NTPC School of Business (NSB)

PGDM(EM), Term-3, Batch-5, 2022-24

Corporate Governance
CONCEPTUAL FRAMEWORK
OF CORPORATE
GOVERNANCE

BY: - CS NARESH KUMAR SINHA

MEANING OF CORPORATE GOVERNANCE

 Corporate Governance essentially involves balancing the

interests of the many stakeholders in a company. These
include its shareholders, management, employees,
customers, suppliers, bondholders, financiers,
government and the community.
 Innarrow sense, corporate governance may be defined to
mean the relationship of a company to its shareholders.
 VARIOUS DEFINITIONS OF
CORPORATE GOVERNANCE
 According to MILTON FRIEDMAN, “Corporate
governance is to conduct the business in accordance with the
owner’s or shareholder’s desires, which generally will be to
make as much money as possible, while conforming to the
basic rules of the society embodied in law and local
customs.”
 VARIOUS DEFINITIONS OF CORPORATE GOVERNANCE

 According to Cadbury Committee, UK, corporate governance

involves
 Fulfilling long term strategic goals of owners
 Taking care of the interests of employees
 A consideration for the environment and local community
 Maintaining excellent relations with customers and suppliers
 Proper compliance with all the applicable legal and regulatory
requirements.
VARIOUS DEFINITIONS OF CORPORATE GOVERNANCE

 Confederation of Indian Industries (CII) describes

corporate governance as:
Corporate Governance deals with laws, procedures, practices, and
implicit rules that determine a company’s ability to take informed
managerial decisions vis-à-vis its claimants- in particular, its
shareholders, creditors, customers, the State and employees.
There is a global consensus about the objective of ‘good’
corporate governance: maximizing long term shareholder value.
VARIOUS DEFINITIONS OF CORPORATE GOVERNANCE

 N.R. Narayan Murthy Committee constituted by SEBI

defined 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. It is about
commitment to values about ethical business Conduct and
about making a distinction between personal and corporate
funds in the management of a company.
NEED FOR CORPORATE GOVERNANCE

The need for corporate governance arises of-

 The separation of management from the ownership;
 The anonymity between the producer and the
ultimate consumers;
 The realisation that business being part of the
society owes certain responsibilities.
 CORPORATE GOVERNANCE IN INDIA

 During the Chairmanship of Ram Krishna Bajaj, Federation of

Chamber of Commerce and Industry (FICCI) had evolved a Code of
Fair Business Practices.
 Again in 1960s, various study groups discussed and formulated Code
for Indian Business.
 Sachar Committee in 1978 also went into the question of Corporate
Governance and stressed upon proper and adequate disclosures
requirements on the part of the companies.
CORPORATE GOVERNANCE IN INDIA

 Further, with the constitution of SEBI, a large

number of guidelines/ regulations have been issued
by SEBI since 1992 in the interest of investor’s
protection.
 Again, Confederation of Indian Industries (CII)
evolved a Code of Corporate Governance in late 90’s
CORPORATE GOVERNANCE IN INDIA

A full-scale debate on Corporate Governance dominated the

Indian scene since the submission of its report by the Kumar
Mangalam Birla Committee constituted by SEBI on May 7,
1999. Most of its recommendations were notified by SEBI on
February, 2000 as guidelines for good corporate governance
and primarily sought to be enforced through listing
agreement. Consequently, Clause 49 of the Listing Agreement
has been amended quite a few times thereafter keeping in line
with the developments.
EVOLUTION AND
STRUCTURE OF JOINT
STOCK COMPANIES
 MEANING

In simple terms, the members contributed to the

capital by providing the joint stock and were
shareholders in respect of the profits earned by its
use. The profits were, however, shared at the end of
each voyage.
CHARACTERISTIC FEATURES OF A COMPANY

1. Incorporated association
2. Legal entity distinct from its members
3. Artificial person
4. Limited liability
5. Transferability of shares
6. Perpetual succession
7. Common seal
 ORGANISATIONAL STRUCTURE OF JOINT STOCK COMPANY

 Ownership in the joint stock company is

represented by shares or the equity, which may be
either a general equity or a preferential equity.
 Generalequity shareholders can take part only in
the distributable profits of the company as
dividend. They also enjoy voting rights in general
body meetings.
 ORGANISATIONAL STRUCTURE OF JOINT STOCK COMPANY

