BIBLIOGRAPHY

Internet Sources:-

1. https://www.corpgov.net/2015/05/corporate-governance-in-india/
2. http://www.yourarticlelibrary.com/business/corporate-governance-
business/corporate-governance-in-india-concept-needs-and-principles/69978
3. http://www.economicsdiscussion.net/business-environment/corporate-
governance/corporate-governance-in-india-need-importance-and-conclusion/10145
4. https://iclg.com/practice-areas/corporate-governance-laws-and-regulations/india

Books:-

1. Ciancanelli, Penny and Reyes-Gonzalez, José Antonio ‘Corporate Governance in

Banking: A Conceptual Framework’ (undated).
2. Goswami, Omkar, 2002, “Corporate Governance in India,” Taking Action Against
Corruption in Asia and the Pacific (Manila: Asian Development Bank), Chapter 9.
3. Hopt, Klaus J., Corporate Governance of Banks after the Financial Crisis (August 29,
2011). ECGI - Law Working Paper No. 181/2011
 TABLE OF CONTENTS

S . No. Topic Page No.

1. INTRODUCTION

2. DEFINITION

3. OBJECTIVES OF CORPORATE GOVERNANCE

4. EVOLUTION OF CORPORATE GOVERNANCE

5. PREREQUISITES AND CONSTITUENTS

6. BENEFITS OF CORPORATE GOVERNANCE

7. ELEMENTS OF GOOD CORPORATE GOVERNANCE

8. CONCLUSION

9. BIBLIOGRAPHY
 ABBREVIATIONS

1. CII - Confederation of Indian Industry

2. SEBI - Securities and Exchange Board of India
3. Sec. - Section
4. ICSI - Institute of Companies Secretaries of India
5. OECD - Organisation for Economic Co-operation and Development
 ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and assistance from
many people and I am extremely fortunate to have got this all along the completion of my project
work. Whatever I have done is only due to such guidance and assistance and I would not forget
to thank them.

I respect and thank Asst. Prof. Chandra Nath Singh for giving me an opportunity to do the
Project work on CONCEPT AND EVOLUTION OF CORPORATE GOVERNANCE and I
am extremely grateful to him, our subject teacher for providing all the support and guidance.
 ABSTRACT

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, management, customers, suppliers, financiers,
government and the community. Since corporate governance also 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. The
corporate governance framework consists of (1) explicit and implicit contracts between the
company and the stakeholders for distribution of responsibilities, rights, and rewards, (2)
procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with
their duties, privileges, and roles, and (3) procedures for proper supervision, control, and
information-flows to serve as a system of checks-and-balances.
 1. INTRODUCTION

Corporate governance is a process that aims to allocate corporate resources in a manner that
maximizes value for all stakeholders – shareholders, investors, employees, customers, suppliers,
environment and the community at large and holds those at the helms to account by evaluating
their decisions on transparency, inclusivity, equity and responsibility. The World Bank defines
governance as the exercise of political authority and the use of institutional resources to manage
society's problems and affairs.

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting
the way a corporation (or company) is directed, administered or controlled. Corporate
governance also includes the relationships among the many stakeholders involved and the goals
for which the corporation is governed. In contemporary business corporations, the main external
stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customers and
communities affected by the corporation's activities. Internal stakeholders are the board of
directors, executives, and other employees.

In a broader sense, however, good corporate governance- the extent to which companies are run
in an open and honest manner- is important for overall market confidence, the efficiency of
capital allocation, the growth and development of countries’ industrial bases, and ultimately the
nations’ overall wealth and welfare. It is important to note that in both the narrow as well as in
the broad definitions, the concepts of disclosure and transparency occupy center-stage.

