Section G |Group – 7

LAM Project

Corporate Governance and Sustainability

GROUP MEMBERS

AS Jayanth (PGP31363)

Hemant Verma (PGP31377)

Nikhat Kashmi (PGP31391)

Swarnima Gupta (PGP31418)

Rohit Banka (PGP31405)

Contents Introduction ................................................................................................................................................... 4

What is Corporate Governance? ................................................................................................................... 5

Parties of corporate governance .................................................................................................................... 5

Responsibilities of board of directors ....................................................................................................... 6

Stakeholder interests ..................................................................................................................................... 6

Control and ownership structures ................................................................................................................. 7

Family control ........................................................................................................................................... 7

Diffuse shareholders ................................................................................................................................. 7

Pillars of corporate governance: ................................................................................................................... 8

Accountability: .......................................................................................................................................... 8

Meaning: ............................................................................................................................................... 8

How is accountability ensured? ............................................................................................................ 9

Importance of Accountability: .............................................................................................................. 9

Fairness ..................................................................................................................................................... 9

Meaning ................................................................................................................................................ 9

Importance of Fairness ........................................................................................................................ 10

How to ensure fairness? ...................................................................................................................... 10

Transparency: .......................................................................................................................................... 11

Meaning .............................................................................................................................................. 11

Transparency means ensuring timely, accurate disclosure on all material matters, including the

financial situation, performance, ownership and corporate governance. ............................................ 11

Importance of Transparency: .............................................................................................................. 11

How to ensure transparency? .............................................................................................................. 11

Independence: ......................................................................................................................................... 12

Meaning: ............................................................................................................................................. 12

How is Independence ensured? ........................................................................................................... 12

Key elements of Corporate Governance ..................................................................................................... 12

Why corporate governance?........................................................................................................................ 17

Issues in corporate governance ................................................................................................................... 19

Sustainability............................................................................................................................................... 22

Sustainability reporting ........................................................................................................................... 22

Governance and Sustainability ................................................................................................................ 23

Challenges ............................................................................................................................................... 23

Innovative policies for sustainable development .................................................................................... 23

Anatomy of a sustainable innovative organization ................................................................................. 24

Innovation is the key to Sustainability .................................................................................................... 25

Sustainable strategy for corporate ........................................................................................................... 25

Sustainability vs Sustainable Development ............................................................................................ 26

Bibliography ............................................................................................................................................... 26

Introduction Corporate governance is a process which aims at allocating corporate resources in such a manner

that maximizes the value for all the stakeholders. The principal stakeholders are the shareholders,

management and the board of directors. Other stakeholders include employees, suppliers,

customers, banks and other lenders, regulators, the environment and the community at large. It

also evaluates transparency, equity and responsibility of those at the helm. Contemporary

corporate governance started in 1992, with the Cadbury report in the UK. The Cadbury report was

the result of several high profile company collapses and is concerned primarily about protecting

weak and widely dispersed shareholders against self-interested Directors and managers. Corporate

governance is primarily concerned with the public companies which are listed in the stock

exchange. In this regard the main focus is on avoiding major company collapses such Enron,

Maxwell, etc. Corporate Governance is important because it is part of the institutional

infrastructure (laws, regulations, institutions and enforcement mechanisms) underlying sound

economic performance. An important theme of corporate governance is to ensure the

accountability of certain individuals in an organization through mechanisms that try to reduce or

eliminate the principal-agent problem.

In recent times, the corporate governance and sustainability should go hand in hand in order to

establish a global cooperation, based mainly on joint coordination of strategies and adopting the

best decisions. For the business community, sustainability is more than mere window-dressing. By

adopting sustainable practices, companies can gain competitive edge, increase their market share,

and boost shareholder value. The concept of sustainable development involves the integration of

three main pillars, which are economic, social and environmental. The economic pillar of

sustainable development is based on the necessary retaining of ordinary capital with all the

business activities performed, and use of only the generated profit. This enhances the

sustainability of the company and hence avoid major collapses in the run. The social pillar

concentrates more on the individuals as well as the community. These individuals and community

mainly involves the employees, the customers and the communities which are affected by the

activities of the company. The final pillar is the environment, which as the name suggests

concentrates on the environment related issues. It mainly dictates the terms necessary for the

protection of the environment, specifically on improvement and protection of exhausting the

limited natural resources.

In order to achieve a sustainable growth and development in the long run, a company has to

concentrate on formulating its strategic goal. In India, since the government of India has made it

mandatory for the companies to invest in Corporate Social Responsibility (CSR) activities, it is

imperative for the companies to devise a strategic goal taking into consideration both the

governance and the sustainable development.

What is Corporate Governance?

It is the system of rules, practices and processes by which a company is directed and

controlled.

There are multiple parties or stakeholders of the company whose interests need to be

balanced. These include its shareholders, management, customers, suppliers, financiers,

government and the community.

Since corporate governance also provides the framework for attaining a company's

objectives, it encompasses practically every sphere of management, from action plans and

internal controls to performance measurement and corporate disclosure.

Parties of corporate governance Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive

Officer, the board of directors, management and shareholders). Other stakeholders who take part

include suppliers, employees, creditors, customers and the community at large.

The regulatory body takes major decisions related to the company and its performance. Major

responsibilities will be in the hands of the regulatory body, who take key decisions in the

governance of the company.These are the individuals who will be accountable for all the actions

of the company whther its loss or profits foe the company. The other category of the parties in

corporate governance includes the suppliers, customers, employees, etc,. who are part of the

company even though they don’t take major decisions related to the company. These are the

individuals who are generally affected by the decisions of the regulatory body. But when the

concept of sustainability comes into picture all the parties of corporate goverance will be key

factors in deciding the growth and susatainability of the company. Hence for any company

corpaorate governance should take into consideration all the parties befotre coming to any kind of

conclusion.

