The corporate governance lies in the hands of the board of directors of a company (even if its day-to-day running is delegated

to the CEO who may or may not be head of the board and the other members of its management). It is the directors who have the responsibility and accountability to govern the corporation in the best interests of the companys shareholders and all the other stake holders (and some people include even the general public, since the public also gets affected by the presence and working of a company).

What is corporate governance?

Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society - Sir Adrian Cadbury

Corporate Covernance ,simply stated is therefore ,system by which corporate entities are directed and controlled as a system of structuring operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers with legal and regulatory requirements ,apart from meeting environmental and local community needs. It leads to building a legal, commercial and institutional frame work. It also demarcated the boundaries within which these functions are performed

In terms of corporate governance, the directors of the board of a company have to act as trustees to the shareholders and stake holders. Traditionally, as per the law, the directors on the board of a company were thought to be primarily responsible to the company and their responsibility to companys share holders was thought to be secondary. However, with the modifications in the provisions of the law, the law regarding the corporate governance has become more stringent on the board of directors. Now, the directors responsibility to their shareholders is primary. Directors on the boards of the companies must not have any financial, family, employee or business relationships with the companies on whose boards they serve. There should not exist any conflict of interest.

There are many restrictions on the auditors also like necessity to rotate the auditors at a fixed periodicity for a particular client company and the employees of the audit firm should not have any financial dealings in the companies where they audit. Therefore, while on one hand, policies on corporate governance must empower the board of directors and the executive management of the company, it must create a foolproof mechanism of checks and balances to ensure that the various powers vested in the board and management are used with lots of responsibility to meet all the stakeholders and societal expectations.

Fundamental Objective of CG

Enhancement of Shareholder Value, keeping in view the Interests of other Stakeholders CG a Way of Life rather than a Code

Corporate Governance Philosophies

By and large, the companies can be guided by the following major philosophies of corporate governance: Transparency Truthful disclosures on financial and other related matters Trusteeship Supervision Controls Ethical practices Legal practices Empowerment with accountability Prevention of conflict of interest Commitments to shareholders and other stakeholders Societal commitments Environmental commitment Resource utilization commitments Wealth generation

Tasks of Corporate Governance

Hiring of CEO and his direct reports Supervision over CEO and his management team Firing of CEO when necessary Board composition Periodic conduct of board meetings Taking all the strategic decisions Internal controls, checks and balances Mergers Takeovers Remuneration management Sustainability practices

Disclosures and communication Prevent inside trading Prevent any kind of frauds Audit of the company by auditors as per laws Adherence to the laws Adherence to ethics and ethical practices Ultimately, ensuring all stakeholders and societal interests

Why Corporate Governance?

1.Past and recent business scams, resultant down slides/closures of the companies, 2.Falsification of companys financial records and their public disclosures, 3.Auditors collusion with the companys bigwig(s) in doing so and ultimately, hoodwinking the stakeholders and 4. general public has necessitated questioning the veracity of the corporate governance into the limelight. 5. Unlawful practices by the individuals and companies in their high offices, public and investors confidence shaken up badly 6.Emerging need to define corporate governance and tightening up the legal side of it

Requirements for CG
Corporate governance in India calls for Two main requirements: Transparency in decision-making, and Accountability to ensure that responsibility could be assigned easily for actions or inaction and also for the safeguarding the interests of the stakeholders and the investors in the organization

The Cadbury Report was the beginning of Corporate Governance in the Developed countries,
In India, it was Mahatma Gandhi who captured the essence of the concept as

Factors for The Emergence of CG in India

Corporate Scandals
The stock market scandal (Harshad Mehta) in 1992. Ketan Parekh scandal in 2001 Tata Finance scandal (Serious financial irregularities in the amount of rupees 400crores (86.95 million dollars) were detected ) Accounting and financial reporting frauds Vanishing companies scam In order for the Indian capital market and Indian companies to compete in the global market, India needs a set of good corporate governance doctrines