 Preference shareholders can get a fixed rate/

amount of return and, in some cases, irrespective
of the profit accrued or not. They do not have a
right to vote in the general body meetings of the
company. They get the dividends as well as return
of capital (in case of winding up) before other
equity claims.
AGENCY PROBLEMS IN JOINT STOCK COMPANIES

 TheBoard of directors, have been described as the

agents of the company since they represent the
company in all its dealings with the third parties.
 Consequently, whatever they do within the scope
of authority conferred upon them, they bind the
company and not themselves.
AGENCY PROBLEMS IN JOINT STOCK COMPANIES

 However, they have also been described as the trustees

of the company. In that position, directors are expected
to take all decisions in the best interests of the
company.
 Thus,the directors are essentially the agents of the
company and consequently, the composite body of
shareholders but not of the individual shareholders.
 COMPANIES ACT, 2013

Key provisions of this Act, vis-à-vis corporate governance

include:
 Stakeholder Relationship Committee: Companies with
more than 1,000 shareholders, debenture-holders, deposit-
holders and any other security holders at any time during a
financial year to constitute a Stakeholders Relationship
Committee, with a non-executive director as a chairperson
and such other members as may be decided by the board.
 COMPANIES ACT, 2013

 Certificate by the Company’s Auditor : No

compromise or arrangement shall be sanctioned by the
Tribunal unless a certificate by the Company’s Auditor
has been filed with the Tribunal to the effect that the
accounting treatment, if any, proposed in the scheme of
compromise or arrangement is in conformity with the
accounting standards prescribed under Section 133
 COMPANIES ACT, 2013

 Valuation by Registered Valuer: Where any valuation is required

to be made of any property, stocks, shares, debentures, securities or
goodwill or any other assets or net worth of a company or its
liabilities under the Act, it shall be valued by a registered valuer
possessing qualifications as may be prescribed by the Central
Government.
 Woman Director: At least one woman director shall be on the
Board of such class or classes of companies as may be prescribed.
 COMPANIES ACT, 2013
(cont.)

 Appointment of Key Managerial Personnel: Every company

belonging to such class or classes of companies as may be
prescribed shall have the whole-time key managerial personnel
(Section 203)
 Chairman not to be M.D./CEO: Unless the articles of a
company provide otherwise, an individual shall not be the
chairperson of the company as well as the managing director
or Chief Executive Officer of the company at the same time.
 COMPANIES ACT, 2013
(cont.)

 Appointment of Independent Directors: Concept of

independent directors has been introduced for the first time in
the Companies Act [Section 149(5)]. All listed companies shall
have at least one-third of the Board as independent directors.
 Board Committees: Besides the Audit Committee, the
constitution of Nomination and Remuneration Committee has
also been made mandatory in the case of listed companies and
such other class or classes of the companies as may be
prescribed.
 COMPANIES ACT, 2013
(cont.)

 Annual Return [Section 92]: Every company shall prepare a return

(hereinafter referred to as the annual return) in the prescribed form
containing the particulars as they stood on the close of the financial
year regarding;
 Its registered office, principal business activities, particulars of
its holding, subsidiary and associate companies;
 Its shares, debentures, and other securities and shareholding
pattern;
 COMPANIES ACT, 2013
(cont.)

 Its indebtedness;
 Its members and debenture-holders along with changes
therein since the close of the previous financial year;
 Its promotors, directors, key managerial personnel along
with changes therein since the close of the last financial year;
 Meetings of members or a class thereof, Board and its
various committees along with attendance details;
 COMPANIES ACT, 2013
(cont.)

 Remuneration of directors and key managerial personnel;

 Penalties imposed on the company, its directors or officers and
details of compounding of offences;
 Matters related to certification of compliance, as may be
prescribe;
 Details in respect of shares held by foreign institutional investors;
and
 Such other matters as may be prescribed.
 COMPANIES ACT, 2013
(cont.)

 Changes in Shareholding of Promotors and Top Ten

Shareholders: A return to be filed with the Registrar
with respect to change in the number of shares held by
promotors and top ten shareholders (to ensure audit trail
of ownership) by a listed company.
 COMPANIES ACT, 2013
(cont.)

 Director’s Responsibility Statement: The Director’s

Responsibility Statement shall also include the statement
that the directors had devised proper systems to ensure
compliances with the provisions of all applicable laws and
that such systems were adequate and operating effectively.
 COMPANIES ACT, 2013
(cont.)

