Introduction of

Corporate Governance
Unit- 1
 Corporate Misgovernance
• In new millenium several companies in USA
and elsewhere faces collapse
• Existing framework seems inadequate with
the gigantic business conglomerate
Corporate mis-governance in India
 Governance
• Refers to “all processes of governing , whether
undertaken by the government, market, or network,
whether over a family, tribe, formal or informal
organisation or territory and whether through laws,
norms, power or language.
• It relates to "the processes of interaction and
decision-making among the actors involved in a
collective problem that lead to the creation,
reinforcement, or reproduction of social norms and
institutions
 What is a Corporate Body?
• Any Company is a corporate body. However, in
a broader sense only public limited companies
are taken to be the subject matter of CG.
– So far the thrust of CG is only on listed companies.
– Greatest emphasis is on those that are controlled
by closed groups.
– In USA and Europe, companies are frequently run
by minority shareholders. Hence, they require
even greater degree of CG.
 Defining Corporate Governance
According to OECD:
“Corporate Governance is 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, and spells out the rules and procedures
for making decisions on corporate affairs.”
Corporate governance may be defined as
follows:
Corporate governance refers to the
accountability of the Board of Directors to all
stakeholders of the corporation i.e.
shareholders, employees, suppliers, customers
and society in general; towards giving the
corporation a fair, efficient and transparent
administration.
“Corporate governance means that company
managers its business in a manner that is
accountable and responsible to the
shareholders. In a wider interpretation,
corporate governance includes company’s
accountability to shareholders and other
stakeholders such as employees, suppliers,
customers and local community.” – Catherwood.
“Corporate governance is the system by which
companies are directed and controlled.” – The
Cadbury Committee (U.K.)
 Small excerpt from the report:

Robert Maxwell's death while cruising on the Canary Islands in 1990 shone a spotlight on
his company's affairs. A series of risky acquisitions in the mid-eighties had led Maxwell
Communications into high debts, which was being financed by diverting resources from the
pension funds of his companies. After his disappearance, it emerged that the Mirror
Group's debts (one of Maxwell's companies) vastly outweighed its assets, while £440
millions (GBP) were missing from the company's pension funds. Despite the suspicion of
manipulation of the pension schemes, there was a widespread feeling in the City of
London that no action was taken by UK or US regulators against the Maxwell
Communications Corp. Eventually, in 1992 Maxwell's companies filed for bankruptcy
protection in the UK and US. At around the same time the Bank of Credit and Commerce
International (BCCI) went bust and lost billions of dollars for its depositors, shareholders
and employees. Another company, Polly Peck, reported healthy profits one year while
declaring bankruptcy the next. Following the raft of governance failures, Sir Adrian
Cadbury chaired a committee whose aims were to investigate the British corporate
governance system and to suggest improvements to restore investor confidence in the
system. The Committee was set up in May 1991 by the Financial Reporting Council,
the London Stock Exchange, and the accountancy profession. The report embodied
recommendations based on practical experiences and with an eye on the US experience,
further elaborated after a process of consultation and widely accepted. The final report
was released in December 1992 and then applied to listed companies reporting their
accounts after 30th June 1993.
 Pillars of Corporate Governance
Principles of Corporate Governance
 Rights and Equitable Treatment of
Shareholders
 Interests of Other Stakeholders
 Role and Responsibilities of the Board
 Integrity and Ethical Behaviour
 Disclosure and Transparency
 Code of Corporate Governance
• The Corporate Governance Code sets out
standards of good practice in relation to issues
such as board composition and development,
remuneration, accountability and audit, and
relations with shareholders.
 Need for the Code
 Wide Spread of Shareholders:
Today a company has a very large number of
shareholders spread all over the nation and even the
world; and a majority of shareholders being
unorganised and having an indifferent attitude
towards corporate affairs. The idea of shareholders’
democracy remains confined only to the law and the
Articles of Association; which requires a practical
implementation through a code of conduct of
corporate governance.
Changing Ownership Structure:
The pattern of corporate ownership has changed
considerably, in the present-day-times; with
institutional investors (foreign as well Indian)
and mutual funds becoming largest shareholders
in large corporate private sector. These investors
have become the greatest challenge to
corporate managements, forcing the latter to
abide by some established code of corporate
governance to build up its image in society.
Corporate Scams or Scandals:
Corporate scams (or frauds) in the recent years of
the past have shaken public confidence in corporate
management. The event of Harshad Mehta scandal,
which is perhaps, one biggest scandal, is in the heart
and mind of all, connected with corporate
shareholding or otherwise being educated and
socially conscious. The need for corporate
governance is, then, imperative for reviving
investors’ confidence in the corporate sector
towards the economic development of society.
Greater Expectations of Society of the
Corporate Sector:
Society of today holds greater expectations of
the corporate sector in terms of reasonable
price, better quality, pollution control, best
utilisation of resources etc. To meet social
expectations, there is a need for a code of
corporate governance, for the best management
of company in economic and social terms.
Hostile Take-Overs:
Hostile take-overs of corporations witnessed in
several countries, put a question mark on the
efficiency of managements of take-over
companies. This factors also points out to the
need for corporate governance, in the form of
an efficient code of conduct for corporate
managements.
Huge Increase in Top Management Compensation:
It has been observed in both developing and
developed economies that there has been a
great increase in the monetary payments
(compensation) packages of top level corporate
executives. There is no justification for
exorbitant payments to top ranking managers,
out of corporate funds, which are a property of
shareholders and society.
Globalisation:
Desire of more and more Indian companies to
get listed on international stock exchanges also
focuses on a need for corporate governance. In
fact, corporate governance has become a
buzzword in the corporate sector. There is no
doubt that international capital market
recognises only companies well-managed
according to standard codes of corporate
governance.