Diemensions lead to C G
.Legislation ,Laws and infrastructure, codes of conduct for the law makers themselves
Corporate themselves The values and concerns

.Codes of conduct particularly at corporate level Society their values morals and awakening. Their responses to corrupt practices are expressed through pressure group media

Major Players in CG
The Board of Directors
Pivotal role Accountable to stakeholders Directs management

The Shareholders & Stakeholders

To participate in appointment of directors To hold the BoD accountable for governance through proper disclosures

The Management
To act on the direction of the BoD To provide requisite information to the BoD for decision making To implement and monitor control systems

Thomass description of -Role of a Board Cohin J Coulson

a) Determine a distictive purpose for the company ,a rationale for its continued existance and articulate and share a compelling vision b) Establish achievable and measurable objectives and formulate strategy c) Appoint a management team and establish a framework of policies and values within which the management operates d) Agree and review plans ,and monitor performance against agreed targets ,taking corrective actions,where appropriate e) Safeguard the physical, financialand intellectual assets of the company and ensure ethical conduct f) Ensure renewal , learning and development of Key competencies g) Report performance to various shareholders in the company particularly to those with ownership rights and la legal entitlement to certain information

Parameters of a Good Board

1.Accountability to shareholders 2.Transparency of disclosure 3.Quality of Directors 4.Independence of Decision making

Duties of a director
a. Duty of care and skill in the discharge of function as director b. Duty to attend Board meetings and devote sufficient time and attention to affairs of the company c. Duty not to be negligent and not to commit or let others to commit tort liable acts d. Duty not to exceed powers e. Duty to have regard and act in the best interest of the company ,shareholders and customers f. Duty to creditors if the business is conducted with intent to defraud them g. Duty of confidentiality h. Duty not to make secret profits i. Duty not to exercise powers for collateral purpose j. Duty not to misapply company assets k. Duty not to compete with the company

Functions of The Board

The major functions of the Board are : a. Representative of the shareholders to ensure the company
has clear goals and to measure progress against these goals b. To agree the strategy and resources to achieve it c. To appoint CEO and monitor his/her performance d. To review succession and Management development plans. e. To set and monitor operating climate through a statement of values that describes character of the company

Committees of the Board

a.Audit committee b.Remuneration Committee c.Nomination Committee

Corporate Governance
Corporate Governance as
the efficient supervision which encourages `doing everything better' and protects the interest of the company while conforming to all established laws and ethics. Corporate governance in any organization needs to be principle based and SMART- smart, moral, accountable, responsive and transparent. Corporate governance has to be principlebased not rule-based.

Regulators for CG
Indian Companies Act, 1956
SEBI Act, 1992

Stock Exchanges-Listing Agreement

ICAI Act, 1949 ICSI ICWAI

Journey of CG in India
Voluntary-industry driven The corporate governance

movement in India began in 1997 with a voluntary code framed by the CII :Desirable Corporate Governance: A Code
In the next three years, almost 30 large listed companies accounting for over 25 per cent of India's market capitalization voluntarily adopted the CII code

Journey of CG in India
Several committees on Corporate Governance Kumar Mangalam Birla Committee report
the introduction of Clause 49 in the standard Listing Agreement in 2000, All listed companies are mandatorily required to comply with the clause

the Naresh Chandra Committee, Narayana Murthy Committee J.J. Irani are Committee

The Companies (Amendment) Bill of 2003

Introduced and passed by the

upper house of the Indian parliament Incorporated some recommendations based on the Naresh Chandra Committee report Returned to the Department of Company Affairs for redrafting

Comprehensive law
governing

Corporate Governance
Clause 49 is not the only legislation on governance. The Companies Act, 1956 itself covers
corporate governance widely through its various provisions such as inclusion of directors' responsibility statement in the directors' report under Section 217(2AA), constitution of audit committee under Section 292A, fixing maximum ceiling on remuneration that can be drawn by a director under Schedule XIII, Relating to oppression, mismanagement, etc.