Responsibilities of board of directors

As part of the corporate governance the board of directors of a company, ideally, should take up

the following responsibilities:

Board members should be informed and act ethically and in good faith, with due diligence

and care, in the best interest of the company and the shareholders.

Review and guide corporate strategy, objective setting, major plans of action, risk policy,

capital plans, and annual budgets.

Oversee major acquisitions and divestitures.

Select, compensate, monitor and replace key executives and oversee succession planning.

Align key executive and board remuneration (pay) with the longer-term interests of the

company and its shareholders.

Ensure a formal and transparent board member nomination and election process.

Ensure the integrity of the corporations accounting and financial reporting systems,

including their independent audit.

Ensure appropriate systems of internal control are established.

Oversee the process of disclosure and communications.

Where committees of the board are established, their mandate, composition and working

procedures should be well-defined and disclosed.

Stakeholder interests

All parties to corporate governance have an interest, whether direct or indirect, in the financial

performance of the corporation. Directors, workers and management receive salaries, benefits and

reputation, while investors expect to receive financial returns. For lenders, it is specified interest

payments, while returns to equity investors arise from dividend distributions or capital gains on

their stock. Customers are concerned with the certainty of the provision of goods and services of

an appropriate quality; suppliers are concerned with compensation for their goods or services, and

possible continued trading relationships. These parties provide value to the corporation in the form

of financial, physical, human and other forms of capital. Many parties may also be concerned

with corporate social performance.

A key factor in a party's decision to participate in or engage with a corporation is their confidence

that the corporation will deliver the party's expected outcomes. When categories of parties

(stakeholders) do not have sufficient confidence that a corporation is being controlled and directed

in a manner consistent with their desired outcomes, they are less likely to engage with the

corporation. When this becomes an endemic system feature, the loss of confidence and

participation in markets may affect many other stakeholders, and increases the likelihood of

political action. There is substantial interest in how external systems and institutions, including

markets, influence corporate governance.

Control and ownership structures

Control and ownership structure refers to the types and composition of shareholders in a

corporation. In some countries such as most of Continental Europe, ownership is not necessarily

equivalent to control due to the existence of e.g. dual-class shares, ownership pyramids, voting

coalitions, proxy votes and clauses in the articles of association that confer additional voting rights

to long-term shareholders. Ownership is typically defined as the ownership of cash flow rights

whereas control refers to ownership of control or voting rights. Researchers often "measure"

control and ownership structures by using some observable measures of control and ownership

concentration or the extent of inside control and ownership. Some features or types of control and

ownership structure involving corporate groups include pyramids, cross-shareholdings, rings, and

webs. German "concerns" (Konzern) are legally recognized corporate groups with complex

structures. Japanese keiretsu and South Korean chaebol (which tend to be family-controlled) are

corporate groups which consist of complex interlocking business relationships and shareholdings.

Cross-shareholding are an essential feature of keiretsu and chaebol groups. Corporate engagement

with shareholders and other stakeholders can differ substantially across different control and

ownership structures.

Family control

Family interests dominate ownership and control structures of some corporations, and it has been

suggested the oversight of family controlled corporation is superior to that of corporations

"controlled" by institutional investors (or with such diverse share ownership that they are

controlled by management). A recent study by Credit Suisse found that companies in which

"founding families retain a stake of more than 10% of the company's capital enjoyed a superior

performance over their respective sectorial peers." Since 1996, this superior performance amounts

to 8% per year. Forget the celebrity CEO. "Look beyond Six Sigma and the latest technology fad.

One of the biggest strategic advantages a company can have is blood ties," according to a Business

Week study

Diffuse shareholders

The significance of institutional investors varies substantially across countries. In developed

Anglo-American countries (Australia, Canada, New Zealand, U.K., U.S.), institutional investors

dominate the market for stocks in larger corporations. While the majority of the shares in the

Japanese market are held by financial companies and industrial corporations, these are not

institutional investors if their holdings are largely with-on group.

The largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest

investment management firm for corporations, State Street Corp.) are designed to maximize the

benefits of diversified investment by investing in a very large number of different corporations

with sufficient liquidity. The idea is this strategy will largely eliminate individual firm financial or

other risk and. A consequence of this approach is that these investors have relatively little interest

in the governance of a particular corporation. It is often assumed that, if institutional investors

pressing for will likely be costly because of "golden handshakes" or the effort required, they will

simply sell out their interest.

Pillars of corporate governance:

Accountability:

Meaning:

Accounting literally means a record or a description of previously happened events.

Accountability, thus, simply pertains to giving an account of an event, which is, a description of

the event. In the context of corporate governance, the parties involved – who give and receive

accounts and the accuracy of the information becomes the important issue at hand. Management

is accountable to the board and board is accountable to shareholders.

Thus accountability involves that actions should be clearly related to objectives and the objectives

should be initiated and agreed by a significant group of responsible stakeholders. There should

PILLARS OF CORPORATE

GOVERNANCE

ACCOUNTABILITY

INDEPENDENCE

TRANSPARENCY

FAIRNESS

then be regular and transparent reporting back by those executing the actions to the stakeholders

to whom they are accountable. In the absence of such clear lines and regular, transparent reporting

there can be no effective accountability.

How is accountability ensured?

Seven principles need to be fulfilled to ensured accountability. These are:

1. Delegation

2. Responsibility

3. Disclosure

4. Autonomy

5. Authority

6. Power

7. Legitimacy

Importance of Accountability:

Breach of trust by managers via intentional acts, omission of key facts from reports, neglect, or

incompetence can cause conflict if management and ownership is separate. To avoid this, entities

should act be accountable to all stakeholders including shareholders.

