New Corporate Governance

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Corporate Governance

1.1 Introduction1.2 Concept of Corporate Governance1.3 Meaning of the Term Governance1.4 Who are Stakeholders?1.5 What is Corporate Governance?1.6 Definitions of Corporate Governance1.7 History/Background of Corporate Governance1.8 What is Good Corporate Governance?1.9 Corporate Governance- Effective Management of Relationships1.10Objective of Corporate Governance


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1.11Values, Ethics & Principles of Corporate Governance1.12Attributes of Corporate Governance1.13Importance of Good Corporate Governance1.14Why Corporate Governance Matters?1.15Advantages of Good Corporate Governance1.16Popular Models of Corporate Governance

1.16-1 The Anglo American Model

1.16-2 The German Model

1.16-3 The Japanese Model

1.16-4 The Indian Model

1.17 Major Components or Aspects of Corporate Governance

1.18 Corporate Governance in World and in India (Various Committees)


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A. Global Perspective

B. Asian Perspective

C. Indian Perspective


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1.19 Recent Development in Corporate Governance

1.20 The Role of SEBI in Corporate Governance

References


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Corporate Governance

1.1 INTRODUCTION:-

Happy companies have robust growth in revenues, strong balance sheets and

healthy profits that reflect genuine business success, not phony book keeping.

And they share other important traits as well.


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They abide by high ethical standards which is a key to their solid success. They

dont obstruct the flow of information to shareholders, but rather view the shareholders

as the ultimate owner and the ultimate boss.

They choose directors on the strength of their abilities, character, and capacity for

independent judgment.

And their internal controls work well, so that the companys executives can take

immediate corrective action when something goes wrong.

Chairman Christopher Cox,

U.S. Securities and Exchanges Commission,

Washington D. c., March 21, 2006.


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Remarks before the Committee for

Economic Development.

Corporate Governance refers to the mechanism and arrangements employed by

financiers and shareholders, lenders and so that their interests are taken care of by the

agents who have considerable residual control rights in practice.

With fast paced globalization and all round economics growth, Corporate

Governance is the new mantra being chanted across the global business world. The

concept started taking roots in India in early 1990s, and received a boost in the second

half of that decade mainly because of economic liberalization and deregulation of

industry, demand for new corporate ethos and stricter compliance with the law of the


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land. The demand for greatest accountability of companies to their shareholders and

customers further added to importance of the concept.

There is a slow and conscious shift in the Indian economy from a controlled one

to a market driven one. In the process several developments have unfolded. Indian

corporate need to absorb these developments in order to survive and flourish amidst

global competition. They can aspire to reach their goals with success if they pursue the

right means.

Corporate Governance is the means to that end. The objectives before a business

are to create wealth for the society, maintain, and preserve that wealth efficiently and


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to share the wealth with the shareholders; corporate governance is the method by

which the aforesaid objectives are achieved.


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1.2 CONCEPT OF CORPORATE GOVERNANCE:-

The Concept of corporate governance is not just adding up two words, corporate

and governance, it is one concept but with multitude of different interpretations.

Corporate governance is a voluntary ethical code of business of companies.

According to the Cadbury Committee, corporate governance is the system by

which companies are directed and controlled. The board of directors is responsible for

the governance of the company. The shareholders role in the governance is to appoint

the directors and the auditors and to satisfy themselves that an appropriate governance

stature is in place.


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1.3 MEANING OF THE TERM GOVERNANCE:-

Governance, derived from the word Gubernare, means to rule or steer.

Though originally meant to be a normative framework for exercise of power and

acceptance of accountability thereof in the running of kingdoms, regions and towns

over the years, it has found significant relevance in the corporate world.

The word Governance according to Oxford Dictionary is governing or to

rule.Therefore, governance is to control. To govern means to direct and to control by


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ruling, one can manage or control the given condition. In this aspect, controlling and

directive action of people for several aspects of work is governance.

1.4 WHO ARE STAKEHOLDERS?

The focus under Corporate Governance is shifted from Shareholders to

Stakeholders. Noble Prize Winner in Economics, Milton Friedman linked Corporate

Governance to the conduct of business in accordance with the shareholders desires,

which primarily meant to create wealth for shareholders/owners but at the same time

conforming to the laws, rules, regulation, and customs established by the society. The


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Corporate Governance is no longer restricted to creation of wealth for the

shareholders. The concept now encompasses interest of stakeholders. But who really

are the stakeholders?

The shareholders include, besides the shareholders, other participants in the

corporation such as the Board of Directors, Managers, Employees, Workers,

Customers, Vendors, Lenders and Community goals cant be overlooked under the

Corporate Governance.

1.5 WHAT IS CORPORATE GOVERNANCE?


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The primary goal of any organisaton is the maximization of the shareholders

wealth in a legal and ethical manner. The main participants in a corporation are the

shareholder management led by the CEO and the board of directors. There are other

participants well such as the Employees, Customers, Suppliers, Creditors, and the

Community.

Corporate governance has succeeded in attracting a good deal of public interest

because if it is apparent importance for the economic health of corporation and society

in general.

However, the concept of corporate governance defined poorly because it

potentially converts a large number of distinct economic phenomenon. As a result,


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different people have come up with different definitions. That reflects their special

interested in the field. It is hard to see that this disorder will be any different in the

future so the best way to define the concept so few definitions are as under.

1.6 DEFINITION OF CORPORATE GOVERNANCE:-

Corporate Governance is about promoting corporate fairness, transparency and

accountability.

J Wolfensohn,President, World Bank


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The fundamental objective of corporate governance is the enhancement of long

term shareholder value while, at the same time, protecting the interests of other stake

holders.

Kumar Mangalam Committee Report on Corporate

Governance, 1999.

CG comprehends that structure of relationships and corresponding

responsibilities among a core group consisting of share holders, board member,

corporate managers designed to best foster the competitive performance required to

achieve the corporations primary objective.

The OECD


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Corporate Governance is the mechanism by which the values, principle, policies

and procedures of a corporation are included and manifested.

The Institute of Company Secretaries of India (ICSI)

Corporate Governance is the system through which companies are directed and

controlled in the best interest of stakeholders.

1.7 HISTORY/BACKGROUND OF CG:-

US expansion after World War II through the emergence of Multinational

Corporations saw the establishment of the managerial class and Corporatization of

Institution. According to lorsch and maclver, many large corporations have dominant


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control oval businesses affairs without sufficient accountability or monitoring by their

board of directors. This resulted in dissipating and disillusioning the minority

shareholders interests.

Since the late 1970s, corporate governance has been the subject of significant

debate in the U.S. and around the globe.

In 1997, the East Asian financial crisis saw the economies of Thailand, Indonesia,

South Korea, Malaysia, and the Philippines severely affected by the exit foreign

capital after property assets collapsed. The lack of corporate governance mechanisms

in these countries highlighted the weaknesses of the institutions in their economies.


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Positive effect of good corporate governance on different stakeholders, ultimately

results into strong economy, and hence good corporate governance is tool for socio-

economic development. After East Asia economy collapse in late 20 th country, World

Bank president warned those countries, that for sustainable development, corporate

governance is must to be good.

