New Corporate Governance

CORPORATE GOVERNANCE (CG):

The term “corporate governance” is combination of two words i.e. corporation and governance. The
word “Corporation” refers to a business organization or an institution by which it carries its activities
as to its specific objective.

“Governance” means the process of decision-making and the process by which decisions are
implemented. Governance can be used in several contexts such as corporate governance,
international governance, national governance and local governance. It is the art and skill of
utilizing political and collective power for the management of the society all level and in its
various aspects.
The word “Governance” also refers to the management and control of a body or society . Governance
means the manner in which power is exercised in the management of country’s economic and social
resources. Governance is the art of skill of utilizing political and collective power for the management
of society of all level and in its various aspects.

Similarly “Governance” refers to the process whereby people in power make decisions that create,
destroy or maintain social systems, structures and processes.

Corporation arises as an organization with some specific character and the governance refers to the
process of decision making and their implementation in the organization or society.

Corporate governance is, therefore, the process people in power direct, monitor and lead corporations,
and thereby either creates, modify and destroy the structures and systems under which they operate.
Corporate governors are both potential agents for change and also guardians of existing ways of
working. As such they are, therefore, a significant part of the fabric of our society. Corporate
governance deals with the ways in which suppliers of finance to corporation assure themselves of
getting a return on their investment."

In simple word Corporate Governance refers to the structures and processes for the direction and
control of companies. CG concerns the relationships among the management, Board of Directors,
shareholders including minority shareholders and other stake holders. The principal stakeholders are
the shareholders, the board of directors, employees, customers, creditors, suppliers, and the
community at large.

CG is a set of rules by which management of a company is directed and controlled. It includes a set of
relationship between a company’s management, its boards, its shareholders and other stakeholders.
Proper corporate governance goes beyond the board’s accountability to the company and to
shareholders which extends to include the protection of shareholders, the provision of timely and
accurate information on all matters regarding the company.
CG is the set of process, customs, policies, laws, and institutions affecting the way a corporation or
company is directed, administered or controlled. CG also includes the relationship among the many
stakeholders involved and the goals for which the corporation is governed.

CG is multi dimensional concept. It is also known as a cardinal point (heart) of the corporate sector.
An important theme of CG is to ensure the accountability of certain individuals in an organization
through mechanisms that try to reduce or eliminate the principal-agent problem. Another aspect of
CG is stakeholders view. There has been renewed interest in the CG practices of Modern Corporation
since 2001, particularly due to the high-profile collapses of a number of large U.S firms such as Enron
Corporation and World Com. In 2002, the US federal government passed the Sarbanes-Oxley Act,
intending to restore public confidence in corporate governance.

Corporate governance also means rigorous supervision of the management of a company to ensure that
business is done competently, with integrity and with due regard for the interest of all stakeholders.
Good governance is therefore, a mixture of legislation, non-legislative codes, self-regulation and best
practice, structure, culture, and board competency.

Good CG contributes to sustainable economic development by enhancing the performance of

companies and increasing their access to outside capital.

The principles of corporate governance endorsed by the Organization of Economic Co-operation and
Development (OECD) are considered to be the basic principles and have become an international
benchmark for the policy makers, investors, corporations and other stakeholders worldwide. The
principles are intended to assist OECD and non-OECD governments in their efforts to evaluate and
improve the legal, institutional and regulatory framework for corporate governance in their countries,
to provide guidance and suggestions for stock-exchange business corporations, and other parties that
have a role in the process of developing good corporate governance. The principles focus on publicly
traded companies, both financial and non-financial.

The OECD principles of CG have six common principles to promote good corporate governance
within all corporations. It provides mainly the following framework for identifying the key practical
issues in respect of CG:

The OECD Principles of Corporate Governance

I. Ensuring the Basis for an Effective Corporate Governance Framework

The corporate governance framework should promote transparent and efficient markets, be
consistent with the rule of law and clearly articulate the division of responsibilities among different
supervisory, regulatory and enforcement authorities.

II. The Rights of Shareholders and Key Ownership Functions

The corporate governance framework should protect and facilitate the exercise of shareholders’
rights.

A. Basic shareholder rights should include the right to:

 1) secure methods of ownership

2) Transfer shares;

3) obtain relevant information on the corporation

4) participate and vote in general shareholder meetings;

5) elect and remove members of the board; and

6) share in the profits of the corporation.