2. DEFINITION

Corporate governance is: Set of rules that define the relationship between stakeholders,
management, and board of directors of a company and influence how that company is operating.
At its most basic level, corporate governance deals with issues that result from the separation of
ownership and control. But corporate governance goes beyond simply establishing a clear
relationship between shareholders and managers”.
Corporate governance is: “The system by which companies are directed and controlled…..”
Report of the Committee on the Financial Aspects of Corporate Governance.1

"Corporate governance involves a set of relationships between a company’s management, its

board, its shareholders and other stakeholders. Corporate governance also provides the structure
through which the objectives of the company are set, and the means of attaining those objectives
and monitoring performance are determined."2

Corporate governance is: The process carried out by the board of directors, and its related
committees, On behalf of and for the benefit of the company's Shareholders and the other
Stakeholders, to provide direction, authority, and oversights to management, “It means how to
make the balance between the board members and their benefits and the benefits of the
shareholders and the other stakeholders”.3

According to Economist and Noble Laureate Milton Friedman, “Corporate Governance is to

conduct the business in accordance with owners or shareholders’ desires, while conforming to
the basic rules of the society embodied in law and local customs”(EconomicTimes, 2001).

Corporate Governance as under: "Corporate Governance is the application of best management

practices, compliance or jaw in true letter and spirit and adherence to ethical standards for
effective management and distribution of wealth and discharge of social responsibility for
sustainable development of all stakeholders.4

3. OBJECTIVES OF CORPORATE GOVERNANCE

The fundamental objective of corporate governance is to enhance shareholders' value and protect
the interests of other stakeholders by improving the corporate performance and accountability.
Hence it harmonizes the need for a company to strike a balance at all times between the need to
enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other

1
UK - Cadbury Report, London, 1992.
2
OECD 2004.
3
M.Tarek Youssef, 2007.
4
ICSI.
stakeholders in the company. Further, its objective is to generate an environment of trust and
confidence amongst those having competing and conflicting interests.

It is integral to the very existence of a company and strengthens investor's confidence by

ensuring company's commitment to higher growth and profits. Broadly, it seeks to achieve the
following objectives:

• A properly structured board capable of taking independent and objective decisions is in

place at the helm of affairs;
• The board is balance as regards the representation of adequate number of non executive
and independent directors who will take care of their interests and wellbeing of all the
stakeholders;
• The board adopts transparent procedures and practices and arrives at decisions on the
strength of adequate information;
• The board has an effective machinery to subserve the concerns of stakeholders;
• The board keeps the shareholders informed of relevant developments impacting the
company;
• The board effectively and regularly monitors the functioning of the management team;
• The board remains in effective control of the affairs of the company at all times.

The overall endeavor of the board should be to take the organization forward so as to maximize
long term value and shareholders' wealth.

4. EVOLUTION OF CORPORATE GOVERNANCE

The concept of good governance is very old in India dating back to third century B.C. where
Chanakya (Vazir of Parliputra) elaborated fourfold duties of a king viz. Raksha, Vriddhi, Palana
and Yogakshema. Substituting the king of the State with the Company CEO or Board of
Directors the principles of Corporate Governance refers to protecting shareholders wealth
(Raksha), enhancing the wealth by proper utilization of assets (Vriddhi), maintenance of wealth
through profitable ventures (Palana) and above all safeguarding the interests of the shareholders
(Yogakshema or safeguard).
Corporate Governance was not in agenda of Indian Companies until early 1990s and no one
would find much reference to this subject in book of law till then. The fiscal crisis of 1991 and
resulting need to approach the IMF induced the Government to adopt reformative actions for
economic stabilization through liberalization. The momentum gathered albeit slowly once the
economy was pushed open and the liberalization process got initiated in early 1990s. As a part
of liberalization process, in 1999 the Government amended the Companies Act, 1956. Further
amendments have followed subsequently in the year 2000, 2002 and 2003. A variety of measures
have been adopted including the strengthening of certain shareholder rights (e.g. postal balloting
on key issues), the empowering of SEBI (e.g. to prosecute the defaulting companies, increased
sanctions for directors who do not fulfill their responsibilities, limits on the number of
directorships, changes in reporting and the requirement that a ‘small shareholders nominee’ be
appointed on the Board of companies with a paid up capital of Rs. 5 crore or more)

The major corporate governance initiatives launched in India since the mid 1990s are discussed
below:

(A) The CII Code

On account of the interest generated by Cadbury Committee Report of UK, the Confederation of
Indian Industry (CII) took special initiative with the objective to develop and promote a code of
Corporate Governance to be adopted and followed by Indian Companies both in private & public
sector, Banks and Financial Institutions. The final draft of the code was circulated in 1997 and
the final code called ‘Desirable Corporate Governance Code’ was released in April 1998. The
Committee was driven by the conviction that good corporate governance was essential for Indian
Companies to access domestic as well as global capital at competitive rates. The code was
voluntary, contained detailed provisions with focus on listed companies.