Thus, practically, corporate governance has meant that there should be at the

board level non-official directors who are professionals and who have no conflicting

interests and who can particularly operate the two key committees the Ethics

Committees and the Finance Committee see that there is greater transparency in the

management of the enterprise. Ultimately, the better transparency in the operations

without sacrificing business strategy or business secretes which are necessary for


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success in the business, market place and absolutely ethical behaviors where the

conduct of the company will not only be legal but also ethical.

1.8 WHAT IS GOOD CORPORATE GOVERNANCE?

Corporations around the world is realizing the good governance adds

considerable value to their operational performance. The poor quality of local systems

of CG lies at the heart of one of the greatest challenges facing most countries in the

developing world. Asian Development Bank, for instance, defines good governance

based on four pillars: Transparency, Accountability, Predictability, and Participation,


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Recognizing that their application must be country specific and solidly grounded in

the Economic, Social and Administrative capacity realities of the country.

Good Governance is not simply a matter of adopting a set of rules, but a continues

process of implementing tailored strategic initiatives to maximize long term value.

cccc

Anglo- American

model

UK and

US

Pursues the interest

of shareholders

German-

Japanese model

Germany,

Japan and

Interest of all

stakeholders,

employees, and

CORPORATE GOVERNANCE MODEL


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Though these models have different focus there is a global consensus as far as the

objective of good governance is concerned maximizing long term shareholdersvalues.

Better Reputation, Higher Credit Rating, Mitigation of Risks, Higher Valuations

Premium, Improving Overall Performance, Lowering the firms cost of capital. These

all are benefits of good corporate governance practices.


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1.9 CORPORATE GOVERNANCE - EFFECTIVE MANAGEMENT OF

RELATIONSHIPS:-

The management is accountable to the directors in running the company. The

Board of directors in turn is answerable to various shareholders. All of them aretogether expected to effectively manage the corporation, both legally and ethically.

The responsibility of the board is to ensure accountability of the management to the

board of the public. The directors role is to keep vigil over the management to ensure

proper use of the nations wealth. Therefore, corporate governance is concerned with

effective management of relationships among Board of Directors, Management, and

Shareholders to ensure proper use to resources. If relates to promoting corporate


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fairness, transparency and accountability Corporate Governance and Effective

Management of Relationships can be depicted as follows!


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Corporate GovernanceEffective Management of Relationship

Shareholder

Creditors Community

Board of directors

Executive director Accountable Non Executive

Independent

DirectorManagement led by

CEO

Suppliers Customers Employees


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The management is accountable to the directors in running the company. The

board of directors, in turn is answer able to various shareholders. All are together

expected to effectively mange the corporation, both legally and ethically.

LEGAL FREMEWORK

The responsibility of the board is ensuring accountability of the management to

the board and that of the board to the public. The directors role is to keep vigil over

the management to ensure proper use of the nations wealth.

Board ofDirectors Share holders

Elect

AccountableShare holders


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1.10 OBJECTIVES OF CORPORATE GOVERNANCE:-

The principle objective of corporate governance is to help the organization to

grow and develop in healthy manner on self-sustaining basis in highly competitive

environment by resolving conflicts of interests among the stakeholder and themanagement. However, the following are also to be identified as the key objective of

corporate governance:

Transparency of corporate structures and operations. Accountability of managers and the board of directors to shareholders. Corporate responsibility towards stakeholders.


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Creating long-term trust between companies and the external providers of capital. Rationalizes the management and monitoring of risk that a firm faces globally and

assures the integrity of financial reports.

1.11 VALUES, ETHICS, AND PRINCIPLES OF CG:-

To understand the relevance or irrelevance of values, ethics, and principles in

the context of corporate governance, we would have to have an understanding of these

terms.

Following are certain well-established principles of corporate governance, whichwill be applicable to banking and non-banking corporate enterprises:


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The crux of corporate governance is separation of ownership from management. The philosophy underlying corporate governance is that the board of directors

should not be confine itself to statutory functions alone but become an effective

pivot ensuring direction and management.

Corporate Governance represents a set of system which includes certain structuresand organizational aspects, and processes that embrace how things are done

within such structural and organizational systems.

Independence is the cornerstone of accountability and independent boards areessential.

Corporate governance implies regulation and laws.

Corporate governance goes far beyond regulations. Key pillars of a corporate governance framework are disclosure and transparency.


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The term value represents a quality desirable as means or as an end in itself and

also as the ideals, customs, institutions, etc. That arouses an emotional response for or

against them, in a given society, or a given person.

Values are like fingerprints. Nobodys are the same, but you leave them all over

everything you do

Elvis Presley

It may be used to refer to the basic norms and ideals that guide peoples

behaviors in the firm and form the underpinning of a firms corporate culture

Ahmed chopra


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The term ethical refers here to the the rule or standards for right conduct or

practice, especially the standards of a profession. Some of the ethical values of an

organization can be:

Trustworthiness Respect Responsibility Caring Justice and Fairness Civil Virtue and Citizenship


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1.12 ATTRIBUTES OF CORPORATE GOVERNANCE:-What do the stakeholders look for in an organization?


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The answer is that they will all be looking for the basic characteristics of good

corporate governance. Literature on corporate governance often mentions four to

seven core cornerstones of corporate governance.

Discipline Trusteeship Transparency Independence Accountability and Empowerment Responsibility

Fairness Social Responsibility


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1.13 IMPORTANCE OF GOOD GOVERNANCE:-

With competition raising the bar for survival, it is parameters like corporate

governance that will set firms apart.

-Kumar Mangalam Birla

Good corporate governance is the degree to which companies are run in an open

and transparent manner. The importance of governance can be thus listed as:


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It reduces the chances of reputation hazards. Helps in attracting talent in terms of non-executive manager directors. Good governance and a disciplined approach to financial controls reduce the

amount of frauds.

Leads to reduction in both audit fees and insurance premiums. Reduces the likelihood of operational dislocation, litigation and fraud arising out

of improper evaluation of business hazards and controls.


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1.14 WHY CORPORATE GOVERNANCE MATTERS?

Effective corporate governance not only cuts down the agency costs incurred due

to the divisions of ownership and control but it also helps investors save on time and

other resources.

It is Essential that the corporate sectors understand the importance of good quality

corporate governance since it has a generous impact on the following:

Efficient use of corporate assets. Ability to attract law-cost capital.

Ability to meet social expectations. Overall performance.


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Good corporate governance is the degree to which companies are run in an open

and transparent manner. The importance of good governance and be thus listed as:


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It reduces the chances of reputation hazards. Helps in attracting talent in terms of non-executives managers directors. Good governance and a disciplined approach to financial controls reduce the

amount of frauds.

Leads to reduction in both audit fees and insurance premiums. Reduces the likelihood of operational dislocation, litigation and fraud arising out

of improper evaluation of business hazards and controls.

