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Module 9 - Corporate Governance

This document provides an overview of corporate governance. It discusses the concept, key players, principles, and essentials of good corporate governance. It also covers the evolution of corporate governance in India, the US, the UK, and Japan. The regulation of corporate governance in India is outlined as well as important issues related to corporate governance such as agency costs, investment decisions, ethical climate, and transparency.

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Suraj Agarwal
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118 views13 pages

Module 9 - Corporate Governance

This document provides an overview of corporate governance. It discusses the concept, key players, principles, and essentials of good corporate governance. It also covers the evolution of corporate governance in India, the US, the UK, and Japan. The regulation of corporate governance in India is outlined as well as important issues related to corporate governance such as agency costs, investment decisions, ethical climate, and transparency.

Uploaded by

Suraj Agarwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Corporate Governance

Sandeep Goel
Chapter 2

CORPORATE
GOVERNANCE:CONCEPT,
SCOPE & REGULATION

2
CONCEPT OF CORPORATE GOVERNANCE
Corporate governance is concerned with the standards of behaviour and conduct
expected from directors and other senior executives (including the finance manager) in
directing and controlling the affairs of a company.

Features of corporate governance


Legal obligation
Fair and transparent management
Relationship with stakeholders
Protection of shareholders' interests
Essence of management
Universal application
Means to end activity
All-round process

3
Key players of corporate governance
There are three main players of corporate governance structure:
Board of Directors
Senior Management
Shareholders

RATIONALE OF CORPORATE GOVERNANCE


Equitable distribution of resources
Easy access to capital
Reduces conflicting interests
Investors’ confidence
Corporate image
Value addition
Growth and development
Risk mitigation
Globalization

4
PRINCIPLES OF CORPORATE GOVERNANCE

5
ESSENTIALS OF GOOD CORPORATE GOVERNANCE
There is no single model of good corporate governance. However, as discussed above, OECD has
formulated some important principles of good corporate governance. Based on them following attributes
can be laid down as characteristics of good corporate governance:

1. Clear Strategy

2. Organizational Discipline

3. Effective Risk Management

4. Fairness to all Stakeholders

5. Transparency

6. Accountability

7. Self-Evaluation

8. Corporate Social Responsibility

6
EVOLUTION OF CORPORATE GOVERNANCE
a) India
Phase 1: Ancient Phase: The concept of corporate governance in India goes back to old
Arthshastra days (third century) when there were kings and subjects instead of CEOs and
shareholders of present times.
Phase 2: 1990s-2000s: The corporate governance gained momentum in India during 1990s
in the wake of economic liberalization, globalization, and deregulation of industry and
business. With the changing times, the need was felt for greater accountability of companies
to their stakeholders, including shareholders. Thus, it was introduced by the Confederation of
the Indian Industry (CII) as a voluntary measure to be adopted by the Indian companies in
1998.
Phase 3: Post 2013: The corporate frauds like Satyam in 2009 and others during the decade
proved that the system of existing regulations was not satisfactory and there was strong need
for improved corporate governance. This how the Companies Act, 2013, which replaced the
erstwhile Companies Act, 1956, was notified by the Government of India for ensuring higher
standards of transparency and accountability, and aligning the corporate governance
practices in India with global best practices.

7
Development of Corporate Governance in India

8
b) US
The corporate organizations in the US during 1960s and 1970s were characterized by strong control of
managers and weak owners, resulting into agency issues.
During the 1980s, the power of managers was challenged by a variety of new developments, such as
slowdown of macroeconomic growth, increasing foreign competition, high interest rates, and stagnated
stock market returns. This climate of economic crisis led to the shift of power towards investors due to
the rise of new types of institutional investors and the advent of hostile takeovers. This period saw the
birth of Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1985 to
check corporate failures and improve organizational performance and governance.
By the early 2000s, most of the key pillars in the U.S. “model” of corporate governance were in place,
setting an example of “good” corporate governance practices around the word.
The scams of high profile companies like the energy giant Enron and the telecom heavyweight
WorldCom in 2001 warranted a re-examination of the system of corporate governance. Sarbanes –
Oxley Act (SOX), 2002 was introduced to address all the issues associated with corporate failures to
achieve quality governance and to restore investor’s confidence.

9
c) UK
Numerous scandals and financial collapses in the UK in the late 1980s and early 1990s made the UK
Government to recognize insufficiency of existing legislation. Thus the Cadbury Committee was set up
under Sir Adrian Cadbury on the financial aspects of corporate governance, by the London Stock
Exchange in May 1991.
In its report and associated "Code of Best Practices" (1992), it spelt out the methods of governance
needed to achieve a balance between the essential powers of the Board of Directors and their proper
accountability. Subsequently, there were committees, viz. Paul Ruthman Committee, Ron Hampel
Committee Greenbury Committee, which came out with added or refined codes of corporate
governance.
In 2008, the banking crisis and the effective nationalisation of several UK banks led the government for
a new version, this time with a new title – the UK Corporate Governance Code. It applies to company
accounting periods beginning on or after 29 June 2010.

10
d) Japan
Corporate governance of listed companies in Japan is regulated by the Commercial code. This
controls the relationship between management and shareholders, and has been revised several times
so as to strengthen the governance framework.
In 1993, it introduced the kansayaku system, which required a company to have a board with a
minimum of three statutory auditors (kansayaku), including one outside auditor. In addition, there was
greater emphasis placed on increasing shareholders’ rights. Earlier, firm management was monitored
by the ‘main bank system’ in which a firm’s bank was usually both its major shareholder and primary
lender.
In 2001, the Commercial Code got revised again with the objective of improving corporate governance.
It necessitated better qualifications for kansayaku, eagerness to perform more thorough supervision
and deploy greater authority.
In 2002, the government introduced a new corporate governance system that enabled Japanese
companies to choose between the traditional kansayaku system and a new ‘committees system’.
Under the committees system, three committees of directors are formed: an auditing committee, an
appointment committee and a compensation committee.

11
REGULATION OF CORPORATE GOVERNANCE IN INDIA
Broadly speaking, the corporate governance mechanism in India is regulated by the following
regulations:

1. The Companies Act, 2013


2. SEBI’s Revised Clause 49 of the Equity Listing Agreement of Stock Exchanges
3. SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations 2018
4. Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI)
5. Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI)

12
IMPORTANT ISSUES OF CORPORATE GOVERNANCE
1. Agency costs
2. Investment decisions
3. Ethical climate
4. Holistic view
5. Legal compliance
6. Financial reporting
7. Transparency and accountability
8. Shareholders’ activism
9. People management
10. Global outreach

________________________________________________________________________________

13

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