cg for class , revised, feb 11

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Corporate Governance Issues -Abroad / India

ByProf. Jiban K Mukhopadhyay

( Fmr. Chief Economic Adviser/ Chief WTO

Officer, Tata Group)

(Email ID: [email protected])Mobile : +91 98 219 209 28

SPJIMR Feb, ‘1111

mailto:[email protected]

mailto:[email protected]



I. C G Issues: Abroad / India

- Evolution

- Committees

- Definitions

- TBL & Sustainability

- CG Initiatives in India

II. Board Architecture of Corporates

(Ref. Allan Blake)

Modules

22



Corporate Governance in a nutshellCorporate Governance in a nutshell

“ “Corporate Governance is the system byCorporate Governance is the system by

which companies are directed and controlled…” which companies are directed and controlled…”

-- Sir Adrian CadburySir Adrian Cadbury

Four Pillars of Corporate GovernanceFour Pillars of Corporate Governance- Accountability - Transparency- Accountability - Transparency

- Fairness - Responsibility- Fairness - Responsibility

Elements of good Corporate GovernanceElements of good Corporate Governance

- Good board practices - Effective controls- Good board practices - Effective controls

- Transparent disclosure - Board Commitments- Transparent disclosure - Board Commitments

- Defined share owner rights- Defined share owner rights33



C G - EvolutionC G - Evolution

2020thth

c:c:-- The Great Wall Street Crash, 1929 – many legalThe Great Wall Street Crash, 1929 – many legal

experts emphasized on changing role of modernexperts emphasized on changing role of modern

corporation in society (e.g. Berle and Means, Thecorporation in society (e.g. Berle and Means, The

Modern Corporation and Private Property, 1932.Modern Corporation and Private Property, 1932.-- Ronald Coase wrote his famous, “The Nature of theRonald Coase wrote his famous, “The Nature of the

Firm, 1937”.Firm, 1937”.

-- Post WW II, emergence of MNCs , several publicationsPost WW II, emergence of MNCs , several publications

from HBS- Alfred D Chandler Jr, Myles Mace , Elizabethfrom HBS- Alfred D Chandler Jr, Myles Mace , ElizabethMaclver, Lorsch and MacIver : corporations haveMaclver, Lorsch and MacIver : corporations have

dominant control without adequate accountability /dominant control without adequate accountability /

monitoring by the board.monitoring by the board.

55



C G - EvolutionC G - Evolution

1970s:1970s:-- Significant debate on CG in USA / World.Significant debate on CG in USA / World.

-- Eugene Fama and Michael Jensen discussedEugene Fama and Michael Jensen discussed

Agency Theory and Corporate Governance,Agency Theory and Corporate Governance,

1983, further highlighted by Kathleen1983, further highlighted by Kathleen

Eisenhardt, 1989.Eisenhardt, 1989.

First half of 1990s:First half of 1990s:

- A number of CEO dismissals by their boards:- A number of CEO dismissals by their boards:IBM / Kodak / Honeywell.IBM / Kodak / Honeywell.

- CalPERS – led a web of institutional- CalPERS – led a web of institutional

shareholder activism.shareholder activism.66



CG - EvolutionCG - Evolution1997:1997:

-- East Asian financial meltdown – lack of CGEast Asian financial meltdown – lack of CGmechanisms – weakness of the institutions .mechanisms – weakness of the institutions .

Early 2000s:Early 2000s:

-- Massive bankruptcies / criminal malfeasance byMassive bankruptcies / criminal malfeasance byEnron/ Worldcom/ Adelphia Communication, AOL,Enron/ Worldcom/ Adelphia Communication, AOL,

Arthur Andersen, Global Crossing , Tyco.Arthur Andersen, Global Crossing , Tyco.

