Role of Ethics in

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 aim is to align as nearly as possible the
interests of individuals, corporations and
society
- Sir Adrian Cadbury
 What is corporate governance?
Contd…
• 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.
• The raison d'être of every corporate body is to
ensure predictability, sustainability and
profitability of revenues year after year.

• - N R Narayana Murthy
 History of Corp Gov in India
• Unlike South-East and East Asia, the corporate
governance initiative in India was not triggered by any
serious nationwide financial, banking and economic
collapse
• Also, unlike most OECD countries, the initiative in India
was initially driven by an industry association, the
Confederation of Indian Industry
– In December 1995, CII set up a task force to design a voluntary
code of corporate governance
– The final draft of this code was widely circulated in 1997
– In April 1998, the code was released. It was called Desirable
Corporate Governance: A Code
– Between 1998 and 2000, over 25 leading companies voluntarily
followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s
Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI
and many others
 History of Corp Gov in India
• Following CII’s initiative, the Securities
and Exchange Board of India (SEBI) set
up a committee under Kumar Mangalam
Birla to design a mandatory-cum-
recommendatory code for listed
companies
• The Birla Committee Report was approved
by SEBI in December 2000
• Became mandatory for listed companies
through the listing agreement, and
implemented according to a rollout plan
 History of Corp Gov in India
• Following CII and SEBI, the Department of Company
Affairs (DCA) modified the Companies Act, 1956 to
incorporate specific corporate governance provisions
regarding independent directors and audit committees
• In 2001-02, certain accounting standards were
modified to further improve financial disclosures.
These were:
– Disclosure of related party transactions
– Disclosure of segment income: revenues, profits
and capital employed
– Deferred tax liabilities or assets
– Consolidation of accounts
• Initiatives are being taken to (i) account for ESOPs, (ii)
further increase disclosures, and (iii) put in place
systems that can further strengthen auditors’
independence
 Fundamental Objective of
Corporate Governance
• Enhancement of Shareholder
Value, keeping in view the
Interests of other
Stakeholders

• CG a Way of Life rather than a

Code
 Constituents of Corp Gov
• The Board of Directors
• Pivotal role
• Accountable to stakeholders
• Directs management
• The Shareholders & Stakeholders
• To participate in appointment of directors
• To hold the BoD accountable for governance through
proper disclosures
• The Management
• To act on the direction of the BoD
• To provide requisite information to the BoD for
decision making
• To implement and monitor control systems
Rationale` for Disclosures
 An effective disclosure based regulation
(DBR) implies greater responsibilities
on the company directors, its
management and advisers
 An effective DBR promotes investor
activism
 Markets believe that perceived benefits
outweigh perceived costs
 Disclosure based Regulation –
Components & types of disclosure
Disclosures Disclosures
by whom for whom

Public Listed Cos. Shareholders

Intermediaries Investors
Stock Exchanges MARKET Intermediaries
Mutual Funds Regulator
Analysts & advisors Government
Other stake -
holders
Disclosure Based Regulation
Components & types of disclosures
 Initial Disclosures – Disclosures for
raising capital by companies, mutual
funds in offer documents
- Public Offers
- Private Placement
 Continuous disclosures – financial / non-
financial
 Frequency of disclosure
 Dissemination process – electronic,
physical, centralised, dispersed
 Accessibility of information
Disclosure Based Regulation

 Initial Disclosures
 Continuous disclosures
 Corporate Governance
 Financial disclosures
 Risk based disclosures for
intermediaries
 Disclosures for stock exchanges
 Disclosures
Board of Directors: information that must be
supplied
• Annual, quarter, half year operating plans, budgets and
updates
• Quarterly results of company and its business segments
• Minutes of the audit committee and other board committees
• Recruitment and remuneration of senior officers
• Materially important legal notices and claims, as well as any
accidents, hazards, pollution issues and labor problems
• Any actual or expected default in financial obligations
• Details of joint ventures and collaborations
• Transactions involving payment towards goodwill, brand
equity and intellectual property
• Any materially significant sale of business and investments
• Foreign currency and other risks and risk management
• Any regulatory non-compliance
 Disclosures
Disclosures to shareholders in addition to balance
sheet, P&L and cash flow statement
• Board composition (executive, non-exec, independent)
• Qualifications and experience of directors
• Number of outside directorships held by each director
(capped at director not being a member of more than 10
board-level committees, and Chairman of not more than 5)
• Attendance record of directors
• Remuneration of directors
• Relationship (familial or pecuniary) with other directors
• Warning against insider trading, with procedures to
prevent such acts
• Details of grievances of shareholders, and how quickly
these were addressed
• Date, time and venue of annual general meeting of
shareholders
 Disclosures
Disclosures to shareholders in addition to
balance sheet, P&L and cash flow statement
• Dates of book closure and dividend payment
• Details of shareholding pattern
• Name, address and contact details of registrars
and/or share transfer agents
• Details about the share transfer system
• Stock price data over the reporting year, and how
the company’s stock measured up to the index
• Financial effects of stock options
• Financial effects of any share buyback
• Financial effects of any warrants that are to be
exercised
• Chapter reporting corporate governance practices
 Disclosures
Disclosures to shareholders in addition to
balance sheet, P&L and cash flow statement
• Detailed chapter on Management Discussion and
Analysis focusing on markets, operations,
finances, accounts, risks, opportunities and
threats, internal control systems
• Consolidated financial statement, incorporating
accounts of all subsidiaries (over 50% shares
held by reporting company)
• Details of all significant related party
transactions
• Detailed segment reporting (revenues, costs,
operating profits and capital employed)
• Deferred tax liabilities and assets and
debit/credit in the P&L for the reporting year
 Disclosures
(A) Basis of related party transactions
I. A statement in summary form of
transactions with related parties in the
ordinary course of business shall be placed
periodically before the audit committee.
II. Details of material individual transactions
with related parties which are not in the
normal course of business shall be placed
before the audit committee.
III. Details of material individual transactions
with related parties or others, which are not
on an arm’s length basis should be placed
before the audit committee, together with
Management’s justification for the same
 Disclosures
(B) Disclosure of Accounting Treatment
To disclose in the financial statements, if
an accounting treatment other than
prescribed in Accounting Standard has
been followed alongwith explanation.