Further,

environmental and other pieces of legislation also protect different stakeholders'

interest, ensuring, in the process, good corporate governance.

The key aspects of CG

Composition of the board with optimum
number of independent directors

Constitution of audit committee with

the chairman being an independent director, members,
Laying down

a code of conduct for board

Mandatory disclosures on related party

Risk management, Certification on financial statements and

transactions,

internal controls by the CFO (chief financial officer), Mandatory reporting on corporate governance along with annual report, etc.

Recent Developments:Clause 49
Corporates have been advised to comply with the

Revised guidelines on corporate governance

as per the recommendations of the Narayana Murthy Committee Initially, the compliance date was April 1, 2005 which was subsequently extended to December 31, 2005. Certain provisions of Clause 49 were clarified in January 2006.
a) maximum gap between two board meetings has been increased to four months; b) sitting fees paid to the non-executive directors would not require prior approval of the shareholders; c) certification of internal controls and internal control systems by CEO /CFO would be for the purpose of financial reporting.

Compliance :Clause 49
The actual implementation of corporate governance has

so far been sparse and poor

Recent media reports suggest that though a year has gone by, some

60% of Indian firms have not yet complied with Clause Influence of business houses on politics and on policy makers The influence that the important corporate houses have on the SEBI and the Joint Parliamentary Committees The enforcement regime is weak and easily swayed the furor raised by various sections of the industry to the Companies (Amendment) Bill of 2003 Rampant corruption Numerous unclear laws with weak authorities to enforce them
The multiple authorities give rise to lack of consolidated control which in turn gives rise to corrupt practices

The ICSI Initiative

During 2000-01, the ICSI had decided to set up a

Secretarial Standards Board (SSB) to integrate, harmonise and standardise various secretarial practices prevalent in the corporate sector The SSB comprises representatives of The Company Affairs Ministry, SEBI, ICAI, and Institute of Cost and Works Accountants of India, besides eminent members of the profession of Company Secretaries The Institute has so far issued four standards Secretarial Standards on Meetings of Board of Directors (SS-1), Secretarial Standards on General Meetings (SS-2), Secretarial Standards on Dividend (SS-3), and Secretarial Standards on Registers and Records (SS-4).

The ICSI Initiative

The Secretarial standards on

managerial remuneration, loans and investments, directors, related party transactions, and investor servicing, are under consideration of the SSB

If the secretarial standards devised by ICSI were made mandatory, it would improve the compliance of corporate governance norms by India

C G Awards in India
ITC Ltd and Abhishek Industries Ltd received the Institute of Company

Excellence in Corporate Governance 2006. ITC Ltd has won the `Golden Peacock Award for Excellence in Corporate Governance 2005', instituted by the

Secretaries of India National Award for

Institute of Directors, New Delhi, in association with the London-based World Council for Corporate Governance and Centre for Corporate Governance.

C G Awards in India
THE Coimbatore-based Precot Mills Ltd, in

units excelling in management practices Good corporate governance is more an exception than a rule.

association with the Tamilnadu Centre of ABK-AOTS Dosokai, Japan, has for the first time instituted an award for textile

Which, perhaps, explains why the various bodies have annually been announcing a national award for excellence in corporate governance

C G Awards in India
The ICSI has consistently refused to rank companies for corporate governance. Its award process judges but does not rate companies for their governance performance Industry bodies put off plans for rating and rewarding companies on corporate governance for now. There has to be a large number of companies effectively engaged in corporate governance before the best can be selected

Rating
for

corporate governance practices

Mahindra & Mahindra Ltd (M&M) has been assigned `Governance and Value Creation Rating (GVC) Level - 1' rating by CRISIL for corporate governance practices. This is the highest rating in the category.

