CORPORATE

GOVERNANCE

Unit 2
Course Code: NHS 004
Session: 2023-24
Offered to: B. Tech 2nd year
Semester: Even (IVth)

Course Instructor:
Ms. Sonal Mehrotra
Humanities Department,
SoHSS,
HBTU, Kanpur.

*This course is part of Minor in Business Analytics Program offered by School of Humanities and Social Sciences.
Unit I: Corporate Governance B.Tech 2nd: 2023-24, Even Sem

Unit-II: Corporate Governance

Syllabus
Global Corporate Governance Practices: Anglo-American Model, German Model, Japanese
Model, Landmarks in Emergence of Corporate Governance, Corporate Social Responsibility
(CSR) and Business Ethics, Meaning and evolution of CSR in India, Need for CSR, Social
Responsibility of Business

Global Corporate Governance Practices: Models of Corporate Governance

Corporate Governance Models give information about key players in the organization, formal
board structures, pattern of share ownership, link between shareholders and company etc.
These elements differ between countries. As a result, different corporate governance models
may be found throughout the world. Some of them have been explained below.

[Remember: There is no one model of corporate governance which is universally acceptable

as each model has its own advantages and disadvantages. ]

Anglo American Model

 It is also called Anglo Saxon Model and is used mostly in USA, UK, Canada and some
common wealth countries.

 The shareholders appoint directors who is turn appoint the managers to manage
business. Thus there is separation of ownership and control.

 The board usually consist of executive directors and few independent directors. The
board often has limited ownership stake in the company. Traditionally, the board
chairperson and the CEO is the same person, but two different persons can also hold
these positions.

 This model relies on effective communication between shareholders, board and

management with all important decisions taken after getting approval of shareholders
(by voting).

 Management is tasked with running the company in a way that maximizes shareholder
interest. The fact that shareholders provide the company with funds and may withdraw
support if dissatisfied keeps management working effectively.

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Unit I: Corporate Governance B.Tech 2nd: 2023-24, Even Sem

 Example: Microsoft, Google, Amazon

German Model

 It is also known as Continental model. It is a 2 tier board model that comprises of

supervisory board and the management board. It is used in countries like Germany,
France, Holland etc.

 Usually a large majority of shareholders are banks and financial institutions. The
shareholders can appoint only 50% of members to constitute the supervisory board.
The rest is appointed by employees and labor unions.

 The size of the supervisory board is determined by a country's laws and can't be
changed by shareholders.

 The management board is composed of company insiders, such as its executives.

 National interests have a strong influence on corporations with this model of corporate
governance. Companies can be expected to align with government objectives.

 Example: Volkswagen group

Course Instructor: Ms. Sonal Mehrotra 3

Unit I: Corporate Governance B.Tech 2nd: 2023-24, Even Sem

Japanese Model

 This model is also called business network model, usually the major shareholders are
banks/financial institutions, large family shareholders, corporate with cross-
shareholders.

 There is a supervisory board which is made up of board of directors and president, who
are jointly appointed by shareholder and banks/financial institutions.

 There exists Japanese ‘keiretsu’ – a form of cultural relationship among family

controlled corporate and group of cross-shareholders (who may have invested in
common companies or have trading relationships).

 The board of directors is usually made up of insiders including company executives.

Most of the directors are heads of different divisions of the company. Outside directors
or independent directors are found rarely.

 The government affects the activities of corporate management via its regulations and
policies. Small, independent, individual shareholders have no role or voice. Keiretsu
may remove directors from the board if profits wane.

In this model, corporate transparency is less because there is concentration of power of

people with major interests.

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Unit I: Corporate Governance B.Tech 2nd: 2023-24, Even Sem

Understanding Keiretsu
 These include major shareholders.
 Keiretsu is a Japanese term referring to a business network made up of different
companies that work together, have close relationships, and sometimes take small
equity stakes in each other, all the while remaining operationally independent.
 Japanese Corporations value having close ties with one another. Working together is
believed to be mutually beneficial for all parties.
 Examples: The automobile company Toyota and Mitsubishi are best-known examples
of Japanese keiretsu.

