Professional Documents
Culture Documents
GOVERNANCE AN IDEA
WHOSE TIME HAS COME
By
2008-2011
CERTIFICATE
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ACKNOWLEDGEMENTS
Last but not certainly the least, I would like to extend my gratitude to the
faculty of Lala Lajpat Rai Institute of Management (LLIM), Mumbai and the
Library staff for equipping me with the basics that helped me throughout the
making of this project.
I am also thankful to Vidya my friend and my sister and all those seen and
unseen hands & heads, which have been of direct or indirect, help in the
completion of this project.
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PROLOGUE
Corporate Governance (CG) has emerged as one of the key elements of public
policy reforms individuals. It is still in its infancy; it has been around only for the
last three to four years. It is however not a foolproof concept as it relies heavily on
data available from insiders. But it has specific and special role to play to enhance
the strength of a particular unit and of the entire corporate sector. Corporate
Governance is to be maintained or observed as effective tool to assure the
stakeholders of their long-term interests without prejudice to public interest.
Thus Corporate Governance (CG) is the way the firm ought to be run, managed
and controlled. It is related with supervision and holding the responsibility of those
who direct and control the management.
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OBJECTIVE
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technologies are on the anvil e.g. Information Technology thereby improving the
speed of communication and dearth of distance.
It is known fact that vital needs of success of any organization lingers on its ability
to mobilize and utilize all kinds of resources to meet the objectives clearly set as
part of the planning process. Managing well depends on internal and external
factors, the latter include availability, cost effectiveness; technological
advancement. Increasingly, revelations of deterioration in quality and transparency,
have called for adoption of internationally accepted ‘Best Practices’. The
acceptance of the concept gave rise to ‘Corporate Governance’. ‘Corporate
Governance’ encompasses commitment to values and to ethical business conduct
to maximize shareholder values on a sustainable basis, while ensuring fairness to
all stakeholders including customers, employees, and investors, vendors,
Government and society at large. Corporate Governance is the system by which
companies are directed and managed. It influences how the objectives of the
company are set and achieved, how risk is monitored and assessed and how
performance is optimized. Sound Corporate Governance is therefore critical to
enhance and retain investors’ trust.
The very definition of corporate governance stems from its organic link with the
entire gamut of activities having a direct or indirect influence on the financial
health of corporate entities. The Cadbury Report (1992) simply describes
Corporate Governance as ‘the system by which companies are directed and
controlled’. So far as corporate governance is concerned, it is financial integrity
that assumes tremendous importance. This would mean that the directors and all
concerned should be open and straight/forthright about issues where there is
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USA initiated action against multinational accounting firms for failure to detect
blatant violation of accounting standards, and penalities running to several million
dollars were recovered, from certain multinational consultancy firms.
The increasing concern of the foreign investors is that the enterprise in which they
invest should not only be effectively managed but should also observe the
principles of corporate governance. In other words, the enterprises will not do
anything illegal or unethical. This need for re-assurance is felt by the FIIs due to
the fact that there have been cases of dramatic collapse of enterprises which were
apparently doing well but which were not observing the principles of corporate
governance.
becoming a less corrupt country and improving its rank in the Corruption
Perception Index listed by the Transparency International.
Studies in India and abroad show that markets and investors take notice of well
managed companies respond positively to them and reward such companies with
higher valuations.
Clause 49 Stock Exchange Listing Agreements (“Listing
Agreements”), SEBI ACT
(ii) Board controls are laid down code of conduct and accountable to
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(iv) Independent directors not to have material or pecuniary relations with the
Company / subsidiaries and if had, to disclose in Annual Report.
(vii) Optimum combination of not less than 50% of non-executive directors and
of which companies with non-executive Chairman to have at least one third of
independent directors and under executive Chairman at least one half of
independent directors.
DIRECTORS RESPONSIBILITY
The following major responsibilities of the board of directors reflect the broad
purposes of governance:
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INSIDER TRADING
SHAREHOLDERS
The shareholders are the owners of the company and as such they have certain
rights and responsibilities. But in reality companies cannot be managed by
shareholder referendum. The shareholders are not expected to assume
responsibility for the management of corporate affairs. A company’s management
must be able to take business decisions rapidly. The shareholders have therefore to
necessarily delegate many of their responsibilities as owners of the company to the
directors who then become responsible for corporate strategy and operations. The
implementation of this strategy is done by a management team. This relationship
therefore brings in the accountability of the boards and the management to the
shareholders of the company. A good corporate framework is one that provides
adequate avenues to the shareholders for effective contribution in the governance
of the company while insisting on a high standard of corporate behavior without
getting involved in the day to day functioning of the company.