Indian Realities Managements not as broad based as is thought : Prime Database

An analysis of the board compositions of around 1,500 companies listed on the BSE shows that 58 individuals occupy over 10 directorship positions each in these firms, with several of them holding up to 15 directorial slots. holding non-independent director positions, but are not involved in the day-to-day running of these companies. the largest number of directorial positions occupied by a single individual is 15, with four such persons in the list of the firms surveyed.
either chartered accountants or corporate lawyers.

Indian Realities
Due to the distrust in Indian auditors,

most of the multinational companies have insisted that the parent company's auditor should also audit the subsidiary companies in India, often at much higher costs The board of directors of a company has become a tool that can be manipulated; It is very complicated with around 9,000 listed companies in the country, and the amount of data provided is mind-boggling. To read the huge data and take a policy decision is difficult and time consuming

Indian Realities
The annual basic salary of Rs 4,26,000 for a company's executive director (ED) may not seem much.
But the case of Kolkata-based Hindustan Wires Ltd is interesting

because the company's sales, at Rs 75,000 for the year ended March 31, are just about one-sixth of the pay of the ED, Mr R.K. Gupta.

Indian Realities
The culture of corporate governance has not

really caught on in India except for a few companies. "For instance, Mr Anil Ambani raised the issue when he fell out with his brother, Mukesh. He accused his brother of several corporate governance failures. Subsequently, an arrangement was worked out between the brothers and the issues were pushed under the carpet. It is not an issue between the two of them alone, as several thousands of investors are involved, Most Indian companies were controlled by families and "it is difficult to persuade them to change their style of functioning and adopt corporate governance norms."

Indian Realities
Norway is `the first country in the world' to

demand gender balance within the boards of public limited companies. In India, Companies Amendment Bill, 2003, had spoken of public company having `such number of women directors, as may be prescribed' in Section 252 of the Companies Act Another issue is the independence of the Institute of Chartered Accountants in disciplining its peers In India,

Indian Realities
The Chartered Accountants Act, the Company Secretaries Act,

and the Cost and Works Accountants Act provide the framework for taking disciplinary action against members. More often than not, disciplinary action is either not taken against auditors, or there is so much delay in bringing action against the auditors, that such action becomes irrelevant Sections 232 and 233 of the Indian Companies Act prescribe the penalties for any companys failure to comply with these provisions,128 and section 233 outlines penalties for auditors non-compliance. Unfortunately, the penalties are so insignificant that they are unlikely to deter anyone from non-compliance.

Indian Realities
Audit firms in India receive inadequate remuneration, thus explaining why audit firms engage in non-audit work

Better remuneration for auditors

Prohibition of non-audit services, Mandatory rotation, and Stringent penalty provisions,
could possibly address the issue of non-independence of Indian auditors

Where India Stands-CG

India stands

Third in Asia
in terms of good corporate governance, said Mr Rajnikant Patel, Managing Director and CEO, Bombay Stock Exchange Ltd

What World Bank Says

Indian companies disclosure of financial

information is still poor while pressure from Indian investors to improve corporate transparency remains weak.With the exception of a handful of large businesses, most companies do not follow international best practice in disclosing information to investors, despite reforms to Indian corporate governance regulations. Aside from weak enforcement, the World Bank cites a lack of interest from investors as a major reason for the failure of these laws to improve disclosure according to a report from the World Bank.

What Finance Minister P Chidambaram Says

Pulled up India Inc for flouting

corporate governance norms, saying many companies have yet to appoint independent directors and audit commmittees. If I ask CEOs what is the distance they have travelled in the corporate governance milestone of 1-10, not many of them will reply that they have crossed even 3,"

Institute of International Finances report :Indias corporate governance better

Indias corporate governance system is better than those prevalent in most emerging market economies, but it suffered from poor
enforcement of rules and regulations

neither the stock exchanges nor SEBI had increased staff as needed to effectively scrutinise compliance with the revised Clause 49 of the listing agreement and other rules and regulations

Welcome Initiatives
Ministry of Company Affairs (MCA) and the Confederation of Indian Industry (CII) in partnership with the Institute of Company Secretaries of India (ICSI) and the Institute of Chartered Accountants of India (ICAI) has set up The National Foundation for Corporate Governance (NFCG).

