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BUSINESS ETHICS & CORPORATE GOVERNANCE

MODULE 1

Business Ethics
Business ethics is the study of proper business policies and practices regarding potentially
controversial issues, such as corporate governance, insider trading, bribery, discrimination,
corporate social responsibility and fiduciary responsibilities. Law often guides business ethics,
while other times business ethics provide a basic framework that businesses may choose to
follow to gain public acceptance.

Business ethics ensure that a certain required level of trust exists between consumers and
various forms of market participants with businesses. For example, a portfolio manager must
give the same consideration to the portfolios of family members and small individual investors.
Such practices ensure that the public receives fair treatment.

Board of Directors
A board of directors is a group of individuals, elected to represent shareholders. A board’s
mandate is to establish policies for corporate management and oversight, making decisions on
major company issues. Every public company must have a board of directors. Some private
and nonprofit organizations also have a board of directors.

Role of Board of Directors

1. Trusteeship: The board of directors act as trustees to the property and welfare of the
company. Hence, the board must use the company’s property for the long-run gain of the
company, but not for their personal use.

2. Formulation of Mission, Objectives and Policies: Board of directors must see the long run
view and have long run perspective of the company. The board formulates, reviews and
reformulates the company’s mission, objectives and policies which forms the basis for strategy
formulation and implementation.

3. Designing Organizational Structure: The board designs the structure of the organization
based on the objectives, policies, environmental factors, degree of competition, role of quality,
expectations of employees etc.

4. Selection of Top Executives: The board should assume the responsibility of screening and
selecting the top executives who can formulate and implement the strategies. Chief executives
are key personnel in the process of strategy implementation.

5. Financial Sanctions: The important financial decisions like sanctioning of finances to

various projects, reserves, distribution of profit to shareholders and repayment of loans and
advances etc., are taken by the board. Further, the board reviews the financial performance of
the company from time to time and reformulates the financial policies.

6. Feed forward and Feedback: The board has to obtain information from the external
environmental factors and feed that information forward to various key points in the company
in order to prevent possible hurdles and mistakes in the process of achieving organizational
goals. Further, the board also obtains the information from internal sources of the organization,
and feeds it forward to prevent possible failures in decision-making by the top level executives.
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7. Link between the Company and External Environment: The board acts a vital and
continuous link between the company and external environment like government, other
companies, social and economic institutions etc.

Who is an independent director?

The Companies Act of 1956 does not give any specific definition of an independent director.
In a broad sense an independent director is a non-executive director who does not have any
kind of relationship with the company that may affect the independence of his/her judgment.

How does the listening agreement define and independent director?

As per clause 49 of the listening agreement, an independent director is a non-executive director
who does not have any pecuniary relationship with the company, its promoters, senior
management or affiliate companies, is not related to promoters or the senior management,
and/or has not been an executive with the company in the three preceding financial years.
It also says that an independent director should not have been a partner or executive director
of the auditors/lawyers/consultants of the company in preceding three years or should not hold
2% or more of shares of the company.
Further, he should not be a supplier, service provider or customer of the company.

What is the role of independent director?

• Independent directors act as a guide to the company.
• Their roles broadly include improving corporate credibility and governance standards
functioning as a watchdog, and playing a vital role in risk management.
• Independent directors play an active role in various committees set up by company to
ensure good governance.
• Independent directors should makeup at least two-thirds of the directors in the audit
committees of listed companies to oversee the financial reporting process and
disclosure of the company's financial information, ensure compliance with listing and
other legal requirements, disclosure of related party transactions and qualification in
the draft audit report, among other things.
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Organizational Climate & Structure (Elements)

The organizational climate is the general set of attitudes that the members of an organization,
especially its management, have. These attitudes can affect decision-making and member
satisfaction with the organization. Organizational climate concept apply to businesses,
nonprofit organizations, clubs and any other situation where groups of people gather for a
common purpose.

• Diversity
Each organizational climate has its own attitude towards diversity, either positive, negative or
somewhere between. Ideally, all organizational climates should have a positive attitude toward
diversity. Organizations should not discriminate against people based on race, religion or
gender.

• Centralized or Decentralized
Organizational climates are either centralized and hierarchical or decentralized. Centralized
organizations give certain individuals power over others. Decentralized organizational cultures
have authority spread out between different members.