B. Shareholders should have the right to participate in, decisions concerning fundamental corporate
changes such as:

1) amendments to the statutes, or articles of incorporation

2) the authorisation of additional shares; and

C. Shareholders should have informed of the rules, including voting procedures, that govern general
shareholder meetings,

D. Enable certain shareholders to obtain a degree of control ownership should be disclosed

E. The exercise of ownership rights by all shareholders, including institutional investors, should be
facilitated.

F. Shareholders, including institutional shareholders, should be allowed to consult with each other on
issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to
prevent abuse.

III. The Equitable Treatment of Shareholders:

The corporate governance framework should ensure the equitable treatment of all shareholders,
including minority and foreign shareholders. All shareholders should have the opportunity to
obtain effective redress for violation of their rights.

A. All shareholders of the same series of a class should be treated equally.

B. Insider trading and abusive self-dealing should be prohibited.
C. Members of the board and key executives should be required to disclose to the
board whether they, directly, indirectly or on behalf of third parties, have a material
interest in any transaction or matter directly affecting the corporation.

IV. The Role of Stakeholders in Corporate Governance

The corporate governance framework should recognize the rights of stakeholders established
by law or through mutual agreements and encourage active co-operation between
 corporations and stakeholders in creating wealth, jobs, and the sustainability of financially
sound enterprises.

A. The rights of stakeholders that are established by law or through mutual agreements

are to be respected.

B. opportunity to obtain effective redress for violation of their rights.

C. employee participation should be permitted to develop.

D. they should have access to relevant, and reliable information on a timely and regular basis.

E. Stakeholders, employees and their representative bodies, should be able to freely communicate their
concerns about illegal or unethical practices to the board and their rights should not be compromised
for doing this.

F. The corporate governance framework should be complemented by an effective,

efficient insolvency framework and by effective enforcement of creditor rights.

V. Disclosure and Transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all
material matters regarding the corporation, including the financial situation, performance, ownership,
and governance of the company.

A. Disclosure should include:

1. The financial and operating results of the company.,

2. Company objectives.

3. Major share ownership and voting rights,

4. Remuneration policy for members of the board and key executives, and information about board
members, including their qualifications, the selection process, other company directorships and
whether they are regarded as independent by the board.

5. Related party transactions.

6. Foreseeable risk factors.

7. Issues regarding employees and other stakeholders.

8. Governance structures and policies, in particular, the content of any corporate

governance code or policy and the process by which it is implemented.

B. An annual audit should be conducted by an independent, competent and qualified,

 auditor in order to provide an external and objective assurance to the board and

shareholders that the financial statements fairly represent the financial position and

performance of the company in all material respects.

C. External auditors should be accountable to the shareholders and owe a duty to the

company to exercise due professional care in the conduct of the audit.

D. Channels for disseminating information should provide for equal, timely and cost-efficient

access to relevant information by users.

VI. The Responsibilities of the Board

The corporate governance framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the board’s accountability to the
company and the shareholders.

A. Board members should act in good faith, with due diligence and care, and in the best interest of
the company and the shareholders.

B. Where board decisions may affect different shareholder groups differently, the
board should treat all shareholders fairly.
C. The board should apply high ethical standards. It should take into account the
interests of stakeholders.
D. The board should fulfill certain key functions, including:

1. Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and
business plans; setting performance objectives; monitoring implementation and corporate
performance; and overseeing major capital expenditures, acquisitions and divestitures.

2. Monitoring the effectiveness of the company’s governance practices and

making changes as needed.
3. Selecting, compensating, monitoring and, when necessary, replacing key executives and
overseeing succession planning.

4. Aligning key executive and board remuneration with the longer term interests of
the company and its shareholders.
5. Ensuring a formal and transparent board nomination and election process.

6. Monitoring and managing potential conflicts of interest of management, board

members and shareholders, including misuse of corporate assets and abuse in
related party transactions.
7. Ensuring the integrity of the corporation’s accounting and financial reporting
 systems, including the independent audit, and that appropriate systems of
control are in place, in particular, systems for risk management, financial and
operational control, and compliance with the law and relevant standards.
8. Overseeing the process of disclosure and communications.

E. The board should be able to exercise objective independent judgement on corporate

affairs.

F. In order to fulfill their responsibilities, board members should have access to

accurate, relevant and timely information.