1.15 ADVANTAGES OF GOOD CORPORATE GOVERNANCE:-

Corporate Governance has come to be viewed as a Differentiator among Firms

as Good Governance Practices provides higher Market Valuation and SustainableCompetitive Advantages


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A better managed company. Increased management credibility. More long-term investors. Greater analyst following. Improved access to, and lower cost of capital. The realization of a companys true underlying value. Good governance provides comfortable share and competitive advantage in the

global market place.

Good governed companies can raise capital widely easily and cheaply fromdomestic and foreign markets.

Good governance becomes strong image self earned reputation like brand equityand providers positive goodwill.


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Good corporate governance leads to improve employees morale and finallyhigher productivity.

Good governance is the mirror of good human resource and judicious use offinancial resources.

Good corporate governance leads to improve employees morale and finallyhigher productivity.

Good governance is the mirror of good human resources and judicious use offinancial resources.

Good governance is shaping of the growth and future of the company. Good governance maintaining the steady and improved trade record. Good governance is essential not only in order to gain credibility and trust, but

also as a part of strategic management for survival, consolidation and growth.


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Essential for creation of wealth. Good governance improves corporate excellence due to presence of trust.

1.16 POPULAR MODELS OF CG:-

The following four are important models of corporative governance, to study the

unique characteristics and distinctive features:

1. The Anglo American model

2. The German model

3. The Japanese model

4. The Indian models


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1.16-1 The Anglo American Model:-

In this model the board appoints and supervises the managers who manage the

day-to-day affairs of the corporations. While the legal system provides the structural

framework, the stakeholders in the company will be suppliers, employees and

creditors. However, creditors exercise their lien over the assets of the company. The

policies are framed by the board of directions and implemented by the management.

The theme of this model can be depicted as followed.


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The Anglo AmericanModel

B.O.D.(supervisors)

Officers(Managers)

Company

Shareholders

Creditors

Stakeholders

Legal system


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The distinctive features of the Anglo-American model are:

Clear separation of ownership and management, which minimizes conflicts ofinterest.

Professional managers who have negligible ownership stakes to performance runcompanies.CEO has major role to play.


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1.16-2 The German Model:-

In this model the shareholders own the company; they do not entirely dictate the

governance mechanism. The shareholders elect 50% members of the supervisory

board and the other half is appointed by labor unions. This ensures the employees and

laborers also enjoy the share in the governance. The supervisory board appoints and

monitors the management board. There is a reporting relationship between them,

although the management board independently governs the day-to-day operations of

the company. The theme of this model can be depicted as follows:


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The German Model

Supervisory Board

Management Board

(Including Labor)

Company

Employees & Labor Unions

Shareholders


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The distinctive features of the German models are:

Banks and financial institutions have substantial stake in the company. Labor relations officer is represented in the management board. Workers

participator in management is essential.

Both shareholders and employees have equal say in selecting the members ofsupervisory board.

1.16-3 The Japanese Model:-


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The shareholders and the banks together appoint the Board of Directors and the

President. It can be easily understood by the followings Figure:

The Japanese Model

Regulatory Framework

Self vs. Legal Company Law Take Over Code Disclosure Required

Accountability Supervision of Directors

Auditors Role-Expectation Gap

Audit Committees Executive Remuneration Committees/Disclosures Parliamentary

Committees

Stakeholders Shareholders Financing Institution Market for Corporate

Control

Non-Executive Directors

Directors (Executive)

Management


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The distinctive features of the Japanese models are:

Inclusion of president who consults both the supervisory board and the executivemanagement.

Importance of lending banks is highlighted.1.16-4 The Indian model:-

Indian in its own right has unique background in the corporate governance. In

ancient time the king was always considered the representative of the people. The

wealth of the state was not the personal wealth of the king. The principal of trusteeship

was also followed. Various modern authors have taken tips from kautilyas

Arthasastra. The Indian model of corporate governance can be understood with the


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following figure. The Indian corporate governance model is same as Japanese

corporate governance models:

The Indian Model

Regulatory Framework

Self vs. Legal Company Law Take OverCode Disclosure Required

Accountability Supervision of Directors

Auditors Role-Expectation Gap

Audit Committees Executive Remuneration

Committees/Disclosures Parliamentary

Committees

Stakeholders Shareholders

Financing Institution Market for CorporateControl

Non-Executive Directors

Directors (Executive)


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The distinctive features of the Indian model are:

The government owned the equity shares wholly or substantially (51% or more).

Good deal of Political and Bureaucratic influence over the management. Excessive emphasis on observing rules, regulations and guidelines. Organization often viewed as social entity. Administrative ministry appoints the Board of Director.

1.17 MAJOR COMPONENTS OR ASPECTS OF CG:-

Over the year, many experts have developed Corporate Governance guidelines,

which are very useful for any enterprise to develop and fulfill the corporate

responsibility to various stakeholders. The major components or aspects are as under:


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A. BOARD COMPOSITION:-

Size and Composition of the Board:The B.O.D. of the company shall have an optimum combination of executive and

non-executive directors, with not less than 50% of the B.O.D. comprising Non-

Executive Directors.

Responsibility of the Chairman, CEO and the COO:The responsibility of the chairman, chief executive officer and chief operating

officer should be specific and there is clear demarcation of responsibilities and

authority among them.


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Independent Directors:As per clause 49 of the Listing Agreement with Indian Stock Exchanges, the

proper and qualified person should appoint as the Independent Director and the

responsibilities and duties of Independent Director should be defined.

Board Membership criteria:To manage and guide a high knowledge, skills and experience, for that purpose, a

Nomination Committee should be there to determine and appoint appropriate directors.

Membership Term:The Board constantly evaluates the contribution of members and recommends to

shareholders their reappointment periodically as per statute. The current law in India


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mandates the retirement of one-third of the Board Members every years and qualities

the retiring members to reappointments.

Board Compensation Policy:Remuneration of the executive directors and independent directors consist of a

fixed component and a performance incentive, which is determine and recommends by

the compensation committee.

Membership of Other Boards:As per law, memberships exceeding 10 companies are restricted. Board should

clearly show in the annual reports, the membership of directors in other companies.


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B. BOARD COMMITTEES:-

Various expert committees, appointed for Corporate Governance have mentioned

that for effective control. Board Committees are important part of the management.

Audit Committee:A qualified and an independent Audit Committee should be up by the Board of

the company. This would go a long way in enhancing the creditability of the financial

disclosure of the company and promoting transparency. Here Board should decide the

objectives and responsibilities of the Audit Committee under Audit Committee

Charter.


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Remuneration or Compensation Committee:The Board should set up a Remuneration Committee or Compensation Committee

to determine on their behalf and on behalf of the shareholders, with agreed terms of

reference, the companys policy on specific remuneration packages for executive

directors, including pension rights and any compensation payment.

Nomination Committee:

For the purpose of evaluate the current composition, organization and governance

of the Board and its committees, as well as determine future requirements and make

recommendation to the Board for approval and evaluating and making

recommendations to the Board concerning the appointment of directors to Board


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Committees, the selection of Board Committee chairs and the Board Members eligible

for reappointment etc., there should be a Nomination Committee.


