Corporate Governance

CORPORATE GOVERNANCE
© Directorate of Distance & Continuing Education, Utkal University, Vani Vihar, Bhubaneswar-751007
The study material is developed exclusively for the use of the students admitted under DDCE, Utkal University.
Name of the Study Matrial: Corporate Governance
ISBN : ************
Author's Name:
Dr. Suratha Kumar Das, Lecturer in Commerce, DR Nayapalli College, Bhubaneswar.
Dr. Chitta Ranjan Mishra, DKN College, Eranch, Bhubaneswar
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UTKAL UNIVERSITY : VANI VIHAR
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CONTENTS
UNIT-1 CORPORATE GOVERNANCE: AN OVERVIEW AND HISTORICAL 3-22

Definition of Corporate Governance
The OECD Principles of Corporate Governance States
Benefits of Corporate Governance
Need for Corporate Governance
Principles of Corporate Governance
SEBI Code of Corporate Governance
Corporate Governance - History in India
Corporate Governance in India Past, Present and Future
Perspective and Important Issues in Corporate Governance
Corporate Governance-Theory and Practice
Introduction
The Theory of Corporate Internal Control
Corporate Governance in Practice
Competition
Governance Linked with Competition
Good Governance: Meaning and Concept
Origin and Emergence of the Concept of Good Governance
Basic Features or Elements of Good Governance
Significance of Good Governance
Agency Theory in Corporate Governance
The Role of Agency Theory in Corporate Governance?
Stewardship Theory of Corporate Governance
Shareholder and Stakeholder Theory of Corporate Governance
Stakeholders and their Effect on Business
Summary
Questions
UNIT-2 CURRENT SCENARIO, OBLIGATION TO INVESTOR 23-44
Principles
Obligation to Investors, Customers, Employees, Suppliers, Government and Society
A Land Mark in Indian Corporate History
Case Study
Case Study
National Committees on Corporate Governance
Issues in Corporate Governance Practices in India
Summary
Questions
UNIT-3 AGENT AND INSTITUATION 45-60
Shareholder Rights under Companies Act, 2013
Rights and Privileges of Common Stockholders
Corporate Governance from the Investor’s Perspective
Corporate Governance: Director, Auditor and Bank
Role and Responsibility of Board of Directors in Corporate Governance
Exhibit-Guidelines for Determining Independence of Directors
Summary
Questions
UNIT-4 INDIAN SCENARIO, PUBLIC POLICIES SEBI,
CORPORATION IN GLOBAL SOCIETY 61-68
Present Framework of Corporate Governance in Indian
Various Policies to be Framed as per SEBI Regulations, 2015
Securities and Exchange Board of India (SEBI)
Corporate Social Responsibility (CSR)
Corporate Governance - in Global Society and the Environment
Summary
Questions
UNIT-5 SOCIAL RESPONSIBILITY: CS IN INDIA, USA AND OTHER
COUNTRIES, CSR LAWS IN INDIA 69-79
What is CSR?
For Whom it's Applicable?
What to do when CSR is Applicable?
The Objectives of the Policy
The Concept of CSR in India
The Key Components of CSR would therefore Include the Following
Corporate Social Responsibility
Corporate Social Responsibility (CSR) in Different Countries
Other Countries
Corporate Social Responsibility under Companies Act
Summary
Answers
UNIT 1 CORPORATE GOVERNANCE: AN OVERVIEW Corporate
Governance: An
AND HISTORICAL Overview and
Historical
Structure NOTES
Definition of Corporate Governance
The OECD Principles of Corporate Governance States
Benefits of Corporate Governance
Need for Corporate Governance
Principles of Corporate Governance
SEBI Code of Corporate Governance
Corporate Governance - History in India
Corporate Governance in India Past, Present and Future
Perspective and Important Issues in Corporate Governance
Corporate Governance-Theory and Practice
Introduction
Corporate Governance in Practice
Competition
Good Governance: Meaning and Concept
Agency Theory in Corporate Governance
The Role of Agency Theory in Corporate Governance?
Stewardship Theory of Corporate Governance
Shareholder and Stakeholder Theory of Corporate Governance
Summary
Questions
LESSON OUTLINE
• Introduction of CG & an overview
• Definition
• The OECD of CG
• Benefit of CG
• Need for CG
• Principles of CG
• SEBI code of CG
• CG -History in India
• CG in India-past, present &future
• Perspective & important issues in CG
• CG theory &practice
• Theory of corporate internal control
• CG in practice &Competition
• Governance linked with competition
• Good governance meaning &concept
• Origin &emergence of the concept of good governance
• Features and element of good governance
• Significance of good governance
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Corporate
Governance: An • Agency theory of CG
Overview and • Introduction of agency theory
Historical
• Role of agency theory in CG
NOTES • Steward ship theory of CG
• Share holder & Stakeholder theory of CG
• Stake holders & their effect on business
LEARNING OBJECTIVES
After Reading this lesson you should be able to
• Introduction &Definition of CG
• What is OECD Of CG
• Need and Importance of CG
• What are the principles of CG
• Define SEBI code
• History in India of CG
• What are the perspective& importance issues in CG
• Theory of corporate internal control
• Discuss the meaning and importance of good governance
• Meaning and definition of Agency theory
• What is the theory of share holder and stakeholder of CG
INTRODUCTION
Corporate Governance refers to the way a corporation is governed. It is the technique by which companies
are directed and managed. It means carrying the business as per the stakeholders' desires. It is
actually conducted by the board of Directors and the concerned committees for the company's
stakeholder's benefit. It is all about balancing individual and societal goals, as well as, economic and
social goals.
Corporate Governance is the interaction between various participants (shareholders, board of
directors, and company's management) in shaping corporation's performance and the way it is proceeding
towards. The relationship between the owners and the managers in an organization must be healthy
and there should be no conflict between the two. The owners must see that individual's actual
performance is according to the standard performance. These dimensions of corporate governance
should not be overlooked.
Corporate Governance deals with the manner the providers of finance guarantee themselves
of getting a fair return on their investment. Corporate Governance clearly distinguishes between the
owners and the managers. The managers are the deciding authority. In modern corporations, the
functions/ tasks of owners and managers should be clearly defined, rather, harmonizing.
Corporate Governance deals with determining ways to take effective strategic decisions. It
gives ultimate authority and complete responsibility to the Board of Directors. In today's market-
oriented economy, the need for corporate governance arises. Also, efficiency as well as globalization are
significant factors urging corporate governance. Corporate Governance is essential to develop added
value to the stakeholders.
Corporate Governance ensures transparency which ensures strong and balanced economic
development. This also ensures that the interests of all shareholders (majority as well as minority
shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the
organization fully recognizes their rights.
Corporate Governance has a broad scope. It includes both social and institutional aspects.
Self-Instructional Corporate Governance encourages a trustworthy, moral, as well as ethical environment
Material
4
Corporate
DEFINITION OF CORPORATE GOVERNANCE Governance: An
Overview and
The definition of corporate governance most widely used is “the system by which companies are Historical
directed and controlled” (Cadbury Committee, 1992). More specifically it is the framework by which the
various stakeholder interests are balanced, or, as the IFC states, “the relationships among the management, NOTES
Board of Directors, controlling shareholders, minority shareholders and other stakeholders”. Cadbury
Committee[1] ( U.K.), 1992 has defined corporate governance as such
1. “Corporate governance is the system by which companies are directed and controlled. It
encompasses the entire mechanics of the functioning of a company and attempts to put in
place a system of checks and balances between the shareholders, directors, employees,
auditor and the management.”
2. “Corporate governance is the system by which business corporations are directed and controlled.
The corporate governance structure specifies the distribution of rights and responsibilities among
different participants in the corporation, such as, the board, managers, shareholders and spells
out the rules and procedures for making decisions on corporate affairs. By doing this, it also
provides this; it also provides the structure through which the company objectives are set, and
the means of attaining those objectives and monitoring performance.”
3. Definition of corporate governance by the Institute of Company Secretaries of India is as under:
“Corporate Governance is the application of best Management practices, Compliance of law
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”.
THE OECD PRINCIPLES OF CORPORATE GOVERNANCE STATES

“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.”
While the conventional definition of corporate governance and acknowledges the existence and
importance of ‘other stakeholders’ they still focus on the traditional debate on the relationship
between disconnected owners (shareholders) and often self-serving managers. Indeed it has been
said, rather ponderously, that corporate governance consists of two elements:
1. The long term relationship which has to deal with checks and balances, incentives for manager
and communications between management and investors;
2. The transactional relationship which involves dealing with disclosure and authority.
This implies an adversarial relationship between management and investors, and an attitude
of mutual suspicion. This was the basis for much of the rationale of the Cadbury Report, and is one
of the reasons why it prescribed in some detail the way in which the board should conduct itself:
consistency and transparency towards shareholders are its watchwords.
As fundamentally important as these traits are, we prefer to take a rather broader view, which places the
Cadbury Code and other codes developed since (Combined Code, Sarbanes-Oxley, King, etc) in a wider
context and shows its recommendations emerging naturally in the course of a company’s evolution.
In an early book on corporate governance, also published in 1992, one of the creators of this website
developed a definition of corporate governance as consisting of five elements which the board must
consider:
• long term strategic goals
• employees: past, present and future
• environment/community
• customers/suppliers
• compliance (legal/regulatory)
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Corporate
Governance: An BENEFITS OF CORPORATE GOVERNANCE
Overview and
Historical
• Good corporate governance ensures corporate success and economic growth.
NOTES • Strong corporate governance maintains investors’ confidence, as a result of which, company
can raise capital efficiently and effectively.
• It lowers the capital cost.
• There is a positive impact on the share price.
• It provides proper inducement to the owners as well as managers to achieve objectives that
are in interests of the shareholders and the organization.
• Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
• It helps in brand formation and development.
• It ensures organization in managed in a manner that fits the best interests of all.
NEED FOR CORPORATE GOVERNANCE

The need for corporate governance is highlighted by the following factors:
(i) Wide Spread of Shareholders
Today a company has a very large number of shareholders spread all over the nation and even the world;
and a majority of shareholders being unorganized and having an indifferent attitude towards
corporate affairs. The idea of shareholders’ democracy remains confined only to the law and the
Articles of Association; which requires a practical implementation through a code of conduct of
corporate governance.
(ii) Changing Ownership Structure
The pattern of corporate ownership has changed considerably, in the present-day-times; with institutional
investors (foreign as well Indian) and mutual funds becoming largest shareholders in large corporate
private sector. These investors have become the greatest challenge to corporate managements,
forcing the latter to abide by some established code of corporate governance to build up its image in
society.
(iii) Corporate Scams or Scandals
public confidence in corporate management. The event of Harshad Mehta scandal, which is perhaps,
one biggest scandal, is in the heart and mind of all, connected with corporate shareholding or
otherwise being educated and socially conscious.
The need for corporate governance is, then, imperative for reviving investors’ confidence in
the corporate sector towards the economic development of society..
PRINCIPLES OF CORPORATE GOVERNANCE
The fundamental or key principles of corporate governance are described below:

(i) Transparency
Transparency means the quality of something which enables one to understand the truth easily. In the
context of corporate governance, it implies an accurate, adequate and timely disclosure of relevant
information about the operating results etc. of the corporate enterprise to the stakeholders.
In fact, transparency is the foundation of corporate governance; which helps to develop a high
level of public confidence in the corporate sector. For ensuring transparency in corporate administration,
a company should publish relevant information about corporate affairs in leading newspapers, e.g.,
on a quarterly or half yearly or annual basis.
(ii) Accountability
Accountability is a liability to explain the results of one’s decisions taken in the interest of others. In the
context of corporate governance, accountability implies the responsibility of the Chairman, the Board of
Directors and the chief executive for the use of company’s resources (over which they have
authority) in the best interest of company and its stakeholders.
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(iii) Independence Corporate
Good corporate governance requires independence on the part of the top management of the corporation Governance: An
Overview and
i.e. the Board of Directors must be strong non-partisan body; so that it can take all corporate Historical
decisions based on business prudence. Without the top management of the company being
independent; good corporate governance is only a mere dream. NOTES
SEBI CODE OF CORPORATE GOVERNANCE

To promote good corporate governance, SEBI (Securities and Exchange Board of India) constituted
a committee on corporate governance under the chairmanship of Kumar Mangalam Birla. On the
basis of the recommendations of this committee, SEBI issued certain guidelines on corporate governance;
which are required to be incorporated in the listing agreement between the company and the stock
exchange.
An overview of SEBI guidelines on corporate governance is given below, under appropriate heads:
(a) Board of Directors
Some points in this regard are as follows:
(i) The Board of Directors of the company shall have an optimum combination of executive and non-
executive directors.
(ii) The number of independent directors would depend on whether the chairman is executive or
non-executive.
In case of non-executive chairman, at least, one third of the Board should comprise of independent
directors; and in case of executive chairman, at least, half of the Board should comprise of
independent directors.
The expression ‘independent directors’ means directors, who apart from receiving director’s
remuneration, do not have any other material pecuniary relationship with the company.
(b) Audit Committee
Some points in this regard are as follows:
(1) The company shall form an independent audit committee whose constitution would be as follows:
(i) It shall have minimum three members, all being non-executive directors, with the majority
of them being independent, and at least one director having financial and
accounting knowledge.
(ii) The Chairman of the committee will be an independent director.
(iii) The Chairman shall be present at the Annual General Meeting to answer shareholders’
queries.
(2) The audit committee shall have powers which should include the following:
(i) To investigate any activity within its terms of reference
(ii) To seek information from any employee
(iii) To obtain outside legal or other professional advice
(iv) To secure attendance of outsiders with relevant expertise, if considered necessary.
(3) The role of audit committee should include the following:
(i) Overseeing of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.
(ii) Recommending the appointment and removal of external auditor.
(iii) Reviewing the adequacy of internal audit function
(iv) Discussing with external auditors, before the audit commences, the nature and scope of
audit; as well as to have post-audit discussion to ascertain any area of concern.
(v) Reviewing the company’s financial and risk management policies.
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Corporate
(c) Remuneration of Directors
Governance: An
Overview and The following disclosures on the remuneration of directors shall be made in the section on the corporate
Historical governance of the Annual Report:
NOTES (i) All elements of remuneration package of all the directors i.e. salary, benefits, bonus, stock options,
pension etc.
(ii) Details of fixed component and performance linked incentives, along with performance criteria.
(d) Board Procedure Some Points in this Regards are
(i) Board meetings shall be held at least, four times a year, with a maximum gap of 4 months between
any two meetings.
(ii) A director shall not be a member of more than 10 committees or act as chairman of more than five
committees, across all companies, in which he is a director.
(e) Management
A Management Discussion and Analysis Report should form part of the annual report to the shareholders;
containing discussion on the following matters (within the limits set by the company’s competitive
position).
(i) Opportunities and threats
(ii) Segment-wise or product-wise performance
(iii) Risks and concerns
(iv) Discussion on financial performance with respect to operational performance
(v) Material development in human resource/industrial relations front.
(f) Shareholders
Some points in this regard are:
(i) In case of appointment of a new director or reappointment of a director, shareholders must be
provided with the following information:
1. A brief resume (summary) of the director
2. Nature of his expertise
3. Number of companies in which he holds the directorship and membership of
committees of the Board.
(ii) A Board Committee under the chairmanship of non-executive director shall be formed to
specifically look into the redressing of shareholders and investors’ complaints like transfer of
shares, non- receipt of Balance Sheet or declared dividends etc. This committee shall be
designated as ‘Shareholders / Investors Grievance Committee’.
(g) Report on Corporate Governance
There shall be a separate section on corporate governance in the Annual Report of the company, with a
detailed report on corporate governance.
(h) Compliance
The company shall obtain a certificate from the auditors of the company regarding the compliance of
conditions of corporate governance. This certificate shall be annexed with the Directors’ Report sent
to shareholders and also sent to the stock exchange.
CORPORATE GOVERNANCE – HISTORY IN INDIA
Introduction
Corporate governance is concerned with set of principles, ethics, values, morals, rules regulations, &
procedures etc. Corporate governance establishes a system whereby directors are entrusted with
duties and responsibilities in relation to the direction of the company’s affairs.
The term “governance” means control i.e. controlling a company, an organization etc or a
company & corporate governance is governing or controlling the corporate bodies i.e. ethics, values,
Self-Instructional principles,
Material
8
morals. For corporate governance to be good the manager needs to meet its responsibilities towards Corporate
its owners (shareholders), creditors, employees, customers, government and the society at large. Corporate Governance: An
governance helps in establishing a system where a director is showered with duties and Overview and
responsibilities of the affairs of the company. Historical
Corporate governance concept emerged in India after the second half of 1996 due to NOTES
economic liberalization and deregulation of industry and business. With the changing times, there
was also need for greater accountability of companies to their shareholders and customers. The
report of Cadbury Committee on the financial aspects of corporate Governance in the U.K. has given
rise to the debate of Corporate Governance in India.
Need for corporate governance arises due to separation of management from the ownership. For
a firm success, it needs to concentrate on both economical and social aspect. It needs to be fair with
producers, shareholders, customers etc. It has various responsibilities towards employees, customers,
communities and at last towards governance and it needs to serve its responsibilities at the best at all
aspects.
The “corporate governance concept” dwells in India from the Arthshastra time instead of CEO at
that time there were kings and subjects. Today, corporate and shareholders replace them but the principles
still remain same, unchanged i.e. good governance.
20th century witnessed the glossy of Indian Economy due to liberalization, globalization, and
privatization. Indian economy for the 1st time here was together with world economy for product, capital
and lab our market and which resulted into world of capitalization, corporate culture, business ethics
which was found important for the existence of corporation in the world market place.
For effective corporate governance, its policies need to be such that the directors of the company
should not abuse their power and instead should understand their duties and responsibilities towards
the company and should act in the best interests of the company in the broadest sense.
The concept of ‘corporate governance’ is not an end; it’s just a beginning towards growth of
company for long term prosperity.
CORPORATE GOVERNANCE IN INDIA PAST, PRESENT AND

FUTURE
Good corporate governance in the changing business environment has emerged as powerful tool of
competitiveness and sustainability. It is very important at this point and it needs corporation for one
and all i.e. from CEO of company to the ordinary staff for the maximization of the stakeholders’ value
and also for maximization of pleasure and minimization of pain for the long term business.
Global competitions in the market need best planning, management, innovative ideas, compliance
with laws, good relation between directors, shareholders, employees and customers of companies,
value based corporate governance in order to grow, prosper and compete in international markets by
strengthen their strength overcoming their weaknesses and running them effectively and efficiently in
an efficient and transparent manner by adopting the best practices.
Corporate India must commit itself as reliable, innovative and prompt service provider to
their customers and should also become reliable business partners in order to prosper and to have all
round growth.
Corporate Governance is nothing more than a set of ideas, innovation, creativity, thinking having
certain ethics, values, principles etc which gives direction and shape to its people, employees and
owners of companies and help them to flourish in global market.
Indian Corporate Bodies having adopted good corporate governance will reach themselves to
a benchmark for rest of the world; it brings laurels as a way of appreciation. Corporate governance
lays down ethics, values, and principles, management policies of a corporation which are inculcated
and brought into practice. The importance of corporate governance lies in promoting and maintains
integrity, transparency and accountability throughout the organization.
Corporate governance has existed since past but it was in different form. During Vedic times
kings used to have their ministers and used to have ethics, values, principles and laws to run their
state
Self-Instructional
9 Material
Corporate
but today it is in the form corporate governance having same rules, laws, ethics, values, and morals
Governance: An
Overview and etc which helps in running corporate bodies in the more effective ways so that they in the age of
Historical globalization become global giants.
Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance are some of the
NOTES global giants which have their flag of success flying high in the sky due to good corporate
governance.
Today, even law has a great role to play in successful and growing economy. Government
and judiciary have enacted several laws and regulations like SEBI, FEMA, Cyber laws, Competition laws
etc and have brought several amendments and repeal the laws in order that they don’t act as barrier for
these corporate bodies and developing India. Judiciary has also helped in great way by solving the
corporate disputes in speedy way.
Corporate bodies have their aim, values, motto, ethics and principles etc which guide them to the
ladder of success. Big and small organizations have their magazines annual reports which reflect
their achievements, failure, their profit and loss, their current position in the market. A few companies
have also shown awareness of environment protection, social responsibilities and the cause of upliftment
and social development and they have deeply committed themselves to it. The big example of such a
company can be of Deepak Fertilizers and Petrochemicals Corporation Limited which also bagged 2nd
runner up award for the corporate social responsibility by business world in 2005.
Under the present scenario, stakeholders are given more importance as to shareholders, they
even get chance to attend, vote at general meetings, make observations and comments on the
performance of the company.
Corporate governance from the futuristic point of view has great role to play. The corporate
bodies in their corporate have much futuristic approach. They have vision for their company, on
which they work for the future success. They take risk and adopt innovative ideas, have futuristic goals,
motto, and future objectives to achieve.
With increase in interdepence and free trade among countries and citizens across the globe,
internationally accepted corporate governance standards are of paramount importance for Indian
Companies seeking to distinguish themselves in global footprint. The companies should always keep
improving, enhancing and upgrading themselves by bringing more reliable integrated product and
service quality. They should be more transparent in their conduct.
Corporate governance should also have approach of holistic view, value based governance,
should be committed towards corporate social upliftment and social responsibility and environment
protection. It also involves creative, generative and positive things that add value to the various
stakeholders that are served as customers. Be it finance, taxation, banking or legal framework each
and every place requires good corporate governance.
Hence corporate governance is a means and not an end, corporate excellence should be end.
PERSPECTIVE AND IMPORTANT ISSUES IN CORPORATE

GOVERNANCE
There are several important issues in corporate governance and they play a great role, all the issues
are inter related, interdependent to deal with each other. Each issues connected with corporate
governance have different priorities in each of the corporate bodies.
The issues are listed as below:
1. Value based corporate culture
2. Holistic view
3. Compliance with laws
4. Disclosure, transparency, & accountability
5. Corporate governance and human resource management
6. Innovation
7. Necessity of judicial reforms
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Material 10
8. Globalization helping Indian companies to become global giants based on good corporate Corporate
governance. Governance: An
Overview and
9. Lessons from Corporate failure
Historical
1. Value based corporate culture: For any organization to run in effective way, it needs to
have certain ethics, values. Long run business needs to have based corporate culture. Value NOTES
based corporate culture is good practice for corporate governance. It is a set of beliefs, ethics,
principles which are inviolable. It can be a motto i.e. A short phrase which is unique and helps in
running organization, there can be vision i.e. dream to be fulfilled, mission and purpose, objective,
goal, target.
2. Holistic view: This holistic view is more or less godly, religious attitude which helps in
running organization. It is not easier to adopt it, it needs special efforts and once adopted it
leads to developing qualities of nobility, tolerance and empathy.
3. Compliance with laws: Those companies which really need progress, have high ethical
values and need to run long run business they abide and comply with laws of Securities Exchange
Board Of India (SEBI), Foreign Exchange Regulation Act, Competition Act 2002, Cyber Laws,
Banking Laws etc.
4. Disclosure, transparency, and accountability: Disclosure, transparency and accountability are
important aspect for good governance. Timely and accurate information should be disclosed
on the matters like the financial position, performance etc. Transparency is needed in order
that government has faith in corporate bodies and consequently it has reduced corporate tax
rates from 30% today as against 97% during the late 1970s. Transparency is needed towards
corporate bodies so that due to tremendous competition in the market place the customers
having choices don’t shift to other corporate bodies.
5. Corporate Governance and Human Resource Management: For any corporate body, the
employees and staff are just like family. For a company to be perfect the role of Human Resource
Management becomes very vital, they both are directly linked. Every individual should be treated
with individual respect, his achievements should be recognized. Each individual staff and
employee should be given best opportunities to prove their worth and these can be done by
Human Resource Department. Thus in Corporate Governance, Human Resource has a great
role.
6. Innovation: Every Corporate body needs to take risk of innovation i.e. innovation in products, in
services and it plays a pivotal role in corporate governance.
7. Necessity of Judicial Reform[5]: There is necessity of judicial reform for a good economy and
also in today’s changing time of globalization and liberalization. Our judicial system though
having performed salutary role all these years, certainly are becoming obsolete and outdated
over the years. The delay in judiciary is due to several interests involved in it. But then with
changing scenario and fast growing competition, the judiciary needs to bring reforms accordingly.
It needs to speedily resolve disputes in cost effective manner.
8. Globalization helping Indian Companies to become global giants based on good governance:
In today’s age of competition and due to globalization our several Indian Corporate bodies are
becoming global giants which are possible only due to good corporate governance.
9. Lessons from Corporate Failure[6]: Every story has a moral to learn from, every failure has
success to learn from, in the same way, corporate body have certain policies which if goes as
a failure they need to learn from it. Failure can be both internal as well as external whatever it may
be, in good governance, corporate bodies need to learn from their failures and need to move
to the path of success
CORPORATE GOVERNANCE-THEORY AND PRACTICE
Various theories and philosophies have provided the foundation for the development of alternative
forms of corporate governance systems around the world. Furthermore, as economies have evolved
through time it appears that corporate executives have deviated from the sole objective of
maximizing shareholders’ wealth. Owners of the capital have responded to these forces for the purpose of
preserving their wealth and earning a reasonable return on their invested capital. Whereas internal
corporate control,
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Material
11
Corporate
external financial market forces, and institutional investors’ responses have been effective in
Governance: An
Overview and securing shareholders’ wealth, legal protection needs to be provided for them.
Historical
Introduction
NOTES As a legal entity, a corporation enters into contracts to produce goods and services and it has the
right to own property. Furthermore, the firm can borrow from various lenders and raise cash by issuing
shares of its ownership. Shareholders would not only benefit from the earnings generated by the
corporation, but by electing members of the board of directors they could indirectly oversee actions
undertaken by the managers. These managers, as agents of the shareholders, are expected to perform
for the best interest of the owners of the corporation. Corporate managers can add value to common
stockholders without decreasing the welfare of the other corporate stakeholders. For example, borrowing
a portion of the capital that is needed for financing activities of the firm, would lead to a higher return
to common stockholders. This is because borrowing is generally inexpensive for the firm in the face
of taxation benefits available to business enterprises. Executive decisions may result in a transfer of
wealth from one group of shareholders to the other. For example, by undertaking risky investment
projects, greater rewards may be available to common stockholders without any such benefits to
bondholders, except for suffering from excessive risk. Corporate managers can also destroy wealth.
History tells us numerous examples in which actions undertaken by corporate executives have
resulted in bankruptcy of the firm. The managers of a business enterprise, however, could add value for
all corporate stakeholders including owners of the capital, labor, and the society at large. This would be
a case of Pareto optimality in which the welfare of some group is increased without any decrease in
benefits to the others.
Corporate governance is concerned with managing the relationship among various corporate
stakeholders. Roe (1994), states that the American corporate governance system emerged as a result of
both economic evolution and its democratic philosophy. In effect, the government by deliberately
weakening commercial banks gave corporate managers excessive power. U.S. Banks were prevented
from becoming corporate shareholders, let alone a large shareholder. U.S. laws further restrained activities
of large shareholders. In this manner, the profile of the American corporate shareholding became as
widely dispersed as possible. The idea, as expressed by the Coase Theorem, was that in this manner
management would need to get the agreement of numerous dispersed shareholders, and thereby act
in the best interests of them all. The political view on corporate governance was based on the belief
that banks, as lenders to the corporation, should not be able to affect the payoffs to common
stockholders. The modern view on corporate governance, as expressed by North (1994), depicts
formal and informal contractual agreements among corporate stakeholders. These may include the
payoff structure for suppliers of capital such as stockholders and lenders, the incentive structure for
corporate managers, and the organizational structure for maintaining an effective balance in
bargaining power of employees of the corporation. This humanly designed organizational structure
would involve transaction costs for maintaining and enforcing agreements. The neoclassical view
assumes that institutions do not matter. Modigliani and Miller (1958), for example, hypothesize that
assuming that the investment policy of the firm is known to the market, its total market value would The
Journal of American Academy of Business, Cambridge * September 2004 46 be independent of the mix of
debt and equity that is used in financing the firm’s assets. In particular, the firm’s structure of capital
claims would not affect its overall cost of capital. As a consequence, investment and financing
decisions of the firm would remain independent of each other. In this manner, corporate governance
structure of the firm would not contribute to creation of value for shareholders. In contrast to the
neoclassical view, Williamson (1988) states that the debt and equity are not mainly alternative
financing instruments, but rather an alternative governance structure. Furthermore, whether a project
should be financed by debt or equity depends principally on the characteristics of the assets. Re-
deployable assets could be financed by debt, while projects that are not re-deployable should be
financed by equity. Furthermore, Jensen and Meckling (1976), and Meyers (1977), state that capital
structure affect the nature of income to be distributed between the suppliers of the capital. Since
bondholders and stockholders are jointly sharing the risk of the firm, maximizing shareholder wealth
may not be in line with maximizing the total value of the firm. In addition, the incentive structure of the
corporate decision makers can play a significant role on the mix of debt and equity used in financing
the firm’s assets, and on its capital investments. History shows that managers can create and add
value to the firm by proper investment and financing decisions, or they may transfer and redistribute
Self-Instructional
Material corporate wealth among the stakeholders, as well as destroying shareholders’ wealth. In
12
effect, investment, financing, and the distribution of business profits are all integrated with each Corporate
other rather than being independent. Governance: An
Overview and
Corporate Governance in Practice Historical
Common stockholders have the right to elect their representatives on the board of directors of a
corporation. Members of the board of directors assume the responsibility of monitoring, directing NOTES
and appointing the firm’s managers. In this manner disperse shareholders are potentially empowered
in setting direction, monitoring performance, and controlling distribution of profits of the
corporation. In particular, this internal control mechanism is purported to integrate the interests of
common stockholders and the executive managers of a corporation by rewarding good corporate
performance. The board of directors has the right and responsibility to remove poorly performing
managers. Historically, dissatisfied shareholders have “walked away” from the corporation by selling
their shares at depressed prices and thereby incurring losses. Alternatively, major shareholders either
through hostile actions, “investor activism,” or a friendly approach, “relationship investing,” have
pursued their objectives of monitoring corporate managers. Furthermore to the extent U.S. corporate
laws permit, competing managers would remove incompetent ones and take over poorly performing
firms. These aforementioned actions collectively are purported to add value for the existing
shareholders. The business judgment rule followed by the U.S. courts, has kept the courts out of
corporate decisions. The U.S. Business Law rests on the belief that actions of corporate managers are
evaluated and approved by members of the board of directors of the corporation. In particular,
corporate actions that have direct effects on shareholders’ wealth are assumed to be communicated to
them in a timely manner. Therefore, the U.S. courts would not interfere in corporate matters except for
fraudulent activities. If members of the board of directors are not able or motivated to control managers,
relationship investing is purported to achieve that. Relationship investing is an example of involved
ownership of a business enterprise. Large investors tend to act as mentors to the managers of the firm
and behave in a supportive and friendly manner. Investors pursue different approaches for
maintaining corporate internal control for the purpose of creating a well functioning business
enterprise. The underlying reason for the corporate governance system is the stakeholders’ pursuit
for preserving their respective share of profit earned by business enterprises.
Competition
As per Oxford dictionary, the meaning of Competition is the activity or condition of striving to gain
or win something by defeating or establishing superiority over others. Competition in the market
means sellers striving independently for buyers patronage to maximize profit or other business
objectives. A buyer prefers to buy a product at a price that maximizes his benefits whereas the seller
prefers to sell the product at a price that maximizes his profit. Competition makes enterprise more
efficient and offers wider choice to consumers at lower prices. This ensures optimum utilization of
available resources. It also enhances consumer welfare since consumers can buy more of better
quality products at lower prices. Fair Competition is beneficial for the consumers, producers/sellers
and finally for the whole society since it induces economic growth. The objective of Competition is
free and fair market. It will lead to enhancement of economic freedom and lower barriers to entry for
new firms and competitors.
Competition is a dynamic concept with no unique definition, except what is understood in common
parlance in the context of Market and Trade. In the manner of speaking, Competition can be likened
to what is antithetical to monopoly. While monopoly is pernicious to consumer interest and free and
fair trade, Competition affords wide ranging benefits to the consumers. Adam Smith (1776) captured
this altruism in his famous book “Wealth of Nations”, when he observed:
“By a perpetual monopoly, all the other subjects of the State are taxed very absurdly in two
different ways, first by the high price of goods, which, in case of free trade, could be bought
at much cheaper rates and secondly, by their total exclusion from a branch of business,
which it might be both convenient and profitable for many of them to carry on.”