Accountability is imperative for economic prosperity. If there is poor accountability for players in

the economy, stakeholders may lose the confidence they have in it and hence become reluctant to

put in their best. For instance; for some developing countries, lack of accountability may lead to a

fall in the participation rate in their development programs by their cooperating partners- a

situation that leads to further deterioration in the development process.

Accountability is also important for performance measurement. Verdict of performance

measurement processes will be more true and representative of the measured performance if the

corporate governors are more accountable.

Without accountability, the agency problem would be hard to defeat. It contributes to increasing

shareholder confidence. It is achieved through faithfulness in various aspects of corporate

governance especially reporting. The strength and accuracy of the reporting is also strengthened

by various standards and regulations.

Fairness

Meaning

The literal meaning of fairness is to treat people with equality. It means avoiding any biases

towards one or more entities on any basis. Under the purview of corporate governance, fairness

involves protecting shareholders rights, treating all shareholders including minorities equitably

and providing effective redress for violations.

Importance of Fairness

We often encounter the concept of fairness in the economic development context. For example:

fair distribution of national wealth is a much debated concept. In the context of corporate

governance as well, fairness has become a controversial issue.

Some examples can be cited to illustrate the concept. For instance, a lot has been said so far with

respect to fairness and the governance of Ghana Airways. Although not publicly debated or talked

about often, fairness in corporate governance is a matter of national interest for many other state

owned companies such as ZESCO, ZSIC and ZNBC among others in Zambia and Africa. As a

result of most strategic positions being filled by political appointments, the managers of these firms

are split between fulfilling the interests of the people responsible for the appointment and

achieving corporate goals and other stakeholder’s interests. Indeed, fairness is a crucial concept

all over the world.

If you know the contentions that a bad decision as a result of bias in any of the above named

companies can bring, then you already know just how critical it is that fairness is practiced in the

way companies are directed and controlled.

Fairness is usually considered with various stakeholders of a company in mind. The choice as to

what is fair and will most likely be made by taking into account the stakeholder’s position on the

power-interest matrix. Some of the stakeholders of a company include; shareholders (including

institutional investors), suppliers (creditors), employees, customers and the community at large.

How to ensure fairness?

Companies have to make multiple decisions on a day to day basis. For company boards, being fair

is a big dilemma as decisions involve interests (financial or otherwise). In transactions such as

mergers or acquisitions for instance, it is very hard to be as fair as possible if you are on the board.

For this reason, many companies are turning to what is known as fairness opinions. This involves

calling in an independent knowledgeable entity to assess a particular transaction and give their

opinion on its fairness.

Another way that is being used as a tool to increase fairness is known as corporate governance

rating. Here, various companies are assessed on aspects of their corporate governance and the

results are published in order to help the firm(s) improve performance on fairness. This is however

not a widespread practice and is most likely un-heard of in many developing countries.

Various solutions to the problem of unfairness are being developed. This is as a result of the

realization by many firms that fairness is important in the way the companies are directed and

controlled. Simple misconceptions on how fair a transaction is can raise serious public debate as

in the case of the sale of Zamtel Libya’s Lap green. The fairer the entity appears to stakeholders,

the more likely it is that it can survive the pressure of these interested parties.

Transparency:

Meaning

Transparency means ensuring timely, accurate disclosure on all material matters, including the

financial situation, performance, ownership and corporate governance.

“Transparency can be defined as a principle that allows those affected by administrative decisions,

business transactions or charitable work to know not only the basic facts and figures but also the

mechanisms and processes. It is the duty of civil servants, managers and trustees to act visibly,

predictably and understandably.”-Transparency international

An entity is transparent if others can see through and there is no ambiguity. Transparency works

simultaneously with integrity. Higher integrity translates into higher transparency. Because of the

aforesaid closeness, many people even tend to think transparency is integrity.

Importance of Transparency:

If a company is transparent enough and reports material facts in real time, stakeholders will have

more confidence in the management. Consequently, they will be more willing to invest in the

company, thereby reducing the cost of capital. Transparency also helps those in charge to avoid

fraud and put measures in place against it. All these factors put together enable the firm’s

productive capacity and productivity to improve.

How to ensure transparency?

From time in memorial, corporate governance chains have undergone various overhauls in order

to increase transparency. There is increased regulation on how financial reporting should be done

and who should do it. International Accounting Standards (IASs) and other regulations are

continually being improved so that what is measured, recognized, disclosed and reported is true

and fair. Simultaneously, various trends are occurring in the area of auditing. This is in order for

an independent knowledgeable entity to pass an opinion on the truth and fairness of the reports

made by the corporations. Apart from these, regulations such as Acts of parliament and codes of

best practice are also playing a critical role in enhancing openness. Most of the parliamentary Acts

relate to securities exchange, companies in general (Companies’ Acts) and even those that directly

target corporate governance such as Sarbanes.

The strife for transparency does not however come without costs. For a small firm, the cost of

reporting transactions and the related audit fees can be too much to bear. For this reason,

governments around the world exempt certain ‘small’ firms from some of these reporting

requirements. However, it is advisable for any entity, no matter what the size to prepare its own

reports as a management or performance measurement tool.

Independence:

Meaning:

Independence means that procedures and structures are in place so as to minimize, or avoid

completely conflicts of interest. Directors and Advisors need to be independent, free from the

influence of others. Independence literally means not influenced by personal feelings or opinions

in considering and presenting facts.

There are many groups of people who are involved directly and indirectly in the governance of a

corporation. Each group has to exercise the role(s) they play in the direction and control of the

companies with some independence.

How is Independence ensured?

To enhance independence, various controls are used to prevent threats to objectivity such as self-

review, self-interest, advocacy, familiarity and intimidation threats. Some of the controls include;

what are known as Chinese walls, quarantines, and declaration of interest (s) – financial or

otherwise, rotation of manpower and so on.

