Welcome To The World of Governance: Dorli 2012 © HT Rig Opy C

Welcome to the World of Governance
Dorli
2012
©
ht
rig
opy
C
Business Ethics and Corporate Governance, 2e A. C. Fernando

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Landmarks in the Emergence of
Corporate Governance
Ch 15 A.C.Fernando

Developments in the USA
Corporate governance gained importance with the

occurrence of the Watergate scandal in the United States.
Thereafter, as a result of subsequent investigations, the US
regulatory and legislative bodies were able to highlight
control failures that had allowed several major corporations
to make illegal political contributions and to bribe
government officials. In 1979 by the Securities and
Exchange Commission’s proposals for mandatory reporting
on internal financial controls.

Developments in the USA (contd)
In 1985, following a series of high profile business failures in

the USA, the most notable one being the Savings and Loan
collapse, the Treadway Commission was formed to identify the
main causes of misrepresentation in financial reports and to
recommend ways of reducing incidence thereof. The Treadway
Report published in 1987 highlighted the need for a proper
control environment, independent audit committees and an
objective internal audit function and called for published
reports on the effectiveness of internal control.

Developments in the UK
In England, the seeds of modem corporate governance were

probably sown by the BCCI scandal.
BCCI was a global bank, constituting multiple layers of
entities related to one another through an impenetrable
series of holding companies, affiliates, subsidiaries, banks-
within-banks, insider dealings and shareholder (nominee)
relationships.
With this corporate structure of BCCI and shoddy record-
keeping, regulatory review and audits, the complex BCCI
family of entities was able to evade ordinary legal
restrictions on the movement of capital and goods as a
matter of daily practice and routine.

Developments in the UK (contd.)
Since BCCI was a vehicle fundamentally free of government

control, it was an ideal mechanism for facilitating illicit activity
by others, including such activity by officials of many of the
governments whose laws BCCI was breaking. The failure of
Barings Bank was another landmark that heightened people’s
awareness and sensitivity on the issue and the resolve that
something ought to be done to stem the rot of corporate
misdeeds. Nick Leeson was posted in charge of the back office
operations of Barings Bank as well. He started trading on behalf
of the Bank, when he had to trade only on behalf of the
customers.

Developments in the UK (contd.)
Eventually when his strategy failed because of an

earthquake in Japan, Barings Bank had already lost $1.4
billion and it had to shut office.
As a result of these failures and lack of regulatory measures

from authorities as an adequate response to check them in
future, the Committee of Sponsoring Organisations (COSO)
was born. The report produced by it in 1992 suggested a
control framework, and was endorsed and refined in the
four subsequent UK reports: Cadbury, Ruthman, Hampel
and Turnbull.

CODES AND LAWS
 A code is a set of rules, which are accepted as general
principles, or a set of written rules, which state how
people in a particular organization and country
should behave.
 Many corporate governance codes were developed by

non governmental organizations. Stock exchanges,
investor groups and professional associations were
responsible for promoting and commissioning codes or
principles for corporate governance.

CODES AND STANDARDS OF
CORPORATE GOVERNANCE
 Corporate governance principles and codes have been
developed in different countries and issued either from
stock exchanges or corporations or by the associations
(institutes) of directors and managers with the support of
governments and international organisations.

Purpose of Corporate Governance Code
The aim of these codes and guidelines has been to:

1. bring transparency and accountability in the
functions and decisions;
2. seek to establish accountability standards of the
board and management of the company;
3. protect investors’ interests;
4. care for other stakeholders;
5. promote investor confidence in the business
system.

SELF REGULATORY CODES
 Codes are generally self regulatory rules for guiding

conduct or behaviour. They do not direct or control
behaviour by some official authority.
 Self regulations are more comprehensive than official
regulations and are easier to operate and implement.

Global Practice of Corporate
Governance
1. World Bank on Corporate Governance
2. OECD Emphasis on Corporate
Governance
3. Sarbanes Oxley Act of 2002

1. World Bank on Corporate Governance
• The World Bank, both as an international development bank

and as an institution interested and involved in equitable
and sustainable economic development worldwide, was one
of the earliest international organisations to study the issue
of corporate governance and suggest certain guidelines.
• Corporate governance is concerned with holding the balance
between economic and social goals and between individual
and communal goals.
• The governance framework is there to encourage the
efficient use of resources and equally to require
accountability for the stewardship of those resources.

World Bank on
Corporate Governance (contd.)
• Openness is the basis of public confidence in the corporate

system and funds will flow to those centres of economic
activity, which inspire trust.
• This Report points the way to the establishment of trust
and the encouragement of enterprise. It marks an
important milestone in the development of corporate
governance.

