'I

r·

- MEANING AND DEFINITIONS OF CO

RPORATE GOVERNANCE
The phr ase "corporate governance
rules, relationships, systems and
" describes "the framework of
·.
Lesson 1 • PP-GRMCB

processes wit hin and by which ''Corpo rate Gov ern ance is the app
lication of
authority is exercised and control bes t man age men t prac tice s, com
led within corporations. It pliance of
encompasses the mechan ism s by law in true lett er and spir it and adh
which companies, and those in erence to
control, are held to account." ethi cal stan dar ds for effettive man
agemen t
Corporate governance is the bro and dist ribu tion of wea lth and
ad term use d to describe the discharge
processes, customs, policies, laws of social resp ons ibil ity for
and institutions tha t direct the sustainable
organizations and corporations in dev elop men t of all stak eho lder s:·
the way they act or administer
and control thei r ope rati ons. It wor
ks to achieve the goal of the The Institute of Company Secreta
organization and manages the rela j ries of
tionship with the stakeholders Ind ia
including the boa rd of directors and
the shareholders.
Corporate governance mea ns to stee
r an organization in the desired dire
strategic decisions. It also deals with ction by dete rmi nin g ways to take
the accountability of the individuals effe ctive
principal-agent problem in the orga through a mechan ism which redu
nization . ces the
Corporate Governance has a bro ad
scope. It includes both social
and institutional aspects. Corpora
te Governance encourages "Corporate Governance is concern
a trustworthy, moral, as well as ed with
ethical environment. In oth er the way corp ora te enti ties are
words, the hea rt of cor por ate govern ed,
governance is transparency, as cl.istinct from the way bus ines
disclosure, accountability and inte _s wit hin
grity. lt is to be borne in mind . those com panies are· managed.
tha t mer e legislation doe s not _Corporate
ens ure good governance. Good governance · add ress es .t he issu
governance flows from ethic~! es facing
business practices even when Board of Directors, .su~h as the
the re is no legislation. inte ract ion
with top man~gemen t and rela
Good cor por ate governance promot tionships
es investor confidence, which with the owners and oth ers inte
is crucial to the ability of entities rest ed in
listed on stock exchanges to the affairs,_) >f the com pany" Rob
com pete for capital. Good corp ertl an
orate governance is essential (Bob) Tric ~er '(who introduced
the wor ds
to develop additional values to corp orate governance for the.first
the stakeholders as it ensures time in his
tran spa ren cy which ens ure s stro book in 1-984)
ng and balanced economic ,-::- -..
dev elop men t. This also ens ures
that the interests of all
sha reh old ers (majority as well
as minority shareholders) are safe
exercise the ir rights and tha t the guarded. It ensures that all shareho
organization fully recognizes their lders fully
rights.
Corporate Governance is managin
g, monitoring and overseeing vari
cor por ate reliability, rep utat ion ous corporate systems in such a man
are not put at stake. Corporate Gov ner that
action satisfying accountability and ernance pillars on transparency and fairn
responsibility towards the stakeho ess in
lders.

Responsibility Corporate
Governance
~

Accq11111abi111y
, t~sson 1 • Conceptual Framework of Cor

-
porate Gov ernance 't
The long term per form anc e of a cor
porate is judged by a wide constitu
affected by the governance practic ency of stakeholders. Various stakeho
es of the company include: lders

Stakeholders
•

l,. _
Customers J I

Advantages of Corporate Govern

ance
1. Good cor por ate governance ensure
s corp orate success and economic growth.
2. Strong cor por ate governance maintai
ns investors' confidence , as a result
efficiently and effectively. of which, company can raise capital
3. The re is a positive imp act on the sha
re price.
4. It pro vid es pro per ind uce men t to the
owners as well as managers to achieve
the sha reh old ers and the organizatio objectives tha t are in interests of
n.
5. Good cor por ate governance also min
imizes wastages, corruption, risks and
6. mismanagement.
It hel ps in bra nd formation and dev
elopment.
7. It ens ure s org aniz atio n is manage
d in a manner that fits the best interest
s of all.
8. It red uce s cos t and aids in long term
sustenance and growth of the Company
.
NEED FOR CORPORATE GOVERNA
NCE
Cor por ate Gov ern anc e is integra
l to the existence of the company.
cor por ate cul ture of tran spa ren cy, Corporate Governance is needed to
accountability and disclosure. create a

Corporate Enhanced Investor Bett er Access to

Performance Trus t Glob al Mar ket

Enha ncin g
Easy Finance Combatin g
Ente rpri se fro m Insti tutio ns Corruptio n
Valu ation