Key elements of Corporate Governance ‘Expressing the sentiments of corporate governance is dead easy…What is going to be harder is

making it work, putting flesh on the bones’

The purpose of corporate governance is to promote effective entrepreneurial and wise management

that can deliver long term success to the company. Good corporate governance is responsible for

the present and future needs of the company, exercises cautiousness in policy-setting and decision-

making, taking into account the best interests of all the stakeholders. The key elements of corporate

governance could be stated as follows-

1. Sensible Board Practices

2. Control Environment

3. Transparent Disclosure

4. Well outlined shareholders rights

5. Board Commitment

1. Sensible Board Practices- It refers to the practice of effectively choosing the board members,

in appropriate composition and mix of skills, with a well-defined structure and appropriate

board procedures, having clearly defined roles, authorities, duties and responsibilities. Few

important elements that could be incorporated by the organizations as a part of corporate

governance are as stated-

Accountability- Accountability is a key creed of good governance. Who is in charge for

what should be clearly documented in policy statements. So, properly specified roles of

every members ensure the compatibility of this attribute. This also ensure for the common

welfare of the organization, ensuring expectation delivery and non-ambiguity. Members can

then contribute individually and wholly as an organization, as in general, an organization is

accountable to those who will be affected by its decisions or actions as well as the applicable

rules of law. The transcendence of this element to the complete organization is also the

strategic responsibility of the directors, ensuring the proper delegation of roles and duties

for the common benefit of the stakeholders at large.

Effectiveness and efficiency- Good corporate governance means that the processes enforced

by the organization to supply favorable results meet the demands of its stakeholders, while

creating the best use of resources – human, technical, monetary, natural and environmental

– at its disposal.

Responsiveness- Good corporate governance needs that organizations and their processes

are designed to serve the simplest interests of stakeholders within an affordable timeframe.

Rule of law- Honest legal frameworks that are enforced by an associate degree impartial

regulative body, for the complete protection of stakeholders is that the most essential

characteristic apply for efficient and effective corporate governance.

Consensus oriented- Consultation to know the various interests of neutrals so as to achieve

a broad agreement of what's within the best interest of the complete stakeholder cluster and

the way this could be achieved during a property and prudent manner.

Equity and Inclusiveness- The organization that gives the chance for its stakeholders to keep

up, enhance, or usually improve their well-being provides the foremost compelling message

concerning its reason for existence and worth to society.

Participation- Participation by every individual, either men or women, directly or through

legitimate representatives, could be a key cornerstone of fine governance. Participation has

to be learned and arranged, together with freedom of expression and diligent concern for

the simplest interests of the organization and society normally.

2. Control Environment- Corporate governance mechanisms and controls are designed to

reduce the ineffectiveness that arise from moral hazard and adverse selection.

Internal corporate governance control-

Internal corporate governance focuses on controlling and monitoring activities and then

take corrective action to accomplish structure goals.

o Monitoring by the board of directors: The board of directors, with its legal authority to rent,

hearth and compensate prime management, safeguards endowed capital. Regular board

conferences enable potential issues to be known, mentioned and avoided. While non-

executive administrators are thought to be a lot of freelance, they'll not perpetually end in

simpler company governance and would not increase performance. Completely different

board structures are optimum for various companies. Moreover, the flexibility of the board

to watch the firm's executives could be a duty of its access to information. Government

administrators possess superior information of the decision-making method and so judge

prime management on the idea of the standard of its choices that cause monetary

performance outcomes, ex ante.

o Internal control procedures and internal auditors: Internal control procedures are policies

enforced by an entity's board of administrators, audit committee, management, and

different personnel to supply affordable assurance of the entity achieving its objectives

concerning reliable monetary reportage, in operation potency, and compliance with laws

and laws. Internal auditors are personnel within an organization who test the design and

implementation of the entity's internal control procedures and the reliability of its financial

reporting.

o Balance of power: The balance of power requires that the President should be a different

person from the Treasurer. This application of separation of power is further carry

forwarded in many companies where separate divisions check and balance each other's

actions. One cluster might propose company-wide body changes, another cluster review

and might veto the changes, and a 3rd cluster make certain that the interests of individuals

(customers, shareholders, employees) outside the company are being met.

o Remuneration: Performance-based remuneration is intended to relate some proportion of

pay to individual performance. It could be in the form of cash like salary or non-cash

payments such as shares and share options, superannuation or other benefits. Such

incentive schemes, however, are not very effective in the sense that they supply no

mechanism for prevention of mistakes or timeserving behavior, and might result in myopic

behavior.

External corporate governance controls

External corporate governance incorporates the controls external stakeholders exercise

over the company. For examples:

o Competition

o debt covenants

o demand for and assessment of performance information (especially financial

statements)

o government laws

o managerial labor market

o media pressure

o takeovers

Strategic Risk management- The effective risk management should be outlined loosely so

as to avoid strategic failures. Basic cognitive process and poor strategic risk management

will quickly erode competitive advantage. Strategic risk management isn't restricted

exclusively to creating necessary enhancements in company governance and ethics. It

includes managing risks that threaten a firm’s semi-permanent competitive success and

survival: risks to its market position, vital resources, and talent to introduce and grow. The

5 key elements for strategic risk management and corporate governance are-

o Culture

o Leadership

o Alignment

o Systems

o Structure

Fig: CLASS- Culture, Leadership, Alignment, System and Structure. Five elements of corporate governance to manage strategic

risk

Culture- An ethical and effective corporate culture encourages integrity, openness, and

balances those elements with reasonable levels of risk taking. Culture cannot easily be

separated from leadership, it is shaped and supported by systems, both those that reward

desired behaviour and those punishes undesired activities. The further reinforcement of

each of the five CLASS elements is critical for effective, ethical strategic risk management.