The basic rights of the shareholders include right to transfer and registration of
shares, obtaining relevant information on the company on a timely and regular
basis, participating and voting in shareholder meetings, electing members of the
board and sharing in the residual profits of the corporation.
A company must have appropriate systems in place which will enable the
shareholders to participate effectively and vote in the shareholders’ meetings. The
company should also keep the shareholders informed of the rules and voting
procedures, which govern the general shareholder meetings. The annual general
meetings of the company should not be deliberately held at venues or the timing
should not be such which makes it difficult for most of the shareholders to attend.
The company must also ensure that it is not inconvenient or expensive for
shareholders to cast their vote.
Currently, although the formality of holding the general meeting is gone through,
in actual practice only a small fraction of the shareholders of that company do or
can really participate therein. This virtually makes the concept of corporate
democracy illusory. It is imperative that this situation which has lasted too long
needs an early correction. In this context, for shareholders who are unable to attend
the meetings, there should be a requirement which will enable them to vote by
postal ballot for key decisions. This would require changes in the Companies Act.
The Committee was informed that SEBI has already made recommendations in this
regard to the Department of Company Affairs. The Committee believes that the
General Body Meetings provide an opportunity to the shareholders to address their
concerns to the board of directors and comment on and demand any explanation on
the annual report or on the overall functioning of the company. It is important that
the shareholders use the forum of general body meetings for ensuring that the
company is being properly stewarded for maximising the interests of the
shareholders. This is important especially in the Indian context. It follows from the
above that for effective participation shareholders must maintain decorum during
the General Body Meetings.
The effectiveness of the board is determined by the quality of the directors and the
quality of the financial information is dependent to an extent on the efficiency with
which the auditors carry on their duties. The shareholders must therefore show a
greater degree of interest and involvement in the appointment of the directors and
the auditors. Indeed, they should demand complete information about the directors
before approving their directorship.
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A company should:
1. Lay solid foundations for management and oversight, recognise and publish the
respective roles and responsibilities of board and management.
2. Structure the board to add value - Have a board of an effective composition, size
and commitment to adequately discharge its responsibilities and duties.
- Promote timely and balanced disclosure of all material matters concerning the
company.
Traditionally the matters with corporate sector were involved with esoteric branch
of commercial law. Limited generally to a narrow view of how to ensure the
managers follow the interests of shareholders. Basic standards of Corporate
Governance structure and processes have been slowly evolving over last two
decades. Traditionally it was observed only in respect of the operation of market
pressure.
Looking beyond India the scenario in general is different. In the country like U.S.
and U.K. there is an active market for corporate control to discipline managers, if
they fail to maximize shareholders wealth. They largely adopted three main
instruments they are- "Proxy Contests". Friendly mergers and Hostile takeover.
The first among the above said there is considered more effective Friendly mergers
have hardly succeeded to solve the "agency problem". While takeover is not
appealing strongly on the ground of heavy cost incurred in it and also for want of
political will conducive to the policy. In Germany and Japan the system that
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prevails in U.K. and U.S. is absent. Unlike that system there is "Banking
Supervision". The main bank financing the corporate unit acts as an external
control mechanism. In such case very least intervention is found and that only
when financial problem arises. It is in light of these experiences that innovative
approach to the concept is formed. Several credit rating agencies have stepped in
the market and they are offering services of the kind, which meets with the Quality
of Governance in corporate entities.
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a) Audit Committee 6%
b) Remuneration Committee 6%
c) Nominations Committee 5%
3) Transparency (20%)
a) Ownership Structure 9%
b) Takeover Defences 6%
a) Credit Rating 4%
c) Social Responsibility 3%
Case I
CORPORATE GOVERNANCE PRACTICES IN INFOSYS
TECHNOLOGIES LTD.
Infosys was incorporated in 1981 with the vision of building a globally respected
corporation – a vision that has translated into a strong organization commitment
towards discipline, fair play and good corporate governance. Infosys was the first
Indian company to emphasise on strong corporate governance practices in India.
The company expanded its corporate governance practices significantly beyond
what was required by the letter of the law. It voluntarily complied with the US
GAAP accounting requirements, and was the first company to prepare financial
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capability and integrity of boards and management of companies they deal with
and the processes these companies follow.
