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The Foundation For Corporate Citizenship and sustainable businesses
Submitted By: Neha Singh BBA-TTM (IV sem) R.No: 03014905010
 Ways of mitigating or preventing these conflicts of interests include the processes. the Principles of Corporate Governance (OECD.. most of which involved accounting fraud. An important theme of corporate governance is the nature and extent of accountability of people in the business. Their demise is associated with the U..Corporate Governance Corporate governance is "the system by which companies are directed and controlled" (Cadbury Committee. debtholders. customers and communities affected by the corporation's activities. It is intended to increase the confidence of shareholders and capital-market investors. professional. intending to restore public confidence in corporate governance.g. and institutions which have impact on the way a company is controlled. particularly due to the high-profile collapses of a number of large corporations. is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. the Sarbanes-Oxley Act of 2002 (US. Similar corporate failures in other countries stimulated increased regulatory interest (e. these include Enron Corporation and MCI Inc. with a strong emphasis on shareholders' welfare. customs. federal government passing the Sarbanes-Oxley Act in 2002. policies.  A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency. Principles of corporate governance Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK. One. . It involves a set of relationships between a company’s management. informally referred to as Sarbox or Sox. In contemporary business corporations. There has been renewed interest in the corporate governance practices of modern corporations since 2001. executives. and other employees. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. this aspect is particularly present in contemporary public debates and developments in regulatory policy (see regulation and policy regulation). the main external stakeholder groups are shareholders. Comparable failures in Australia (HIH. (formerly WorldCom). 1992). it deals with prevention or mitigation of the conflict of interests of stakeholders. its board. 2002). suppliers. and mechanisms that try to decrease the principal–agent problem. laws.Tel) are associated with the eventual passage of the CLERP 9 reforms. The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. trade creditors. 1992). its shareholders and other stakeholders. It guarantees that an enterprise is directed and controlled in a responsible. Internal stakeholders are the board of directors. 1998 and 2004). and transparent manner with the purpose of safeguarding its long-term success. The Sarbanes-Oxley Act. In the U.S.S. Parmalat in Italy).
It is about commitment to values. The Anglo-American "model" tends to emphasize the interests of shareholders." It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions. and policy makers. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. suppliers. including employees. managers. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. customers. local communities. suppliers. creditors. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. factual information. Interests of other stakeholders: Organizations should recognize that they have legal. investors. Corporate governance models around the world There are many different models of corporate governance around the world. Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. It also needs adequate size and appropriate levels of independence and commitment Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members. The coordinated or multi-stakeholder model associated with Continental Europe and Japan also recognizes the interests of workers. . Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear. and the community. Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. contractual. India India's SEBI Committee on Corporate Governance defines corporate governance as 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. These differ according to the variety of capitalism in which they are embedded. social. customers. and market driven obligations to non-shareholder stakeholders. Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights.
It also results in the perpetual existence that characterizes the modern corporation. and various laws and regulations affecting business practices. other executives and line management. creditors. developing directional policy. shareholders and auditors). customers and the community at large. Parties to corporate governance The most influential parties involved in corporate governance include government agencies and authorities. whether direct or indirect. corporations are subject to common law in some countries. stock exchanges. The capacity of shareholders to modify the constitution of their corporation can vary substantially. workers and management receive salaries.Regulation Legal environment . This allows the entity to hold property in its own right without reference to any particular real person. In most jurisdictions. in English-speaking jurisdictions. Other influential stakeholders may include lenders. In addition to the statutory laws of the relevant jurisdiction. Partly as a result of this separation between the two investors and managers. corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. in the financial performance of the corporation. The board has the responsibility of endorsing the organization's strategy. corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. the Chief Executive Officer or the equivalent.General Corporations are created as legal persons by the laws and regulations of a particular jurisdiction. management (including the board of directors and its chair. All parties to corporate governance have an interest. it is usually known as the Corporate Charter or the [Memorandum and] Articles of Association. and ensuring accountability of the organization to its investors and authorities. The agency view of the corporation posits that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Agency concerns (risk) are necessarily lower for a controlling shareholder. suppliers. This constitution is identified by a variety of terms. appointing. Directors. employees. The statutory granting of corporate existence may arise from general purpose legislation (which is the general case) or from a statute to create a specific corporation. A board of directors is expected to play a key role in corporate governance. supervising and remunerating senior executives. which was the only method prior to the 19th century. but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. benefits . These may vary in many respects between countries.
