Presented by-SANJANA.R

NATASHA FERNENDESNEETU.P.S

SHRUTHI MADONNASHYLA.B

A corporation is an organization created (incorporated)

by a group of shareholders who have ownership of the

corporation.

The elected board of directors appoint and oversee

management of the corporation .

CORPORATE

Oxford English dictionary defines “governance "as the

act, manner , fact or function of governing sway control.

The word has Latin origins that suggest the notion of

“steering". it deals with the processes and systems by

which an organization or society operates.

Governance can be used with reference to all kind of

organizational structure e.g.

Ngo –not for profit organization

Municipal corporation /gram panchyat

Central/state government

Partnership firm

GOVERNANCE

It is generally understood as the framework of rules,

relationships, systems and processes within and by

which authority is exercised and controlled in

corporations.

“A system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby mitigating agency risks which may stem from the misdeeds of corporate officers”

CORPORATE GOVERNANCE

OBJECTIVES OF GOOD CORPORATE GOVERNANCES

Strengthen management oversight functions and accountability.

Balance skills, experience and independence on the board appropriate to the nature and extent of company operations.

Establish a code to ensure integrity.Safeguard the integrity of company reporting. Risk management and internal control.Disclosure of all relevant and material matters.Recognition and preservation of needs of

shareholders.

The Aim And Purpose Of Corporate Governance

Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society. The incentive to corporations and to those who own and manage them to adopt internationally accepted governance standards is that these standards will help them to achieve their corporate aims and to attract investment. The incentive for their adoption by states is that these standards will strengthen the economy and discourage fraud and mismanagement.The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system, and funds will flow to the centers of economic activity that inspire trust.

Importance of Corporate Governance

• Shapes the growth and future of capital market & economy.

• Instrument of investor’s protection.• Protecting the interest of Shareholders and all other

stakeholder.• Contributes to the efficiency of the business enterprise.• Creation of wealth.• Enables firm to compete internationally in sustained way.• Keeps an eye on the issues of insider training.

Reasons for the Growing Demand for Corporate Governance

• Inadequacies and failures of an existing system often bring to the fore the need for norms and codes to remedy them. This is true of corporate governance too. Deficiencies in the Accounting Standards became more evident after many companies, in their eagerness to increase earnings and accelerate growth, exploited the weaknesses in the accounting standards to show inflated profits and understate liabilities.

• There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since the high-profile collapses of a number of large corporations during 2001-2002, most of which involved accounting fraud

Reasons for growing demand for corporate governance

• The growing awareness of investors and investors group of their rights.

• Economic reforms that allowed the growth of free enterprise and freed private investment opportunities.

• Exposures of domestic private and public sector companies to greater domestic and foreign competition ,which has multiplied choices for consumers and compelled increases in efficiency.

• The consequential changes in the shareholding pattern of private and public sector companies.

• The growing importance of institutional investors and public financial institutions, gradually asserting and transforming themselves in their new role as active shareholders rather than as lenders.

• The stock exchanges becoming increasingly conscious of their roles as self regulatory organizations and exploring the possibility of using the listing agreement as a tool for raising the standard of corporate governance

LIVE EXAMPLES:

• . Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance.

• Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms.

• Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).

• Unlike South-East and East Asia, the corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic collapse

• The initiative in India was initially driven by an industry association, the Confederation of Indian Industry

– In December 1995, CII set up a task force to design a voluntary code of corporate governance.

– The final draft of this code was widely circulated in 1997.

– In April 1998, the code was released. It was called Desirable Corporate Governance: A Code.

– Between 1998 and 2000, over 25 leading companies voluntarily followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI and many others

Brief history of corporate governance in India

• Following CII’s initiative, the Securities and Exchange Board of India (SEBI) set up a committee under Kumar Mangalam Birla to design a mandatory-cum-recommendatory code for listed companies

• The Birla Committee Report was approved by SEBI in December 2000

• Became mandatory for listed companies through the listing agreement, and implemented according to a rollout plan:

– 2000-01: All Group A companies of the BSE or those in the S&P CNX Nifty index… 80% of market cap.

– 2001-02: All companies with paid-up capital of Rs.100 million or more or net worth of Rs.250 million or more.

– 2002-03: All companies with paid-up capital of Rs.30 million or more

Brief history of corporate governance in India

• Following CII and SEBI, the Department of Company Affairs (DCA) modified the Companies Act, 1956 to incorporate specific corporate governance provisions regarding independent directors and audit committees.