Leadership- The board will balance the role of a magnetic leader with the thoughtfulness

of a CRO, develop systems that reward longer-term strategic and moral systems, and

reinforce a healthy culture. Boards may focus on choosing leaders who demonstrate

“servant-leadership” behaviour that focuses on the role of leader for the individual

improvement of followers. It enforces that leadership evolves throughout the organization

and is shared among management, instead of centralized in one individual.

Alignment- There are several vital aspects of alignment between enterprise risk

management, strategic management, and governance. Arrangement will arise from speedy

structure changes, failure of company’s governance ethics, and lack of adherence to a

strategic perspective on decision-making and risk handling. There could also be necessary

replacements of risk-return trade-offs throughout the organisation, as some are easier to

spot than others.

Systems- Improving the risk capabilities requires firms to consider the adequacy of formal

systems to identify, analyse, forecast, and manage a wide range of business and strategic

risks. There is significant interplay among the elements of CLASS. Global firms must take

into account the national and international cultural differences in designing control systems

for risk. Such control systems should be incorporated in the global policy of the

organisation as a part of a global strategy.

Structure- Implementing a structure requires identifying necessary and suitable systems to

enable communication across the organization, and creating systems that ensures the

structure to function. Structure influence culture by promoting individual organizational

roles. Alignment of appropriate structure with cultural norms, systems and leadership

strengthens the organisation’s risk managing capabilities.

3. Transparent Disclosure- It refers to the practice of disclosure of financial and non-financial

information. Company should ensure to make upto date registry entries, publish high quality

annual report and make proper and necessary web disclosure for the stakeholders and the new

investors. It also incorporates that all the disclosures made should be freely available and

directly available to those who will be influenced by governance policies and practices, as well

as the outcomes resulting from it; and that any decisions taken and their enforcement are in

compliance with established rules and regulations.

4. Well outlined shareholders rights- Since shareholders are the stakeholders of the company,

it becomes the top priorities to include the properly framed rules and regulations regarding

them. The company should have proper policies for communicating related party transactions

and extraordinary transactions to the shareholders. There should be proper and well managed

meetings with the shareholders to discuss and implement important decisions. The dividend

policies should be laid down very clearly and informed to every shareholder. The rights of the

minority shareholders should be kept into account while taking any crucial decision on the

behalf of the company. Voting should always be routine through either mail, telephones or

internet, and shareholders should be having the right to give consent to major transactions, like

mergers, policy restructuring and equity-based compensation plans.

5. Board Commitment- The commitment of the board constitutes following characteristics and

duties as a part of corporate governance-

Board of Directors should be independent, experienced and diverse- The independent

director should be free of any relationship with the organization or its senior management

that may in any way, impair the director’s ability to make uninfluenced judgments, and

should adopt strict independence standards based on this principle.

Focus on key business priorities and leadership development- The board ought to review

the Company’s strategic plans and receives elaborated briefings throughout the year on vital

aspects of its implementation. It ought to conjointly have intensive involvement in

succession designing and team development with special specialize in chief executive

officer succession. It should discuss potential successors to key executives and must

examine backgrounds, capabilities and acceptable biological process assignments.

Open communication between and among directors and management- Key senior managers

should be a part of the Board meetings along with the directors and should even reach out

to them in more informal settings; together they must actively participate in candid

discussions of various business issues. Between scheduled Board meetings, directors are

invited to contact, question and ask for suggestion from the senior managers.

Establish policies guide governance and business integrity- The board ought to ceaselessly

review the rules for company governance problems and guarantee they're in accordance

with the current needs. Formal charters ought to outline the duties of every Board committee

and guide their execution. The Board ought to even be committed to the integrity and

transparency of Company’s monetary reports. This commitment ought to be mirrored in

Company’s long-standing policies and procedures, together with internal audit cluster,

freelance auditors etc.

Staff interaction- The board should be developing ethics code for the organization and all

the policies, procedures and formalities should be formalized and distributed to the relevant

staff. The appropriate resources should be allocated that should be committed to corporate

governance initiatives.

Why corporate governance? Corporate governance is of great importance to a company and it stands almost as important as its

basic and primary business plan. When it is executed effectively, it can prevent corporate fraud,

scandals, and the civil and criminal liability of the company. It also enhances the image of a

company in the public’s eyes as a self-policing company that is responsible and worthy of its

shareholders’ and debtholders’ capital. It dictates the shared practices, philosophy and culture of

an organization as well as its employees. A corporation without a system of corporate governance

can very well be regarded as a body without a conscience or soul. Corporate governance mandates

a company to be honest and keeps it out of any trouble. If this shared philosophy breaks down

anywhere, then the corners and edges will be cut, products will become defective and management

will grow corrupt and complacent. The end result is a fall that will occur when gravity – in the

form of audited criminal investigations, financial reports, and federal probes – finally catches up

the corporation, bankrupting the company just in an overnight. Unethical and dishonest dealings

can cause shareholders to flee or withdraw out of distrust, fear, and disgust.

Corporate governance assists boards and leaders in implementing legal, regulatory and best-

practice governance standards, including the new remuneration codes and the Belgian Code.

Corporate governance measures are introduced that make a real difference to an organization by:

• improving board effectiveness

• improving risk and control oversight at board level

• optimizing audit committee and remuneration committee structures

• reviewing remuneration policies and practices

Corporate groups can improve their internal governance while ensuring their subsidiary boards

meeting their regulatory obligations successfully. We need corporate governance because they

help us to improve the productivity of the organization and enhance its output in following ways:-

• Better access to external finance

• Lower costs of capital - interest rates on loans

• Enhanced company performance - sustainability

• Higher firm valuation and share performance

• Reduced risk of corporate scandals and crisis

In 2002, L Klapper and I Love from the World Bank found evidence that when a company’s

corporate governance is improved there is a greater impact in countries which have weaker legal

environments. They have suggested that companies can establish good corporate governance at

the company level so as to compensate for ineffective laws and enforcement and provide credible

protection to the investors.