Corporate Governance The word ‘Corporate’ is associated by legal enactment for the transaction of a
business. Similarly, the word ‘Governance’ means exercise of Authority, Direction or Control. Thus, the
concept of ‘Corporate Governance’ is the system by which the management of a business entity
directs and controls the activities in the best interest of the stakeholder. Corporate Governance refers to
the way a corporation is governed. It is the technique by which companies are directed and
managed. It is all
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13 Material
Corporate
about balancing individual and societal goals, as well as, economic and social goals. It includes both
Governance: An
Overview and social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as
Historical ethical environment. Corporate Governance has competing definitions, but in Margaret Blair’s estimation
encompasses the “the whole set of legal, cultural and institutional arrangements that determine what
NOTES publicly traded corporations can do, who controls them, how that control is exercised, and how the risks
and returns from the activities they undertake are allocated”.5
As per N.R Narayana Murthy, Chairman, Committee on Corporate Governance, SEBI, Mumbai, February
8, 2003
“Corporate Governance is 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.”
OECD originally defined Corporate Governance as the system by which business
corporations are directed and controlled. The Corporate Governance structure specifies the distribution of
rights and responsibilities among different participants in the Corporation, such as the Board,
Managers, Shareholders and other Stakeholders and spells out the rules and procedures for making
decisions on Corporate Affairs. By doing this, it also provides the structure through which the
Company objectives are set, and the means of attaining those objectives and monitoring
performance.
The OECD also offers a broader definition as Corporate Governance refers to the Private and
Public institutions, including laws, regulations and accepted business practices, which together
govern the relationship in a market economy between Corporate managers and entrepreneurs (Corporate
insiders) on one hand, and those who invest resources in corporations, on the other hand
GOOD GOVERNANCE: MEANING AND CONCEPT

Defining Good Governance
Good is a term used with great flexibility; Depending on the context, good governance has been said
at various times to encompass: full respect of effective participation, human rights, the rule of law,
multi- actor partnerships, and accountable processes, political pluralism, transparent and institutions, an
efficient and effective public sector, legitimacy, access to knowledge, information and education,
political empowerment of people, equity, sustainability, and attitudes and values that foster responsibility,
solidarity and tolerance
• “Good governance” was initially expressed in a 1989 World Bank publication.
• In 1992, the Bank published a report entitled, Governance and Development, which explored
the concept further and its application.
• In 1997, the Bank redefined the concept “good governance” as a necessary precondition for
development.
Good governance is to promote and sustain holistic and integrated human development. The
central focus is to see how the government enables, simplifies and authorises its people, regardless of
differences of caste, creed, class, and political ideology and social origin to think, and take certain
decisions which will be in their best interest, and which will enable them to lead a clean, decent,
happy, and autonomous existence.
“Good” about governance
Good Governance manages and allocates resources to respond to combined problems of its citizens.
Hence states should be assessed on both the quality and the quantity of public goods provided to
citizens. The policies that supply public goods are guided by principles such as human rights,
democratization and democracy, transparency, participation and decentralized power sharing, sound
public administration, accountability, rule of law, effectiveness, equity, and strategic vision.
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Material 14
The Human Development Report issued insists on “good” governance as a democratic exigency, Corporate
in order to rid corruption, provides rights, the means, and the capacity to participate in the decisions that Governance: An
affect their lives and to hold their governments accountable for what they do. Overview and
Historical
Good governance has 8 major characteristics. It is participatory, consensus oriented, accountable, NOTES
transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law. It
assures that corruption is minimized, the views of minorities are taken into account and that the
voices of the most vulnerable in society are heard in decision-making. It is also responsive to the
present and fixture needs of society.
Participation
Good governance requires that civil society has the opportunity to participate by both men and
women during the formulation of development strategies. This aspect of governance is an essential
element in securing commitment and support for projects and enhancing the quality of their
implementation. Participation needs to be informed and organized. This means freedom of
association and expression and an organized civil society should go hand in hand.
Rule of law
Good governance requires a fair, predictable and stable legal framework enforced impartially. Full
protection of human rights, especially minorities should be covered. Impartial law enforcement requires a
judiciary to be independent and police force should be impartial and incorruptible.
Transparency
Transparency in government is an important precondition for good governance, and those decisions
taken and their enforcement are done in a manner that follows rules and regulations. Transparency
ensures that enough information is provided and that it is provided in easily understandable forms
and media.
Responsiveness
Good governance requires the institutions to serve all stakeholders in a given time-frame. There are
several actors and viewpoints and the different interests in society needs mediation. The best interest
of the community should be analysed and achieved which requires a broad and long-term perspective
on what is needed and how to achieve the goals of sustainable development.
15 Self-Instructional
Material
Corporate
Equity and inclusiveness
Governance: An
Overview and A society’s wellbeing depends on ensuring that all men and women have opportunities to improve or
Historical maintain their well-being. This requires all groups, especially the most vulnerable, should have
opportunities to improve or maintain their standards of life.
NOTES
Effectiveness and efficiency
Good governance means Processes and institutions produce results that meet needs while making the
best use of resources. The concept of efficiency covers the sustainable use of natural resources and
the protection of the environment.
Accountability
It is a key requirement of good governance. Both Public and private sector and civil society organizations
must be accountable to the public and to their institutional stakeholders. An organization or an institution
is accountable to those who will be affected by its decisions or actions. Accountability can be
enforced only with transparency and the rule of law.
Rule of Law
Rule of law supports the demand for equity and fairness and means to be impartial, not corrupt and
to protect the human rights of all. These are the leading criteria becoming benchmarks one has to
keep in mind when striving for good Governance in the decision-making processes.
India follows republic, democratic and secular form of governance, and the values that are enshrined
in our constitution. The term “governance” means a political unit for the functioning of policy-
making for both the political and administrative units of Government. Good governance is based on
the conviction that man has the ethical and rational ability, as well as the absolute right, to govern
himself with motive and just. The concept of good governance is associated with capable and real
administration in democratic set up.
In practical terms, there are three particular features of good governance that makes it significance in the
working of the government.
• First, the empowerment and capacity of government to frame and implement policies and
discharge functions.
• Second, the form of political will.
• Third, the process by which authority is exercised in the management of country’s economic and
social resources for development.
It also reflects the attitudes of the people towards the functioning of the so many agencies of
the government. “Good” governance promotes gender equality, sustains the environment, enables
citizens to exercise personal freedoms, and provides tools to reduce poverty, deprivation, fear, and
violence. The UN views good governance as participatory, transparent and accountable. It
encompasses state institutions and their operations and includes private sector and civil society
organizations.
Good governance is significant in public institutions to conduct and manage public affairs and
resources to guarantee human rights in free of abuse and corruption, and with due regard for the rule
of law.
It is significant because it promises to deliver on the promise of human rights: civil, cultural,
economic, political and social rights. Good governance is thus, a function of installation of positive
virtues of administration and elimination of vices of dysfunctional ties.
It makes the government work effective, credible and legitimate in administrative system and
citizen-friendly, value caring and people-sharing.
AGENCY THEORY IN CORPORATE GOVERNANCE
What is an agency?
An agent is a person who works for, or on behalf of, another. Thus, an employee is an agent of a
company. But agency extends beyond employee relationships. Independent contractors are also agents.
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Material 16
Advertising firms, lawyers, and accountants are agents of their clients. The CEO of a company is an Corporate
agent of the board of directors of the company. A grocery store is an agent of the manufacturer of corn Governance: An
chips sold in the store. Thus, the agency relationship extends beyond the employee into many Overview and
different economic relationships. The entity—person or corporation—on whose behalf an agent Historical
works is called a principal.
NOTES
Agency theory is the study of incentives provided to agents. Incentives are an issue because
agents need not have the same interests and goals as the principal. Employees spend billions of hours
every year browsing the Web, e-mailing friends, and playing computer games while they are supposedly
working. Attorneys hired to defend a corporation in a lawsuit have an incentive not to settle, to keep the
billing flowing. (Such behavior would violate the attorneys’ ethics requirements.) Automobile repair
shops have been known to use substandard or used replacement parts and bill for new, high-quality
parts. These are all examples of a conflict in the incentives of the agent and the goals of the principal.
Agency theory focuses on the cost of providing incentives. When you rent a car, an agency
relationship is created. Even though a car rental company is called an agency, it is most useful to look at
the renter as the agent because it is the renter’s behavior that is an issue. The company would like the
agent to treat the car as if it were her own car. The renter, in contrast, knows it isn’t her own car and often
drives accordingly
Introduction of Agency Theories
Agency theories arise from the distinction between the owners (shareholders) of a company or an
organization designated as “the principals” and the executives hired to manage the organization
called “the agent.” Agency theory argues that the goal of the agent is different from that of the principals,
and they are conflicting (Johnson, Daily, & Ellstrand, 1996). The assumption is that the principals
suffer an agency loss, which is a lesser return on investment because they do not directly manage the
company. Part of the return that they could have had if they were managing the company directly goes to
the agent. Consequently, agency theories suggest financial rewards that can help incentivize executives to
maximize the profit of owners (Eisenhardt, 1989). Further, a board developed from the perspective of
the agency theory tends to exercise strict control, supervision, and monitoring of the performance of
the agent in order to protect the interests of the principals (Hillman & Dalziel, 2003). In other words,
the board is actively involved in most of the managerial decision making processes, and is
accountable to the shareholders. A nonprofit board that operates through the lens of agency theories will
show a hands-on management approach on behalf of the stakeholders.
Agency theory relative to corporate governance assumes a two-tier form of firm control:
managers and owners. Agency theory holds that there will be some friction and mistrust between
these two groups. The basic structure of the corporation, therefore, is the web of contractual relations
among different interest groups with a stake in the company.
Features
In general, there are three sets of interest groups within the firm. Managers, stockholders and
creditors (such as banks). Stockholders often have conflicts with both banks and managers, since
their general priorities are different. Managers seek quick profits that increase their own wealth, power
and reputation, while shareholders are more interested in slow and steady growth over time.
Function
The purpose of agency theory is to identify points of conflict among corporate interest groups. Banks
want to reduce risk while shareholders want to reasonably maximize profits. Managers are even
more risky with profit maximization, since their own careers are based on the ability to turn profits to then
show the board. The fact that modern corporations are based on these relations creates costs in that
each group is trying to control the others.
Costs
One of the major insights of agency theory is the concept of costs of maintaining the division of
labor among credit holders, shareholders and managers. Managers have the advantage of
information, since they know the firm close up. They can use this to enhance their own reputations at
the expense of shareholders. Limiting the control of managers itself contains costs (such as reduced
profits), while profit seeking in risky ventures might alienate banks and other financial institutions.
Monitoring and limiting managers itself contains sometimes substantial costs to the firm.
Material
Corporate
Significance
Governance: An
Overview and The agency model of corporate governance holds that firms are basically units of conflict rather than
Historical unitary, profit-seeking machines. This conflict is not aberrant but built directly into the structure of
modern corporations.
NOTES
Effects
It is possible, if one accepts the premises of agency theory, that corporations are actually groups of
connected fiefs. Each fief has its own specific interest and culture and views the purpose of the firm
differently. In analyzing the function of a corporation, one can assume that managers will behave in a
way to maximize their own profit and reputation, even at the expense of shareholders. One might
even understand the manager’s role as one of institutionalized deceit, where the asymmetry of
knowledge permits managers to operate with almost total independence.
1.12.1 The Role of Agency Theory in Corporate Governance?
Agency theory is used to understand the relationships between agents and principals. The agent
represents the principal in a particular business transaction and is expected to represent the best interests
of the principal without regard for self-interest. The different interests of principals and agents may
become a source of conflict, as some agents may not perfectly act in the principal’s best interests.
The resulting miscommunication and disagreement may result in various problems within
companies. Incompatible desires may drive a wedge between each stakeholder and cause inefficiencies
and financial losses. This leads to the principal-agent problem.
The principal-agent problem occurs when the interests of a principal and agent are in conflict.
Companies should seek to minimize these situations through solid corporate policy. These conflicts
present normally ethical individuals with opportunities for moral hazard. Incentives may be used to
redirect the behavior of the agent to realign these interests with the principal’s. Corporate governance can
be used to change the rules under which the agent operates and restore the principal’s interests. The
principal, by employing the agent to represent the principal’s interests, must overcome a lack of
information about the agent’s performance of the task. Agents must have incentives encouraging
them to act in unison with the principal’s interests. Agency theory may be used to design these incentives
appropriately by considering what interests motivate the agent to act. Incentives encouraging the
wrong behavior must be removed and rules discouraging moral hazard must be in place. Understanding
the mechanisms that create problems helps businesses develop better corporate policy.
STEWARDSHIP THEORY OF CORPORATE GOVERNANCE

Introduction: Stewardship Theories
Stewardship theories argue that the managers or executives of a company are stewards of the owners,
and both groups share common goals (Davis, Schoorman, & Donaldson, 1997). Therefore, the board
should not be too controlling, as agency theories would suggest. The board should play a supportive
role by empowering executives and, in turn, increase the potential for higher performance (Hendry, 2002;
Shen, 2003). Stewardship theories argue for relationships between board and executives that involve
training, mentoring, and shared decision making (Shen, 2003; Sundaramurthy & Lewis, 2003).
Most theories of corporate governance use personal self interest as a starting point.
Stewardship theory, however, rejects self-interest. Agency theory begins from self-interested
behavior and rests on dealing with the cost inherent in separating ownership from control. Managers
are assumed to work to improve their own position while the board seeks to control managers and hence,
close the gap between the two structures.
Motivation
For stewardship theory, managers seek other ends besides financial ones. These include a sense of
worth, altruism, a good reputation, a job well done, a feeling of satisfaction and a sense of purpose. The
stewardship theory holds that managers inherently seek to do a good job, maximize company profits and
Self-Instructional
Material 18
bring good returns to stockholders. They do not necessarily do this for their own financial interest, Corporate
but because they feel a strong duty to the firm. Governance: An
Overview and
Identification Historical
Agency and stewardship theories begin from two very different premises. The basic agency problem
revolves around individuals considering themselves only as individuals, without any other NOTES
meaningful attachments. However, stewardship theory holds that individuals in management
positions do not primarily consider themselves as isolated individuals. Instead, they consider themselves
part of the firm. Managers, according to stewardship theory, merge their ego and sense of worth with
the reputation of the firm.
Policies
If a firm adopts a stewardship mode of governance, certain policies naturally follow. Firms will spell out
in detail the roles and expectations of managers. These expectations will be highly goal-oriented and
designed to evoke the manager’s sense of ability and worth. Stewardship theory advocates managers
who are free to pursue their own goals. It naturally follows from this that managers are naturally
“company men” who will put the firm ahead of their own ends. Freedom will be used for the good of
the firm.
Consequences
The consequences of stewardship theory revolve around the sense that the individualistic agency
theory is overdrawn. Trust, all other things being equal, is justified between managers and board
members. In situations where the CEO is not the chairman of the board, the board can rest assured
that a long-term CEO will seek primarily to be a good manager, not a rich man. Alternatively, having a
CEO who is also chairman is not a problem, since there is no good reason that he will use that
position to enrich himself at the expense of the firm. Put differently, stewardship theory holds that
managers do want to be richly rewarded for their efforts, but that no manager wants this to be at the
expense of the firm.
SHAREHOLDER & STAKEHOLDER THEORY OF CORPORATE

GOVERNANCE
The Cadbury Committee 1992 defined corporate governance as “the system by which companies are
directed and controlled.” Numerous theories have been proposed on corporate governance best practice,
none more popular than the shareholder and stakeholder theories.
Shareholder Theory
The shareholder theory was originally proposed by Milton Friedman and it states that the sole
responsibility of business is to increase profits. It is based on the premise that management are hired
as the agent of the shareholders to run the company for their benefit, and therefore they are legally
and morally obligated to serve their interests. The only qualification on the rule to make as much
money as possible is “conformity to the basic rules of the society, both those embodied in law and those
embodied in ethical custom.”
The shareholder theory is now seen as the historic way of doing business with companies
realising that there are disadvantages to concentrating solely on the interests of shareholders. A focus
on short term strategy and greater risk taking are just two of the inherent dangers involved. The role
of shareholder theory can be seen in the demise of corporations such as Enron and Worldcom where
continuous pressure on managers to increase returns to shareholders led them to manipulate the company
accounts.
Stakeholder Theory
Stakeholder theory, on the other hand, states that a company owes a responsibility to a wider group
of stakeholders, other than just shareholders. A stakeholder is defined as any person/group which can
affect/be affected by the actions of a business. It includes employees, customers, suppliers, creditors
and even the wider community and competitors.
Edward Freeman, the original proposer of the stakeholder theory, recognized it as an
important element of Corporate Social Responsibility (CSR), a concept which recognizes the
responsibilities of
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19 Material
Corporate
corporations in the world today, whether they be economic, legal, ethical or even philanthropic.
Governance: An
Overview and Nowadays, some of the world’s largest corporations claim to have CSR at the centre of their
Historical corporate strategy. Whilst there are many genuine cases of companies with a “conscience”, many
others exploit CSR as a good means of PR to improve their image and reputation but ultimately fail to
NOTES put their words into action.
Recent controversies surrounding the tax affairs of well known companies such as Starbucks,
Google and Facebook in the UK have brought stakeholder theory into the spotlight. Whilst the measures
adopted by the companies are legal, they are widely seen as unethical as they are utilising loopholes
in the British tax system to pay less corporation tax in the UK. The public reaction to Starbucks tax
dealings has led them to pledge £10m in taxes in each of the next two years in an attempt to win back
customers.
The various stakeholders are shareholder, employees, customers, government ,lenders and others and
they all have different interests. With the dynamic world, the influence of the stakeholders on setting
goals also changes; day-to-day, it becomes tougher for managers to take decisions as in this
competent environment they cannot afford to neglect the interest of single stakeholder .Before
coming to any conclusion it is preferable if managers analyses their stakeholders thoroughly, sometimes a
minor conflict causes big problems.
Shareholder and their interest
Shareholders are the real owner of the business and their main interest is to maximize their wealth. They
want that the share price rise as much as possible and if firm unable to fulfill their expectations they can
sell their shares that means managers need to consider their interest.
Employees and their interest
Employees are the assets of the business; no doubt they can also be the firm competent edge. Employees
also have their interest like future and carrier development; want some bonus or rewards for their
performance etc. If managers do not fulfill their interest for the sake of earning more profit, the firm not
only loses its employees but also loses market reputation. The ongoing dispute between British Airways
and Cabin Crew is the best example of management-employee dispute. British Airways want to save 62.5
million pounds annually by cost cutting in order to remain competent in the market (Holden, 2010). This
year, they have already taken 22 days of strike, costing the company more than 150 million
pounds (Guardian, 2010). Freeman argued over dispute that company should create values with its
employees (UVA Today, 2010). British Airways¶ management is thinking about increasing profit by cost
cutting but they are not bothered about their relationship with employees, costing them more than
150 million pounds lose during strikes, moreover market reputation and share price also get affected
by this dispute.
Customer and their interest
Customer is the God, every firm produce products for their customers considering their expectations and
interest. The customer’s interest and expectations is Quality for Price. In today’s world customer is more
aware and conscious, a firm can afford billions of dollars of loss but it cannot afford to loseits customers.
The best example for this is Toyota, in 2010 when it faced the quality problem; the company took a step
ahead and recalled more than 9million cars from all around the world; which ultimately cause company
loss of billions of dollars (Conner, 2010). No doubt, with the news of allegation of using poor quality of
spare parts, the company lost its share price in the market, button February 5, 2010 when Akio Toyoda,
president of Toyoda apologized and announced the recall of the Toyota cars, the companies share
price ended 4.5% higher 74.71 on the New York Stock Exchange; Investors relieved that announcement
as a concrete step to deal with the quality crisis (Reuters, 2010).This case also reveal that share price
also get affected by customer satisfaction; as if customers are not satisfied, they can switch to some
other product adversely affect sales and profit which ultimately affect the share price of the company
Creditors and their interest
The primary objective of lenders is to get back the amount with interest on time. Some scholars
argue that lenders can secure themselves by contracts. But it doesn’t mean that lenders are not at all
interested in the market performance of the company. Lending institutes lend money to the firms by
considering its
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market value and previous performance. That means they are not only interested in their returns on Corporate
time but also in market value of the firm and long-term relationships. Governance: An
Overview and
Community and their interest Historical
Business exist in a social environment, business and community have organic relationship. The
stakeholder theory state that the main purpose of the businesses not only to maximize wealth but it NOTES
should also do some social activities because business directly or indirectly affect the environment
and society. Tata Group is committed to improve the quality of life of communities they serve(TATA,
2010)
Government and their interest
Governments principle purpose is to ensure that corporate operate according to the law imposed on
it and do business by fair means. Government impose lawn the business in order to protect the rights
of their citizens moreover they form apex bodies to keep eye on the businesses, as SEBI (Security
and Exchange Board of India), its main purpose is to guard the interests of investors in securities and
to standardize the security market (SEBI, 2010).
SUMMARY
This unit summarizes overall minimum corporate governance principles and best practices applicable to
all organizations (whether public, private or nonprofit). A corporation is created to address objectives
which are much more than creating products and services, it has to serve the larger purpose of satisfying
multilevel needs of the society. Healthy corporate governance practices are no longer the need of the law
but have become essential for the very survival of the organizations, the current economic crisis has
proven that beyond doubts.
The corporations have always faced the tug of war of protecting the interests of the
shareholders (the legal owners) or the stakeholders which includes suppliers, creditors, government
and communities.
This unit discusses certain current best practices as advocated by corporate governance
groups and practiced by some Fortune public companies, with the understanding that best practices
tend to evolve over time. We proceed on the assumption that a ‘best practice’ is one in which the benefits
to the organization substantially exceed the cost of implementation. What is a best practice today
may not be a best practice in the future.
QUESTIONS
Conceptual Types
1. What is CG?
2. Define OECD?
3. Define theory of internal control in CG
4. What is the Meaning of Good Governance?
5. What is the Meaning of Agency?
6. What is Steward ship?
7. Who is share holder?
Analytical Types
1. What is the meaning& overview of CG? Discuss
2. What are the OECD principles &Benefit of CG in states?
3. Why need for CG? Discuss
4. What is SEBI code of CG? Discuss
5. What is the History of India of CG? Discuss
6. Discuss about CG in India present, past, future.
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Corporate
7. What are the perspective & importance issues in CG? Discuss
Governance: An
Overview and 8. Discuss about the Corporate internal control?
Historical
9. What are the Practice of CG?
NOTES 10. What is Good Governance? Discuss
11. What is an Agency theory? Discuss its importance & Function?
12. What is Stewardship theory of CG?
13. What is the theory of S hare holder & Stake holders of CG?
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UNIT 2 CURRENT SCENARIO, OBLIGATION TO Current Scenario,
Obligation to
INVESTOR Investor
Structure
NOTES
Principles
Obligation to Investors, Customers, Employees, Suppliers, Government and Society
A Land Mark in Indian Corporate History
Case Study
Case Study
National Committees on Corporate Governance
Issues in Corporate Governance Practices in India
Summary
Questions
LESSON OUTLINE
• Introduction
• Current scenario of CG
• Principle of CG
• Obligation to investors, customer, employees,
• Government &society, Managerial
• A land mark in India CG
• CASE STUDY-CG at Infosys, Alacrity housing
• National committees on CG
• Issues in corporate CG practice in India
LEARNING OBJECTIVES
After going through this unit, you will be able to:

