CORPORATE

GOVERNANCE
 INTRODUCTION TO CORPORATE GOVERNANCE

Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled.

Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, senior
management executives, customers, suppliers, financiers, the government, and the community.

corporate governance provides the framework for attaining a company's objectives, it encompasses practically every sphere of
management, from action plans and internal controls to performance measurement and corporate disclosure.

Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the
governance of their companies.

The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance
structure is in place.
 INTRODUCTION TO CORPORATE GOVERNANCE

Corporate governance is the structure of rules, practices, and processes used to direct and manage a
company.

A company's board of directors is the primary force influencing corporate governance.

Bad corporate governance can cast doubt on a company's operations and its ultimate profitability.

Corporate governance covers the areas of environmental awareness, ethical behavior, corporate strategy,
compensation, and risk management.

The basic principles of corporate governance are accountability, transparency, fairness, responsibility, and
risk management.
 BENEFITS OF CORPORATE GOVERNANCE
Good corporate governance creates transparent rules and controls, provides guidance to leadership, and aligns the interests of
shareholders, directors, management, and employees.

It helps build trust with investors, the community, and public officials.

Corporate governance can provide investors and stakeholders with a clear idea of a company's direction and business integrity.

It promotes long-term financial viability, opportunity, and returns.

It can facilitate the raising of capital.

Good corporate governance can translate to rising share prices.

It can lessen the potential for financial loss, waste, risks, and corruption.

It is a game plan for resilience and long-term success.

 CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS

◦ The board of directors is the primary direct stakeholder influencing corporate governance.
◦ Directors are elected by shareholders or appointed by other board members. They represent shareholders
of the company.
◦ The board is tasked with making important decisions, such as corporate officer appointments, executive
compensation, and dividend policy.
◦ In some instances, board obligations stretch beyond financial optimization, as when shareholder
resolutions call for certain social or environmental concerns to be prioritized.
◦ Boards are often made up of insiders and independent members. Insiders are major shareholders,
founders, and executives. Independent directors do not share the ties that insiders have.
◦ They are chosen for their experience managing or directing other large companies. Independents are
considered helpful for governance because they dilute the concentration of power and help align
shareholder interests with those of the insiders.
◦ The board of directors must ensure that the company's corporate governance policies incorporate
corporate strategy, risk management, accountability, transparency, and ethical business practices
IMPORTANCE OF CORPORATE GOVERNANCE

Corporate governance is important because it creates a system of rules and

practices that determines how a company operates and how it aligns the
interest of all its stakeholders.

Good corporate governance leads to ethical business practices, which leads

to financial viability. In turn, that can attract investors.

Examples of Corporate Governance

 Volkswagen AG

◦ Bad corporate governance can cast doubt on a company's reliability, integrity, or obligation to shareholders. All can have
implications for the firm's financial health. Tolerance or support of illegal activities can create scandals like the one that rocked
Volkswagen AG starting in September 2015.
◦ The details of "Dieselgate" (as the affair came to be known) revealed that for years, the automaker had deliberately and
systematically rigged engine emission equipment in its cars in order to manipulate pollution test results in America and Europe.
◦ Volkswagen saw its stock shed nearly half of its value in the days following the start of the scandal. Its global sales in the first
full month following the news fell 4.5%.
◦ VW's board structure facilitated the emissions rigging and was a reason it wasn't caught earlier. In contrast to a one-tier board
system that is common in most companies, VW has a two-tier board system, which consists of a management board and a
supervisory board.
◦ The supervisory board was meant to monitor management and approve corporate decisions. However, it lacked the
independence and authority to carry out these roles appropriately.
◦ The supervisory board included a large portion of shareholders. Ninety percent of shareholder voting rights were controlled by
members of the board. There was no real independent supervisor. As a result, shareholders were in control and negated the
purpose of the supervisory board, which was to oversee management and employees, and how they operated. This allowed the
rigged emissions to occur.
 PEPSICO
◦ It's common to hear about examples of bad corporate governance. In fact, it's often why companies end up in the
news. You rarely hear about companies with good corporate governance because their corporate guiding policies
keep them out of trouble.
◦ One company that has consistently practiced good corporate governance and seeks to update it often is PepsiCo.
In drafting its 2020 proxy statement, PepsiCo sought input from investors in six areas:
◦ Board composition, diversity, and refreshment, plus leadership structure
◦ Long-term strategy, corporate purpose, and sustainability issues
◦ Good governance practices and ethical corporate culture
◦ Human capital management
◦ Compensation discussion and analysis
◦ Shareholder and stakeholder engagement
◦ The company included in its proxy statement a graphic of its current leadership structure. It showed a combined
chair and CEO along with an independent presiding director and a link between the company's "Winning With
Purpose" vision and changes to the executive compensation program.
 corporate governance composition of board