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Investor Grievance Committee:The Board should set up a committee under the chairmanship of a non-executive

independent director to specially look into shareholders issues, including share

transfers and redressed of shareholders complaints.

C. BOARD MEETINGS:-

The Board Meetings should be held at least four times a years, with a maximum

time gap of four months between any two meetings. All information recommended by

the SEBI Committee should be placed before the Board.

D. MANAGEMENT REVIEW AND RESPONSIBILITY:-


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Four sound and effective management system Board should specify the

management review and responsibilities for that purpose Board should consider the

following points:

Formal Evaluation of Officers.

Board Interaction with Clients, Employees, Institutional Investors, theGovernment and the Media.

Risk Management. Managements Discussion and Analysis.


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E. COMMUNICATION AND DUTIES TOWARDS THE SHAREHOLDERS:

The Boards interaction with the shareholders is very important. So Board should

constantly communicate with the shareholders and consider the various points,

problems and participation of shareholders in the management. Board should convey

the information regarding the meetings, annual reports, various committees

performance, appointments, reappointments of directors etc.

F. COMPLIENCE WITH THE MANDATORY AND NON-MANDATORYREQUIREMENTS OF CLAUSE 49 OF THE LISTING AGREEMENT:


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The Board should follow the all mandatory and non- mandatory requirements of

Clause-49 of the Listing Agreement and revised them time to time, as and when

required, like shareholders rights, training of Board members, Mechanism for

evaluating non-executive Board Members, Whistle-blower policy etc.

G. COMPLINCE WITH CORPORATE GOVERNANCE CODES:

The Board should confirm that the Corporate Governance practices of the

company are followed and complied with the Corporate Governance Codes given by

various committees and government authorities, i.e. Naresh Chandra Committee, Birla

Committee, and OECD principles of Corporate Governance etc.


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1.18 CG IN WORLD AND IN INDIA:-

A. GLOBAL PERSPECTIVE:-

A number of committees were set up to look into the various aspects of Corporate

Governance. These include:

(i)

Sir Adrian Cadbury Committee on Financial Aspects of Corporate Governance.[1992]

(ii) Mervyn E. Kings Committee on Corporate Governance. [1994](iii) Greenbury Committee on Directors Remuneration. [1995](iv) CalPERS- Global Corporate Governance Principles. [1996](v) Market Specific Principles- UK and France. [1997]

( i) M k S ifi P i i l J d G [1997]


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(vi) Market Specific Principles- Japan and Germany. [1997](vii) TIAA-CREF- Policy Statement on Corporate Governance [Sep-1997]

(viii) Business Round Table (BRT) Statement on Corporate Governance. [1997](ix) Hampel Committee on CG. [1998](x) Combined Codes of Best Practices-LSE. [1998]

(xi) CACG Principles for CG in Commonwealth. [1998](xii)

Core Principles and Guidelines-USA. [April-1998]

(xiii) Blue Ribbon Committee on Improving the Effectiveness of Corporate AuditCommittee. [1999]

(xiv) OECD (Organization for Economic Co-Operation and Development) Principle ofCG. [1999]

(xv) Euro Shareholders Corporate Governance Guidelines. [2000]

( i) Th Hi R UK [J 2003]


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(xvi) The Higgs Report- UK. [Jan-2003]These Committees/Codes recommended the following in relation to Accounts,

Reporting and Auditing:

I. Sir Adrian Cadbury Committee on Financial Aspects of CorporateGovernance-[1992]:

Audit Committee to have minimum three members, written terms of reference andauthority to investigate.

Listed companies to publish full financial statements annually and half yearlyreports interim.

Code of Best Practice:

B d t t t b l d d d t d bl t f


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Board to present to balanced and understandable assessment of companysposition.

Directors to report on effectiveness of internal control system.II. Mervyn E. Kings Committee on Corporate Governance- [1994]:

Effective Internal Audit Function.Establishment of Audit Committee.Observance of highest level of business and professional ethics.Accounting Standards in line with International Standards.

III. Hampel Committee on Corporate Governance-[1998]:


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Companies and Auditors should apply the following principles:

Financial Reporting:The Board should present a balanced and understandable assessment of the

companys position and prospects.

Internal Control:


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Internal Control:

The Board should maintain a sound system of internal control to safeguard

shareholders investments and repays assets.

Relationship with Auditors:

The Board should establish formal and transparent arrangements for maintaining

and appropriate relationship with the companys auditors.

External Auditors:

The external auditors should independently report to shareholders in accordance


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The external auditors should independently report to shareholders in accordance

with statutory and professional requirements and independently assure the board on

the discharge of its responsibilities in accordance with professional guidance.

The Auditors have Dual Responsibility:

The public report to shareholders on the statutory financial statements and on

other matters and additional private reporting to directors on operational matters.

IV. CACG Principles for CG in Commonwealth-[1998]:

Ensure that the corporate comply with all relevant laws regulations and codes of


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Ensure that the corporate comply with all relevant laws, regulations and codes ofbest business practices.

Ensure that the corporate communication with shareholders and other stakeholderseffectively.

Serve the legitimate interest of the shareholders of the corporate and account tothem fully.

Regularly review processes and procedures to ensure effectiveness of its internalsystem and control so that its decision making capability and the accuracy of its

reporting and financial results are maintain at a high level at all times.

Ensure annually that the corporate will continue as a going concern for its nextfinancial year.

V. Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit


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V. Blue Ribbon Committee on Improving the Effectiveness of Corporate AuditCommittee-[1999]:

Members of Audit Committee to be independent.Audit Committee to consist of independent directors only.Audit Committee to have minimum of three directors- each to be financially

literate.

Audit Committee to have formal written charter, approved by full board,specifying:

Responsibilities Structure, Process and Membership.

Charter to specify outside auditors responsibility towards boards and committee.

Companies to attach with Annual Report, a letter from Audit Committee as to


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Companies to attach with Annual Report, a letter from Audit Committee as towhether or not:

Management reviewed the audited financial statements with the committee. Outside auditors discussed with committee, their judgment. Committee believes that companys financial statement is fairly presented in

conformity with GAAP.

VI. OECD (Organization for Economic Co-Operation and Development) Principleof CG-[1999]:

The government of the 30 organization for Economic Co-operation and

Development (OECD) countries have recently approved a revised version of the

OECDs principles of Corporate Governance adding new recommendations for good

practices in corporate behavior with a view to rebuilding and maintaining public trust


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p a p a av w a v w g a a a g p

in companies and stock markets.

The revised principles respond to a number of issues that have undermined the

confidence of investors in company management in recent years. They call on

governments to ensure themselves to be truly accountable. They advocated increased

awareness among institutional investors and an effective role for shareholders in

executive compensation. They also urge strengthened transparency and disclosure to

counter conflicts of interest.

VII. Euro Shareholders Corporate Governance Guidelines- [2000]:

Euro Shareholders is the confederation of European shareholders association,


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p ,

constituted with the overall task of representing the interest of individual shareholders

in the European Union.

