CORPORATE GOVERNANCE1s hich a company is \d processes by wi the system of rules, practices an ; : a ol encod Cas ntally involves balancing the interests of the ment, customers, is directed and controlled. Corporate governance ess many stakeholders in a company these inchide its shareholders, EE ede suppliers, financiers, government and the community. Since corporate ine every apbere of the framework for staining a company’s objectives, i encompasses practice Y rt oo orate management, from action plans and internal controls to performance measurement 7 : i i disclosure, Governance provides the structure through which corporations set 2 Pursue their objectives while reflecting the context of the social, regulatory and_market environment Goccrvance is a mechanism for monitoring the actions, policies and decisions of corporations. Most companies strive to have a high level of corporate governance, These ait isinok enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behaviour and sound corporate governance practices. Corporate Govemance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders” desires. It is actually conducted by the board of directors and the concerned committees for the company’s stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and social goals. According to OECD, "Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaini objectives and monitoring performance". ing thoseAccording to J. Wolfensohn, “Corpocats © transparency and accountability, Goveniance is about promoting corporate fairies, According to Cadbury Commitee (U.K), “Corporate| governance is the system by which companies are directed and controlled. It encompasses the entite mechanics of the functioning of « company and attempts to put in’ place a system of checks and | Balances between the shareholders, directors, employees, auditor and the management.” [ According to the Institute of Company Secretaries of India, “Corporate Governance is the application of best Management practices, Compliance of law in tue leter and spirit and adherence to ethical standards for Effective Mangement and_distribution of wealth and discharge of social Responsibility for sustainable dovelopinent ofall stakeholder”, ‘The development of the limited company in 1856 spit the roles of ownership and control for the first time and created the need for corporate governance, Limited liability alongside the Separation of ‘ownership and contol introduced the risk of financial itreguarity arising from dishonest or incompetent managers, Corporate governance is the system by which organizations are directed and controlled, Cadbury defined corporate governance as ‘the dicection, management and control of an organisation’ (1992). It relates to the way in which companies are governed, with a particular mphasis on the relationship between shareholders and directors. Corporate governance looks at how an organization is managed in order to achieve its objectives. A company should be managed in the best interests of its stakeholders, with 2 particular emphasis on its shareholders, Consideration should be given to all stakeholders in relation to the activites @ business Uundertakes, for example employees, the general publi, lenders, suppiets should all be considered, US.A- Corporate Governance Modem corporate governance began to take shape inthe United States in the early 1980s, A number of powerful and arrogant boards and éxecutives of majo listed corporations had been acting in ways that were not considered consistent with the interests of the owners, who were mainly small private investors, represented by pension funds and other institutional investors. This Caused leading institutional investors to intervene by exercising their power as owners and formulating special corporate governance guidelines for how comporations should be run, The 1990s andthe begining of the 21st century saw the introduction of binding regulations on he major American stock exchanges, primarily the NYSE and Nasing, 36 well sinerasnglywhich came into force in rica have not led to the for this is that American corporate ational legal foundation on the power of "soft law" in nes-Oxley Act, b it rbat detailed legislation, One example of the latter is the Sar ets in AME July 2003. Unlike in other parts of the world, however, introduction of corporate governance codes. One likely reason : legislation is an issue for individual states and there is therefore no which to build a national code. Another may be lower confidence in ‘American society than in many other countries. Europe-Corporate Governance The breakthrough for corporate governance in Europe Cadbury report in pi United Kingdom in 1992. This came in response to @ number ot eee scandals in the UK in the late 1980s. The report introduced the comply-or-explain Hn , whic has since provided the standard for corporate governance codes in many. countries. Cadbury we followed by a number of other reports on different aspects of corporate governance wit British companies. A number of these were then collected in the Combined Code, which was originally introduced for British companies in the mid 1990s and has been updated several times. Towards the end of the 1990s, numerous national corporate govel ; in Europe and other parts of the world. The first codé,in the Nordic region was introduced in Denmark in 2001, with the other Nordic countries following a few years later. The European Commission bas had an active corporate governance agenda since 2003, when it adopted its Action Plan for Corporate Law and Govemnance. This stated that far-reaching harmonisation of corporate law or goveriance codes were neither possible nor desirable within the foreseeable future. Instead, the Commission expressed its expectation that all member states introduce national corporate governance codes, based on their own legislation and other conditions. It also decided that harmonisation would be limited’ to. certain key issues within corporate governance. Since then, the Commission has issued a significant number of recommendations and directives concerning corporate governance, many of which have been implemented in the member states through legislation. came with the publication of the mance codes were devised Sweden-Corporate Governance The breakthrough for corporate governance in Sweden came at the beginning of the 1990s, when the Companies Act Committee began working on a revision of the Swedish Companies Act. The end result - the new Swedish Companies Act - came into force on 1 January 2006. The Swedish Shareholders Association published the first Swedish ownership policy in March 1993 This was a set of guidelines for the ownership role within listed e soit eee a OM i in significant Swedish institutional investors have issued similar guidelines. panies. Since then, most ‘The first major practical impact of this new - co the Volvo-Renault deal in 1993. The boards and e proach is considered to have taken place in ‘Xecutive management teams of both companieshad planned to merge the two companies, but the deal was blocked by the intervention of a number of major institutional investors. During the ensuing decade, a number of rules, guidelines and recommendations concerning important corporate governance issues were published by various self-regulating bodies, most notably by the Swedish Industry and Commerce Stock Exchange Committee and the Swedish Securities Council. The Stockholm Stock Exchange also introduced a number of corporate governance rules in its listing requirements. In January 2003, the Swedish Academy of Directors (Styrelse Akademien) published its Guidelines for Good Board Practice, the first comprehensive code of practice for boards of directors of Swedish companies. In September 2003, the Code Group, a joint working group of the Commission on Business Confidence and a number of private sector organisations, was set up to devise a Swedish corporate governance code. The Code Group issued its first draft of the Swedish Corporate Governance Code in April 2004. After this proposal had been widely circulated for comment, the final version was presented in December 2004, The Code came into force on i July 2005 and applied to all companies listed on Stockholm Stock Exchange A List and to all companies on the List with a market capitalization exceeding SEK 3 billion, around 70 companies in total at that time. ‘The Swedish Corporate Governance Board was set up in 2005. The duties of the Board include monitoring and analysing how the Code is applied in practice and the introduction of any modifications or changes deemed necessary and appropriate. Three years after the introduction of the Code, the Board conducted a major review with the aim of broadening the Code's application to cover all companies listed on a regulated stock market in Sweden. The revised code came into force on 1 July 2008 and applies to all Swedish companies that have their shares traded on NASDAQ OMX Stockholm and on NGM Equity, a total of around 300 companies. A second revision of the Code was carried out, resulting in a number of new rules taking effect from 1 February 2010. _ A. Pre-Liberalization iin india stoned independence from Britgh:file in 1947, the country was poor, ‘witian "average per-capita annual income under thirty dollars, However, it still possessed sophist “regarding “listing, trading and settlements.” It even had four fully operational stock s. Subsequent laws, such as the 1956 Companies Act, further solidified the rights ofgountry tumed away in, the wm Great Bs , step in this ithe eae oowing Tdi independents S55 industries A rot "The i ital 4 embraced socialism. the centt : from its capitalist past an would dominate the enormous state-owned s public sector 1956 Industrial Policy Resolution it created yvernmen! < the Indian £0 vot toorruption, economy." To put this plan into effect Soot and India steadily moved toward & Se aie enterprises and rejuvenated Ene oe goverment one over mousing POTN Tic guts? One scholar them, it essentially “converts private bankruptcy to high inefficiency." referred to India's economic history as “the institutionalization © te , pated the situation. Government TThe absence of a corporate-govemance framework x50 «ahi busines accountability was minimal and the few private companies that TT i Hcy. ‘itated landscape enjoyed free reign with respect 0 most laws; the ae Bete of directors punitive action, even for nonconformity with basic governance 4 Diverabty were sated by fiends ox relatives of mansgement ADE oo shareholders and management were commonplace. India's equity markets iwere not liquid or sophisticated enough" to punish these abuses. Scholars believe that “takeover threats act as disciplining mechanism to poorly companies” because as the slock price of poorly govemed firms decreases (because disgruntled investors discard stock), the firms become susceptible to hostile-takeover attempts. Thus, "the fear of a takeover is supposed to keep the agement honest." However, until recently, hostile takeovers were almost entirely non- tent in India and therefore, the poorly governed Indian firms had little to worry about in terms of following corporate laws once they had raised capital through their initial public offeri corporate govemance in India was in a dismal condition by the early 1990 nepotism and performing B. Post-Liberalization Liberalization and its associated developments, i.e., deregulation, priv financial liberalization, have made effective Corporate Goveimante ver frauds, malpractices can render capital market reforms desultory. Ind d effecti corporate governance reforms are, therefore, necessary in order to restore Eran | st credibility of capital market and to facilitate the flow of inves . stent fins : reforms which were channelled through a number of di feta ie are various and Exchange Board of India (SEBI) and the Ministry of Corporat n both the Security India (MCA) playing important roles. porate Affairs, Government of In 1999, in a defining moment in India's corporate. created the Securities and Exchange Board of an ayes history, the Indian Parliament : ia ("SEBI") to * i investors in secures and 10 promote the development of 20 rotet the interest market." Inthe years leading Up to 2000, a5 Indian enterorsog nn” UME the securities nterprises 7 tumed to the stock market forcapital, it became important to ensure good corporate governance industry-wide, Additionally, & plethora of scams rocked the Indian business scene and corporate governance emerged as ‘a solution to the problem of unscrupulous corporate behaviour, In 1998, the Confederation of Indian Industry ("CII"), "India's premier business association," | unveiled India's first code of corporate governance. However, since the Code's adoption was Voluntary, few firms embraced it, Soon after, SEBI appointed the Birla Committee to fashion a code of corporate governance. In 2000, SEBI accepted the recommendations of the Birla Committee and introduced Clause 49 into the Listing Agreement of Stock Exchanges. Clause 49 outlines requirements vis-a-vis corporate governance in exchange-traded companies. In 2003, SEBI instituted the Murthy Committee to scrutinize India's corporate-governance framework further and to make additional recommendations to enhance its effectiveness, SEBI has since incorporated the recommendations of the Murthy Committee and the latest revisions to Clause 49 became law on January 1, 2006. Corporate governance reform in India has focused primarily on the "role and composition of the board of directors. Each of the three sets of recoinmiendations (the Cil Code recommendations from 1997, the Kumar Mangalam Birla Committee recommendations from 2000 and the Murthy Committee recommendations from 2003) has advanced a more nuanced _ and sophisticated understanding of corporate governance in this respect. For example, while the Cll Code was silent on the financialliteracy levels expected of : . the Murthy Committee recommended that companies train their "Board members in business model of the company as well as the risk profile of the business parameters of company." Another notable recommendation of the Murthy Committee was that the Audit Ci be comprised entirely of "financially literate non-executive members with at least “one member having accounting or related financial activities. The importances of corporate governance are listed below: 1. Changing Ownership Structure In recent years, the ownership structure of companies has changed a lot. Public financial institutions, mutual funds, etc. are the single largest shareholder in most of the large companies. So, they have effective control on the management of the companies. They force the management to use corporate governance. That is, they put pressure on the management to become more efficient, transparent, accountable etc. They also ask the management to make consumer-friendly policies, to protect all social groups and to protect the environment. So, the changing ownership structure has resulted in corporate governance.2. Importance of Social Responsibility Today, social responsibility is given a lot of importance. The Board of Directors has to Protect the rights of the customers, employees, shareholders, suppliers, local communities etc. This is possible only if they use corporate governance. 3. Growing Number of Scams In recent years, many scams, frauds and corrupt practices have taken place. Exploitation and misappropriation of public money are happening everyday in India and worldwide. It is happening in the stock market, banks, financial institutions, companies and government offices. In order to avoid these scams and financial irregularities, many companies have started corporate governance. 4. Indifference on the part of Shareholders In general, shareholders are inactive in the management of their companies. They attend the Annual general meeting. Postal ballot is still absent in India, Proxies are not allo speak in the meetings. Shareholders associations are not strong. Therefore, directors misuse their Power for their own benefits. So, there is a need for corporate governance to protect all the stakeholders of the company. 5. Globalization Today most big companies are selling their goods in the global market, So, they have to attract foreign investor and foreign customers. They also have to follow foreign rules and regulations. All this requires corporate governance. Without Corporate governance, it is impossible to enter, survive and succeed the global market, 6. Takeovers and Mergers Today, there are many takeovers and mergers in the business world. Corporate govemance is required to protect the interest of all the parties during takeovers and mergers, 7. SEBI SEBI has made corporate governance compulsory for certain companies. This is done to Protect the interest of the investors and other stakeholders, The various Principles of Corporate Governance are as follows: 1, Shareholder recognitionof majority shareholders and the executive board. Good corporate governance seeks to make sure that all shareholders get a voice at general meetings and are allowed to participate. 2, Stakeholder interests Stakeholder interests should also be recognized by corporate governance. In particular, taking the time to address non-shareholder stakeholders can help your company establish a positive relationship with the community and the press. 3. Board responsibilities must be clearly outlined Board responsibilities must be clearly outlined to majority shareholders. All board members must be on the same page and share a similar vision for the future of the company. 4. Ethical behaviour Ethical behaviour violations in favour of higher profits can cause massive civil and legal problems down the road. Underpaying and abusing outsourced employees or skirting around lax environmental regulations can come back and bite the company hard if ignored. A code of conduct regarding ethical decisions should be established for all members of the board. 5. Business transparency Business transparency is the key to promoting shareholder trust. Financial records, earings reports and forward guidance should be clearly stated without exaggeration or “creative” accounting. Falsified financial records can cause your company to become a Ponzi scheme and will be dealt with accordingly. Corporate governance is of paramount importance to a company and is almost as important as its primary business plan, When executed effectively, it can prevent corporate scandals, fraud and the civil and criminal liability of the company, It also enbances a company's image in the public eye as a self-policing company that is responsible and worthy of shareholder and debt holder capital. It dictates the shared philosophy, practices and culture of an organization and its employees. A. corporation without a system of corporate governance is often regarded as a body without a soul or conscience. Corporate governance keeps a company honest and out of trouble. If this shared philosophy breaks down, then comers will be cut, products will be defective and management will grow complacent and corrupt. The end result is a fall that will occur when gravity in the form of audited financial reports, criminal investigations and federal probes finally catches up, bankrupting the company overnight. Dishonest and unethical dealings can cause shareholders to flee out of fear, distrust and disgust.OECD Principles of Corporate Governance are as follows: 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, ‘11. The rights of shareholders and key ownership functions The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. TIL The equitable treatment of shareholders > Performance, ownership, and govemance of the company, VE. The responsibilities of the board The corporate governance framew:Different Theories of Corporate Governance are: Agency theory defines the relationship between the principals (such as shareholders of company) and agents (such as directors of company). According to this theory, the principals of the company hire the agents to perform work. The principals delegate the work of running the business to the directors or managers, who are agents of shareholders. The shareholders expect the agents to act and make decisions in the best interest of principal. On the contrary, it is not necessary that agent make decisions in the best interests of the principals. The agent may be succumbed to self-interest, opportunistic