They believe that sound corporate governance is critical to enhance and retain
stakeholders' trust. Accordingly, they always seek to ensure that they attain their
performance rules with integrity. Their Board exercises its fiduciary
responsibilities in the widest sense of the term. Their disclosures always seek to
attain best practices in international corporate governance. They also endeavor to
enhance long-term shareholder value and respect minority rights in all our business
decisions.
1. Satisfy the spirit of the law and not just the letter of the law. Corporate
governance standards should go beyond the law .
2. Be transparent and maintain a high degree of disclosure levels. When in
doubt, Disclose.
3. Make a clear distinction between personal conveniences and corporate
resources.
4. Communicate externally, in a truthful manner, about how the Company is
run internally.
5. Comply with the laws in all the countries in which we operate.
6. Have a simple and transparent corporate structure driven solely by business
needs.
7. Management is the trustee of the shareholders' capital and not the owner.
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As a part of their commitment to follow global best practices, they comply with the
Euro shareholders Corporate Governance Guidelines, 2000, and the
recommendations of The Conference Board Commission on Public Trusts and
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Private Enterprises in the U.S. They also adhere to the UN Global Compact
Programme.
CG Score & Company Valuation.
Taking into account the above variables and studying the corporate governance of
the company in detail we got the following scores for Infosys Technologies Ltd.
( The details of the scores are given in the table below)
Corporate Governance Score of Infosys Technologies (2002-2007)
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Following table shows the CG score, Market Capitalization and Enterprise Value
of Infosys Technologies Ltd.
Period 2007 2006 2005 2004 2003 2002
Market Capitalisation (in Rs. Cr) 115307 82154 61073 32909 26847 24654
Enterprise Value(in Rs. Cr) 109657 78375 59390 31070 25208 23627
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Profit after Tax in Rs. (Cr.) 3777 2421 1859 1243 958 808
Income (Turnover in Rs. Cr) 13149 9028 6860 4761 3623 2654
Results of Correlation : Correlation with profit after tax is +0.83 and with
turnover is +0.86.
Turnover proxy of Firm size is positively correlated with good corporate
governance practices. High positive correlation between PAT also suggests that
better corporate governance practices result in better operating performance.
Coefficient of determination confirms the inferences drawn from the coefficient of
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correlation. One can argue that even with the highest estimates of financial
fundamentals one can achieve the same growth in value by more than twice sales
growth or 35% increase in financial results demands more efforts compared to
corporate governance practices improvement leading to the same value growth.
But again improving the performance is related with profitability, which in turn is
the return of brand image. Therefore, the brand is the practical reason for
improving the governance.
Good governance requires a mindset within the corporation, which integrates the
corporate code of ethics into the day-to-day activities of its managers and workers.
As the sociologists Rossouw and van Vuuren note, companies must move from the
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CASE II
CORPORATE GOVERNANCE PRACTICES IN ITC LTD.
Over the years, ITC has evolved from a single product company to a multi-
business corporation. Its businesses are spread over a wide spectrum, ranging from
cigarettes and tobacco to hotels, packaging, paper and paperboards and
international commodities trading. Each of these businesses is vastly different from
the others in its type, the state of its evolution and the basic nature of its activity,
all of which influence the choice of the form of governance. The challenge of
governance for ITC therefore lies in fashioning a model that addresses the
uniqueness of each of its businesses and yet strengthens the unity of purpose of the
Company as a whole.
Since the commencement of the liberalisation process, India's economic scenario
has begun to alter radically. Globalisation will not only significantly heighten
business risks, but will also compel Indian companies to adopt international norms
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ITC has won the Golden Peacock Awards for 'Corporate Social Responsibility
(Asia)' in 2007, the Award for ‘CSR in Emerging Economies
2005’ and ‘Excellence in Corporate Governance' in the same year. These
Awards have been instituted by the Institute of Directors, New Delhi, in
association with the World Council for Corporate Governance and Centre for
Corporate Governance
CORE PRINCIPLES
ITC's Corporate Governance initiative is based on two core principles. These are :
i. Management must have the executive freedom to drive the enterprise
forward without undue restraints; and
ii. This freedom of management should be exercised within a framework of
effective accountability.
ITC believes that any meaningful policy on Corporate Governance must provide
empowerment to the executive management of the Company, and simultaneously
create a mechanism of checks and balances which ensures that the decision making
powers vested in the executive management is not only not misused, but is used
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Cornerstones
From the above definition and core principles of Corporate Governance emerge the
cornerstones of ITC's governance philosophy, namely trusteeship, transparency,
empowerment and accountability, control and ethical corporate citizenship. ITC
believes that the practice of each of these leads to the creation of the right
corporate culture in which the company is managed in a manner that fulfils the
purpose of Corporate Governance.