In April 1999, the OECD published its general principles on Corporate

Governance. The Euro Shareholders Guidelines are based on the same principles, but

are more specific and detailed.

B. ASIAN PERSPECTIVE:-


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CG Watch an annual collaboration studies of the CG landscape of the Asianmarkets undertaken by the independent stockbroker, Asia Pacific Markets and the

Asian Corporate Governance Association (ACGA) provides the most

comprehensive and qualitative assessment of CG standards, and progress for both

regulators and companies within the Asia region. The CG scores for the Asian Markets

from 2003 to 2007 (no survey in 2006) are shown in Table. It is a matter of pride and

satisfaction that Indian retains third position in the overall CG rankings of 11 markets

in Asia behind just Hong Kong and Singapore.

The CG scores for markets and individual companies are based on seven


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categories; six of the categories

Discipline,Transparency,Independence,Accountability,Responsibility,Fairness

They are unchanged from previous years scores. The 7 th category in 2007 being

the score for Clean and Green survey that replaced the previous years Social

Responsibility category.


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Corporate Governance Markets Score (2003-2007)


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Sr.

No.

Markets 2003 2004 2005 2007

1. Hong Kong 73 67 69 672. Singapore 77 75 70 65

3. India 66 62 61 56

4. Taiwan 58 55 52 54

5. Japan - - - 51

6. South Korea 55 58 50 49

7. Malaysia 55 60 56 49

8. Thailand 46 53 50 47

9. China 43 48 44 45

10. Philippines 37 50 48 41

11. Indonesia 32 40 37 37

(Source: Executive Chartered Secretary, Vol-5, No-2, Feb-2008)

Jamie Allen, secretary of ACGA, describes about the methodology followed:


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Under each of these categories, we assess the companies on issues that areKey to

constituting good CG. Our CG score is based on how we rate a company on 54 issuesunder 6main aspects, each with a 15% weighting, that we take to constitute the concept

of CG, to which we add the C & G score with a 10% weighting.

Table-1.1 depicts breakdown of the average score of the companies in each

market/country by scores for each of the seven categories in the CG score. The 2007

CG scores show slightly better average CG improvement for companies in India,

China and Indonesia, while a slight deterioration in the average score in Taiwan. Japan

(a new entrant in 2007) surprisingly has a higher average CG score for its firms than

the rest of the sample.

Average CG Category Scores by Asian Countries in 2007


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Markets Disci-

pline

Trans-

parency

Inde-

pendence

Account-

ability

Res-

ponsibility

Fair-

ness

Clean &

Green

Overall

CG

Japan 55.3 89.3 42.3 27.7 76.0 72.1 45.0 58.9

Thailand 51.3 92.9 62.5 51.1 32.6 66.9 31.8 56.7

Hong Kong 56.3 79.7 47.3 56.8 57.2 69.2 12.0 56.2

Taiwan 68.4 57.2 42.6 51.9 62.6 59.9 28.9 54.3

India 65.4 83.8 43.1 43.1 41.2 49.2 27.5 51.6

Malaysia 63.4 85.3 57.6 37.1 44.4 46.4 13.2 51.4

Singapore 57.6 84.2 72.7 27.2 50.6 36.3 10.6 50.3

Korea 50.3 71.9 42.8 49.2 42.3 59.4 23.4 49.7

Philippines 39.1 65.1 63.1 35.7 26.7 60.4 20.5 45.5

China 45.5 66.6 45.8 44.6 28.6 45.7 7.9 42.3

Indonesia 59.6 44.9 49.1 38.8 21.0 39.6 9.8 38.9

AVERAGE 55.7 74.6 51.7 42.1 43.9 55.0 21.0 50.5

(Source: Executive Chartered Secretary, Vol-5, No-2, February- 2008)


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It is worth mentioning here that some Exemplary companies can be found in

Asia also. Three Hong Kong companies dominate at the very top of the list of

companies with the highest CG scores in 2007. Of the top-30 CG scores, 10 are

Japanese companies. However, of the top-5 companies in the high CG large cap list

(which score above 80%) only one company (sharp) is from Japan. Other Japanese

companies CG scores are below 80%. In all seven of the top-30 CG companies arefrom HK. The other two companies in this list at the top for CG are TSMC and Infosys

Technologies. In this list of top-30, South Korea has 6 companies but unfortunately

none of them scored above 80%-top companies have good but not excellent CG

scores.


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C. INDIAN PERSPECTIVE:-

The Government of India has initiated major Corporate Governance since the

mid-1990s. The first was by the Confederation of Indian Industry (CII), which came

up with the first voluntary code of Corporate Governance in 1998. The second was

Kumar Mangalam Birla Committee of the SEBI, which is submitted its report in 1999.

Based on this report the SEBI now enshrined as Clause 49 of the listing agreement.

In our country, there are six mechanisms to ensure Corporate Governance. They

are:

i. The Companies Act 1956.

ii The Securities and Exchange Board of India (SEBI) Act 1992


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ii. The Securities and Exchange Board of India (SEBI) Act, 1992.iii. Corporate Control.iv. Shareholders Participation.v. Statutory Audit.

vi. Code of Conduct.India has formulated codes of Corporate Governance through various committees,

more important once being:

(i) CII Code of Desirable Corporate Governance. [1998](ii) UTI Code of Governance. [1999]

(iii) SEBI Norms Based on Kumar Mangalam Birla Committee of CorporateGovernance. [2000]

(iv) SEBI Norms Based on N.R.Narayan Murthy Committee.


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(iv) SEBI Norms Based on N.R.Narayan Murthy Committee.(v) Naresh Chandra Committee on Corporate Audit and Governance.

Besides companies like Infosys, ICICI, BSES etc. have created their own

benchmarks.

I. CII Code of Desirable Corporate Governance-[1998]:The CII was the Indias first company which came up with the first voluntary

code of Corporate Governance in 1998.

CII Code Recommends that:

Key information to be reported.

Listed companies to have Audit Committees.

Corporate to give a statement of value addition.


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C p a g v a a va a

Consolidation of accounts to be optional.II. SEBI Norms Based on Kumar Mangalam Birla Committee of Corporate

Governance-[2000]:

The Securities and Exchange Board of India (SEBI) appointed the Committee on

corporate governance on May 7, 1999 under the Chairmanship of Shri KumarMangalam Birla, member SEBI Board, to promote and raise the standards of corporate

governance. The Committees detailed terms of the reference are as follows:

To suggest suitable amendments to the listing agreement executed by the stockexchanges with the companies and any other measures to improve the standards of

corporate governance in the listed companies.

To draft a code of corporate best practices; and


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p p ;

To suggest safeguards to be instituted within the companies to deal with insiderinformation and insider trading.

The SEBI Board in its meeting held on January 25, 2000 considered the

recommendation of the Committee and decided to make the amendments to the listing

agreement in pursuance of the decision of the Board, it is advised that a new clause,

namely clause 49, be incorporate in the listing agreement as under:

Board of Directors: The company agrees that the board of directors of the company shall have an

optimum combination of executive and non-executive directors with not less than

fifty percent of the board of directors comprising of non-executive directors.