Red uced Risk of

Corp orat e Cris is Accountabili ty
an d Scan dals
 -
(aJ Corporate Performance
Lesson 1 • PP-GRMCE

Improved governance structures and processes 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 finan ce. This can be linked with improved corporate performance- either in
terms of share price or profitability.
(b) Enhanced Investor Trust
As individuals and institutions invest capital directly or through Intermediary funds, they look to see if well-
governed corporate boards are there to protect their interests. Investors who are provided with high levels
of disclosure and transparency such as relating to data on matters such as pay governance, pay components,
performance goals, and the rationale for pay decisions etc. are likely to invest openly in those companies.
On Apple's investor relations site, for example, the firm outlines its leadership and governance, including its
executive team, its board of directors and also the firm's committee charters and governance documents, such
as bylaws, stock ownership guidelines etc.
(c) Better Access to Global Market
Good corporate governance systems attract investment from global investors, which subsequently leads
to greater efficiencies in the financial sector. The relation between corporate governance practices and th e
increasing international character of investment is very important. International flows of capital enable
companies to access financing from a much larger pool of investors. In order to reap the full benefits of the
global capital market and attract long-term c;pital, corporate governance arrangements must be credible, well
I
understood across borders and should adhere to internationally accepted principles. On the other hand, even
if corporations do not rely primarily on foreign sources of capital, adherence to good corporate governance
practices helps improve the confidence of domestic investors, reduces the cost of capital, enables good
functioning of financial markets and ultimately leads to more stable sources of finance.
(d) 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 would
certainly fade out. Corporate Governance enables a corporation to compete more efficiently and prevent fraud
and malpractices within the organization.
(e) 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.
Evidences indicate that well-governed companies receive higher market valuations. The credit worthiness of a
company can be trusted on the basis of corporate governance practiced in the company.

(f) Enhancing Enterprise Valuation

Improved management accountability and operational transparency fulfill investors' expectations and
confidence on management and corporations, and in return, increase the value of corporations.

(g) Reduced Risk of Corporate Crisis and Scandals

Effective Corporate Governance ensures efficient risk mitigation system in ?lac~. Atrans~arent a~d accountable
system makes the Board of a company aware of the majority of the mask nsks mvolved ma _particular strategy,
thereby, placing various control systems in place to facilitate the monitoring of the related issues.

(h) Accountability t
. d t rnance Investors directly/ indirectly entruS
Investo r relations are essential part of goo corpora e gove . Th pany is hence obliged to
ma nagement of the company to create enhan ced value for their investme nt: t e con~d investor relation. Good
make ti mely disclosu res on regul ar basis to all its shareholders in order to main am go th eir accountabi lity to
• t wh ereby Board s ca nn ot ignore
Corp orate Govern ance practices create t h e envi ro n men
these stakeholders.
r""", Lesso n 1 •. Conceptual Frame wo,k of Corporate Govern

ELEM ENTS / SCOPE OF GOO D CORPORATE GOVE

ance

RNANCE
Some of the impor tant elements of good corporate govern
ance are discussed as under:
1. Role and powe rs of Board
Board of Directors is th e prima ry in te rface between th e Co
mpany and its various stake holders. Directors are
elected by shareholde rs to represent them and are tas ked
wi th making Important decisions, such as corpo rate
officer appointmen ts, executive comp ensati on and divid end
poli cy, In some instances, board obligations stretch
beyon d finan cial opti mizat ion, when share holde r resoluti
ons call fo r ce rtai n social or environmental conce rns
to be prioritized.
The Board as a main fun ctiona ry is prima ry responsible
to ensur e value creation for its stake holde rs. The
absence of clearl y design ated role and powe rs of Board
weakens accountability mechanism and th reaten s
th e achievemen t of organi zational goals. Therefore, the forem
ost requi remen t of good governance is th e clear
identification of powe rs, roles, responsibilities and accou
ntability of th e Board, CEO, and the Chair man of th e
Board . The role of th e Board should be clearly documented
in a Board Charter.
2. Legislation
Clear and unam biguo us legislation and regulations are
fundamental to effective corpo rate gov~rnance.
Legislation that requi res continuing legal interp retati on
or is difficult to int~rp ret on a day-t o-day basis can be
subject to delibe rate manip ulatio n or inadv ertent misinterpre
tation.
3. Management envir onme nt
Management envir onme nt includes setting-up of clear
objectives and appro priate ethica l frame work ,
estab lishin gdue proce sses, provi dingf ortran spare ncy and
cleare nunci ation ofresp onsib ility and accou ntabil ity,
imple menti ng sound busin ess planning, encouraging busin
ess risk asses smen t, havin g right peopl e and right
skill for the jobs, estab lishin g clear bound aries for accep
table behavior, estab lishin g perfo rman ce evalu ation
meas ures and evalu ating perfo rmanc e and sufficiently
recognizing individual and group contr ibutio n withi n
the organ isatio n.

