Corporate governance

Regulatory Compliance

& Corporate Governance

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ACKNOWLEDGEMENTS

The Group would like to convey their sincere thanks to Professor for his unstinted

support & guidance without which it would not have been possible for us to carry out

the study.

His valuable inputs on the subject ‘Legal Aspects of Management’ and deliberations

in the class were knowledge enriching & facilitated in completing the project.

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Introduction .................................................................................................. 4 What is Corporate Governance? ................................................................. 4 Structure of Corporate Governance ........................................................... 6 The Evolution of Corporate Governance .................................................... 9 International Corporate Governance ........................................................ 14 Corporate Governance in India ................................................................. 18 Systemic Problem of Corporate Governance .......................................... 19 Corporate Governance: Regulatory Compliance ................................... 21 Best Corporate Experiences in Corporate Governance.......................... 24

Nokia ...................................................................................................... 24

Dabur ..................................................................................................... 24

ONGC ..................................................................................................... 25

Royal Philips Electronics ..................................................................... 26

Tata Sons .............................................................................................. 27

Toyota .................................................................................................... 29

Conclusion .................................................................................................. 31

Contents

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Introduction A country’s growth and progress; its sustainability and consistency solely depend on

the systematic approach and practice of good governance. Good Governance can

help to create a healthy and effective development of the economy, which in turn will

provide equity and benefits to its shareholders. Corporate Governance has evolved

and grown significantly as a burning issue in the last decade. Numerous countries

have issued codes of Corporate Governance and the recommendations of these

codes symbolize ‘Good Governance’ in the Corporation’s undoubted contribute

towards increased transparency, morality, ethics and disclosure.

<Swami (Dr.) Parthasarathy, Corporate Governance – Principles, Mechanisms &

Practice, Page 3-4, Year- 2010, Publisher- Biztantra, New Delhi>

What is Corporate Governance? Corporate Governance is the set of processes, customs, policies, laws and institutions

affecting the way a Corporation is directed or controlled. Corporate Governance is

important for the economic health of Corporations and the Society in general. The key

elements of Corporate Governance principles include honesty, ethics, transparency,

integrity, openness, responsibility, accountability, mutual respect and commitment to the

Organisation.



Corporate governance is all about the policies, procedures and rules governing the

relationships between the shareholders, stakeholders, Directors and Managers in a

company, as defined by the applicable laws, the Corporate charter, the Company’s

bylaws, and formal policies. Primarily it is about managing top management, building in

checks and balances to ensure that the senior executives pursue strategies that are in

accordance with the corporate mission. It consists of a set of processes, customs,

policies, laws and institutions affecting the way of a corporation is directed, administered

or controlled. Corporate governance governs the relationship among the many players

involved (the stakeholders) and the goals for which the corporation is governed.

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<www.scu.edu/ethics/practicing/focusareas/.../ItiBose.pdf, 22.11.2011, 10:19 PM>

The Integrity of corporations, financial institutions and markets is particularly central

to the health of economies & their stability. Corporate Governance refers to the

processes, mechanism, principles and structure by which the business & affairs of the

company are directed, managed and governed effectively. The ultimate goal is to

enhance long term shareholder value by improving corporate governance and

accountability.



J.Wolfensohn, the then president of the World Bank has opined that corporate

governance is about promoting corporate fairness, transparency and accountability.

<Quoted in Financial Times, June 21, 1999>

<http://heritageinstitute.com/governance/definitions.htm, 01.12.2011, 8:01 AM>

Corporate Governance is a system by which companies are directed and controlled. The

objectives are-

• Protecting the long term interest and enhancing the values of shareholders and

other stakeholders (viz. customers, employees, creditors, bankers, regulators

and society at large)

• Harmonizing rights & interest of shareholders and stakeholders by continuous

exercise of striking balance.

• Reducing the risks normally faced by the company/ organization.

• Responsibility to introduce and effectively implement Corporate Governance is

exclusively of Board of Directors in a manner that it becomes way of

organizational life and not merely written rules or regulations or code of ethics.

• Ethics & Transparency are cardinals of Corporate Governance.

<http://cab.org.in/Lists/Knowledge%20Bank/Attachments/114/Corporate%20Governance.

ppt, 12.12.2011, 8:00 PM>

Governance, Good Governance & Corporate Governance

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Board of

Directors

Shareholders

Managers

Governance

Governance is not merely about ownership and control. Even an owner has to learn to

govern.

Good Governance

Good governance is about simplicity in processes combined with checks and balances,

clarity of roles, assignment of responsibilities and obligation, all of which would lead to

enhanced accountability, wherever it is due.

Corporate Governance

Corporate Governance encompasses commitment to values and to ethical business

conduct to maximise shareholder values on a sustainable basis, while ensuring fairness

to all stakeholders. Corporate Governance is a way of life and not a set of rules. It is a

way of life that necessitates taking into account the shareholders’ interest in every

business decision.

<www.mcx-sx.com/downloads/Corporate_Governance.pdf, 18.11.2011, 9:21 PM>

Poor Governance versus Good Corporate Governance

Poor governance

• Undermines integrity of corporations and discourages the use of public markets

as a means to intermediate savings

• Particularly the areas of transparency and disclosure have been a major factor

behind instability in the financial markets across the globe

Good corporate governance

• Essential pre-requisite for the integrity and credibility of capital market players

• Contributes to the development of a vibrant economy and robust capital markets

<http://www.nfcgindia.org/T.%20V.%20Mohandas%20Pai.ppt, 25.11.2011, 7:34 AM>

Structure of Corporate

Governance

The Corporate Governance

structure specifies the relations

and the distribution of rights and

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responsibilities among primarily three groups of participants i.e.