behavior and fall short of expectations of the principal. The key feature of agency theory is separation of ownership and control. The theory prescribes that people or employees are held accountable in their tasks and responsibilities. Rewards and Punishments can be used to correct the priorities of agents, Fundamental Theories of corporate governance rooted in agency theory were developed in the early 70s American literature. The theory refers to the relationships established between the owners of a company and its directors, relationships embodied in a mandate (agent) contract which consists in one first part (the principal) that engages the other part (the agent) to perform some services on their behalf. Agency theory has been developed from the theory of the firm, stated by Alchian and Demsetz (1972) and further developed by Jensen and Meckling (1976). Fundamentals of agent theory can be found even in the writings of Adam Smith (1976): "You can not expect those who manage other people's money to be as careful and caring as it would belong to them. Waste and negligence are present, always, more or less, in the management of every business." Although the development of agency theory is found only in the 70s, the idea of separating the control government has been highlighted since the 30s by Berle and Means (1932). According to studies of these authors, the divergence between ownership and control is a potential conflict between shareholders and management.ee Under the agency theory, shareholders (the principal) are expecting from the directors (the agents) to lead and make decisions in their interest, and of those who have mandated. On the other hand, the agent can not only adopt the decisions that pursue only the interests of the principal. (Padilla, 2000). Such a conflict of interests between owners and managers was first highlighted by Berle & Means (1932) and Adam Smith (1976) followed by Ross (1973) and then expanded by Meckling (1976). Specifically, the conflict is highlighted by Davis, Schoorman & Donaldson (1997). Agency theory leads to the need for harmonization of the interests of managers with those of shareholders for the objective of maximizing the company value could not be affected by the competing interests of managers in different decision-making circumstances. The steward theory states that a steward protects and maximises shareholders wealt through firm Performance. Stewards are company executives and managers working oa shareholders, protects and make profits for the shareholders. The stewards are satisfied and motivated when organizational success is attained. It stresses on the position of employees or executives to act more autonomously so that the shareholders’ returns are maximized. The employees take ownership of their jobs and work at them diligently. Empower and trust ‘Shareholders’ profits and Intrinsic and Shareholders extrinsic ‘motivation Protects and maximise shareholders wealth ‘While profit drives any business, some companies may consider themselves part of something bigger. Stewardship theory holds that ownership doesn’t really own a company; it’s merely holding it in trust. : ‘The operation may be a vehicle for a higher calling or designed to honor a founder’s initial vision, so making a profit often takes a back seat to meeting a company’s social standards. Examples of Corporate Stewardship ‘An example of a stewardship model of corporate ight i } governance might include a business focused on environmental concems, where the company believes it should operate with as littleimpact as possible on the earth. The Coca-Cola Company, which uses huge amounts of for its products, for example, has committed to being good stewards of water resources. Other companies may champion human or animal rights, refraining from using products that are made in sweatshops or tested on live subjects. Still others may honor the owner’s religious beliefs that show themselves in the form of servant leadership. These models tend to be subjective, with management determining the boundary between socially responsible or irresponsible behavior. Effects on Business ‘A company committed to a higher purpose will draw clients who share that same purpose, according to Business Insider. However, if the owners talk about stewardship or social responsibility in its corporate governance, the customers carefully weigh this against how the company truly operates. Discrepancies between talk and action alienate the client base. Effects on Employees Employees can tell fairly quickly if a company’s stewardship stance translates into how they're treated. Workers may have higher expectations than they would if an employer operates under a pure profit motive. However, employees who hold to the same vision tend to stick around and work hard to achieve the company’s goals even if compénsation is not as much as they can get elsewhere. A solid sense of stewardship improves company morale when the workers feel they're part of something bigger. Effects on Clients Because people are often polarized in their political beliefs, it's important to review consumer stewardship theory strengths and weaknesses. Some of your customers will want to feel like they're part of something, and will stay with a stewardship-driven business even if its price for goods or services is higher. However, a company’s stance on stewardship may rub some potential customers the wrong way, particularly if their cause is unpopular or management becomes strident about their beliefs. Common Stewardship Model Pitfalls Stewardship-based companies find themselves under a microscope. If clients or workers sense the higher mission is just talk, the company will lose trust or credibility. A company may cite social responsibility as justification for higher prices or inferior products. But even if a company stays true to its mission, it may miss out on some profits for the sake of its higher Purpose, As a company matures, stewardship may fall by the wayside if the founders are no longer around to set the tone. On the other hand, employees and workers may take advantage of this stewardship mindset for their own purposes.Stakeholder theory incorporate: twork 0 stakeholders. It states ers in organizations have a net . states that manag c s. The theory focuses on managerial this includes the suppliers, employees and business partner: s : 7 i interests is decision making and interests of all stakeholders have intrinsic value, and no sets of .d the accountability of management to a broad range of f relationships to serve — assumed to dominate the others. a , EP ‘Sempiier — FIRM. mee ‘Customers ey i — = The stakeholder theory of corporate governance focuses on the effect of corporate activity On all identifiable stakeholders of the corporation. This theory Posits that corporate managers external stakeholders. () Internal Stakeholders: Are the corporate directors and employees, who are ac tually involved in corporate governance process. olves Gi) External Stakeholders: May include creditors, auditors, customers, suppliers, government agencies, and the community at large. These stakeholders exert influence but are not dieely involved in the process, Key the stakeholder theory is the realization that all stakeholders engage in some manner with the corporation with the hope or expectation that the corporation will deliver the type of value desired or expected, The benefits may include dividends, salary, bonuses, additional orders, new jobs, tax revenue, etc.The conflict of Si , is of interest determined by the separation between Power and control (on which agency theory is foundated) can cause Opportunistic behaviour of ti which is not necessarily converged with the shareholders interest maximizing shareholders wealth. Thus, behaviour guided by their own interests, the managers (as agents) (as principals), that of Managers are prone to moral hazard and opportunistic The theory of moral hazard is central within agency theory and also refers to hidden actions or opportunistic behaviour of managers (Hendrik, 2003). Hidden action arises as a consequence of asymmetric information held by counterparties. (Arrow,1968), Eisenhardt ,1989) and opportunistic actions occur as human inclination, (Jensen 1994) Hendrik (2003) and Smith (2011) identify moral hazard as being determined by two issues: the conflict of interests of the counterparties (principal and agent), hidden actions and opportunistic behaviour as a result of asymmetric information, The result can only be extremely dramatic such as decreasing performance and even business failure. Dinga (2009) considers moral hazard to be a result of a high degree of insurance against risk in the context of the financial crisis which began in 2007, when banks were launched in loans because they expected the government to intervene in restoring liquidity (for example, by relaxing the requirements minimal legal reserve). Therefore, the hazard moral theory is strongly connected to the remuneration manager policy. The concems to define the managers! remuneration policy according to the need to develop a common interest between manager and shareholders (to mitigate moral hazard) are current and they are the subject of various economic, financial and management researches. Regarding the managers remuneration policy, Corporate Governance Code issued by the Bucharest Stock Exchange in 2008 states that (in art. VI, Recommendation 21): "The board should establish a remuneration committee among its members to assist in formulating & remunerat i the committee's internal on policy for directors and managers and it should define tila the board should deal with these i i i i been set up, regulations. Until a remuneration committee has \ red responsibilities at least once a year. The remuneration policy shall be subject to AGM approval.” that a company has number of contracts within the company ‘Transaction cost theory states itself or with market through which it ereates value for the company. There is cost associated with each contract with external party; such cost is called transaction cost. If transaction cost of ving the market is higher, the company would undertake that transaction itself Unlike agency theory, transaction