European Corporate Governance Forum

Introduction

On 21 May 2003, the Commission adopted an Action Plan announcing measures to

modernise company law and enhance corporate governance in the European Union .
In the Action Plan the Commission announced that it would confirm the collective
responsibility of board members for financial statements and key non-financial
information, increase transparency in intra group relations and transactions with
related parties and improve disclosure about corporate governance practices. To that
effect the Commission intends to propose to amend the Accounting Directives. The
Commission’s Action Plan follows the recommendations that The High Level Group
of Company Law Experts (HLG) presented in its final report on “A modern
regulatory framework for company law in Europe”, on 4 November 2002.

Why are measures needed?

The overall reason is to build confidence in European capital markets.

Corporate scandals have confirmed a need to clarify that all board members are collectively
responsible for financial statements and key non-financial information and that all board
members have to be held accountable for their actions and proper conduct of their
responsibilities.

In its Action Plan the Commission therefore proposed that listed companies should publish an
annual corporate governance statement. The main objective would be to collect all relevant
information concerning corporate governance elements and practices in listed companies in one
single place. This should allow shareholders’, investors’ and other stakeholders’ to assess
whether the company pursues good corporate governance.

Nepal Prospective:
Importance of CG:

This 21st Century is the era of Trade and Commerce. Economic prosperity for the people has become the main
goal of the governments worldwide. Cadbury Committee Report of 1992 (U.K.) has already accepted
the concept of corporate governance. Fulfillment of the basic elements like Rule of law, fairness, balance of
power, disclosure and transparency, role and responsibility of the board etc. are considered as an
importance aspect of good corporate governance. European Corporate Governance Forum has
considered importance of CG. Thus importance of corporate governance in present situation carries
more value. Without healthy corporate sector it has become impossible to fulfill the expectation and
aspiration of the people in respect of economic activities to make them economically sound. This helps
to protect the public capital and shareholders are enabled to get profit.

Corporate governance deals with the rights and responsibilities of company's management, its board,
shareholders and various stakeholders. Different laws related to govern the corporate affairs are part and
partial of the corporate governance. Corporate sector subscribe its capital from public in terms of equity. It
is the concept of good corporate governance by which all the economic activities and dealings are
governed and provide driving force to them. So, the whole success of economic dealings and activities are
depends upon concept of good corporate governance.

The Importance of Corporate Governance can be observed from following grounds:

a. The separation of management from the ownership.

b. Creation and enhancement of a corporation’s competitive advantage.

c. Enabling a corporations prefer efficiency by preventing fraud and malpractice.

d. Providing protection to shareholders interest.

e. Enhancing the violation of an enterprise.

f. Ensuring compliance of laws and regulation.

g. Providing stability and growth to the enterprise.

Basically, we can summarize the importance of Corporate Governance as follows:

It enhances a culture of company business:

Good corporate governance helps to draw attention of investors ranging from high cost capital to low cost
capital by inspiring investor’s confidence. This, combined with greater oversight of the use of such
capital, usually provides a greater return on investment.

Leads to Societal Gains:

Proper corporate governance precludes corruption. A corrupt management is guided by vested interest in
the course of use and distribution of the assets of a company. Management governed by the proper
controlling authority seeks to develop the company’s competitiveness in order to survive and thrive. In
result, members of the society will be benefitted.

Promotes Restructuring:
Good Corporate Governance helps to restructure a company and become competitive in an increasingly
global market. For this the directors and managers are to make more efficient and active with more
facilities. To carry out tough decisions and create proper incentives, a strong and independent supervising
body is needed which is possible only through the concept of good corporate governance.

Fairness to Shareholders:
Shareholders are the owners of the company. The owners have a right to provide guidelines for the proper
use and handling of their investment. Such appropriate handling and use of investment can be ensured
only through the system off good corporate governance.

The Importance of Corporate Governance can be considered under the following grounds:

 It shapes the growth and future of capital market of the economy.

