INRODUCTION

The customers, banks, the environment and the community at large are the

other stakeholders. Accountability of individuals and economic efficiency of

the corporation are the important aspects of corporate governance. The

stakeholder view and the corporate governance models are also the topics of

concern of corporate governance. Thus corporate governance is a multi-

faceted subject.

Donovan defines corporate governance as "an internal system encompassing

policies, processes and people, which serves the needs of shareholders and

other stakeholders, by directing and Corporate governance refers to the set

of processes, customs, policies, laws and institutions influencing the

administration of a corporation.

Corporate governance includes the relationships among the many players

and the goals of the corporation.

The shareholders, management and the board of directors are the principal

players. The employees, suppliers controlling management activities with

good business savvy, objectivity and integrity. Sound corporate governance

is reliant on external market place commitment and legislation, plus a

healthy broad culture which safeguards policies and processes".

According to SEBI, corporate governance is the acceptance by the

management of the inalienable rights of shareholders as the true owners of

the corporation and of their own role as trustees on behalf of the

shareholders. Corporate governance is considered as ethics and a valuable

duty

PRINCIPLES OF CORPORATE GOVERNANCE

Honesty, trust, openness, performance orientation, responsibility,

accountability, mutual respect and commitment are the key elements of

corporate governance.

The important principles of corporate governance can be stated as follows:

(1) Rights of shareholders:

Corporations should respect the rights of shareholders and help the

shareholders to exercise their rights.

(2) Equal treatment for shareholders:

Equal treatment should be given to all the shareholders. All the shareholders

are to be equal Encouraged The interests of all the stakeholders have to be

protected.

(4) Role of the Board of Directors:

The Board of Directors should be dynamic, efficient and capable of

developing a range of skills. It should be capable of meeting all the

challenges. It should be sufficient in size and a good level of commitment to

fulfill its responsibilities and duties. There should be a good mix of

executive and non-executive directors. The key positions of chairman and

CEO should not be held by the same person.

(5) Ethical behavior :

Corporations should develop a code of conduct for the directors and

executives to organization promote ethical and responsible decision making.

Many corporations have established Compliance and Ethics Programmes to

minimize the risk that the firm steps outside of ethical and legal boundaries.

(6) Disclosure and transparency:

There should be the timely and balanced disclosure of matters related to the

all investors have access to clear and factual information.

Issues involved in corporate governance principles:

• Effective internal controls and independence of auditors.

• Correct preparation of financial statements arrangements for CEO and

other Directors.

• Nomination of members of the Board.

• Management of risk.

Rights of corporation:

A corporation is a legal

Corporate governance with the following rights:

(i) The ability to sue and be sued.

(ii) The ability to hold assets in its own name.

(iii) The ability to hire agents.

(iv) The ability to sign contracts.

(v) The ability to make by-laws to govern its internal affairs.

Need for corporate governance:

(1) It is reducing the risk of the investor.

(2) It increases the mobilization of capital.

(3) It enhances the value of the companies.

The companies have to be evaluated on the basis of commitment to good

corporate governance, shareholders' rights, nature of Board of Directors as

well as transparency and disclosure.

Most of the Indian companies are a hybrid of family owned and publicly

listed companies with the following problems:

(a) Ownership and management are not separated.

(b) Governance policies are informal.

(c) The controls are inadequate.

(d) Absence of professional management.

(e) The rights of shareholders are not fully protected.

(f) Absence of adequate transparency and disclosure.

TATA GROUP

Corporate governance in Tata group is fair and civic minded, fulfilling its

duties to the stakeholders.

Integrity is an article of faith across all its operations. Jamsetji Tata gave

importance to the means and ends.

Tata wrote: "We do not claim to be more unselfish, more generous or more

philanthropic than other people, but we think we started on sound and

straightforward business principles, considering the interests of the

shareholders our own, and the health and welfare of the employees the sure

foundation of our success.