The company agrees that all pecuniary relationship or transactions of the non-


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p y g p y p

executive directors viz-a-viz. the company should be disclosed in the Annual

Report.

Audit Committee:The company agrees that a qualified and independent audit committee shall

be set up and that:

The audit committee shall have minimum three members, all being non-executivedirectors, with the majority of them being independent, and with at least one

director having financial and accounting knowledge;

The chairman of the committee shall be an independent director;

The chairman shall be present at Annual General Meeting to answer shareholder


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queries;

The audit committee should invite such of the executives, as it considersappropriate to be present at the meetings of the committee, but on occasions it

may also meet without the presence of any executives of the company. The

finance director, head of internal audit and when required, a representative of the

external auditor shall be present as invitees for the meetings of the audit

committee;

The Company Secretary shall act as the secretary to the committee.The audit committee shall meet at least thrice a year. One meeting shall be held

before finalization of annual accounts and one every six months. The quorum shall be

either two members or one third of the members of the audit committee, whichever is


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higher and minimum of two independent directors.

The audit committee shall have powers which should include the following:

a) To investigate any activity within its terms of reference.

b) To seek information from any employee.

c) To obtain outside legal or other professional advice.d) To secure attendance of outsiders with relevant expertise, if it considers

necessary.

The company agrees that the role of the audit committee shall include the

following:

a) Oversight of the companys financial reporting process and the disclosure of


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its financial information to ensure that the financial statement is correct,

sufficient and credible.

b) Recommending the appointment and removal of external auditor, fixation of

audit fee and also approval for payment for any other services.

Remuneration of Directors:

The company agrees that the remuneration of non-executive directors shall bedecided by the board of directors.

The company further agrees that the following disclosures on the remuneration ofdirectors shall be made in the section on the corporate governance of the annual

report.

All elements of remuneration package of all the directors i.e. Salary, Benefits,


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Bonuses, Stock Options, Pension etc. Details of fixed component and performance

linked incentives, along with the performance criteria. Service contracts, notice period,

severance fees. Stock option details, if anyand whether issued at a discount as well

as the period over which accrued and over which exercisable.

Board Procedure: The company agrees that the board meeting shall be held at least four times a

year, with a maximum time gap of four months between any two meetings.

The company further agrees that a director shall not be a member in more than 10committees or act as Chairman of more than five committees across all companies

in which he is a director.

Furthermore it should be a mandatory annual requirement for every director to


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inform the company about the committee positions he occupies in other companies and

notify changes as and when they take place.

Management: The company agrees that as part of the directors report or as an addition there to,

a Management Discussion and Analysis report should form part of the annualreport to the shareholders. This Management Discussion & Analysis should

include discussion on the following matters within the limits set by the companys

competitive position:

a)Industry structure and developments.b)Opportunities and Threats.

c)Segmentwise or product-wise performance.


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d)Outlooke)Risks and concerns.f)Internal control systems and their adequacy.

Disclosures must be made by the management to the board relating to all materialfinancial and commercial transactions, where they have personal interest that may

have a potential conflict with the interest of the company at large.

Shareholders:


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The company agrees that in case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following

information:

a)A brief resume of the director;b)

Nature of his expertise in specific functional areas; and

c)Names of companies in which the person also holds the directorship and themembership of Committees of the board.

The company further agrees that information like quarterly results, presentationmade by companies to analysts shall be put on companys web -site, or shall be

sent in such a form so as to enable the stock exchange on which the company is


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listed to put it on its own web-site.

The company further agrees that a board committee under the chairmanship of anon-executive director shall be formed to specifically look into the redressing of

shareholder and investors complaints like transfer of shares, non-receipt of

balance sheet, non-receipt of declared dividends etc. This Committee shall be

designated as Shareholders/Investors Grievance Committee.

The company further agrees that to expedite the process of share transfers theboard of the company shall delegate the power of share transfer to an officer or a

committee or to the registrar and share transfer agents. The delegated authority


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shall attend to share transfer formalities at least once in a fortnight.

Report on Corporate Governance:The company agrees that there shall be a separate section on Corporate

Governance in the annual reports of company, with a detailed compliance report on

Corporate Governance. Non compliance of any mandatory requirement i.e. which ispart of the listing agreement with reasons there of and the extent to which the non-

mandatory requirements have been adopted should be specifically highlighted.

Compliance:

The company agrees that it shall obtain a certificate from the auditors of the


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company regarding compliance of conditions of corporate governance as stipulated in

this clause and annexed the certificate with the directors report, which is sent annually

to all the shareholders of the company. The same certificate shall also be sent to the

Stock Exchanges along with the annual returns filed by the company.

III. SEBI Norms Based on N.R.Narayan Murthy Committee:The SEBI Committee on Corporate Governance was constituted under the

Chairmanship of Shri N. R. Narayana Murthy, Chairman and Chief Mentor of Infosys

technologies Limited.

The Committee met thrice on December 7, 2002, January 7, 2003 and February 8,


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2003, to deliberate the issues related to corporate governance and finalize its

recommendations to SEBI.

Background:The key issues debated by the Committee and the related recommendations are

discussed below.

Audit Committees:Suggestions were received from members that audit committees of publicly listed

companies should be required to review the following information mandatorily:

Financial statements;

Management discussion and analysis of financial condition and results ofi


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operations;

Reports relating to compliance with laws and to risk management; Management letters / letters of internal control weaknesses issued by statutory /

internal auditors; and

Records of related party transactions.The Committee noted that most of this information was already reviewed by audit

committees during the audit committee meeting. Further, it was already contained as a

recommendation in the Kumar mangalam Birla Committee on Corporate Governance.

The Committee also noted that the recommendation in the Birla Committee

Report cast a responsibility on the audit committee vis--vis their duties and role.

Further, the compliance report of the Mumbai Stock Exchange showed that

i t l l 53% f th i li d ith thi i t t i d


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approximately only 53% of the companies complied with this requirement contained

in the Birla Committee Report.

In view of the above deliberations, the Committee makes the following mandatory

recommendation:

Mandatory Recommendation:


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1)Audit committees of publicly listed companies should be required to review thefollowing information mandatorily:

a.Financial statements and draft audit report, including quarterly / half-yearlyfinancial information;

b.Management discussion and analysis of financial condition and results ofoperations;

c.Reports relating to compliance with laws and to risk management;d.Management letters / letters of internal control weaknesses issued by statutory /

internal auditors; and

e.Records of related party transactions.

2)All audit committee members should be financially literate and at least onemember should have accounting or related financial management expertise


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member should have accounting or related financial management expertise.

Audit Reports and Audit Qualifications:Mandatory recommendation:

In case a company has followed a treatment different from that prescribed in an

accounting standard, management should justify why they believe such alternative

treatment is more representative of the underlying business transaction. Management

should also clearly explain the alternative accounting treatment in the footnotes to the

financial statements.

Non-Mandatory Recommendation:


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Companies should be encouraged to move towards a regime of unqualified

financial statements. This recommendation should be reviewed at an appropriate

juncture to determine whether the financial reporting climate is conducive towards a

system of filing only unqualified financial statements.

