BBA III (Semester 6) Corporate Governance and Corporate Social Responsibility
Corporate Governance: Definition, Principles, Models, and Examples
Good corporate governance can benefit investors and other stakeholders, while bad governance can lead to scandal and ruin.
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Investopedia / Jessica Olah
What Is Corporate Governance?
Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, which can include shareholders, senior management, customers, suppliers, lenders, the government, and the community. As such, corporate governance encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
KEY TAKEAWAYS
- Corporate governance is the structure of rules, practices, and processes used to direct and manage a company.
- A company's board of directors is the primary force influencing corporate governance.
- Bad corporate governance can destroy a company's operations and ultimate profitability.
- The basic principles of corporate governance are accountability, transparency, fairness, responsibility, and risk management.
Understanding Corporate Governance
Governance refers to the set of rules, controls, policies, and resolutions put in place to direct corporate behavior. A board of directors is pivotal in governance, while proxy advisors and shareholders are important stakeholders who can affect governance.
Communicating a company's corporate governance is a key component of community and investor relations. For instance, Apple Inc.'s investor relations site profiles its corporate leadership (the executive team and board of directors) and provides information on its committee charters and governance documents, such as bylaws, stock ownership guidelines, and articles of incorporation.1
Most successful companies strive to have exemplary corporate governance. For many shareholders, it is not enough for a company to be profitable; it also must demonstrate good corporate citizenship through environmental awareness, ethical behavior, and other sound corporate governance practices.
Benefits of Corporate Governance
- Good corporate governance creates transparent rules and controls, guides leadership, and aligns the interests of shareholders, directors, management, and employees.
- It helps build trust with investors, the community, and public officials.
- Corporate governance can give investors and stakeholders a clear idea of a company's direction and business integrity.
- It promotes long-term financial viability, opportunity, and returns.
- It can facilitate the raising of capital.
- Good corporate governance can translate to rising share prices.
- It can reduce the potential for financial loss, waste, risks, and corruption.
- It is a game plan for resilience and long-term success.
Corporate Governance and the Board of Directors
The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members and charged with representing the interests of the company's shareholders.
The board is tasked with making important decisions, such as corporate officer appointments, executive compensation, and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder resolutions call for certain social or environmental concerns to be prioritized.
Boards are often made up of a mix of insiders and independent members. Insiders are generally major shareholders, founders, and executives. Independent directors do not share the ties that insiders have. They are typically chosen for their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interests with those of the insiders.
The board of directors must ensure that the company's corporate governance policies incorporate corporate strategy, risk management, accountability, transparency, and ethical business practices.
A board of directors should consist of a diverse group of individuals, including those with matching business knowledge and skills, and others who can bring a fresh perspective from outside the company and industry.
The Principles of Corporate Governance
While there can be as many principles as a company believes make sense, some of the most common ones are:
- Fairness: The board of directors must treat shareholders, employees, vendors, and communities fairly and with equal consideration.
- Transparency: The board should provide timely, accurate, and clear information about such things as financial performance, conflicts of interest, and risks to shareholders and other stakeholders.
- Risk Management: The board and management must determine risks of all kinds and how best to control them. They must act on those recommendations to manage risks and inform all relevant parties about the existence and status of risks.
- Responsibility: The board is responsible for the oversight of corporate matters and management activities. It must be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit and hire a chief executive officer (CEO). It must act in the best interests of a company and its investors.
- Accountability: The board must explain the purpose of a company's activities and the results of its conduct. It and company leadership are accountable for the assessment of a company's capacity, potential, and performance. It must communicate issues of importance to shareholders.
Corporate Governance Models
Different corporate governance models may be found throughout the world. Here are a few of them.
The Anglo-American Model
This model can take various forms, such as the Shareholder, Stewardship, and Political Models. The Shareholder Model is the principal model at present.
The Shareholder Model is designed so that the board of directors and shareholders are in control. Stakeholders such as vendors and employees, though acknowledged, lack control.
Management is tasked with running the company in a way that maximizes shareholder interest. Importantly, proper incentives should be made available to align management behavior with the goals of shareholders/owners.
The model accounts for the fact that shareholders provide the company with funds and may withdraw that support if dissatisfied. This is supposed to keep management working effectively.
The board will usually consist of both insiders and independent members. Although traditionally, the board chairperson and the CEO can be the same, this model seeks to have two different people hold those roles.