Indian Model
The model of corporate Governance found in India is mix of Anglo-American & German Models
 This mix is because in India, there are three types of corporations i.e. private, public Co.
and public sectors undertakings (that includes statutory companies, government
companies, banks and other kind of financial institutions).
 Each of these corporations, have a distinct pattern of shareholding.
 In case of companies, the promoter and his family have almost complete control over
the company. They depend less on outer equity capital. Hence in private companies the
German Model of corporate governance is followed.
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Unit I: Corporate Governance B.Tech 2nd: 2023-24, Even Sem

Landmarks in Emergence of Corporate Governance

“Landmarks in the Emergence of Corporate Governance” illuminates the origins and evolution
of corporate governance. It highlights the influential role of committees and legislative acts
implemented in different countries that shaped corporate governance.

The corporate scams and frauds brought change in outlook of external regulators and a need
to penalize the wrongdoers. The committees were formed to recommend ways of governance
that could minimize occurrences of scams and frauds.

Developments in the USA

1972: Occurrence of Watergate scandal (A political scandal involving President Nixon)
1979: Securities and Exchange Commission’s (SEC) proposed mandatory reporting on internal
financial controls.
1985:Savings and Loan collapse revealed due to excessive lending, speculation, and risk-taking.
1985: Treadway Commission formed under chairman ship of James C. Treadway, Jr. to identify
the main causes of misrepresentation in financial reports.
1987: Treadway Report published. It recommended a framework for internal control and
proposed independent audit committees and implementation of internal audit by companies.

Developments in the UK
1990: BCCI (Bank of credit and commerce International) scandal occurred. The bank was
charged of money laundering, serving terrorist and drug runners, dictators as its customers.

1991: The Cadbury committee was formed chaired by Sir Adrian Cadbury and focused on
financial aspects of corporate governance.

Cadbury Committee Recommendations, 1992

The report gave recommendations on company boards and accounting system to mitigate
corporate governance risks and to raise standards of corporate governance.

 The position of Chairman of the Board should be separated from that of Chief Executive.
 The majority of the Board to be comprised of outside directors.
 The remuneration committees for Board members should be made.
 Board should appoint an Audit Committee including at least 3 non-executive directors.
 Board should meet regularly and monitor working of executive management.
 The report insisted on the disclosure of balance reports by the company to the
shareholders.

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Unit I: Corporate Governance B.Tech 2nd: 2023-24, Even Sem

Sarbanes Oxley Act (SOX), 2002

 Addressed all the issues associated with corporate failures to achieve quality
governance and to restore investor confidence.
 It insisted upon the need to set up a Public Company Accounting Oversight Board
(PCAOB) to monitor and regulate the conduct of auditors.
 It established standards for external auditor independence. It restricted external
auditors to give consulting services to same clients.
 It mandates senior executives take responsibility for accuracy and completeness of
CFR(Code of Federal Regulations)
 It mandates financial disclosures and timely reporting.
 It mandates CEO to sign to sign the company tax return.
 It identifies corporate frauds and tampering records as financial crime.
 It mandates penalties for non-compliance and financial crimes.

Kumar Mangalam Birla Committee, 1999

The Kumar Mangalam Birla Committee was formed in 1999 by SEBI (Securities and Exchange
Board of India) to develop recommendations for corporate governance practices in India.

 It consisted of 17 members under chairmanship of Shri Kumar Mangalam Birla.

 The report was Ist formal attempt to evolve a “Code of Corporate Governance” in India.
 It distinguishes the responsibilities and obligations of the Board and Management.
 It emphasizes the right of shareholders in demanding corporate governance.
 It identified roles & responsibilities of - Shareholders, Board and Management.
The Committee’s recommendations consisted of
(i) mandatory recommendations (ii) non-mandatory recommendations.
Mandatory Recommendations
 Applicable to all listed companies with paid-up share capital of Rs. 3 crore and above
 The Board of Directors of a company must have an optimum combination of executive
and non-executive Directors.
 The Audit Committee should have a minimum 3 members.
 The Board of Directors should decide the remuneration of nonexecutive directors.
 The Board meeting should be held at least 4 times a year with a maximum time gap of 4
months between any two meetings.
 In case of appointment of a new Director or re-appointment of existing Director,
information containing a brief resume, expertise and companies in which the person
holds Directorship, must be provided to the shareholders.
 Any Information should be shared with shareholders in regard to their investments.
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Unit I: Corporate Governance B.Tech 2nd: 2023-24, Even Sem

Non-Mandatory Recommendations
 Role of chairman should be different from role of CEO.
 Remuneration Committee: The Board of Directors should set up a Remuneration
Committee to determine remuneration packages for executive directors including
pension rights and any other compensation payment.
 Shareholders’ Rights: Half-yearly declaration of financial performance including
summary of the significant events in the six months should be sent to each of the
shareholders.