2. OECD Emphasis on Corporate Governance
Organisation for Economic Co-operation and Development (OECD)
 The OECD Principles of Corporate Governance were

endorsed by OECD Ministers in 1999 and have since
become an international benchmark for policy makers,
investors, corporations and other stakeholders
worldwide.
 The Principles are intended to assist OECD and non-
OECD governments in their efforts to evaluate and
improve the legal, institutional and regulatory framework
for corporate governance in their countries, and to
provide guidance and suggestions for stock exchanges,
investors, corporations, and other parties that have a
role in the process of developing good corporate
governance.

OECD Principles
1) Rights of Shareholders
2) Equitable Treatment of Shareholders
3) Role of stakeholders in corporate
governance
4) Disclosure and Transparency
5) Role and Responsibilities of the Board

I. Ensuring the basis for an effective corporate
governance framework
 The corporate governance framework should promote
transparent and efficient markets, be consistent with the
rule of law and clearly articulate the division of
responsibilities among different supervisory, regulatory
and enforcement authorities.
II. The rights of shareholders and key ownership

functions
 The corporate governance framework should protect and
facilitate the exercise of shareholders’ rights.

III. The equitable treatment of shareholders
 The corporate governance framework should ensure the
equitable treatment of all shareholders, including
minority and foreign shareholders. All shareholders
should have the opportunity to obtain effective redress
for violation of their rights.
IV. The role of stakeholders in corporate governance

 The corporate governance framework should recognise
the rights of stakeholders established by law or through
mutual agreements and encourage active co-operation
between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound
 enterprises.

V. Disclosure and transparency
 The corporate governance framework should ensure that
timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial
situation, performance, ownership, and governance of
the company.
VI. The responsibilities of the board

 The corporate governance framework should ensure the
strategic guidance of the company, the effective
monitoring of management by the board, and the board’s
accountability to the company and the shareholders.

3. Sarbanes Oxley Act of 2002
 The Sarbanes-Oxley Act of 2002 (often shortened to SOX) is
legislation passed by the U.S. Congress to protect shareholders and
the general public from accounting errors and fraudulent practices in
the enterprise, as well as improve the accuracy of corporate
disclosures.
 The Sarbanes-Oxley Act of 2002 is mandatory. ALL organizations,
large and small, MUST comply.
 The legislation came into force in 2002 and introduced major
changes to the regulation of financial practice and corporate
governance.
 Named after Senator Paul Sarbanes and Representative Michael
Oxley, who were its main architects, it also set a number of
deadlines for compliance.
 The bill, which contains eleven sections, was enacted as a reaction
to a number of major corporate and accounting scandal including
Enron and Worldcom

Sarbanes-Oxley Act, 2002
The Sarbanes–Oxley Act (SOX Act), 2002 is a serious

attempt to address all the issues associated with corporate
failures to achieve quality governance and to restore
investor confidence. The Act contains a number of
provisions that dramatically change the reporting and
corporate directors governance obligations of public
companies, the directors and officers.

Sarbanes-Oxley Act, 2002 (contd.)
Important provisions contained in SOX Act are briefly given

below:
1. Establishment of Public Company Accounting

Oversight Board (PCAOB)
All accounting firms will have to register themselves with this

board and submit among other details particulars of fees
received from public, company clients for audit and non-audit
services, financial information about the firm, list of firms staff
who

participate in audits, quality control policies, information on
civil criminal and disciplinary proceedings against the firm or
any of the staff.
The board will conduct annual inspections of firms, which audit

more than 100 public companies, and once in three years in
other cases. The board will establish rules governing audit
quality control, ethics, independence and other standards. It
can conduct investigations and displinary proceedings and can
impose sanctions on auditors. The board reports to Securities
and Exchange Commission (SEC).

2. Audit Committee
• The SOX Act provides for a “new improved” Audit

Committee.
• The audit committee is responsible for appointment,

fixing fees and oversight of the work of independent
auditors. The committee is also responsible for
establishing reviewing the procedures for the receipt,
treatment of accounts, internal control and audit
complaints received by the company from the interested
or affected parties.

3. Audit Partner Rotation
• The SOX Act provides for mandatory rotation of lead audit

or co-ordinating partner and the partner reviewing audit
once every five years.
4. Improper Influence on Conduct of Audits
• It will be unlawful for any executive or director of the firm to

take any action to fraudlently influence, coerce, manipulate
or mislead any auditor engaged in the performance of an
audit with the view to rendering the financial statements
materially misleading.