cost theory explicitly uses the concept of corporate governance. (Fulop, 2011) This theory states that the company is « relatively efficient hierarchicalstructure that serves as frame) n t serves . © main concern j T™ms of effi transaction cost theory is "to explain the transactions conducted in te TYPES OF COST ‘ ciens governance structures. oa BARGAINING AND DECISION SEARCH AND INFORMATION POLICING AND ENFORCEMENT The fatherhood of “transaction costs" was atibuted to Ronald Coase, who in is fameus article The Nature of the Firm, in 1937, has bale the judgment regarding the firm's existence without using, explicitly, the concept of "transaction costs" but that of "cost of using the price mechanism". Coase substantiates his argument about the nature of the firm b y emphasising that organizing the production through the market channels (contracting by market) involves some costs. So, by creating an organization which has the responsibility for resources allocation, some expenditure can be avoided. Going forward, transaction cost theory is developed by Kenneth Arrow who defines transaction costs as “operating costs of the economic system.” Later, Williamson, founder of the transaction cost economics, believes that "the study of governance include: identifying, explaining and combating all types of risky contracts". Certainly, in addition to transaction costs, agency costs resulting from divergent relationship between manager and shareholders interests and information asymmetry, must be saken in? consideration, costs which are based on two sources: the costs inherent due fo an ages (eg, the risk that agencies use the company's resources for their own purpose) and a involved by protecting against the risks associated with the use of an agent °8> * ve b Preparing the financial statements of costs consisting in the use of Stockcopions fst align the managers and shareholders’ interests. Therefore, as Abdoullah & Velentine (2009) notice, Transacti complex theory incorporating interdisciplinary issues related to organizational sciences the a jnasizes Resource dependency is an explanatory model of organization activities that 2 . cecil cen they are open systems and the environment in which they opens are the basis in decision making about resources allocation. ory faces * ics and lee | economi on Cost ThBoard Demography Corporate Process Effect Corporate Outcome | r Links to Relational Access to Petformance Environment (More) |} Neiwork (Widens) | )Resources (Increase) (Increase) | The Resource Dependency Theory focuses on the role of board directors in providing access to resources needed by the firm. It states that directors play an important role in providing or securing essential resources to an organization through their linkages to the external environment. The provision of resources enhances organizational functioning, firm’s performance and its survival. The directors bring resources to the firm, such as information, skills, access to ey constituents such as suppliers, buyers, public policy makers, social groups as well as legitimacy. Directors can be classified into four categories of insiders, business experts, suppor specialists and community influential In this context, Pfeffer and Salancik (1978) highlighting the resource dependence al behaviour, argue that: "To understand the organization the context in which that behaviour occurs [..] this is linked with the perspective on_ inter-organization behaviour you must understand understandable from the perspective that organizations’ activity is inevitably environmental conditions in which they operate." Hillman, Canella and Paetzold (2000) argue that the the role that managers play in providing essential resources extemal environment. ‘According to studies conducted by Hillman, Canella and Paetzold making process, the managers contribute with information resources skills, business partners of an organization such as suppliers, ereditors, goveramen' social groups, etc. ‘According to Abdoullah & Valentine (2009), the managers responsible for leading a business are classified into four categories: insiders", meaning the current and former managers of the company offering expertise in specific areas of the company and finance laws {big companies who provide expertise in business resource dependence theor y focuses on for the organization in relation to the (2000), in the decision access to key a) b) "business experts", meaning the managers 0! strategy, decision-making and solving economic problems facing the company; ¢) "support specialists" represented by lawyers, bankers and insurance companies, public relations experts and all those experts who provide specialised support in their individual specialization area; 4) “community influenti: ‘and community organization leaders, 1, meaning political leaders, academic leaders, religious leaders or socialallocated internal resources the power en, i gaged in the pre rocess of f view of 1» weaker and it depends on the extent to which m lanagers stronger 0 gories listed above. From the point 0 allocated resources ca” be relong to one of the four cal dependency theory emphasizes the complex character of * of "network" concept The resource governance concept. underiying the corporate “GORPORATE GOVERNANCE AND AGENCY THEORY i A lustrate how economic agency theory simplifies and how this can be problematic in an analysis of corporate governance. ‘An obvious bias in much of th current corporate governance literature concerns the bestowal of the name ‘col ovate P pai : ‘corporate governance’ itself in combination with the standard perspective in which these studies are most ote conducted, The very label of ‘corporate governance’ suggests a series of observations ; ps ot comme on the manner in which modern corporations are being governed. Two “i ental questions concerning this governance are: what is the ‘corporate objective’ and at constitutes the basis of legitimacy for the corporation? ‘ti tinue label of governance in combination with the fact that actual the question how owners ae of corporate governance in general are typically reduced t (which are supposed to ‘wok sl areholders or principals in agency terms) can control managers the only: oc the india vent ‘Beit agents) (Shleifer and Vishny, 1997) suggests that this stating from the nan por at issue to be raised in this field of inquiry. As a result, whes stakeholders are already lace agency corporate governance perspective, any interests of ote corporate governance suggests cn subordinate position in the debate. The agency framework io mzybe even the only legitimate tthe furthering of shareholder interests is @ privileged got transaction costs economics, an goal for a corporation to pursue. Within the framework of the argument that shareholders adjacent economic theory of organization, is also suppor? ty in other words: all other ince unique bearers of residual risk in any entrepreneurial roe their disposal have stakes tan, ates which form part of the enterprise have other means * This argument has been ° secured before those of the bearers of residual risks - the restricted financial ren nn ingly challenged by Blair. This author hes pointed ou ‘eatin ofthe description of the of agency theory does not account for this My Tee forporale owners and mney any corporation, It just picks out the on ve oP i poaoeiion with shareholder inte ent and treats this priory #8 @ privileged on a ws Perrow (1986) argues ie carries normative implications of the wn io? interests of the agent in pe? predispositions and the inability * the St ys oo nding solutions, makes the paradigm * ero 4 There are several ways 10 illustrat“co ee specifically because of its ideological connotations. This can be illustrated by focusing on two of the fundamental assumptions made in agency theory; 1) the assumption of maximizing social wealth by maximizing shareholder wealth and 2) the assumption of self-interests, A core argument made on behalf of the economic interpretation of agency theory is that in governing the corporation, it makes sense to seek to produce maximum value first, only after you have done this you can consider questions of distributive justice. The idea is to make sure you produce the highest value for corporate owners first in order to create the highest possible social welfare, only then you can and should start thinking about how to distribute this welfare fairly. Of fundamental concer in this respect is the complete contracting assumption of agency theory. Following Zingales (1998), in a world of complete contracts no meaningful definition of corporate governance is however possible. The argument here is that investments in the corporation can be sunk and firm-specific in a way that they create additional surplus to only the supplier of the good and the consumer of that good. These transactions create so-called quasi- rents. In those cases, products cannot be sold immediately on the market at current market prices, as market prices do not reflect the specific value the contracting parties contribute to it or cannot immediately be sold without interfering the production process. To effectively structure the bargaining processes over these rents is the reason for corporate governance in the first place. In a world of complete contracts however, the designer of the contract would have anticipated all possible disputes about the distribution and bargaining over quasi-rents in the ex- ante contract. Ex-post agency problems can therefore not occur because they are already resolved in the initial ex-ante contract. In other words, by solving all possible problems ex-ante the issue of clearly existing problems of ex-post bargaining cannot even be raised. The different contracts which make up the firm in this nexus of contracts approach would thereby somehow have to systematically be related to each other. Ex-ante the designer of this system would have to have insights in all possible (future) problems to be able to give priority to given contract or at least give priority to parts of a contract to other parts of the (other) contracts. ‘The manner in which theory development and theory extensions build on the agency paradigm ean for instance be illustrated by the