◦ Section 149 of the Companies Act states that every company's board of directors must necessarily have a minimum of three directors
if it is a public company.
◦ two directors if it is a private company and one director in a one person company.
◦ The maximum number of members a company can assign as directors is fifteen.
◦ Composition and term of BOD
◦ According to Articles of Association, the Board comprises of the Chairman and the Vice chairman and 3 to 6 members elected by the
general meeting of shareholders.
◦ The term of a Board member begins from the general meeting in which they have been elected and ends at the end of the next
general meeting.
◦ COMPOSITION OF BOARD OF DIRECTORS IN A LISTED COMPANY:
◦ As per Regulation 17 of Securities and Exchange of India (Listing Obligations and Disclosure Requirement) 2015 the composition
of Board of Directors in a listed company is as follows:
◦ 1. Board of directors shall have a combination of executive and non-executive directors with at least one woman director and not
less than fifty per cent of the board of directors shall constitute of non-executive directors.
◦ 2. If the chairperson of the board of directors is a non-executive director, thenat least one-third of the board of directors shall
constitute of independent directors and if the listed entity has an executive chairperson, then at least half of the board of directors
shall comprise of independent directors
 Corporate Governance and the Board of Directors

◦ The board of directors is the primary direct stakeholder influencing corporate governance.
◦ Directors are elected by shareholders or appointed by other board members. They represent shareholders
of the company.
◦ The board is tasked with making important decisions, such as corporate officer appointments, executive
compensation, and dividend policy.
◦ In some instances, board obligations stretch beyond financial optimization, as when shareholder
resolutions call for certain social or environmental concerns to be prioritized.
◦ Boards are often made up of insiders and independent members. Insiders are major shareholders,
founders, and executives.
◦ Independent directors do not share the ties that insiders have. They are chosen for their experience
managing or directing other large companies.
◦ Independents are considered helpful for governance because they dilute the concentration of power and
help align shareholder interests with those of the insiders.
 The Board of Director- Roles and Responsibilities

◦ The Board of Directors key function is to ensure the company's prosperity whilst meeting the appropriate
interests of the shareholders.
◦ However, the authority of the board is subject to the limitations imposed by the Memorandum of
Association, Articles of Association of the company and the relevant provisions of the Companies Act,
2013.
◦ When it comes to public listed companies, securities are traded publically and various other provisions
like SEBI regulations and guidelines in the listing agreement deserve consideration.
◦ While private limited companies are closely held and run by the directors. Annual general meetings in
such companies are actually conducted as there are certain directions which can only be given by a
discussion in AGM.
◦ Rest day to day affairs of the company are taken care of by the directors according to the provision of
Companies Act, 2013 as it is not possible for AGM to direct company in every matter.
◦ Let us examine the role and responsibilities of Board of Directors in terms of Companies Act, 2013 and
other legal provisions. Company is a legal personality and BOD's are its body and mind.
 The Board of Director- Roles and Responsibilities

◦ The Board of Directors focuses on four key areas:

◦ by establishing vision, mission and values;
◦ by setting strategy and structure;
◦ by delegating authority and responsibility to management; and,
◦ by exercising accountability to shareholders and be responsible to relevant stakeholders.
 DUTIES OF THE DIRECTOR
◦ They should act in accordance with the Articles of a company.
◦ 1. A director of the company shall act in good faith in order to promote the objects of the company
for the benefits of its members as a whole.
◦ It was also held in Bank of Poona Ltd. v Narayandas that the good faith would require that all the
endeavours of the directors must be directed to the benefit of the company.
◦ 2. A due and reasonable care, skill and diligence shall be exercised which performing duties of a
director.
◦ The Supreme Court in the case of Official Liquidator v. P.A. Tendolkar, held that a director could be held
liable for dereliction of duties if his negligence is of such character as to enable frauds to be committed
and losses thereby incurred by the company.
◦ 3. A director should never involve into a situation which directly or indirectly collides with the
interests of the company.
◦ In Walchandnagar Industries v Ratan chand, it was held that the director's other duties would include
duty to disclose interest to the company and to ensure that his personal interest as an agent of the
company do not conflict with company's principal interest.
◦ 4. A director shall not attempt to achieve an undue gain for himself or his relatives and if he is
found guilty of making such undue advantage then he has to pay a sum equal to that gain to the
company.
◦ It was held in the case of Guinness plc v. Saunders that director in question is bound to hand over the
benefits , if any, that he might have secured under the transaction and he cannot ask for set off for any
claim that he may have against the company.
◦
◦ 5. A director shall not assign his office and any assignment so made is void.
◦ For better governance, the board should function as follows- the directors must be totally committed to the
company, should meet regularly and steer discussions properly.
◦ They should set up their priorities and then acted upon them. They must have the courage to look to any
deteriorating situation related to stock market, finance and especially moral issues. They should not exercise the
powers for their own or in a fiduciary capacity but for a proper purpose, for which they are given to them by the
shareholders.
◦ The Supreme Court in Eclairs Group Ltd and Glengary Overseas Ltd v JKX specified that the proper purpose rule
is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it as
a matter of construction or implication. It is concerned with abuse of power, by doing acts which are within its
scope but done for an improper purpose.

◦ 6. The directors must always look for the best interests of the company and should work honestly and in
good faith and if there is a conflict between their own interests and company’s
◦ then they must go in favour of the company's interest. The Board has a great responsibility of recruiting the CEO
of the company based on the market reports. They have to ensure that processes are in place in order to maintain
the integrity of the company and should also look upon the company's compliance with all legal requirements.
 Role of Independent Directors
◦ The revised clause 49 of the listing agreement states that if a company has executive chairman then the Board requires to have at
least 50 percent of independent directors and if a company has non- executive chairman then the independent directors required
are one-third of the board.
◦ An independent director is a non-executive director who maintains integrity, sense of accountability, tracks various activities of
the company from failures to achievements, plans strategically, degree of commitment and possess sense of devotion. Neither
they possess any financial relationship with the company (except the sitting charges) nor can own shares in the company.

◦ Some of the most significant duties and functions of independent directors as per Schedule IV of the Companies Act, 2013 are:
◦ Help in bringing an independent and equitable judgement to the board;
◦ Safeguard the interests of all stakeholders, particularly the minority shareholder;
◦ balance the conflicting interest of the stakeholders;
◦ Strive to attend all the meetings of the Board;
◦ Report concerns about unethical behaviour, actual or suspected fraud or violation of the companys code of conduct or ethics
policy.
◦ Independent directors plays a major role in improving the corporate credibility of the company and in
risk management. They also play a great role in various committees set up by the company to ensure
good governance.
◦ They should makeup at least two-thirds of the directors in the audit committees of listed companies to
oversee the financial reporting process and disclosure of the company's financial information, ensure
compliance with listing and other legal requirements, disclosure of related party transactions and
qualification in the draft audit report, among other things.
◦ Independent directors are responsible for formulating business strategies on behalf of the shareholders
and have to make sure that all business activities are compatible with all legal provisions.
◦ These directors have power to challenge the decision of management directors and this protects the
interests of shareholders and other stakeholders also.
 Role of Board Committees
◦ The committees are incorporated into the company to improve the corporate governance.