5. Prohibition of Non-audit Services
• Non-audit services include: (i) book-keeping or other

services related to the accounting records or financial
statements of the client; (ii) financial information system,
design and implementation; (iii) appraisal or valuation
services, fairness opinions; (iv) acturial services; (v) internal
audit outsourcing services; (vi) management functions or
human resources; (vii) broker or dealer, investment adviser,
or investment banking services; (viii) legal services or expert
services unrelated to the audit and (ix) any other service
that the board determines, by regulation, is impermissible.
However, the Board has the power to grant exemptions.

6. CEOs and CFOs Required
to Affirm Financials
• Chief Executive Officers and Chief Finance Officers are
required to certify the reports filed with the Securities
Exchange Commission. If the financials are required to be
restated due to material non-compliance “as a result of
misconduct” of CEO or CFO, then such CEO or CFO will
have to return to the company bonus and any other
incentives received by him. False and or improper
certification can attract fine ranging from $ 1 million to $ 5
million or up to 10 years imprisonment or both.

7. Loans to Directors
• The SOX Act prohibits US and foreign companies with

securities traded within the US from making or
arranging from third parties any type of personal loan to
directors.

8. Attorneys
• The attorneys dealing with the publicly traded companies

are required to report evidence of material violation of
securities law or breach of fiduciary duty or similar
violations by the company or any agent of the company to
the Chief Counsel or CEO and if the Counsel or CEO does
not appropriately respond to the evidence the attorney
must report the evidence to the audit committee or the
board of directors.

9. Securities Analysts
• The SOX Act has a provision under which brokers and

dealers of securities should not retaliate or threaten to
retaliate an analyst employed by the broker or dealer for
any adverse, negative or unfavourable research report on a
Public Company.

10. Penalties
• The penalties prescribed under SOX Act for any

wrongdoings are very stiff. Penalties for willful violations
are even stiffer. Any CEO or CFO providing a certificate
knowing that it does not meet with the criteria stated
may be fined upto $ 1 million and/or imprisonment upto
10 years.
• Those who ‘willfully’ provide such certificate can be
punished with $ 5 million and prison upto 20 years.

11. Conflict of Interest
Public accounting firms should not perform any audit service

for a publicly traded company if the CEO, CFO, CAO, controller
or any person was employed by such firm and participated in
any capacity in the audit of that company during the one year
period preceding the date of initiation of the audit.

Corporate Governance Committees
Indian Committees International Committees
1. Working Group on the 1. Cadbury Committee on
Companies Act, 1996 Corporate Governance
2. Confederation of Indian (1992)
Industri’s (CII) Initiative (1997) 2. Paul Ruthman Committee
3. Naresh Chandra Committee
3. Greenbury Committee
(2002)
(1995)
4. Ganguly Committee (2002)
4. Hampel Committee(1995)
5. Narayan Murthy Committee
(2003) 5. Combined Code (1998)
6. Kumarmangalam Birla 6. Turnbull Committee
Committee (2001) (1999)
7. Clause 49

Indian Committees

1. Working Group on the Companies Act,
1956.
The government accordingly set up a Working Group in August

1996 for this purpose.
The Working Group on the Companies Act has recommended a

number of changes and also prepared a working draft of
Companies Bill 1997.
The Bill was introduced in the Rajya Sabha on 14 August 1997,

containing the following recommendations.

Financial Disclosures Recommended by the
Working Group on the Companies Act
• A tabular form containing details of each director’s

remuneration and commission should form a part of the
Directors’ Report.
• A listed company must give certain key information on its
divisions or business segments as a part of the Directors
Report in the Annual Report.
• Where a company has raised funds from the public by issuing
shares, debentures or other securities, it would have to give
a separate statement showing the end-use of such funds.
• The disclosure on debt exposure of the company should be
strengthened.

Non-financial Disclosures Recommended by the
Working Group on Companies Act
1. A comprehensive report on the relatives of directors—either

as employees or Board members—to be an integral part of
the Directors’ Report of all listed companies.
2. Companies have to maintain a register, which discloses
interests of directors in any contract or arrangement of the
company.
3. Likewise, the existence of the directors’ shareholding
register and the fact that members in any AGM can inspect
it should be explicitly stated in the notice of the AGM of all
listed companies.

Non-financial Disclosures Recommended by the
Working Group on Companies Act (contd.)
4. Details of loans to directors should be disclosed as an annex

to the Directors’ Report in addition to being a part of
schedules of the financial statements.
5. Appointment of sole selling agents for India will require prior
approval of a special resolution in a general meeting of
shareholders.
6. Subject to certain exceptions there should be a Secretarial
Compliance Certificate forming a part of the Annual Returns
that is filed with the Registrar of Companies.
7. The Compliance Certificate should certify in prescribed
format that the secretarial requirements under the
Companies Act have been adhered to.