Corporate governance in this context has thus become a topic on which all the corporate companies

have started to put emphasis and offer information, and thus they are striving to increase

transparency and accountability.

The importance of corporate governance consists not only in its contributing to the corporate

prosperity but to the responsibility as well. Along with the development of global markets, there

is an increase in investors’ activities. They demand higher standards of responsibility, conduct,

and performance. Investors have a tendency to seek opportunities outside their domestic markets

ever more often. The companies are trying to gain resources from the international capital markets,

however, it is often found that capital is only available for those who conform and adapt to the

internationally accepted standards of publishing of information and corporate governance. These

are only some of the reasons which lead to the worldwide improvement of the standard of

Corporate Governance and, to some extent, to its adaptation and convergence. The corporate

governance gives us a system through which companies are controlled and managed. The statutory

bodies are given the responsibility for the corporate management. The responsibility of the body

includes the setting of a company’s strategic goals, keeping check on the management who is

responsible for realization of the goals, supervising the management and informing the

shareholders about the performance of the duties of stewards. It is corporate governance through

which companies respond to the requests and rights of stakeholders. Corporate Governance is

linked with risk management and compliance through which people, processes, technology and

strategy are interlinked. So, corporate governance leads to the establishment of ethically correct

behavior which in turn leads to improved efficiency and effectiveness. This can be well explained

by the diagram given below.

Corporate governance is taken as the key element in the effort to achieve economic efficiency and

a growth justifying an increase in the investor’s trust. It includes a broad range of problems arising

from the relationships between the administrative authorities, corporate management shareholders

and the other stakeholders.

Issues in corporate governance Major issues involved in corporate governance reports include the role of the board, the quality of

financial reporting and auditing, risk management, directors’ remuneration and corporate social

responsibility. Let’s now discuss the major areas that have been widely affected by the corporate

governance.

Duties of the Directors

The corporate governance reports have aimed to build on the duties of the directors as defined in

statutory and case law duties of the directors. These include the fiduciary duties to be delivered in

the best interests of the company, avoiding conflicts of interest, using their powers for a definite

purpose, and exercising a duty of care.

Composition and Balance of the Board

A feature of many corporate governance scandals has been found as boards dominated by a single

senior executive or a group of small ‘cabinet’s kitchen’ with some other members of the board

who are working just as robot toys under control. It is possible that a single person may neglect

and bypass the board directions to carry on his own personal interests. The report made on the UK

Guinness case suggested that the chief executive of Earnest Saunders paid himself a reward of £3

million without the consent of any of the other directors.

In cases where the organization is not predominated by a single person, there may be the problem

with the composition of the board of directors. The organization may be run by a minority group

revolving around CEO or CFO and appointments and recruitment may be done on personal

recommendations for personal benefits rather than a formal system that should have been followed.

So in order to run a smooth business a board must be well balanced in sense of skills, talents and

competence from numerous specialists and diversity related to the situation of the organization

and also in terms of age and gender (so as to ensure that senior directors are bringing on newer

directors to assist in the planning of succession).

Remuneration and Reward of Directors

Directors being paid excessive salaries and bonuses have been identified as significant corporate

abuses for a larger number of years. However, it is unavoidable that the corporate governance

codes have targeted this very significant issue.

Financial Reporting Reliability and External Auditors

Financial reporting and auditing issues are seen more critical and important to corporate

governance by the investors and financiers because of their main consideration in ensuring

management accountability. It is the prime reason that they have been debated and the focus of

serious litigation. While considering the corporate governance debate only on financial reporting

and accounting issues is rather insufficient, the greater regulation and control of the practices such

as off-balance sheet financing has led to a reduction in risks and a greater transparency which is

faced by the investors.

The necessary questioning need not to be carried out by an external auditor from the senior

management because the auditors may feel the threat of losing the audit assignment. In the same

way, internal auditor may not ask an irrelevant and alien question to a senior member because their

employment matters are determined and fixed by the CFO. But most often it is the external auditors

who become the reason of corporate collapse. For example in the case of Barlow Clowes that was

poorly planned and focused, audit failed to work out and determine the illegal usage of money

from the clients.

Responsibility of the Board for Risk Management and Internal Control

If the board fails to arrange the regular meetings this shows that the board is not meeting their

responsibilities. But this can also happen sometimes when the board is not provided by full

information to properly oversight all the business activities. All this mess results in the poorly

managed system that may be not able to report and measure the risks associated with the business.

Shareholders’ Rights and Responsibilities

Shareholders’ roles and rights are subject of a particular importance. They should be well informed

about all those information that are important and material to them because this information may

have a good influence on their amount of investment. They should also be given the right to vote

and decide on the policies affecting the governance of the organization.

Corporate Social Responsibility and Business Ethics

The lack of sense of responsibility and mutual decision for stakeholders and businesses has

unavoidably turned out the social responsibility and business ethics a significant part of corporate

governance debate.

Corporate Governance-compliance Issues

GRC stands for Governance, Risk Management, and Compliance. It is the umbrella term which

covers an organization's approach over these three areas. Being closely related concerns,

governance, risk and compliance activities are always tried to be integrated and aligned together

to some extent so as to avoid conflicts, gaps, and wasteful overlaps. While it is interpreted

differently according to organizations, GRC typically includes activities such as corporate

governance, corporate compliance and enterprise risk management (ERM) with laws and

regulations as applicable.

Governance includes the overall management approach adopting which senior executives control

and direct whole organization using a combination of hierarchical management control structures

and management information. Governance activities are there to make sure that critical

management information that reach the executive team is sufficiently complete, accurate and

timely so as to help management in appropriate decision making, and provide a kind of control

mechanisms so as to ensure that directions, strategies, and instructions from management are

carried out effectively and systematically.