• Meaning & Definition of CG in Current scenario
• What are the principles of Current Scenario?
• Define obligation to investor, customer & employ
• What are the responsibilities of Government?
• What is national committees on CG
INTRODUCTION
In the present century of emerging corporate sectors in the emerging economies and the rise of
market economy has paved the way of corporate governance and thereby we can no longer stand
going beyond globalization. The further approach in order to carry on with a pace in the world of
modern business progress as with the globalization, the need of a proper model and practice of
corporate governance round the corner and in the present scenario the interests of the board of
directors, business partners, shareholders, employees, and the alike personnel cannot be ignored in the
name of organizational value. Such ignorance may lead to internal conflicts among the business
societies which may create a downfall in the present world economic progress and in the individual
minds related to the business activities. Turmoil may occur where a negative activity may prevail instead
of cooperation in the groups who are going to achieve their earnest goals as their achievements and to
create a prosperous globalization and market economy thereon. In order to maintain a lively
responsibility among the personnel in a society from the very top level to the lower level with a very
my-dear relationship and in order to achieve
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23
Current Scenario,
the prosperity which is the bird's eye at any viewpoint, a better managerial activity is very necessary and
Obligation to
Investor which can only be adopted through a proper practice of a corporate governance model.
Definition
‘Corporate governance is, “the framework of rules, relationships, systems and processes
NOTES within and by which authority is exercised and controlled in corporations.” It
encompasses the mechanisms by which companies, and those in control, are held to
account.’
– Owen, J.; HIH Royal
Commission. “Corporate governance is a dynamic force that keeps evolving.”
– Eric Mayne, Chair, ASX Corporate Governance Council.
“Corporate governance describes the structure of rights and responsibilities among the
parties that have a stake in a firm.”
– Aguilera, R.V. & Jackson, G.
Corporate governance may be termed as to the system which effects the direction and control of
the corporations. The corporate governance brings a harmonious relationship in the structure of a
corporation regarding the rights and the responsibilities among the different personnel in a
corporation and specifies the rules and procedures that how the managers of the different levels, the
board of directors, shareholders, creditors, auditors, regulators, and other stakeholders shall make
decisions and help themselves to cooperate in the following corporate affairs. At the certain levels, it
seeks the structure in which the power and the responsibilities should be distributed among the
different personnel. In the modern times the term governance is used which is describing the concept
of action taken in what way and various factors of decision and control can be balanced so that the
organisation can implement the meaning of capital in the most forthcoming event which is used as the
main motive and the most common goal in the present scenario of business entity in order to make a
progress and keep a pace in the modern market economy in the market of globalisation in the twenty-
first century. The present managerial activities as concerned with an entity are a very much factor to
maintain the harmony in order to maintain the level in the modern business environment and to cope up
with the other competitive authorities in the system of the corporate sectors
Corporate governance provides the rules and regulations and appropriate control mechanism
through which creates a systematic obligation to maintain the propositions in the entities and
supervise the total materialistic issues from one level to another hand to hand within a modern scope
of business environment which helps in the initiation and development of the activities, building a
social scope, and modelling of the entities according to the modern systems which provide a lot of market
development in the developing nations with a sustainable development and a continuous involvement
in restructuring the main branches of the economy or social sector reforms.
The traditional market system hence belonged to a traditional family oriented basic structure
of the business whereby the total concept of the entity was determined by the owner of the business
and thereby the owner of the family; thus the autocratic leadership in so many ways used to fluctuate
the mind of the employees of the different levels and a sudden breakage to the socio-cultural pattern
in the existing firm due to excessive need of proper managerial activities which needs proper
managers and determination of a proper leadership. Thus the modern system evolved which is providing
an enthusiasm to build a proper relationship among the human society in order to achieve the ultimate
goal with a very positive effect in every stream of leadership and to develop a proper model of corporate
governance and to utilise it with a very effective practise.
Corporate governance has also been defined as “a system of law and sound approaches by
which corporations are directed and controlled focusing on the internal and external corporate structures
with the intention of monitoring the actions of management and directors and thereby mitigating agency
risks which may stem from the misdeeds of corporate officers.”.The term “corporate governance” denotes
the entire process by which corporations are managed and controlled. J. Wolfensohn, president of the
World Bank has opined that corporate governance is about promoting corporate fairness,
transparency and accountability.
The main motive of corporate governance lies with the motion that to strengthen the
economic efficiency through a strong emphasis on the stakeholders’ welfare and thereby one of its
importance arises out is the nature and extent of corporate accountability. Most of the interest in corporate
governance is concerned with that of the mitigation of the conflicts arising out of the interests between the
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24
Current Scenario,
PRINCIPLES Obligation to
Investor
The 1990 report regarding the three documents along with the discussions of refers to principles of
corporate governance which are the Cadbury Report, 1992 of UK; OECD Principles of Corporate
Governance 1998 and revised on 2004 of OECD; and the Sarbanes-Oxley Act, 2002, of US. The Cadbury NOTES
and OECD reports gives the general principles regarding which businesses are expected to operate
and assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an
attempt by the federal government in the United States to legislate several principles recommended
in the Cadbury and OECD reports.
• Rights and equitable treatment of shareholders: Hereby the organizations are compelled
to respect the rights of the shareholders and help them to exercise their rights and the entities
are responsible thereon to help the shareholders in exercising their rights by openly an
effectively communication and basic information and by encouraging them to participate in
the general meetings.
• Interests of other shareholders: Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities, customers, and policy makers.
• Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.
• Integrity and ethical behaviour: Integrity should be a fundamental requirement in choosing
corporate officers and board members. Organizations should develop a code of conduct for their
directors and executives that promotes ethical and responsible decision making.
• Disclosure and transparency: Hereby accountability is a major factor which is a major mode to
be abided in any form of entity according to the rules and regulations. Organizations should
clarify and make publicly known the roles and responsibilities of board and management to
provide stakeholders with a level of accountability. They should also implement procedures
to independently verify and safeguard the integrity of the company’s financial reporting.
Disclosure of material matters concerning the organization should be timely and balanced to
ensure that all investors have access to clear, factual information
OBLIGATION TO INVESTORS, CUSTOMERS, EMPLOYEES,

SUPPLIERS, GOVERNMENT AND SOCIETY
Obligations Towards Owners or Shareholders

In the case of sole trader ship and partnership concerns, the owners can look after their interest
themselves. Where as in the case of the company, the directors have the following responsibilities
towards the shareholders:
A. Reasonable Dividend: shareholders are a source of funds for the company. They
Management and Society expect a high rate of dividend on the money invested by them and also
the maximization of the value of their investment in the company.
B. Protection of assets: The assets of the company are purchased with shareholders funds. Therefore
the company is responsible to safeguard these assets.
C. Information: It is the responsibility of the management to keep the shareholders informed about
the financial position as well as the progress of the company.
Obligations towards Customers
Customer’s satisfaction is the ultimate aim of all economic activity. Therefore, it is, theduty of
management
a. To make goods of the right quality available to the right people at the right time andplace and
at reasonable prices.
b. The business should not indulge into unfair practices such as black marketing, hoarding,
adulteration etc.
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25
Current Scenario,
c. To provide prompt and courteous service to customers.
Obligation to
Investor d. To handle customers grievances carefully.
e. To distribute the goods and services properly so that the customers do not face any difficulty
NOTES in purchasing them.
f. To produce goods which meet the needs of the customer who belong to different classes,
tastes and with different purchasing power.
Obligations towards Employees
Employees should be treated as human beings and their co-operation must be achieved for the realization
of organizational goals. The business should fulfil the following obligations towards their
employees.
a. Fair wages: Business should pay reasonable salaries so that their employee’s may lead a good
life and satisfy their needs.
b. Adequate benefits: Employees should be provided benefits like housing, insurance cover, medical
facilities and retirement benefits.
c. Good Working Conditions: Good working conditions are necessary to maintain the health of the
workers. Therefore they must be provided with good working conditions.
d. Opportunity for Growth: Business should give their employees opportunity to develop their
capabilities through training and education.
e. Recognition of Worker’s Rights: The business should recognize the worker’s right to fair wages,
to form trade unions, to collective bargaining etc.
f. Co-operation: The business must win the co-operation of the workers by creating the conditions
in which workers are willing to put forward their best efforts towards the common goals of
the business.
Responsibility towards Suppliers
The business must create healthy relations with the supplier. Management should deal with them
judiciously. They should be provided with fair terms and conditions regarding price, quality, delivery of
goods and payment.
Obligations towards Government
It is the duty of every business enterprise to manage its affairs according to the laws affecting it. It
should pay taxes and other dues honestly. It should not encourage corruption,black marketing and other
social evils. It should discourage the tendencies of concentration of economic power and monopoly
and should encourage fair trade practices.
Obligation towards Society
Every business owes an obligation to the society at large. The following are the important obligations of
business towards society.
a. Socio-Economic Objectives: A business should not indulge in any practice which is not fair from
social point of view. The business should use the factors of production effectively and efficiently
for the satisfaction of the needs of the society.
b. Employment Opportunities: It is the responsibility of management to help increase direct and
indirect employment in the area where it is functioning.
c. Efficient use of Resources: The resources at the command of business belong to the society.
Therefore, the business should make the best possible use of the resources at its disposal for
the well being of the society.
d. Business Morality: The business should not indulge into anti-social and unfairtrade practices
such as adulteration, hoarding and black marketing.
e. Improving local environment: Business should take preventive measures against water and air
pollution. It can develop the surrounding area for the well being of the employees and the
general public. A business can also contribute to the advancement of local amenities.
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Managerial Obligations to Society Current Scenario,
Society contributes its resources to a company. It becomes duty of the corporate to give back to society. Obligation to
Investor
In today’s world no company can afford to ignore its social obligations. Otherwise the company will lose
its trust and faith in the society.
As the company makes profit, grows financially and progresses the same way the society should NOTES
also more forward. If there is an oasis of affluence in a desert of neglect, it will call for dangers
ahead.
A company is part and parcel of a society hence it cannot isolate or close its eyes. The society is
a stakeholder. Indian companies are allocating funds or part of their net profits for social
development and taking active part in uplifting the needy and down trodden.
Companies have taken up social work in the areas of:
(i) Primary education,
(ii) Providing education facilities,
(iii) Building large university,
(iv) Giving medical facilities to rural areas,
(v) Creating human capabilities,
(vi) Upliftment of backward areas,
(vii) Women education, literacy,
(viii) Sanitary, health and greening.
The process is bringing positive image of the companies. Social commitment is not against
creating profits, it is an addition to profits in long range.
Management Obligation to Investors
A corporate governance structure in a company should provide a frame work to protect the rights of
shareholders. That is one vote for one share.
To active this salient features are:
(i) It should ensure that management provides sufficient and relevant information in time.
(ii) It should encourage share holder participation in annual general meetings and vote.
(iii) Shareholders should get sufficient dividends or residual profit to stay with the company.
(iv) Minority shareholders are protected against the oppression of large shareholders.
(v) Ensure transparency and fairness in the operations of the company.
(vi) Keep the reputation or brand image high image of the company to attract and retain investments.
(vii) Addressing the grievances of the shareholders.
(viii) Equitable treatment to all shareholders.
(ix) Provide disclosure information relevant to stakeholders
A LAND MARK IN INDIAN CORPORATE HISTORY

As corporations increasingly access global pools of financial and human capital, partner with
vendors on mega collaborations, and are required to function in harmony with the community,
corporate governance becomes imperative.
India is close to having one million registered companies, and the need for a strong company
legislation is even greater. The new Companies Act intends to bring governance standards on par with
those in developed nations through several key provisions, such as composition and function of Board of
directors, code for independent directors, performance evaluation of independent directors, class
action suits, auditor rotation and independence, and establishment of Serious Fraud Investigation
Office.
Board of directors
The Act recognises the Board as a key component and entrusts it with significant responsibilities for
strong internal controls and risk management.
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Current Scenario,
Besides the audit committee, listed and prescribed class of companies should constitute the
Obligation to
Investor nomination and remuneration committee and stakeholder relationship committee. The Act stipulates
appointing at least one woman director in listed and prescribed class of companies.
Independent directors
NOTES
The concept of independent directors has been introduced for the first time in the Companies Act.
The Act lays down the qualification, code of professional conduct (includes assisting companies
in implementing best corporate governance practices), performance evaluation mechanism, and
duties of independent directors. Independent directors will now have greater responsibility to ensure a
vigilant and active board.
While this is a welcome step, there may be an element of subjectivity when enforcing compliance.
Class action suits
The concept of class action suits is prevalent in countries like the US and the UK. The Companies Act
now allows a requisite number of members or depositors or any class of them to file an application before
the National Company Law Tribunal (NCLT), if they feel that the company’s affairs are being conducted
in a manner prejudicial to the interests of the company, its members or depositors.
The average value of a settlement in the US in the first half of 2012 was $71 million — a sharp
rise from $46 million during 2005–2011. Major allegations in the suits included operational
shortcomings/ product defects (45 per cent), followed by accounting, breach of fiduciary duty, and
customer/ vendor issues.
Audit and auditors
Auditor rotation has been made mandatory for listed and prescribed class of companies. Severe penal
provisions have been introduced to enforce compliance. Most countries do not have mandatory rotation
of audit firms, even as they mandate the rotation of audit partners. Regulators in the UK, the US, and
Germany have discussed the topic in the past, but concluded that the potential benefits of mandatory
rotation do not outweigh the risks and costs.
Fraud Investigation
The Government shall establish a Serious Fraud Investigation Office (SFIO) for companies, and stringent
penal provisions have been defined for fraud-related offences.
In summary, the Act is a landmark development in the Indian corporate landscape. The impact of
the new pronouncement should not be underestimated, and companies and other stakeholders should
start evaluating the implications and act swiftly.
The Ministry of Corporate Affairs will have to proactively issue circulars and clarifications to
ensure the act is implemented in the right spirit.
CASE STUDY
Corporate Governance at Infosys
By the late 1990s, Infosys Technologies Limited (Infosys) 1 had clearly emerged one of the best managed
companies in India. Its corporate governance practices seemed to be better than those of many other
companies in India. Because of its good governance practices, Infosys was the recipient of many
awards. In 2001, Infosys was rated India’s most respected company by Business World 2. Infosys was
also ranked second in corporate governance among 495 emerging companies in a survey conducted
by Credit Lyonnais Securities Asia (CLSA) Emerging Markets. It was voted India’s best managed
company five years in a row (1996-2000) by the Asia money poll. In 2000, Infosys had been awarded the
“National Award for Excellence in Corporate Governance” by the Government of India. In 1999, Infosys
had been selected as one of Asia’s leading companies in the Far Eastern Economic Review’s REVIEW
2000 Survey and voted India’s most admired company by The Economic Times. Infosys had also
provided all the information required by the Cadbury committee3 Infosys had benchmarked its
corporate governance
Self-Instructional
Material 28
practices against those of the best managed companies in the world (Refer Exhibit I for broad structures Current Scenario,
and processes for good governance). Obligation to
Investor
It was one of the first companies in India to publish a compliance report on corporate
governance, based on the recommendations of a committee constituted by the Confederation of
Indian Industries (CII).4 Infosys maintained a high degree of transparency while disclosing information NOTES
to stakeholders. It had been providing consolidated financial statements under US GAAP to its global
investors and financial statements under Indian GAAP to Indian shareholders. Infosys provided
details on high and low monthly averages of share prices in all the stock exchanges on which the
company’s shares were listed. It was one of the few companies in India to provide segmentwise
breakup of revenues.
Code of Corporate Governance
In the late 1990s, the Confederation of Indian Industries (CII) published a code of corporate governance
(Refer Exhibit II for the highlights of the report). In 1999, the Securities and Exchange Board of
India (SEBI) appointed a committee under the Chairmanship of Kumar Mangalam Birla 5 to recommend a
code of corporate governance. The report was submitted by the committee in November 1999 and
accepted by SEBI in December 1999 (Refer Exhibit III for the highlights of the report).
Infosys had accepted the recommendation of both the CII and the Kumar Mangalam Birla
Committee. This section provides an overview of corporate governance practices followed by Infosys.
Infosys had an executive chairman and chief executive officer (CEO) and a managing
director, president and chief operating officer (COO). The CEO was responsible for corporate
strategy, brand equity, planning, external contacts, acquisitions, and board matters. The COO was
responsible for all day-to-day operational issues and achievement of the annual targets in client
satisfaction, sales, profits, quality, productivity, employee empowerment and employee retention. The
CEO, COO, executive directors and the senior management made periodic presentations to the board
on their targets, responsibilities and performance.
In 2001, the board had sixteen directors. There were eight executive directors and eight non-
executive directors (Refer Table I). Infosys believed that the one thing that could help them to
improve corporate governance was to bring international professionals on corporate boards
The board members were expected to possess the expertise, skills and experience required to
manage and guide a high growth, hi-tech software company. Expertise in strategy, technology,
finance, and human resources was essential. Generally, they were between 40 and 55 years of age
and were not related to the other board members. They did not serve in any executive or non-executive
position in any company in direct competition with Infosys. The board members were expected to
rigorously prepare for, attend, and participate in all board and relevant committee meetings. Each board
member was expected to ensure that other existing and planned future commitments did not interfere
with the member’s responsibility as a director of Infosys.
Normally, the board meetings were scheduled at least a month in advance. Most of the
meetings were held at the company’s registered office at Electronics City, Bangalore, India. The
chairman of the board and the company secretary drafted the agenda for each board meeting and
distributed it in advance to the board members. Board members were free to suggest the inclusion of
any item on the agenda. Normally, the board met once a quarter to review the quarterly results and
other issues. The board also met on the occasion of the annual shareholders’ meeting. If the need
arose, additional meetings were held. The non-executive directors had to attend at least four board
meetings in a year. The board had access to any information that it wanted about the company.
In 2001, the board had three committees - the nominations committee, the compensation
committee and the audit committee. To ensure independence of the board, the members of the
nominations committee, the compensation committee and the audit committee were all non-executive
directors.
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Current Scenario,
Corporate Governance - The Infosys Way Contd...
Obligation to
Investor Table I Composition of the Board (2001)
Executive Directors Profile

NOTES Narayana NR Murthy
Chairman of the Board and CEO since 1981. Also served as
managing director until February 1999.
Co-founder of Infosys. Managing Director, COO and President
Nandan M Nilekani
since February 1999.
Co-founder of Infosys. Deputy Managing Director, Head of
S Gopalkrishnan
Customer Service & Technology.
Co-founder of Infosys. Head of HRD, IS, Quality &
K Dinesh
productivity.
SD Shibutal Co-founder of Infosys. Head of Customer Delivery.
TV Mohandas Pai CFO, Head of Administration and Facilities.
Phaneesh Murthy Head of Sales & Marketing.
Srinath Batni Head of West North America.
NON-EXECUTIVE DIRECTORS
Managing Director of Housing Development Finance
Deepak M Satwalekar
Corporation Ltd. since 1993.
Charles E. Merrill Professor of Finance and Economics at the
Dr Marti G Subrahmanyam
Stern School of Business at New York University since 1993.
Ramesh Vangal President of Seagram Asia Pacific since 1997.
Executive Chairman of the Singapore Economic Development
Board. Also, Deputy Chairman of the National Science and
Philip Yeo
Technology Board and Chairman of Pidemco Land, a subsidiary
of the Singapore Technologies Group.
Member of Congress for 22 years. A senior partner in the
Senator Larry Pressler
Washington, D.C. law firm of O'Conner & Hannan.
Senior Consultant and Chief Economist to the Confederation of
Dr Omkar Goswami
Indian Industry (CII).
Saul P. Steinberg Professor in the Department of Management
Dr Jitenrda Singh
at the Wharton School, University of Pennsylvania.
A recognised thought leader on marketing strategy and
consumer related issues in India and runs a strategic marketing
Rama Bijapurkar
consulting practice working across a wide range of sectors,
helping organizations develop marketing strategies.
Source: Annual Report, 2000-01

The nominations committee had four non-executive directors who looked after the issue of
retirement of existing members and their re-appointment, on the basis of their performance. The
nominations committee constantly evaluated the contribution of the members of the board and
recommended to shareholders their re-appointment. The executive directors were appointed by the
shareholders for a maximum period of five years, but were eligible for re-appointment upon completion of
their term. The nominations committee adopted a retirement policy for the members of the board
under which the maximum age of retirement of executive directors, including the CEO, was 60 years,
which was the age of superannuation for the employees of the company. Their continuation as
members of the board upon superannuation / retirement was determined by the nominations
committee.
The compensation committee, which had three non-executive directors, looked after issues relating
to compensation and benefits for board members. It determined and recommended to the board, the
compensation payable to the members of the board. The compensation of the executive directors
consisted of a fixed component that was paid monthly, and a variable component, which was paid
quarterly, based on performance. The annual compensation of the executive directors was approved
by the compensation committee within the parameters set by the shareholders at the shareholders
meetings. The shareholders determined the compensation of the executive directors for the entire
period of their term.
The compensation of the non-executive directors was approved at a meeting of the full board.
The components were a fixed amount, and a variable amount based on their attendance of the board and
committee meetings. The total compensation payable to all the non-executive directors together was
limited to a fixed sum per year determined by the board.
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This sum was within the limit of 0.5% of the net profits of the company for the year calculated, as Current Scenario,
per the provisions of the Companies Act and as approved by the shareholders. The compensation Obligation to
payable to the non-executive directors (and the method of calculation) was disclosed in the financial Investor
statements. Since 1999, the non-executive directors were eligible for stock options. Of the compensation
payable for the year 1999, 60% was paid for being on the board and the balance 40% was paid in
proportion to the board/committee meetings attended (Refer Table II for compensation payable to NOTES
non- executive directors in 1999).
Table II Compensation Payable to Non-Executive Directors (1999)
Compensation
Pro rata
Name payable on Total
compensation
attendance
Susim M. Datta* 0.36 0.3 0.66
Deepak M. Satwalekar 0.36 0.36 0.72
Ramesh Vangal 0.36 0.1 0.46
Dr.Marti G.
0.36 0.2 0.56
Subrahmanyam
Total 1.44 0.96 2.4
*Susim M Datta retired from the board in 2000.