The success of this corporate governance model depends on ongoing communications among the board, company management, and the shareholders. Important issues are brought to shareholders' attention. Important decisions that need to be made are put to shareholders for a vote.
U.S. regulatory authorities tend to support shareholders over boards and executive management.
The Continental Model
Two groups represent the controlling authority under the Continental Model. They are the supervisory board and the management board.
In this two-tiered system, the management board is composed of company insiders, such as its executives. The supervisory board is made up of outsiders, such as shareholders and union representatives. Banks with stakes in a company also could have representatives on the supervisory board.
The two boards remain entirely separate. The size of the supervisory board is determined by a country's laws and can't be changed by shareholders.
National interests have a strong influence on corporations with this model of corporate governance. Companies can be expected to align with government objectives.
This model also greatly values the engagement of stakeholders, as they can support and strengthen a company's continued operations.
The Japanese Model
The key players in the Japanese Model of corporate governance are banks, affiliated entities, major shareholders called Keiretsu (who may be invested in common companies or have trading relationships), management, and the government. Smaller, independent, individual shareholders have no role or voice. Together, these key players establish and control corporate government.
Corporate Governance and the Board of Directors
The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members and charged with representing the interests of the company's shareholders.
The board is tasked with making important decisions, such as corporate officer appointments, executive compensation, and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder resolutions call for certain social or environmental concerns to be prioritized.
Boards are often made up of a mix of insiders and independent members. Insiders are generally major shareholders, founders, and executives. Independent directors do not share the ties that insiders have. They are typically chosen for their experience managing or directing other large companies. Independents are considered helpful for governance because
The Anglo-American Model
This model can take various forms, such as the Shareholder, Stewardship, and Political Models. The Shareholder Model is the principal model at present.
The Shareholder Model is designed so that the board of directors and shareholders are in control. Stakeholders such as vendors and employees, though acknowledged, lack control.
Management is tasked with running the company in a way that maximizes shareholder interest. Importantly, proper incentives should be made available to align management behavior with the goals of shareholders/owners.
The model accounts for the fact that shareholders provide the company with funds and may withdraw that support if dissatisfied. This is supposed to keep management working effectively.
The board will usually consist of both insiders and independent members. Although traditionally, the board chairperson and the CEO can be the same, this model seeks to have two different people hold those roles.
The success of this corporate governance model depends on ongoing communications among the board, company management, and the shareholders. Important issues are brought to shareholders' attention. Important decisions that need to be made are put to shareholders for a vote.
U.S. regulatory authorities tend to support shareholders over boards and executive management.
The Continental Model
Two groups represent the controlling authority under the Continental Model. They are the supervisory board and the management board.
In this two-tiered system, the management board is composed of company insiders, such as its executives. The supervisory board is made up of outsiders, such as shareholders and union representatives. Banks with stakes in a company also could have representatives on the supervisory board.
The two boards remain entirely separate. The size of the supervisory board is determined by a country's laws and can't be changed by shareholders.
National interests have a strong influence on corporations with this model of corporate governance. Companies can be expected to align with government objectives.
This model also greatly values the engagement of stakeholders, as they can support and strengthen a company's continued operations.
The Japanese Model
The key players in the Japanese Model of corporate governance are banks, affiliated entities, major shareholders called Keiretsu (who may be invested in common companies or have trading relationships), management, and the government. Smaller, independent, individual shareholders have no role or voice. Together, these key players establish and control corporate governance.
The board of directors is usually made up of insiders, including company executives. Keiretsu may remove directors from the board if profits wane.
The government affects the activities of corporate management via its regulations and policies.
In this model, corporate transparency is less likely because of the concentration of power and the focus on the interests of those with that power.
How to Assess Corporate Governance
As an investor, you want to select companies that practice good corporate governance in the hope that you can thereby avoid losses and other negative consequences such as bankruptcy.
You can research certain areas of a company to determine whether or not it's practicing good corporate governance.
Examples of Corporate Governance: Bad and Good
Bad corporate governance can cast doubt on a company's reliability, integrity, or obligation to shareholders. All can have implications for the financial health of the business.
What Is Corporate Governance?
Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, which can include shareholders, senior management, customers, suppliers, lenders, the government, and the community. As such, corporate governance encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
KEY TAKEAWAYS
- Corporate governance is the structure of rules, practices, and processes used to direct and manage a company.
- A company's board of directors is the primary force influencing corporate governance.
- Bad corporate governance can destroy a company's operations and ultimate profitability.