 Secretarial Audit (Section 204): Every listed company and

a company belonging to other class of companies as may be
prescribed shall annex with its Board’s Report a Secretarial
Audit Report, given by a Company Secretary in Practice, in
such form as may be prescribed. The Board of Directors, in
their report, shall explain in full any qualification or
observation or other remarks made by the Company
Secretary in Practice in his report.
 COMPANIES ACT, 2013
(cont.)

 Corporate Social Responsibility:

• Every company having net worth of rupees 500 crore or more, or
turnover of rupees 1000croe or more or a net profit of rupees 5 crore or
more during any financial year shall constitute a Corporate Social
Responsibility Committee of the Board consisting of three or more
directors, out of which at least one director shall be an independent
director.
 COMPANIES ACT, 2013
(cont.)

 The CSR Committee shall formulate and

recommend Corporate Social Responsibility Policy
which shall indicate the activity or activities to be
undertaken by the company as specified in schedule
VII and shall also recommend the amount of
expenditure to be incurred on the CSR activities.
 COMPANIES ACT, 2013
(cont.)

 The Board of every company shall ensure that the company

spends in every financial year at least 2% of the average net
profits of the company made during the three immediately
preceding financial years in pursuance of its CSR Policy.
 Where the company fails to spend such amount, the Board
shall in its report specify the reasons for not spending the
amount. The approach is to ‘comply or explain’.
 COMPANIES ACT, 2013
(cont.)

 The company shall give preference to local areas

where it operates, for spending amount earmarked
for Corporate Social Responsibility (CSR)
activities.
 COMPANIES ACT, 2013
(cont.)

 Auditors: A company shall appoint an individual

or a firm as an auditor at annual general meeting
who shall hold office till the conclusion of the sixth
annual general meeting. However, the company
shall place the matter relating to such appointment
for ratification by members at every annual general
meeting.
 COMPANIES ACT, 2013
(cont.)

 Investor Protection Measures:

 Issue and transfer of securities and non-payment of dividend
by listed companies, shall be administered by SEBI by making
regulations.
 An act of fraudulent inducement of persons to invest money
shall be punishable with imprisonment for a term which may
extend to ten years and with fine which shall not be less than
three times the amount involved in fraud.
 COMPANIES ACT, 2013
(cont.)

 Serious Fraud Investigation Officer (Section 211): Statutory

status to SFIO has been granted under the Act. Investigation
report of SFIO filed with the Court for framing of charges shall
be treated as a report filed by a Police Officer. SFIO shall have
power to arrest in respect of certain offences of the Bill which
attract the punishment for fraud. Those offences shall be
cognizable and the person accused of any such offence shall be
released on bail subject to specified conditions only.
 COMPANIES ACT, 2013
(cont.)

 Stringent Penalty Provided for Fraud Related Offences

(Section 447): The term “Fraud” has for the first time been
defined in the Companies Act, 2013. Any person who is found to
be guilty of fraud, shall be punishable with imprisonment for a
term which shall not be less than six months but which may
extend to ten years and shall also be liable to fine which shall not
be less than the amount involved in the fraud, but which may
extend to three times the amount involved in the fraud.
 COMPANIES ACT, 2013
(cont.)

 Prohibition of Insider Trading: Section 195 has been introduced

with respect to prohibition of insider trading of securities. The
definition of price sensitive information has also been included.
 Prohibition on Forward Dealings (Section 194): Directors and
the key managerial personnel of a company are prohibited from
forward dealings in securities of the company.
 E-voting Recognized.
STAKEHOLDER SOCIETY
THEORY OF CORPORATE
GOVERNANCE
WHAT IS STAKEHOLDER SOCIETY
THEORY?

 Stakeholder theory is a theory of organizational

management and business ethics that addresses morals
and values in managing an organization.
 In the traditional view of the firm, the shareholder
view, the shareholders or stockholders are the owners
of the company, and the firm has a binding fiduciary
duty to put their needs first, to increase value for them.
WHAT IS STAKEHOLDER SOCIETY THEORY?