• Formal or Informal
The climate can have a more formal or informal structure. Formalized structures have
standardized rules about how workers carry out activities in the organization, while less
formalized structures give members the freedom to engage in alternative solutions to problems,
with members having more freedom.

• Social Interaction
The level of social interaction in an organizational climate influences how innovative and
cooperative the climate is, according to Chung-Jen Chen and Jing-Wen Huang in the
International Journal of Information Management. Some organizational climates are more
teamwork-oriented, while other organizational climates have isolated members operating on
their own. Teamwork-oriented climates are more supportive.

• Integration
Integration is the extent to where the subdivisions of the organization work together.
Organizations that are highly integrated have more opportunities for the members to work
together, share information, learn from each other, solve problems and identify potential
problems that other members miss.

• Self-Direction
Organizations vary in the extent to which the members feel like they have control over
themselves and the organization. Some organizational climates have a high degree of stress,
which increases the chances that members will experience burnout and increases the rate at
which members leave due to low satisfaction with the organization. Workers experience
burnout when they feel exhausted both emotionally and with their work.
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Addressing Ethical Dilemmas

Finding ways to successfully deal with ethical conflicts is critical not only to the distressed
employees but also to organizations striving to improve outcomes, since ethical conflicts can
adversely affect organizations and is associated with employee burnout and job turnover.

1. Support the code of ethics: Employees should be familiar with the code and use it on a
daily basis. Organizations should incorporate behavior consistent with the code of ethics
into job descriptions and consider that during annual performance reviews.

2. Offer ongoing education: Ethics, like most other disciplines, must be learned. It is not
intuitive or just being good. New employee orientation and all educational programs
should include ethics content, with specific examples of how to apply theoretical principles
to concrete issues. Education gives employees tools for decision making.

3. Create an environment where employees can speak up: Having a practice environment
that supports employees in raising ethical questions and empowering them to address
those concerns also is vital. Ethical issues are complicated and everyone brings their own
experiences and values to the situation. These are complicated issues, and it is hard to
work it through in your own head. The best ethical analysis is done in the open with other
people.”

4. Bring different disciplines together: Employees from different departments experience

shared suffering. Working together could prove beneficial in addressing ethical issues.
Employees from different departments don’t realize how helpful they can be to one
another.

5. Provide ethics experts: On-site ethicists or other ethics professionals who can
confidentially talk with are valuable in helping people look at the situation from other
perspectives. All staff should feel safe in reaching out, perhaps to request a consultation
or just to talk things through. They often will call looking for affirmation they are thinking
correctly and not going off base.

6. Add unit-based ethics mentors: (Prevention is better than cure) Everyday ethical issues
need to be addressed. Organizations could develop unit-based ethics mentors, who could
help their colleagues with those day-to-day concerns that come up. If you have someone
unit-based, you could address the conflicts earlier and from a preventive ethics
perspective, and therefore it could be readily resolved and not lead to further conflict.

7. Sponsor ethics journal or book clubs: Book clubs and journal clubs offer an opportunity to
focus on ethics. Reading articles helps employees to realize other people have experienced
similar feelings. A journal club can make it safe to talk about, because the discussion starts
with the article, although it can move into personal values.

8. Offer employee counseling services

Employees especially troubled by an ethical issue perhaps relating to something happening
in their personal lives or how the current situation rekindles past events may benefit from
individual sessions with a counselor from an employee assistance program.
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Code of Ethics
• A code of ethics is a guide of principles designed to help professionals conduct
business honestly and with integrity.
• A code of ethics document may outline the mission and values of the business or
organization, how professionals are supposed to approach problems, the ethical
principles based on the organization's core values and the standards to which the
professional is held.
• Both businesses and trade organizations typically have some sort of code of ethics
that its employees or members are supposed to follow.
• Breaking the code of ethics can result in termination or dismissal from the
organization.
• A code of ethics is important because it clearly lays out the rules for behavior and
provides the groundwork for a preemptive warning.
• Regardless of size, businesses count on their management staff to set a standard of
ethical conduct for other employees to follow.
• When administrators adhere to the code of ethics, it sends a message that universal
compliance is expected of every employee.