Deficiencies of the Companies Act
(i) Though non-executive directors can play a significant role

in providing independent and objective opinion in
discussions on many strategic areas in board
deliberations, the Act does not assign them any formal
role between executive and non-executive directors.
(ii) In actual practice, non-executive directors have only

ornamental value.

Deficiencies of the Companies Act (contd.)
(iii) With regard to financial reporting, the provisions of the Act

make it more rule-based and ritualistic, rather than being
transparent.
(iv) The Act does not prescribe any formal qualifications for a
director of a company, with the result even an incompetent
and mediocre person can become a member of the board.
(v) Though the Act formally provides for the appointment of

auditors by shareholders, in practice they work more
closely with the company management. Shareholders
hardly have a chance to interact with the auditors.

2. The Confederation of Indian Industry’s
Initiative
• In 1996, the Confederation of Indian Industry (CII) took a

special initiative on Corporate Governance, the first ever
institutional initiative in Indian industry.
• This initiative by CII flowed from public concerns regarding

the protection of investors interest, especially of the small
investor; the promotion of transparency within business and
industry; the need to move towards international standards
in terms of disclosure of information by the corporate sector
and through all of this, to develop a high level of public
confidence in business and industry.

The Confederation of Indian
Industry’s Initiative (contd.)
• A National Task Force that was set up with Rahul Bajaj,

former President of CII as the Chairman and members from
industry, the legal profession, media and academia,
presented the draft guidelines and the Code of Corporate
Governance in April 1997 at the National Conference and
Annual Session of CII.

Recommendations of the CII’s Code of
1. A single board, if it performs well, can maximize long-

term shareholder value. The board should meet at least
six times a year, preferably at intervals of 2 months.
2. A listed company with a turnover of Rs 100 crores and
above should have professionally competent and
recognized independent non-executive directors who
should constitute
• at least 30 per cent of the board, if the Chairman of
the company is a non-executive director or
• at least 50 per cent of the board, if the Chairman and
Managing Director is the same person.

3. A person should not hold directorships in more than 10

listed companies.
4. For non-executive directors to play a significant role in

corporate decision making and maximising long term
shareholder value they need to
• become active participants in boards and not passive

advisors;
• have clearly defined responsibilities within the board such
as the Audit Committee; and
• know how to read a balance sheet, profit and loss account,
cash flow statements, and financial ratios and have some
knowledge of various company laws.

5. To secure better effort from non-executive directors,

companies should pay a commission over and above the
sitting fees for the use of the professional inputs.
6. While re-appointing members of the board, companies

should give the attendance record of the concerned
directors. 50 % attendance is mandatory.

7. Key information that must be reported to, and placed before

the board, must contain:
• Annual operating plans and budgets, together with up-dated
long term plans;
• Capital budgets, manpower and overhead budgets;
• Internal audit reports including cases of theft and dishonesty
of a material nature;
• Fatal or serious accidents, dangerous occurrence, and any
effluent or pollution problems;
• Default in payment of interest or non-payment of the principal
on any public deposit and/or to any secured creditor or
financial institution;

• Defaults such as non-payments of the principal on any

company or materially substantial non-payments for goods
sold by the company;
• Details of any joint venture or collaboration agreement;
• Transactions that involve substantial payment towards
goodwill, brand equity or intellectual property;
• Recruitment and remuneration of senor officers just below
the board level, including appointment or removal of the
Chief Financial Officer and the Company Secretary;
• Labour problems and their proposed solutions and
• Quarterly details of foreign exchange exposure and the
steps taken by management to limit the risks of adverse
exchange rate movement, if material.

8. For all companies with paid-up capital of Rs 20 crores or

more the quality and quantity of disclosure that
accompanies a GDR issue should be the norm for any
domestic issue.
9 Companies that default on fixed deposits should not be

permitted to accept further deposits and make inter-
corporate loans or investments or declare dividends until
the default is made good.

11. Major Indian Stock Exchanges should insist upon a

compliance certificate, signed by the CEO and the CFO
which should clearly state:
• The company will continue business in the course of the
following year;
• The accounting policies and principles conform to the
standard practice;
• The management is responsible for the preparation,
integrity and fair presentation of financial statements and
other information contained in the Annual Report.
• The board has overseen the company’s system of internal
accounting and administrative controls either directly or
through its Audit Committee.