(B) Kumar Mangalam Birla Committee Report

While the CII code was well received by corporate sector and some progressive companies also
adopted it, it was felt that under Indian conditions a statutory rather than a voluntary code would
be more meaningful. Consequently the second major initiative was undertaken by the Securities
and Exchange Board of India (SEBI) which set up a committee under the chairmanship of
Kumar Mangalam Birla in 1999 with the objective of promoting and raising of standards of good
corporate governance. The Committee in its Report observed “the strong Corporate Governance
is indispensable to resilient and vibrant capital market and is an important instrument of investor
protection. It is the blood that fills the veins of transparent corporate disclosure and high quality
accounting practices. It is the muscle that moves a viable and accessible financial reporting
structure”. In early 2000 the SEBI Board accepted and ratified the key recommendations of this
committee and these were incorporated into Clause – 49 of the Listing Agreement of the Stock
Exchanges. (Discussed in detail in Session XI & XII) These recommendations, aimed at
providing the standards of corporate governance, are divided into mandatory and non-mandatory
recommendations. The recommendations have been made applicable to all listed companies
with the paid-up capital of Rs. 3 crore and above or net worth of Rs.25 crore or more at any time
in the history of the company. The ultimate responsibility of putting the recommendations into
practice rests directly with the Board of Directors and the management of the company.

(C) Report of Task Force.

In May 2000, the Department of Corporate Affairs (DCA) formed a broad based study group
under the chairmanship of Dr. P.L. Sanjeev Reddy, Secretary of DCA. The group was given the
ambitious task of examining ways to “operationalise the concept of corporate excellence on a
sustained basis” so as to “sharpen India’s global competitive edge and to further develop
corporate culture in the country”. In November 2000 the Task Force on Corporate Excellence
set up by the group produced a report containing a range of recommendations for raising
governance standards among all companies in India. It also recommended setting up of a Centre
for Corporate Excellence.

(D) Naresh Chandra Committee Report

The Enron debacle of 2001 involving the hand-in-glove relationship between the auditor and the
corporate client, the scams involving the fall of the corporate giants in the U.S. like the
WorldCom, Owest, Global Crossing, Xerox and the consequent enactment of the stringent
Sarbanes Oxley Act in the U.S. led the Indian Government to wake up. A committee was
appointed by Ministry of Finance and Company Affairs in August 2002 under the chairmanship
of Naresh Chandra to examine and recommend inter alia amendments to the law involving the
auditor-client relationships and the role of independent directors. The committee made
recommendations in two key aspects of corporate governance: financial and non-financial
disclosures: and independent auditing and board oversight of management

(E) Narayana Murthy Committee Report

The SEBI also analysed the statistics of compliance with the clause-49 by listed companies and
felt that there was a need to look beyond the mere systems and procedures if corporate
governance was to be made effective in protecting the interest of investors. The SEBI therefore
constituted a committee under the chairmanship of Narayana Murthy for reviewing
implementation of the corporate governance code by listed companies and issue of revised clause
49. Some of the major recommendations of the committee primarily related to audit committees,
audit reports, independent directors, related party transactions, risk management, directorships
and director compensation, codes of conduct and financial disclosures.