 However, stakeholder theory argues that there are other parties

involved, including governmental bodies, political groups, trade
associations, trade unions, communities, financiers, suppliers,
employees, and customers.
 For supporters of the ‘stakeholder theory’ of the firm, shareholders
are, but one of a number of important stakeholder groups. like
customers, suppliers, employees and local communities, shareholders
have a stake in, and are affected by the firm’s success or failure.
WHAT IS STAKEHOLDER SOCIETY THEORY?

 Whereas a firm and its managers have special

obligations to ensure that the shareholders receive
a fair return on their investment; the firm also has
special obligations to other stakeholders, which go
above and beyond those required by law.
 ORGANIZATION FOR ECONOMIC COOPERATION (OECD) PRINCIPLE

OECD identified the following principles regarding good

corporate governance relating to stakeholders:
 Therights of stakeholders that are established by law or through
mutual agreements are to be respected.
 Where stakeholder interests are protected by law, stakeholders
should have the opportunity to obtain effective redress for
violation of their rights.
ORGANIZATION FOR ECONOMIC COOPERATION (OECD) PRINCIPLE

 Performance-enhancing mechanisms for employee

participation should be permitted to develop.
 Where stakeholders participate in the corporate
governance process, they should have access to
relevant, sufficient and reliable information on a
timely and regular basis. Reporting of Corporate
governance in the Annual report
 ORGANIZATION FOR ECONOMIC COOPERATION (OECD) PRINCIPLE

 Stakeholders, including individual employees and their

representative bodies, should be able to freely communicate
their concerns about illegal or unethical practices to the board
and their rights should not be compromised for doing this.
 The corporate governance framework should be
complemented by an effective, efficient insolvency
framework and by effective enforcement of creditor rights.
 RESPONSIBILITY TOWARDS
VARIOUS GROUPS

Responsibilities of a business may be grouped under two

broad categories:
1. Internal- Internal Responsibilities Include responsibilities
towards owners (shareholders)and employees.
2. External- External Responsibilities include responsibilities
towards consumers, government and the community
 Internal Responsibilities

Responsibilities towards Owners (Shareholders):-

These responsibilities include
 Ensuring a fair return on their investments;
 Treating them as business partners through appropriate
representation of small shareholders on the Board of the
company;
 Internal Responsibilities
(Cont.)

 Ensuring capital appreciation of their stocks through

bonus issues and other good management practices;
 Redressal of their grievances with respect to matters
such as delay in transfer of shares, issue of duplicate
shares in case of loss of original shares, delay in
dispatch of share certificates and dividend warrants and
non-receipt of dividend warrants.
 Internal Responsibilities
(Cont.)

Responsibilities towards Employees: -

 Payment of fair wages and salaries
 Offering a share in the profits/ growth of the company
through bonus, ESOPs, etc.;
 Sympathetic treatment by the supervisors;
 Absence of favoritism;
 provision for leave
 Internal Responsibilities
(Cont.)

 Communication network between management and employees;

 Appropriate representation on the Board;
 Setting up of norms, and disputes resolution mechanism;
 Encouraging formation of healthy trade unions;
 Concern for safety; and
 Provision of healthy and satisfactory working conditions.
 External Responsibilities

Responsibilities towards Consumers:

 Offering of goods that meet the needs of the consumers of
different classes, tastes and purchasing power;
 Goods offered should be reasonably priced and be of
dependable quality and in sufficient variety
 Informationabout risks of injury from normal usage of
products and services and the precautions to be taken;
 External Responsibilities

 Informationregarding contents, additives, and treatment of foods

and medicines, sufficient to allow reasonably informed
consumers to make rational market decisions and to protect
themselves and their families;
A sale should be followed by service to ensure correct
installation, advice, guidance and maintenance;
 Making goods available at the nearest store, i.e. ensuring good,
fairly widespread and efficient distribution network.
 External Responsibilities
(Cont.)

Responsibilities towards Community:

 Not to corrupt public servants;
 To sell goods and services without adulteration;
 Fair treatment of suppliers and competitors;
 To follow fair trade practices; and
 To work with others in the same industry and outside as well as
NGOs to lead society to a better economic standard and quality of
life.
 External Responsibilities
(Cont.)

Responsibilities towards Government:

 To be law abiding citizen;
 To pay the taxes and other dues fully and honestly;
 Not to purchase political support by unfavorable means; and
 Tocontribute to stable and balanced development of the
economy.
 External Responsibilities
(Cont.)