and webs. A key factor in a party's decision to participate in or engage with a corporation is their confidence that the corporation will deliver the party's expected outcomes. Ownership is typically defined as the ownership of cash flow rights whereas control refers to ownership of control or voting rights. ownership pyramids. an independent third party (the external auditor) attests the accuracy of information provided by management to investors. and possible continued trading relationships. Many parties may also be concerned with corporate social performance. . In some countries such as most of Continental Europe. human and other forms of capital. Corporate engagement with shareholders and other stakeholders can differ substantially across different control and ownership structures. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality. Some features or types of control and ownership structure involving corporate groups include pyramids. rings. crossshareholdings. proxy votes and clauses in the articles of association that confer additional voting rights to long-term shareholders. These parties provide value to the corporation in the form of financial. Cross-shareholding are an essential feature of keiretsu and chaebol groups . For lenders. it is specified interest payments. physical. voting coalitions. ownership is not necessarily equivalent to control due to the existence of e. Mechanisms and controls Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. to monitor managers' behavior. dual-class shares. An ideal control system should regulate both motivation and ability. Researchers often "measure" control and ownership structures by using some observable measures of control and ownership concentration or the extent of inside control and ownership.g. For example. Control and ownership structures Control and ownership structure refers to the types and composition of shareholders in a corporation. German "concerns" (Konzern) are legally recognized corporate groups with complex structures. including markets. influence corporate governance. When categories of parties (stakeholders) do not have sufficient confidence that a corporation is being controlled and directed in a manner consistent with their desired outcomes. while returns to equity investors arise from dividend distributions or capital gains on their stock. There is substantial interest in how external systems and institutions. Japanese keiretsu (系列) and South Korean chaebol (which tend to be family-controlled) are corporate groups which consist of complex interlocking business relationships and shareholdings. and increases the likelihood of political action. the loss of confidence and participation in markets may affect many other stakeholders. When this becomes an endemic system feature. while investors expect to receive financial returns. suppliers are concerned with compensation for their goods or services.and reputation. they are less likely to engage with the corporation.
Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors. ex ante. safeguards invested capital. Whilst nonexecutive directors are thought to be more independent. Monitoring by large shareholders and/or monitoring by banks and other large creditors: Given their large investment in the firm. Regular board meetings allow potential problems to be identified. fire and compensate top management. One group may propose company-wide administrative changes. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting Balance of power: The simplest balance of power is very common. Different board structures are optimal for different firms. and can elicit myopic behavior. shareholders. It could be argued. that executive directors look beyond the financial criteria. and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting.. to monitor the management. however. they may not always result in more effective corporate governance and may not increase performance. it is relatively rare elsewhere. operating efficiency. It may be in the form of cash or non-cash payments such as shares and share options. management. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. superannuation or other benefits. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. another group review and can veto the changes.K. successive codes of best practice have recommended against duality. In the U.S. corporations. Such incentive schemes. Examples include: Monitoring by the board of directors: The board of directors. these stakeholders have the incentives. discussed and avoided. In publicly-traded U. the ability of the board to monitor the firm's executives is a function of its access to information. employees) outside the three groups are being met. therefore. and compliance with laws and regulations. .. require that the President be a different person from the Treasurer.Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. The practice of the CEO also being the Chair of the Board is known as "duality".S. are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior. audit committee. While this practice is common in the U. combined with the right degree of control and power. with its legal authority to hire. Moreover. and a third group check that the interests of people (customers. boards of directors are largely chosen by the President/CEO and the President/CEO often takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes.