In 1999, the board had four non-executive directors and six executive directors.
Source: Annual Report, 1998-99
None of the directors gained financially from any other contract of significance which the
company or any of its subsidiary undertakings was party to.
The audit committee was responsible for effective supervision of the financial reporting process,
ensuring financial and accounting controls and compliance with the financial policies of the
company. The committee periodically interacted with the statutory auditors and the internal auditors
to ascertain the quality of the company’s transactions; to review the manner in which they were
performing their responsibilities; and to discuss auditing, internal control and financial reporting
issues. The committee provided overall direction on the risk management policies and also indicated the
areas that internal and management audits should focus on. The committee had full access to financial
data. The committee reviewed the annual and half yearly financial statements before they were
submitted to the board. The committee also monitored proposed changes in the accounting policy,
reviewed the internal audit functions and discussed the accounting implications of major
transactions.
As per the recommendations of the Kumar Mangalam Committee, Infosys included a separate
section on corporate governance in its annual report, which disclosed the remuneration paid to
directors in all forms, including salary, benefits, bonuses, stock options. The annual report also carried a
compliance certificate from the auditors.
Infosys also laid emphasis on succession planning and management development. The chairman
reviewed succession planning and management development with the board from time to time. The
chairman and CEO also managed all interaction with the investors, media, and the government.
Where necessary, he took advice and help from the managing director, president, and COO as well as the
CFO. The managing director and COO managed all interactions with the clients, taking the advice and the
help of the CEO. Both the CEO and the COO handled employee communication.
Infosys-A Benchmark for Corporate Governance
Some analysts felt that Infosys’ corporate governance practices offered many lessons to corporate
India. Infosys had shown that increasing shareholder wealth and safeguarding the interests of other
stakeholders was not incompatible. Infosys had given its non-executive directors the mandate to pass
judgement on the efficacy of its business plans. Every non-executive director not only played an
active role in decision making, but also led or served on at least one of the three (Nomination,
Compensation and Audit) committees. Infosys’ founders had set very high standards, in a country
where malpractices by founders were rampant. The founders only took salaries and dividends and derived
no other financial benefits from the company.
Commenting on the strengths and weaknesses of Infosys’ corporate governance, Nandan M
Nilekani, Managing Director, Chief Operating Officer and President of Infosys, said, “The strengths are
Self-Instructional
31 Material
Current Scenario,
that we have been very successful in creating a value based system with a very strong focus on
Obligation to
Investor ethics, and strong division between personal and professional funds etc. That has translated into
brand equity, shareholder value etc.
Obviously, we can do things better. We believe that we can never stand still. We will keep looking
NOTES at global best practices, what the world is saying on this front. We keep trying to improve the way
we manage to be on par with it.” It remained to be seen whether other Indian companies could
emulate Infosys form of corporate governance
CASE STUDY
Alacrity Housing
In India, the housing and construction sector accounted for about 40-50% of the capital expenditure
on infrastructure projects in a year. The sector contributed significantly to the economy, enhancing
GDP, increasing income and generating employment. The construction activity accounted for about
50% of the development outlay in India. Till the late 1980s, the housing and construction sector was
not given the status of an industry. The sector required a scientific approach for the management of
materials, machines, manpower and money, and general management discipline to become organized
and get the status of an industry.
With the formulation of the National Housing Policy (NHP) in 1989-1990,2the construction
business started to be recognized as an industry. In addition, the government lost its monopoly status
in the industry; instead, it now became a facilitator and monitor of the industry. Soon after the NHP
was announced, the industry grew alarmed at the unethical practices followed by many people in the
industry. Because of this unethical behavior, there was crisis of confidence between the supplier and the
consumer
The unprofessional and unethical practices covered a whole range of activities in the industry.
These included illegal, unauthorized and unsafe constructions; black money transactions; time and
cost overruns; exploitative profit margins etc. Bribery was common in the industry since many
corrupt government officials demanded huge amounts for issuing permits and clearances for
drainage, water and electricity connections, and no-objection certificates etc.
Time and cost overruns were also very common. The builders never seemed to give
possession of the flat/house on time. The price too, was never the same as agreed on initially and
increased substantially due to the project cost overrun. Laborers were exploited and not paid even
minimum wages. There was also discrimination against women.
In addition, black money transactions were common in the industry. No contractor or builder
objected to this practice. The underworld was also involved in the construction industry. Builders
sought the help of the underworld to remove encroachments on the plots they were going to develop. In
return, the underworld demanded huge sums of money.
To self regulate the industry and weed out corruption, the National Real Estate Development
Council (NAREDCO) was established in 1998. To improve the confidence level of investors and
consumers in the real estate sector, NAREDCO took measures to improve transparency in real estate
transactions. It represented all enterprises dealing with various aspects of real estate development
including land development; lay-out; planning; construction of residential; commercial and
institutional buildings/ complexes; development of townships; provision of urban infrastructure
(roads, electricity, drainage, sewerage, water supply) and social infrastructure (recreational,
educational and medical facilities); architecture; town planning; supply of building materials; estate
finance insurance; and estate marketing and brokerage; and other allied fields. A Code of Ethics was
developed (Refer Exhibit I). NAREDCO also developed a rating system in association with CRISIL 3 to
facilitate prudent investment decisions in real estate ventures.
Even though unethical and corrupt behavior was common in the housing and construction
industry, one company - Alacrity Housing believed that it paid to run an honest business. The company
strongly opposed to the unethical behavior so common in the industry. It did not believe in giving bribes
or dealing in black money. Analysts doubted that such a company could survive for long in a corrupt
business environment
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Material 32
Alacrity Foundations Private Limited (Alacrity) was founded in 1978 by Amol Karnad (Karnad) 4. Current Scenario,
Karnad believed that personal dignity and integrity were vital for an individual’s spiritual progress in life, Obligation to
and that work was the medium for the true expression of these qualities. Investor
Karnad’s views on the dignity and glory of the human being were influenced by philosopher
and novelist Ayn Rand. His views on organisation and management by Peter Drucker5. He set up a NOTES
management consultancy to test his ideas. The consultancy showed mixed results. Though clients
seemed happy and did not mind paying a fee to listen to the recommendations, they were not very
enthusiastic when it came to implementation. They felt that the consultancy comprised of “smart
young people with ideas, but really quite impractical.”
However, Karnad was not discouraged by the response. He decided to pursue his convictions
by launching his company operations in 1981. With the help of research in management and some
propositions (Refer Exhibit II for the propositions), he formulated Alacrity’s corporate mission: “To try
and prove that organized business when deeply committed to human values is the best equipped to
lead society to a better quality of life.” Karnad strongly believed that business could play a crucial
role in evolving a new ethical social order.
Alacrity planned to establish businesses, which were in line with national goals and generated
both employment and purchasing power. Accordingly, Alacrity identified three thrust areas:
Housing, Electronics (Energy Management), and Healthcare and Education. Of these, urban housing
and energy management were chosen as Alacrity’s first streams of business.
When hunting for a flat after marriage, Karnad realized that he could not afford one. It
seemed very strange to him that there were no large corporations in a field as basic as shelter. Karnad
said, “This gave me an insight into the manner in which the construction industry functioned. Market
confidence in the developer was low, mainly because the industry was not organized. Clearly, there
was a niche for a construction firm which promised reliability and accountability.”
This prompted Karnad to enter the housing business. So when Karnad’s uncle, Indukanth Ragade
(Indukanth), who went on to become the Vice President of Alacrity, wanted to develop his property in
Chennai, Karnad took up the project even though he was not a civil engineer. Consequently, in the early
1980s Alacrity started its housing operations in Chennai. The housing sector was then marked by fly-by-
night companies which did not have a favorable market regulation and which associated with
bribery, time and cost overruns, and poor quality and service.
Despite the uncertainty and high risks of the construction business, Karnad sensed an
opportunity. Initially, the company built housing complexes for its employees and their friends. The
houses were priced economically, without any reference to the market rate. The price struck a
balance between a reasonable return to the business and a fair price that the people could afford. As a
result, the price was about two-thirds the prevailing market price.
Alacrity introduced many new, value-added features. The company offered its customers a
one- year warranty and after sales service. During the warranty period, Alacrity offered free maintenance
to the house owners. After the warranty period, any services required by the owners were charged
reasonably.
To maintain a good relationship with its customers, Alacrity bore any price escalation caused
by project cost overruns or increase in the prices of raw materials. The company also tried to get its
suppliers to commit to a particular rate.
The customers had to pay only the price that was agreed on when they signed the contract.
Alacrity also promised to pay customers the rent they would have to pay for living elsewhere, if
there was a time overrun.
By building a reputation for honesty, Alacrity attracted people who wanted to invest their money
with a builder they could trust. Alacrity offered a fixed price and also underwrote all cost overruns
thereafter. The company also compensated by way of liquidated damages for any delay in the
delivery of a project, even if the delay was beyond the control of the company. People seemed to
appreciate these considerate policies. In a survey conducted by an independent agency that required
resondents to prioritise the builders preferred by them, more than 60% named only Alacrity.
However, because of its ethical policies, company faced many problems. In one particular case,
the company’s project was held up because it could not secure electricity supply for its housing complex.
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33 Material
Current Scenario,
Though Alacrity’s Government Relations Team actively pursued the matter with the concerned
Obligation to
Investor department, it was not successful. Because of this delay, the liquidated damages to be paid to
customers added up to several million rupees. Customers became impatient and started questioning
Alacrity’s policies. But, Alacrity stood by its priniciples.
NOTES To pressurize the electricity departments, one of the customers wrote to the Governer, asking him
to intervene to help an honest builder. However, the Governer was unable to influence the
department. Fortunately, after several days, electric supply was provided and the apartments were
handed over to their owners. This episode ended with the customers of the project releasing an
advertisement in a newspaper publicly thanking Alacrity
The customers thanked Alacrity not only for the good housing complex but also for the
manner in which it was delivered. Karnad commented, “The publicity and the goodwill that we gained out
of this story being told and retold more than justified the expenditure incurred in liquidated damages
as an effective advertisement cost.”
In another incident, the Chennai Metropolitan Development Authority (CMDA) did not
withdraw a ‘stop-work order’ for a long time. The order was issued misguidedly against one of Alacrity’s
projects that also affected the processing of its new applications.
Alacrity resolved the problem, by addressing a letter to the Member Secretary of the CMDA
(Refer Box for the concluding excerpt of the letter). The maturity and understanding displayed by
Alacrity was applauded by the CMDA. A year later, CMDA approached Alacrity to carry out a study for
improving the efficiency of its own approval procedures.
Given the general ignorance and apathy of the environment at large, the task of town planning and
urban development appears to us to be ambitious in itself. For its successful performance we would
require to organise and direct all the available strengths in human resources, irrespective of whether
they come from the private sector or government sector. These strengths would include:
• the stringency of the Development Control Rules,
• the procedural discipline of the ‘green channel’,
• the belief and conviction of honest entrepreneurship,
• and the commitment and enthusiasm of both government authority and private enterprise
Even more important, we believe, it will require an appropriate perspective in implementation
which does not allow procedural lapses on either side to develop into a loss of mutual confidence.
By the middle of 1988, Alacrity would have completed more than 40 projects within the city, all of
which would manifest the inherent values of the Development Control Rules. The apartments in
these projects would have been priced nearly Rs.100/- per square feet less than the price charged by others
for comparable quality and service, thereby laying to rest the myth that the Development Control
Rules can be observed only at a prohibitive cost to the consumer. If, by then, Alacrity’s buildings
along with the constructions of other like-minded builders accounted for even 25% of the total area
put up by apartment builders in the city the Development Control Rules would be well on the way to
gaining popular acceptance During its initial years, Alacrity continuously posted a net loss. In the first
year of its operations, Alacrity reported a loss of Rs 42 lakhs. Karnad was surprised as he had
followed the principle of moderation. Employee salaries were low and everybody led a fairly simple life
style. Karnad called the loss product/ business development cost.
In 1990, Alacrity reported a loss of Rs 32.5 million in its housing business. Though the company’s
revenues were growing rapidly, productivity had come down considerably. And due to huge losses, the
company faced a cash crisis. Since no financial institution was ready to help the company, Alacrity
decided to go public. In 1992, Alacrity incorporated Alacrity Housing Ltd., and transferred the
ongoing housing business to the latter. In the same year, Alacrity Housing came out with a public
issue. Alacrity had a 20% stake in Alacrity Housing Ltd. After the initial public offering, much of
Alacrity Housing’s financial problems were solved. In the next 2-3 years, Alacrity Housing declared
dividends and established itself in the market.
The Indian construction industry was so corrupt that it appeared to be impossible for a
construction company to survive without giving bribes and or dealing in black money. The
companies
Self-Instructional
Material 34
in the industry required large sums of money to purchase property and building materials. In addition, to Current Scenario,
obtain licenses, they had to deal with corrupt and bureaucratic government officials. Following short cut Obligation to
routes, speeding up processes through bribes, and accepting sub-standard materials seemed to be Investor
common practices in the industry.
However, Alacrity Housing felt that it could behave in an ethical manner and still survive in NOTES
the industry. A strong Gandhian principle seemed to run through Alacrity. The company believed
that perseverance and patience were the most important weapons to deal with the corrupt bureaucracy
of government departments. Indukanth explained, “If you want to beat the bureaucracy at its own
game, there’s a very simple rule to follow. Read up and understand their procedures - and you may
be sure each government department is governed by detailed do’s and don’t’s. I admit that it takes
a little more time, but the effort is worth it.” Sharing his experiences of seeking appointments with
officials for obtaining clearances, Indukanth said, “The first day, I waited in the queue, having
taken an advance appointment and arrived half an hour early. But that day the official left early. I
took a fresh appointment, but this time the concerned person did not came to the office. The third
time, someone else was let into the room ahead of the rest.” Since Indukanth was unable to meet the
official after following the government’s ‘system,’ he went into the official’s room. He informed the
official of his previous experiences and explained that he couldn’t wait any longer. Alacrity got the
appointment and the permissions. Indukanth explained, “People don’t really want to take bribes. It
robs them of their dignity and their self-respect. When we deal with someone honestly, although we
face difficulties at first, eventually we are the winners, and so are they because they feel good about
themselves.”
To keep this good feeling and encourage the government departments not to take bribes, Alacrity
released series of large advertisements in 1992. The ads were headlined as “It still pays to be
honest.” The ads named seven government departments that had not taken bribes and issued
permissions to Alacrity. These departments had issued about 200 planning and building permits, 1100
sewerage, drainage, water and electricity connections, more than 100 no-objection certificates and 1500
sale deed registrations. It seemed to be a very good corporate strategy. Indukanth said, “Those we
mentioned became our supporters in clean dealings.”
Alacrity Housing also believed in having fair dealings with customers. They were given detailed
information of the house that they planned to buy. The company’s booklet - Key Questions to Ask while
Buying a Flat - explained the municipal development control rules and formalities. The company
prohibited any black money dealings with its customers. In one of its ads, Alacrity applauded and
named hundreds of customers who had bought flats without paying in black. The Chief Vigilance
Commissioner, Govt. of India said, “Alacrity is an illustrious example among the glorious exceptions
of companies observing ethical practices in business. The Urban Land Ceiling Act and the Income Tax
Act had ensured that real estate became a gold mine for black money. In that sector, for a company to
adopt ethical standards was unbelievable and the fact that they succeeded is really incredible. The
question is, if Alacrity can afford to be honest, why not other companies?” The Economic Times 6 also
said, “Will Alacrity’s example of honest business be replicated elsewhere? ... Actually, making and
selling even one flat without black money is a feat in today’s India.”
In a decade, Alacrity had revolutionized the approach to urban housing and, inspite of difficulties,
it seemed to have succeeded in bringing about a sense of organization, discipline and stability in the
housing sector. By 1997, Alacrity Housing had emerged as the single largest builder of residential
apartments in Chennai, Tamilnadu (Refer Table I, Exhbit III, and Exhibit IV). In the process, it had
proved that ethics and economics were not mutually exclusive.
However, one question was uppermost in the minds of critics: Will Alacrity last? An article7
asked, “How can a company, especially one in an industry as cut-throat as housing construction,
survive without underhand payments, bribes and black money dealings?”
However, the founder and the core members of the group were confident that they could continue
to follow their corporate philosophy (Refer Table II). They also believed that they could deal with
any downturn in the industry. This optimism was reflected in the pledge taken by 31 senior executives of
the Alacrity group on its seventeenth anniversary (Refer Exhibit)
Self-Instructional
35 Material
Current Scenario,
Table I Alacrity Housing - 1997 Statistics
Obligation to
Investor
Projects Flats Area (Sq. Ft) Value (crores)
Projects Completed
NOTES 210 3700 39 lakhs 307
Projects Under Construction
17 810 7.9 lakhs 98
Projects yet to commence
22 1248 12 lakhs 217
Source: www.alacrityhomes.com
Table II Alacrity’s Corporate Philosophy
The quality of life of an individual is truly enhanced only when the quality of life of the
society in which the individual lives is improved
Professional fulfillment for any institution is attainable only when it accepts public
accountability for its contribution to social / national causes.
A business mission can be worthwhile and enduring only if it is in line with national
goals and priorities.
In the conduct of business integrity - 'not knowingly to do harm' - is the only moral
touchstone, and excellence the only performance touchstone.
Business development can be integrated with social/national development only if there
is uncompromising respect for laws and regulations and faithful compliance therewith.
Source: www.alacrityhomes.com
NATIONAL COMMITTEES ON CORPORATE GOVERNANCE
After reading this article you will learn about the recommendations of various National committees
on corporate governance.
Committee # 1. CII Code of Desirable Corporate Governance (1998)
For the first time in the history of corporate governance in India, the Confederation of Indian
Industry (CII) framed a voluntary code of corporate governance for the listed companies, which is
known as CII Code of desirable corporate governance.
The main recommendations of the Code are summarised below:
(a) Any listed company with a turnover of Rs. 1000 million and above should have
professionally competent and acclaimed non-executive directors,
who should constitute:
(i) at least 30% of the board, if the chairman of the company is a non-executive director, or
(ii) at least 50% of the board if the chairman and managing director is the same person.
(b) For the non-executive directors to play an important role in corporate decision-making and
maximising long-term shareholder value,
They need to:
(i) become active participants in boards, not passive advisors,
(ii) have clearly defined responsibilities within the board, and
(iii) know how to read a balance sheet, profit and loss account, cash flow statements and
financial ratios, and have some knowledge of various company laws.
(c) No single person should hold directorships in more than 10 listed companies. This ceiling excludes
directorship in subsidiaries (where the group has over 50% equity stake) or associate companies
(where the group has over 25% but no more than 50% equity stake).
(d) The full board should meet a minimum of six times a year, preferably at an interval of two months,
and each meeting should have agenda items that require at least half-a-days discussion.
Self-Instructional
Material 36
(e) As a general rule, one should not re-appoint any non-executive director who has not had the time Current Scenario,
to attend even one-half of the meetings. Obligation to
Investor
(f) Various key information must be reported to, and placed before the board, viz., annual
budgets, quarterly results, internal audit reports, show cause, demand and prosecution notices
received, fatal accidents and pollution problem, default in payment of principal and interest to the NOTES
creditors, inter corporate deposits, joint venture foreign exchange exposures.
(g) Listed companies with either a turnover of over Rs. 1000 million or a paid up capital of Rs.
200 million, whichever is less, should set up audit committees within 2 years. The committee
should consist of a least three members, who should have adequate knowledge of finance,
accounts, and basic elements of company law. The committees should provide effective
supervision of the financial reporting process. The audit committees should periodically
interact with statutory auditors and internal auditors to ascertain the quality and veracity of
the company’s accounts as well as the capability of the auditors themselves.
(h) Consolidation of group accounts should be optional.
(i) Major Indian stock exchanges should generally insist on a compliance certificate, signed by
the CEO and the CFO.
Committee # 2. Kumar Mangalam Birla Committee (2000)
Another Committee named as K.M. Birla Committee was set up by SEBI in the year 2000. In fact,
this Committee’s recommendation culminated in the introduction of Clause 49 of the Listing Agreement
to be complied with by all listed companies. Practically most of the recommendations were accepted
and included by SEBI in its new Clause 49 of the Listing Agreement in 2000.
The main recommendations of the Committee are:
(a) The board of a company should have an optimum combination of executive and nonexecutive
directors with not less than 50% of the board comprising the non-executive directors. In case,
a company has a non-executive chairman, at least one-third of board should be comprised of
independent directors and in case, a company has an executive chairman, at least half of the
board should be independent.
(b) Independent directors are directors who apart from receiving director’s remuneration do not
have any other material pecuniary relationship or transaction with the company, its
promoters, management or subsidiaries, which in the judgement of the board may affect their
independence of judgment.
(c) A director should not be a member in more than ten committees or act as chairman of more
than five committees across all companies in which he is a director. It should be a mandatory
annual requirement for every director to inform the company about the committee positions he
occupies in other companies and notify changes as and when they take place.
(d) The disclosures should be made in the section on corporate governance of the annual report:
(i) All elements of remuneration package of all the directors, i.e., salary, benefits, bonus, stock
options, pension etc.
(ii) Details of fixed component and performance linked incentives along with the performance
criteria,
(iii) Service contracts, notice and period, severance fees,
(iv) Stock option details, if any, and whether issued at a discount as well as the period over
which accrued and exercisable.
(e) In case of appointment of a new director or re-appointment of a director, the shareholders must be
provided with the information:
(i) a brief resume of the director,
(ii) nature of his experience in specific functional areas, and
(iii) names of companies in which the person also holds the directorship and the
membership of committees of the board.
Self-Instructional
37 Material
Current Scenario,
(f) Board meetings should be held at least four times in a year, with a maximum times gap of 4
Obligation to
Investor months between any two meetings. The minimum information (specified by the committee)
should be available to the board.
(g) A qualified and independent audit committee should be set up by the board of the company in
NOTES order to enhance the credibility of the financial disclosures of a company and promote
transparency. The committee should have minimum three members, all being non-executive
directors, with majority being independent, and with at least one director having financial and
accounting knowledge. The chairman of the committee should be an independent director and he
should be present at AGM to answer shareholder queries.
Finance director and head of internal audit and when required, a representative of the external
auditor should be present as invitees for the meetings of the audit committee. The committee
should meet at least thrice a year. One meeting should be held before finalization of annual
accounts and one necessarily every six months. The quorum of the meeting should be either two
members or one-third of the members of the committee, whichever is higher and there should
be a minimum of two independent directors.
(h) The board should set up a remuneration committee to determine on their behalf and on behalf
of the shareholders with agreed terms of reference, the company’s policy on specific
remuneration package for executive directors including pension rights and any compensation
payment. The committee should comprise of at least three directors, all of who should be non-
executive directors, the chairman of the committee being an independent director.
(i) A board committee under the chairmanship of a non-executive director should be formed to
specifically look into the redressal of shareholder complaints like transfer of shares, non-
receipt of balance sheet, declared dividends etc., The committee should focus the attention of
the company on shareholders’ grievances and sensitize the management of redressal of their
grievances,
(j) The companies should be required to give consolidated accounts in respect of all their subsidiaries
in which they hold 51% or more of the share capital,
(k) Disclosures must be made by the management to the board relating to all material, financial
and commercial transactions, where they have personal interest that may have a potential
conflict with the interest of the company at large. All pecuniary relationships or transactions
of the non- executive directors should be disclosed in the annual report.
(l) As part of the Directors’ Report or as an additional thereto, a management discussion and
analysis report should form part of the annual report to the shareholders,
(m) The half-yearly declaration of financial performance including summary of the significant events
in last six months should be sent to each household of shareholders,
(n) The company should arrange to obtain a certificate from the auditors of a company regarding
compliance of mandatory recommendations and annex the certificate with the Directors’
Report, which is sent annually to all the shareholders of the company,
(o) There should be a separate section on corporate governance in the annual reports of
companies, with a detailed compliance report on corporate governance.
Committee # 3. Reserve Bank of India (RBI) Report of the Advisory Group on Corporate
Governance (2001)
An advisory group on corporate governance under the chairmanship of Dr. R.H. Patil, then
Managing Directors, National Stock Exchange was constituted by a standing committee of RBI in
2000. They submitted their report in March 2001, which contained several recommendations on corporate
governance.
Committee # 4. Naresh Chandra Committee (2002)
Consequent to the several corporate debacles in the USA in 2001, followed by the stringent
enactments of Sarbanes Oxley Act, Government of India appointed Naresh Chandra Committee in 2002
to examine and recommended drastic amendments to the law pertaining to auditor-client relationships
and the role of independent directors.
Self-Instructional
Material 38
The main recommendations of the Committee are given below: Current Scenario,
(a) The minimum board size of all listed companies as well as unlisted public limited companies with Obligation to
Investor
paid-up share capital and free reserves of Rs. 100 million and above, or turnover of Rs. 500
million and above, should be seven, of which at least four should be independent directors.
(b) No less than 50% of the board of directors of any listed company as well as unlisted public limited NOTES
companies with a paid-up share capital and free reserves of Rs. 100 million and above or turnover
of Rs. 500 million and above, should consist of independent directors.
(c) In line with the international best practices, the committee recommended a list of
disqualification for audit assignment which included prohibition of:
(i) Any direct financial interest in the audit client,
(ii) Receiving any loans and/or guarantees,
(iii) Any business relationship,
(iv) Personal relationship by the audit firm, its partners, as well as their direct relatives,
prohibition of
(v) Service or cooling off period for a period of at least two years, and
(vi) Undue dependence on an audit client.
(d) Certain services should not be provided by an audit firm to any audit client, viz.:
(i) Accounting and book keeping,
(ii) Internal audit,
(iii) Financial information design,
(iv) Actuarial,
(v) Broker, dealer, investment advisor, investment banking,
(vi) Outsourcing,
(vii) Valuation,
(viii) Staff recruitment for the client etc.
(e) The audit partners and at least 50% of the engagement team responsible for the audit of either
a listed company, or companies whose paid-up capital and free reserves exceeds Rs. 100
million or companies whose turnover exceeds Rs. 500 million, should be rotated every 5
years.
(f) Before agreeing to be appointed (Section 224 (i)(b)), the audit firm must submit a certificate
of independence to the audit committee or to the board of directors of the client company.
(g) There should be a certification on compliance of various aspects regarding corporate governance
by the CEO and CFO of a listed company.
It is interesting to note that majority of the recommendations of this committee are the culmination
of the provisions of Sarbanes Oxley Act of the USA.
Committee # 5. N.R. Narayana Murthy Committee (2003)
SEBI constituted this Committee under the chairmanship of N.R. Narayana Murthy, chairman and mentor
of Infosys, and mandated the Committee to review the performance of corporate governance in India and
make appropriate recommendations. The Committee submitted its report in February 2003.
The main items of Committee recommendations are as follows:
(a) Persons should be eligible for the office of non-executive director so long as the term of office did
not exceed nine years (in three terms of three years each, running continuously).
(b) The age limit for directors to retire should be decided by companies themselves.
(c) All audit committee members shall be non-executive directors. They should be financially literate
and at least one member should have accounting or related financial management expertise.
(d) Audit committee of listed companies shall review mandatorily the information, viz.:
(i) Financial statements and draft audit reports,
(ii) Management discussion and analysis of financial condition and operating results, Self-Instructional
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39
Current Scenario,
(iii) Risk management reports,
Obligation to
Investor (iv) Statutory auditors’ letter to management regarding internal control weaknesses, and
(v) Related party transactions.
NOTES (e) The audit committee of the parent company shall also review the financial statements, in
particular, the investments made by the subsidiary company.
(f) A statement of all transactions with related parties including their bases should be placed
before the independent audit committee for formal approval/ratification. Of any transaction is not
on an arm’s length basis, management should provide an explanation to the audit committee,
justifying the same.
(g) Procedures should be in place to inform board members about the risk assessment and
minimisation procedures.
(h) Companies raising money through an Initial Public Offering (IPO) shall disclose to the audit
committee, the uses/application of funds by major category (capital expenditure, sales and
marketing, working capital etc.) on a quarterly basis. On an annual basis, the company shall
prepare a statement of funds utilized for purposes other than those stated in the offer
document/ prospectus. This statement shall be certified by the independent auditors of the
company. The audit committee should make appropriate recommendations to the board to
take up steps in this matter.
(i) It should be obligatory for the board of a company to lay down the code of conduct for all board
members and senior management of a company. They shall affirm compliance with the code on an
annual basis. The annual report of the company shall contain a declaration to this effect
signed off by the CEO and COO.
(j) A director to become independent shall satisfy the various conditions laid down by the Committee.
(k) Personnel two observe an unethical or improper practice (not necessarily a violation of law)
should be able to approach the audit committee without necessarily informing their supervisors.
Companies shall take measures to ensure that this right of access is communicated to all
employees through means of internal circulars etc. Companies shall annually affirm that they
have not denied any personal access to the audit committee of the company (in respect of matters
involving alleged misconduct) and that they have provided protection to whistle blowers from
unfair termination and other unfair or prejudicial employment practices. Such affirmation
shall form a part of the board report on corporate governance that is required to be prepared
and submitted together with the annual report.
(l) For all listed companies there should be a certification by the CEO and CFO confirming, the
financial statements as true and fair in compliance with the existing accounting standards,
effectiveness of internal control system, disclosure of significant fraud and significant
changes in internal control and/or of accounting policies to the auditors and the audit
committee. It is worth noting here that majority of the recommendations of this committee have
been accepted by SEBI and thereby incorporated in the revised Clause 49 of the Listing
Agreement in 2003 and 2004.
Committee # 6. J.J. Irani Committee (2005)
The J.J. Irani Committee was constituted by the Government of India in December, 2004 to evaluate the
comments and suggestions received on ‘concept paper’ and provide recommendations to the Government
in making a simplified modern law. The Committee submitted its report to the Government in May 2005,
which is under consideration till date.
The main features of its recommendations pertaining to corporate governance are as follows:
(a) The (new) company law should provide for minimum number of directors necessary for various
classes of companies. There need not be any limit to the maximum numbers of directors in a
company. This should be decided by the companies or by its Articles of Association. Every
company should have at least one director resident in India to ensure availability in case of
any issue regarding accountability of the board.
(b) Both the managing director as also the whole time directors should not be appointed for more
than five years at a time.
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(c) No age limit may be prescribed in the law. There should be adequate disclosure of age of the Current Scenario,
directors in the company’s document. In case of a public company, appointment of directors Obligation to
beyond a prescribed age (say) seventy years should be subject to a special resolution passed Investor
by the shareholders.
(d) A minimum of one-third of the total strength of the board as independent directors should be NOTES
adequate, irrespective of whether the chairman is executive or non-executive, independent or
not. A director to be independent should satisfy certain conditions laid down by the Committee.
(e) The total number of directorships, any one individual may hold, should be limited to a maximum
of fifteen.
(f) Companies should adopt remuneration policies that attract and maintain talented and
motivated directors and employees for enhanced performance. However, this should be
transparent and based on principles that ensure fairness, reasonableness and accountability.
There should be a clear relationship between responsibility and performance vis-a-vis
remuneration. The policy underlying directors’ remuneration should be articulated, disclosed and
understood by investors/ stakeholders.
(g) There need not be any limit prescribed to sitting fees payable to non-executive directors including
independent directors. The company with the approval of shareholders may decide on
remuneration in the form of sitting fees and/or profit related commissions payable to such directors
for attending board and committee meetings, and should disclose it in its director’s remuneration
report forming part of the annual report of the company.
(h) The requirement of the Companies Act, 1956 to hold a board meeting every three months and at
least four meetings in a year should continue. The gap between two board meetings should
not exceed four months. Meetings at short notices should be held only to transact emergency
business. In such meetings, the mandatory presence of at least one independent director
should be required in order to ensure that only well considered decisions are taken. If even
one independent director is not present in the emergency meeting, then decisions taken in
such meeting should be subject to ratification by at least one independent director.
(i) Majority of the directors of the audit committee should be independent directors if the
company is required to appoint independent directors. The chairman of the committee should
be independent. At least one member of the audit committee should have knowledge of
financial management or audit or accounts. The recommendation of the committee, if
overruled by the board should be disclosed in the Directors’ Report along with the reasons for
overruling.
(j) There should be an obligation on the board of a public listed company to constitute a remuneration
committee, comprising non-executive directors including at least one independent director.
The chairman of the committee should be an independent director. The committee will determine
the company’s policy as well as specific remuneration packages for its managing/executive
directors/ senior management.
(k) The rights of minority shareholders should be protected during general meetings of the company.
There should be extensive use of postal ballot including electronic media to enable shareholders
to participate in meetings. Every company should be permitted to transact any item of
business through postal ballot, except the items of ordinary business, viz., consideration of annual
accounts, reports of directors and auditors, declaration of dividends, appointment of directors,
and appointment and fixation of remuneration of the auditors.
(l) All non-audit services may be pre-approved by audit committee. An audit firm should be
prohibited from rendering certain non-audit services as specified by the committee,
(m) Public listed companies should be required to have a regime of internal financial controls for their
own observance. Internal controls should be certified by the CEO and the CFO of the
company and mentioned in the Directors Report.
(n) Detail of transactions of the company with its holding or subsidiary or associate companies in
the ordinary course of business and transacted on an arm’s length basis should be placed
periodically before the board through the audit committee. The transactions not in a normal
course of business and/or not on an arm’s length justification for the same. A summary of such
transaction should form part of the annual report of the company.
Self-Instructional
41 Material
Current Scenario,
(o) Every director should disclose to the company on his directorships and shareholdings in the
Obligation to
Investor company and in other companies.
It is important to mention here that despite various recommendations made by the above Committee
on corporate governance, the Committee kept silence on two major issues on corporate governance.
NOTES
They are:
(i) Chairman and CEO duality (particularly in regard to separation of these two posts), and
(ii) Appointment of nomination committee.
ISSUES IN CORPORATE GOVERNANCE PRACTICES IN INDIA
In the last decade, the frequencies of corporate frauds and governance failures that have dotted the
global corporate map have witnessed comparably vigorous efforts of improving corporate
governance practices. India has liberalized the regulatory fabric of the country to align its corporate
governance norms with those of developed countries. And yet, achieving good governance and
ensuring results of such governance practices continue to remain one of the top priorities of
stakeholders even today.
Set out below are top ten issues affecting corporate governance practices in India.
1. Getting the Board Right
Enough has been said on board and its role as the cornerstone for good corporate governance. To this
end, the law requires a healthy mix of executive and non-executive directors and appointment of at
least one woman director for diversity. There is no doubt that a capable, diverse and active board
would, to large extent, improve governance standards of a company. The challenge lies in ingraining
governance in corporate cultures so that there is improving compliance “in spirit”. Most companies’ in
India tend to only comply on paper; board appointments are still by way of “word of mouth” or fellow
board member recommendations. It is common for friends and family of promoters (a uniquely Indian
term for founders and controlling shareholders) and management to be appointed as board members.
Innovative solutions are the need of the hour – for instance, rating board diversity and governance
practices and publishing such results or using performance evaluation as a minimum benchmark for
director appointment.
2. Performance Evaluation of Directors
Although performance evaluation of directors has been part of the existing legal framework in India,
it caught the regulator’s attention recently. In January 2017, SEBI, India’s capital markets regulator,
released a ‘Guidance Note on Board Evaluation’. This note elaborated on different aspects of
performance evaluation by laying down the means to identify objectives, different criteria and
method of evaluation. For performance evaluation to achieve the desired results on governance
practices, there is often a call for results of such evaluation are made public. Having said that,
evaluation is always a sensitive subject and public disclosures may run counter-productive. In a peer
review situation, to avoid public scrutiny, negative feedback may not be shared. To negate this
behavior, the role of independent directors in performance evaluation is key.
3. True Independence of Directors
Independent directors’ appointment was supposed to be the biggest corporate governance reform.
However, 15 years down the line, independent directors have hardly been able to make the desired
impact. The regulator on its part has, time and again, made the norms tighter – introduced comprehensive
definition of independent directors, defined a role of the audit committee, etc. However, most Indian
promoters design a tick-the-box way out of the regulatory requirements. The independence of such
promoter appointed independent directors is questionable as it is unlikely that they will stand-up for
minority interests against the promoter. Despite all the governance reforms, the regulator is still
found wanting. Perhaps, the focus needs to shift to limiting promoter’s powers in matters relating to
in independent directors.
4. Removal of Independent Directors
While independent directors have been generally criticised for playing a passive role on the board,
instances of independent directors not siding with promoter decisions have not been taken well –
they were removed from their position by promoters. Under law, an independent director can be easily
Self-Instructional
Material removed by promoters or majority shareholders. This inherent conflict has a direct impact on
independence. In
fact, earlier this year, even SEBI’s International Advisory Board proposed an increase in transparency Current Scenario,
with regard to appointment and removal of directors. To protect independent directors from vendetta Obligation to
action and confer upon them greater freedom of action, it is imperative to provide for additional Investor
checks in the process of their removal – for instance, requiring approval of majority of public
shareholders.
NOTES
5. Accountability to Stakeholders
Empowerment of independent directors has to be supplemented with greater duties for, and accountability
of directors. In this regard, Indian company law, revamped in 2013, mandates that directors owe
duties not only towards the company and shareholders but also towards the employees, community and
for the protection of environment. Although these general duties have been imposed on all directors,
directors including independent directors have been complacent due to lack of enforcement action.
To increase accountability, it may be a good idea to require the entire board to be present at general
meetings to give stakeholders an opportunity to interact with the board and pose questions.
6. Executive Compensation
Executive compensation is a contentious issue especially when subject to shareholder accountability.
Companies have to offer competitive compensation to attract talent. However, such executive
compensation needs to stand the test of stakeholders’ scrutiny. Presently, under Indian law, the
nomination and remuneration committee (a committee of the board comprising of a majority of
independent directors) is required to frame a policy on remuneration of key employees. Also, the annual
remuneration paid to key executives is required to be made public. Is this enough? To retain and nurture a
trustworthy relationship between the shareholders and the executive, companies may consider framing
remuneration policies which are transparent and require shareholders’ approval.
7. Founders’ Control and Succession Planning
In India, founders’ ability to control the affairs of the company has the potential of derailing the
entire corporate governance system. Unlike developed economies, in India, identity of the founder
and the company is often merged. The founders, irrespective of their legal position, continue to exercise
significant influence over the key business decisions of companies and fail to acknowledge the need
for succession planning. From a governance and business continuity perspective, it is best if founders
chalk out a succession plan and implement it. Family owned Indian companies suffer an inherent
inhibition to let go of control. The best way to tackle with this is widen the shareholder base - as PE
and other institutional investors pump in capital, founders are forced to think about a succession plan
and step away with dignity.
8. Risk Management
Today, large businesses are exposed to real-time monitoring by business media and national media
houses. Given that the board is only playing an oversight role on the affairs of a company, framing
and implementing a risk management policy is necessary. In this context, Indian company law
requires the board to include a statement in its report to the shareholders indicating development and
implementation of risk management policy for the company. The independent directors are mandated
to assess the risk management systems of the company. For a governance model to be effective, a robust
risk management policy which spells out key guiding principles and practices for mitigating risks in
day-to-day activities is imperative.
9. Privacy and Data Protection
As a key aspect of risk management, privacy and data protection is an important governance issue. In
this era of digitalization, a sound understanding of the fundamentals of cyber security must be
expected from every director. Good governance will be only achieved if executives are able to engage
and understand the specialists in their firm. The board must assess the potential risk of handling data
and take steps to ensure such data is protected from potential misuse. The board must invest a reasonable
amount of time and money in order ensure the goal of data protection is achieved.
10. Board’s Approach to Corporate Social Responsibility (CSR)
India is one of the few countries which has legislated on CSR. Companies meeting specified
thresholds are required to constitute a CSR committee from within the board. This committee then
frames a CSR policy and recommends spending on CSR activities based on such policy. Companies
are required to spend at least 2% of the average net profits of last three financial years. For companies
who fail to meet the CSR spend, the boards of such companies are required to disclose reasons for
such failure in the Self-Instructional
Material
43
Current Scenario,
board’s report. During the last year, companies which failed to comply received notices from the ministry
Obligation to
Investor of corporate affairs asking for reasons why they did not incur CSR spend and in some cases questioning
the reasons disclosed for not spending. In these circumstances, increased effort and seriousness by
the board towards CSR is necessary. CSR projects should be managed by board with as much
NOTES interest and vigour as any other business project of the company.
SUMMARY
This unit summarizes why we require good corporate governance in the country. India provides proper
norms and laws aligned with international requirements to govern a corporate. Some of the important
reasons are discussed below which raised the need for corporate governance in India.
1. A corporate has a lot of shareholders with different attitudes towards corporate affairs, corporate
governance protects the shareholder democracy by implementing it through its code of conduct.
2. Large corporate investors are becoming a challenge to the management of the company
because they are influencing the decision of the company. Corporate governance set the code to
deal with such situations.
3. Corporate governance is necessary to build public confidence in the corporation which was
shaken due to numerous corporate fraud in recent years. It is important for reviving the confidence
of investors.
4. Society having greater expectations from corporate, they expect that corporates take care of
the environment, pollution, quality of goods and services, sustainable development etc. code
to conduct corporate is important to fulfill all these expectations. Takeovers of the corporate entity
created lots of problems in the past. It affects the right of various stakeholders in the
company. This factor also pushes the need of corporate governance in the country.
5. Globalization made the communication and transport between countries easy and frequent, so
many Indian companies are listed with international stock exchange which also triggers the need
for corporate governance in India.
6. The huge flow of international capital in Indian companies are also affecting the management of
Indian Corporate which require a code of corporate conduct.
QUESTIONS
Conceptual Type
1. What is Current Scenario of CG?
2. What is Nation Committee in CG?
3. What is obligation?
4. What is the Land Mark in India?
5. What is responsibility
Analytical Type
1. What is current scenario of CG ? Discuss its Principles.
2. Discuss about Obligation towards owners or Shareholder.
3. Discuss about obligation towards customers and society.
4. What is the responsibility towards suppliers?
5. Discuss the land mark in India in corporate history?
6. Discuss the National Committees on corporate Governance.
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Material 44
UNIT 3 AGENT AND INSTITUATION Agent and
Institution
Structure
Shareholder Rights under Companies Act, 2013
Rights and Privileges of Common Stockholders NOTES
Corporate Governance from the Investor’s Perspective
Corporate Governance: Director, Auditor and Bank
Role and Responsibility of Board of Directors in Corporate Governance
Exhibit-Guidelines for Determining Independence of Directors
Summary
Questions
LESSON OUTLINE
• Introduction
• Agent and institution
• Share holder rights under company act 2013
• Rights & principles of common stake holder
• Corporate Governance from investor's perspective
• Director, Auditor& Banks
• Role & Responsibility of Board of Director
• Corporate Governance Guidelines
LEARNING OBJECTIVES