- The enactment Sarbanes – Oxley Act, 2002- The enactment Sarbanes – Oxley Act, 2002

-

No. of committees on CG world wide.No. of committees on CG world wide.2008/092008/09 ::

- Financial meltdown & recession since Sept 09-- Financial meltdown & recession since Sept 09-

emergence of new CG initiatives.emergence of new CG initiatives.77



Corporate Governance –Corporate Governance –

Global InitiativesGlobal Initiatives A number of Committees:

Sir Adrin Cadbury Committee on Financial Aspects of

Corporate Governance, 1992

Mervyn K. King Committee on Corporate Governance,

1994

Greenbury Committee on Directors Remuneration

CalPERS – Global Corporate Principles,1996

Business Round Table,..1997

Hampel Committee, 1998

88




Global PerspectivesGlobal Perspectives

Blue Ribbon Committee on Audit Committees, 1999

Combined Code of Best Practice ( LSE), 1998

OECD Principles…, 1999

Derek Higgs Committee, 2002

Sarbanes Oxley Act, 2002

as so on

* Widespread initiatives all over the world due to many lapses

of the corporates

• Recommendations are being implemented… 99




A PerspectiveA Perspective“ A code of corporate governance cannot be imported from outside,it has to be developed based on a country’s experience. There

cannot be any compulsion on the corporate sector to follow a

particular code. An equilibrium should be struck so that corporate

governance is not achieved at the cost of growth of the corporate sector.”

- Sir Adrian Cadbury

________________________________________________

•On-going Boardroom activism for arriving at the “equilibrium”…

• The aftermath of financial crisis / recession - Emergence of CG

Initiatives

1111



Corporate Governance – Definitions(Abroad)

“… the conduct of business in accordance with shareholder’s desires,which generally is to make as much money as possible, while conforming

to the basic rules of the society embodied in law and local customs.”- Milton Friedman, Noble Laureate in Economics

“Corporate Governance is about promoting corporate fairness,

transparency and accountability” – James D. Wolfensohn, Fmr.

President World Bank

“A system by which business corporations are directed and controlled”- OECD

“… the way a company is organized and managed to ensure that all

financial stakeholders … receive their fair share of a company’searnings and assets” – Standard & Poor 1212

C G fi i i ( i )



Corporate Governance – Definitions (India)

“Corporate Governance deals with the laws, procedures, practices and

implicit rules that determine a company’s ability to take informed

managerial decisions vis – a – vis its claimants – in particular, its

shareholders, creditors, customers, the State and employees…”

- CII – Desirable Corporate Governance Code

“Strong Corporate Governance is indispensable to resilient and vibrant

capital markets and is an important instrument of investors protection. It is the blood that fills the veins of transparent corporate disclosure and

high quality accounting practices. It is a muscle that moves a viable and

accessible financial reporting structure.” – Kumar Mangalam Birla

Committee1313

C G D fi i i (I di )



“Corporate Governance is the expectable by management of the

inalienable rights of the shareholders as the true owners of corporation

and of their own role as trustees on behalf of the shareholders. It is

about commitment to values, and ethical business conduct and about

making a distinction between personal and corporate funds in themanagement of a company” – N. R. Narayan Murthy Committee…

“Corporate Governance is the application of the best management

practices, compliance of law in true letter and sprit and adherence to

ethical standard for effective management and distribution of wealth and

discharge of social responsibility for sustainable development of all

stakeholders” – The Institute of Company Secretaries of India

Corporate Governance – Definitions (India)

1414



C G-taking care of Triple BottomC G-taking care of Triple Bottom

Line (TBL)Line (TBL)Econ Social Environment

• Sales (Top line)• Profit/ROI(Bottom line)• Taxes paid• Transaction

Flows…..• Sales creates –

income generated

• Labor practices• Communityimpact• Econ Cost-Benefit….• Productresponsibilities•

Human Rights

• Air/Water Quality• Waste/Pollutanttreatment• Global Warmingrelated issues- EnergyConservation

- Non fossil fueltechnology

Based on John Elkington, Cannibals With Forks 19971515



Sustainability in all aspects—TBL

• Taking care of not only top and bottom lines but also recycling thewealth created back to the society (TBL)

• “Business needs sustainable planet for its own survival”

-John Browne, CEO/BP

• Tata Trusteeship concept- an unique model

• Hershey Food Corporation/Trust.

