporate governance support: Provided support to help improve its corporate
governance practices, including reducing the family’s representation on the board,
nominating two independent directors, and hiring a chief financial officer.

Examples of Corporate governance at different levels :12

Other Indian biggies like Tata Steel, L&T, Grasim, GIC, Mahindra & Mahindra, Asian
Paints, SAIL and ITC are some of the other companies who have made it to this prestigious
list. HDFC is the only company from the banking and financial sector to have attained a
position in this list.

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Corporate governance in India (gov.in)
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A company is not all about just profits, market valuations, P/E multiples and turnovers, there
is a lot that goes into building its position and image. Corporate Governance is one such
hidden force. After numerous scandals, maligned reputations and economic downturns,
companies are now realising that few concrete steps towards better governance could have
saved years of their labour.

Other sectors, such as FMCG, IT and Retail need to prioritize good governance, but this may
not help them in enhancing their market value. The influence of governance on value also
varies. It gains more importance during tough times rather than smooth sailing periods.

Nevertheless, corporate governance in India will continue to be crucial no matter what. The
approach must be a perfect balance between excessive stringency and too much flexibility.
Only the framework must be holistic and take the interests of all the stakeholders into account

Most companies chase only monetary gains and take corporate governance for granted. Due
to lack of trust on governance, investor sentiments go awry resulting in mass outflow of FII
funds, sale by majority shareholders, reduced market value and so on.

Conclusion

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The impact of good corporate governance is being comprehended in the Asian region
throughout the last decade. Public and private sector institutions should continue to make the
business case for the value of good corporate governance among companies, board members,
gatekeepers, shareholders and other interested parties, such as professional associations. The
implementation and monitoring of audit and accounting standards should be overseen by
bodies independent of the profession. Key stakeholders like external auditors, rating agencies,
advisors and intermediaries should be able to inform and advise shareholders free of conflicts
of interest. Accordingly, corporate governance can act as a glue of harmonization in the
corporate setting.

Bibliography

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For the following project I have taken help from the following:

Anderson, R., Mansi, S. and Reeb, D. (2004).

Board characteristics, accounting report integrity and the cost of debt.
Journal of Accounting and Economics, 37, 315- 342.
Baysinger, B. and Butler, H. (1985).
Corporate governance and the board of directors: ww.oecd.org

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