(F) J.J. Irani Committee Report

The Companies Act 1956 was enacted on the recommendations of the Bhaba Committee set up
in 1950 with the object to consolidate the existing corporate laws and to provide a new basis for
corporate operation in independent India. With enactment of this legislation in 1956 the
Companies Act 1913 was repealed. The need for streamlining this Act was felt from time to time
as the corporate sector grew in pace with the Indian economy and as many as 24 amendments
have taken place since 1956. The major amendments to the Act were made through Companies
(Amendment) Act 1998 after considering the recommendations of Sachar Committee followed
by further amendments in 1999, 2000, 2002 and finally in 2003 through the Companies
(Ammendment) Bill 2003 pursuant to the report of R.D. Joshi Committee. After a hesitant
beginning in 1980, India took up its economic reforms programme in 1990s and a need was felt
for a comprehensive review of the Companies Act 1956. Unsuccessful attempts were made in
1993 and 1997 to replace the present Act with a new law. In the current national and
international context the need for simplifying corporate laws has long been felt by the
government and corporate sector so as to make it amenable to clear interpretation and provide a
framework that would facilitate faster economic growth. The Government therefore took a fresh
initiative in this regard and constituted a committee in December 2004 under the chairmanship of
Dr. J.J. Irani with the task of advising the government on the proposed revisions to the
Companies Act 1956.The recommendations of the Committee submitted in May 2005 mainly
relate to management and board governance, related party transactions, minority interest,
investors education and protection, access to capital, accounts and audit, mergers and
amalgamations, offences and penalties, restructuring and liquidation, etc.

(G) Central Coordination and Monitoring Committee

A high powered Central Coordination and Monitoring Committee (CCMC) co-chaired by

Secretary, Department of Corporate Affairs’ and Chairman, SEBI was set up by the Department
of Corporate Affairs to monitor the action taken against the vanishing companies and
unscrupulous promoters who imsused the funds raised from the public. It was decided by this
committee that seven Task Forces be set up at Mumbai, Delhi, Chennai, Kolkata, Ahmedabad,
Bangalore and Hyderabad with Regional Directors/Registrar of Companies of respective regions
as convener, and Regional Offices of SEBI and Stock Exchanges as Members. The main task of
these Task Forces was to identify the companies, which have disappeared, or which have
misutilised the funds mobilized from the investors and suggest appropriate action in terms of
Companies Act or SEBI Act.

(H) National Foundation of Corporate Governance

Recently the Ministry of Company Affairs has set up National Foundation for Corporate
Governance (NFCG) in association with Confederation of Indian Industry (CII), Institute of
Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI).
The NFCG would focus on the following areas:

• Creating awareness on the importance of implementing good corporate governance

practices both at the level of individual corporations and for the economy as a whole. The
foundation would provide a platform for quality discussions and debates amongst
academicians, policy makers, professionals and corporate leaders through workshops,
conferences, meetings and seminars.
• Encouraging research capability in the area of corporate governance in the country and
providing key inputs for developing laws and regulations, which meet the twin objectives
of maximizing wealth creation and fair distribution of this wealth.
 • Working with the regulatory authorities at multiple levels to improve implementation and
enforcement of various laws related to corporate governance.
• Working In close co-ordination with the private sector, work to instill a commitment to
corporate governance reforms and facilitate the development of a corporate governance
culture.
• Cultivating international linkages and maintaining the evolution towards convergence
with international standards and practices for accounting, audit and non-financial
disclosure.
• Setting up of 'National Centers for Corporate Governance' across the country, which
would provide quality training to Directors as well as produce quality research and aim to
receive global recognition.

5. PREREQUISITES AND CONSTITUENTS

Today adoption of good Corporate Governance practices has emerged as an integral element for
doing business. It is not only a pre-requisite for facing intense competition for sustainable growth
in the emerging global market scenario but is also an embodiment of the parameters of fairness,
accountability, disclosures and transparency to maximize value for the stakeholders.

Corporate governance is beyond the realm of law. It cannot be regulated by legislation alone.
Legislation can only lay down a common framework – the "form" to ensure standards. The
"substance" will ultimately determine the credibility and integrity of the process. Substance is
inexorably linked to the mindset and ethical standards of management.

Studies of corporate governance practices across several countries conducted by the Asian
Development Bank, International Monetary Fund, Organization for Economic Cooperation and
Development and the World Bank reveal that there is no single model of good corporate
governance.