• Ecomagination- GE/2005,Jack Walch to Jeffry Immelt.

• Du Pont – “Sustainability philosophy”…200 yrs ago.

• J&J Credo,1943 ___________________________________________________________________

• Corporate Social Responsibilities –not “philanthropy” , it is business

itself

1616



+ - + +

- - - +

Sustainability in all aspects—Sustainability in all aspects—

TBLTBL

Profitability

Social Benefit

1717



StakeholdersStakeholders

A set of systems/ processes to ensure the best interest of allstakeholders:

i. Internal: Promoters, directors, management /executives

workers,

ii. External: Shareholders, customers, lenders, dealers, vendors,

bankers, government, regulators, the

community…

• Maximisation of shareholders’ wealth is the cornerstone of

good governance.

• How to maintain an equilibrium of good corporate governance

& the steady growth of the company? - Boardroom dynamism1818



India : Changing BusinessIndia : Changing Business

EnvironmentEnvironment

Sharp discontinuities between the closed economy

model of the past and increasing forces of

globalization of today.

Role of government - shifting from the direct

control of the economy towards providing a rule

based regulatory frame work.Reforms have unleashed opportunities for business

leading to rapid growth of entrepreneurial initiative

1919



India: Changing BusinessIndia: Changing Business


In a globally competitive environment, Business needs to take

care of a large no. of issues; viz.

Increasing and sustaining consumer base

Benchmarking in cost and quality

Rewarding and enthusing human resources

Satisfying all stakeholders, particularly shareholders with

increasing profitability

Creating investor confidence

Building capacities & capabilities all around.

The unfortunate Post Satyam Saga.2020



India: Changing BusinessIndia: Changing Business


Overall transparency and accountability

Consistency in achievements, irrespective of

the changes in political and economic

environment, etc.

In such a complex and dynamic environment,In such a complex and dynamic environment,

corporate governance has assumed seriouscorporate governance has assumed serious

importanceimportance

An experience globally sharedAn experience globally shared2121



India: Factoring CorporateIndia: Factoring Corporate

GovernanceGovernance Due to several market scams, Government has been under

pressure to take drastic action enforcing good corporate

governance.

Based on the recommendation of several committees on

Corporate Governance, the Companies Act. 1956 has been

amended many times

New legislation (2008 Bill in Parliament) replacing the old

Companies Act, 1956 is yet to be done.

SEBI Clause 49 of the listing norms.

- Ongoing revisions

2323

SEBI Cl 49 CG C liSEBI Cl 49 CG C li



SEBI Clause 49 : CG ComplianceSEBI Clause 49 : CG Compliance

CriteriaCriteria

Mandatory & Non- mandatory ComplianceMandatory & Non- mandatory Compliance with the Regulatory normswith the Regulatory normsfor Corporate Governance as covered under the SEBI Clause 49 onfor Corporate Governance as covered under the SEBI Clause 49 onCorporate Governance.Corporate Governance.

13 major Mandatory criteria with over 21 sub – criteria.13 major Mandatory criteria with over 21 sub – criteria.

++

8 Non - mandatory compliance criteria (eg. remuneration8 Non - mandatory compliance criteria (eg. remunerationcommittee, whistle blower policy, etc) .committee, whistle blower policy, etc) .

++

CG PracticesCG Practices Beyond ComplianceBeyond Compliance : 23 criteria (e.g. company: 23 criteria (e.g. company philosophy, values and obligations, goals and objectives, contribution of philosophy, values and obligations, goals and objectives, contribution of independent directors, board level/ other committees, risk management,independent directors, board level/ other committees, risk management,human resource development, environment protection, innovation, CSR,human resource development, environment protection, innovation, CSR,etc ).etc ).