discussion on executive compensation between Bruce, Buck and Mein (2005) and Gomez-Mejia, Wiseman and Dykes (2008). The issue here is agency theory’s neglect of institutional embeddedness of pay practices. Bruce et al, (2005) argue that the dominance of principal-agent theory has led to a narrow focus in the Hitorature that may give rise wo problems in the context of research that examines cross-country differences of executive pay, They suggest that agency theory is undersocalized and therefore lacks peneralzabitioy to sesings where other social solutions would seem to alleviate the agencyproblem by other means than prov @ management with incentives to serve shareholder interests. To address these shortcomings, institutional theory is offered as a useful overarching framework within which appropriate variants of these approaches can be deployed to better comprehend current developments in executive pay. In reaction, Gomez-Mejia et al. (2005) argue, while agreeing that agency theory does not explicitly recognize contextual factors, that this abstraction from context gives agency theory greater generalizability and thus greater explanatory power. The fact that an institutional perspective provides for a fuller explanation of executive pay arrangements across different institutional contexts does not necessarily mean that can all these arrangements can be conceived as solutions to the agency problem. In a counter response Bruce et al. argue that more fundamental issues are at stake since the appropriate yardstick for the evaluation of pay packages may differ between institutional environments and may be required to serve for social legitimacy as well as the mitigation of agency problems. They emphasize that it is the drive for legitimacy rather than any immediate concem with distributive justice that makes institutional explanations of executive remuneration so fundamental. Corporate Governance; these words have been hitting the headlines of financial magazines for quite some years, particularly post Enron and in India they have once again triggered debates Post Satyam seam. Satyam this word would no longer be used as an adjective to signify the attribute of truthfulness, but will now be used as a noun to signify systemic failure in history of Indian corporate governance system, Satyam story holds within it, legion of myriad hidden lessons for a spectrum of bodies, from directors to investors and from auditors to regulators. A lot has been and will be written and discoursed on the concept of corporate governance. This article discusses one of such aspects. In the first part, it highlights the portent of Adam ‘Smith and tries to prove how Adam Smith had prescient of the inherent flaw in the model ‘Corporation’. The second part advocates a prescription for good govemance practice. Corporations today are based on, ‘Agency Theory’ (a branch of organisational behaviour) wherein the owners of funds (alias principals) invest their money in a company that is managed by altogether different group of people called directors and managers (alias agents); this agency relationship between the sharcholders and directors is based on the premise of trust; shareholders lend their money to directors under trust that the latter shall deploy the money in a manner that would maximise shareholders’ interests. Agency Theory is defined by Chartered Institute of Management Accountants ‘Hypothesis that attempts to explain elements of organisational behaviour through a understanding of the relationships between principals (shareholders) and agents (directors andCo aaa managers). A conflict may exist between the actions undertaken by agents in furtherance of their own self interest and those required {o promote the interest of principals.” Some of the instances w) erein a conflict can exist between owners and managers can be: Managers are interested in short-term profits against long-term sharcholders’ value, as it has positive impacts on their compensation, incentives, bonus and promotion. The episode of sub- prime crises in United States exemplifies this conflict wherein the investment bankers and financial institutions took recourse to highly complex derivative products in order to inflate short- term profits and thereby inflate their incentives, Management myopia on short-term profits also motivates them to resort to creative accounting, inflating the top line and bottom line. Enron’s episode best exemplifies such myopia where the company resorted to creative accounting to show better profitability. Quite often, managers having financial interest in their own company tend to send wrong cues to the market in order to inflate the share prices and ultimately increase their own wealth. Managers deploy shareholder’s funds in risky investments so as to get quick and immediate retums, at the cost of preserving shareholder’s wealth. Shareholder’s funds are siphoned into projects in which the management may have personal interest; examples of this can be deploying funds in a company that is owned by a relative of the managing director or awarding a contract to a vendor company that is operated by a relative of ‘one of the executives. Managers of companies that are subject to a takeover bid often put up a defence to repel the predator, even though such a takeover may be in the long-term interest of shareholders of the acquired company; managers of the acquired company do so in fear of losing their jobs or status to the managers and functional heads of the predator company: ‘Adam Smith, known as father of economics, was highly cynical and pessimistic about the success of corporation as a model of creating wealth and pursuing economic growth. The entire idea of dilution of ownership, whereby the owner and manager of funds are two different groups/persons, was not at all invidious to Smith, Smith had preseience of the inherent and institutional flaw in the model of corporations. The directors of such companies being the managers of other people’s money rather than of their own, it cannot well be expected that they should watch over it with the same anxious Vigilance with which the partners in a private co-partner frequently watch over their own. Like stewards of rich man, they are apt to consider attention to small matters as not for their master’s honour and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company,helieved so strongly in the power of self interest and the conflicts it generates, that ith believ' ems ‘istic about the ability of the joint stock company to survive in any but tremely pessimi : ; he.wns ex {’s behaviour could be easily monitored, the simplest of activities where management Without a monopoly joint stock company cannot carry long on any branch of foreign trade, To buy in one market, in order to sell, with profit, in another, when there are many competitors in both; to watch over, not only the occasional variations in the demand, but the much greater and more frequent variations in the competition or in the supply which that is likely to get from other people and to suit with dexterity and judgment both the quantity and quality of each assortment of goods to all these circumstances, is a species of warfare of which the operations are continually changing and which can scarce ever be conducted successfully, without such an unremitting exertion of vigilance and attention, as cannot long be expected from the directors of a joint stock company. Smith had strong surmise about the sustainability of a corporation without it being granted a state monopoly. Only activities where this model can work, were those that were easily monitored; Smith implicates this when he says in his words "which all the operations are capable of being reduced to what is called a routine or to such a uniformity of method as admits of little or no variation". Smith was well aware of the benefits of corporations, including their ability to concentrate large amounts of money into capital-intensive undertakings. Negligence, profusion and conflict of interest would rnin the corporation as its business sealed high and it would be predicament for anyone to preclude these costs, by whatsoever checks, balances, controls and regulations being instituted. (Pending outcome of investigation, it Was negligence and profusion that resided at the bottom of Satyam pyramid.) These agency costs viz. negligence, profusion and conflict of interest, are today reflected in the form of corporate debacles, be it Enron, World-com or Satyam. It is sad, but the fact is that Smith has been proven right hitherto specifically in last decade if one is to go purely oo regression analysis. Smith’s prophecy that ‘negligence and profusion must always prevail’ made 200 years before, still holds good today. The irony is: it is only now when we realise the unfathomable truth in his profound statement. Enron brought @ sea change in our perspective towards corporate governance; it had IS own lessons to teach and so would Satyam. Stringent and vigilant controls would be instituted PY regulatory bodies, in the form of codes, rules, audits and peer reviews; investigations will " carried out, special committees will be appointed, white papers will be issued and; signilics® amount of research would be done in investigating why this happened, how this happens °° it have been prevented or at least predicted, what to do to prevent its re-occurrence, WhO SMO be held responsible, how should they be punished, etc. However, the fact is and as Smith _oS Ss i is mot 5 wrote, this 0 “— of corporation possesses an inherent flaw and this would time and again be reflected in the form of more Enrons and Satyams. These are bound to take place in future irrespective of checks and balances because of the inherent greed and conflict of interest. ‘ | MODELS OF CORPORATE GOVERNANCE AROUND THE WORLD Various Models of Corporate Governance around the World are as follows. 