However, to meet aforesaid social responsibilities, business also expects

certain considerations from the State such as: -
 Clean, prompt and efficient administration;
 Intelligent practical laws, easily understood and easily applied;
 Reasonable stability in legislative, administrative and fiscal policies;
 External Responsibilities
(Cont.)

 Preservation of law and order ensuring safety of life,

property and continuity of business;
 Rational tax structure; and
 Even treatment of various groups and sections in the society.
 ENTERPRISE
GOVERNANCE
MEANING OF ENTERPRISE GOVERNANCE

 Enterprise Governance is an emerging term which

describes a framework covering both corporate
governance and the business governance aspects
of an organization.
 It constitutes the entire accountability framework
of an organization.
 MEANING OF ENTERPRISE GOVERNANCE

 It has two dimensions:

1. Conformance or corporate governance: ‘Conformance’ involves
compliance with laws and regulations, best practice governance odes,
accountability, and the provision of assurances to stakeholders in
general. The term can refer to

(a) internals factors defined by the officers, as well as

(b) external forces such as consumer groups, clients and regulators.
MEANING OF ENTERPRISE GOVERNANCE

2. Performance or business governance:

‘Performance’ involves deciding on policies and
procedures that

(a) focus on opportunities and risks, strategy, value

creation, and resource utilization, and
(b) guide on organization’s decision-making.
 CONFORMANCE RESPONSIBILITIES

Conformance Responsibilities focus on providing assurances to stakeholders:

 That the role of the chairman and CEO have been rationally defined.
 That the role and composition of the board of directors is as per the statutory or
listing requirements.
 That appropriate board committees including audit committee, nomination
committee and remuneration committee are properly functional.
 The effective internal control system is in place.
 CONFORMANCE RESPONSIBILITIES

 That the executive remuneration is comparable to other firms in the same

industry and conforms to the statutory norms.
 That effective steps have been taken with respect to the identification,
prioritization, management, control, mitigation and reporting of strategic,
tactical, and operational risks.
 That the system generating financial and non-financial information are working
within prescribed standards of accuracy and reliability, and that such information
reflects the true performance of the organization.
 CONFORMANCE RESPONSIBILITIES

 That management’s fiduciary responsibilities are being met.

 That the organization is able to prevent and detect criminal activities such as
fraud, money laundering, theft and misappropriation.
 That the organization complies with all (other) relevant rules and regulations.
 PERFORMANCE RESPONSIBILITIES

Performance Responsibilities focus on strategy, value

creation and resource utilization and include:
 Establishment of a robust decision-making process,
including the determination of risk appetite, oversight of
strategy implementation and evaluation of the strategy’s
ongoing relevance and success.
 PERFORMANCE RESPONSIBILITIES

 Alignment of business operations and resource

utilization with strategic direction and the
organization’s levels of risk appetite.
 Identificationof the critical points at which an
organization needs to make decisions in response
to changing conditions.
 STRATEGIC OVERSIGHT

 There is no equivalent mechanism to the Audit

Committee in the conformance dimension to
ensure adequate oversight of the performance or
business dimension.
 STRATEGIC OVERSIGHT

 One possible way of addressing the strategic oversight gap is through the
establishment of a strategic committee which may review the strategic
development and implementation process, challenge the information
provided and assess the key business drivers. Such a committee could only
be a “preparatory committee” for the full board which would still be
responsible for major strategic decisions. The ultimate aim of such a
committee would be to better inform the full board’s deliberations over
strategic decisions.
 STRATEGIC OVERSIGHT

 There are range of tools and techniques-e.g. score

cards, continuous improvement, strategic
enterprise system, and investment committees-
which can help boards to focus on strategic
direction and its implications for all areas of the
business.
 STRATEGIC SCORECARD

 Asa pragmatic means of addressing the strategic

oversight gap, Chartered Institute of Management
Accountants (CIMA) has proposed a strategic
scorecard.
 STRATEGIC SCORECARD

 The fundamental objectives of ‘CIMA’s Strategic Scorecard’ are that it:

•Assists
the board, particularly the independent directors, in the oversight of
a company’s strategic process;
•Is able to deal with strategic choice and transformational change;
•Gives a true and fair view of a company’s strategic position and progress;
•Track actions in, and outputs from, the strategic process- not the detailed
content.
 STRATEGIC SCORECARD