3. Naresh Chandra Committee Report, 2002
The Naresh Chandra Committee was appointed as a High
Level Committee to examine various corporate governance
issues by the Department of Company Affairs on 21st August,
2002.
The Committee’s recommendations mainly concerned:
(i) the Auditor–Company relationship;
(ii) disqualifications for audit assignments;
(iii) list of prohibited non-audit services;
(iv) independence standards for consulting;
(v) compulsory audit partner rotation;
(vi) auditor’s disclosure of contingent liabilities;
(vii) auditor’s disclosure of qualifications and consequent action;
(viii) managements certification in the event of auditor’s
replacement;

Naresh Chandra Committee Report, 2002

(contd.)
(ix) auditor’s annual certification of independence;
(x) appointment of auditors;
(xi) certification of annual audited accounts by CEO and CFO;
(xii) auditing the auditors;
(xiii) setting up of the independent Quality Review Board;
(xiv) proposed disciplinary mechanism for auditors;
(xv) independent directors;
(xvi) audit committee charter;
(xvii)exempting non-executive directors from certain liabilities;
(xvii) training of independent directors;
(xix) establishment of Corporate Serious Fraud Office;
(xx) SEBI and subordinate legislation.

The Committee has Further Recommended
• Tightening of the noose around the auditors by asking them

to make an array of disclosures,
• Called upon CEOs and CFOs of all listed companies to certify
their companies’ annual accounts, besides suggesting,
• Setting up of quality review boards by the Institute of
Chartered Accountants of India (ICAI), Institute of Company
Secretaries of India and the Institute of Cost and Works
Accountants of India, instead of a Public Oversight Board
similar to the one in the United States.

4. Ganguly Committee (2002)
 In April 2002, Ganguly Committee report was

made for improving corporate governance in
banks and financial institutions.
 The Ganguly committee-appointed by the RBI –
has recommended that in large banks the
position of Chairman and CEO should be split
and that in all public sector banks, it should be
implemented.

Objectives
 1. To review the supervisory role of Boards of banks and financial
institutions and to get feedback on the functioning of the Board
including compliance, transparency’ disclosures, audit committees
etc.
 2. To study the system prevalent in banks/financial institutions for
monitoring by the Board, the implementation of the policies laid
down by it.
 3. To make recommendations for making the role of Board of
Directors more effective with Notes a view to minimising risks and
over-exposure.
 4. To consider any other matter relevant to the subject.

Recommendations
 Constitution of the Board of Directors
 Composition of the Board
 Independent/Non-executive Directors
 Commonality of Directors of Banks and NBFCs
 Responsibilities of Directors
 Training of Directors
 Remuneration to Directors
 Company Secretary
 Committees of the Board
 (Read in detail from the PDF file)

5. Narayana Murthy Committee Report, 2003
The Committee on Corporate Governance set up

by SEBI under the Chairmanship of N.R. Narayana
Murthy which submitted its Report in February,
2003 on the subject signifying the regulator’s
anxiety to expeditiously promote corporate
governance practices in Indian Companies

Narayana Murthy Committee Report, 2003
(contd.)
The Committee’s report expresses its total concurrence with

the recommendations contained in the Naresh Chandra
Committee’s report on
• Disclosure of contingent liabilities
• Certification by CEO and CFO
• Definition of independent directors
• Independence of audit committees
The committee came out with two sets of recommendations

namely, Mandatory recommendations and non-
mandatory recommendations

Mandatory Recommendations
1. Audit Committee:
An Audit Committee is the foundation of quality

governance. The Committee recommended a bigger role for
the audit committee. The audit committee should review
the following information:
1. Financial statements and draft audit reports including

quarterly and half yearly information
2. Management discussion and analysis of financial condition
3. Report relating to compliance with laws
4. Management letters of internal control weaknesses issued
by statutory internal auditors
5. Records of related party transactions
Narayana Murthy’s Committee has not taken a View on Rotation of
Auditors
2. Related Party Transactions
A statement of all transactions with related parties including

their basis should be placed before the audit committee for
formal approval/ratification
3. Proceeds from Initial Public Offerings

Companies raising money through initial public offering
should disclose to the audit committee the uses and
application of funds under major heads on a quarterly basis.
4. Risk Management
The Committee has deemed it necessary for the boards of
companies to be fully aware of the risks involved in the
business and that it is also important for shareholders to
know about the process by which companies manage their
business risks. The mandatory recommendations in this
regard are:

Risk Management (contd.)
• “Procedures should be in place to inform board members

about the risk assessment and minimisation procedures.
These procedures should be periodically reviewed to ensure
that executive management controls risks through means
of a properly defined framework.”
• Management should place a report before the entire board

of directors every quarter documenting the business risks
faced by the company, measures to address and minimize
such risks and any limitation to the risk-taking capacity of
the corporations. The board should formally approve this
document.