• Meaning and Definition of Agent &Institution
• What is the Rights of Share holder
• What is the Rights & Principles of Common Stake Holder?
• What is the Role & Responsibilities of Board of Directors
• What is the Guidelines of Corporate Governanc
INTRODUCTION
Understanding ethical behavior in the context of corporate governance requires two levels that is the
internal concerns of corporate agency and the emergent effects on social welfare.
Corporate agency is based on the premise that employees, managers, and directors (i.e., agents)
should behave in the best interests of owners or shareholders (i.e., principals). Two things get in the way
of that ideal:
First, managers’ interests, while overlapping with those of shareholders, are distinct.
Sometimes agents can help themselves in ways that hurt the firm and its shareholders. Examples
include shirking, waste and, in extreme cases, fraud or other self-serving actions that can bring down
the company, as have happened in numerous business scandals.
Second, shareholders have neither the specific knowledge nor skills possessed by
management. That can create a dynamic where even well-intentioned managers may feel compelled to
“short-termism,” i.e., acting in ways that look good to shareholders now, but actually undermine value
creation over time. Various oversight, transparency, and incentive mechanisms have evolved, and
continue to develop, to contain agency costs.
Self-Instructional
45 Material
Agent and
Social welfare is based on the premise that companies should engage in fair dealing with all
Institution
of their stakeholders—including customers, employees, suppliers, and communities, as well as
shareholders—in accordance with the expectations of the larger society in which they operate. The
debate about what is “fair dealing” reflects the larger, ongoing debate about the purpose of corporations
NOTES in society, but even a shareholder-centric model recognizes that companies benefit from at least nurturing
their reputations among all stakeholders, and that minimizing their negative externalities (pollution, plant
closures, etc.) preserves the freedom of companies to operate with otherwise minimal external constraints.
While traditional corporations are expected to prioritize shareholder interests above those of
other stakeholders and, to a considerable extent, attempt to maximize shareholder value within their legal
constraints, other corporate forms permit a more balanced approach between shareholders and
vendors (cooperatives).
SHAREHOLDER RIGHTS UNDER COMPANIES ACT, 2013
Shareholders of a company are the owners of the company owning equity shares issued by the
company. Shareholders of a company are granted various rights and protections under the
Companies Act, 2013. In this article, we look at those rights.
Changes to MOA or AOA
Memorandum of Association or Articles of Association of a Company can be amended only in a general
meeting of the company, which can be convened by providing sufficient notice to the shareholders of
the company. All shareholders have a right to vote on amendments relating to changes to MOA or AOA.
An affirmative vote of not less than 75% of shareholders is required for some amendments that
require special majority.
Convene General Meeting
The Board of Directors of a company is required to convene an extra ordinary general meeting (EGM) if
a request to convent a EGM is received from shareholders holding not less than 10% of the paid-up
capital of the company. The board is required to call for the EGM within 21 days of the date of request by
shareholders on a date not less than 45 days from date of request for EGM. In case the Board of Directors
fail to call for a EGM within the time provided, then the shareholders can themselves call for a EGM.
Attend and Vote at General Meeting
All companies are required to hold an annual general meeting every year, with no more than 15
months elapsing between two annual general meetings. All shareholders of a company have a right to
receive a notice convening annual general meetings and extraordinary general meetings and to vote at
such meetings for or against each of the resolutions proposed to be passed at such meetings.
Transfer Shares
Shareholders of a company have the right to transfer shares held by them in the company freely,
except that, the board may refuse to register a transfer of shares if they are not fully paid or where the
transferee is not a person approved by the board. A private limited company, however may, by its
articles of association, restrict the transfer of shares and provide preemptive rights to its members for
purchasing shares proposed to be transferred by the transferee.
Receive Dividends
Dividends can be paid by a company for any financial year out of the profits of the company for that year
arrived at after providing for depreciation or out of the profits of the company for any previous financial
year or years arrived at after providing for depreciation and remaining undistributed, or out of both.
The declaration of dividends is subject to shareholders’ approval at an annual general meeting. Once
dividends are announced, it must be paid within 30 days and any unpaid dividends must be transferred to a
special dividend account opened by the company in a scheduled bank.
Minority Shareholders Protection
In case of oppression or mismanagement of the affairs of the company by majority shareholders, minority
shareholders enjoy protection and right to relief from oppression. If 100 or more shareholders, or a
number representing not less than 10% of the total number of shareholders, can apply to the
Company Law Board if they are of the view that the affairs of the company are being conduced in
Self-Instructional a manner
Material
46
prejudicial to the public interest or company’s interest or in a manner oppressive to any shareholder. Agent and
If found fit, the Company Law Board can pass any order it deems fit, including directing majority Institution
shareholders to buyout shared held by the oppressed minority
RIGHTS AND PRIVILEGES OF COMMON STOCKHOLDERS NOTES
The common stockholders are the real owners of the company, and as such they have certain rights
and privileges. These rights and privileges of common stockholders are established by the term of
the charter and laws of the state in which the company is registered. Common stockholders have
some specific rights as individual owners. Some important rights are as follows:
1. Right To Share Income And Assets
Common stockholders have the right to share company’s earnings equally on a per-share basis. Similarly,
in the event of liquidation, stockholders have claim on assets that remain after meeting the obligation to
accrued taxes, accrued salary and wages, creditors including bondholders and preferred stockholders.
Thus, common stockholders are residual claimants of the firm’s income and assets.
2. Control Of The Firm
Common stockholders control the firm through their right to elect the company’s board of directors,
which appoints management. In a small firm, the largest stockholder typically holds the position of
president or chairperson of the board of directors. In a large publicly owned firm, the managers have
some stock, but their personal holdings are insufficient to provide voting control. Thus, the
shareholders remove the management if they do not perform effectively.
3. Preemptive Right
Preemptive right is a privilege offered to existing shareholders for buying a specified number of
shares of the company’s stocks before the stocks are offered to outsiders for sale.It is a provision in
company’s charter or by-laws that gives the existing shareholders right to purchase new shares at a
subscribed price on pro-rate basis. Each stockholder receives one right for each share of stock
owned. If the company sells new shares to the existing stockholders, it is called right offering.
4. Voting Right
Common stockholders can attend at annual general meeting to cast vote or use a proxy. A proxy is a legal
document given one person the authority to cast vote and represent on behalf of others. Generally,
each share of stock has one vote for each director at the general meeting. Thus, the owner of 1,000 shares
has 1,000 votes for each director to be elected.
CORPORATE GOVERNANCE FROM THE INVESTOR’S

PERSPECTIVE
Corporate governance has always been an important topic. It is even more so today, as many Americans
recognize the need to develop a more robust corporate governance regime in the aftermath of the
deepest financial crisis since the Great Depression.
Although the recent financial crisis—aptly named the “Great Recession”—has many fathers,
there is ample evidence that poor corporate governance, including weak risk management standards
at many financial institutions, contributed to the devastation wrought by the crisis. For example, it
has been reported that senior executives at both AIG and Merrill Lynch tried to warn their respective
management teams of excessive exposure to subprime mortgages, but were rebuffed or ignored.
These and other failures of oversight continue to remind us that good corporate governance is
essential to the stability of our capital markets and our economy, as well as the protection of
investors.
Unfortunately, the important lessons of the recent past are quickly forgotten. For many, the Great
Recession, which began in late 2007, is already in the rearview mirror. Last month, the S&P 500 hit
record highs, while Wall Street bonuses reached their highest levels since the 2008 crash. In addition,
recent reports suggest that retail investors are beginning to return in volume to the stock market.
All of this has taken place even though other reports suggest that there is only tepid
confidence in the actual recovery. Many Americans continue to lack trust not only in the stock
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47
Agent and
financial institutions and the U.S. economy. According to researchers at the University of Chicago,
Institution
trust in America’s financial system languishes at about the 24% level, with many expressing continued
concerns regarding both excessive compensation and a lack of integrity among top corporate managers.
Only 17% of those surveyed expressed trust in America’s large corporations. This is a serious issue,
NOTES because trust is fundamental to both trade and investment. When there is a lack of trust, both Wall
Street and Main Street suffer.
So, how can trust be restored? believe that a key driver of greater trust is the oversight that
comes from robust corporate governance..
Investors as Owners and the Source of Capital
It is, after all, investors that provide the capital that businesses need to grow, compete, succeed, and
create jobs. They are, in a very real way, the fuel that keeps the engine of our economy moving.
Investors, of course, are not limited to the so-called “one percent.” In fact, the vast majority of
investors make their livings on Main Street, not Wall Street. They are school teachers and sanitation
workers, factory workers and first responders—indeed, anyone with a mutual fund, a pension fund, or a
401(k) plan. About half of all U.S. households participate, either directly or indirectly, in the stock
market; and while that percentage is far less than it was during the boom years prior to the financial
crisis, it remains true that millions of households invest in stocks, bonds, and mutual funds in order
to save for retirement, to put together a down payment on a house, or to pay for their children’s
college—and law school—education. These hard working Main Street Americans are the investors that
need to be kept in mind as we think about corporate governance.
So, what does corporate governance mean for investors? Simply this: it means that the owners of
the company are those who have paid to own the company’s stock, and that management are merely
their employees—albeit often well-paid employees. The separation of ownership and control is the
hallmark of the modern corporation. It would be neither possible nor desirable for the many, widely-
dispersed shareholders of any public company to come together and manage that company’s business
and affairs. As a result, full-time management is essential for public companies to operate, and any
investor will tell you that talented management is extremely valuable.
But even the most capable management, left unchecked, can make bad decisions, leading to
undesirable results for a company and its shareholders. That is why shareholders elect a board of
directors to represent their interests. Good corporate governance helps shareholders and their
representatives to hire the right managers, and helps make sure that the managers remember they
ultimately answer to shareholders. Additionally, good corporate governance also helps to remind the
company’s directors that they work for the company’s shareholders, not for themselves, and certainly
not for management.
The exercise of these duties requires the development of a corporate culture, as well as
specific processes and practices that promote the fundamental principles of corporate governance.
Accountability
It is particularly fitting that the name of Emory Law School’s new journal—The Emory Corporate
Governance and Accountability Review—makes it clear that accountability is central to effective
Accountability means that actions have consequences. When corporate governance embodies
the principle of accountability, shareholders know that performance will be measured. They know
that good performance will be rewarded, and poor performance will not. And, most importantly, they
know that misconduct will not be tolerated.
Executive Compensation
One important measure of accountability involves executive compensation. Common sense would
indicate that good corporate governance should align compensation with performance. However,
recent history has to make you wonder if the principle of accountability is lacking in today’s
It is well known that the last 30 years have seen rapid growth in the compensation of
corporate executives. Much of that growth reflects the trend towards equity-based and other incentive
compensation. This form of pay is intended to align the interests of public company shareholders and
corporate managers. The concept is straightforward: When stock prices rise, shareholders benefit and
managers
Self-Instructional
Material 48
share in the wealth through stock options, appreciation rights, and other awards. In essence, when the Agent and
companies do well, so do executives. During the boom years, executive pay soared. Institution
But a strange thing has been happening: Many executives have been enjoying the benefits of
the pay-for-performance boom, without necessarily delivering increased performance. In fact, the
development of the golden parachute has often meant that, in practice, executives have been NOTES
rewarded handsomely for failure. To give just a few examples, in 2006, Viacom gave roughly $85 million
in severance pay to its then CEO after just nine months in the top job. The former CEO of CVS
received a severance package worth $185 million when he left in early 2011, even though his
company’s net earnings had declined the prior year. And last week it was reported that the former chief
operating officer of Yahoo! who was fired earlier this year, received about $96 million in compensation
for his 15 months on the job, including about $58 million in severance payments. Many other top
executives have been shown the door with seven- and eight-figure severance payments. As many
commenter’s have observed, safety nets of these sizes undermine management incentives from the
moment they are granted. When even failure can vastly increase your wealth, you don’t need to
worry about working hard to be successful. Nor do you need to worry about being accountable.
Say-On-Pay
One important way to enhance accountability is to make sure that shareholders are able to express their
views. In 2010, Congress took steps to address this concern in the context of executive
compensation, by requiring public companies to give shareholders a voice through so-called “say-on-
pay” votes. Specifically, Section 951 of the Dodd-Frank Act requires public companies to conduct
shareholder advisory votes to approve the compensation of executives, at least once every three
years. In addition, companies soliciting votes to approve merger or acquisition transactions must
disclose, and in some circumstances hold a shareholder advisory vote on, any golden parachute
compensation arrangements.
In January 2011, the SEC adopted final rules to implement these “say-on-pay” provisions.
Although these votes are not directly binding on the corporation, they do nevertheless enhance
accountability. Experience demonstrates that corporate boards pay close attention to the voting
results and will seek to avoid “no” votes greater than 25-30%. Moreover, early signs suggest that some
companies have reacted positively to the “say-on-pay” regime and have begun to re-evaluate
compensation packages when pay out-strips performance. As Senator Carl Levin has said, these
provisions are intended to “instill a culture of accountability in the executive pay arena.” This
accountability will be further enhanced when the Commission finalizes its long overdue rules to
implement another provision within Section 951 of the Dodd-Frank Act, which requires large
investment managers to publicly disclose their “say-on-pay” votes.
Enforcement Actions Relating to Executive Misconduct
An additional way to enhance accountability is by making sure that companies are playing by the
rules. While this is true as to many issues, it is particularly troubling when management is willing to break
the law to boost their paychecks. For example, in the last decade, some companies secretly backdated
stock options to give executives and other employees the benefits of favorable stock price movements.
Others manipulated exercise dates so that executives could profit unfairly at the expense of the
corporation and its shareholders.
The SEC has pursued such cases aggressively, charging dozens of public companies and their
executives with fraud and reporting violations. Sadly, many of the individual defendants who
participated in such schemes were company general counsels and other lawyers, who should have
known better— and clearly should have done better.
Commission enforcement actions are a key mechanism for imposing accountability on corporate
officers and gatekeepers. This is particularly important when self-dealing or other breaches of duty
result in violations of the Commission’s rules regarding fraud, reporting requirements, books and
records, or financial controls. When such violations occur, the Commission has a number of tools at
its disposal, including the ability to seek disgorgement of ill-gotten gains, to impose civil penalties,
and to bar wrongdoers from serving as a public company officer or director.
A robust enforcement program helps to reinforce the principle of accountability by punishing
those in a position of trust and responsibility who cross the line.
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Transparency
Institution
A second principle of corporate governance is transparency. Without transparency, it is difficult to
have accountability. After all, shareholders can only hold corporate directors accountable if they know
what is going on at the companies they own.
NOTES
The Commission promotes this principle of transparency by requiring that public companies
shine a light on the information that investors need to make good investment and voting decisions. In
this regard, the Commission’s rules require public disclosure of various types of information,
including descriptions of a company’s business, its board and management, and financial and operating
data, both historical and forward-looking. The access to audited financial information and other
required public disclosures is particularly important when it comes to shareholders holding officers
and directors responsible for corporate performance.
One of the important ways that the Commission mandates public disclosure is through the proxy
process, which is intended to duplicate what would happen in an “in-person” meeting of
shareholders. The proxy disclosure regime is an evolving process that takes into account the needs of
investors, changes in the markets, and the Commission’s own experience.
It should be no surprise that investors have a strong interest in knowing about how their
companies are doing and the decisions that are being made. This is also true as to matters involving
executive compensation. After all, at the end of the day, it is the shareholder that pays the CEO’s salary.
The question is, how can the average shareholder tell if she’s gotten her money’s worth?
To help answer that question, over the years the Commission has periodically amended its
disclosure rules. For example, in 2006, the Commission amended the proxy rules to help provide investors
with a clearer and more complete picture of total compensation for the chief executive, other highly-
paid executive officers, and directors. And in 2009, the Commission responded to lessons learned
from the financial crisis by significantly enhancing proxy statement disclosures with respect to
corporate governance and executive compensation. Noting an increased focus by investors on
corporate accountability, the Commission adopted new disclosure requirements regarding risk
management and compensation matters, including improvements to the reporting of stock and option
awards, disclosure regarding potential conflicts of interest of compensation consultants, and a
requirement to discuss how compensation policies and practices may incentivize risk-taking.
All of these disclosures enhance transparency.
Disclosure Rules Relating to Executive Compensation
Moreover, in Title IX of the Dodd-Frank Act, Congress has mandated that the Commission adopt rules
to address a number of new compensation-related disclosures. These include disclosures as to:
• the relationship between executive compensation actually paid and the financial performance
of the issuer;
• company policies regarding the hedging of equity securities held or awarded to directors and
employees; and
• the ratio between the compensation of the chief executive officer and the total annual
compensation of its average worker (known as “Pay Ratio”).
Last September, the Commission took an important step to fulfill the Congressional mandate
by proposing the Pay Ratio rule. As mentioned earlier, in recent decades, the compensation of
corporate executives has taken an explosive upward trend. In fact, reports demonstrate that the
compensation growth of public company CEOs has far outpaced the growth in salaries of the typical
employee over the years. For example, an April 2013 study by Bloomberg finds that large public
company CEOs were paid an average of 204 times the compensation of rank-and-file workers in their
industries. By comparison, in the 1950s, it is estimated that the average CEO was paid only about 20 times
the typical worker’s pay, with that multiple rising to 42-to-1 in 1980, and to 120-to-1 in 2000. Hopefully,
disclosing Pay Ratios will help investors evaluate the reasonableness of a CEO’s compensation in the
context of a company’s overall business, provide insight into the effectiveness of board oversight,
and offset the upward bias in executive pay that seems to result from benchmarking a CEO’s
compensation only against the compensation of other CEOs.
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The Commission has received an extraordinary number of comment letters regarding the Pay Agent and
Ratio proposal, most of which have been strongly supportive. I hope and expect that the Commission Institution
will move quickly to adopt a final rule this year.
I also urge the Commission to adopt rules requiring the mandated pay-for-performance and
hedging disclosures. Taken together with the Pay Ratio rule, these enhanced disclosures will foster NOTES
accountability by making compensation decisions more transparent, and will help investors to make
more informed investment decisions when they exercise their rights as shareholders and owners.
Engagement
A third principle of corporate governance is engagement. By this I mean that shareholders need a way to
make sure that their voices are heard.
Traditionally, the primary opportunity for shareholders to communicate with directors and
management takes place once a year at the Annual Meeting of Shareholders. However, for most
shareholders, it is simply not practical to attend the annual meeting.
As a result, shareholders have long complained that more engagement was needed for them to
exercise their rights as owners of the company and have pointed out the difficulty of communicating
with directors and management. So, how can companies committed to good corporate governance
fill that gap? And what can security holders do proactively to protect their rights?
Informal Engagement
To address shareholder concerns, many public companies have recently increased their efforts to
engage with shareholders—and have become more proactive in investor relations. In fact, one proxy
solicitation firm has characterized the current period as “The Era of Engagement.” It wasn’t so long ago
that a large public company could make news by saying that it would meet regularly with investors to
discuss executive pay and management practices. However, shareholder-management meetings and other
forms of engagement have increased dramatically in recent years. A study that came out in 2011 indicated
that 87% of the issuers, 70% of the asset managers, and 62% of the pension funds and other investors
surveyed reported at least one engagement over the preceding year, with most respondents saying
that shareholder-company contact was occurring more frequently.
There are many reasons for the reported increase in shareholder involvement. Some observers
credit the role of proxy advisory firms, which they say have helped investors to magnify their influence.
Others cite the adoption of “say-on-pay” rules, which provided both a forum for investors to demonstrate
their concerns regarding executive pay and other governance issues, as well as a clearly-defined
metric of investor sentiment, as evidenced by approval rates. For example, shortly after Johnson &
Johnson received a weak 57% approval rate for its “say-on-pay” proposal in 2012, the company’s
compensation and benefits committee chair and presiding director, along with several executives, met
with representatives of many of the company’s institutional investors to discuss their concerns.
As an advocate for investors, I am gratified by these indications of responsiveness on the part
of many public company boards, but let us not confuse activity with progress. According to a 2011
report, management is much more likely than investors to consider such outreach a success. It’s one
thing to start a dialogue; but it’s quite another thing entirely to change behavior. Investors need concrete
action to enhance accountability, pay-for-performance, and other goals—not just words.
Moreover, this type of engagement is focused almost entirely on institutional investors—and,
in many cases, only the largest of these. Small investors that own shares directly are typically frozen
out of the process. That’s a problem because, often times, the interests of Main Street and Wall
Street are not aligned.
Engaging Retail Shareholders
One obstacle to promoting engagement by retail shareholders is that individual shareholders often
tend to be passive investors. For example, last year, retail investors voted only 30% of their public
company shares, as compared to institutional investors, which voted 90% of their shares.
One innovation that has the potential to increase engagement by retail shareholders is the use
of electronic shareholder forums. To that end, in January 2008, the Commission adopted rules to
facilitate
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the use of this tool by public companies and their shareholders. The intent was to facilitate
Institution
shareholder communications and uphold shareholder rights by encouraging experimentation, innovation,
and greater use of the Internet. Unfortunately, however, reports suggest that only a small minority of
U.S. domestic issuers take advantage of this innovation. The Commission should investigate this and
NOTES determine whether our rules should be amended.
Shareholder Proposals
Another way that investors may seek to communicate with directors, management, and each other is by
submitting shareholder proposals for consideration at the annual meeting. Long-standing SEC rules
address when a company is required to include a shareholder proposal in its proxy materials.
Generally, these rules include both substantive and procedural requirements, and shareholders must
also meet certain eligibility rules.
In recent years, common topics for shareholder proposals have included executive compensation,
environmental issues, majority voting for directors, and eliminating classified boards. This year,
some observers expect “proxy access” to be a popular topic—that is, proposals to establish a
procedure that would allow shareholder director nominees to be included in company proxy
materials.
Both companies and shareholders have used the shareholder proposal process as an occasion
to engage with one another. Last year, for example, it was reported that the management of
JPMorgan Chase & Co. actively lobbied institutional investors to oppose a shareholder proposal seeking
to separate the CEO and board chairman roles at the bank. Supporters of the proposal also took their
arguments directly to investors, including meetings with substantial shareholders. Although in this case
management defeated the shareholder proposal, campaigns like these—which are becoming more and
more common— underscore the impact that shareholder proposals can have on corporate governance
matters. Notably, during the 2013 proxy season, individual shareholders sponsored 49% of all
shareholder proposals (up from less than 41% in 2012), as compared to about 16% for public pension
plans (down from 21% in 2012), and about 26% for labor unions (about the same as the prior year).
Experience shows that the shareholder proposal process can be an effective tool to amplify the voice of
individual shareholders in corporate governance. In fact, often an issue raised through the shareholder
proposal process is addressed through negotiations between management and the proposing
shareholder, making the inclusion of a shareholder proposal in the final proxy statement
unnecessary.
In that regard, it has been reported that companies received over 750 shareholder resolutions
with respect to the 2013 proxy season. Although few of these resolutions may actually be approved by
vote at a meeting, each provides an opportunity for engagement so that investors can have their
views heard and have an impact on corporate governance.
In the end, whatever the mechanism—shareholder proposals, shareholder forums, or “in-person”
meetings—it is important that shareholders be able to communicate with their companies. I firmly
believe that companies with corporate governance processes that enhance how they engage with their
owners will be more successful than those that keep the doors shut.
CORPORATE GOVERNANCE: DIRECTOR, AUDITOR AND BANK
Introduction
Corporate governance had gain popularity nowadays specially after the collapses of many companies
who appeared giant and efficient while actually they were fragile. Expropriation of stakeholders by
senior managers is widely evident with the collapses of companies such as Enron which is symbolic
of shareholders failure to protect their interests due to asymmetrical information and conflict of
interest in board of directors. The inefficiency of corporate governance mechanisms in banks and
financial institutions are blamed in each crises. However, after absorbing the impact of failure, many
opinions call for re-designing corporate governance mechanisms to ensure board responsibility and
accountability, risk management, transparency and disclosure in financial reports. Despite the negative
impact of Enron collapse, the case “has done for reflection on corporate governance what AIDS did
for research on the immune system”. The ties between executive managers and shareholders were
destroyed because of manager’s greed and willingness to benefit themselves over shareholders interest.
Although shareholders should be supported by board and have a special position in the front line of
interest to managers as providers of capital, sometimes board of directors do not choose to act and
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States Agent and
Boards of Directors often conspired with the executives (because the executives and their friends sat on Institution
the Board, controlling the agenda and directing important committees), or failed to exercise
sufficient diligence in monitoring the executives; the shareholders, especially large institutional
shareholders, paid insufficient attention to the quality of the Boards and to the reports of external NOTES
auditors.
According to stakeholders’ theory, managers should make decisions that are in the best interest
of stakeholders. However, Jensen [2] criticizes the ability of managers to satisfy all stakeholders at
the same time and in this case the theory is “unassailable”. As when a manager is trying to maximize
shareholders wealth, current profits, market share, future growth in profits can destroy his ability to take
the right decision. As “A manager directed to maximize both profit and market share has no way to decide
where to be in the range between maximum profits and maximum market share”. Managers under
the supervision of the board should take all different dimensions in mind for the well-being of the
firm and welfare of society. It is necessary to have internal control system to limit managerial
actions.
Because stakeholder theory provides no criteria for what is better or what is worse, it leaves
boards of directors and executives in firms with no principled criterion for problem solving … it
leaves managers and directors unaccountable for their stewardship of the firm’s resources. With no
criteria for performance, managers cannot be evaluated in any principled way. Therefore,
stakeholder theory plays into the hands of self-interested managers allowing them to pursue their
own interests at the expense of society and the firm’s financial claimants.
The size and magnitude of Enron’s failure challenges academic beliefs about corporate governance
and the role that could be played by board of directors, external auditors in constraining executive
managers from going too far, destroying companies and creating losses to stakeholders. The aligning
of manager’s interests with stakeholder’s interests needs more solid foundations other than assuming
that it is easily being aligned. Enron highlighted the way in which loose regulations had led auditors to
allow accounting methods that promote overstating profits while analysts remained positive and
sometimes silent in spite of un-logical financial results. The changes in executive compensation in
the 1990s in USA, designed to align executive interests with those of shareholders, provided a strong
incentive to managers to overstate earnings, even if this was not sustainable and illusionary. When
chief executive officers spend three to four years in companies and cash their stock options and then
markets are not quick to respond then stakeholders face the consequences .
Board of directors should play different roles in organizations in order to maintain their
sustainability. They have to plan strategic direction, advising, active monitoring and disciplining
roles. Also the board should control the process of appointing executives and assessing their actions.
Adams et al.
Assessment can be seen as having two components, one is monitoring of what top
management does and the other is determining the intrinsic ability of top management. The
monitoring of managerial actions can, in part, be seen as part of a board’s obligation to be vigilant
against managerial malfeasance. Yet, being realistic, it is difficult to see a board actually being in a
position to detect managerial malfeasance directly; at best, a board would seem dependent on the
actions of outside auditors, regulators, and, in some instances, the news media. Indirectly, a board
might guard against managerial malfeasance through its choice of auditor, its oversight over
reporting requirements, and its control over accounting practices.
ROLE AND RESPONSIBILITY OF BOARD OF DIRECTORS IN