 The CIMA observed that ‘Strategic Scorecard’ is not a detailed strategic

plan. It is aimed at helping the board ensure that all the aspects of the
strategic process have been completely thoroughly. It helps the board to
identify the key decision points and then the timing of strategic options,
milestones in strategic implementation together with the identification and
mitigation of strategic risks.
 The point of Strategic Scorecard is to make the board aware of what work is
being done and when within the strategic process.
 KEY ELEMENTS OF STRATEGIC SCORECARD

ELEMENT 1- THE STRATEGIC POSITION

There are various models available. Porter’s five-fold model is well known.
Porter’s model categorizes the forces under the power, vigor and competence of:
 Existing competitors- Rivalry among existing firms;
 Potential competitors- Threat to new entrants;
 Customers- Bargaining power of buyers;
 Suppliers- Bargaining power of suppliers;
 Threat to substitute products and services.
 KEY ELEMENTS OF STRATEGIC SCORECARD

ELEMENT 2- STRATEGIC OPTIONS

The board needs to be aware of what strategic options are available to the
company in terms of the following:
 Change of Scope- eg, geography, product, market sector.
 Change of direction-eg, high/low growth, offering of price/quality.
For each business there are probably only about three or four strategic options
that will be under active consideration at any one time.
 KEY ELEMENTS OF STRATEGIC
SCORECARD
(Cont.)
ELEMENT 3- STRATEGIC IMPLEMENTATION
 Once a project has moved through the evaluation stage to implementation, the
board needs to be updated on progress.
 The detailed evaluation of a specific option should have developed and set out
attainable milestones and timelines to be met.
 Critical success factors should also be clearly set out-what are those things that
must happen to make the strategy successful?
 KEY ELEMENTS OF STRATEGIC
SCORECARD
(Cont.)
 TheBoard need to be aware of where there are breakpoints
when board decisions and/or intervention might be required.
 These decisions would include whether to accelerate, abort,
delay or possibly switch strategy.
 KEY ELEMENTS OF STRATEGIC
SCORECARD
(Cont.)
ELEMENT 4- STRATEGIC RISK
 Enterprise risk management is interrelated with corporate governance by
providing information to the board of directors on the most significant risks
and how they are being managed
 And, it interrelates with performance management by providing risk-
adjusted measures, and with internal control, which is an integral part of
enterprise risk management.
 STRATEGIC ENTERPRISE SYSTEM

 Commonly called Enterprise Resource Planning

(ERP), Strategic Enterprise System is a software
that helps an organization to have a
comprehensive database to house complete
corporate information- customer, marketing, sales
production, financial, etc.
 STRATEGIC ENTERPRISE SYSTEM

 For an effective Strategic Enterprise System:

•Clarify your strategy before planning your strategic enterprise system.
•Change organizational structures- not just computer systems to address
information-flow problems.
•Create competitive advantage with your enterprise system.
•Put the right people in place.
•Install your enterprise system gradually.
 KEY PRINCIPLES OF EVALUATING AND IMPROVING GOVERNANCE IN
ORGANIZATIONS

1. The creation and optimization of sustainable stakeholder value should be

the objective of governance.
2. Good governance should appropriately balance the interest of
stakeholders.
3. The performance and conformance dimensions of governance are both
important to optimize stakeholder value.
4. Good governance should be fully integrated into the organization and
structured.
 KEY PRINCIPLES OF EVALUATING AND IMPROVING GOVERNANCE IN
ORGANIZATIONS

5. The governing body should be properly constituted and structured to

achieve an appropriate balance between performance and conformance.
6. The governing body should establish a set of fundamental values by
which the organization operates. All those participating in governance
should embrace these fundamental values.
 KEY PRINCIPLES OF EVALUATING AND IMPROVING GOVERNANCE IN
ORGANIZATIONS

7. The governing body should understand the organization’s business

model, its operating environment, and how sustainable stakeholder value
is created and optimized.
8. The governing body should provide strategic direction and oversight
in both the performance and conformance dimensions.
9. Effective and efficient enterprise risk management should form an
integral part of an organization’s governance system.
 KEY PRINCIPLES OF EVALUATING AND IMPROVING GOVERNANCE IN
ORGANIZATIONS