1. The anglo-saxon model ~ based on enterpreneurship and Private property Anglo-Saxon model is characterized by the dominance in the company of independent persons and individual shareholders. The manager is responsible to the Board of Directors and shareholders, the latter being especially interested in profitable activities and received dividends. It ensures the mobility of investments and their placement from the inefficient to the developed areas, but it however feels a lack of strategic development. In the US., financial markets activities dominate the allocation of ownership and control rights into organizations. Legislation always appeared hostile to concentration, especially in the banking industry, but in the recent years there have been notice new regulations development, more forced by the new economic trends: the increasing influence of boards, investors are increasingly demanding and cautious and managers give more importance to key business issues. Enterprises are required to disclose more information compared to those Japanese or German. On financial markets (NASDAQ) smaller companies are also present, even if some are still in growth and development. Corporate governance was encouraged by the work of various associations which have introduced a motion to support the shareholders, such as National Association of Investors Corporation (founded in 1951) which advises on investments on the stock exchange and National Council of Individual Investors, which protects interests of the shareholders in front of regulatory authorities. Mainly are considering the transparency and access to information, strengthening the relationship between regulators and shareholders, and promoting business ethics. ‘The Anglo-Saxon countries are characterized by the emergence of financial markets and strong banking restrictions, especially regarding the holding of shares in companies outside the ed as a special presence in Europe, having recognized banking sector. Great Britain can be perceiv h the importance of the financial market in London, where many national companies are listed, The overnance structures, banks being considered banking system does not have @ central role in govern merely “credit providers”. In the economic entities, capital structure is dispersed and shareholder power is stable compared with that of managers. The Govemance model (similar to the American) is dominated by the influence of extemal capital markets, through merger and acquisitions, but also through the control exercised over securities trading, Regulatory institutionsact to protect investors by implementing specific policies and practices of corporate governance system. Such a system requires an independent Board, responsible for monitoring and control of management, to improve its organizational performance and recovery. 2. The Continental-European Model — characterized by major Shareholders’ Interests The Continental European model is characterized by a high concentration of capital, Shareholders have common interests with the organization and participate in its management and control. Managers are responsible to a wider group of stakeholders, besides shareholders, such as unions, business partners, etc It can be said that in Italy, the idea of corporation dates back to ancient Rome, from time of Emperor Trajan. At that time they had institutions ,,collegia artificum” similar to the contemporary, which were legal entities for various types of trade. The members of ,,collegia artificum’” enjoyed tax benefits and other reliefs. They were inspired by the example of Greek society and the goal was to assist entrepreneurs. Halian corporatism saw two levels: the Catholic and fascist. Catholic: appeared in 1891 and has grown to earl; Giuseppe Toniolo, inspired corporatism ly-twentieth century. Representative is the name of economist and sociologist, who has always promoted solidarity, rejecting individualism and liberal doctrines. Fascist corporatism developed during the years 1920-1940, {and its general principles were set out in the Charter of Labour in 1927 and were institutionalized With the advent of new corporations, bringing together different categories of entrepreneurs and workers. 1939 was the crucial step by establishing Chamber fascia. Its abolition coincided with the removal procedure. The 1980s brought into attention a new conce; neocorporatism. Currently, less receptive environment some pt, later debated by the Italian literature: market and companies management regulation is prevalent public in a and exposed to adverse conditions. Socio-economic reality generated ifferent structures of distribution and control management, each specific to the reference market and with special characteristics, Ownership and control of listed companies are Sienificantly concentrated, shareholders having the opportunity of intervention in the management Process, Jn the German system of govemance, the enterprise is seen as the combination of various ‘terest groups aimed to coordinate the national interest objectives. From a historical point of view, German banks have played an important role in corporate decisions. Only one of four companies in Germany is entitled to public transactions, assistance from banks. A great importance is given to the Point where a bank might dominate a firm. Unlike the U.S. of their own clients. This ensures the deposi in a company. thus most comp: seek financial protection of creditors, even 10 the German banks may hold only action’ ry voting rights to control the decisions and votes—_ 4, The Japanese Model ~ specific to a oriented control Governance System The Japanese model brings, as a new, the holding concept, which designates industrial goups consisting of companies with common interests and similar strategies. The managers’ responsibility manifests itself in relations with shareholders and Keiretsu (a network of loyal suppliers and customers). Keiretsu represents a complex pattern of cooperation and also competition relationships, characterized by the adoption of defensive tecties in hostile takeovers, reducing the degree of opportunism of parties involved and keeping long term business relationships. Most Japanese companies are affiliated with this group of trading partners. The characteristic pattern of governance is dominated by two types of legal relationships: one of co-determination between shareholders and unions, customers, suppliers, creditors, goverment and another ratio between administrators and those stakeholders, including managers. ‘The necessity of the model results from the fact that the activity of a company should not be upset by the relations between all these people, relationships that generate risks. Management decisions pursue improving the income and power of an enterprise, in particular by specific although sometimes the shareholders control on the management can be hampered. Therefore, the Japanese model (similar to the German one) is based on internal control; it does not focus on the influence of strong capital markets, but on the existence of those strategic shareholders such as banks. As in Germany, major shareholders are actively involved in the management process, to stimulate economic efficiency and to penalize its aims to harmonize the interests of social partners and employees of the entity. corporate governance practices, absence. It is also The Japanese governance system facili effective communication between them an in bank loans. tates the monitoring and flexible financing of enterprises, 4 the banks, as the main source of financing consists ance concept emerged in India after the second half of 1996 due to industry and business. With the changing times, there ff companies to their shareholders and customers. The corporate Governance in the U.K. has Corporate govern: economic liberalization and deregulation of was also need for greater accountability o' report of Cadbury Committee on the financial aspects of iven rise to the debate of Corporate Governance 1n India. arises due to separation of management from the ownership. entrate on both economical and social aspect. It needs to be customers etc. It has various responsibilities towards dat last towards governance and it needs to serve its Need for corporate governance For a firm success, it needs to cone fair with producers, shareholders, \ employees, customers, communities ant Tesponsibilities at the best at all aspectsrporate Governance “corporate governance concept” dwells in India from the Arthshastra time instead of cso a tar ine there were kings and subjects. Today, corporate and shareholders replace them a but the principles still remain same, unchanged i.e. good governance. 20th century witnessed the glory of Indian Economy due to liberalization, globalization and privatization. Indian economy for the Ist time here was together with world economy for product, capital and labour market and which resulted into world of capitalization, corporate culture, business ethics which was found important for the existence of corporation in the world market place. A corporation is a congregation of various stakeholders, namely customers, employees, investors, vendor partners, government and society, In this changed scenario an Indian corporation, as also @ corporation elsewhere should be fair and transparent to its stakeholders in all its transactions. This has become imperative in today’s globalized business world where corporations need to access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed. Corporations need to recognize that their growth requires the cooperation of all the stakeholders and such cooperation is enhanced by the corporations adhering to the best Corporate Governance practices. In this regard, the management needs to act as trustees of the Shareholders at large and prevent asymmetry of benefits between various sections of Shareholders, especially between the owner-managers and the rest of the shareholders. x aw can only provide a minimum code of conduct for proper regulation of human being o* Company. Law is made not to stop any act but to ensure that if you do that act, you will fice Such consequences i.e. good for io f00d and bad for bad. Thus, in the same manner, role of law ia Porate governance is to supplement and not to supplant, It i i ennot be only way to govern corporate governance but instead it provides @ minimum © of conduct for good corporate Bovernance. Law provides certain ethics to govern one and all So as to have maximum satisfaction and minimum fri Role of law in cos Directors