4. Boar d skills
To be able to under take its functions efficiently and effecti
vely, the Board must posse ss the neces sary blend
of qualit ies, skills, know ledge and experience. Each of
the direct ors shoul d make qualit y contr ibutio n to the
organ izatio ns policies, opera tions and mana geme nt. Illustr
atively, a Board shoul d have a mix of the following
skills, know ledge and exper ience :

Opera tiona l or techn ical exper tise, comm itmen t to estab

lish leade rship;
Finan cial skills;

Legal skills; and

Know ledge of Gove rnme nt and regul atory requi remen

t.
5. Board appo intm ents
To ens ure that the most comp etent peopl e are appoi nted
on the Board , the Board positi ons shoul d be filled only
afte r maki ng an exten sive sea rch. A well- defin ed and open
proce dure must be in place for re-ap point ment s as well
as for appo int me nt of new direc tors . Appo intm ent
mech a nism shoul d satisf y all statu tory and admin istra
requ ireme nts. High on the pri ori ty should be an und tive
e rstan d ing of skill requi reme nts of the Board particu
at the time of maki ng a choic e for ap point ing a new larly
di rector. All new d irecto rs should be provi ded wi th a
of appo intm ent sett ing out in deta il their dutie s a nd letter
res ponsibilities. Orie ntatio n progr am fo r new direct ors
shoul d also be provid ed to a ppris e them abou t th e
comp a ny, its inte rn al and exter nal mana geme nt a nd th
expec tati ons from th e direc tors an d the Boa rd . e
 - The role of the board of direc tors was summarize
governance) as:
Lesson 1 • PP-GRMCE
d by the King Report (a South African repor t on corpo
rate

To defin e the value s

To defin e the purp ose To ident ify the
by whic h the
of the company company will perfo rm stake hold ers relev ant
its daily dutie s to the comp any