Risk management is defined as the set of processes through which company management group

analyses, identifies, and wherever necessary appropriately responds to risks that may adversely

affect the realization of the business objectives of the organization. The response to risks typically

involves controlling, depends on their perceived gravity, avoiding, transferring or accepting them

to a third party. Often organizations routinely manage a wide range of risks including

commercial/financial risks, information security risks, technological risks, etc. external legal and

regulatory compliance still risks are definitely the key issues in GRC.

Compliance means conforming and agreeing with the stated requirements. At an organizational

level, compliance to a great extent is achieved through management processes which identify the

applicable requirements (defined for example in contracts, strategies, laws, regulations, and

policies), assess the state of compliance and also assess the risks and involved potential costs of

non-compliance against the expected and projected expenses to achieve compliance, and therefore

prioritize, initiate and fund any corrective actions which are deemed necessary. Widespread

interests in GRC were sparked by the US Sarbanes-Oxley Act and the US listed companies needed

to design and implement suitable control in governance for SOX compliance, but after that the

focus of GRC has shifted towards adding and enhancing business values and ethics through

improving strategic planning and operational decision-making. It, therefore, has importance and

relevance beyond the SOX world. "GRC" or Governance, Risk, and Compliance is an increasingly

recognized term that reflects new ways in which organizations are increasingly adopting an

integrated approach to these aspects of their business.

Other issues with corporate governance involves:

• Asymmetry of power

• Asymmetry of information

• Interests of shareholders as residual owners

• Division of corporate pie among stakeholders

• Role of owner management

• Theory of separation of powers

Systemic problems of corporate governance

Demand for information: In order to put influence on the directors, the shareholders are required

to combine with others to form a voting group which can bring out a real threat of appointing

directors or carrying resolutions at general meetings.

Monitoring costs: The cost of processing information is a barrier to the shareholders using good

information, especially when it comes to smaller shareholders. The conventional answer to this

problem is the effective and efficient market hypothesis, according to which the small shareholder

will free ride on the decisions and judgments of larger professional investors.

The supply of accounting information: Financial accounts form a very crucial and important link

in enabling the financiers and the investors to monitor directors. Any fault and imperfections in

the financial reporting process will in turn cause imperfections in the effectiveness of corporate

governance. Ideally this should be corrected by the working of the external auditing processes.

Sustainability Sustainability is historically outlined as the capability of an eco-system to endure. Exploiting the

carrying capability of the earth promiscuously impoverishes future generations. The word

“promiscuously” is crucial because you may increase next generations' capital by innovating new

models of production and consumption. The capability depends on the degree of human

imagination and innovation. This is what has enabled humans to thrive on this planet and take

mammoth leaps despite monumental natural handicaps.

Sustainability reporting

Sustainability reporting and management services will assist you in determining the impact of key

social, environmental and economic problems and share that data with all stakeholders, as well as

regulators and therefore the wider community. Its focus is on four activities:

reporting and communication designing and strategy

review and improvement of governance, systems and reportage processes within the field

of property reportage

assurance of non-financial info

reporting analysis and feedback

Governance and Sustainability

Global opportunities and growth have brought the need for global corporate governance

responsibilities. New levels of accountability, that return not simply from new laws and

regulations, but additionally from the expectations of a broader stakeholder cluster, have elevated

the issues at board level of guaranteeing that effective, sturdy and dependable governance and

compliance tools are in place and being utilized efficiently. There's additionally an enhanced

awareness that this must be underpinned with the correct attitudes and behaviors to make sure

individuals can still act in a manner that protects the organization’s name.

Challenges

Today’s businesses face a wider variety of stakeholder expectations and a lot of public scrutiny

than ever before. Capital markets, consumers, pressure teams, workers, and governments are

simply a couple of those that justifiably hold corporations to account for the way they outline and

execute their corporate methods.

Users of annual accounts are becoming more explicit regarding transparent coverage on

governance, risk management and corporate responsibility matters, particularly qualitative aspects

with an effect on businesses’ monetary situations.

Innovative policies for sustainable development

Innovation is discovering new ways in which we can create value. Innovation is the lifeblood of

many organizations whose survival and growth rely on developing new technology, products, and

services. An eminent organization is an artistic organization. In an exceedingly prosperous

organization, innovation is sustainable and on-going, instead of a method characterized by the

continuation of “boom and bust” events. An inventive organization is “lead,” rather than

“managed.” A sustainable innovative organization should be fluid and “organic”, nearly biological

in nature to foster the constant creative thinking very important for the success of a contemporary

organization. Innovation isn't “business as usual”. A degree of stability and security is crucial to

“incubate” creative thinking. In the ferociously aggressive twenty-first century marketplace, an

innovative ability is important for survival. The subsequent are major points for sustaining and

creating an environment for innovation:

Creating value: Innovation is a method of creating value and to stimulate the survival and growth

of the organization. Ideas will come from anywhere. Ideas by themselves don't add to the value.

Productive innovative firms cultivate artistic ideas that add value.

Dynamic process: Innovation for the corporate is as “oxygen for a living body”. Oxygen should

be received by all or any cells for the survival of the complete body. The innovative organization

includes everybody within the loop to come up with ideas. Just like the individual cells serving the

body, in a really innovative organization, the people are authorized by releasing their untapped

potential and ability. Successful innovation is a dynamic method that sustains itself.

Innovation is anything but business as usual: Innovation is getting individuals to beat their ego

and to acknowledge that business, as was common, isn't the most effective approach in finding a

tangle. Helping individuals to broaden their perspective, think “out-of-the-box,” permits one to be

inventive. Getting individuals to examine a unique point of view is an ego issue. Individuals tend

to assume that the way they have perpetually done business should be the simplest method.