• The Board of Directors

• Managers

&

• Shareholders

The system spells out the rules & procedures for making decisions on Corporate Affairs,

provides the structure through which the company objectives are set, as well as the

means of attaining and monitoring the performance of those objectives. Corporate

Governance helps in ensuring conditions whereby the Organisation’s Directors and

Managers act in the larger interests of the Organisation and its shareholders and to

ensure the means by which manager’s are held accountable to capital providers for use

of assets.


Practice,Year- 2010, Publisher- Biztantra, New Delhi>

www.scu.edu/ethics/practicing/focusareas/.../ItiBose.pdf, 12.12.2011, 10:19 pm

Performance Expectations of Stakeholders

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Practice, Page 22, Year- 2010, Publisher- Biztantra, New Delhi>

Corporate Governance Framework

<http://www.iirmworld.org.in/ppt/yrkreddy.pps#383,4,Slide 4 <Corporate Governance

Framework by Nadereh Chamlou, Magdi Iskande>, 13.12.2011, 6:20 AM>

4P’s of Corporate Governance

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<http://lcgc.lifeforeveryone.com/, 26.11.2011, 08:30 AM

Corporate Governance can also be explained on the basis of 4P’s (People, Processes &

Performance). Business cannot run with only profits, but there must be recognition for

human aspects too. This is possible by Corporate Governance. Corporate Governance

has the integrated framework, where the people are formally either trained or helped to

develop to work for a definite and defined purpose in applying the systematic processes

consistently to give constant growth by better performance.



The Evolution of Corporate Governance

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Since the mid-1990s, several corporate governance guidelines and regulations have

been prepared in different parts of the world. Some of the guidelines are:

• Cadbury Committee Report (1992)

• CalPERS- Global Corporate Governance Principles (1996)

• Market Specific Principles- UK and France (1997)

• Market Specific Principles- Japan and Germany (1997)

• Core Principles and Guidelines- USA (April 1998)

• TIAA-CREF- Policy Statement on Corporate Governance (September 1997)

• Business Roundtable- Statement on Corporate Governance (September 1997)

• Hampel Report on Corporate Governance- UK (January 1998)

• The Sarbanes-Oxley Act – USA (August 2002)

• The Higgs Report- UK (January 2003)

<www.nfcgindia.org/library/cgitp.pdf, 20.11.2011, 09:53 AM>

The evolution of the corporate governance guidelines is elaborated below:-

Cadbury Report, United Kingdom 1995

The objective of the Cadbury committee was to investigate how large public companies

should adopt corporate governance guidelines with a focus on the procedures of financial

report production and the role of the accounting profession. Issues included the role of

the board of directors, standard s of financial reporting, accountability of the auditors and

directors pay. The Committee-

• Aimed to improve information to shareholders, reinforce self-regulation and

strengthen auditor independence.

• Produced the Cadbury Code of Best Practice.

• Recommended that:

(i) The boards of Directors should report on the effectiveness of companies

systems of internal control.

(ii) The directors service contracts should not exceed three years without approval

by the shareholders.

(iii) Each listed company should establish an audit committee of at least three non-

executive directors.

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<www.nfcgindia.org/pdf/corporate_governance_report.pdf, 12.12.2011, 10:15 PM>

Greenbury Report, United Kingdom, 1995

The report dealt with the remuneration of executives and non-executives board members

and recommended the setting up of a remuneration committee in each public company to

determine remuneration packages for the board members. It also provided suggestions

on the disclosure of remuneration and the setting up of remuneration policy and service

contracts and compensation. The Committee-

• Aimed to provide an answer to the general concerns about the accountability and

level of directors.

• Argued against statutory control and for strengthening accountability by the proper

allocation of responsibility for determining director’s remuneration, the proper

reporting to shareholders, and greater transparency in the process.

• Produced the Greenbury Code of best practice which was divided into four

sections thus:

i. Remuneration Committee

ii. Disclosure

iii. Remuneration Policy

iv. Service contracts and compensation.



<www.nfcgindia.org/pdf/corporate_governance_report.pdf, 12.12.2011, 10:15 PM>

Hampel Report, United Kingdom, 1998

Four major issues were discussed with practical guidelines offered; (a) the role of

directors (b) directors compensation (c) the role of shareholders (d) accountability and

audit. The Hampel Report-

• Developed the Cadbury report.

• Produced the combined code.

• Recommended that:

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i. The auditor maintains and reviews all controls.

ii. Companies that do not already have an internal audit function should free time

to time review their need for one.

iii. Introduced the combined code that consolidated recommendations of extant

corporate governance reports(Cadbury and Greenbury)

The Turnbull Committee

It was set up by the ICAEW in 1999 to provide guidance to assist companies in

implementing the requirement of the combined code relating to internal control.

• Provided guidance to assist companies in implementing the requirements of the

combined code relating to internal control.

• Recommended that where companies do not have an internal audit function, the

board should consider the need for carrying out an internal audit annually.

• Recommended that boards of directors confirm the existence of procedures for

evaluating and managing key risks.



CII Voluntary Code of Corporate Governance, 1998

This was the first of the voluntarily evolved codes in India.

Kumara Mangalam Birla Committee, India, 1999

The mandatory recommendations of the Kumar Mangalam committee include the

constitution of Audit Committee and Remuneration Committee in all listed companies,

appointment of one or more independent directors in them, recognition of the leadership

role of the Chairman of a company, enforcement of Accounting Standards, the obligation

to make more disclosures in annual financial reports, effective use of the power and

influence of institutional shareholders, and so on. The Committee also recommended a

few provisions, which are non- mandatory.

Corporate governance

Documents

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