Trusteeship :
ITC believes that large corporations like itself have both a social and economic
purpose. They represent a coalition of interests, namely those of the shareholders,
other providers of capital, business associates and employees. This belief therefore
casts a responsibility of trusteeship on the Company's Board of Directors. They are
to act as trustees to protect and enhance shareholder value, as well as to ensure that
the Company fulfill its obligations and responsibilities to its other stakeholders.
Inherent in the concept of trusteeship is the responsibility to ensure equity, namely,
that the rights of all shareholders, large or small, are protected.
Transparency :
ITC believes that transparency means explaining Company's policies and actions to
those to whom it has responsibilities. Therefore transparency must lead to
maximum appropriate disclosures without jeopardising the Company's strategic
interests. Internally, transparency means openness in Company's relationship with
its employees, as well as the conduct of its business in a manner that will bear
scrutiny. We believe transparency enhances accountability.
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Control :
ITC believes that control is a necessary concomitant of its second core principle of
governance that the freedom of management should be exercised within a
framework of appropriate checks and balances. Control should prevent misuse of
power, facilitate timely management response to change, and ensure that business
risks are pre-emptively and effectively managed.
Roles
The core roles of the various entities at the three levels of Corporate Governance
will be as follows:
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examined by the CMC. Minutes shall be circulated within 15 working days of the
meeting and confirmed at the next meeting. Board decisions shall record the
related logic as far as practicable.
The Board shall have the following Committees whose terms of reference shall be
determined by the Board from time to time :
Audit Committee : To provide assurance to the Board on the adequacy of internal
control systems and financial disclosures. The Head of Internal Audit will act as
coordinator to the Audit Committee, but will be administratively under the control
of the Director accountable to the Board for the Finance function.
Compensation Committee : To recommend to the Board compensation terms for
Executive Directors and the senior most level of management below the Executive
Directors.
Nominations Committee : To recommend to the Board nominations for
membership of the CMC and the Board, and oversee succession for the senior most
level of management below the Executive Directors.
Investor Services Committee : To look into redressal of shareholder and investors
grievances, approval of transmissions, sub-division of shares, issue of duplicate
shares, etc.
Terms of Reference of the Board Committees shall include :
Objectives, Role, Responsibilities
Authority / Powers
Membership & Quorum
Chairmanship
Tenure
Frequency of Meetings
The composition of these Committees will be as follows :-
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Nominations The Executive Chairman and all the Non- Executive Chairman.
Committee Executive Directors.
approval should be tabled in the form of a note to the Board from the Committee
Chairman. In the event there are no issues to be brought before the Board by the
Audit Committee, the Committee Chairman shall submit a 'NIL' report to the
Board.
Corporate Management Committee (CMC) :
The primary role of the CMC is strategic management of the Company's
businesses within Board approved direction / framework. The CMC will operate
under the superintendence and control of the Board. The composition of the CMC
will be determined by the Board (based on the recommendation of the
Nominations Committee), and will consist of all the Executive Directors and three
or four key senior members of management. Membership of the CMC shall be
reviewed by the Nominations Committee annually. The CMC shall be convened
and chaired by the Executive Chairman of the Company. The Company Secretary
shall be the Secretary of the CMC. The quorum for meetings will be 50% of the
members, subject to a minimum of three members. Decisions will be taken by
simple majority. Minutes of CMC meetings shall be tabled before the Board for its
information. However, issues arising from CMC Meetings and requiring Board's
approval / attention should be tabled in the form of a note from the relevant
Executive Director. Agenda items shall be backed by comprehensive notes from
the concerned member / invitee, along with DMC approval where applicable.
Agenda papers, as far as practicable, shall be circulated at least three days prior to
the meeting. The CMC shall normally meet once a month.
relevant issues are on the agenda, for ensuring that all CMC members are enabled
and encouraged to play a full part in its activities.
Executive Director :
a) As a member of the CMC, contribute to the strategic management of the
Company's businesses within Board approved direction / framework.
b) As Director accountable to the Board for a business (Line Director), assume
overall responsibility for its strategic management, including its governance
processes and top management effectiveness.
c) As Director accountable to the Board for a wholly owned subsidiary, or its
wholly owned subsidiary (Line Director), act as the custodian of ITC's interest and
be responsible for their governance in accordance with the charter approved by the
Board.
d) As Director accountable to the Board for a particular corporate function (Line
Director), assume overall strategic responsibility for its performance.