The 1956 Companies Act built on this foundation. trading and settlements. and inefficiency became the hallmarks of the Indian corporate sector. Examples include: competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labour market media pressure takeovers Corporate Governance in India – A Historical Background The historical development of Indian corporate laws has been marked by many interesting contrasts. The country also inherited four functioning stock markets (predating the Tokyo Stock Exchange) with clearly defined rules governing listing.15 In terms of corporate laws and financial system. and widespread red-tape that bred corruption and stilted the growth of the corporate sector.External corporate governance controls External corporate governance controls encompass the controls external stakeholders exercise over the organization. became the main providers of long-term credit to companies. India inherited one of the world’s poorest economies but one which had a factory sector accounting for a tenth of the national product. protection. a well-developed equity culture (if only among the urban rich). . Exorbitant tax rates encouraged creative accounting practices and gave firms incentives to develop complicated emolument structures with large ―under-the-table‖ compensation at senior levels. Along with the central government-owned and managed mutual fund. nepotism. The turn towards socialism in the decades after independence. three central (federal) government development finance institutions (the Industrial Finance Corporation of India. together with about thirty other state-government owned development finance institutions. At independence. the Industrial Development Bank of India and the Industrial Credit and Investment Corporation of India). therefore. The situation worsened in subsequent decades and corruption. these institutions also held (and still hold) large blocks of shares in the companies to which they lent. Early corporate developments in India were marked by the managing agency system. as did other laws governing the functioning of joint-stock companies and protection of investors’ rights. India emerged far better endowed than most other colonies. the Unit Trust of India. and invariably had representations on their boards in the form of nominee directors. In the absence of a stock market capable of raising equity capital efficiently. put in place a regime and a culture of licensing. marked by the 1951 Industries (Development and Regulation) Act and the 1956 Industrial Policy Resolution. though they traditionally played very passive roles in the boardroom. and a banking system replete with well-developed lending norms and recovery procedures. This contributed to the birth of dispersed equity ownership but also gave rise to the practice of management enjoying control rights disproportionately greater than their stock ownership.
Concerns about corporate governance in India were. Company Boards had often been largely ineffective in their monitoring role. largely triggered by a spate of crises in the early 1990’s—particularly the Harshad Mehta stock market scam of 1992-followed by incidents of companies allotting preferential shares to their promoters at deeply discounted prices. the legal process took over 10 years on average. it won immediate protection from creditors’ claims for at least four years. it has played a crucial role in establishing the basic minimum ground rules of corporate conduct in the country. as well as those of companies simply disappearing with investors’ money. we have witnessed wideranging changes in both laws and regulations. noncompliance with disclosure norms had been rampant and even the failure of auditors’ reports to conform to the law attracted only nominal fines and little punitive action. the BIFR took well over two years. Established primarily to regulate and monitor stock trading. Recent Developments in Corporate Governance in India Liberalization of the Indian economy began in 1991. Listing requirements of exchanges enforced some transparency. Between 1987 and 1992. Protection of creditors’ rights had therefore existed only on paper in India. and it has been referred to the Board for Industrial and Financial Reconstruction (BIFR).These concerns about corporate governance stemming from the corporate scandals. just to reach a decision.Though financial disclosure norms in India have traditionally been superior to most Asian countries. in reality minority shareholders had often suffered from irregularities in share transfers and registrations. This could well explain why Indian banks have historically under-lent and invested primarily in government securities. however. and even for those that needed to be liquidated. which considers a company ―sick‖ only after its entire net worth has been eroded. minority shareholders and creditors in India had remained effectively unprotected despite the laws on the books. India’s system has been driven by the 1985 Sick Industrial Companies Act (SICA). While the Companies Act has always provided an excellent framework. on average. by which time the assets of the company were usually almost worthless. Sometimes non-voting preferential shares had been used by promoters to channel funds and expropriate minority shareholders. therefore. but non-compliance was neither rare nor punished. and clear instructions for maintaining and updating share registers. However. this relatively dismal environment started changing rapidly after the monumental economic reforms and the major liberalization programs initiated by the Indian government in the early nineties. Perhaps the single most important development in the field of corporate governance and investor protection in India has been the establishment of the Securities and Exchange Board of India in 1992 and its gradual and growing empowerment since then.The corporate bankruptcy and reorganization system also had serious problems. As soon as a company was registered with the BIFR. For most of the post-Independence era the Indian equity markets were not liquid or sophisticated enough to exert effective control over the companies. The Institute of Chartered Accountants in India has rarely taken action against erring auditors. All in all. coupled with a perceived need of opening up the corporate sector to the forces of competition . Since then. and their independence had been perceived as highly questionable. Very few companies emerged successfully from the BIFR. and a major positive transformation of the corporate sector and the corporate governance landscape. There were cases in which the rights of minority shareholders had been compromised by management’s private deals in the relatively infrequent event of corporate takeovers. and its bankruptcy process was featured among the worst in World Bank surveys on business climate.