Objectives of Code of Ethics

1. Social and environmental commitment
We believe that as global corporate citizens, it is not enough to successfully offer useful
products and services. Our businesses should protect and improve our environment, promote
sustainable development, and conduct business affairs in a way that is socially responsible.

2. Quality of service
The Code of Ethics aims to ensure and safeguard the quality of service provided by the
signatories to the public we serve. We acknowledge that the establishment and maintenance
of high standards of practice are a fundamental responsibility to the public and the public
good, essential to winning and preserving customer confidence

3. Fair competition
The Code of Ethics focuses on orderly and courteous professional conduct among
signatories. In addition to stating the rules that govern our actions, the Code of Ethics is an
expression of shared fundamental values and represents a framework for decision-making.
We recognize the importance of integrity and discipline in our operations and how we relate
to each other. We pledge to practice the highest standards of accuracy, fairness and
professionalism.

4. Quality of information
One objective of this Code is to set a basis to provide consistent and clear information for
customers, partners and governments on metrics, statistics, charges and services, so that
those parties are better able to make informed decisions.
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Ethics Committee
• Companies should have a committee of independent non-executive directors who are
responsible for ensuring that systems are in place in the company to assure employee
compliance with the code of ethics.
• An ethics committee will be able to provide an overarching view of how the company
does its business.
• It will have responsibility for establishing and embedding corporate ethical values, the
ethics policy and code and ensuring and monitoring ethical business practice.

Role of Ethics Committee

1. Conflict Resolution All the Way Around: Members of an ethics committee often
get involved in setting up the initial guidelines and policies for behavior within an
organization. The process for new or revised rules may start with a conflict. The
problems may arise from conflicts between management and front-line staff or
between customers and the company.

2. Oversee Compliance to Company Standards: Businesses thrive in an atmosphere

of accountability. When each department, manager and employee works with the
best interests of the company in mind, success is more likely.

3. Conduct Reviews and Deliver Discipline: It’s often left to the ethics committee
members to dole out discipline when an employee violates company ethics rules.
At the very least, it’s the ethics committee that oversees disciplinary actions taken
by managers to ensure they are distributed equally and fairly.

4. Review Company Ethics Policies and Recommend Changes: While the ethics
committee may create the initial set of rules and regulations to govern company
ethics, it also reviews those policies on a regular basis and refines them when
necessary. The committee may get input from employees through surveys,
employee hotlines and questionnaires.

Ethics Training
• The purpose of Ethics Training is "to enable employees to identify and deal with
ethical problems developing their moral intuitions, which are implicit in everyday
choices and actions".
• Training in Ethics helps the members of an organization judge the moral legitimacy
of their decisions, enabling them to apply moral principles and values in business
decision-making.
• At the same time, ethics training fosters the employees' agreement and compliance
with the organization’s ethical vision representing a mutually-acceptable balance
between different stakeholders.
• Therefore, implementing ethics training does not only mean informing employees
about choices made by the management of the company, but also putting each
individual corporate member in a position to understand, interiorize and
contribute to the corporate mission achievement through a conscious orientation
of their own choices and everyday behaviour.
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Integrity Pact
• The Integrity Pact (IP) is a tool developed during the 1990s by Transparency
International (TI) to help governments, businesses and civil society intent on fighting
corruption in the field of public contracting. It consists of a process that includes an
agreement between a government or government department and all bidders for a
public sector contract.
• The IP sets out rights and obligations to the effect that neither side will pay, offer,
demand or accept bribes, or collude with competitors to obtain the contract, or while
carrying it out. In addition, bidders are required to disclose all commissions and similar
expenses paid by them to anybody in connection with the contract.
• If violations occur then sanctions will apply. These sanctions range from loss or denial
of contract, forfeiture of the bid or performance bond and liability for damages, to
blacklisting for future contracts on the side of the bidders, and criminal or disciplinary
action against employees of the government.
• Companies and governments alike stand to benefit from IPs. Companies can refrain
from bribing in the knowledge that their competitors are bound by the same rules,
while governments can reduce the high cost of corruption on procurement,
privatization and licensing.
• The IP has shown itself to be adaptable to many legal settings and flexible in its
application.
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MODULE 2

Corporate Governance
• Corporate governance is the system of rules, practices and processes by which a firm
is directed and controlled.
• Corporate governance essentially involves balancing the interests of a company's
many stakeholders, such as shareholders, management, customers, suppliers,
financiers, government and the community.
• Since corporate governance also provides the framework for attaining a company's
objectives, it encompasses practically every sphere of management, from action plans
and internal controls to performance measurement and corporate disclosure.
• Governance refers specifically to the set of rules, controls, policies and resolutions put
in place to dictate corporate behavior.
• Proxy advisors and shareholders are important stakeholders who indirectly affect
governance, but these are not examples of governance itself. The board of directors
is pivotal (importance) in governance, and it can have major ramifications for equity
valuation.