- The basic principles of corporate governance are accountability, transparency, fairness, responsibility, and risk management.
Understanding Corporate Governance
Governance refers to the set of rules, controls, policies, and resolutions put in place to direct corporate behavior. A board of directors is pivotal in governance, while proxy advisors
Benefits of Corporate Governance
- Good corporate governance creates transparent rules and controls, guides leadership, and aligns the interests of shareholders, directors, management, and employees.
- It helps build trust with investors, the community, and public officials.
- Corporate governance can give investors and stakeholders a clear idea of a company's direction and business integrity.
- It promotes long-term financial viability, opportunity, and returns.
- It can facilitate the raising of capital.
- Good corporate governance can translate to rising share prices.
- It can reduce the potential for financial loss, waste, risks, and corruption.
- It is a game plan for resilience and long-term success.
Corporate Governance and the Board of Directors
The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members and charged with representing the interests of the company's shareholders.
The board is tasked with making important decisions, such as corporate officer appointments, executive compensation, and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder resolutions call for certain social or environmental concerns to be prioritized.
Boards are often made up of a mix of insiders and independent members. Insiders are generally major shareholders, founders, and executives. Independent directors do not share the ties that insiders have. They are typically chosen for their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interests with those of the insiders.
The board of directors must ensure that the company's corporate governance policies incorporate corporate strategy, risk management, accountability, transparency, and ethical business practices.
A board of directors should consist of a diverse group of individuals, including those with matching business knowledge and skills, and others who can bring a fresh perspective from outside the company and industry.
The Principles of Corporate Governance
While there can be as many principles as a company believes make sense, some of the most common ones are:
- Fairness: The board of directors must treat shareholders, employees, vendors, and communities fairly and with equal consideration.
- Transparency: The board should provide timely, accurate, and clear information about such things as financial performance, conflicts of interest, and risks to shareholders and other stakeholders.
- Risk Management: The board and management must determine risks of all kinds and how best to control them. They must act on those recommendations to manage risks and inform all relevant parties about the existence and status of risks.
- Responsibility: The board is responsible for the oversight of corporate matters and management activities. It must be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit and hire a chief executive officer (CEO). It must act in the best interests of a company and its investors.
- Accountability: The board must explain the purpose of a company's activities and the results of its conduct. It and company leadership are accountable for the assessment of a company's capacity, potential, and performance. It must communicate issues of importance to shareholders.
Corporate Governance Models
Different corporate governance models may be found throughout the world. Here are a few of them.
The Anglo-American Model
This model can take various forms, such as the Shareholder, Stewardship, and Political Models. The Shareholder Model is the principal model at present.
The Shareholder Model is designed so that the board of directors and shareholders are in control. Stakeholders such as vendors and employees, though acknowledged, lack control.
Management is tasked with running the company in a way that maximizes shareholder interest. Importantly, proper incentives should be made available to align management behavior with the goals of shareholders/owners.
The model accounts for the fact that shareholders provide the company with funds and may withdraw that support if dissatisfied. This is supposed to keep management working effectively.
The board will usually consist of both insiders and independent members. Although traditionally, the board chairperson and the CEO can be the same, this model seeks to have two different people hold those roles.
The success of this corporate governance model depends on ongoing communications among the board, company management, and the shareholders. Important issues are brought to shareholders' attention. Important decisions that need to be made are put to shareholders for a vote.
U.S. regulatory authorities tend to support shareholders over boards and executive management.
The Continental Model
Two groups represent the controlling authority under the Continental Model. They are the supervisory board and the management board.
In this two-tiered system, the management board is composed of company insiders, such as its executives. The supervisory board is made up of outsiders, such as shareholders and union representatives. Banks with stakes in a company also could have representatives on the supervisory board.
The two boards remain entirely separate. The size of the supervisory board is determined by a country's laws and can't be changed by shareholders.
National interests have a strong influence on corporations with this model of corporate governance. Companies can be expected to align with government objectives.
This model also greatly values the engagement of stakeholders, as they can support and strengthen a company's continued operations.
The Japanese Model
The key players in the Japanese Model of corporate governance are banks, affiliated entities, major shareholders called Keiretsu (who may be invested in common companies or have trading relationships), management, and the government. Smaller, independent, individual shareholders have no role or voice. Together, these key players establish and control corporate governance.
The board of directors is usually made up of insiders, including company executives. Keiretsu may remove directors from the board if profits wane.