• In 2001-02, certain accounting standards were modified to further improve financial disclosures. These were:

– Disclosure of related party transactions.– Disclosure of segment income: revenues, profits and capital

employed.– Deferred tax liabilities or assets. – Consolidation of accounts.

• Initiatives are being taken to (i) account for ESOPs, (ii) further increase disclosures, and (iii) put in place systems that can further strengthen auditors’ independence.

Brief history of corporate governance in India

Supervisory board/committee/team

Audit committee

Internal audit

Statutory audit

Disclosure of information

Risk management framework

Internal control framework

FRAMEWORK OF GOVERNANCE

Corporate Governance Environment and Outcomes

Board of directors

Managers

Workers

Shareholders or owners

Regulators

Customers

Suppliers

Community(people affected by the actions of the

organization.)

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PARTIES TO CORPORATE GOVERNANCE

Principles of corporate governance• Rights and equitable treatment of share holders: Organizations should respect

the rights of shareholders and help shareholders to exercise those rights. • Interests of other stakeholders: Organizations should recognize that they have

legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.

• Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment

• Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members.

• Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Every listed company should be headed by an effective

board which should lead and control the company. There should be board balance of executive & non

executive directors such that no individual can dominate the board decision making.

The board should be supplied with timely information to enable it to discharge its duties.

There should be formal and transparent procedure for the appointment of new directors to the board.

All directors should be required to submit themselves for re-election at regular intervals and at least every three years.

PRICIPLES OF CORPORATE GOVERNANCE

Integrity of the management

Ability of the board

Adequacy of the process

Commitment level of individual board members

Quality of corporate reporting

Participation of stakeholders in the management

FACTORS INFLUENCING QUALITY OF GOVERNANCE

Demand for greater transparency and accountability

Written job descriptions detailing roles and responsibilities

of chairman and board members.

Core competencies for board members are defined and

those without skills or expertise not invited.

Development of performance criteria and annual

evaluations of the board.

Orientation for new members.

Ongoing training

Succession planning

TRENDS IN CORPORATE GOVERNANCE

Overseeing strategic development & planning

Management selection, supervision and upgrading.

Maintenance of good member relations.

Protecting and optimizing the organization’s assets.

Fulfilling legal requirements.

THE BOARD RESPONSIBILITIES

Accou

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y

Fundamental Pillars of Corporate Governance

Corporate Governance

Tran

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ncy

Resp

on

sib

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y

Fair

ness

Accountability

Clarifying governance roles & responsibilities, and

supporting voluntary efforts to ensure the alignment of

managerial and shareholder interests and monitoring by

the board of directors capable of objectivity and sound

judgment.

Transparency

Requiring timely disclosure of adequate information

concerning corporate financial performance

Responsibility

Ensuring that corporations comply with relevant laws and

regulations that reflect the society’s values

Fairness

Ensuring the protection of shareholders’ rights and the

enforceability of contracts with service/resource providers

Investors are Willing to Pay More For a Company With Good Board Governance Practices

83 81 89

Companies are willing to pay 18 % to 28% more for better governance.

CORPORATE GOVERNANCE

Best Governed Companies

ICSI NATIONAL AWARD FOR EXCELLENCE IN CORPORATE GOVERNANCE

Code of CG should be redesigned to reflect international best

practices

Stringent enforcement of Law

More effective coordination and cooperation between SEBI, DCA

CG mechanism should be flexible and suitable

Overall ethical values in all segments should be promoted for

effective accounting, auditing, disclosure and transparent system.

CONCLUDING OBSERVATIONS

Board of Directors: information that must be supplied

Annual, quarter, half year operating plans, budgets and updates.

Quarterly results of company and its business segments. Minutes of the audit committee and other board

committees. Recruitment and remuneration of senior officers. Materially important legal notices and claims, as well as

any accidents, hazards, pollution issues and labor problems.

Any actual or expected default in financial obligations.

MANDATED CG GUIDELINES AND DISCLOSURES

Details of joint ventures and collaborations.

Transactions involving payment towards goodwill, brand

equity and intellectual property.

Any materially significant sale of business and

investments.

Foreign currency and other risks and risk management.

Any regulatory non-compliance.

• Report of the Kumar Mangalam Birla Committee on Corporate Governance.

Recommendations of Birla Committee

• The Birla Committee Report is 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.

• The Committee, felt that the recommendations should be divided into mandatory and non-mandatory categories.