The OECD Code also recognizes that different legal systems, institutional frameworks and
traditions across countries have led to the development of a range of different approaches to
corporate governance. However, a high degree of priority has been placed on the interests of
shareholders, who place their trust in corporations to use their investment funds wisely and
effectively is common to all good corporate governance regimes.

Also, irrespective of the model, there are three different forms of corporate responsibilities which
all models do respect:

(1) Political Responsibilities: the basic political obligations are abiding by legitimate law;
respect for the system of rights and the principles of constitutional state.
(2) Social Responsibilities: the corporate ethical responsibilities, which the company
understands and promotes either as a community with shared values or as a part of
larger community with shared values.
(3) Economic Responsibilities: acting in accordance with the logic of competitive
markets to earn profits on the basis of innovation and respect for the rights/democracy
of the shareholders which can be expressed in terms of managements' obligation as
'maximizing shareholders value'.

In addition, business ethics and corporate awareness of the environmental and societal interest of
the communities, within which they operate, can have an impact on the reputation and long-term
performance of corporations.

The three key constituents of corporate governance are the Board of Directors, the Shareholders
and the Management.

(1) The pivotal role in any system of corporate governance is performed by the board of
directors. It is accountable to the stakeholders and directs and controls the management.
It stewards the company, sets its strategic aim and financial goals and oversees their
implementation, puts in place adequate internal controls and periodically reports the
activities and progress of the company in the company in a transparent manner to all the
stakeholders.
(2) The shareholders' role in corporate governance is to appoint the directors and the auditors
and to hold the board accountable for the proper governance of the company by requiring
the board to provide them periodically with the requisite information in a transparent
fashion, of the activities and progress of the company.
 (3) The responsibility of the management is to undertake the management of the company in
terms of the direction provided by the board, to put in place adequate control systems and
to ensure their operation and to provide information to the board on a timely basis and in
a transparent manner to enable the board to monitor the accountability of management to
it.

The underlying principles of corporate governance revolve around three basic inter-related
segments. These are:

Integrity and Fairness

Transparency and Disclosures
Accountability and Responsibility

(6) BENEFITS OF CORPORATE GOVERNANCE

The Benefits to Companies

Compliance with the CG principles can benefit the owners and managers of companies and
increase transparency and disclosure by:

• Improving access to capital and financial markets

• Help to survive in an increasingly competitive environment through mergers, acquisitions,

partnerships, and risk reduction through asset diversification

• Provide an exit policy and ensure a smooth inter-generational transfer of wealth and divestment
of family assets, as well as reducing the chance for conflicts of interest to arise (very important
for the investors).

• Also, adopting good CG practices leads to a better system of internal control, thus leading to
greater accountability and better profit margins.

• Good CG practices can pave the way for possible future growth, diversification, or a sale,
including the ability to attract equity investors – nationally and from abroad – as well as reduce
the cost of loans/credit for corporations.
• Many businesses seeking new funds often find themselves obliged to undertake serious
corporate governance reforms at a high cost and upon the demand of outsiders, often in a time of
crisis. When the foundations are already in place investors and potential partners will have more
confidence in investing in or expanding the company’s operations.

The Benefits to Shareholders

• Good CG can provide the proper incentives for the board and management to pursue objectives
that are in the interest of the company and shareholders, as well as facilitate effective monitoring.

• Better CG can also provide Shareholders with greater security on their investment.

• Better CG also ensures that shareholders are sufficiently informed on decisions concerning
fundamental issues like amendments of statutes or articles of incorporation, sale of assets, etc.

The Benefits to the National Economy

• Empirical evidence and research conducted in recent years supports the proposition that it pays
to have good CG. It was found out that more than 84% of the global institutional investors are
willing to pay a premium for the shares of a well-governed company over one considered poorly
governed but with a comparable financial record.

• The adoption of CG principles - as good CG practice has already shown in other markets - can
also play a role in increasing the corporate value of companies.