5. Code of Conduct
• The Committee has recommended that it should be

obligatory for the board of a company to lay down a
code of conduct for all board members and senior
management of the company. This code should be
posted on the company’s Web site.

6.Nominee Directors
• The Committee recommended doing away with nominee

directors. If a corporation wishes to appoint a director on the
board, such appointment should be made by the
shareholders.
• The Committee insisted that an institutional director, if
appointed, shall have the same responsibilities and shall be
subject to the same liabilities as any other director.
• Nominees of the Government on public sector companies
shall be similarly elected and shall be subject to the same
responsibilities and liabilities as other directors.

7. Other Mandatory Recommendations Are:
• Compensation to non-executive directors (to be approved

by the shareholders in general meeting;
• Whistle blower policy to be in place in a company.

Non-Mandatory Recommendations
 The non-mandatory recommendations pertain to moving

to a regime providing for unqualified corporate financial
statements, training of board members and evaluation of
non-executive director’s performance by a peer group
comprising the entire board of directors, excluding the
director being evaluated.

6. Kumar Mangalam Birla Committee
• The Committee’s recommendations consisted of (i)

mandatory recommendations, and (ii) non-mandatory
recommendations.

1. Applicability
• Applicable to all listed companies with paid-up share capital
of Rs 3 crore and above
2. Board of directors
• The Board of Directors of a company must have an optimum
combination of executive and non-executive Directors. The
number of independent Directors should be at least one-third
in case the company has a non-executive Chairman and at
least half of the Board in case the company has an executive
Chairman.

(contd.)
3. Audit Committee
The Audit Committee should have a minimum 3 members

all being non executive directors and at least one director
having financial and accounting knowledge.
The Committee should invite such executives as it

considers appropriate.
The audit committee should meet at least thrice a year

with a gap of not more than six months.

4. Remuneration Committee of the Board
The Board of Directors should decide the remuneration of
non-executive directors.
Full disclosure of the remuneration package of all the

directors covering salary benefits, bonuses, stock options,
pension fixed component, performance linked incentives
along with the performance criteria, service contracts, notice
period, severance fees, etc., is to be made in the section on
corporate governance of the annual report.
5. Board Procedures
The Board meeting should be held at least four times a year
with a maximum time gap of four months between any two
meetings.

6 Management
• Management discussions and analysis report covering
industry structure, opportunities and threats, segment-wise
or product-wise performance outlook, risks, internal control
systems, etc. are to form a part of Directors Report or as
an addition thereto.
7. Shareholders
In case of appointment of a new Director or re-appointment
of existing Director, information containing a brief resume,
nature of expertise in specific functional areas and companies
in which the person holds Directorship, Committee
Membership, must be provided to the benefit of shareholders.
A Board committee under the chairmanship of a non-executive

director is to be formed to specifically look into the redressing
of shareholder complaints of declared dividends etc

8. Report on Corporate Governance
• A separate section on Corporate Governance in the annual

reports of the company, with a detailed compliance report
on Corporate Governance, board of directors, audit
committee, etc. should be highlited.

Non-mandatory Recommendations
1. Chairman of the Board
The Chairman’s role should in principle be different from

that of the Chief Executive, though the same executive can
perform both the roles.
2. Remuneration Committee
The Board of Directors should set up a Remuneration

Committee to determine on their behalf and on behalf of
the shareholders with agreed terms of reference the
company’s policy on specific remuneration packages for
executive directors including pension rights and any other
compensation payment.
Non-mandatory Recommendations
(contd.)
3. Shareholders’ Rights
Half-yearly declaration of financial performance including

summary of the significant events in the six months should
be sent to each of the shareholders.
4. Postal Ballot
Although the formality of holding the general meeting is
gone through , in actual practice only a small fraction of
shareholders can really participate. Shareholders who are
unable to attend the meetings, will vote by postal ballot for
key decisions……

Critical matters decided by postal ballot are as follows:
1. Matters relating to alteration in MOA for change in name,

address etc.
2. Sale of whole or substantially whole of the undertaking.
3. Sale of investments
4. Making a further issue of shares through preferential
allotment
5. Corporate restructuring
6. Entering new business area
7. Matters relating to change in management

7. Clause 49
• Kindly refer PDF file and/or Another PPT – Ch3 (I)

International Committees

1. Cadbury Committee on
Corporate Governance, 1992
The stated objective of the Cadbury Committee was "to

help raise the standards of corporate governance and the
level of confidence in financial reporting and auditing by
setting out clearly what it sees as the respective
responsibilities of those involved and what it believes is
expected of them".