10. Resource utilization shall align with strategic direction.

11. The governing body should practically measure and evaluate the
organization’s strategic direction and business operations, and follow up
with appropriate actions to ensure appropriate progress and continued
alignment with objectives.
12. The governing body should ensure that the information provided is
relevant, understandable, and reliable.
 CORPORATE
GOVERNANCE
MECHANISMS
CORPORATE GOVERNANCE SYSTEMS

A board of directors is a corporate governance

mechanism that protects the interests of a
company’s shareholders. The shareholders use the
board to bridge the gap between them and
company owners, directors and managers.
CORPORATE GOVERNANCE SYSTEMS

 Effective corporate governance is essential if a business wants

to set and meet its strategic goals. A corporate governance
structure combines, controls policies and guidelines that drive
the organization towards its objectives while also satisfying
stakeholders needs. A corporate governance structure is often a
combination of various mechanisms.
i. Internal Mechanisms
ii. External Mechanisms
 Internal Mechanism

These controls monitors the progress and activities of the

organization and take corrective actions as and when the
business goes off-track. Through an active internal control
system, they serve the internal objectives of the corporation
and its internal stakeholders, including employees, managers
and owners.
 Internal Mechanism

Internal Mechanisms include-

 Appointment of competent, honest and
independent board of Directors
 Oversight of management
 Internal controls
 Independent internal audit
 Internal Mechanism

 Balancing power
 Structure of the Board of Directors into levels of
responsibility
 Segregation of duties
 EXTERNAL MECHANISM

 External Control Mechanisms are controlled by those

outside an organization and serve the objectives of entities
such as regulators, governments, trade unions and financial
institutions.
 These objectives include voluntary and legal compliance.
 External mechanisms are often imposed on organizations
by external stakeholders in the forms of union contracts and
regulatory guidelines.
 EXTERNAL MECHANISM

 Independent Audit: An independent external audit of a

corporation’s financial statements is part of the overall
corporate governance structure. An audited financial statement
and the accompanying auditor’s report helps investors,
employees, shareholders and regulators determine the financial
performance of the corporation.
 CORPORATE GOVERNANCE NORMS IN INDIA

 Corporate governance in India have evolved over the past couple of decades.
 The Securities and Exchange Board of India (SEBI) set up the Kumar
Mangalam Birla Committee whose recommendations culminated into now
famous Clause 49 of Standard Listing Agreement, setting out mandatory and
non-mandatory provisions for the governance of the listed companies. These
inter-alia include:
 CORPORATE GOVERNANCE NORMS IN INDIA

•Composition of Board
•Non executive director’s compensation and disclosures
•Limit on number of directorship
•Periodically review of compliance reports
•Code of conduct
 CORPORATE GOVERNANCE NORMS IN INDIA

•Qualified and independent Audit Committee

•Role of Audit Committee
•Remuneration of Directors
•Report on Corporate Governance
 CORPORATE GOVERNANCE NORMS IN INDIA
(cont.)

 In early 2000, the government-appointed Sanjiv Reddy Committee

issued its report on Corporate Excellence through Governance, setting
out far reaching recommendations. These recommendations
culminated into a bouquet of amendments in the form of Companies
(Amendment) Act, 2000 introducing certain far reaching changes and
new concepts. These include:
 CORPORATE GOVERNANCE NORMS IN INDIA
(cont.)

•Minimum paid-up capital requirement

•Protection to small depositor
•ShelfProspectus, Information Memorandum and Red-Herring
Prospectus
•Non-voting Equity Shares
 CORPORATE GOVERNANCE NORMS IN INDIA
(cont.)

•Passing of Resolutions through Postal Ballots

•Director’s Responsibility Statement included in Director’s
Report
•Audit Committees
•Secretarial Audit
 CORPORATE GOVERNANCE NORMS IN INDIA
(cont.)

 Again, Companies Act, 2013 has introduced certain provisions relating to

corporate governance and corporate social responsibility. These include:
•At least one-third of the Board should comprise of Independent Directors
and term “independence” defined in relation to a company.
•Independent directors should not have more than two consecutive tenures of
five year each on the board of the company.
•Nominee directors are not to be considered as independent directors
 CORPORATE GOVERNANCE NORMS IN INDIA
(cont.)

•At least one woman to be of Board of the “prescribed companies”.

•Limits total directorships to 20 companies (including 10 directorships in
public companies).
•Ifa director abstains from Board meetings for a period of 12 months, with or
without permission, his/her office shall become vacant.
•All listed companies must have a Nomination and Remuneration Committee.
 CORPORATE GOVERNANCE NORMS IN INDIA
(cont.)