Corporate Governance and the Board of Directors

• The board of directors is the primary direct stakeholder influencing corporate
governance. Directors are elected by shareholders or appointed by other board
members, and they represent shareholders of the company.
• The board is tasked with making important decisions, such as corporate officer
appointments, executive compensation and dividend policy. In some instances, board
obligations stretch beyond financial optimization, when shareholder resolutions call
for certain social or environmental concerns to be prioritized.
• Boards are often made up of of inside and independent members. Insiders are major
shareholders, founders and executives.
• Independent directors do not share the ties of the insiders, but they are chosen
because of their experience managing or directing other large companies.
Independents are considered helpful for governance because they dilute the
concentration of power and help align shareholder interest with those of the insiders.

Good and Bad Governance

• Bad corporate governance can cast doubt on a company's reliability, integrity or
obligation to shareholders — which can have implications on the firm's financial
health.
• Tolerance or support of illegal activities can create scandals like the one that rocked
Volkswagen AG in 2015, when it was revealed that the firm had rigged engine
emissions tests in America and Europe.
• Volkswagen saw its stock shed nearly half its value in the days following the start of
the scandal, and its global sales in the first full month following the news fell 4.5%.
• Companies that do not cooperate sufficiently with auditors or do not select auditors
with the appropriate scale can publish spurious or noncompliant financial results. Bad
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executive compensation packages fail to create optimal incentive for corporate

officers.
• Corporate governance became a pressing issue following the 2002 introduction of the
Sarbanes-Oxley Act in the United States, which was ushered in to restore public
confidence in companies and markets after accounting fraud bankrupted high-profile
companies such as Enron and WorldCom.

• Good corporate governance creates a transparent set of rules and controls in which
shareholders, directors and officers have aligned incentives.
• Most companies strive to have a high level of corporate governance.
• For many shareholders, it is not enough for a company to merely be profitable, it also
needs to demonstrate good corporate citizenship through environmental awareness,
ethical behavior and sound corporate governance practices.

Need for Corporate Governance

1. Wide Spread of Shareholders:
Today a company has a very large number of shareholders spread all over the nation
and even the world; and a majority of shareholders being unorganized and having an
indifferent attitude towards corporate affairs. The idea of shareholder’s democracy
remains confined only to the law and the Articles of Association, which requires a
practical implementation through a code of conduct of corporate governance.

2. Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present-day-
times; with institutional investors (foreign as well Indian) and mutual funds becoming
largest shareholders in large corporate private sector. These investors have become
the greatest challenge to corporate managements, forcing the latter to abide by some
established code of corporate governance to build up its image in society.

3. Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have shaken public
confidence in corporate management. The event of Harshad Mehta scandal, which is
perhaps, one biggest scandal, is in the heart and mind of all, connected with corporate
shareholding or otherwise being educated and socially conscious.

4. Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of
reasonable price, better quality, pollution control, best utilization of resources etc. To
meet social expectations, there is a need for a code of corporate governance, for the
best management of company in economic and social terms.

5. Hostile Take-Overs:
Hostile take-overs of corporations witnessed in several countries, put a question mark
on the efficiency of managements of take-over companies. This factors also points out
to the need for corporate governance, in the form of an efficient code of conduct for
corporate managements.
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6. Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that there has
been a great increase in the monetary payments (compensation) packages of top level
corporate executives. There is no justification for exorbitant payments to top ranking
managers, out of corporate funds, which are a property of shareholders and society.

7. Globalization:
Desire of more and more Indian companies to get listed on international stock
exchanges also focuses on a need for corporate governance. In fact, corporate
governance has become a buzzword in the corporate sector. There is no doubt that
international capital market recognizes only companies well-managed according to
standard codes of corporate governance.