so that n, It plays a complementary role: "porate governance is in Companies Act which imposes certain restrictions ©? is there is no it : i pone uty not to make secret profit and make good losses due to breach of Au “te, duty to act in the best interest of the ‘company ete. isrepresentation of documents, there is no excessive of powes: *EVOLUTION OF CORPORATE GO | Prior to Independence and Four Decades | Indian associations/corporate entities were bound by colonial guidelines and a large portion of the principles and guidelines took into account the impulses and likes of the British employers. The Companies Act was enacted in 1866 and was amended in 1882, 1913 and 1932. Partnership ‘Act was enacted in 1932, These enactments had a managing organisation model as a focus as people/business firms went into a legitimate contract with business entities to manage the later. This period was an era of misuse/abuse of resources and shunning of obligations by managing specialists because of scattered and unprofessional proprietorship Soon after independence, there was interest among industrialists for production of a lot of essential items for which the Government directed and dictated fair prices. This was the point at wich the Tariff Commission and the Bureau of Industrial Costs and Prices were set up by the Government, Industries (Development and Regulation) Act and Companies Act were introduced into the legal system in 1950s. 1960s was a time of setting up of heavy industries in addition to the routine affairs. The period between 1970s to mid-1980s was a time of cost, volume and profit examination, as a vital piece of the cost accounting activities. Coming of Age India has been distinctly looked upon by the objective of making inroads into untapped new endeavour to put the frameworks of good corporate administration in place from the word g0, place, However, the scenario was not too encouraging, given a go by for the sake of associations/organisations worldwide with the ‘markets, Dynamic firms in India made an whether or not any regulations were 10 being too promoter-centric and good governance norms convenience or comfort of the promoters. 1d professionally to make Realisi ing the corporates more effectively and prof 0 Sa oti tera vvnber of discourses and occasions prompting the them globally competitive, there have been 2 ™ P atvancement of nate govemance, The fundamental code for corporate sdsineaton ms Proposed by the Chamber of Indian Industries (CH) in 1998. The definition prop 7 " a was Corporate governance manages laws, methods, practices and understood principles it a le ia rginisation’s capacity to take administrative ‘choices specifically its investors, banks, clients, 8 "ale and the representatives. ance Reforms: 1996-2008 The First Phase of India’s Corporate Gover™ corporate govemance reforms were focussed at dependent, focussed and powerful supervisor of at The primary or the first phase of India’ ng Audit Committees and Boards more 1n* amanagement and also of aiding shareholders, including institutional and foreign shareholders/ investors, in supervising management. These reform efforts were channelled through & number of different paths with both the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) playing important roles. (a) ClL—1996 In 1996, Cll taking up the first institutional initiative in the Indian industry took a special Step on corporate governance. The aim was to promote and develop a code for companies, be in the public sectors or private sectors, financial institutions or banks, all the corporate entities, The Steps taken by CII addressed public concems regarding the security of the interest and concer of investors, especially the small investors; the promotion and encouragement of transparency within industry and business, the necessity to Proceed towards international standards of "porate bodies, and through all of this to build a high level of People’s confidence in business and industry. The final draft of this Code ‘was introduced in April 1998, (b) Report of the Committee (Kumar Mangalam Birla) on Corporate Governance Noted industrialist, Mr Ki Committee. The objective which they have invested, Corporate governance. was to enable the shareholders to know, where the companies, in » Stand with respect to specific initiatives taken to ensure robust (©) Clause 49 The Committee also realised the importance of auditing body and made many specifi ‘Suggestions related to the Constitution and function of Board Audit Committees. At that time, SEBI reviewed it's listing contract to inchude the recommendation. These rules and regltos Were listed in Clause 49, a new section of the listing agreement which came into force in pha: of 2000 and 2003, (@) Report of the Advisory Group on Corporate Governance Standing Committee on International Financial Standards and Code March 2001 ‘ aa yisedevis _ The advisory group tried to compare the potion of corporate governance in India bere the international best Standards and advised to improve corporate governance standards in(c) Report of the Consultative Group of Directors of Banks April 2001 The corporate govemance of directors of banks and financial institutions was constituted by Reserve Bank to review the supervisory role of boards of banks and financial institutions and to get feedback on the activities of the boards vis-a-vis compliance, transparency, disclosures, audit committees, etc. and provide suggestions for making the role of Board of Directors more effective with a perspective to mitigate or reduce the risks. (f) Report of the Committee (Naresh Chandra) on Corporate Audit and Governance Committee December 2002 The Committee took the charge of the task to analyse, and suggest changes in different areas like the statutory auditor and company relationship, procedure for appointment of Auditors and determination of audit fee, restrictions if required on non-auditory fee, measures to ensure that management and companies put forth a true and fair statement of financial affairs of the company. (g) SEBI Report on Corporate Governance (N.R. Narayan Murthy) February 2003 So as to improve the governance standards, SEBI constituted a committee to study the role of independent directors, related parties, risk management, directorship and director compensation, codes of conduct and financial disclosures. (bh) (Naresh Chandra Committee II) Report of the Committee on Regulation of Private Companies and Partnerships As large number of private sector companies were coming into the picture there was a need to revisit the law again. In order to build upon this framework, the Goverment constituted a committee in January 2003, to ensure a scientific and rational regulatory environment. The main focus of this report was on (a) the Companies Act, 1956; and (b) the Partnership Act, 1932. The final report was submitted on 23-7-2003. () Clause 49 Amendment—Murthy Committee In 2004, SEBI further brought about changes in Clause 49 in accordance with the Murthy Committee's recommendations. However, implementation of these changes was postponed till 1- 1-2006 because of lack of preparedness and industry resistance to accept such wide-ranging ‘eforms. While there were many changes to Clause 49 as a result of the Murthy Report, Severance requirements with respect to corporate boards, audit committees, shareholder disclosure, and CEO/CFO certification of internal controls constituted the largest transformation f the governance and disclosure standards of Indian companies.Second Stage of Corporate Governance—After Satyam Scam India's corporate community experienced a significant shock in January 2009 with damaging revelations about board failure and colossal fraud in the financials of Satyam. The Satyam scandal also served as a catalyst for the Indian Government to rethink the corporate governance, disclosure, accountability and enforcement mechanisms in place. Industry response shortly after news of the scandal broke, the CII began examining the corporate governance issues arising out of the Satyam scandal. Other industry groups also formed corporate governance and Ethics Committees to study the impact and lessons of the scandal, In late 2009, a Cll task force put forth corporate governance reform recommendations, In its report the CII emphasised the unique nature of the Satyam scandal, noting that Satyam is a one-off incident. The overwhelming majority of corporate India is well run, well regulated and does business in a sound and legal manner. In addition to the CH, the National Association of Software and Services Companies (Nasscom, self-described as the premier trade body and the Chamber of Commerce of the IT-BPO industries in India) also formed a Corporate Governance and Ethics Committee, chaired by N.R. Narayana Murthy, one of the founders of Infosys and a leading figure in Indian corporate governance reforms, The Committee issued its recommendations in mid-2010. The Companies Act, 2013.