The government affects the activities of corporate management via its regulations and policies.
In this model, corporate transparency is less likely because of the concentration of power and the focus on the interests of those with that power.
How to Assess Corporate Governance
As an investor, you want to select companies that practice good corporate governance in the hope that you can thereby avoid losses and other negative consequences such as bankruptcy.
You can research certain areas of a company to determine whether or not it's practicing good corporate governance. These areas include:
- Disclosure practices
- Executive compensation structure (whether it's tied only to performance or also to other metrics)
- Risk management (the checks and balances on decision-making)
- Policies and procedures for reconciling conflicts of interest (how the company approaches business decisions that might conflict with its mission statement)
- The members of the board of directors (their stake in profits or conflicting interests)
- Contractual and social obligations (how a company approaches issues such as climate change)
- Relationships with vendors
- Complaints received from shareholders and how they were addressed
- Audits (the frequency of internal and external audits and how any issues that those audits raised have been handled)
Types of bad governance practices include:
- Companies that do not cooperate sufficiently with auditors or do not select auditors with the appropriate scale, resulting in the publication of spurious or noncompliant financial documents
- Executive compensation packages that fail to create an optimal incentive for corporate officers
- Poorly structured boards that make it too difficult for shareholders to oust ineffective incumbents.
Volkswagen AG
Tolerance or support of illegal activities can create scandals like the one that rocked Volkswagen AG starting in September 2015. The details of "Dieselgate" (as the affair came to be known) revealed that for years, the automaker had deliberately and systematically rigged engine emission equipment in its cars to manipulate pollution test results in the U.S. and Europe.
Volkswagen saw its stock shed nearly half its value in the days following the start of the scandal. Its global sales in the first full month following the news fell 4.5%.2
VW's board structure facilitated the emissions rigging and was a reason it wasn't caught earlier. In contrast to a one-tier board system common to most U.S. companies, VW had a two-tier board system consisting of a management board and a supervisory board, in keeping with the Continental Model of corporate governance.
The supervisory board was meant to monitor management and approve corporate decisions. However, it lacked the independence and authority to carry out these roles appropriately.
The supervisory board included a large portion of shareholders. Ninety percent of shareholder voting rights were controlled by members of the board. There was no real independent supervisor. As a result, shareholders were in control and negated the purpose of the supervisory board, which was to oversee management and employees, and how they operated. This allowed the rigged emissions to occur.
Enron
Public and government concern about corporate governance tends to wax and wane. Often, however, highly publicized revelations of corporate malfeasance revive interest in the subject.
For example, corporate governance became a pressing issue in the United States at the turn of the 21st century, after fraudulent practices bankrupted high-profile companies such as Enron and WorldCom.
The problem with Enron was that its board of directors waived many rules related to conflicts of interest by allowing the chief financial officer (CFO), Andrew Fastow, to create independent, private partnerships to do business with Enron.
These private partnerships were used to hide Enron's debts and liabilities. If they'd been accounted for properly, they would have reduced the company's profits significantly.3
Enron's lack of corporate governance allowed the creation of the entities that hid the losses. The company also employed dishonest people, from Fastow down to its traders, who made illegal moves in the markets.
The Enron scandal and others in the same period resulted in the 2002 passage of the Sarbanes-Oxley Act. It imposed more stringent recordkeeping requirements on companies and stiff criminal penalties for violating them and other securities laws. The aim was to restore confidence in public companies and how they operate.
PepsiCo
It's common to hear examples of bad corporate governance. In fact, it's often why companies end up in the news. You rarely hear about companies with good corporate governance because their corporate guiding policies keep them out of trouble.
One company that seems to have consistently practiced good corporate governance, and adapts or updates it often, is PepsiCo. In drafting its 2020 proxy statement, PepsiCo sought input from investors in six areas:
- Board composition, diversity, and refreshment, plus leadership structure
- Long-term strategy, corporate purpose, and sustainability issues
- Good governance practices and ethical corporate culture
- Human capital management
- Compensation discussion and analysis
- Shareholder and stakeholder engagement4
The company included in its proxy statement a graphic of its current leadership structure. It showed a combined chair and CEO along with an independent presiding director and a link between the company's "Winning With Purpose" vision and changes to the executive compensation program.4
What Are the 4 Ps of Corporate Governance?
The four P's of corporate governance are people, process, performance, and purpose.
Why Is Corporate Governance Important?