Scope / Features of Corporate Governance

1. Transparency: This means that the Board of Directors must release all relevant
information to the stakeholders. They must show all the necessary financial and
operational data to the stakeholders. They must not hide any important information
or maintain any secrecy.

2. Protection of Shareholders' Rights: The Board of Directors must protect the rights of
the stakeholders. They must protect all the stakeholders, especially the minority
stakeholders.

3. More Powers to CEO: The CEO must be given more powers so that he can approve
the companies plans and strategies independently.

4. Accountability: The CEO and the Board of Directors must be made accountable for
their actions to the stakeholders and to the entire society.

5. Based on Ethics: Corporate governance is based on ethics, moral principles and
values. So, the Board of directors must avoid unfair practices, cheating, exploitation,
etc.

6. Universal Application: Corporate governance has universal application. That is, it is
used by companies all over the world. It is given a legal recognition in many countries.
All companies must use corporate governance voluntarily.

7. Systematic: Corporate governance is very systematic. It is based on laws, procedures,
practices, rules, etc. All these laws are made to increase the wealth of the
shareholders and to protect the rights of all the stakeholders of the company.
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Evolution of Corporate Governance

• Corporate governance concept emerged in India after the second half of 1996 due to
economic liberalization and deregulation of industry and business. With the changing
times, there was also need for greater accountability of companies to their
shareholders and customers.
• The report of Cadbury Committee on the financial aspects of corporate Governance
in the U.K. has given rise to the debate of Corporate Governance in India.
Cadbury Committee [1] (U.K.), 1992 has defined corporate governance as such:
“Corporate governance is the system by which companies are directed and controlled.
It encompasses the entire mechanics of the functioning of a company and attempts
to put in place a system of checks and balances between the shareholders,
directors, employees, auditor and the management.”
• Need for corporate governance arises due to separation of management from the
ownership. For a firm success, it needs to concentrate on both economical and social
aspect. It needs to be fair with producers, shareholders, customers etc.
• It has various responsibilities towards employees, customers, communities and at last
towards governance and it needs to serve its responsibilities at the best at all aspects.
• The “corporate governance concept” dwells in India from the Arthshastra time instead
of CEO at that time there were kings and subjects. Today, corporate and shareholders
replace them but the principles still remain same, unchanged i.e. good governance.
• 20th century witnessed the glossy of Indian Economy due to liberalization,
globalization, and privatization. Indian economy for the 1st time here was together
with world economy for product, capital which resulted into world of capitalization,
corporate culture, business ethics which was found important for the existence of
corporation in the world market place.

Perspectives of Corporate Governance

Mainly we will deal with the perspectives of corporate governance from three points of
view:
1. Shareholders (Capital Market) – Control perspective
2. Organization (Management) – Control perspective
3. Stakeholders – Control perspective

1. Shareholders: as providers of a risk capital have final control on resource allocation

decisions.

2. Organization: have the main purpose is to control i.e. through skills, intelligence,
innovation, ideas, professionalism etc. Therefore, here in this perspective, resource
allocation decision should rest with them.

3. Stakeholders: here, it says that for long term business, only shareholders value
maximization should not be seen as sole goal but it should be for well being of all groups
with stake of long run of business and it should be goal of corporate governance.
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Development of Corporate Governance in India

• Corporate governance has existed since past but it was in different form. During Vedic
times kings used to have their ministers and used to have ethics, values, principles and
laws to run their state but today it is in the form corporate governance having same
rules, laws, ethics, values, and morals etc. which helps in running corporate bodies in
the more effective ways so that they in the age of globalization become global giants.

• Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance are
some of the global giants which have their flag of success flying high in the sky due to
good corporate governance.

• Toady, even law has a great role to play in successful and growing economy.
Government and judiciary have enacted several laws and regulations like SEBI, FEMA,
Cyber laws, Competition laws etc and have brought several amendments and repeal
the laws in order that they don’t act as barrier for these corporate bodies and
developing India. Judiciary has also helped in great way by solving the corporate
disputes in speedy way.

• Corporate bodies have their aim, values, motto, ethics and principles etc which guide
them to the ladder of success. Big and small organizations have their magazines
annual reports which reflect their achievements, failure, their profit and loss, their
current position in the market.