Cadbury Committee on
Corporate Governance, 1992 (contd)
The Cadbury Code of Best Practices had 19 recommendations.
Relating to the board of directors, the recommendations are:
• The Board should meet regularly, retain full and effective
control over the company and monitor the executive
management.
• There should be a clearly accepted division of responsibilities
at the head of a company, which will ensure balance of power
and authority, such that no individual has unfettered powers
of decision.

Corporate Governance, 1992 (contd.)
• The board should include non-executive directors of

sufficient caliber and number for their views to carry
significant weight in the board's decisions.
• All directors should have access to the advice and services of
the Company Secretary, who is responsible to the Board for
ensuring that board procedures are followed and that
applicable rules and regulations are complied with. Any
question of the removal of company secretary should be a
matter for the board as a whole.

Corporate Governance, 1992 (contd)
Relating to the non-executive directors the

recommendations are:
• Non-executive directors should bring an independent
judgment to bear on issues of strategy, performance,
resources, including key appointments, and standards of
conduct.
• Non-executive Directors should be appointed for specified
terms and reappointment should not be automatic.
• Non-executive Directors should be selected through a
formal process and both, this process and their
appointment, should be a matter for the Board as a
whole.

On reporting and controls, the Cadbury Code of Best
Practices stipulate the following:
• It is the Board’s duty to present a balanced and

understandable assessment of the company’s position.
• The Board should ensure that an objective and professional
relationship is maintained with the Auditors.
• The Board should establish an audit committee of at least 3
non-executive directors with written terms of reference,
which deal clearly with its authority and duties.
• The directors should explain their responsibility for
preparing the accounts next to a statement by the auditors
about their reporting responsibilities.
• The directors should report on the effectiveness of the
company’s system of internal control.

2. The Greenbury Committee, 1995
This committee was set up in January 1995 to identify good

practices by the Confederation of British Industry (CBI) in
determining directors' remuneration and to prepare a code of
such practices for use by public limited companies of the United
Kingdom.
The committee
• aimed to provide an answer to the general concerns about
the accountability and level of directors' pay;
• argued against statutory control and for strengthening
accountability by the proper allocation of responsibility for
determining directors' remuneration, the proper reporting to
shareholders, and greater transparency in the process.

The Greenbury Committee, 1995 (contd.)
• Produced the Greenbury Code of Best Practice which was

divided into four sections thus:
 Remuneration committee
 Disclosure
 Remuneration policy
 Service contracts and compensation.

3. The Hampel Committee, 1995
The Hampel Committee was set up in November 1995 to protect

investors and preserve and enhance the standing of companies
listed on the London Stock Exchange.
The committee
• developed further the Cadbury Report
• recommended that
 the auditors should report on internal control privately
to the directors
 the directors maintain and review all (and not just
financial) controls

The Hampel Committee, 1995 (contd.)
 Companies that do not already have an internal audit

function should from time to time review their need
for one
• Introduced the Combined Code that consolidated the

recommendations of earlier corporate governance reports
(Cadbury and Greenbury).

4. The Turnbull Committee, 1999
The Turnbull Committee was set up by the The Institute of

Chartered Accountants in England and Wales (ICAEW) in 1999.
The committee
• provided guidance to assist companies in implementing the
requirements of the Combined Code relating to internal
control.
• recommended that where companies do not have an internal
audit function, the board should consider the need for
carrying out an internal audit annually.
• recommended that boards of directors confirm the existence
of procedures for evaluating and managing key risks.

5. The Combined Code, 1998
 It was derived from Hampel Committee, Cadbury Report

and Greenbury Report, addressed the issue of directors’
remuneration.
 Board should maintain a sound system of internal control
to safeguard shareholder’s investment and the
company’s assets.
 The directors should atleast, annually, conduct a review
of effectiveness of group’s internal control.
 The review should cover all controls, including financial,
operational, and compliance controls and risk
management.

6. The Pa ul Ruthman Committee
 The Committee was constituted later to deal with the

controversial point of Cadbury Report.
 It restricted the reporting requirement to internal financial
controls only as against ‘the effectiveness of the
company’s system of internal control’ as stipulated by
the Code of Best Practices contained in the Cadbury
Report.
 The final report submitted had some important elements
notably the extension of director’s responsibilities to ‘all
relevant control objectives including business risk
assessment and minimizing the risk of fraud’

McKinsey Survey on
McKinsey, the international management consultant

organisation conducted a survey with a sample size of 188
companies from six emerging markets (India, Malaysia,
Mexico, South Korea, Taiwan and Turkey), to determine the
correlation between good corporate governance and the
market valuation of the company.