(C) Board Disclosures – Risk management

– Internal and external business risks
– Procedures to inform Board members about
the risk assessment and minimization.
– Periodically reviewed
 Disclosures
(D) Proceeds from public issues, rights issues,
preferential issues etc.
 To disclose to the Audit Committee, on
use/application of funds as and when any issue
is made
(E) Additional disclosures:
 In the Annual Report the criteria of making
payments to NEDs to be disclosed or a reference
to be made that the same is available on the
company’s website
 number of shares and convertible instruments
held by NEDs.
 NEDs shall disclose their shareholding (both own
or held by / for other persons on a beneficial
basis) in the company in which they are
proposed to be appointed as directors, prior to
their appointment.
 Disclosures
F) Management
A Management Discussion and Analysis
report to form part of the Annual Report.
G) Shareholders
Disclosures to shareholders in case of
appointment /reappointment of directors,
quarterly results and presentations made,
shareholders’ grievance committee and
share transfer committee, shareholding
pattern-change
 CEO/CFO certification
The CEO, i.e. Managing Director and the CFO i.e.
whole-time Finance Director or head of the finance
function to certify to the Board that:
(a) They have reviewed financial statements and the
cash flow statement for the year and these
statements:
(i) do not contain any materially untrue statement or omit
any material fact or contain statements that might be
misleading;
(ii) together present a true and fair view of the company’s
affairs and are in compliance with existing accounting
standards, applicable laws and regulations.
(b) no transactions entered into by the company
during the year which are fraudulent, illegal or
violative of the company’s code of conduct.
 CEO/CFO certification (contd)
(c)They accept responsibility for establishing and
maintaining internal controls and that they have
evaluated the effectiveness of the internal control
systems of the company and they have disclosed to
the auditors and the Audit Committee, deficiencies in
the design or operation of internal controls, if any, of
which they are aware and the steps they have taken
or propose to take to rectify these deficiencies.
(d)They have indicated to the auditors and the Audit
committee
(i) Significant changes in internal control during the year;
(ii) Significant changes in accounting policies during the
year and that the same have been disclosed in the notes
to the financial statements; and
(iii)Instances of significant fraud of which they have
become aware and the involvement therein, if any, of
the management or an employee having a significant
role in the company’s internal control system
 ETHICS-definitions
• The word ethics is derived from the Greek
word ethos meaning character and latin
word mores meaning customs
• To better understand ethics let us
understand and contrast the definition of
ethics and law
• Law is a consistent set of universal rules
that are widely published, generally
accepted and usually enforced. These
rules describe the ways in which people
are required to act in society.
• Ethics defines what is good for the
individual and for society and establishes
the nature of duties that people owe to
oneself and others in society
 What are ethics
• The principle of conduct – professional
ethics
• A system or philosophy of conduct
• A discipline dealing with what is good and
bad- moral duty and obligation
• A set of moral principles or values.
Relation between ethics and law
 ETHICS-
 Reflection in a company’s operations of the values
and moral principles used in the communities in
which they operate
 Successful markets and corporate performance are
founded on a commitment to basic ethical
principles aligned as much as possible to the
interests of individuals, corporations and society.
 Ethical standards may be expressed in a
company’s formal conduct requirements, or
contained in generally stated principles that guide
a company’s preferred conduct or behavior.
 Most companies have put in place a code of ethics
for its employees to conduct themselves in a
particular manner while doing business.
 Purpose of Ethics
• Ethics are the guiding principles.
• Where the proposed business activity/
operation of the company borders on the
unknown, the company needs to apply the
ethics principle to decide on the project.
• Ethics help make relationships mutually
pleasant and productive- imbibes a sense
of community among members- a sense of
belongingness to society.
 Why have a code of ethics?
• To define acceptable behavior
• To promote high standards of practice
• To provide a benchmark for self-evaluation
• To establish a framework for professional
behavior and responsibilities
• As a vehicle for occupational identity
• As a mark of occupational maturity.
 Code of ethics -transition
Original Revised
Compliance Integrity

Enforcement Inspiration

Punishment Motivation

Directive Educational

Secretive Open
 Creating the Ethical Imperative
• Written code of ethics
• Employee commitment
• Employee training
• Discipline process
• Full disclosure
• Building expectations
• Resolution process – conflict management
 THE INFOSYS MODEL
• A formal code of business conduct and
ethics.
• To be signed and adhered to by
employees.
• Action against any employee for violation
thereof.
 THE INFOSYS MODEL -Contents
• General standards of conduct
• Management of conflicts of interest
• Prohibition of exploitation of corporate opportunities
• Protection of company’s confidential information
• Obligations under securities laws
• Use of assets
• An entire section on responsibilities to customers and
stakeholders.