CORPORATE GOVERNANCE
In many countries shareholders have a dominant role in appointing board of directors. Shareholders
believe that appointed board and senior managers will act in their interests. Senior managers are
responsible of directing; planning and controlling work and take corrective actions necessary. They
should manage risk, have appropriate control systems, provide accurate information and act
ethically. Shareholders place their trust in board’s decisions in supervising senior manager’s actions
and proficiency. However, in many incidents this is not the case and agency problem persist. When
existing and potential investors are considering buying or selling stocks of any companies, they often
rely on financial information which is not forward looking, subjective and sometimes incorrect. In this
case, shareholders confidence
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Agent and
for an effective role and responsibilities of the board in supervising and selecting senior managers is
Institution
crucial. In order for corporate governance to function efficiently, several dimensions might be taken
into consideration including role and responsibilities of the board, board composition, management
process, relationship between board members, and duality of CEO and Chairman .
NOTES Corporate governance can be viewed as a nexus of relations between board of directors, company
management, shareholders, debt holders, customers, government and other stakeholders within a social,
legal and political framework. The effectiveness of corporate governance flourishes in an
environment of compliance, transparency and accountability. Board of directors has a control,
strategic and resource provision roles the supervisory board “can help the firm connect with the
relevant segments and environmental constituencies”. Isik and Ince argued that board of directors is
a cornerstone in the governance mechanism. They explored the relationship between board size and
board composition on performance for a sample of 30 commercial banks from 2008 to 2012 in
Turkey. They measured banks performance by operating return on assets and return on assets. Their
findings showed that board size has a significantly positive effect on bank’s financial performance while
there is no significant relationship between for the percentage of outside directors on banks’ financial
performance. Different critical areas should be taken into consideration by the board such as
emphasizing ethical values, standards in the work environment and overseeing strategies that address
sustainability and stakeholder interests. Bernardi and Lacross surveyed a sample of quarter of Fortune
500 companies in order to explore their concern about publishing their codes of ethics. They
discovered that since the collapse of Enron in 2002, companies generally give increasing emphasis to
the code of ethics, which can be seen as a positive sign. There were also no significant differences in
the disclosure rates between different industries. One astonishing finding was that in 2002 none of the
former companies audited by Arthur Andersen revealed ethics policies on their websites. Fung states:
Corporate governance highlights the important principles of oversight and control over the
executive management’s performance and strategic directions; and their accountability to the
shareholders. A code of ethics, which clarifies and stipulates adherence to some of more abstract
ideals of trust and accountability, is essential for good corporate governance. The board and
management should endeavor to uphold and nurture accountability, transparency, fairness, and
integrity in all aspects of the company operations.
Onto argued that two agency problems exists one where the board is the agent for
shareholders and at the same time assumed to be principal to directors. It monitors management on
behalf of its principals – shareholders, and trying to monitor and deduct managerial inefficiency and
abuse. Sometimes managers have power over the board as it manifested in Enron.
A board’s independence depends on a bargaining game between the board and the CEO of the
many responsible parties implicated in Enron’s scandal, it could be said that the board’s inactions, up to
a certain extent, led the company to its demise in December 2001. Enron’s board approved a disclosure
policy that made the firm’s financial results substantially opaque to public capital markets. It also
approved a compensation strategy that made managerial payoffs highly sensitive to stock price
changes and it also failed to engage in an intense monitoring of business results and financial
controls.
The roles and responsibilities of a Board of directors are different, depending on the nature
and type of organization and the laws applied in a certain country. Similarly, the establishment of
different committees is a means to channel the functions of a board into expertise groups of directors
that focus on specific issues in organization. The role of the board is critical for the success of companies.
According to UK Corporate Governance Code , the board should make sure that financial and human
are available to fulfil companies objectives. They board is responsible for making sure an amalgam
of skills and experience in the board for running companies smoothly and efficiently . In Saudi Arabia,
The General Department of Finance is in charge of controlling the financial sector and has the
authority to supervise the activities of finance companies according to Finance Companies Control Law.
Although rules and regulations are available, monitoring implementation is necessary when managers
and board try to manipulate it .
Financial Institution and Board Responsibilities
Corporate governance regulation has been issued by Capital Market Authority (CMA) in November
2006, in response for Saudi Stock market crash. However, corporate governance in Saudi Arabia is still a
fairly new concept, the Saudi Arabian Monetary Agency (SAMA) and Capital Market Authority (CMA)
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are still in the process of organizing the financial markets and highlighting the benefits of applying Agent and
good corporate governance and many of the laws and institutions are still relatively new with little Institution
experience; awareness of the importance of good corporate governance is low, and implementation by
companies is in its early stages.
The Saudi Arabian Monetary Agency (SAMA), the central bank of the Kingdom of Saudi Arabia, NOTES
has been entrusted with performing many functions. The most important two of those functions are:
licensing financial institutions to operate in the kingdom financial sector and supervise those finance
institutions’ activities in accordance with the rules and regulations:
Corporate Governance Guidelines
The following corporate governance guidelines of the Board of Directors of the Company, have been
approved by the Board of Directors and provide the framework for the corporate governance of the
Company.
Role of the Board of Directors
The Company’s business is managed under the direction of the Board of Directors. The Board delegates
to the Chief Executive Officer, and through that individual to other senior management, the authority and
responsibility for managing the Company’s business. The Board’s role is to oversee the management
and governance of the Company and to monitor senior management’s performance.
Among the Board’s core responsibilities are to:
• Select individuals for Board membership and evaluate the performance of the Board, Board
committees and individual directors.
• Select, monitor, evaluate and compensate senior management.
• Assure that management succession planning is adequate.
• Review and approve significant corporate actions.
• Review and monitor implementation of management’s strategic plans.
• Review and approve the Company’s annual operating plans and budgets.
• Monitor corporate performance and evaluate results compared to the strategic plans and other
long-range goals.
• Review the Company’s financial controls and reporting systems.
• Review and approve the Company’s financial statements and financial reporting.
• Review the Company’s ethical standards and legal compliance programs and procedures.
• Oversee the Company’s management of enterprise risk.
• Monitor relations with shareholders, employees, and the communities in which the Company
operates.
Board size and Composition
The Board of Directors is comprised of such number of directors as the Board deems appropriate to
function efficiently as a body, subject to the Company’s Articles of Association. The Corporate
Governance and Nominating Committee reviews the composition of the full Board to identify the
qualifications and areas of expertise needed to further enhance the composition of the Board, makes
recommendations to the Board concerning the appropriate size and needs of the Board and, on its
own or with the assistance of management or others, identifies candidates with those qualifications.
The Board is made up of a substantial majority of independent, non-employee directors and
the Board considers this to be the appropriate structure. The Board establishes principles and procedures
to determine whether or not any particular director is independent in accordance with applicable
regulations and the requirements of the New York Stock Exchange. The standards currently in effect for
determining the independence of individual directors are attached as Exhibit I to these Corporate
Governance Guidelines.
Selection of Directors
Under the Articles of Association, the Board of Directors has authority to fill vacancies in the Board and
appoint additional directors (in each case subject to their re-election at the next annual general meeting)
Material
Agent and
and to nominate candidates for election by the shareholders. The screening process is done by the
Institution
Corporate Governance and Nominating Committee with direct input from the Chairman and CEO
and from the other directors and from time to time with the assistance of director search firms. In
considering candidates for director, the Corporate Governance and Nominating Committee will take into
NOTES account all factors it considers appropriate, including, among other things, breadth of experience,
understanding of business and financial issues, ability to exercise sound judgment, diversity, leadership,
and achievements and experience in matters affecting business and industry. The Corporate
Governance and Nominating Committee considers the entirety of each candidate’s credentials and
believes that at a minimum each nominee should satisfy the following criteria: highest character and
integrity, experience and understanding of strategy and policy-setting, sufficient time to devote to
Board matters, and no conflict of interest that would interfere with performance as a director.
Shareholders may recommend candidates for Board membership for consideration by the Corporate
Governance and Nominating Committee. Such recommendations should be sent to the Committee, care
of the Secretary of the Company. Candidates recommended by shareholders are evaluated in the same
manner as director candidates identified by any other means.
Chairman of the Board and CEO
The positions of Chairman of the Board and CEO are held by the same person, except in unusual
circumstances, such as during a CEO transition. This policy has worked well for the Company. It is
the Board’s view that the Company’s corporate governance principles, the quality, stature and
substantive business knowledge of the members of the Board of Directors, as well as the Board’s
culture of open communication with the CEO and senior management are conducive to Board
effectiveness with a combined Chairman and CEO position.
Lead Director
It is the policy of the Board that a Lead Director be appointed for a three-year minimum term from among
the Company’s independent directors. The Lead Director shall have the roles and responsibilities set
forth in Exhibit II to these Corporate Governance Guidelines
The Board of Directors has the following committees: Audit, Compensation, Corporate
Governance and Nominating, Finance, Technology and Innovation and Executive. All committees
have written, Board-approved charters detailing their responsibilities and the extent to which they have
been delegated powers of the Board of Directors. Only non-employee directors serve on the Audit,
Compensation, Corporate Governance and Nominating, Finance and Technology and Innovation
Committees. Chairpersons and members of these five committees are rotated periodically, as appropriate.
The Chairman, who is also the CEO, serves on the Company’s Executive Committee and is Chairperson
of such Committee. The remainder of the Executive Committee is comprised of the non-employee
director Chairpersons of the Audit, Compensation, Corporate Governance and Nominating and
Finance Committees. At each meeting of the Audit Committee, committee members meet privately with
representatives of the Company’s independent auditors, and with the Company vice president
responsible for the internal audit function. At least once a year, the Audit Committee meets privately
with the Company’s chief compliance officer.
The Audit Committee meets at least five times each year, and the Compensation, Corporate
Governance and Nominating and Finance Committees each meet at least four times each year, and
the Technology and Innovation Committee meets at least once a year. The Executive Committee meets on
an as needed basis when directed by the Chairman or Lead Director. Additional committee meetings
are called as required.
Board Agenda and Meetings
The Chairman establishes the agendas for the Board meetings in conjunction with the Lead Director.
Each director is free to suggest items for inclusion in the agenda, and each director is free to raise at any
Board meeting subjects that are not on the agenda for that meeting. Board materials relating to
agenda items are provided to Board members in advance of meetings to allow the directors to
prepare for discussion of matters at the meeting. The Board reviews and approves the Company’s
yearly operating plan and specific financial goals at the start of each year, and the Board monitors
performance throughout the year. At an expanded Board meeting once a year, the Board reviews in depth
the Company’s long- range strategic plan. At the expanded meeting, it also reviews senior
management development and succession planning.
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Management presentations are made to the Board and its committees regularly on various aspects Agent and
of the Company’s operations. The directors have unrestricted access to management and corporate Institution
staff.
Executive sessions of Non-employee Directors
The non-employee directors meet privately in executive sessions to review the performance of the CEO NOTES
and to review recommendations of the Compensation Committee concerning compensation for the
employee directors. The non-employee directors also meet as necessary, but at least twice a year, in
executive session to consider such matters as they deem appropriate without management being present.
Director orientation and Continuing Education
In order to become familiar with the Company, as well as the functioning of the Board of Directors,
newly- appointed directors receive a variety of materials, including a Directors’ Handbook, which
provide an overview of the Company, its operations and organization. They are also provided with
access to key management personnel to provide additional information, including significant issues
currently facing the Company. Management will also maintain a program to keep directors up to date on
legal, regulatory and other matters relevant to their positions as directors of a large publicly-held
corporation.
Director Compensation and Stock ownership
The Corporate Governance and Nominating Committee periodically reviews the Board of Directors’
compensation and benefits and compares them with director compensation and benefits at peer
companies. It is the Board of Directors’ policy that directors be required to acquire shares of
Company stock worth five times the annual cash retainer. A director cannot sell any shares of Company
stock until he or she attains such level of ownership and any sale thereafter cannot reduce the total
number of holdings below the required share ownership level. Directors are required to retain this
minimum level of Company stock ownership until their resignation or retirement from the Board. It is
also the policy of the Board that directors’ fees be the sole compensation received from the Company
by any non-employee director.
CEO Performance Evaluation
At the beginning of each year, the CEO presents his or her performance objectives for the upcoming year
to the non-employee directors for their approval. At the end of the year, the non-employee directors then
meet privately to discuss the CEO’s performance for the current year against his or her performance
objectives. The non-employee directors use this performance evaluation in the course of their
deliberations when considering the compensation of the CEO. The non-employee directors and the CEO
then meet to review the CEO’s performance evaluation and compensation.
Chief Executive Officer Succession
The Board of Directors views CEO selection as one of its most important responsibilities. To assist
the Board in succession planning, the CEO reports at least annually to the Board providing an
assessment of senior managers and their potential to succeed the CEO, either in the event of a sudden
emergency or in anticipation of the CEO’s future retirement.
Director Retirement
Each non-employee director must retire at the annual general meeting immediately following his or her
75th birthday. Directors who change the occupation they held when initially elected must offer to resign
from the Board. At that time, the Corporate Governance and Nominating Committee reviews the
continued appropriateness of Board membership under the new circumstances and makes a
recommendation to the Board. Employee directors, including the CEO, must retire from the Board at the
time of a change in their status as an officer of the Company, unless the policy is waived by the
Board.
Board and Board Committee Performance Evaluation
With the goal of increasing the effectiveness of the Board of Directors and its relationship to management,
the Corporate Governance and Nominating Committee assists the Board in evaluating its performance as
a whole and the performance of its committees. Each Board committee is also responsible for conducting
an annual evaluation of its performance. The effectiveness and contributions of individual directors
are considered each year when the directors stand for recombination.
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Agent and
Board Memberships
Institution
The CEO and other members of senior management must seek the approval of the Board (or the
Board committee to which this responsibility has been delegated), before accepting outside board
memberships with for-profit entities.
NOTES
Non-employee directors must advise the Chairman of the Board and the Chair of the
Corporate Governance and Nominating Committee if they are being considered for election or
appointment to a board of directors of another publicly-held company. The Corporate Governance
and Nominating Committee will determine whether the new board membership is compatible with
continued service on the Company’s Board. It is the policy of the Board that non-executive directors
may not serve on the board of more than four other publicly held companies without the prior
approval of the Board of Directors, except that any new board members shall be given a reasonable
transition period to come into compliance with the policy.
Independent Advice
The Board or a committee of the Board may seek legal or other expert advice from a source independent
of management. Generally, this would be with the knowledge of the CEO.
Code of Conduct
The Company will maintain a code of business conduct and ethics which will articulate for
employees, shareholders, customers and suppliers the standards of conduct, including conflicts of
interest matters, to which the Company expects to adhere. Directors will also be required to abide by the
code of conduct. Any waivers of the conflict of interest requirements of such code in favor of a
director or executive officer will be subject to approval by the Board. In the case of the consideration of
such a waiver in favor of a director, such director shall not participate in the deliberation or vote
relating to such waiver.
Internal Audit Function
The Company will maintain an internal audit function whose head will report directly to the Audit
Committee. The internal audit function is responsible for bringing a systematic, disciplined approach
to evaluate the effectiveness of risk management, control and governance processes. Its duties
include monitoring the compliance by Company operations with the Company’s internal controls and
identifying any deficiencies in the design or operation of such internal controls which could adversely
affect the Company’s ability to record, process, summarize and report financial data.
EXHIBIT-GUIDELINES FOR DETERMINING INDEPENDENCE

OF DIRECTORS
(A) A director will not be deemed “independent” if: (i) the director is affirmatively determined by the
board of directors of the Company to have a material relationship to the Company (either directly
or as a partner, shareholder or officer of an organization that has a relationship with the
Company);
(ii) the director is or was within the last three years employed by the Company or any of its
subsidiaries; (iii) an immediate family member of the director is or was within the last three
years employed by the Company or any of its subsidiaries as an executive officer; (iv) the director
or an immediate family member of the director has received during any twelve-month period
within the last three years more than $120,000 in direct compensation (other than director and
Board committee fees and pension or other forms of deferred compensation not contingent on
continued service as a director from the Company and its subsidiaries), provided, however that
for purposes of this subparagraph (iv), compensation received by an immediate family
member for service as an employee of the Company (other than an executive officer) shall not
be included in determining a director’s independence; (v) the director, or an immediate family
member of the director, is a current partner of a firm that is the Company’s internal or
external auditor; (vi) the director is a current employee of such audit firm; (vii) an immediate
family member of the director is a current employee of such audit firm and personally works on
the Company’s audit; (viii) the director or an immediate family member of the director was
within the last three years (but is no longer) a partner or employee of such audit firm and
personally worked on the Company’s audit within that time; (ix) an executive officer of the
Company is or was within the last three years on the compensation committee of the board of
directors of a company that employed the director, or an
Self-Instructional
Material 58
immediate family member of the director, as an executive officer at the same time; or (x) the Agent and
director is a current employee, or has an immediate family member who is a current executive Institution
officer, of a company or tax exempt organization having any of the relationships with the
Company described in paragraph (B) below.
(B) The following commercial or charitable relationships are considered to be material relationships NOTES
that would impair a director’s independence: (i) if a director is a current employee, or an
immediate family member of a director is a current executive officer, of another company that
has made payments to, or receives payments from, the Company for property or services in
an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2%
of the other company’s consolidated gross revenues or (ii) if a director is a current employee, or
an immediate family member of a director is a current executive officer, of a tax exempt
organization, and the Company’s discretionary charitable contributions to the organization in
the aggregate are greater than $1 million, or 2% of that organization’s consolidated gross
revenues. (The amount of any “match” of charitable contributions under the Company’s
matching gifts program will not be included in calculating the amount of the Company’s
contributions for this purpose.) The Board will annually review all commercial and charitable
relationships of directors.
(C) For relationships other than those of the types described in (A) and (B), the determination of
whether the director has a material relationship with the Company, and therefore may not be
independent, will be made in good faith by the directors who satisfy the guidelines set forth in
such preceding paragraphs.
(D) For purposes of these guidelines the term “immediate family member” includes an
individual’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and
daughters-in-law, brothers and sisters-in-law and anyone (other than domestic employees)
who shares such individual’s house.
(E) For purposes of these guidelines the term “executive officer” shall have the same meaning as the
term “officer” in Rule 16a-1(f) of the Securities Exchange Act of 1934.
Exhibit II- Ingersoll-Rand PCL Lead Director Board Role
The Lead Director coordinates the activities of all of the Board’s independent directors. The Lead
Director is the principal confidant to the CEO and ensures that the Board has an open, trustful relationship
with the Company’s senior management team. In addition to the duties of all Directors, as set forth in the
Company’s Governance Guidelines, the specific responsibilities of the Lead Director are as follows:
• Chair the meetings of the independent directors when the Chairman is not present;
• Ensure the full participation and engagement of all Board members in deliberations;
• Lead the Board in all deliberations involving the CEO’s employment, including hiring,
contract negotiations, performance evaluations, and dismissal;
• Counsel the Chairman on issues of interest/concern to directors and encourage all directors to
engage the Chairman with their interests and concerns;
• Work with the Chairman to develop an appropriate schedule of Board meetings and approve
such schedule, to ensure that the directors have sufficient time for discussion of all agenda
items, while not interfering with the flow of Company operations;
• Work with the Chairman to develop the Board and Committee agendas and approve the final
agendas;
• Keep abreast of key Company activities and advise the Chairman as to the quality, quantity
and timeliness of the flow of information from Company management that is necessary for the
directors to effectively and responsibly perform their duties; although Company management is
responsible for the preparation of materials for the Board, the Lead Director will approve
information provided to the Board and may specifically request the inclusion of certain
material;
• Engage consultants who report directly to the Board and assist in recommending consultants
that work directly for Board Committees;
• Work in conjunction with the Corporate Governance and Nominating Committee in compliance
with Governance Committee processes to interview all Board candidates and make
recommendations to the Board; Self-Instructional
Material
59
Agent and
Institution • Assist the Board and Company officers in assuring compliance with and implementation of
the Company’s Governance Guidelines; work in conjunction with the Corporate Governance
Committee to recommend revisions to the Governance Guidelines;
• Call, coordinate, develop the agenda for and chair executive sessions of the Board’s
NOTES independent directors; act as principal liaison between the independent directors and the
CEO;
Work in conjunction with the Corporate Governance and Nominating Committee to identify for
appointment the members of the various Board Committees, as well as selection of the Committee
chairs;
• Be available for consultation and direct communication with major shareholders;
• Make commitment to serve in role of Lead Director for a minimum of three years; and
• Help set the tone for the highest standards of ethics and integrity.
Adopted by the Board to be effective as of January 1, 2018
SUMMARY
This unit has provided a summary in which has been conducted in the field of agency theory and
corporate governance designed to minimize its damage to shareholder wealth. In general, the only
strong conclusion which appears to have been suggested is that what is optimal for one firm at one point
in time, need not be so for another. In efficient markets it could be argued that firms and investors
will choose between these various devices based upon their optimal contracting relationships. While,
at the same time, large divergences of interest by management always carries the threat of external
market discipline from labor markets and the market for corporate control
QUESTIONS
Conceptual Type
1. Meaning and Definition of Agent & Institution
2. Who is Agent?
3. What is Institution?
4. Who is Stock holder?
5. Who is Auditor?
Analytical Type
1. Describe what is the Relationship between Agent &Institution ?
2. What is Rights of Shareholder under Companies Act2013?
3. What are the Rights privileges of Stock holders? Discuss
4. What is the Role and Responsibilities of Director, Auditor & bank in CG?
5. Discuss about the Board Committee &its Performance?
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Material 60
UNIT 4 INDIAN SCENARIO, PUBLIC POLICIES SEBI, Indian Scenario,
Public Policies SEBI,
CORPORATION IN GLOBAL SOCIETY Corporation in
Global Society
Structure NOTES
Present Framework of Corporate Governance in Indian
Various Policies to be Framed as per SEBI Regulations, 2015
Securities and Exchange Board of India (SEBI)
Corporate Social Responsibility (CSR)
Corporate Governance - in Global Society and the Environment
Summary
Questions
LESSON OUTLINE
• Introduction & definition an Indian scenario
• Present frame work of CG in India
• SEBI Policy & Regulation 2015
• Corporate and social Responsibility
• CG in Global society & the environment
LEARNING OBJECTIVES