The 'leadership with trust' is the philosophy of Tatas. Tata Business

Excellence Model is a framework which helps Tata companies to achieve

their business objectives through specific process.

Global Reporting Initiative (GRI) is an independent body affiliated to UNO.

GRI has a triple bottom approach, financial, social and environmental. Tata

group has the appreciation of GRI.

THEORIES OF CORPORATE GOVERNANCE

I. Agency theory:

This theory is based on the principal-agent framework. One party, namely,

the principal delegates work to another party, the agent. The agent has to

work for the principal.

The managers are supposed to be the agents of a corporation's owners. at the

same time, the managers must be monitored and checks and balances have to

be implemented. The costs resulting from managers are called 'agency costs'.

Both the principal and manager should have a clear and correct

understanding. Both should have correct access to information.

There is the separation of ownership and control. All the shareholders,

including minority

Shareholders have to be protected. There is a drive for effective

shareholders. The need for improved transparency and disclosure are also

emphasized.

II. Transaction cost economics:

This theory was developed by Williamson and is closely related to agency

theory. The firm is considered as a governance structure. The marketing

costs have to be saved. The ideas of economies of scale and scope have to be

introduced. Good governance can reduce the cost and increase the profit. A

mere operation of incentives is not good in the long run.

In terms of this theory, there is a justification for the growth of large firms

and conglomerates. it states that the costs may be reduced by judicious

choice of governance.

III. Stakeholder theory:

Good governance should take care of the interests of all the stakeholders.

There are many

Stakeholders like shareholders, employees, suppliers, customers, local

communities and government.

A good corporate governance should increase the long-term enhancement of

the various stakeholders. The corporate governance should recognize the

rights of the stakeholders established through mutual agreements and

encourage active co-operation between corporations and stakeholders. This

will result in the good co-operation of all the stakeholders.

IV. Stewarding theory:

There should be a unity of command in the corporate governance. The

managers should be empowered to take autonomous executive action. The

share holders should facilitate. The authority to exercise managerial

opportunism by the board.

ROLE OF INDEPENDENT DIRECTORS:

There is an urgent need to minimize corporate frauds and scams.

An effective tool is the reinforcement of the institution of audit. audit

committees should play an important role through the guidance of

independent directors. It should be noted that independence should be

combined with competence.

The corporations should appoint competent independent directors to achieve

higher standards of governance. The independent directors should be able to

offer wise inputs for the companies. Naturally, the remuneration for

independent directors should be of decent standards. Globalizations require

high standards of governance.

The non-executive or independent directors should have proper competences

and enough time. They should meet appropriate independence criteria. They

should be appointed for specified terms subjected to re-election. They should

have required diversity of knowledge, judgment and experience to properly

complete their tasks. The independent director should be independent from

any business, family or other relationship with the company.

Independent directors are invited to join the board for their specialization

and expertise in achieving a balance of knowledge, skills and attitudes of

other directorial resources. Neutrality of views and the quality of debate at

the board level are necessary for good governance.

Iran Committee (2005) has recommended the important advisory role of

independent directors. The independent directors should be independent in

their thinking, approach and actions.

An independent director should be independent of judgment with no

pecuniary relationship.

An independent director is required because of independent judgement,

technical expertise and to build investor confidence.

Duties of independent director:

(i) To reduce potential conflict between specific interests of the management

and wider interests of the company and shareholders.

(ii) To demand financial transparency.

(iii) To safeguard the interests of minority shareholders.

(iv) To protect the interests and welfare of the employees.

(v) To make independent assessment of evaluating business plans.

(vi) To make the use of technical and financial expertise and experience for

the development of the corporation.

(vii) To make useful communication between management and shareholders.

Power of independent directors:

(i) Power to demand the necessary information.

(ii) Power to exercise the vote.

(iii) Power to govern.

Independent directors are the cornerstones of good corporate governance.

Their duty is toprovide an independent unbiased and experienced

perspective to the Board of Directors. One third of company's directors are

required to be independent. The independent directors should be really

independent. The independent directors are the only hope to instill some

discipline in the murky world of corporate finance.