— consists of law provisions conceming the constitution of the board, board processes, board meetings, independent directors, audit committees, general meetings, party transactions, disclosure requirements in the financial statements and etc. SEBI Guidelines SEBI is a governing authority having jurisdiction and power over listed companies and Which issues regulations, rules and guidelines to companies to ensure the protection of investors. Standard Listing Agreement of Stock Exchanges is for those companies whose shares are listed on the stock exchanges. Accounting Standards Issued by the Institute of Chartered Accountants of India an ICAI is an independent body, which issues accounting standards providing auietines e disclosures of financial information. In the new Companies Act, 2013 Section 129 cape i die the financial statements would give a fair view of the state of affairs of the ena ver ven the accounting standards given under Section 133 of the Companies Act, 2013. " is aah we that the things contained in such financial statements should be in complianc accounting standards, ‘sl ; ies of India (ICSD. IC Secretarial Standards issued by the Institute of Company Secretaries Sas of the ne” is an independent body, which has secretarial standards in terms of the pcS eee Companies Act ICS] has issued secretarial standards on “Meetings of the Board of Directors” (5-1) and secretarial standards on “General Meetings” (SS-2). Given secretarial standards have come into force from 1-7-2015. Companies Act, 2013, Section 118(10) provides that every company (other than one person company) shall observe secretarial standards specified as such by the ICSI with respect to general and Board meetings. IV, Landmark Cases of failure of Corporate Govemance Satyam Case Satyam Computer Services scandal was a corporate scandal affecting India-based company Satyam Computer Services in 2009, in which Chairman Ramalinga Rajii admitted that, the company’s accounts had been manipulated. The Satyam scandal was a Rs 7000 crore corporate scandal in which accounts had been manipulated. On 7-1-2009, Ramalinga Raju sent an e-mail to SEBI, wherein he confessed to falsify the cash and bank balances of the company. Weeks before the scam began to unravel with his popular statement that he was riding a tiger and did not know how to get dovn without being killed. Raju had said in an interview that Satyam, the fourth largest IT company, had a cash balance of Rs 4000 crore and could leverage it further to raise another Rs 15,000-20,000 crore. Ramalinga Raju was convicted with 10 other members on 9-4-2015. Ramalinga Raju and three others were given six months jail term by Serious Fraud Investigation Office (SFIO) on & 12-2014, Even auditors Price Waterhouse Coopers (PWC) had to face a hard time, Ricoh Case The saga at Ricoh India demonstrates that the radiance of good governance that is automatically ascribed to MNCs is not ensured the result. In spite of administrative interference afer the Satyam scam and legislative amendments to tighten’ the govemance framework (Companies Act, 2013, SEBI (Listing Obligations and Disclosure Requirements) Regulations, et. the Ricoh scene ‘was almost a replica of the Satyam episode in terms of accounting fraud and resultant fraud of stock prices interestingly without any promoter being in the sedi: Fests fw corrupt managers were sufficient to obliterate the system with the usual failure of the main regulating institutions such as the auditors, eredit rating agencies independent directors of repute, committees of directors including the powerful audit committees manned by independent directors, etc. ICICI Bank Scam Case 1 was the role of the Board in hurries of an independent investigation released ii "epotism, and its refusal to take any questions on the matter. .dly giving a clean chit to its CEO without the results in the public domain in an apparent case of allegedKingfisher Airlines and United Spirits Case smal corporate funding ‘© paris, fliying accounts, 1, ya. Mainly regarding illegal inter from United Spirits Ltd. (USL) to Subsidise | ed entirely evident that assets had been transferr J Ly Kingfisher, that United Breweries (UB) Holdings was utilised as a channel for raising loans ang giving them to his group, that intercorporate credits were given to related groups without the Board’s approval, accounts were inappropriately expressed, reviews were stage overseen, ei. during the period Mr Vijay Mallya was responsible for USL. The concept corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It deals with conducting the affairs of a company such that there ig faimess to all stakeholders and that its actions benefit the greatest number of stakeholders. In this regard, the management needs to prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company. Ethical, dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders. It is the interaction between various participants (shareholders, board of directors and company’s management) in shaping corporation's performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual’s actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked. Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair return on their investment. Corporate Governance clearly distinguishes between the owners and the managers. The managers are the deciding authority. In modern corporations, the functions/ tasks of owners and managers should be clearly defined, rather, harmonizing. Corporate governance is concemed with set of principles, ethics, values, morals, rules regulations, & procedures ete. Corporate governance establishes a system whereby directors are entrusted with duties and responsibilities in relation to the direction of the company’s affairs. The term “governance” means control i.e, controlling a company, an organization ete. oF @ company & corporate governance is governing or controlling the corporate bodies ie. ethics,inciples, morals. ves, prince parte 4 For corporate governance to be good the manager needs to meet its onsite (owas iS owners (shareholders), creitrs, employees, customers government tne society at large. Corporate governance helps in establishing a system where a director is showered with duties and responsibilities of the affairs of the company. val For effective corporate governance, its policies need to be such that the directors of the company should not abuse their power and instead should understand their duties and responsibilities towards the company and should act in the best interests of the company in the proadest sense. The concept of ‘corporate governance’ is not an end; it’s just a beginning towards growth of company for long term prosperity, Corporate Governance is essentially all about how corporations are directed, managed, controlled and held accountable to their shareholders. In India, the question of Corporate Governance has come up mainly in the wake of economic liberalization and de-regularization of industry and business. The objective of any corporate governance system is to simultaneously improve corporate performance and accountability as a means of attracting financial and human resources on the best possible terms and of preventing corporate failure. With the rapid pace of globalization many companies have been forced to tap international financial markets and consequently to face greater competition than before. Both policy makers and business managers have become increasingly aware of the importance of improved standards of Corporate Governance. IANCIENT AND MODERN CONC Anelatit Concept of Corporate, Governaned The concept of corporate governance had deep historical roots in ancient India. Corporate governance was important concept in Indian ancient commercial world. Economy was base of all civilized society. No society can exist without economic activities. But there must be some faimess, justice in economic activities. The concept of faimess and justice is known as corporate Corporate governance was known by different names. In a governance. But in ancient India ancient India Dharma was main regulator. Corporate Governance during Vedic Era 1500-322 BC cial instinct in men, From the most primitive period of s manifest in human society in some form or other. Nevertheless it is brought into prominent activity, and lends itself to some conscious organization, tecording to the temper of man and the circumstances in which he finds himself. The nature of these circumstances dictates the form of such organization, but the character of development depends to a great degree upon the peculiar genius of the society in which it is fostered. Thus it ‘The spirit of cooperation is a 0% which we possess any record, it haES ————————E——EEEee i , however, rudimentary ; is that we find in almost all ages and countries cooperative organization, 9 ary in different fields of human society cil political, religious and arenes oe of this organization has however varied in different parts of the w ee taneae mst of economic life during the Gupta period is the vigorous activities = Gein, Foe ah Is ang corporations, The guild life led to much economic progress in ancie hile the eat individual craftsman could thus find scope to develop their skill and ingenuity, while the guild laws ang regulations safeguard their interest against internal or external danger. In ancient India corporate activity seems to have been manifest, in a marked degree, firs in the economic field. This appears from a passage in the Brihad Aranyak Upanishad when reaq along with Sankaracharya comments thereon. There was an analogy of the Brahmana, Kshatriyas, Vaisyas and Sudras in human society. Brahama treated as similar classes among the Gods. But Brahmana and Kshatriyas could not acquire wealth hence were created the Vaisyas who were called Ganesh owing to the circumstances that it was by cooperation and not by individual efforts that they could acquire wealth. Constitution of Guilds The executive machinery which enabled the guilds to perform these multifarious works is also described in some detail in Bribaspati. There was a chief of president, assisted by two, three or five executive officers. Brahaspati says those only people who are honest, acquainted with the Vedas and are duty able, self controlled, sprung from noble families and skilled in every business shall be appointed as executive officer. Vishnu Purana By the Vedic period, the society had crossed the primitive stage of economic life, the various arts and crafts had come into prevalence. Rural industries also exist in society, and craft had tendency of being multiplied and subdivided. The crafts were in process of gradual evolution in the Vedic age. During the age of Buddhist literature servant craft also had made progress. But Vishnu Purana do not throw sufficient light on the topic of trade. It is clear from the Purana that the Vaisyas followed trade for their livelihood which was corporations of artisans and merchants respectively. Sukracharya Nitisara In Nitisara the larger towns, Where there were many artisans merchants guilds were formed. Thus there were craft guilds, banking corporations and mercantile associations. There were, of course, religious organisations also. Gradually, as trade and commerce increased, the merchant class became rich and important and as it grew in importance, it was given certain privileges and freedom to arrange the domestic affairs of its guilds. But even then it had no real share in the power of the state."