IMPLEMENTATION OF CORPORATE GOVERNANCE IN INDIA

• SHRI KUMAR MANGALAM COMMITTEE – CONSTITUTED IN MAY 1999 TO PROMOTE AND RAISE THE STANDARD OF CORPORATE GOVERNANCE IN INDIA

• MANDATORY RECOMMENDATIONS OF BIRLA COMMITTEE: • APPLIES TO LISTED COMPANIES WITH PAID UP CAPITAL OF Rs.3

CRORE AND ABOVE• COMPOSITION OF BOARD OF DIRECTORS – OPTIMUM

COMBINATION OF EXECUTIVE & NON-EXECUTIVE DIRECTORS• AUDIT COMMITTEE – WITH 3 INDEPENDENT DIRECTORS WITH

ONE HAVING FINANCIAL AND ACCOUNTING KNOWLEDGE.

MANDATORY RECOMMENDATIONS OF BIRLA COMMITTEE

• REMUNERATION COMMITTEE• BOARD PROCEDURES – ATLEAST 4 MEETINGS OF THE BOARD IN

A YEAR WITH MAXIMUM GAP OF 4 MONTHS BETWEEN 2 MEETINGS. TO REVIEW OPERATIONAL PLANS, CAPITAL BUDGETS, QUARTERLY RESULTS, MINUTES OF COMMITTEE’S MEETING.

• DIRECTOR SHALL NOT BE A MEMBER OF MORE THAN 10 COMMITTEE AND SHALL NOT ACT AS CHAIRMAN OF MORE THAN 5 COMMITTEES ACROSS ALL COMPANIES

• MANAGEMENT DISCUSSION AND ANALYSIS REPORT COVERING INDUSTRY STRUCTURE, OPPORTUNITIES, THREATS, RISKS, OUTLOOK, INTERNAL CONTROL SYSTEM

• INFORMATION SHARING WITH SHAREHOLDERS

NON-MANDATORY RECOMMENDATIONS OF BIRLA COMMITTEE

• ROLE OF CHAIRMAN • REMUNERATION COMMITTEE OF BOARD • SHAREHOLDERS’ RIGHT FOR RECEIVING HALF YEARLY

FINANCIAL PERFORMANCE • POSTAL BALLOT COVERING CRITICAL MATTERS LIKE

ALTERATION IN MEMORANDUM ETC • SALE OF WHOLE OR SUBSTANTIAL PART OF THE

UNDERTAKING• CORPORATE RESTRUCTURING • FURTHER ISSUE OF CAPITAL • VENTURING INTO NEW BUSINESSES

IMPLEMENTATION OF RECOMMENDATIONS OF BIRLA COMMITTEE

• BY INTRODUCTION OF CLAUSE 49 IN THE LISTING AGREEMENT WITH STOCK EXCHANGES

• PROVISIONS OF CLAUSE 49

• COMPOSITION OF BOARD – IN CASE OF FULL TIME CHAIRMAN, 50% NON-EXECUTIVE DIRECTORS AND 50%

EXECUTIVE DIRECTORS

• CONSTITUTION OF AUDIT COMMITTEE – WITH 3 INDEPENDENT DIRECTORS WITH CHAIRMAN HAVING SOUND FINANCIAL

BACKGROUND. FINANCE DIRECTOR AND INTERNAL AUDIT HEAD TO BE SPECIAL INVITEES AND MINIMUM 3 MEETINGS TO BE CONVENED. RESPONSIBLE FOR REVIEW OF FINANCIAL PERFORMANCE 0N HALF YEARLY/ANNUALLY BASIS; APPOINTMENT/ REMOVAL/REMUNERATION OF AUDITORS; REVIEW OF INTERNAL CONTROL SYSTEMS AND ITS ADEQUACY

• CLAUSE 49 REQUIREMENTS• REMUNERATION OF DIRECTORS – REMUNERATION OF NON-EXECUTIVE DIRECTORS TO BE DECIDED BY THE BOARD.