2424



SEBI Clause 49 -the listing normsSEBI Clause 49 -the listing norms

• Listed companies in India (with paid-up capital of Rs.3 crore and

more) have to comply with the corporate governance related

provisions of Clause 49 of the Listing Agreement of Stock

Exchanges. (2004)

Implemented from January 1, 2006

___________________________________________________

• Legal Compliance2525



SEBI Clause 49 - ProvisionsSEBI Clause 49 - Provisions

Composition of Board of Directors: 50% non-executive directors

Exact number of Independent Directors (ID) would depend

whether the Chairman is non-executive(= at least one third of

board should be IDs) or executive (= at least half of the board

member be IDs)

A director shall be a member in no more than 10 committees or

act as Chairman in no more than 5 committee

Number of other compliances regarding: Renumaration

/Compensation, Code of Conduct, Audit Committee, Disclosures,

Management , shareholders etc.2626

SEBI Cl 49 B d f



SEBI Clause 49 :Board of Directors

Board – Role and Power

Independence

Resources

Skills

Appointments

Induction & training

Legislation/ Regulations

Management Environment

Code of Conduct

Strategy Setting

Business & community obligation

Financial & operational reporting

Monitoring the Board performance

Audit Committees

Risk Management

2727



SEBI Clause 49 provisionsSEBI Clause 49 provisions

Board of directors:

•Composition

•Non executive/ Independent Directors

•Remuneration

•Board procedurals•Management

•Code of Conduct etc.

Audit committee:

•Qualified and independent member

•Role & power

•Meetings•Review of Information etc.

2828



SEBI Clause 49 ProvisionsSEBI Clause 49 Provisions

Shareholders

CEO/CFO Certification

Report on CG- To be published in the Annual Report

Compliance

(SEBI website for details)

3030



India: Management & BoardIndia: Management & Board

GovernanceGovernance

The board of directors has to exercise strategic oversight over

business operations:Measuring & rewarding management’s performance.Ensure compliance with the legal framework.

Integrate financial accounting and reporting systems.Credibility in the eyes of the stakeholders through proper &

timely disclosures.

Board’s responsibilities inherently demand the exercise of judgement. Therefore, the Board necessarily has to be vested

with a resonable level of discretion.

3131



India: Company LawIndia: Company Law

Corporates have to function as economic persons within the unionof India in a manner that contributes to the social & economic well

being of the country as a whole & as such must be subject to the laws

pronounced by the Parliament for the welfare of its citizens.

Corporate governance goes far beyond the access to capital.

Taking a narrow view of the Corporate Governance as limited to

public issue of capital & the processes that follow would be to the

detriment of corporate entities themselves.

_____________________________________________________

Harmonious blend of the State & the regulatory agencies – the

environment for the corporates to function.3232



India: The Companies Act 1956India: The Companies Act 1956

The Companies Act, 1956, based on the recommendations of

Bhabha Committee Report, 1950, repealing the companies act,

1913

The Companies Act, 1956 Undergone 24 amendments Major amendments in 1988, 1998, 2000, 2002 ( based on

Eradi Committee).

3333



Unsuccessful attempts were made in 1993, 1997 to replace thepresent Companies Act with a new law.

The Companies ( Amendment) Bill, 2004, containing important

provisions regarding corporate was introduced, but was heldback.

Piecemeal reforms continued through amendments, but

comprehensive, new legislation has not yet been possible.

India: The Companies Act 1956India: The Companies Act 1956

3434

I di C GI di C t G



India: Corporate GovernanceIndia: Corporate Governance

(Need for New Legislation)(Need for New Legislation) The proposed Companies (Amendment) Bill, 2003 provides anumber of significant amendments relating to independence of

directors, audit committee, meeting, accounts, audit holding and

subsidiary companies, accountability of officers role. Major

proposals are:Piecemeal reforms confined through amendments, but

comprehensive & new legislation yet to be enacted.

The Concept paper on New Company law in the legislative format

Dr J J Irani Committee evaluated the suggestions made in

the Concept Paper.

The new company law bill,2008 is yet to be legislated before Lok Sabha.