To deve lop a strat egy To ens ure

combining these impl ementation of
facto rs this strat egy

6. Board induction and training

Directors must have a broad unde rstan ding of the
area of operation of the comp any's busin ess, corpo
strate gy and chall enges being faced by the Board rate
. Attendance at continuing educ ation and profession
deve lopm ent prog ramm es is essen tial to ensur e that al
directors remain abrea st of all deve lopm ents, which
or may impa ct their corpo rate governance and other are
related duties.
7. Board independence
Indep ende nt Board is essen tial for sound corporate
governance. This goa! may be achie ved by assoc iating
sufficient numb er of indep ende nt directors with the
Board. Independence of direc tors woul d ensu re that
are no actua l or perceived conflicts of interest. It also there
ensures that the Board is effective in super visin g and,
wher e necessary, challenging the activities of mana
gement. The Board needs to be capab le of asses sing
perfo rman ce of mana gers with an objective perspective the
. Accordingly, a porti on of the Board mem bers shou
be indep ende nt of both the mana geme nt team and ld
any commercial dealings with the company. At the
time a prop er balan ce betw een indep ende nt and non-i same
ndependent directors is also very impo rtant .
8. Board meetings
Directors must devo te sufficient time and give due atten
tion to meet their obligations. Attending Board meetings
regul arly and prepa ring thoroughly before entering
the Boardroom increases the quality of intera ction
Board meetings. Board meetings are the forums for at
Board decision-making. These meetings enabl e direc
to disch arge their responsibilities. The effectivene tors
ss of Board meetings is depe nden t on carefully plann
agen das and provi ding relev ant pape rs and material ed
to directors sufficiently prior to Board meetings.
9. Code of conduct
It is essen tial that the organ izatio n's explicitly presc
ribed norms of ethical practices and code of conduct
comm unica ted to all conc erned and are clearly unde are
rstoo d and followed by each mem ber of the organizatio
Systems shou ld be in place to periodically measure, n.
evaluate and if possible recognize the adherence to code
of
cond uct.
10. Strategy setti ng
The objec tives of the comp any must be clearly docu
ment ed in a long-term cor porate str~tegy includ ing
annu al busin ess plan toget her with achievable and an
meas urable perfo r manc e targe ts and miles to nes.
11. Business and community obligations
Thou gh basic activity of a business entity is inh erent
ly com mercial yet it mus t also take care of commu nity's
·gatio ns Comm ercia l objec tives and comm uni ty
bl
o I • service obligations should be clear ly documented
he Boar after
appro va 1by t d
·
The stake holde rs must be in formed abou t the propo se d an d ongoi.ng int
. .t" tives taken
ta
to meet the comm unity oblig atio ns. Cor porat e Socia . . .
l Responsibility is rapidly becoming l part of the
an integra
ma nage me nt's role and responsibility.
 of Corporate Governance
; Les so n 1 • Con cept ual Fram ewo rk
orti ng
12. Fin anc ial and ope rati ona l rep
va nt info r matio n in a form and of
rd com pre hen s ive, regu la1; relia ble, tim ely, correct a nd rele
The Boa requ ires e pe rfor ma nce. For th is purp ose,
opr ia te to disc harg e its fun ctio n of mon itor ing corp orat
a qua li ty t~a t is a ppr crib ed whi ch wou ld add to
pe rfor ma nce mea sure s - fina ncial and non -fin a ncia l sho uld be pres
clea rly defin ed
the orga niza tion .
the effici enc y a nd effe ctive ness of so exte nsiv e a nd
tion prov ided by the man age men t mus t be com preh ensi ve but not
The re por ts and info rma sho uld be ava ilab le to Boa rd mem
bers
ion of the key issu es. The repo rts
deta iled as to ham per com preh ens ude stat us repo rt abo ut the s tate of
adv a nce to allo w info rme d deci sion -ma king . Rep orti ng sho uld incl ativ es.
well in nt Boa rd app rove d initi
itor ing of the prog ress of a ll sign ifica
imp lem enta tion to facilita te the mon
anc e
13. Mo nito ring the Boa rd per form dua l dire ctor s at peri ~dic
and eval uate its com bine d perf orm anc e and also that ofin divi
The Boa rd mus t mon itor blis h an app rop riat e
perf orm anc e indi cato rs besi des pee r review. The Boa rd sho uld esta rd
inte rval s, usin g key ance eval uati on. Com pan ies Act, 201 3 man date s Boa
lts of Boa rd's perf orm
mec han ism for repo rtin g the resu
pani es.
eval uati on of spec ifie d clas ses of Com
14. Aud it Com mit tee t; inte rnal and stat uto ry aud it~r s,
inte r alia resp ons ible for liais on with the man age men
The Aud it Com mitt ee is cies and pro ced ures , rep orti ng
inte rnal con trol and com plia nce with sign ifica nt poli
reviewi ng the ade qua cy of trib utes to the gov erna nce of
rd on the key issu es. The qua lity of Aud it Com mitt ee sign ifica ntly con
to the Boa
h law s,
the com pan y. "Co rpor ate gov erna nce d eals wit
imp licit rule s
15. Risk man age men t proc edu res, prac tice s and
abil ity to take
of corp orat e func tion ing that dete rmi ne a com pan y's
Risk is an imp orta nt elem ent info rme d man age rial dec isio ns vis- a -vis its
gov erna nce . The re sho uld be a clea rly esta blis hed sha reh olde rs,
and claim ants -in par ticu lar, its
ess of iden tify ing, anal yzin g and trea ting risk s, whi ch Stat e ·and
proc
effectively achi evin g its cred itor s, cus tom ers, t he
cou ld prev ent the com pan y from emp loye es. The re is a~glob al con sen
sus a bou t
It also invo lves esta blis hing a link betw een gov e rna nce :
obje ctiv es.
ritie s. App ropr iate con trol the obje ctiv e of'g ood ' corp orat e
and reso urci ng prio er valu e."
risk -ret urn
man age men t plan mus t be max imiz ing long -ter m sha reh old
proc edu res in the form of a risk
y (Cl l)-
ugh out the orga niza tion . Con fed era tion of Ind ian Ind ustr
put in plac e to man age risk thro e Cod e
s as dive rse as revi ew Des irab le Cor por ate Gov ern anc
The plan sho uld cov er acti vitie
e use of info rma tion (19 98)
of ope rati ng perf orm anc e, effectiv
and outs ourc ing.
technology, con trac ting out
NANCE
EVOLUTION OF CORPORATE GOVER
erna nce .
basi s of evo lutio n of corp orat e gov
Th e following theo ries eluc idat e the