DETAILS OF REMUNERATION PACKAGE, STOCK OPTIONS, PERFORMANCE INCENTIVES OF DIRECTORS TO BE DISCLOSED

• BOARD PROCEDURES – ATLEAST 4 MEETINGS IN A YEAR. DIRECTOR NOT TO BE MEMBER OF MORE THAN

10 COMMITTEES AND CHAIRMAN OF MORE THAN 5 COMMITTEES ACROSS ALL COMPANIES

• MANAGEMENT DISCUSSION & ANALYSIS REPORT – SHOULD INCLUDE:• INDUSTRY STRUCTURE & DEVELOPMENTS• OPPORTUNITIES & THREATS • SEGMENT WISE OR PRODUCT WISE PERFORMANCE

• CLAUSE 49 REQUIREMENTS MANAGEMENT DISCUSSION & ANALYSIS REPORT –

• TO INCLUDE:• OUTLOOK • RISKS & CONCERNS • INTERNAL CONTROL SYSTEMS & ITS ADEQUACY• DISCUSSION ON FINANCIAL PERFORMANCE • DISCLOSURE BY DIRECTORS ON MATERIAL FINANCIAL AND

COMMERCIAL TRANSACTIONS WITH THE COMPANY• SHAREHOLDERS INFORMATION – • BRIEF RESUME OF NEW/RE-APPOINTED DIRECTORS, QUARTERLY

RESULTS TO BE SUBMITTED TO STOCK EXCHANGES AND TO BE PLACED ON WEB-SITE, PRESENTATION TO ANALYSTS

• CLAUSE 49 REQUIREMENTS SHAREHOLDERS’/INVESTORS GRIEVANCE COMMITTEE UNDER THE CHAIRMANSHIP OF INDEPENDENT DIRECTOR. MINIMUM 2 MEETINGS IN A YEAR

• REPORT ON CORPORATE GOVERNANCE AND CERTIFICATE FROM AUDITORS ON COMPLIANCE OF PROVISIONS OF CORPORATE GOVERNANCE AS PER CLAUSE 49 IN THE LISTING AGREEMENT

Names of the Members of the committee Shri Kumar Mangalam Birla, Chairman, Aditya Birla group

Chairman of the Committee

• 1. Shri Rohit Bhagat, Country Head, Boston Consulting Group 2. Dr. J Bhagwati, Jt. Secretary, Ministry of Finance. 3. Shri Samir Biswas, Regional Director, Western Region, Department of Company Affairs, Government of India 4. Shri S.P. Chhajed, President of Institute of Chartered Accountants of India 5. Shri Virender Ganda, Ex-President of Institute of Company Secretaries of India

6. Dr. Sumantra Ghoshal, Professor of Strategic Management, London Business School 7. Shri Vijay Kalantri, President, All India Association of Industries 8. Shri Pratip Kar, Executive Director, SEBI — Member Secretary 9.Shri Y. H. Malegam, Managing Partner, S.B. Billimoria & Co 10.Shri N. R. Narayana Murthy, Chairman and Managing Director, Infosys Technologies Ltd. 11.Shri A K Narayanan, President of Tamil Nadu Investor Association 12.Shri Kamal Parekh, Ex-President, Calcutta Stock Exchange (Shri J M Chaudhary – President Calcutta Stock Exchange 13.Dr. R. H. Patil, Managing Director, National Stock Exchange Ltd. 14.Shri Anand Rathi, President of the Stock Exchange, Mumbai 15.Ms D.N. Raval, Executive Director, SEBI 16.Shri Rajesh Shah, Former President of Confederation of Indian Industries. 17.Shri L K Singhvi, Sr. Executive Director, SEBI 18.Shri S. S. Sodhi, Executive Director, Delhi Stock Exchange

• RECENT DEVELOPMENTS COMMITTEE HEADED BY SHRI NARESH CHANDRA CONSTITUTED IN AUGUST 2002 TO EXAMINE CORPORATE AUDIT, ROLE OF AUDITORS, RELATIONSHIP OF COMPANY & AUDITOR

• RECOMMENDATION OF NARESH CHANDRA COMMITTEE: • RECOMMENDED A LIST OF DISQUALIFICATIONS FOR AUDIT

ASSIGNMENTS LIKE DIRECT RELATIONSHIP WITH COMPANY, ANY BUSINESS RELATIONSHIP WITH CLIENT, PERSONAL RELATIONSHIP WITH DIRECTOR

• AUDIT FIRMS NOT TO PROVIDE SERVICES SUCH AS ACCOUNTING, INTERNAL AUDIT ASSIGNMENTS ETC. TO AUDIT CLIENTS

• AUDITOR TO DISCLOSE CONTINGENT LIABILITIES & HIGHLIGHT SIGNIFICANT ACCOUNTING POLICIES

• RECENT DEVELOPMENTS RECOMMENDATION OF NARESH CHANDRA COMMITTEE:

• AUDIT COMMITTEE TO BE FIRST POINT OF REFERENCE FOR APPOINTMENT OF AUDITORS

• CEO & CFO OF LISTED COMPANY TO CERTIFY ON FAIRNESS, CORRECTNESS OF ANNUAL AUDITED ACCOUNTS

• REDEFINITION OF INDEPENDENT DIRECTORS – DOES NOT HAVE ANY MATERIAL, PECUNIARY RELATIONSHIP OR TRANSACTION WITH THE COMPANY

• COMPOSITION OF BOARD OF DIRECTORS • STATUTORY LIMIT ON THE SITTING FEE TO NON-EXECUTIVE DIRECTORS TO BE

REVIEWED RECOMMENDATIONS HAVE

• FORMED PART OF COMPANIES (AMENDMENT) BILL, 2003 (YET TO BE PASSED)

RECENT DEVELOPMENTS SEBI CONSTITUTED A COMMITTEE HEADED BY SHRI N. R. NARAYANA MURTHY

• TO REVIEW EXISTING CODE OF CORPORATE GOVERNANCE

• CORPORATE GOVERNANCE - ULTIMATE OBJECTIVE

• TO ATTAIN HIGHEST STANDARD OF PROCEDURES AND PRACTICES FOLLOWED BY THE CORPORATE WORLD SO AS TO HAVE TRANSPARENCY IN ITS FUNCTIONING WITH AN ULTIMATE AIM TO MAXIMISE THE VALUE OF VARIOUS STAKEHOLDERS.

Narayana Murthy Committee on Corporate Governance in 2002

• With the belief that the efforts to improve corporate governance standards in India must continue because these standards themselves were evolving in keeping with the market dynamics, the Securities and Exchange Board of India (SEBI) had constituted a Committee on Corporate Governance in 2002 , in order to evaluate the adequacy of existing corporate governance practices and further improve these practices. It was set up to review Clause 49, and suggest measures to improve corporate governance standards. The SEBI Committee was constituted under the Chairmanship of Shri N. R. Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The Committee comprised members from various walks of public and professional life. This included captains of industry, academicians, public accountants and people from financial press and industry forums.

The terms of reference of the committee were to:

• review the performance of corporate governance; and • determine the role of companies in responding to rumor and other price

sensitive information circulating in the market, in order to enhance the transparency and integrity of the market.

The issues discussed by the committee primarily related to audit committees, audit reports, independent directors, related parties, risk management, directorships and director compensation, codes of conduct and financial disclosures.

The committee's recommendations in the final report were selected based on parameters including their relative importance, fairness, accountability, transparency, ease of implementation, verifiability and enforceability.

The key mandatory recommendations focused on:

• strengthening the responsibilities of audit committees; • improving the quality of financial disclosures, including those related

to related party transactions and proceeds from initial public offerings; • requiring corporate executive boards to assess and disclose business

risks in the annual reports of companies; • introducing responsibilities on boards to adopt formal codes of

conduct; the position of nominee directors; and • stock holder approval and improved disclosures relating to

compensation paid to non-executive directors. • WHISTLE BLOWER POLICY TO BE PALCE IN A COMPANY PROVIDING

FREEDOM TO APPROACH THE AUDIT COMMITTEE • SUBSIDIARIES TO BE REVIEWED BY AUDIT COMMITTEE OF HOLDING

COMPANY

Non-mandatory recommendations included:

• moving to a regime where corporate financial statements are not qualified;

• instituting a system of training of board members; and

• evaluation of performance of board members.

• As per the committee, these recommendations codify certain standards of 'good governance' into specific requirements, since certain corporate responsibilities are too important to be left to loose concepts of fiduciary responsibility. Their implementation through SEBI's regulatory framework will strengthen existing governance practices and also provide a strong incentive to avoid corporate failures. The Committee noted that the recommendations contained in their report can be implemented by means of an amendment to the Listing Agreement, with changes made to the existing clause 49.

CONCLUSION:• There are several corporate governance structures

available in the developed world but there is no one structure, which can be singled out as being better than the others. There is no "one size fits all" structure for corporate governance. The Committee’s recommendations are not therefore based on any one model but are designed for the Indian environment.

Corporate governance extends beyond corporate law.

• The Committee believes that its recommendations will go a long way in raising the standards of corporate governance in Indian firms and make them attractive destinations for local and global capital. These recommendations will also form the base for further evolution of the structure of corporate governance in consonance with the rapidly changing economic and industrial environment of the country in the new millenium.

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