Related Party Transactions: A statement ofall transactions with related parties including their bases should be

placed before the independent audit committee for formal approval / ratification.

If any transaction is not on an arms length basis, management should provide anexplanation to the audit committee justifying the same.

Risk Management


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Mandatory Recommendation:1)Procedures should be in place to inform Board members about the risk assessment

and minimization procedures. These procedures should be periodically reviewed

to ensure that executive management controls risk through means of a properly

defined framework.

2)Management should place a report before the entire Board of Directors everyquarter documenting the business risks faced by the company, measures to

address and minimize such risks, and any limitations to the risk taking capacity of

the corporation.

Non-mandatory Recommendation:


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Companies should be encouraged to train their Board members in the business

model of the company as well as the risk profile of the business parameters of the

company, their responsibilities as directors, and the best ways to discharge them.

Proceeds from Initial Public Offerings (IPO):Companies raising money through an Initial Public Offering should disclose to the

Audit Committee, the uses / applications of funds by major category 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

should be certified by the independent auditors of the company. The audit committeeshould make appropriate recommendations to the Board to take up steps in this matter.

Code of Conduct:


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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. This code of

conduct shall be posted on the website of the company. All Board members and senior

management personnel 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.

Nominee Directors:


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There shall be no nominee directors. Where an institution wishes to appoint a

director on the Board, such appointment should be made by the shareholders. An

institutional director, so appointed, shall have the same responsibilities and shall be

subject to the same liabilities as any other director. Nominee of the Government on

public sector companies shall be similarly elected and shall be subject to the same

responsibilities and liabilities as other directors.

Non-Executive Director Compensation:All compensation paid to non-executive directors may be fixed by the Board of

Directors and should be approved by shareholders in general meeting. Limits shouldbe set for the maximum number of stock options that can be granted to non-executive

directors in any financial year and in aggregate. The stock options granted to the

nonexecutive directors shall vest after a period of at least one year from the date such


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p y

nonexecutive directors have retired from the Board of the Company. Companies

should publish their compensation philosophy and statement of entitled compensation

in respect of non-executive directors in their annual report. Alternatively, this may be

put up on the companys website and reference drawn thereto in the annual report.

Companies should disclose on an annual basis, details of shares held by non-executivedirectors, including on an if-converted basis. Non-executive directors should be

required to disclose their stock holding in the listed company in which they are

proposed to be appointed as directors, prior to their appointment. These details should

accompany their notice of appointment.

Whistle Blower Policy:P l h b hi l i i h ld b bl


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Personnel who observe an unethical or improper practice 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. The employment and other

personnel policies of the company shall contain provisions protecting whistle

blowers from unfair termination and other unfair prejudicial employment practices.

Subsidiary Companies:The provisions relating to the composition of the Board of Directors of the

holding company should be made applicable to the composition of the Board of

Directors of subsidiary companies. At least one independent director on the Board of

Directors of the parent company shall be a director on the Board of Directors of the

subsidiary company. The Audit Committee of the parent company shall also review


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y p y p p y

the financial statements, in particular the investments made by the subsidiary

company. The minutes of the Board meetings of the subsidiary company shall be

placed for review at the Board meeting of the parent company. The Board report of the

parent company should state that they have reviewed the affairs of the subsidiary

company also.

Real Time Disclosures: It was suggested that SEBI should issue rules relating to real-time disclosures of

certain events or transactions that may be of importance to investors, within 3-5

business days. These would include events such as (a) a change in the control of

the company, (b) a companys acquisition / disposal of a significant amount of

assets, (c) bankruptcy or receivership, (d) a change in the companys independent


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auditors, and (e) the resignation of a director.

The Committee noted that there are certain practical problems in ensuring timelydisclosures. For example, a business transaction that is under negotiations may

have an impact on the market price. However, its disclosure may prejudice the

underlying business negotiations. The Committee also noted the issue of rumor verification by stock exchanges. It

noted a view that Board decisions that were price sensitive should be disclosed to

the markets within 15 minutes. Stock exchanges are currently responsible for

rumor verification. The Committee however believed that this issue needs to be

studied with much greater depth by SEBI and the stock exchanges, and should not

be restricted to a corporate governance perspective alone.


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The Committee was of the view that no recommendation would be made to SEBIin respect of this suggestion.

Evaluation of Board Performance:The performance evaluation of non-executive directors should be by a peer

group comprising the entire Board of Directors, excluding the director being

evaluated; and Peer group evaluation should be the mechanism to determine whether

to extend / continue the terms of appointment of non-executive directors.

Analyst Reports:


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Analyst Reports:SEBI should make rules for the following:

Disclosure in the report issued by a security analyst whether the company that isbeing written about is a client of the analysts employer or an associate of the

analysts employer, and the nature of services rendered to such company, if any;

and

Disclosure in the report issued by a security analyst whether the analyst or theanalysts employer or an associate of the analysts employer hold or held (in the

12 months immediately preceding the date of the report) or intend to hold any

debt or equity instrument in the issuer company that is the subject matter of the

report of the analyst.


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IV. Naresh Chandra Committee on Corporate Audit and Governance:Background: Section 2.3.8 of this Report states that the Committee would also recommend that

the following mandatory recommendations in the report of the Naresh Chandra

Committee, relating to corporate governance, be implemented by SEBI.

This section sets out such recommendations of the Naresh Chandra Committeethat were considered by this Committee.


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Disclosure of Contingent Liabilities: (Sec- 2.5)Mandatory Recommendation:1)Management should provide a clear description in plain English of each material.2)Contingent liability and its risks, which should be accompanied by the auditors

clearly worded comments on the managements view.

3)This section should be highlighted in the significant accounting policies and noteson accounts, as well as, in the auditors report, where necessary.

4)This is important because investors and shareholders should obtain a clear view ofa companys contingent liabilities as these may be significant risk factors that


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could adversely affect the companys future financial condition and results of

operations.

CEO / CFO Certification: (Sec- 2.10)Mandatory Recommendation:1)For all listed companies, there should be a certification by the CEO (either the

Executive Chairman or the Managing Director) and the CFO (whole-time Finance

Director or other person discharging this function) which should state that, to the

best of their knowledge and belief;

2)They have reviewed the balance sheet and profit and loss account and all itsschedules and notes on accounts, as well as the cash flow statements and the


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Directors Report;

3)These statements do not contain any material untrue statement or omit anymaterial fact nor do they contain statements that might be misleading;

4)These statements together present a true and fair view of the company, and are incompliance with the existing accounting standards and / or applicable laws /

regulations;

5)They are responsible for establishing and maintaining internal controls and haveevaluated the effectiveness of internal control systems of the company; and

6)They have also disclosed to the auditors and the Audit Committee, deficiencies inthe design or operation of internal controls, if any, and what they have done or


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propose to do to rectify these;

7)They have also disclosed to the auditors as well as the Audit Committee, instancesof significant fraud, if any, that involves management or employees having a

significant role in the companys internal control systems; and

8)They have indicated to the auditors, the Audit Committee and in the notes onaccounts, whether or not there were significant changes in internal control and / or

of accounting policies during the year.