• A few companies have also shown awareness of environment protection, social

responsibilities and the cause of upliftment and social development and they have
deeply committed themselves to it. The big example of such a company can be of
Deepak Fertilizers and Petrochemicals Corporation Limited which also bagged 2nd
runner up award for the corporate social responsibility by business world in 2005.

• Under the present scenario, stakeholders are given more importance as to

shareholders, they even get chance to attend, vote at general meetings, make
observations and comments on the performance of the company.

• With increase in interdepence and free trade among countries and citizens across the
globe, internationally accepted corporate governance standards are of paramount
importance for Indian Companies seeking to distinguish themselves in global
footprint. The companies should always keep improving, enhancing and upgrading
themselves by bringing more reliable integrated product and service quality. They
should be more transparent in their conduct.

• Hence corporate governance is a means and not an end, corporate excellence should
be end.
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Elements of Good Corporate Governance

1. Rule of Law
Good governance requires fair legal frameworks that are enforced by an impartial regulatory
body, for the full protection of stakeholders.

2. Transparency
Transparency means that information should be provided in easily understandable forms and
media; that it should be freely available and directly accessible to those who will be affected
by governance policies and practices, as well as the outcomes resulting therefrom; and that any
decisions taken and their enforcement are in compliance with established rules and regulations.

3. Responsiveness
Good governance requires that organizations and their processes are designed to serve the best
interests of stakeholders within a reasonable timeframe.

4. Consensus Oriented
Good governance requires consultation to understand the different interests of stakeholders in
order to reach a broad consensus of what is in the best interest of the entire stakeholder group
and how this can be achieved in a sustainable and prudent manner.

5. Equity and Inclusiveness

The organization that provides the opportunity for its stakeholders to maintain, enhance, or
generally improve their well-being provides the most compelling message regarding its reason
for existence and value to society.

6. Effectiveness and Efficiency

Good governance means that the processes implemented by the organization to produce
favorable results meet the needs of its stakeholders, while making the best use of resources –
human, technological, financial, natural and environmental – at its disposal.

7. Accountability
Accountability is a key tenet of good governance. Who is accountable for what should be
documented in policy statements. In general, an organization is accountable to those who will
be affected by its decisions or actions as well as the applicable rules of law.

8. Participation
Participation by both men and women, either directly or through legitimate representatives, is
a key cornerstone of good governance. Participation needs to be informed and organized,
including freedom of expression and assiduous concern for the best interests of the organization
and society in general.
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MODULE 3

Shareholders

• A shareholder, commonly referred to as a stockholder, is any person, company, or

institution that owns at least one share of a company’s stock.

• Because shareholders are a company's owners, they reap the benefits of the company's
successes in the form of increased stock valuation. If the company does poorly and the
price of its stock declines, however, shareholders can lose money.

• Unlike the owners of sole proprietorships or partnerships, corporate shareholders are

not personally liable for the company's debts and other financial obligations. If the
company becomes insolvent, its creditors cannot demand payment from shareholders.

• Although they are owners of the company, shareholders do not manage operations. A
board of directors is appointed to govern the activities and operations of the company.

Common vs. Preferred Shareholders

• Many companies elect to issue two types of stock: common and preferred. Most
shareholders are common stockholders primarily because common stock is less
expensive and more plentiful than preferred stock.

• Common stock is generally more volatile and more likely to generate profits compared
to preferred stock.

• Preferred stockholders generally have no voting rights because of their preferred status.
They receive fixed dividends, generally larger than those paid to common stockholders,
and their dividends are paid before common shareholders.

• These benefits make preferred shares a more useful investment tool for those primarily
looking to generate annual investment income.

Rights of Shareholders

1. The Right to Share in Profitability

As partial owners of the company, common shareholders have the right to participate in a
company's profitability for as long as they own the shares. Division of profits is based on the
number of shares owned by a shareholder, and gains can be substantial to shareholders over
time.

2. The Right to Influence Management

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Common shareholders also have the right to influence company management through the
election of a company's board of directors. In smaller companies, the president or chairperson
of the board is typically the individual who owns the largest share of common stock. Larger
companies may have greater diversity in the common shareholder investor pool.

3. The Right to Buy New Shares

Common shareholders also have preemptive rights. If the company issues new shares to the
public, current shareholders have the right to buy a specific number of shares before the stock
is offered to new potential shareholders.