◦ A. Audit committee:
◦ Section 292A of the Companies Act, 1956 states that every public limited company (whether listed or unlisted) having a paid-up
capital of at least Rs.10 crore should constitute a committee of the board to be known as Audit Committee.
◦ The meetings of this committee should happen at least two to three times a year and preferably before the date of each Board meeting.
◦ The act provides that the Audit Committee shall consist of a minimum of three directors with independent directors forming a
majority.
◦ The functions of the Audit committee shall include- the recommendation for appointment, remuneration and terms of appointment of
auditors of the company; review and monitor of the auditor's independence and performance and effectiveness of audit process;
examination of the financial statement and the auditor's report thereon;
◦ Approval of any subsequent modification of transaction of the company with related parties; Scrutiny of inter-corporate loans and
investments; Valuation of undertakings or assets of the company, wherever it is necessary; Evaluation of internal financial controls and
risk management systems; Monitoring the end use of funds raised through public offers and related matters.
◦ The committee can also call for the comments of the auditors about the internal control systems and the review of the financial
statement before the submission to the Board.[xix] Satyam scandal is one of the biggest example of lacuna in internal auditing process.
The auditors work didn't yield any good result and they signed the financial statements without any prior examination and hence were
held responsible for fraud.
 B. Nomination and Remuneration Committee
◦ the Objective of this committee is to lay down a framework in relation to the remuneration and
appointment of directors, Key Managerial Personnel and senior management personnel.
◦ This committee consists of three or more non-executive directors out of which not less than one-half
shall be independent directors.
◦ The functions of this committee are- it should identify persons who are qualified to become directors and
recommend their appointment to the Board.
◦ It shall formulate the criteria for determining the qualifications of a director and recommend a policy to
the Board regarding the remuneration for directors and other employees.
◦ The committee while formulating the policy for remuneration should take care that it is reasonable and
motivate directors of the quality required to run the company.
 C. STAKEHOLDERS' RELATIONSHIP COMMITTEE
◦ This committee shall be constituted if BOD of the company consists of more than one shareholders,
debenture-holders, deposit-holders or any other security holder during the financial year.
◦ The said committee shall consist of a chairperson who shall be the non-executive director and such other
persons as may be decided by the Board.
◦ The objective of this committee is to solve the grievances of security holders of a company.
◦ As per the SEBI regulations, the committee shall meet at least once in year. The key to a good
governance is to conduct business in such a manner that the stakeholder's rights and interests are
protected and the transparency is maintained to ensure that the trust and confidence of the stakeholder in
the company remains unharmed.
◦ Thus, this committee plays a great role in achieving the objective of good corporate governance.
 POWERS OF BOARD OF DIRECTORS
◦ As per Section 179 (1) of the Companies Act:
◦ the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts
and things, as the company is authorised to exercise and do unless barred by the restriction on their
power by the memorandum or articles or by the provisions of the Companies Act.
◦ It is not in dispute that directors while exercising their powers do not act as agents for the majority of the
members, so the resolution passed by the majority of members cannot supersede director's power.
◦ The powers of management are confined with the directors and they alone can exercise these powers.
The only way to overrule the BOD's of a company is by altering the articles of association and refusing
to re-elect the directors, whose actions they disapprove.[xxix] The shareholders also can't take away the
powers which are granted to them by the Articles.
 POWERS OF BOARD OF DIRECTORS
◦ Thus, the relationship between Board of Directors and the shareholders is not of subordination but more of a federation.
◦ The powers granted to directors includes the right to ask the shareholders if money is unpaid on their share, power to issue
debentures, power to invest the funds of the company, to grant loans or provide security in respect of loans, to approve
financial statement, amalgamations and mergers, to diversify the business of the company and the power to authorize buy
back Although, the directors can delegate these powers (by a resolution passed at the meeting) to any committee of directors
but still the principal powers vests with the Board of directors themselves.
◦ Apart from this, BoD has powers
◦ to fill up casual vacancies in the office of directors (Section 161),
◦ power to constitute audit committee (Section 177),
◦ to make donation to political parties (Section 182),
◦ power to accord sanctions for specified contracts (Section 459),
◦ power to receive notice of disclosure of director's interest (Section 184),
◦ power to appoint or employ a person as Managing Director or Manager (Section 152 (2)),
◦ power to make a declaration of solvency, where it is proposed to wind up the company voluntarily (305),
◦ power to approve the text of advertising for inviting public deposits (Section 73).
◦ Some of the powers can only be exercised by the resolution passed at the meeting by the consent of directors as per Section
180.