Corporate Social Responsibility (CSR)

Meaning of CSR

Corporate social responsibility (CSR) is a self-regulating business model that helps a

company be socially accountable to itself, its stakeholders, and the public. Engaging in CSR
means a company operates in ways that enhance society and the environment instead of
contributing negatively to them.

Need for CSR

 CSR helps in promoting a positive brand image for companies.

 It benefits society, nature and the environment.
 Embracing CSR increases customer retention and loyalty, increases employee
satisfaction and enhances shareholders’ confidence.
 CSR help build strong relationships with regulatory bodies.
 It leads to more profit generation by creating competitive advantage.

Evolution of CSR in India

India is the first country in the world to make corporate social responsibility (CSR)
mandatory, following an amendment to the Companies Act, 2013 in April 2014. Businesses
can invest their profits in areas such as education, poverty, gender equality, and hunger as
part of any CSR compliance.

The amendment notified in the Companies Act, 2013 requires companies with
 a net worth of INR 5 billion (US$70 million) or more, or
 an annual turnover of INR 10 billion (US$140 million) or more, or
 net profit of INR 50 million (US$699,125) or more,
to spend 2 percent of their average net profits of three years on CSR.

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Unit I: Corporate Governance B.Tech 2nd: 2023-24, Even Sem

Prior to that, the CSR clause was voluntary for companies, though it was mandatory to
disclose their CSR spending to shareholders. Businesses must note that the expenses towards
CSR are not eligible for deduction in the computation of taxable income.

Few Examples of CSR in India

Reliance
Reliance Industries Limited has been the top CSR spender in the country for the last several
years. Reliance Foundation is the CSR arm of the Reliance Group. The main areas of focus of
CSR include rural transformation, education, disaster response, environment, health, sports
for development, and arts, culture and heritage.

ITC
ITC CSR initiatives in areas such as social forestry, biodiversity conservation, climate,
agriculture, women empowerment, education, skilling & vocational training, sanitation, health
& nutrition, waste management etc. contributed significantly to sustainable development.

Other companies like SBI, Tata group, Mahindra and Mahindra, JSW Steel, Wipro, Infosys, L&T,
Vedanta etc contributed to the overall welfare and development of communities across India.

Social Responsibility of Business

The business, in general, has corporate social responsibility towards various stakeholders like:
 Customers
 Suppliers
 Environment
 Communities
 Employees
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Unit I: Corporate Governance B.Tech 2nd: 2023-24, Even Sem

1. Responsibility towards Customers

 Product Quality and Safety: Providing goods that exceed industry standards, protecting
consumers from harm and providing value for their money.
 Eco-Friendly practices: To improve production, packaging and labeling through eco-
friendly measures and minimizing environmental impacts.
 Ethical Practices: To adopt fair and ethical practices and not indulge in adulteration &
hoarding practices.
2. Responsibility towards Suppliers
 Availing Sensible Credit period: To ensure timely payment of all the bills due.
 Reasonable terms and conditions: To bargain for a win- win situation for both.
 Long term Relationship: To make regular delivery of orders for the purchase and sale of
goods to ensure long-term sound business relations.
3. Responsibility towards Environment
 Reducing harmful practices: Decreasing pollution, greenhouse gas emissions, the use of
single-use plastics, water consumption, and general waste
 Regulating energy consumption: Increasing reliance on renewables, sustainable
resources, and recycled or partially recycled materials
 Offsetting negative environmental impact: Planting trees, funding research, and
donating to related causes
4. Responsibility towards Communities
 Development of local infrastructure: like foot ways, roads, water supply, parks and
sanitation facilities, educational institutions, hospitals etc.
 Upliftment of weaker sections of the society: supporting livelihood, skills development,
providing employment, raising standard of living.
 Ethical approach: To refrain from all kinds of anti social, unfair and unethical activities.

5. Responsibility towards Employees

 Remuneration: To pay fair wages/salaries, bonus etc.
 Health and Safety: To ensure healthy and safe working conditions/ work environment
 Other Facilities: To provide adequate benefits such as housing, medical facilities,
insurance cover, retirement benefits etc.

*****

Course Instructor: Ms. Sonal Mehrotra 10