Corporate governance is important because it creates a system of rules and practices that determines how a company operates and how it aligns with the interest of all its stakeholders. Good corporate governance fosters ethical business practices, which lead to financial viability. In turn, that can attract investors.
What Are the Basic Principles of Corporate Governance?
The basic principles of corporate governance are accountability, transparency, fairness, responsibility, and risk management.
The Bottom Line
Corporate governance consists of the guiding principles that a company puts in place to direct all of its operations, from compensation, risk management, and employee treatment to reporting unfair practices, dealing with the impact on the climate, and more.
Corporate governance that calls for upstanding, transparent behavior can lead a company to make ethical decisions that will benefit all of its stakeholders, including investors. Bad corporate governance can lead to the breakdown of a company, often resulting in scandal and bankruptcy.
Evolution Of Corporate Governance In India
Experts at the Organization of Economic Co-operation and Development (OECD) have defined corporate governance as "the system by which business corporations are directed and controlled." According to them, "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" (OECD, April 1999). By doing this, it provides the structure through which the company objectives are set, and also provides the means of attaining those objectives and monitoring performance.
OECD's definition, incidentally is consistent with the one presented by Cadbury Committee.
All these definitions which are shareholder-centric capture some of the most important concerns of governments in particular and the society in general.
These are:
- management accountability,
- providing adequate investments to management,
- disciplining and replacement of bad management,
- enhancing corporate performance,
- transparency,
- shareholder activism,
- investor protection,
- improving access to capital markets,
- promoting long-term investment, and
- encouraging innovation.[1]
- Pillar and principles of corporate governance
- Theories of corporate governance
- To know the evolution of corporate governance.
- The Present paper is basically concerned with the various committee formed for the problem of corporate governance in Indian Companies for Corporate Governance in India.
- The paper also analyses the legislative framework provided for corporate governance in India
Research Methodology
Looking into the objectives stated above the research methodology is descriptive in nature. The data used for research is provided in various books, articles and websites that were availed at the discretion of the researcher .
Pillars Of Corporate Governance
The principles/ pillars of corporate governance are:- Accountability:
It is a liability to explain the results of one's decision taken in the interest of others. In the context of corporate governance ,accountability implies responsibility of chairman, Board of Directors and the chief executive for the use of company resources (over which they have authority) in the best interest of the company and its stakeholders.
- Transparency
It means the quality of disclosure of clear information to shareholders and stakeholders which enables them to know and understand the truth easily. So in the context of corporate governance , it implies timely , accurate and adequate disclosure pf all relevant information material matters, including the financial situation and performance of the company to the stakeholders of the company. To ensure transparency , financial statements are prepared in accordance with financial standard(IFRS)[2].High quality annual reports are published to make sure that all investors are given clear factual information that precisely reflects the financial and environmental position of the organisation.
- Fairness:
Impartially or lack of bias to all shareholders in proportion to their respective shareholding, Fairness refers merely to the way companies and their officers treat stakeholders , employees, foreign investors against the dominant players as majority shareholders. Provide effective v redress for violation and employees, public official should be treated fairly by the company
- Independence:
Good corporate governance requires independence on the part of the top management of the corporation that is, the Board of Directors must be strong non partisan body, so that it can take all corporate decisions based on business prudence. Thus to insure independence , procedures and standards are set in place to minimise or avoid conflicts of interests and the Board has independent non- executive members and advisors to ensure this independence.
Theories Of Corporate Governance
- Agency theory:
Defines the relationship between the principle and the agents. According to this theory the principals of the company hire the agents to perform their work. The principals delegate the work of running the business to the directors or managers , who are the agents of shareholder. The shareholders expect to act and make decision in the best interest of the principal. The key feature of agency theory is separation of ownership and control.
- Shareholder theory:
It is the corporation which is considered as the property of the shareholder, they can dispose off their property as they like .The owner seeks return on their investment and that is why they invest in corporation .But this narrow role has expanded in overseeing the operations of the corporation and it manages to ensure that corporations is in compliance with ethical and legal standards set by the government. The directors are responsible for any damage or harm done to their corporation i.e., corporation.
- Stewardship theory:
It states that a steward protects and maximises shareholders wealth through firm performance. Here 'stewards' are company executives and managers working for the shareholders , protects and make profits for the shareholders. It stresses on the position of employees or executive to act more autonomously so that shareholder's returns are maximised.