The independent directors bring to the corporation a wide range of

experience, knowledge and judgment from their proficiencies in finance,

housing, management, law, accounting and corporate strategy. The

corporations should be immensely benefited from their inputs. In fact, the

audit committee and compensation committee should be consisting of

independent directors

The independent directors should safeguard the interests of the company

during difficult times.

BOARD STRUCTURE

An ideal board structure is necessary for good corporate governance. Recent

research has shown that effective boards must be legitimate and credible. It

should be legitimate in the sense that stakeholders perceive the board to

represent all significant interests and perspectives. It should also be

creditable in the sense the board is viewed as knowledgeable and fair and

that the board process is considered rational.

The combined code of best practices was given by Cadbury code.

The board is the link between managers and shareholders. The board is

essential to good corporate governance and excellent investor relations.

(a) Strategic guidance for the growth and prosperity of the company.

(b) Accountability to all the stakeholders.

(c) Provision of a highly qualified team to manage the company.

Role of duties and responsibilities:

The board's role is to provide entrepreneurial leadership of the company

within a framework of effective controls. The risks have to be assessed and

managed. Decisions have to be taken in an objective way and the interests of

the company have to be protected.

The boards should have regular meetings with an agenda. There should be

appropriate reporting procedures. The roles of chair and CEO should

preferably be split to ensure that no one individual is too powerful. There

should be a balance between executive and non-executive directors.

All the directors should have access to the company secretary. They can also

take independent professional advice.

The following are the duties of directors:

(a) To act in accordance with the company's constitution.

(b) To promote the success of the company.

(c) To exercise independent judgment.

(d) To exercise reasonable care, skill and diligence.

(e) To avoid conflicts of interest.

(f) Not to accept benefits from third parties.

(g) To declare an interest on proposed transactions or arrangements.

It is not possible for the directors to please all shareholders at all times.

Directors should have access to reliable information regularly. The board

should be accountable to shareholders and provide them the relevant

information.

CHIEF EXECUTIVE OFFICER

The CEO has the executive responsibility of running the business. The CEO

should not become the chairman of the company.

Chairman:

The chairman is responsible for the effective running of the board. The

board should meet frequently and the directors should have access to all

information and all the directors should have an opportunity to give their

views at board meetings.

Senior Independent Director:

There should be an appointment of a Senior Independent Director (SID) who

should be one of the independent non-executive directors. The SID should

be available to the shareholders if they have concerns to be resolved.

The non-executive directors should meet without the chairman present at

least annually in order to appraise the performance of the chairman. The SID

will lead these meetings.

Company secretary:

The company secretary should facilitate the work of the board by providing

the necessary information to all the directors. The company secretary can

advice the board, via the chairman, on all governance matters. The company

secretary will assist the professional development needs of directors and

induction requirements for new directors. The company secretary must act in

good faith and avoid conflicts of interest. The dismissal of the company

secretary should be a decision of the board as a whole and not the CEOor

chairman.

Audit committee:

It is a most important subcommittee. It should review the scope and outcome

of the audit. It should ensure that the objectivity of the auditors is

maintained. It provides a bridge between both internal and external auditors

and the board. The board should be fully aware of all relevant issues related

to the audit. It should be able to assess the financial and non-financial risks

of the company.

Remuneration committee:

This committee should make recommendations to the board on the

company's framework of executive remuneration and its cost. It should

determine remuneration packages for each of the executive directors,

including pension rights and any compensation payments.

The establishment of a remuneration committee has prevented the executive

directors from setting their own remunerations. The remuneration of non-

executive directors should be decided by the chairman and the executive

members of the board.

Nomination committee:

Directors were appointed on the basis of personal contacts in the past. At

present there is a formal, rigorous and transparent procedure for the

appointments and recommendations to the board. A majority of members of

the nomination committee should be independent non-executive directors.