• Meaning and Definition of an Indian scenario
• What is the frame work of CG In India
• What is SEBI policy & what is the Regulation 2015
• What are social Responsibility
INTRODUCTION
Corporate governance has become a very hot issue these days because good governance has become
a casualty at all levels. Corporate governance is concerned with set of principles, ethics, values,
morals, rules regulations & procedures. Corporate governance establishes a system whereby
directors are entrusted with duties and responsibilities in relation to the direction of the company’s affairs.
Corporate governance includes Honesty, Disclosure, Transparency, Sustainability and Responsibility.
The UNDP Human Development report labelled the economic growth as ruthless, rootless and
jobless. It highlighted that economic development is the means (way to achieve the goal) and human
development should be the goal. Even today, for many companies Corporate Governance has only a
shareholder focus. The reference point usually is the company’s law and the relevant guidelines of
Securities Exchange Board of India (SEBI). For Human resource professionals and human resource
function (HR), however, the concept of CG is much wider. HR has a key role to shift focus to multi-
stakeholder focus with a ‘balanced score card’ perspective. HR perspective on Corporate Governance
should focus on, among others, the following:
1. Respect for universal human rights and freedoms
2. Internalize international labour standards
3. Practice codified ethics and codes of conduct
4. Develop/benchmark best practices and follow them
5. Conduct internal and external (including social) audit of HR policies Corporate Governance
increases the accountability of the individuals and is aimed at reducing the principal agency
problem. As per Cadbury Committee “Corporate Governance is a system by which companies are
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61
Indian Scenario,
directed and controlled to ensure future growth and survival of the business”. In short, Corporate
Corporation in Governance is aimed at increasing the value for shareholders and can act as a competitive
Global Society advantage because it is aimed towards the long term sustainability of the business. The
philosophy of governance and ethics is not new as a concept. In fact in the Indian tradition,
NOTES this has been a deep rooted and fundamental basis of all religious and scriptural teachings.
Sadly, businesses today seek exponential growth and the profits have overlooked the means
to generating returns to shareholders and stakeholders. Profits however are not a bad word.
But, when the companies use the unethical means to achieve the same, then businesses runthe
risk of permanently damaging their reputation and goodwill. The Organization for Economic
Cooperation and Development (OECD), which, in 1999, published its Principles of Corporate
Governance gives a very comprehensive definition of corporate governance, as under: “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. Good corporate governance should provide proper incentives for the board and
management to pursue objectives that are in the interests of the company and shareholders, and
should facilitate effective monitoring; thereby encouraging firms to use recourses more
efficiently.”
So, authors have mainly focused on the growth of Shareholders which could eventually improve
the corporate governance of the firm in India. Carter et al. (2010) studied that good corporate governance
can be promoted and improved by more gender diverse boards on board room which will ultimately
grow the firm’s financial performance. Andrew Kakabadse (2010) emphasized more on six dimensions
i.e. political, Civil, Judicial, Administrative, economic and financial spheres of the firm that are to be
focused under corporate governance body as these dimensions are the benchmark for every business
and on there basis the corporate governance position are varied. Prof. Rana Singh (2014) studied the
changing dimensions of corporate governance in India and explained the role of Good Governance in
Indian firms and concluded that more tighter the rules of corporate governance, better will the
working of firms. As, it is very important to safeguard stakeholders and shareholders of the company
from fraudulence and scandals which are only possible with the help of disciplined corporate
governance body. Raja Mariappan et al. (2014) stipulated that for enhancement of firm’s performance it
is uttermost important to have good governance factor. As success and growth of any firm is mainly
dependent upon the effective and good corporate governance. The authors found that there is no
significant relationship between corporate governance practices and firm’s performance as there is
no impact of corporate governance on firm’s performance. Further analyzing the results that three
variable – Firm size, Insider ownership and Board independence were insignificant which leads the
investors to carefully invest and take decision accordingly. Overall study revealed two aspects,
firstly, good corporate governance regime is needed to improve the decision making qualities of board
of directors and secondly, good corporate governance will lead to increase in shareholders returns.
Smita Jain (2015) explained the importance of corporate governance in present scenario in India and laid
immense importance on various committees form to regulate corporate governance regulations like
Kumar Manglam Birla Committee, Cadbury
Committee Report, OECD Principles, SarbanesOxley Act, Narayana Murthy Committee, ICSI,
SEBI etc and concluded the performance of Indian firms after Companies Act, 2013 have improved 30%
specifically breaking the Glass –Ceiling effect in Indian firms resulting in betterment of Corporate
governance and increasing the role of Women directors on Boardroom.
PRESENT FRAMEWORK OF CORPORATE GOVERNANCE IN INDIAN
The key question is that despite all this why have the incidences of non compliance, evasion and
wrong reporting not subsided in the world of Business? Does it imply that India need stricter regulations
and control or is it that Businesses are by nature willing to do the wrong things, even at the cost of
a permanent damage to their reputation and image? Given the series of corporate scandals that hit the
world headlines from Enron and WorldCom in the early part of2000 to the Wall Street fiasco that led
to a global financial meltdown through the sub-prime crisis recently in the US, to the Satyam scam
Self-Instructional
Material 62
closer home, we witness one common thread of dissonance. Simply put, this is a lack of ‘Conscious Indian Scenario,
Commitment’ in letter and spirit to the core values of honesty, integrity and transparency by the Public Policies SEBI,
senior leadership team of large enterprise Series of corruption scandals in India have embarrassed the Corporation in
ruling of corporate governance, rattled markets and delayed reform bills as the opposition stalls Global Society
parliament. The country, 87th in Transparency International’s rankings based on perceived levels of
corruption, is no stranger to scandals. In the Indian context Satyam scandal and various other NOTES
scandals has brought to focus the role of independent directors in the companies. This may not be an
India-specific story. In fact, history of capitalism regularly produces headline-making such scandals.
Enron for example, the energy company has become a byword for company fraud. It had 22,000
employees and claimed revenue of nearly $100bn the year before its 2001 collapse. The group had a
complex accounts structure, under which huge debts were hidden behind fraudulent off-balance
sheet partnerships. Its top executives were found guilty of insider trading and lying to investors.
Heeding this fundamental wisdom, various regulatory agencies thought it appropriate to advise the
companies to incorporate independent members on their Board. This may have two broad objectives:
one, effective corporate governance, and two, investors’ confidence. In fact, Corporate Governance
in the UK and the Code of Corporate Governance Practices, emphasize the role and responsibilities of
the non-executive directors, including the need for an independent board and independent non-
executive directors. Independent non-executive directors are expected not only to participate in
committees such as the audit, remuneration and nomination committees but also to form the Majority
in such committees. Build lasting goodwill and reputation for their organizations. Socially responsible
actions that are not merely rhetoric but are sincere and honest is the only route to restoring the
goodwill of public and other stakeholders towards business entities. Hopefully, the lessons learnt
from the many mistakes of the past will rejuvenate corporations to realign and entrust the reins of
leadership to people who command respect through their conduct and professional expertise. They in
turn can then demonstrate qualities that inspire their teams to set the highest standards of personal
and professional integrity for managing the many challenges that lie ahead of enterprises in the
future.
VARIOUS POLICIES TO BE FRAMED AS PER SEBI

REGULATIONS, 2015
Introduction
Securities and Exchange Board of India (SEBI) on 2 nd September, 2015 issued the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) with the aim of
bringing the basic framework governing the regime of listed entities in line with the Companies Act, 2013
and compiling all the mandates of SEBI regulations/ circulars governing equity as well as debt segments
of capital market under the ambit of single document.
The Listing Regulations are effective from 90 days from the date of notification of these regulations
i.e. 1st December, 2015.
As per the Listing Regulations, all listed entities are required to frame various policies which are detailed
below:
B. Gist of policies to be adopted
I. Policy for preservation of documents
II. Policy for determining material subsidiary
III. Policy on materiality of related party transactions
IV. Policy for determination of materiality
V. Archival Policy
VI. Vigil Mechanism/ Whistle Blower policy
VII. Policy relating to remuneration of the directors, key managerial personnel and other employees
VIII. Policy on diversity of board of directors
Self-Instructional
63 Material
Indian Scenario,
C. Detailed notes on above policies
Corporation in I. Policy for preservation of documents [Regulation 9)]
Global Society
Objective: To classify the documents, records and registers of the Listed Company at least under two
NOTES categories:
a. to be preserved permanently
b. to be preserved for period of not less than 8 (eight) years.
The listed entity may preserve the above said documents in electronic mode.
II. Policy for determining material subsidiary [Regulation 16(1)(c]
Objective: To determine the material subsidiaries of a Listed Company and to provide the governance
framework for such subsidiaries.
“material subsidiary” shall mean a subsidiary, whose income or net worth exceeds 20% of the
consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately
preceding accounting year.
III. Policy on materiality of related party transactions and on dealing with related party
transactions [Regulation 23]
Objective: To ensure proper approval of related party transactions.
A transaction with a related party shall be considered material if the transaction(s) to be entered into
individually or taken together with previous transactions during a financial year, exceeds 10% of the
annual consolidated turnover of the listed entity as per the last audited financial statements of the
listed entity.
All related party transactions have to be previously approved by the audit committee and require
approval of the shareholders.
IV.Policy for determination of materiality [Regulation 30(4)(ii)]
Objective: To protect the confidentiality of material/price sensitive information of a Listed Company
Every listed entity has to make disclosures of any events or information which, in the opinion of the
board of directors of the listed company, is material.
Criteria for determination of materiality of events/ information:
a. the omission of an event or information, which is likely to result in discontinuity or alteration
of event or information already available publicly; or
b. the omission of an event or information is likely to result in significant market reaction if the
said omission came to light at a later date;
c. If, the above two clauses are not applicable, an event/information may be treated as being
material if in the opinion of the board of directors of listed entity, the event / information is
considered material.
V.Archival Policy [Regulation 30(8)]
Objective: To ensure that all the information which, has been disclosed to stock exchange(s) under this
regulation and such information which in the opinion of the board of directors of a listed company, is
material has to be made available on the Company’s website for public/members.
The material information of a listed company shall be hosted on its website for a minimum period
of 5 (five) years and thereafter will be archived for a further period as specified in its Archival Policy.
VI. Vigil Mechanism/ Whistle Blower Policy [ Regulation 22
Objective: The Vigil Mechanism/Whistle Blower Policy is implemented to safeguard the unethical
practices and to provide mechanism for reporting genuine concerns or grievances.
Every listed entity has to formulate a vigil mechanism for directors and employees to report
genuine concerns.
The vigil mechanism has to provide for adequate safeguards against victimization of
director(s) or employee(s) or any other person who avail the mechanism and also provide for direct
access to the chairperson of the audit committee in appropriate or exceptional cases.
Self-Instructional
Material 64
VII. Policy relating to remuneration of the directors, key managerial personnel and other Indian Scenario,
employees [Schedule II & PART D] Public Policies SEBI,
Corporation in
The Nomination and Remuneration Committee of every listed company has to recommend to its board of Global Society
directors, a policy relating to remuneration of the directors, key managerial personnel and other
employees. NOTES
Nomination and Remuneration Committee
Every listed company has to set up a Nomination and Remuneration committee comprising at least
three directors, all of whom shall be non-executive directors and at least half shall be independent.
Chairman of the committee shall be an independent director.
Role of Nomination and Remuneration Committee:
1. formulation of the criteria for determining qualifications, positive attributes and independence of
a director and recommend to the board of directors a policy relating to, the remuneration of
the directors, key managerial personnel and other employees;
2. formulation of criteria for evaluation of performance of independent directors and the board
of directors;
3. devising a policy on diversity of board of directors;
4. identifying persons who are qualified to become directors and who may be appointed in
senior management in accordance with the criteria laid down, and recommend to the board of
directors their appointment and removal.
5. whether to extend or continue the term of appointment of the independent director, on the
basis of the report of performance evaluation of independent directors.
VIII. Policy on diversity of board of directors
Objective: To enhance the effectiveness of the Board by diversifying its composition and to obtain
the benefit out of such diversity in better and improved decision making.
In order to ensure that the Company’s boardroom has appropriate balance of skills,
experience and diversity of perspectives that are imperative for the execution of its business strategy,
the Company shall consider a number of factors, including but not limited to skills, industry
experience, background, race and gender.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
BSE has vide its Circulars dated November 30, 2015, March 11, 2016, March 16, 2016 and January 18,
2017 intimated the listed companies regarding mandatory filing of information with the exchange in
electronic mode. BSE has now with a view to make the disclosure more accurate and efficient mandated
the filing of the following regulations in XBRL:-
1. Corporate Governance (Regulation 27)
2. Shareholding Pattern (Regulation 31)
3. Voting Results (Regulation 44)
It has also been decided that with effect from April 01, 2017 onwards, all listed entities with BSE,
would be required to make their filings in respect of financial results (Regulation 33 and Regulation
52) in XBRL mode within 24 hours of submission of results in PDF mode. This requirement however,
would not apply to insurance companies which can continue to make their filings for financial results
in PDF mode only.
Financial Results are required to be submitted along with the Limited Review Report / Audit
Report first, in PDF mode through the Listing Centre website – Corporate Announcement Filing System
(CAFS) within 30 minutes of the conclusion of the Board Meeting.
This is required to be followed by filing of the result in XBRL mode within 24 hours from the
conclusion of the Board Meeting.
It has been clarified that filing of Financial Results (Regulation 33 and Regulation 52) in
other mode would be treated as non-submission and may attract penalties as prescribed by SEBI in
the SOP circular dated November 30, 2016.
Material
Indian Scenario,
Listing of Non - Convertible Redeemable Preference Shares (NCRPS) / Non - Convertible Debentures
Corporation in (NCDs) through a Scheme of Arrangement
Global Society 1. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 places
obligations with respect to Scheme of Arrangement on Listed Entities and Stock
NOTES Exchange(s).
2. Sub - rule (7) of rule 19 of the Securities Contracts (Regulation) Rules, 1957 gives power to
Securities and Exchange Board of India (SEBI) to relax provisions and lay down the detailed
requirement to be complied with by listed entities while undertaking schemes of arrangement
for listing of Equity or Warrants pursuant to the Scheme.
3. In cases where NCRPS/NCDs are issued, in lieu of specified securities, vide a scheme of
arrangement; and where such NCRPS/NCDs are proposed to be listed on recognised Stock
Exchanges, the listed entity shall comply with the some additional requirements.
However additional conditions have to be complied before the Scheme of arrangement is
submitted for sanction by the National Company Law Tribunal (NCLT) as per the said circular.
CORPORATE SOCIAL RESPONSIBILITY (CSR)
Corporate Social Responsibility (CSR) is organisation’s performance against economic, social and
environmental parameters. The theory behind CSR is that companies can be profitable while at the
same time minimize their negative impact on the stakeholders. Many studies were conducted to
understand whether ethics pay and found a positive correlation between better financial performance
and better social performance. In recent years CSR has become an independent business practice and
has gained much attention of chief executives, board of directors and executive management teams of
larger companies. They understand that a strong CSR program is an essential element in achieving
good business practice and effective leadership. Companies have understood that their impact on the
economic, social and environmental landscape directly affects their relationship with stakeholders,
investors, employees, customers, business partners, government and communities. Requirement for
CSR Audit and reporting: Social responsibility is a major concern for management from a reputation
risk perspective. Typically, reputation risk is associated with fraudulent reporting, regulatory actions
against a company, or misconduct of individual officers (for example, personal tax fraud). However
the scope of social responsibility has been expanding continuously to include several aspects that are
perceived by the public to be the social impact of business actions. Such initiatives are also subject to
internal controls and should be considered for periodic review of their accounting and oversight
processes. The audit interlaid would encompass whether the target corporate has formulated CSR
policy which adequately addresses the CSR concerns, whether adequate resources were provided,
whether proper internal control systems were adopted, whether safety measures required if any were
taken, whether the corporate has been able to fulfill their social responsibility in an effective and
efficient manner. Recognition of CSR reporting in global: In the post-Enron era, the number of
companies reporting their social and environmental impact on society has increased immeasurably. CSR
reporting is akin to reporting financials, but rather than focusing on the numbers (i.e. profits), there is
an emphasis on the people and planet impacts. From the information gathered by the writer, presently
environmental reporting is mandatory for public corporations in Sweden, Norway, Netherlands, Denmark,
France and Australia. Although Japan and the U.K. do not have mandatory CSR disclosures, most
companies in these countries choose to participate. Despite the lack of regulations in the United
States requiring companies to disclose, increasingly more and more companies are issuing CSR
reports for a variety of reasons. Research suggest that there are three main theories for this
increasing trend
a. to manage the perceptions of key stakeholders;
b. to convey the organization’s values to the public,
c. to establish that the organization’s activities are in line with social norms.
CSR activities and reporting requirement in India: Corporate Social Responsibility is not a new
concept in India. Corporates like the Tata, the Aditya Birla, Indian Oil Corporation and Reliance to name
a few, have been involved in serving the community to the extent possible since long time. Many
more organisations have been doing their part services through donations and charity events. Some
of the big corporates in India have set up CSR policy, their vision and mission beside giving sufficient
Self-Instructional support to ensure to adhere to the policies, creating internal controls, audit and reporting. The
Material parliamentary
panel has recommended having a clause in the Companies Bill, 2011 that makes it mandatory for Indian Scenario,
companies to contribute to corporate social responsibility initiatives and report on their performance Public Policies SEBI,
including giving an explanation if they cannot perform Corporation in
Global Society
CORPORATE GOVERNANCE — IN GLOBAL SOCIETY AND NOTES

THE ENVIRONMENT
Our societies are all scarred by Milton Friedman’s creed that “the social responsibility of business is
to increase its profits”; our economies are all wounded by corporations’ obsessive pursuit for short-
term profit maximization; regrettably, we all pay the price of dodgy and excessive corporate risk taking at
the expense of long-term reasonable wealth creation and distribution.
“After the financial crisis, there has been considerable debate about the role of
corporations in society. It has become broadly accepted that corporations – particularly
the world’s largest publicly traded corporations – need to be governed with respect for
the society and the environment. This is because corporations are dependent on the
broader institutional and systemic framing for their long-term survival and because the most
pressing of society’s problems cannot be solved without a contribution from corporations
or by regulation alone. However, this consensus has not yet been reflected in mainstream
corporate governance models that have been narrowing since the 1970s in order to put
the maximisation of shareholder value at the centre of corporate attention.”
Compared to just a decade ago, it is now common for businesspeople to talk about social
responsibility and the importance of being good corporate citizens. Many business leaders today consider
it critical to engage with shareholders, the communities in which their companies operate, and others
affected by and interested in what they do. The diverse activities needed to respond to these
expanded duties are widely referred to by the catchall phrase “corporate social responsibility.” It
incorporates a host of concepts and practices, including the necessity for adequate corporate
governance structures, the implementation of workplace safety standards, the adoption of
environmentally sustainable procedures, and philanthropy.
Blanketing these various responsibilities with the single term “corporate social responsibility” is
an oversimplification that has led to a great deal of confusion. It is necessary to distinguish between
the different types of corporate activities, so that the work companies do to engage in society is fairly
recognized and appreciated and companies are better able to benchmark themselves against the
performance of different enterprises and learn from example. A better understanding of engagement
requires separate definitions for corporate governance, corporate philanthropy, and corporate social
responsibility as well as for an emerging element: corporate social entrepreneurship, that is, the
transformation of socially responsible principles and ideas into commercial value.
Above all, a new imperative for business, best described as “global society must be
recognized. It expresses the conviction that companies not only must be engaged with their
stakeholders but are themselves stakeholders alongside governments and civil society.
SUMMARY
In this units organizational framework for corporate governance initiatives in India consists of the
Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). SEBI
monitors and regulates corporate governance of listed companies in India through Clause 49. This
clause is incorporated in the listing agreement of stock exchanges with companies and it is
compulsory for listed companies to comply with its provisions. MCA through its various appointed
committees and forums such as National Foundation for Corporate Governance (NFCG), a not-for-profit
trust, facilitates exchange of experiences and ideas amongst corporate leaders, policy makers, regulators,
law enforcing agencies and non- government organizations.it is important to have rules in place for
all companies to ensure a truly level playing field, and to avoid competition issues of forum shopping for
stock exchanges. Market regulators and operators should engage and work with governments in this
regard.
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Indian Scenario,
Public Policies SEBI, QUESTIONS
Corporation in
Global Society
Conceptual Type
NOTES 1. What is Indian scenario of CG?
2. What is SEBI?
3. What is corporate social Responsibility?
4. What is Globe Society?
Analytical Type
1. What is Indian scenario of CG? Discuss
2. What are the various policies framed as per SEBI Regulation, 2015? Discuss
3. What is corporate Social Responsibility?
4. How to help the Corporate Governance in Global Society?
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UNIT 5 SOCIAL RESPONSIBILITY: CS IN INDIA, USA Social Responsibility:
CS in India, USA and
AND OTHER COUNTRIES, CSR LAWS IN INDIA other Countries, CSR
Laws in India
Structure NOTES
What is CSR?
For Whom it's Applicable?
What to do when CSR is Applicable?
The Objectives of the Policy
The Concept of CSR in India
The Key Components of CSR would therefore Include the Following
Corporate Social Responsibility
Other Countries
Corporate Social Responsibility under Companies Act
Summary
Answers
LESSON OUTLINE
• Introduction
• Corporate social responsibility.
• What is CSR?
• For whom it's Applicable.
• What to do when CSR is Applicable.
• The objectives of the policy.
• Definition of CSR.
• Key components of CSR in India
• Social Responsibility - Introduction of India, USA & bother countries.
• Responsibility in different countries
• Social Responsibility under company ACT.
LEARNING OBJECTIVES

• Meaning and Definition of Social Responsibility
• What is CSR? Meaning and Definition
• Social Responsibility of USA& bother countries
• What are the Responsibility under company ACT
INTRODUCTION
As the term “CSR” is used continually, many complementary and overlapping concepts, such as corporate
citizenship, business ethics, stakeholder management and sustainability, have emerged. These extensive
ranges of synonymously used terms indicate that multiple definition have been devices for CSR
mostly from different perspectives and by those in facilitating roles such as the corporate sector,
government agencies, academics and the public sector. A widely cited definition of CSRin the
business and social context has been given by the European Union (EU). It describes CSR as “the
concept that an enterprise is accountable for its impact on all relevant stakeholders. It is the continuing
commitment by business to behave fairly and responsibly, and contribute to economic development
while improving the quality of life of the work force and their families as well as of the local community
and society at large…1” In other
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Social Responsibility:
words, CSR refers to ensuring the success of the business by inclusion of social and environmental
other Countries, CSR considerations into a company’s operations. It means satisfying your shareholders’ and customers’
Laws in India demands while also managing the expectation of other stakeholders such as employees, suppliers and
the community at large. It also means contributing positively to society and managing your
NOTES organization’s environmental impact.2 Hence, CSR is a contribution to
Sustainable development, implying the way a company balances its economic, environmental
and social objectives while addressing stakeholder expectations and enhancing shareholder value. CSR
not only includes the activities that a company undertakes in order to utilize their profit to enable
social and environmental development, but also includes the methods that a company employs these
profit including responsible investments, and transparency to various stakeholders among others.
Realizing the importance and the long term benefits of being socially responsible many company have
incorporated socially responsible business practices. The basic objective of CSR is to maximize the
company’s overall impact on the society and stakeholders while considering environment and overall
sustainability.
WHAT IS CSR?
The term “Corporate Social Responsibility (CSR)” can be referred as corporate initiative to assess
and take responsibility for the company’s effects on the environment and impact on social welfare.
The term generally applies to companies efforts that go beyond what may be required by regulators or
environmental protection groups. Corporate social responsibility may also be referred to as “corporate
citizenship” and can involve incurring short-term costs that do not provide an immediate financial benefit
to the company, but instead promote positive social and environmental change. Moreover, while
proposing the Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013,
the Chairman of the CSR Committee mentioned the Guiding Principle as follows: “CSR is the
process by which an organization thinks about and evolves its relationships with stakeholders for the
common good, and demonstrates its commitment in this regard by adoption of appropriate business
processes and strategies. Thus CSR is not charity or mere donations. CSR is a way of conducting
business, by which corporate entities visibly contribute to the social good. Socially responsible
companies do not limit themselves to using resources to engage in activities that increase only their
profits. They use CSR to integrate economic, environmental and social objectives with the company’s
operations and growth3 .”
FOR WHOM IT’S APPLICABLE?
The companies on whom the provisions of the CSR shall be applicable are contained in Sub Section 1 of
Section 135 of the Companies Act, 2013. As per the said section, the companies having Net worth of INR
500 crore or more; or Turnover of INR 1000 crore or more; or Net Profit of INR 5 crore or more during
any financial year shall be required to constitute a Corporate Social Responsibility Committee of the
Board “hereinafter CSR Committee” with effect from 1st April, 2014. The pictorial representation below
gives the representation of Section 135 (1).
The above provision requires every company having such prescribed Net worth or Turnover
or Net Profit shall be covered within the ambit of CSR provisions. The section has used the word
“companies” which connotes a wider meaning and shall include the foreign companies having branch
or project offices in India.
WHAT TO DO WHEN CSR IS APPLICABLE?
Once a company is covered under the ambit of the CSR, it shall be required to comply with the provisions
of the CSR. The companies covered under the Sub section 1 of Section 135 shall be required to do
the following activities:
1. As provided under Section 135(1) itself, the companies shall be required to Constitute Corporate
Social Responsibility Committee of the Board “hereinafter CSR Committee”. The CSR
Committee shall be comprised of 3 or more directors, out of which at least one director shall be an
independent director.
2. The Board’s report shall disclose the compositions of the CSR Committee.
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3. All such companies shall spend, in every financial year, at least two per cent of the average Social Responsibility:
net profits of the company made during the three immediately preceding financial years, in CS in India, USA and
pursuance of its Corporate Social Responsibility Policy. It has been clarified that the average other Countries, CSR
net profits shall be calculated in accordance with the provisions of Section 198 of the Companies Laws in India
Act, 2013. Also, proviso to the Rule provide 3(1) of the CSR Rules that the net worth, turnover
or net profit of a foreign company of the Act shall be computed in accordance with balance sheet NOTES
and profit and loss account of such company prepared in accordance with the provisions of
clause (a) of sub-section (1) of section 381 and section 198 of the Companies Act, 2013
THE OBJECTIVES OF THE POLICY