- Stakeholder theory:
This theory incorporated the accountability of management to a broad range of stakeholders. It states that managers in organisation have a network of relationship to serve this includes the suppliers, employees and business partners. This theory focuses on managerial decision making and interest of all stakeholders have intrinsic value , and no sets of interest is assumed is assumed to dominate the others .According to this theory the company is seen as an input output model and all they interest which includes creditors , customers, employees and the government.
- Resource dependency theory:
The resource dependency theory focuses on the role of board of directors in providing access to resource needed by the firm. It states that directors bring resources such as information ,skills access to key constituents such as suppliers, buyers, public policy makers.
- Political theory:
Best approach of developing voting support from shareholders rather by purchasing voting power. It highlights the allocation of corporate power, profits and privileges are determined via the government's favour.
- Transaction cost theory:
A company has a number of contracts within the company itself or with markets through which market which it creates value for the company. There is cost associated with each contract with the external party such cost is called transaction cost. If the transaction cost of using market is higher , the company would undertake that transaction itself.
Evolution Of Legal Framework Corporate Governance In India
Prior to Independence and Four Decades into Independence
Indian organisations and corporations were subject to colonial regulations, many of which took into consideration the desires and preferences of the British employers. The 1866-enacted Companies Act was revised in 1882, 1913, and 1932. In 1932, the Partnership Act was passed. These laws emphasised the managing organisation model because individuals or businesses entered into legal agreements with other businesses to govern the latter.
Because of the disorganised and unprofessional ownership during this time, there was a misuse/abuse of resources and a shunning of responsibilities by managing specialists. Industrialists expressed interest in producing a number of necessities shortly after the country gained its independence, as long as the government set reasonable prices and directed production.
Reforms brought in by SEBI Committees
Initiatives taken by Government of India in 1991, aimed at economic liberalization, privatization and globalisation of the domestic economy, led India to initiate peform process )n order to suitably respond to the developments taking place world over. On account of the interest generated by Cadbury Committee Report, the Confederation of Indian Industry (CI), the Associated Chambers of Cormerce and Industry (ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted committees to recommend initiatives in Corporate Governance.
1998-Desirable Corporate Governance: A Code
CIl took a special initiative on Corporate Governance, the first institution initiative in Indian Industry. The objective was to deve!op and promote a code for Corporate Governance to be adopted and followed by Indian companies, whether in the Private Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate entities. The final draft of the said Code was widely circulated in 1997. In April 1998, the Code was released. It was called Desirable Corporate Governance A Code.
1999- Kumar Mangalam Birla Committee
The Securities and Exchange Board of India (SEBI) had set up a Committee Kumar Mangalam Birla Committee on May 7, 1999 under the Chairmanship of Kumar Mangalam Birla to promote and raise standards of corporate governance. The Report of the committee was the first formal and comprehensive attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets at that time. The recommendations of the Report, led to inclusion of Clause 49 in the Listing Agreement in the year 2000.
2002-Naresh Chandra Committee
The Enron debacle of 2001 involving the hand-in-glove relationship between the auditor and the corporate client, the scams involving the fall of the corporate giants in the U.S. like the WorldCom, Qwest, Global Crossing, Xerox and the consequent enactment of the stringent Sarbanes Oxley Act in the U.S. were some important factors which led the Indian Government to wake up and in the year 2002, Naresh Chandra Committee was appointed to examine and recommend inter alia amendments to the law involving the auditor-client relationships and the role of independent directors.
2003- N R. Narayana Murthy Committee
In the year 2002, SEBI analysed the statistics of compliance with the clause 49 by listed companies and felt that there was a need to look beyond the mere systems and procedures if corporate governance was to be made effective in protecting the interest of investors. SEBI therefore constituted a Committee under the Chairmanship of Shri N.R. Narayana Murthy, for reviewing implementation of the corporate governance code by listed companies and for issue of revised clause 49 based on its recommendations.
2004-Dr JJ Irani Committee
The Government constituted a committee under the ChairmanshipDr. I. I. Irani Committee on Company Law of Dr. J. J. Irani, Director, Tata Sons, with the task of advising the Government on the proposed revisions to the Companies Act, 1956 with the objective to have a simplified compact law that would be able to address the changes taking place in the national and international scenario, enable adoption of internationally accepted best practices as well as provide adequate flexibility for timely evolution of new arrangements in response to the requirements of ever- changing business models.
2009-Task Force on Corporate Governance
In 2009, CIl's Task Force on Corporate Governance gave its report and suggested certain voluntary recommendations for industry to adopt.