Independence of Audit Committee: (Sec-4.7 )Mandatory Recommendation:

All audit committee members shall be non-executive directors

Independent Director Exemptions: (Sec- 4.10)


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p p ( )

Recommendation:1)Legal provisions must specifically exempt non-executive and independent

directors from criminal and civil liabilities under certain circumstances.

2)SEBI should recommend that such exemptions need to be specifically spelt out forthe relevant laws by the relevant departments of the Government and independent

regulators, as the case may be.

3)However, independent directors should periodically review legal compliancereports prepared by the company as well as steps taken by the company to cure

any taint.

4)In the event of any proceedings against an independent director in connectionwith the affairs of the company, defense should not be permitted on the ground


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that the independent director was unaware of this responsibility.

1.19 RECENT DEVELOPMENT IN CG:-

Effective Corporate Governance

Is no Longer a

Nice to Havebut

a Must to have.

The National Foundation for Corporate Governance (NFCG) has been jointly set

up by the Ministry of Company Affairs, the Industry, Institute of Chartered

Accountants of India (ICAI) and ICSI to evolve corporate governance principles in

three areas- Institutional Investors, Independent Directors and Auditing.


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The NFCG will ensure compliance of corporate governance norms in letter and

spirit by the Indian companies.

It estimated that over 9,000 listed companies require about 30,000 independent

directors to comply with requirement of Clause 49. The PRIME database has created

the website primedirectors.com to enable listed companies to find suitable

independent directors for their boards. The main sponsors of the website are the

National Stock Exchange of India Limited (NSE) and Bombay Stock Exchange

Limited (BSE) with the Confederation of Indian Industry (CII) as the institutional

partner.

In the fast-changing business scenario, risk management has acquired top priority.

As such, strong and effective corporate governance is no longer a Nice to have but a


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Must to have. This is the reason why companies, besides restructuring their board ofdirectors, are looking at a more holistic governance model.

E- Governance:-Changing technology is the driving force behind the next wave of economic

growth. To take advantage of that growth, we have to not only apply new technology

but also new thinking.

Information is data that have been arranged into meaningful patterns, and

knowledge is that which helps in application and productive use of information.

Need for E-Governance:World economics have recognized IT as an effective tool in catalyzing the


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economic activity, in efficient governance and developing human resource.

The Electronic Governance wave has started world wide, with the technologies to

implement electronic governance already available. Change in the mindset of the

people particularly at the top levels in the bureaucracy and policy making is important

because it is they who provide the leadership.

In simple terms Electronic Governance (E- Governance) can be defined as giving

citizens the choice of when and where they can have access to government information

and services.

Importance of Electronic Governance:A Joined up government community citizen infrastructure has its own


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significance. A strong and effective information chain, comprising a choice of

practical, accessible and manageable channels of communication has a dual benefit.

Citizens enjoy a fast and convenient service, whilst government not only becomes

more integrated into the community itself, but can focus its resources where they are

needed most.

1.20 THE ROLE OF SEBI IN CG:-

The Securities and Exchange Board of India (SEBI), the chief corporate

regulatory body in India. Over the last decade, SEBI has performed well and has

formed various committees to look into the ways and means to regulate the corporate

governance practices in India, at par with international practice. Commensurate with

the urgent needs and directions of International Organization of Securities


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Commissions (IOSCO), the international regulatory body of International AccountingStandards Board (IASB), SEBI is under sheer pressure to look for better corporate

governance practice in India since SEBI is a member of (OSCO)

On the broad and specific recommendations given by various committees, like

kumar Mangalam Birla Committee (1999) Naresh Chandra Committee (2002),

Narayan Murthy Committee (2003) on corporate governance and financial reporting

practices, the SEBI has approved the following:

To revise Clause 49 of the Listing Agreement to strengthen the responsibilities ofaudit committees to present consolidated financial statements whether necessary

and to publish quality segment financial reporting so as to improve the quality of

financial disclosure, including information on related party transactions:


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TO adopt a formal code of the conduct for directors and introduce performanceevaluation of non-executive directors;

TO introduce a whistle-blower policy whereby an employee can have theopportunity to bring to the notice of the management any irregularity observed by

him/her without any fear of exploitation by superior;

TO induce the independence of directors to improve disclosures relating tocompensation paid to the non-executives directors and their mandatory training.

Some of the above approvals have duly been implemented quite successfully by

SEBI, while others are still pending because of strong protests by the Indian corporate


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sectors. The following have so far been achieved:

The board meeting gap has been reduced from four months to three months; The number of independent directors in the audit committee has been fixed at two-

thirds of the members of audits committee instead of previous requirement of being

majority;

All members of the audit committee shall be financially literate as against theprevious requirement of at least one member having financial and accounting

knowledge;

Minimum number of audit committee meetings in a year has increased from threeto four;


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The presentation of consolidation Financial Statements and Publication of QualitySegment Financial Results have been made mandatory;

The nominee directors are to be regarded as independent directors; Five new criteria have been added to test the independence of directors.

Thus, SEBI has set the ball rolling to usher in excellence in corporate

governance and also to improve the financial disclosure practice in India through the

process of convergence and harmonization of accounting standards.

REFERENCES:REFERENCE BOOKS:


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1)Corporate Governance [MODULES FOR BEST PRACTICES]-4th Edition, ICSI.JOURNALS, MAGAZINES, NEWS PAPERS, BULLETIN:

1)Corporate Governance Scenario-Madan Bhasin, The Accounting World, June-2008.

2)Corporate Governance Practices in India-Prof. V. Gangadhar and Dr. M. Yadagiri,The Accounting World, Jan-2008.

3)Corporate Governance Basic Framework for Better Corporate Management- Dr.Chittaranjan Sarkar, The Accounting World, Feb-2008.

4)Corporate Governance Compliance Report-Nresh Kumar, The Accounting World,July-2007.


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5)Corporate Governance from Compliance to Competitive Advantage-Pankaj M.Madhani, The Accounting World, Aug-2007.

6)Corporate Governance and EVA as a Measure of Wealyh Creation- RupaliKumar, Managament Trends, Vol-2, No-2, April 2005- Sep 2005.

7)Corporate Governance: Problem of Increasing Transparency in Asia- Dr. MadanBhasin, The Chartered Accountant, Vol-56, No-4, October-2007.

8)Corporate Governance Scenario in India: Perspectives andProspects- Dr. Madan Bhasin, Executive Chartered Secretary,

Vol-5, No-2, Feb-2008.

9)Disclosure of Corporate Governance- Building Investors Confidence- SandipBhatt and Hetal Jhaveri, The Accounting World, Dec-2008.


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10)E-Governance Problems and Prospects- Philip Varughese Porattor, SouthernEconomist, Vol-44, No-19, Feb-2006.

11)Looking Beyond Corporate Governance Code- Sumona Ghosh, The CharteredAccountant, Vol-56, No-5, Nov-2007.

Documents

New Corporate Governance