This committee should evaluate the existing balance of skills, knowledge

and experience on the board. It should throw its net as wide as possible for

the search of suitable candidates.

Risk committee:

Business operations involve risks and this committee should comprehend the

risks involved in the business. The competitive advantages have to be

analysed. This committee should be consisting of more of non-executive

directors.

Non-executive directors:

Non-executive directors are essential for good governance. They cannot be

under the pressure of the Board of Directors as executive directors. The non-

executive directors can add to the overall leadership and development of the

company.

The non-executive directors should be independent in the presentation of

their views. They should scrutinize the performance of the management in

meeting agreed goals and objectives. The added value of a non-executive

director may be experience, knowledge, public life and reputation. The non-

executive directors should bring an independent judgment to bear on issues

of strategy, performance, resources and standards of conduct.

DIRECTOR'S REMUNERATION

The company nor the performance of an individual. The size of the

company and the experience of the individual are the major deciding factors.

The bonus is linked to the accounting performance of the firm. The stock

options give the directors to purchase .The following are the six elements in

director's remuneration:

(1) Basic salary

(2) Bonus

(3) Stock options

(4) Restricted share plans

(5) Pension

(6) Benefits like car and health care

The basic salary is in accordance with terms of contract. It is neither related

to the performance of the shares at a specified exercise price over a specified

time period.

Performance measures:

The following are the important performance measures:

• Shareholder return

• Share price

• Profit related measures

• Return on capital

• Earnings for share

• Performance of individual director

Training and development of Directors:

The directors who are elevated from managerial roles find it difficult to

understand their roles.

It is more than a change of responsibility. The newly inducted directors

should know the answers for the following questions:

(a) What are the challenges of the new role?

(b) What are the expectations of the company, customers, and investors?

(c) How to handle the change of status and relationships?

The directors should be given training in the following areas:

(1) Diversity managing training.

(2) Understanding the basics of economy and industry.

(3) Orientation to the company.

(4) Finance for non-financial directors.

(5) Marketing strategies.

(6) Negotiation skills.

(7) Management of HR issues.

(8) Leadership.

(9) Mergers and acquisitions.

(10) Effectiveness of the Board.

ACCOUNTING STANDARDS

Accounting standards regulate accounting policy so as to use the suitable

accounting principles and methods. Accounting standards also ensure

adequate disclosures in financial statements. The use of uniform accounting

policy improves comparability. Hence the quality of financial report is

determined by the quality of accounting standards and the level of

compliance.

In 1977, the Institute of Chartered Accountants of India (ICAI) constituted

the Accounting Standards Board (ASB). ASB organised a workshop in 1983

to hold a dialogue with the industry on the implementation of the accounting

standards.

The following methods were approved for implementation of standards:

• Approaching banks and financial institutions to point out that the adoption

of accounting standards by their borrowers would be of great use to them.

• Approaching authorities for making compliance with the standards as a

necessary condition for listing companies at the various stock exchanges in

the country.

• Making request to apex bodies of trade and industry like FICCIand

ASSOCHAM to issue directives to their associates to follow the accounting

standards.

At present nearly fifty items of disclosure are available. The nature of

business, size of the company, accounting standards, profit data, strategies

and investment pattern are important.

The value of brand equity, the economic value added (EVA) and the value

of human assets are the most popular disclosures.

Reserve Bank of India has suggested the following disclosures:

• Characteristics of underlying assets.

• Procedure for administration and servicing.

• Purpose and contents of legal documents.

SUMMARY

(1) Meaning of corporate government - It refers to the set of processes,

customs, policies, laws and institutions influencing the administration of a

corporation.

(2) Principles of corporate governance.

(3) Issues involved in corporate governance principles.

(4) Rights of corporation.

(5) Need for corporate governance.

(6) Theories of corporate governance - Agency theory - Transaction cost

economies -Stakeholder theory - Stewardship theory.

(7) Role of independent directors.

(8) Board structure.

(9) Training and development of Directors.

(10) Accounting standards.