Divisional Management Committee (DMC) :
Executive management of the divisional business to realise tactical and strategic
objectives in accordance with CMC / Board approved plan. Composition of the
DMC shall be determined by the Line Director with the approval of the CMC. The
Divisional CEO shall convene and chair the DMC meetings. If the Divisional
CEO, for any reason, is not in a position to convene a required DMC meeting, he
shall in writing delegate the power to convene and chair the required meeting to
one of the DMC members identified by name. Such delegation should be either for
a specific meeting or for meetings to be held during a specific period of time. It
cannot be a general, open-ended delegation. The key functions of the Division
shall be represented on the DMC. Normally the Divisional Financial Controller, in
addition to being a member, shall act as the Secretary to the DMC and will be
responsible for circulation and custody of agenda notes and minutes. The DMC
shall generally meet at least once a month to review Divisional performance and
related issues. Quorum for meetings shall be 50% of the members subject to a
minimum of three members. Decisions will be taken by simple majority. Minutes
of meetings shall be tabled before the CMC for its information. Agenda items shall
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CONCLUSION
It is ITC's belief that the right balance between freedom of management and
accountability to shareholders can be achieved by segregating strategic supervision
from strategic and executive management. The Board of Directors (Board) as
trustees of the shareholders will exercise strategic supervision through strategic
direction and control, and seek accountability for effective strategic management
from the Corporate Management Committee (CMC). The CMC will have the
freedom, within Board approved direction and framework, to focus its attention
and energies on the strategic management of the Company. The Divisional Chief
Executive, assisted by the Divisional Management Committee, will have the
freedom to focus on the executive management of the divisional business.
The 3-tier governance structure thus ensures that :
a. Strategic supervision (on behalf of the shareholders), being free from
involvement in the task of strategic management of the Company, can be
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BIBLIOGRAPHY
http://en.wikipedia.org/wiki/Corporate_governance
www.indianmba.com
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www.managementparadise.com
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EPILOGUE
The most important aspect for observing corporate governance is the top
management, particularly the board of directors and the senior level management
of an enterprise - walking their talk. It is by walking their talk that the top
management can earn credibility. This also has a direct bearing on the morale of an
organisation.
With the SEBI trying to bring some discipline in the stock market especially in
terms of greater transparency and disclosure norms, corporate governance in the
Indian context at least seems to focus primarily and rightly on the issue of
transparency. It is lack of transparency that leads to corrupt or illegal behaviour. If
corporate governance is concerned with better ethics and principles, it is only
natural that the focus should be on transparency. But how is this transparency to be
achieved? One method of course is the code. Another would be the regulatory
authorities like SEBI, RBI etc. laying down guidelines so that a certain degree of
transparency is automatically ensured. Another legal approach to achieve better
corporate governance may be to look at the whole issue of bringing the corporate
sector under the discipline of debt and equity. Perhaps amendment of the
Companies Act and bringing in this discipline will also help in automatically
ensuring better ethics and corporate governance.
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Perhaps the most important challenge we face towards better corporate governance
is the mindset of the people and the organisational culture. This change will have
to come from within. The government or the regulatory agencies at best can
provide certain environment, which will be conducive for such a mindset taking
place, but the primary
responsibility, is of the people especially the members of the board of directors and
the top management.
We then come to a common moral problem in running enterprises. One can have
practices which are legal but which are unethical. In fact, many a time, tax
planning exercises may border on the fine razor’s edge between the strictly legal
and the patently unethical. A clear understanding of the fundamental values which
govern corporate governance and their explicit articulation in a proper code backed
by well established structures and traditions like the ethics committee and audit
committee may be the best insurance for good corporate governance under the
circumstances.
Corporate governance extends beyond corporate law. Its objective is not mere
fulfillment of legal requirements but ensuring commitment on managing
transparently for maximising shareholder values. As competition increases,
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Finally the key lesson for us to learn are that Regulations and Policies are only one
part of improving governance. Existence of a comprehensive system alone cannot
guarantee ethical pursuit of shareholder’s interest by Directors, officers and
employees. Quality of governance depends upon competence and integrity of
Directors, who have to diligently oversee the management while adhering to
unpeachable ethical standards. Strengthened systems and enhanced transparency
can only further the ability. Transparency about a company’s governance process
is critical. Implementing Corporate Governance structures are Important but
instilling the right culture – work culture is Most Essential.
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Prologue 4
Introduction 6,7,8,9
Clause 49 10,11
Directory Responsibility 12
Insider Trading 13
Shareholders 14,14,15
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