1. This Policy shall be read in line with Section 135 of the Companies Act 2013, Companies
(Corporate Social Responsibility Policy) Rules, 2014 and such other rules, regulations,
circulars, and notifications (collectively referred hereinafter as Regulations‘) as may be
applicable and as amended from time to time and will, inter-alia, provide for the following:
• Establishing a guideline for compliance with the provisions of Regulations to dedicate a
percentage of Company‘s profits for social projects.
• Ensuring the implementation of CSR initiatives in letter and spirit through appropriate
procedures and reporting
• Creating opportunities for employees to participate in socially responsible
initiatives. Definitions
In this Policy unless the context otherwise requires:
(a) “Act” means the Companies Act, 2013;
(b) “Annexure” means the Annexure appended to these rules;
(c) “Corporate Social Responsibility (CSR)” means and includes but is not limited to
(i) Projects or programs relating to activities specified in Schedule VII to the Act or
(ii) Projects or programs relating to activities undertaken by the board of directors of
a company (Board) in pursuance of recommendations of the CSR Committee of
the Board as Per declared CSR Policy of the company subject to the condition that
such policy will cover subjects enumerated in Schedule Vll of the Act.
(d) “CSR Committee” means the Corporate Social Responsibility Committee of the Board
referred to in section 135 of the Act
(e) “CSR Policy” relates to the activities to be undertaken by the company as specified in
Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in
pursuance of normal course of business of a company.
(f) “Net profit” means the net profit of a company as per its financial statement prepared in
accordance with the applicable provisions of the Act, but shall not include the following,
namely :-
(i) Any profit arising from any overseas branch or branches of the company’
whether operated as a separate company or otherwise;
(ii) Any dividend received from other companies in India, which are covered under and
complying with the provisions of section 135 of the Act: Provided that net profit in
respect of a financial year for which the relevant financial
2. Words and expressions used and not defined in these rules but defined in the Act shall have
the same meanings respectively assigned to them in the Act.
THE CONCEPT OF CSR IN INDIA
The emerging concept of Corporate Social Responsibility (CSR) goes beyond charity and requires
the company to act beyond its legal obligations and to integrated social, environmental and ethical
concerns into company’s business process.
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Material
Business has today, emerged as one of the most powerful institutions on the earth. Some of
other Countries, CSR the biggest companies in the world are in fact, bigger in size than some of the developing countries
Laws in India of the world. Globalization makes the world smaller, and business, worldwide, is expanding like never
before. Companies are expanding their operations and crossing geographical boundaries.
NOTES Indian companies too have made their way into the business boom and are today globally
acknowledged as major players. India is currently amongst the fastest growing countries in the
world. The globalization and liberalization of the Indian economy has helped in stepping up growth
rates. Integration of the Indian with the global economy has also resulted in Indian businesses
opening up to international competition and thereby increasing their operations.
In the current scheme of things, business enterprises are no longer expected to play their traditional
role of mere profit making enterprises. The ever-increasing role of civil society has started to put pressure
on companies to act in an economically, socially and environmentally sustainable way.
The companies are facing increased pressure for transparency and accountability, being
placed on them by their employees, customers, shareholders, media and civil society.
Business does not operate in isolation and there is today, an increased realization that not only
can companies affect society at large, but they are also in a unique position to influence society and
make positive impact.
Milton Friedman, Nobel Laureate in Economics and author of several books wrote in 1970 in the
New York Times Magazine that “the social responsibility of business is to increase its profits” and “the
business of business is business”. This represented an extreme view that the only social
responsibility a law-abiding business has is to maximize profits for the shareholders, which were
considered the only stakeholders for the company. However, time has given the term ‘stakeholder’
wider connotations.
Edward Freeman defines, ‘a stakeholder in an organization is any group or individual who
can affect or is affected by the achievement of the organization’s objectives.’ Thus, the term
stakeholder includes (apart from shareholders), but not limited to, customers, employees, suppliers,
community, environment and society at large.
These and a host of other such ideas have given rise to the concept of Corporate
Social Responsibility (CSR). The concept of CSR goes beyond charity or philanthropy and requires the
company to act beyond its legal obligations and to integrate social, environmental and ethical
concerns into its business process. Business for Social Responsibility defines CSR as “achieving
commercial success in ways that honor ethical values and respect people, communities, and
the environment.
It means addressing the legal, ethical, commercial and other expectations that society has for
business and making decisions that fairly balance the claims of all key stakeholders. In its simplest terms
it is: “what you do, how you do it, and when and what you say.” A widely quoted definition by the World
Business Council for Sustainable Development states that ”Corporate social responsibility is the
continuing commitment by business to behave ethically and contribute to economic development
while improving the quality of life of the workforce and their families as well as of the local
community and society at large”.
Though, there is no universal definition of CSR but the common understanding amongst most of
these definitions concern with how the profits are made and how they are used, keeping in mind the
interests of all stakeholders. The concept of Corporate Social Responsibility is constantly evolving.
The emerging concept of CSR goes beyond charity and requires the company to act beyond
its legal obligations and to integrate social, environmental and ethical concerns into company’s
business process. What is generally understood by CSR is that the business has a responsibility –
towards its stakeholders and society at large – that extends beyond its legal and enforceable
obligations.
The triple bottom line approach to CSR emphasizes a company’s commitment to operating in an
economically, socially and environmentally sustainable manner. The emerging concept of CSR advocates
moving away from a ‘shareholder alone’ focus to a ‘multi-stakeholder’ focus. This would include
investors, employees, business partners, customers, regulators, supply chain, local communities, the
environment and society at large.
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THE KEY COMPONENTS OF CSR WOULD THEREFORE CS in India, USA and
INCLUDE THE FOLLOWING other Countries, CSR
Laws in India
Corporate
NOTES
Governance: Within the ambit of corporate governance, major issues are the accountability, transparency
and conduct in conformity with the laws. Good corporate governance policy would enable the company
to realize its corporate objectives, protect shareholder rights, meet legal requirements and create
transparency for all stakeholders.
Business Ethics: Relates to value-based and ethical business practices. ‘Business ethics defines how
a company integrates core values – such as honesty, trust, respect, and fairness – into its policies,
practices, and decision making. Business ethics also involves a company’s compliance with legal
standards and adherence to internal rules and regulations.’1
Workplace and labour relations: Human resources are most important and critical to a company. Good
CSR practices relating to workplace and labour relations can help in improving the workplace in terms of
health and safety, employee relations as well as result in a healthy balance between work and non-
work aspects of employees’ life. It can also make it easier to recruit employees and make them stay
longer, thereby reducing the costs and disruption of recruitment and retraining.
Affirmative action/good practices: Equal opportunity employer, diversity of workforce that
includes people with disability, people from the local community etc., gender policy, code of
conduct/guidelines on prevention of sexual harassment at workplace, prevention of HIV/AIDS at
workplace, employee volunteering etc. are some of the good practices which reflect CSR practices of
the company.
Supply Chain: The business process of the company is not just limited to the operations internal to
the company but to the entire supply chain involved in goods and services. If anyone from the supply
chain neglects social, environmental, human rights or other aspects, it may reflect badly on the
company and may ultimately affect business heavily. Thus, company should use its strategic position
to influence the entire supply chain to positively impact the stakeholders.
Customers: The products and services of a company are ultimately aimed at the customers. The cost and
quality of products may be of greatest concern to the customers but these are not the only aspects
that the customers are concerned with. With increased awareness and means of communication,
customer satisfaction and loyalty would depend on how the company has produced the goods and
services, considering the social, environmental, supply-chain and other such aspects.
Environment: Merely meeting legal requirements in itself does not comprise CSR but it requires
company to engage in such a way that goes beyond mandatory requirements and delivers
environmental benefits. It would include, but not limited to, finding sustainable solutions for natural
resources, reducing adverse impacts on environment, reducing environment-risky
pollutants/emissions as well as producing environment-friendly goods.
Community: A major stakeholder to the business is the community in which the company operates. The
involvement of a company with the community would depend upon its direct interaction with the
community and assessment of issues/risks faced by those living in the company surrounding areas.
This helps in delivering a community-focused CSR strategy – making positive changes to the lives of
the people and improving the brand-image of the company. Involvement with the community could
be both direct & indirect – through funding and other support for community projects implemented by
local agencies.
CORPORATE SOCIAL RESPONSIBILITY

Introduction of India, USA and other Major Countries
CSR is increasingly integrated as a business strategy and has maintained a proper place in the
policies and practices around the globe. A number of factors are supplementing the awareness about CSR
in a corporate setting. At an international level, a number of multi-stakeholder firms, non-profit
organizations as well as inter-governmental organizations are taking initiatives to adopt CSR as an
integral part of
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their business processing’s. The organizations are adopting CSR as a part of their policy matters to
other Countries, CSR increase the demands and interest of different stakeholders and to enhance the competition to access
Laws in India the global market and satisfying the needs of society. Corporate social responsibility (CSR) in
different countries
NOTES In major markets of the world, the corporate social responsibility is not a new term. In the last
decade, the social media has come up with a number of ideas and opportunities for the companies to get
creative with the initiative of CSR and examine this new kind of engagement. On the whole, the CSR
industry continued to gain a grip with an impressive social impact, making its way to transparency.
At the same time, the rich data and communication technologies have helped the companies
to deal with environmental and social issues. The experts believe that smart devices with rich data
sources are better in exchanging knowledge and these advanced technologies have helped to solve
bigger issues, around the globe.
The corporate social responsibility has become complete decree.
The Committee Encouraging Corporate Philanthropy has seen a prominent trend, around the
globe, that certain regions of the world have obliged certain aspects of the corporate social engagement.
The corporate entities that have current or about to grow multi-national footprint are in need of
understanding this emerging landscape while addressing their social investment programs and the
support compliance. In some emerging markets like Indonesia and Brazil, there are regulations that
determine a particular type or level of corporate social investments.
In most parts of the world, the minorities are another most focused part of the society, when it
comes to the appreciation of the CSR. There are a number of recorded initiatives, focused on the
empowerment of girls and women rights. At the same time, the social impact has made its way to
recommence and become a mission card. Professional on social network seemed to be more willing
to volunteer their skills to induce a positive impact on the society and their circle.
To the fact, CSR has a huge impact on the climatic changed and the global environment on
the whole. At the time when the global industries like textile are working keenly on the idea of
sustainability in their production, the results are remarkable and come up with a massive positive impact
on the society and the global climate on the whole. There are a number of big trends that are on the go,
focusing on the climatic measurement and changes.
The concept of Corporate Social Responsibility say that it is positive step in the sense that it helps
the company make long term profits while doing some social good as well. This statement is rebutted
by saying that too much work would just distract the company from achieving its main aim of profit
making. Studies have proved that when a model for corporate social responsibility is properly
executed, it has a neutral effect on the financial outcome.
The United Nations Industrial Development Organization defines corporate social
responsibility as “a management concept whereby companies integrate social and environmental
concerns in their business operations and interactions with their stakeholders.”
The world has become more and more aware. All the major players have been contributing to the
society in one way or another. If we take the example of India, Aptech, a leading education player with a
global presence that has played a broad and continued role in encouraging and nurturing education
throughout the country since its inception. As a global player with complete solutions-providing
capabilities, Aptech has a long history of participating in community activities. It has, in association
with leading NGOs, provided computers at schools, education to the deprived, and training and
awareness- camps.
This concept of Corporate Social Responsibility has been introduced all across the globe.
Different countries have different ways of application. What is common is that all the countries use
the LBG model to assess the real value and impact of their community investment to both, the business
and society.
When we talk about Corporate Social Responsibility (CSR), it is understood that it is
executed after a lot of planning and strategising.
Here is a brief comparison of the CSR regulation across the globe!
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(1) In USA Social Responsibility:
The Corporate Social Responsibility (CSR) team in the Bureau of Economic and Business Affairs leads CS in India, USA and
other Countries, CSR
the Department’s engagement with U.S. businesses in the promotion of responsible and ethical business Laws in India
practices. The mission of the CSR office is to:
• Promote a holistic approach to CSR to complement the EB Bureau’s mission of building economic NOTES
security and fostering sustainable development at home and abroad.
• Provide guidance and support for American companies engaging in socially responsible, forward-
thinking corporate activities that complement U.S. foreign policy and the principles of the
Secretary’s Award for Corporate Excellence program.
• Build on this synergy, working with multinational companies, civil society, labour groups,
environmental advocates, and others to encourage the adoption of corporate policies that help
companies “do well by doing good.”
(2)In UK
It is a part of Corporate Governance. The Companies Act 2006 has now added to those pressures by
requiring directors to have regard to community and environmental issues when considering their
duty to promote the success of their company and by the disclosures to be included in the Business
Review. CSR is, now, an integral part of good governance, for bigger companies in particular.
(3) In Europe
The European Commission’s CSR agenda for action is:
• Enhancing the visibility of CSR and disseminating good practices.
• Improving and tracking levels of trust in business.
• Improving self and co-regulation processes.
• Enhancing market reward for CSR
• Improving company disclosure of social and environment information.
• Further integrating CSR into education, training and research.
• Emphasising the importance of national and sub-national CSR policies.
• Better aligning European and global approaches to CSR.
The CSR strategy is built upon guidelines and principles laid down by the United Global Compact,
United Nations Guiding Principles on Business and Human Rights, ISO 26000 Guidance Standard
on Social Responsibility and OECD Guidelines for Multinational Enterprises.
(4) In India
CSR in India has traditionally been seen as a philanthropic activity. And in keeping with the Indian
tradition, it was an activity that was performed but not deliberated. In 2014, India became the first
country in the world to have a mandatory CSR contribution legislation. In India, the concept of CSR
is governed by clause 135 of the Companies Act, 2013, which was passed by both Houses of the
Parliament, and had received the assent of the President of India on 29 August 2013. The CSR provisions
within the Act is applicable to companies with an annual turnover of 1,000 crore INR and more, or a net
worth of 500 crore INR and more, or a net profit of five crore INR and more. The new rules, which will be
applicable from the fiscal year 2014-15 onwards, also require companies to set-up a CSR committee
consisting of their board members, including at least one independent director. The Act encourages
companies to spend at least 2% of their average net profit in the previous three years on CSR
activities.
Other Countries
CSR in Australia
“Social responsibility is the responsibility of an organization for the impacts of its decisions and activities
on society and the environment, through transparent and ethical behaviour that:
Contributes to sustainable development, including the health and the welfare of society
• Takes into account the expectations of stakeholders
• Is in compliance with applicable law and consistent with international norms of behaviour, and Is
integrated throughout the organization and practiced in its relationships.”
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Corporate Social Responsibility or CSR has been debated since the early twentieth century, but there
other Countries, CSR has been little agreement over its definition due to:
Laws in India • Differences in national and cultural approaches to business
NOTES • Differences in motivation for CSR – doing it because it is morally correct or doing it because
it makes good business sense
• Differences in disciplinary backgrounds, perspectives and methods of scholars engaged with
CSR
Business View of CSR
Business leaders and management scholars have generally understood CSR as a response to business
failures that have accompanied the astonishing growth in size, impact and power of modern corporations.
That growth is characterized by the separation of ownership from control and the rise of modern
management techniques. While modern management has created great efficiencies, it has also led to
a dilution of individual responsibility that is generally only visible when business gets into strife.
Business failures in Australia, such as Australia’s then biggest corporate collapse of HIH in
2001, together with crises in corporate accountability, such as the machinations of James Hardie to
avoid liability for asbestos compensation by former workers, have led to a greater questioning here
of the nature of corporate responsibilities.
Business leaders deal with CSR issues through specialist business organizations such as the
Global Reporting Initiative, the UN Global Compact and the World Business Council for Sustainable
Development. In contrast, scholarship related to CSR draws from many areas, including
management, ethics, psychology, sociology, finance and accounting, sustainability, public affairs and
communications.
CSR in Canada
Canada’s enhanced Corporate Social Responsibility (CSR) Strategy, “Doing Business the Canadian
Way: A Strategy to Advance Corporate Social Responsibility in Canada’s Extractive Sector Abroad”
builds on experience and best practices gained since the 2009 launch of Canada’s first CSR strategy,
“Building the Canadian Advantage: A Corporate Social Responsibility Strategy for the Canadian
Extractive Sector Abroad.”
The enhanced Strategy, announced on November 14, 2014, clearly demonstrates the Government
of Canada’s expectation that Canadian companies will promote Canadian values and operate abroad
with the highest ethical standards. It also outlines the Government’s initiatives to help Canadian
companies strengthen their CSR practices and maximize the benefits their investments can provide to
those in host countries.
Key elements of the enhanced CSR strategy include
Strengthened support for CSR initiatives at Canada’s diplomatic network of missions abroad, aimed
at ensuring a consistently high level of CSR-related service to the Canadian business community
around the world, building networks and local partnerships with communities, and reinforcing
Canadian leadership, excellence, and best practices in the extractives sector;
• Increased support and additional training for Canada’s missions abroad to ensure Trade
Commissioners and staff are equipped to detect issues early on and contribute to their resolution
before they escalate;
• Re-focusing the role of the Office of the CSR Counsellor, including strengthening its mandate to
promote strong CSR guidelines to the Canadian extractive sector and advising companies on
incorporating such guidelines into their operating approach. The CSR Counsellor will also build
on the work conducted at missions abroad by refocusing efforts on working to prevent,
identify and resolve disputes in their early stages;
• In situations where parties to a dispute would benefit from formal mediation, the CSR
Counselor will encourage them to refer their issue to Canada’s National Contact Point (NCP), the
robust and proven dispute resolution mechanism, guidedby the OECD Guidelines for
Multinational Enterprises on responsible business conduct, and active in 46 countries;
• Companies are expected to align with CSR guidelines and will be recognized by the CSR
Counselor’s Office as eligible for enhanced Government of Canada economic diplomacy. As
a
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penalty for companies that do not embody CSR best practices and refuse to participate in the Social Responsibility:
CSR Counselor’s Office or NCP dispute resolution processes, Government of Canada support in CS in India, USA and
foreign markets will be withdrawn; other Countries, CSR
Laws in India
• Inclusion of benchmark CSR guidance released since 2009, namely the United Nations’
Guiding Principles on Business and Human Rights, and the OECD Due Diligence Guidance for NOTES
Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas; and
• Flexibility to build awareness of a broader range of extractive sector-specific CSR guidance,
including those developed in Canada, e.g., the Mining Association of Canada’s Towards
Sustainable Mining, and the Prospectors and Developers Association of Canada’s e3 Plus.
CSR in United Arab Emirates
The concept of corporate social responsibility (CSR) in Dubai and the UAE has always been present
from the earliest Islamic times, with people and organizations practising Islamic values, donating through
philanthropy and Shariah compliant ways of commerce. In recent years, there have been worldwide
initiatives to invest responsibly and focus on investing profits into community life and saving the
environment.
CSR at government level
The UAE is among the countries in the region most interested in social welfare, through the provision of
various public services aimed at maintaining an advanced level of social and economic stability. This has
included the provision and development of infrastructure and municipal services, education and
health.
In the net shell, reviewing the past decade, we can see that the language of CSR is changing
for a good reason and the people are getting more and more aware as well as willing to implement
the idea. This search has led its way to new ideas and has developed an expectation of what a socially
responsible corporation has to be. The alarming situations in the global village are highly demanding
a strategic implementation of CSR into the society and demand the corporate entities to be an active
part of the ideology.
CORPORATE SOCIAL RESPONSIBILITY UNDER COMPANIES

ACT
Corporate Social Responsibility (CSR) assumes significance as it permits companies to engage in projects
or programs related to activities related to social welfare and improvement enlisted under the terms
of Companies Act, 2013. There is an element of flexibility in company activities by allowing them to
select their preferred CSR engagements that are in agreement with the overall CSR policy of the
company. In this article, we review the applicability of CSR, policy of CSR, role of Board of Directors
and activities of CSR.
Definition of Corporate Social Responsibility (CSR)
The term Corporate Social Responsibility or CSR has been defined as under, but is not limited to:
• Projects or programs with reference to activities that are specified in the Schedule; or
• Projects or programs related to activities undertaken by the Board in pursuance of
recommendations of the CSR Committee according to the declared CSR policy subject to the
condition that such policy covers subjects explained in the Schedule.
Applicability of Corporate Social Responsibility to Companies
Corporate Social Responsibility is required for all companies viz. private limited company, limited
company. The following companies are necessary to constitute a CSR committee:
• Companies with a net worth of Rs. 500 crores or greater, or
• Companies with a turnover of Rs. 1000 crores or greater, or
• Companies with a net profit of Rs. 5 crores or greater.
If any of the above financial strength criteria are met, the Corporate Social Responsibility (CSR)
provisions and related rules will be applicable to the company. These companies are required to form a
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CSR committee consisting of its directors. This committee oversees the entire CSR activities of the
other Countries, CSR Company.
Laws in India Note: Corporate Social Responsibility is a requirement for companies meeting the above criteria. On the other
hand, Section 8 Companies are incorporated solely for not-for-profit purposes.
NOTES Role of Board of Directors in CSR
The board of directors of a company plays a significant role in CSR activities of the company. The role
of Board is as follows:
• Approval of the CSR policy.
• Ensuring its implementation.
• Disclosure of the contents of CSR policies related to its report.
• Placing the same on Company’s website.
• Ensuring that statutory specified amount is spend by the company with reference to CSR activities.
• It’s significant to note that there is no penalty if the particular amount is not spent on CSR
activities. In such case, the board’s report must identify the reason for such short spending.
CSR Committee and Policy
All qualifying company required to have a CSR committee are required to spend at least 2% of its
average net profit for the directly preceding 3 financial years on CSR activities. Additionally, the
qualifying company shall be necessitated to comprise a committee (CSR Committee) of the Board of
Directors (Board) comprising of 3 or more directors. The CSR Committee will prepare and recommend to
the Board, a policy which will specify the activities to be undertaken (CSR Policy); advocate the amount
of expenditure to be incurred on the activities referred and monitor the CSR Policy related to the
company. The Board will take into account the recommendations made by the CSR Committee and
support the CSR Policy of the company.
Activities permitted under Corporate Social Responsibility (CSR)
The following activities can be performed by a company to accomplish its CSR obligations:
• Eradicating extreme hunger and poverty
• Promotion of education
• Promoting gender equality and empowering women
• Reducing child mortality
• Improving maternal health
• Combating human immunodeficiency virus, acquired, immune deficiency syndrome, malaria
and other diseases
• Ensuring environmental sustainability,
• Employment enhancing vocational skills, social business projects
• Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central
Government or the State Governments for socio-economic development, and
• Relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other
backward classes, minorities and women and such other matters as may be prescribed.
Importance to Local Areas and Neighborhoods
Under the terms of Companies Act, preference must be given by companies in its CSR activities to local
areas and the areas where the company operates. Company may possibly also choose to link with 2
or more companies for fulfilling the CSR activities provided that they are competent to report
individually. The CSR Committee will also prepare the CSR Policy in which it includes the projects and
programmers which is to be undertaken, organize a list of projects and programmers which a company
plans to embark on during the execution year and also focus on integrating business models with social
and environmental priorities and process for the reason of creating share value. The company can in
addition make the annual report of CSR activities in which they declare the average net profit for the
3 financial years and also approved CSR expenditure but if the company is not capable to spend
the minimum required
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expenditure the company has to provide the reasons in the Board Report for non-compliance so that Social Responsibility:
there are no related penal provisions. CS in India, USA and
other Countries, CSR
Laws in India
SUMMARY
NOTES
This unit is summarizing in the corporate social responsibility of the core stand of the Indian culture.
Corporate have Social Responsibility (CSR) targets to help to improve society living. CSR referring
to way that businesses are managed to bring about an overall positive impact on the communities,
cultures, societies and environments in which they are operate. A business doesn't exist in isolation
simply as a way of making money. Customers, Suppliers and local Community are all affected by
business. Corporate Social Responsibility takes all this into account and helps the business to create
and maintain effective relationship with your stakeholders. Much has been done in recent years to
make Indian Entrepreneurs aware of social responsibility as CSR is an important segment of their
business activity but CSR in India has yet to receive widespread recognition. Corporate Social
Responsibility (CSR) is a form of social obligation a Company towards society at large. The Indian
government has been trying to make it mandatory for companies to spend at least 2% of net profits
on CSR. In India, though the corporate understand their accountability towards the society and are
willing to take initiatives for the betterment, it becomes difficult for them to reach the grassroots
level. Corporate Social Responsibility Practices in India sets a realistic agenda of grassroots
development through alliances and partnerships with sustainable development approaches. Here
researcher is to study the Corporate social responsibility is must be essential and useful to current
scenarios in IT business sector with special reference to Infosys.
QUESTIONS
Conceptual Type
1. What is Social Responsibility?
2. What is CSR?
3. What is the component of CSR?
Analytical Type
1. What is Social Responsibility? Meaning & Definition
2. What is CSR and what are the Application.
3. What is the concept of CSR of India?
4. What are the key components of CSR?
5. What is the Social Responsibility of different countries?
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Corporate Governance

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CORPORATE GOVERNANCE

Name of the Study Matrial: Corporate Governance

Year of Print: 2020

No. of Copies: ******

Printed and Published by:

ABOUT THE UNIVERSITY

From the Director’s Desk

We wish you happy reading.

UNIT-1 CORPORATE GOVERNANCE: AN OVERVIEW AND HISTORICAL 3-22

THE OECD PRINCIPLES OF CORPORATE GOVERNANCE STATES

NEED FOR CORPORATE GOVERNANCE

PRINCIPLES OF CORPORATE GOVERNANCE

The fundamental or key principles of corporate governance are described below:

SEBI CODE OF CORPORATE GOVERNANCE

CORPORATE GOVERNANCE – HISTORY IN INDIA

CORPORATE GOVERNANCE IN INDIA PAST, PRESENT AND

PERSPECTIVE AND IMPORTANT ISSUES IN CORPORATE

CORPORATE GOVERNANCE-THEORY AND PRACTICE

Governance Linked with Competition

GOOD GOVERNANCE: MEANING AND CONCEPT

AGENCY THEORY IN CORPORATE GOVERNANCE

STEWARDSHIP THEORY OF CORPORATE GOVERNANCE

SHAREHOLDER & STAKEHOLDER THEORY OF CORPORATE

After going through this unit, you will be able to:

OBLIGATION TO INVESTORS, CUSTOMERS, EMPLOYEES,

Obligations Towards Owners or Shareholders

A LAND MARK IN INDIAN CORPORATE HISTORY

Executive Directors Profile

Source: Annual Report, 2000-01

*Susim M Datta retired from the board in 2000.

NATIONAL COMMITTEES ON CORPORATE GOVERNANCE

ISSUES IN CORPORATE GOVERNANCE PRACTICES IN INDIA

After going through this unit, you will be able to:

SHAREHOLDER RIGHTS UNDER COMPANIES ACT, 2013

RIGHTS AND PRIVILEGES OF COMMON STOCKHOLDERS NOTES

CORPORATE GOVERNANCE FROM THE INVESTOR’S

CORPORATE GOVERNANCE: DIRECTOR, AUDITOR AND BANK

ROLE AND RESPONSIBILITY OF BOARD OF DIRECTORS IN

EXHIBIT-GUIDELINES FOR DETERMINING INDEPENDENCE

After going through this unit, you will be able to:

PRESENT FRAMEWORK OF CORPORATE GOVERNANCE IN INDIAN

VARIOUS POLICIES TO BE FRAMED AS PER SEBI

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

CORPORATE SOCIAL RESPONSIBILITY (CSR)

CORPORATE GOVERNANCE — IN GLOBAL SOCIETY AND NOTES

After going through this unit, you will be able to:

FOR WHOM IT’S APPLICABLE?

WHAT TO DO WHEN CSR IS APPLICABLE?

THE OBJECTIVES OF THE POLICY

THE CONCEPT OF CSR IN INDIA

CORPORATE SOCIAL RESPONSIBILITY

CORPORATE SOCIAL RESPONSIBILITY UNDER COMPANIES

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