even though India ranks high on the ease of getting credit. gave rise to several investigations into ways to fix the corporate governance situation in India. There is significant pyramiding and tunneling among Indian business groups and. Most of the corporate governance problems noted here. and display an exceptionally high level of optimism. one of the major architects of the Indian IT outsourcing success story17. and are present in many other economies as well. This is not surprising: concentrated ownership and family control are important in countries where enforceable legal protection of minority property rights is relatively weak. Conclusions This article outlines the salient features of the Indian corporate governance system. shareholdings remain relatively concentrated with ―promoters‖ and family business groups continuing to dominate the corporate sector. developed by a committee chaired by Rahul Bajaj. In particular. the Naresh Chandra Committee on Corporate Audit and Governance in 2002. notwithstanding copious reporting requirements.and globalization. and the Expert Committee on Corporate Law (J. and the second by Narayana Murthy. evidence of earnings management. Familycontrolled businesses provide an organizational form that reduces transaction costs and asymmetric information problems under these conditions. The committee was formed in 1996 and submitted its code in April 1998. are in fact commonplace in Asia. China and Russia. the Department of Company Affairs and the Ministry of Finance of the Government of India also began contemplating improvements in corporate governance. and has a well-functioning banking sector with one of the lowest proportions of non-performing assets.J. another leading industrial magnate. One of the first such endeavors was the Confederation of Indian Industry Code for Desirable Corporate Governance. The first Committee submitted its report in early 2000. Despite the above corporate governance shortcomings. . Concurrent with these initiatives by the SEBI. Much of the country’s extensive small and medium enterprises (SME) sector displays relationshipbased informal control and governance mechanisms. far from being unique to India. a leading industrial magnate. inhibiting financing and keeping the cost of capital at levels higher than necessary. the reality is different with slow. These efforts included the establishment of a study group to operationalize the Birla Committee recommendations in 2000. All of these efforts were aimed at reforming the existing Companies Act of 1956 that still forms the backbone of corporate law in India. corporate governance in India does not compare unfavorably with any of the other major emerging economies: Brazil. Later the SEBI constituted two committees to look into the issue of corporate governance-the first chaired by Kumar Mangalam Birla. The reason is that India is now clearly and strongly committed to sustaining and rapidly furthering the major economic reforms and the liberalization started in the early nineties. These two committees have been instrumental in bringing about far reaching changes in corporate governance in India through the formulation of Clause 49 of Listing Agreements (described below). Irani Committee) in late 2004. the Indian economy and its financial markets have started attaining impressive growth rates in recent years. While on paper the Indian legal system provides one of the highest levels of investor protection in the world. Even among large companies. over-burdened courts and significant corruption. and the second three years later.
also established as part of the reforms. just behind NASDAQ and NYSE. All these positive developments should arguably help Indian industry ensure that their financial gains reach their investors fairly and transparently. and legal changes to improve the enforceability of creditor’s rights. functions efficiently and transparently to now trade among the highest number of trades in the world. and make the individual shareholder their central governance focus. We are also seeing the rise of companies like INFOSYS that are free from the influence of a dominant family or group. Most importantly. particularly with the enactment of Sarbanes-Oxley type measures in Clause 49 of the listing agreements. the Securities and Exchanges Board of India established as a part of these reforms. There is a strong momentum for continuing reforms. .Specifically. the corporate governance landscape in the country has been changing very fast over the past decade. The traditional Bombay Stock Exchange has also reformed effectively. has a rigorous regulatory regime to ensure fairness. and the National Stock Exchange of India. and enable it to sustain its new-found prosperity and growth. and the monumental changes that have already taken place pave the way for more changes to come. transparency and good practice.
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