4. To attend general meetings and vote

All shareholders have the right to receive notice of general meetings and attend them. This
includes both Annual General Meetings and Extraordinary General Meetings, but does not
extend to meetings of the company directors.

5. The Right to Vote

Arguably, the greatest right for common shareholders is the ability to cast votes in a company's
annual or general meeting. Major shifts within a publicly traded company must be voted on
before changes can take place, and common shareholders hold the right to vote either in person
or via proxy.

6. The Right to Sue for Wrongful Acts

Common shareholders who feel their rights have been violated also have the right to sue the
issuing company. A court has the power to enforce common shareholder rights when
corporations are found to have violated their rights, either through a single shareholder
complaint or as a class-action lawsuit.

7. To receive a share of the company's profits

The company can choose to distribute profits by payment of a dividend to shareholders. A
dividend can only be paid from profits and, even if the company is profitable, there is no
obligation on the directors to declare a dividend.

8. To receive certain documents from the company

The main documents of interest to shareholders will be the company’s annual report and
accounts. Each shareholder has the right to receive these when they’re issued generally and on
request. Shareholders also have the right to receive a copy of any written resolution proposed
by either the directors or shareholders.

9. To inspect statutory books and constitutional documents

The Companies Act 2006 gives shareholders the right to ask to see a number of documents.
For example, these include:
Ø The Register of Members (under section 116 of the Companies Act)
Ø The terms of directors’ service agreements (section 229)
Ø The terms of directors’ indemnity provisions (section 238)
Ø Records of resolutions and minutes of general meetings

10. To any final distribution on the winding up of the company

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If the company is wound up, creditors will generally all need to be paid first out of any funds
available. If, however, there are then surplus funds, these can be shared amongst the
shareholders – usually in proportion to the number of shares they hold. However, different
share classes may have different rights to a distribution in these circumstances.

Challenges of exercising Shareholders rights

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Role of Investors Association

Corporate Governance & Related Party Transactions

Meaning:

• Transactions between a firm and its own managers, directors, principal owners or
affiliates are known as related party transactions. Such transactions, which are diverse
and often complex, represent a corporate governance challenge.
• A related-party transaction is a business deal or arrangement between two parties
who are joined by a preexisting special relationship. For example, a business
transaction between a major shareholder and a corporation

“Related Party”, with reference to a company, means—

1) a director or his relative;

2) a key managerial personnel or his relative;
3) a firm, in which a director, manager or his relative is a partner;
4) a private company in which a director or manager is a member or director;
5) a public company in which a director or manager is a director or holds along with his
relatives, more than 2% of its paid-up share capital;
6) any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a
director or manager;
7) any person on whose advice, directions or instructions a director or manager is
accustomed to act.
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Transactions which are deemed as related party transactions.

Institutional Investor
An institutional investor is an entity which pools money to purchase securities, real property,
and other investment assets or originate loans.

Types of Institutional Investor

Institutional investors include banks, insurance companies, pensions, hedge funds, REITs,
investment advisors, endowments, and mutual funds.
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Role of Institutional Investor

1) Fiduciary duty: The culture, activities and role of all institutional investors should focus
on delivering value to the benefit of beneficiaries or clients over the appropriate time-
horizon.

2) Independent oversight: Institutional investors should be led by boards or other

governance structures that act independently and without bias, advancing beneficiary
or client interests as their primary obligation.

3) Capacity and effective management: Institutional investors should be led by boards

and staff with the appropriate capacity and experience to oversee effectively and
manage all relevant activities in the interests of beneficiaries or clients.

4) Conflicts of interest, codes of ethics, compliance: Institutional investors should

understand, minimize and manage the conflicts of interest that they face and behave
ethically, ensuring that they maintain focus on advancing beneficiary or client
interests and disclosing any conflicts transparently to them.

5) Appropriate remuneration structures: Institutional investors’ pay structures should

reinforce their culture and focus on advancing beneficiary or client interests over
appropriate time-horizons, and should be transparently communicated to
beneficiaries or clients.

6) Transparency and accountability: Institutional investors should be transparent and

open with their beneficiaries or clients so as to be fully accountable for the effective
delivery of their duties.
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MODULE 4

National Foundation For Corporate Governance

www.nfcg.in