 It helps in raising funds from capital markets. Sound governance practices contribute to investors'
confidence in corporations to attract long term capital.
 It links company's management with its financial reporting system.
 It enables management to take innovative decisions for effective functioning of the enterprise
within the legal framework of accountability. The effectiveness of legal and regulatory
framework is indispensable to assess the impact of corporate governance on overall economic
performance.
 Good corporate governance enhances the structures through which objectives of the corporations
are set, means of attaining such objectives are determined and performance is monitored.
 It supports investors by making corporate accounting practices transparent. Corporate enterprises
disclose financial reporting structures.
 It provides adequate and timely disclosure reporting requirements, code of conduct etc.
Companies present material price sensitive information to outsiders and ensure that till this
information is made public insider abstain from dealing in corporate securities. It, thus, avoids
insider trading.
 It improves efficiency and effectiveness of the enterprise and adds to wealth of the economy.
Corporate governance is, thus, an instrument of economic growth.
 It improves international image of the corporate sector and enables home companies to raise
global capital.
 It separates the management from the ownership.
 It enables a corporations prefer efficiency by preventing fraud and malpractice.
 It helps to control the violation of business norms of enterprises.
 Ensures the compliance of laws and regulation.
It can be shown the importance of corporate governance through this chart.
 

Elements of Corporate Governance:

Corporate Governance consists of various elements. Some major elements accepted by
corporate sector can be listed as follows.

Good board practices:

 Clearly defines the roles and authorities

 Duties and responsibilities of directors understood

 Board is well structured

 Appropriate composition and mixed of skills

 Board self-evaluation and training conducted

Transparent disclosure:

 Disclosure of financial information

 Disclosure of non-financial information

 quality annual report published

Control environment:

 Establishment of independent audit committee

 Internal control procedures

 Internal control procedures

 Independent external auditor conducts audits

 Establishment of management of information systems

 Compliance function established.

Well defined shareholder rights:

 Minority shareholder rights are formalized

 Well organized general assembly conducted

 Policy on related party transactions along with extraordinary transactions

 Clearly defined and explicit dividend policy.

Board commitment:

 The company has corporate governance champion

 The board discusses corporate governance issues and has created cg committee
  A CG improvement plan has been created

 Policies and procedures have been formulated and distributed to relevant staff

 A cg code has been developed

 The company is publicly recognized as a corporate governance leader.

Although this concept is new for our Country, The Companies Act, 2063 has adopted
certain basic element of Corporate Governance. They are as follows:

a. Rule of law: corporate governance is backed by appropriate legal frameworks,

which protects interest of all stakeholders with special reference to minority
shareholders. This effective implementation if and enforcement of legal
framework leads to the formation of independent judiciary as a regulatory body.
b. Fairness: The corporate governance frameworks should protect share holder rights
and ensure the equitable treatment of all share holders, including minority and
foreign shareholders. All shareholders should have the opportunity to obtain
effective redress for violations of their rights. All shareholders should be entitled to
receive equitable treatment.
c. Balance of power: This concept of separation of power is recently developed
in companies for check and balance between each other’s actions among the wings
of the company i.e. company shareholders, board of directors, and managers of the
company, who are responsible for operation and administration of the company.
d. Protect interest of other stake holders: the OECD has recognized other stake
holders in the companies in addition to share holders . Company should realize and
recognize the sense of and protection that they have legal and other obligations
against all legitimate stakeholders.
e. Disclose and transparency: Corporate governance framework must be consist of the
principle of timely accurate discloser in respect of all material matters regarding the
 corporation, including financial situation, performance, ownership and
governance of the company.

On the basis of above guidelines the Companies Act, 2006 have incorporated
certain basic principles of cg like independent directors S.86(3), audit
committee (Sec 164), accountability, transparency, Sec. 110, 112,164.,
responsibility, code of conduct Sec. 23, 60, 68, 78, 79, 80,81, 92, 93and so on
in various sections as follows:
1. Conflict of interest and Transparency:

a. Information required to give on becoming substantial shareholders

b. Directors required to give information n about transaction between company and his
close relatives

c. Financial disclosure to the shareholders

2. Directors:

a. Directors are made personally liable for any breach of the Act

b. Directors have fiduciary duty to act in the best interest of the company

c. Requirement to appoint independent directors by public companies

d. Disqualification of directors.

3. Audit:

a. Company’s account to be audited by appointing auditor in every general meeting

b. Companies having paid up capital of more than thirty million need to have audit
committee

c. Qualification of an auditor

4. Shareholders’ protection:

a. Shareholders have right to inspect books of the company

b. Shareholders can sue on behalf of the company

c. Directors are prevented from exercising their powers beyond the authority

5. Enforcement mechanisms:
a. Punishment with up to thousand or with imprisonment for a term not exceeding
two years or both (S.160)

b. Personal liability of director, officer, auditor, and liquidator

c. Payment of damages and power to recover damages

d. Formation of commercial court for dispute resolution