Innovation versus invention: Invention is discovering things that have not been discovered

before. Innovation, on the opposite hand, is the discovery of new ways that create value. Not

everybody is an inventor, however, everybody may be innovative. While not all innovations are

inventions, all inventions are innovative. There are 2 basic varieties of workers, implementers, and

innovators. Implementers opt to work inside the prevailing rules, “doing the proper thing.”

Implementers represent the established order and serve vital roles within the company. On the

opposite hand, innovators hunt down new ways and frequently break the principles or past “best

practices” to resolve issues “doing it differently” and in a few cases doing the “impossible.”

Innovations are something to be fostered in a fastidiously controlled atmosphere. Both kinds of

workers are valuable, however, implementers will enhance their productivity and become

innovators. The important thing is to drive implementers to the frontline.

Anatomy of a sustainable innovative organization

Innovation method, to be effective, should be sustainable. The organization should offer an

atmosphere to “incubate” ideas that mature and translate through implementation into merchandise

or services. These components were lacking within the innovation programs of most of the

unsuccessful organizations. Nothing is less productive than “non-innovating,” with the exception

of cultivating and nurturing confusing ideas that don't add worth. An innovative organization is

led, not managed. A sustainable innovative organization is fluid and “organic”, virtually biological

in nature to foster constant creative thinking important for the success of a contemporary

organization.

To add value to the organization, it should develop a mission statement incorporating a core

statement. A prosperous organization is characterized by trust and commitment to solutions, and

not following the blame. The mission of the prosperous inventive organization empowers people

to undertake measured risks while not penalized for failure.

Core values and leadership: to make and add value, there ought to be a value system within the

organization to start with. High trust, individuals’ development, and commitment to learning and

respect for people enable the organization to enforce superior performance. Once people see that

they're revered and valued, they'll dedicate themselves to create true value to the organization.

Enron had a wonderful innovation program however they lacked core values. Lack of values

resulted in one of the largest bankruptcies in modern history. Thus, the innovation method can't be

unrelated with the general core values of the corporate and its workers.

Innovating items which are confusing or which will not add any value to the firm is even worse

that not-innovating. In the past, we have examples where the innovation processes had failed. In

that case, the success of the program was measured by the number of people trained as a part of

the program and the number of ideas generated. Almost no regard was given to the value added to

the firm. Moreover, in some examples innovation programs lacked the long run focus or the

commitment to the firm. The mission statement of the firm must have a core value associated with

it in order to add value to the firm. A prosperous organization is characterized by faith or trust and

commitment to the solutions being offered, not by running after the blame. The mission a

prosperous and growing organization empowers its people to take some calculated risks with a

surety that they will not be penalized in case they fail. The sustainable organization creates an

environment for creativity and adds value to the firm by following a variation of the model

mentioned below:

The form has a defined organizational mission which aligns to incorporate trust and respect

for the people and its employees

The mission is widespread and communicated to each and every member of the firm.

A prosperous sustainable organization is dynamic in nature and keeps on creating new

practices, products, and services or change and innovate the process used to create them.

Innovation is the key to Sustainability

The strategy for sustainability involves 5 Ds – diversity, dissent, dialogue, disclosure, disruption

of status quo in the core of the organization. The foundations of sustainability are innovation,

engagement, transparency and responsibility. Innovation wants the clash of concepts and

acceptance dissent as a value enhancer. If two persons think alike just one is required. This needs

a culture where individuals will freely discuss oppositions' viewpoints. It’s solely through diversity

and distinction that ideas are generated and innovation is stirred. Individuals cannot work along

and build synergy if they're not open with one another. Disclosure could be a necessity for trust

and key to productive teamwork.

Sustainable strategy for corporate

Sustainability long thought about a costly inconvenience by some, has quickly become a

competitive advantage, a discriminator and typically even a matter of survival. Prime corporations

understand that specializing in sustainability may be a way to improve profits and win client

loyalty.

Success not solely means that hold the values and principles of sustainability but additionally

ensuring acceptable actions and choices at all levels of the organization. A comprehensive

sustainability strategy should have a solid framework that ensures its execution is according to

company governance and culture.

Corporate sustainability Strategy provides such a framework. It addresses all aspects of

sustainability—from measuring and mitigating future forces that might have an effect on a

company’s strategy, portfolio and operations, to assessing the company’s environmental impact

on the communities it touches. The result's a roadmap that links quantitative sustainability

objectives and targets to the business strategy.

The roadmap is charted and measured in terms of costs, revenues and reputation. We assess and

quantify sustainability’s impact in all key areas, including:

Value chain (production, supplier selection process, logistics)

Products and services (materials, packaging, pricing strategies)

Organization structure (governance, sales and marketing, finance)

Talent management (recruiting, performance management)

Culture (leadership, change management)

Corporate Sustainability Strategy not only embeds the principles of sustainability into an

organization but also makes sustainability part of the corporate DNA.

Sustainability vs Sustainable Development

The Brundtland report released by the United Nations in 1987 included one of the most widely

accepted definitions of Sustainable Development:

Sustainable development is the development that meets the needs of the present without

compromising the ability of future generations to meet their own needs.

This carries two concepts with it:

1. Priority should be given to the needs and especially the essential needs of the poor

2. Limitations imposed by the social organizations on the environment’s ability to meet the

present and future needs.

Sustainability has become a part of “sustainable development” which was a concept given by the

Brundtland report of the United Nations in 1987. Therefore, it is important to know and understand

the differences between the two. The report defined sustainable development as the development

which meets the needs of the present without disrupting the ability of future generations to meet

their needs. The report did not mention the word sustainability, the experts use the two

interchangeably which led to the confusion that still exists. This damaged the cause of

sustainability as the discussion remained close to the experts.

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