McKinsey Survey on
In short, good corporate governance increases market

valuation by:
• Increasing financial performance;

• Transparency of dealing, thereby reducing the risk that
boards will serve their own self-interest;
• Increasing investor confidence.

McKinsey Survey on
McKinsey rated the performance on corporate governance of

each company based on the following parameters:
• Accountability: Transparent ownership, board size, board
accountability, ownership neutrality
• Disclosure and transparency of the board, timely and
accurate disclosure, independent directors
• Shareholder equality: One share, one vote

McKinsey Survey on
Through the survey, McKinesy found that companies with

good corporate governance practices have high price-to-book
values indicating that investors are willing to pay a premium
for the shares of a well-managed and governed company.
Additionally, the survey revealed that investors are willing to
pay a premium of as much as 28 per cent for shares of such a
corporate governance based company.

SEBI’s Initiatives
• The Securities and Exchange Board of India (SEBI)

appointed a committee on corporate governance on May 7,
1999, with eighteen members under the Chairmanship of
Kumar Mangalam Birla to promoting and raising the
standards of corporate governance.

Dr J.J. Irani Committee Report on
Company Law, 2005
Appointed in December 2004. It submitted its report in May

2004. The committee recommended: (i) One-third of the Board
of listed company should be independent directors, should be
independent directors, (ii) Corporates should be allowed to
maintain pyramidal structure, i.e., a subsidiary of a holding
company itself be a holding company; (iii) Full liberty to
shareholders to do decide to issues; (iv) Mooted the concept of
single person company; (v) Companies encouraged to self-
regulate their affairs; (vi) Provided Stringent penalties for
wrongdoers and recommended publication of the punishment;
(vii) Suggested continuation of Audit and Accounting standards
of ICAI; and (viii) Present governance standards to continue.

Conclusion
• Although India has been fortunate in not having to go

through the massive corporate failures such as Enron and
Worldcom, it has not been wanting in its resolve to
incorporate better governance practices in the country’s
corporates emulating stringent international standards.

Conclusion (contd.)
• However, as the Naresh Chandra Committee on Corporate Audit

and Governance pointed out: “There is scope for improvement.
For one, while India may have excellent rules and regulations,
regulatory authorities are inadequately staffed and lack
sufficient number of skilled people. This has led to less than
credible enforcement. Delays in courts compound the problem.
For another, India has had its fair share of corporate scams and
stock market scandals that has shaken investor confidence.
Much can be done to improve the situation”.

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Welcome to the World of Governance

Business Ethics and Corporate Governance, 2e A. C. Fernando

Business Ethics and Corporate Governance, 2e A. C. Fernando

Corporate governance gained importance with the

Business Ethics and Corporate Governance, 2e A. C. Fernando

In 1985, following a series of high profile business failures in

Business Ethics and Corporate Governance, 2e A. C. Fernando

In England, the seeds of modem corporate governance were

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Since BCCI was a vehicle fundamentally free of government

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Eventually when his strategy failed because of an

As a result of these failures and lack of regulatory measures

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 Many corporate governance codes were developed by

Business Ethics and Corporate Governance, 2e A. C. Fernando

Business Ethics and Corporate Governance, 2e A. C. Fernando

The aim of these codes and guidelines has been to:

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 Codes are generally self regulatory rules for guiding

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• The World Bank, both as an international development bank

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• Openness is the basis of public confidence in the corporate

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 The OECD Principles of Corporate Governance were

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II. The rights of shareholders and key ownership

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IV. The role of stakeholders in corporate governance

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VI. The responsibilities of the board

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Business Ethics and Corporate Governance, 2e A. C. Fernando

The Sarbanes–Oxley Act (SOX Act), 2002 is a serious

Business Ethics and Corporate Governance, 2e A. C. Fernando

Important provisions contained in SOX Act are briefly given

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All accounting firms will have to register themselves with this

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The board will conduct annual inspections of firms, which audit

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• The SOX Act provides for a “new improved” Audit

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Business Ethics and Corporate Governance, 2e A. C. Fernando

• The SOX Act provides for mandatory rotation of lead audit

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• Non-audit services include: (i) book-keeping or other

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• The SOX Act prohibits US and foreign companies with

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• The attorneys dealing with the publicly traded companies

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• The SOX Act has a provision under which brokers and

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• The penalties prescribed under SOX Act for any

Business Ethics and Corporate Governance, 2e A. C. Fernando

Public accounting firms should not perform any audit service