•Auditor’s tenure at a company should not exceed 10 years.

•Statutoryauditors should not provide the non-audit services to a
company that their firm is auditing.
•Spending 2% of average net profit on CSR made mandatory for firms.
•A director’s remuneration shall not exceed 5% of a company’s net
profit.
 CORPORATE GOVERNANCE NORMS IN INDIA
(cont.)

•If a firm winds up operations, it must pay two year’s salary

to employees.
•The number of companies an auditor can serve capped at 20
•Appointment of auditors for five years to be ratified
annually.
•More statutory powers given to Serious Fraud Investigation
Officer (SFIO) to tackle corporate frauds.
 COMPETITION ACT, 2002

 Competition Act introduced a concept of anti-competitive trade practices in

order to offer protection to consumers.
 As per Section 3 of the Act, no enterprise or association of enterprises or persons
or association of persons can enter into any agreement in respect of production,
supply, distribution, storage, acquisition or control of goods or provision of
services, which causes or is likely to cause an appreciable adverse effect on
competition within India. This rule applies to association enterprises and
association of persons while entering into any such agreement.
 COMPETITION ACT, 2002

 An agreement which causes or is likely to cause an appreciable adverse effect on

competition includes the following agreements:
 BID RIGGING/KNOCK OUT AGREEMENT: Bid Rigging means any agreement
between enterprises or persons engaged in identical or similar production or trading
of goods or provision of services, which has the effect of eliminating or reducing
competition for bids or adversely affecting or manipulating the process of bidding.
 TIE-IN ARRANGEMENT: It includes any agreement requiring a purchaser of
goods, as a condition of such purchase, to purchase some other goods.
 COMPETITION ACT, 2002

 EXCLUSIVE SUPPLY AGREEMENT: It includes any agreement

restricting in any manner the purchaser in course of his trade from
acquiring or otherwise dealing in any goods other than those of the seller
or any other person.
 EXCLUSIVE DISTRIBUTION AGREEMENT: It includes any
agreement to limit, restrict, or withhold the output or supply of any
goods or allocate any area or market for the disposal or sale of the goods.
 COMPETITION ACT, 2002

 REFUSAL TO DEAL: It includes any agreement which restricts, or is likely to

restrict, by any method the persons or classes of persons to whom goods are sold
or from whom goods are bought.
 RESALE PRICE MAINTENANCE: It includes any agreement to sell goods
on condition that the prices to be charged on the resale by the purchaser shall be
the prices stipulated by the seller unless it is clearly stated that prices lower than
those prices may be charged.
 COMPETITION ACT, 2002

 EXCEPTIONS TO ANTI-COMPETITIVE AGREEMENTS: Reasonable

restrictions may be placed by a party to protect his rights under the Copyrights Act,
the Patents Act, the Trade and Merchandise Marks Act, the Geographical
Indications of Goods (Registration and Protection) Act, the Designs Act, and the
Semi-conductor Integrated Circuits Layout-Designs Act.
 ROLE OF GOVERNMENT IN ECONOMY

 Government may determine the conditions subject to which persons or

corporations may enter certain lines of business as in the granting of a
license or permission to use public facilities or resources.
 Government may regulate the conduct of business ventures once they are
under way.
 Government may even put ceilings on profits, price regulations (in case of
essential items, drugs, etc.), ceiling on dividends, and imposition of excess
profit tax.
ROLE OF GOVERNMENT IN ECONOMY

 Government may constitute regulatory bodies, such as SEBI, Insurance

Regulatory Authority to protect investors, consumers and the general public
by ensuring best corporate practices.
 Governments not only perform a regulatory role in ensuring that businesses
work to common good; they also create infrastructural facilities so that
businesses can run their affairs smoothly and contribute to the welfare of the
public in general. This is particularly true of developing economies.
 ROLE OF GOVERNMENT IN ECONOMY

 In developing countries, governments also assume entrepreneurial role

because in such countries, there exists a vicious circle of poverty which
can be broken only with the active intervention of the government.
Moreover, government ownership may be justified because of failure on
the part of private management to consider itself a trustee of the public
good.
“Knowledge is to be shared ,not to be stored” – CS
Naresh Sinha