A model code of conduct for board

directors is on the cards

Welcome Initiatives
CRISIL Investment and Risk Management Services has launched a corporate risk evaluation solution for Clause 49 compliance. This solution has been developed in technical collaboration with Microsoft and is called the Corporate Risk Evaluation Framework (CORE). CORE will assist corporates in implementing the directives of Clause 49 as well as putting up an Enterprisewise Risk Management framework,

Realities-Problems-Challenges
Section 25 of the SCRA needs to be amended so that

search and arrest cannot be invoked without SEBI approval and without the nod of a magistrate having jurisdiction

Any violation of the said clause is punishable under Section 23 of the SCRA (Securities Contracts (Regulation) Act, 1956), which involves imprisonment for a term which may extend up to 10 years or fine of up to Rs 25 crore or both the offence of violation of the terms of the Listing Agreement is a cognisable one (non-bailable ) that in such offences the police officers have the authority to arrest the accused without any warrants and also conduct searches and raids on their official and residential premises. the fear of vexatious actions by vested interests resulting in harassment of the directors and other officers of the company by the police. A bare perusal of the provisions of SCRA and the SEBI Act gives rise to two different situations

Realities-Problems-Challenges
Clause 49 is applicable to all listed

companies having a paid-up capital of Rs 3 crore and above or a net worth of Rs 25 crore or more at any time in the history of the company. In the next few years, Indian companies will be faced with the challenge of identifying well-qualified independent directors to join their boards; with no major business school in the country currently incorporating corporate governance into their curricula, there will likely be an acute need for the education of independent directors.

THE NUMBER OF COMPANIES AT WORK as on 31.10.2005

Category of Companies Govt./Non- Public/Pr Number of Govt. ivate Companies Companies Limited by Shares Public 724 Private 612 Non-Govt. Public 78473 Private 628957
SUB-TOTAL

Guarantee Companies Unlimited Liability Companies Total

Govt. Non-Govt.

7,08,766 7 3530 497 7,12,800

Realities-Problems-Challenges
There ought to be a system of evaluating the person on the Board, considering the fact that there were people on the Board who were

serving for more than 10-12 years. For that length of time, even
the best of men and women need to get out, breathe some fresh air, and get back in to bring a fresh set value addition,

Suggestions
The National Investors Foundation had suggested that SEBI creates a panel of professionals suitable for appointment as independent directors based on qualification, experience, reputation etc.
a large number of qualified and successful business managers, many of whom waste their knowledge and experience after retirement the term of office can be limited to three years in any one `group' with a stipulated retirement age of 65 or 70.

Suggestions
The RBI's initiative to frame a code of ethics and standards for banks is laudable. Perhaps a similar initiative by industry bodies would be a step in the right direction. Cross-listing of stocks in exchanges across countries is setting the stage for uniform governance code, besides setting similar credit-rating standards. a separate prescription for unlisted companies, too, was on the anvil

Conclusions
Good ethics and governance are not just `moral' or `compliance' issues In the highly competitive target-driven buyers' market, there is a

tendency to compromise. `Volume creation' takes precedence over `value creation'. Ethical behaviour should be part of corporate culture Only when we realise that the `means' is more important than the `end', will ethics have some value The conduct of CEOs and the values and ethics they stand for will ensure the long-term success of a company Success is a short term phenomenon and knowledge and skills have shelf life.The successful are the ones who manage in this shelf life to adjust knowledge and skills to the market needs While culture and values are the drivers for good governance, codes should be preferred coming in the forefront, and law coming in slightly afterwards Corporate governance is not about numbers but about the quality of people