2012- Policy Governance
The Ministry of Corporate Affairs constituted a Committee toformulate a Policy Document on Corporate Governance under thechairmanship of Mr. Adi Godrej with the President ICSI as MemberSecretary / Convenor.The Policy Document sought to synthesize the disparate elements in the diverse guidelines, draw on innovative best practices adopted by specific companies, incorporate current international trends and anticipate emerging demands on corporate governance in enterprises in various classes and scale of operations.The Adi Godrej Committee submitted its report which was articulated in the form of 17 Guiding Principles of Corporate Governance.
2013-Companies Act
The Companies Act, 2013 brought with it radical changes in the sphere of Corporate Governance in India. It provided a major overhaul in Corporate Governance norms and sought to have far-reaching implications on the manner in which corporate operates in India.The Act has since been amended thrice - in 2018, 201 and 2019.The Amendments impacts different aspects of business management in India, including key structuring,disclosure and compliance requirements.
2015-SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015
With a view to consolidate and streamline the provisions of the erstwhile listing agreements for different segments of the capital market and the provisions pertaining to listed entities with the Companies Act, 2013, the SEBI notified SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for the listed entities having listed designated securities on recognized stock exchanges.
2017- Uday Kotak Committee
The SEBI Committee on corporate governance was formed in June 2017 under the Chairmanship of Mr. Uday Kotak with the aim of improving standards of corporate governance of listed companies in India. With the aim of improving standards of Corporate Governance of listed companies in India, the Committee was requested to make recommendations to SEBI on the following issues:
- Ensuring independence in spirit of Independent Directors and their active participation in functioning of the company;
- Improving safeguards and disclosures pertaining to Related Party Transactions;
- Issues in accounting and auditing practices by listed companies;
- Improving effectiveness of Board Evaluation practices;
- Addressing issues faced by investors in general meetings ,etc.
Landmark Cases of failure of Corporate Governance
Satyam Scam
In 2009, the India-based business Satyam Computer Services was embroiled in a corporate scandal in which Ramalinga Raju, the chairman, acknowledged that the company's financial records had been falsified. A Rs 7000 crore business scandal involving tampered accounts occurred with Satyam. In an email to SEBI dated 7-1-2009, Ramalinga Raju admitted to fabricating the company's funds and bank balances. He made the well-known claim that he was riding a tiger and had no idea how to get off without getting slain weeks before the con started to fall apart. In an interview, Raju claimed that Satyam, the fourth-largest IT firm, had a cash balance of Rs. 4,000 crore and could use it to acquire additional funds.
Ricoh case
The saga at Ricoh India shows that MNCs' reputation for good governance is not always a guarantee of success. The Ricoh incident was almost a carbon copy of the Satyam episode in terms of accounting fraud and the ensuing fraud of stock prices, interestingly without any promoter being in the driver's seat.
This was true despite administrative interference following the Satyam scam and legislative amendments to tighten the governance framework [Companies Act, 2013, SEBI (Listing Obligations and Disclosure Requirements) Regulations, etc. A few dishonest managers were all it took to bring down the entire system, and the primary regulatory bodies�auditors, credit rating agencies, reputable independent directors, boards of directors, powerful audit committees, etc, all failed as usual.
ICICI Bank Scam
Case of ICICI Bank Fraud The Board played a part in the apparent case of alleged nepotism by hastily clearing its CEO of any wrongdoing without releasing the findings of an independent inquiry to the public and by declining to answer any questions about the situation.
Kingfisher Airlines and United Spirits Case
Particularly with regards to falsifying accounts and providing illegal internal corporate financing to parties. It was abundantly clear that during the time Mr. Vijay Mallya was in charge of USL, assets had been transferred from United Spirits Ltd. (USL) to subsidise Kingfisher, United Breweries (UB) Holdings had been used as a conduit for borrowing money and giving it to his group, intercorporate credits had been given to related groups without the Board's approval, accounts had been improperly expressed, reviews had been stage managed, etc. True, but sad. Each month, more corporate frauds are added to the list and discovered at businesses and institutions that once led the way in good corporate governance.
Conclusion
India has taken steps to improve its corporate structure by implementing various guidelines and act to promote and protect the investors interest as well as the key stakeholders it has come a long way from 1956 when Securities Contract (Regulation), Act,1956 was implemented to the current LODR Regulations 2015 which helps in prevailing the pillars of good corporate governance.
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