“If a country does not have a reputation for strong corporate governance practices, capital will
flow elsewhere. If investors are not confident with the level of disclosure, capital will flow
elsewhere. If a country opts for lax accounting and reporting standards, capital will flow
elsewhere. All enterprises in that country suffer the consequences.” (Arthur Levitt, former
chairman of the US Securities & Exchange Commission)

(7) ELEMENTS OF GOOD CORPORATE GOVERNANCE

Good governance is decisively the manifestation of personal beliefs and values, which configure
the organizational values, beliefs and actions of its Board. The Board as a main functionary is
primary responsible to ensure value creation for its stakeholders. The absence of clearly
designated role and powers of Board weakens accountability mechanism and threatens the
achievement of organizational goals. Therefore, the foremost requirement of good governance is
the' clear identification of powers, roles, responsibilities and accountability of the Board, CEO,
and the Chairman of the Board. The role of the Board should be clearly documented in a Board
Charter.

To sub-serve the above discussion, the following are the essential elements of good corporate
governance:

• Transparency in Board’s processes and independence in the functioning of Boards. The

Board should provide effective leadership to the company and management for achieving
sustained prosperity for all stakeholders. It should provide independent judgment for
achieving company's objectives.
• Accountability to stakeholders with a view to serve the stakeholders and account to them
at regular intervals for actions taken, through strong and sustained communication
processes.
• Fairness to all stakeholders.
• Social, regulatory and environmental concerns
• Clear and unambiguous legislation and regulations are fundamentals to effective
corporate governance.
• A healthy management environment that includes setting up of clear objectives and
appropriate ethical framework, establishing due processes, clear enunciation of
responsibility and accountability, sound business planning, establishing clear boundaries
for acceptable behavior, establishing performance evaluation measures.
• Explicitly prescribed norms of ethical practices and code of conduct are communicated to
all the stakeholders, which should be clearly understood and followed by each member of
the organization.
• The objectives of the company must be clearly documented in a long-term corporate
strategy including an annual business plan together with achievable and measurable
performance targets and milestones.
• A well composed Audit Committee to work as liaison with the management, internal and
statutory auditors, reviewing the adequacy of internal control and compliance with
significant policies and procedures, reporting to the Board on the key issues.
• Risk is an important element of corporate functioning and governance, which should be
clearly identified, analyzed for taking appropriate remedial measures. For this purpose
the Board should formulate a mechanism for periodic reviews of internal and external
risks.
• A clear Whistle Blower Policy whereby the employees may without fear report to the
management about unethical behaviour, actual or suspected frauds or violation of
company’s code of conduct. There should be some mechanism for adequate safeguard to
employees against victimization that serves as whistleblowers.
 (8) CONCLUSION

Good corporate governance is the key to efficiency in a competitive environment. In this

corporate governance provides a cutting edge. Good corporate governance is not merely
desirable but it is essential for survival. It is necessary not just because it is good for the
shareholders and other stakeholders, it is essential because it is in the interest of the company
itself in the present competitive environment. It is good for the shareholders because it is good
for the company on which their future depends. Good corporate governance should, of course,
emphasise ethicality. Decision making processes should be transparent, consistent with the need
to protect the competitive interests of the company as otherwise shareholders and other
stakeholders in the enterprise would lose out.

Internationally, corporate governance norms have been initiated through a judicious mix of the
three available routes: legislation, regulation, or self-discipline and free volition. Often, a fourth
driver is also evident in the form of societal pressures. In counties with well developed
economies, capital markets, and commercial and citizen awareness, legislative interventions are
minimal and not the preferred option. Regulatory agencies such as capital market regulators,
professional bodies and central banks play an important role in bringing about an orderly and
disciplined regimen among their constituents.

Self-regulation through persuasion comes about through initiatives taken by industry chambers
and business associations, often also aided by globalisation initiatives that dictate adoption of
international best practices. Societal pressures impact on corporate social responsiveness and
often manifest in corporate responses well beyond legislative demands concerning ecology,
environment, community development, and so on. In today's context what is required is a new
model of corporate governance which recognizes and respects the trusteeship concept
acknowledging corporate personality, allowing the executive entrepreneurial scope to achieve
organizational objectives and yet holding it accountable and responsible for its performance.