3535



Cyber Laws: A PerspectiveCyber Laws: A Perspective

Separating the cyber world from “real world” of Separating the cyber world from “real world” of atomsatoms

Territorially based law making / enforcing – manyTerritorially based law making / enforcing – many

challengeschallenges Common Cyber crimesCommon Cyber crimes

Why Cyber law/s ? - basic approaches -Why Cyber law/s ? - basic approaches -

national/globalnational/global

Cyber laws in IndiaCyber laws in India Internet – new/complex legal issuesInternet – new/complex legal issues

Cyber ethics/ governanceCyber ethics/ governance3636

J J I i C itt R tJ J I i C itt R t



J J Irani Committee ReportJ J Irani Committee Report

Government has taken up a fresh exercise for the

comprehensive revision of the Companies Act, 1956 on the

basis of broad based consultative exercise. Thus, a concept paper on the company law has been drawn

up in the legislative format. Exposed for viewing on the electronic media for

feedback Comments & suggestions from a large no. of

professional bodies received. Government set up Dr. J J Irani Committee on Dec. 2,

2004 to evaluate the concept Papers as well as the

large no. of comments received.

3737



JJIR: Management & BoardJJIR: Management & Board

GovernanceGovernance

Obligation to constitute Board of Directors i.e;

Obligation on the part of a Company to constitute &

maintain a Board of Directors as per the law to discloseparticulars of the directors so appointed in the public domain

through statutory filing of information.

________________________________ Covers all aspects of Corporate Governance

3838

JJIR: Management & BoardJJIR: Management & Board



JJIR: Management & BoardJJIR: Management & BoardGovernanceGovernance

Law should include an enabling provision to prescribespecific categories of companies for which different minimum

norms may be laid down.

Limit to maximum no: of directors should be decided by the

company by/in the Articles of Association.

Appoint Managing director who “suits best for the job”.It can

be from within India, or from other countries with the

approval of Central Government under the Companies Act.

No age limit need to be precribed as per the law. There

should be adequate disclosure of age in the companies

documents.3939



JJIR:JJIR: Corporate GovernanceCorporate Governance

In the current national ( post reform) & international ( i.e

globalised) context, there is a need for a new simplified and

relevant Corporate law.

In a highly competitive & technology driven businessenvironment when corporates require greater autonomy of

operation & opportunity of self regulation with optimum

compliance costs, there is a need to bring about transparency

through better disclosures & greater responsibility for thecorporates.

4040

JJIR C t GJJIR: Corporate Governance



JJIR: Corporate GovernanceJJIR: Corporate Governance

Ensuring easy & unambiguous interpretation enabling greater

procedural flexibility through rule making , so that with thechange of time, the legal framework may adopt without

amendment of the substantive or time consuming enactment.

Addressing the experience of the Stock Market scams of the

1990s, the phenomenon of vanishing companies was

incorporated in the recommendations of the joint Parliamentary

Committee on Stock Market Scams.

Enabling measures to protect the interest of stake holders &investors, including small investors through legal basis for sound

corporate governance practices.

4141



JJIR: Corporate GovernanceJJIR: Corporate Governance

Providing a framework for responsible self regulation through

determination of corporate matters through decisions by

shareholders in the background of clear accountability for such

decisions.

Recognizing the relevance of climate that: Encourages people to set up businesses & make them grow, Addresses the practical concerns of small businesses so as to

enhance confidence of people in such companies, Promote int’l competitiveness of Indian businesses & Provide flexibility to meet the challenges of the global

economy.

4242



Presence of IDs for balancing various interestsPresence of IDs for balancing various interests IDs would bring in an element of objectivity toIDs would bring in an element of objectivity toboard process in the General interest of theboard process in the General interest of thecompany to the benefit of rivalry interest of thecompany to the benefit of rivalry interest of thesmaller shareholders.smaller shareholders.

Independence –not from “Promoter interests”- butIndependence –not from “Promoter interests”- butfor the vulnerable shareholders…for the vulnerable shareholders…

Pragmatic recommendations… when will these be implemented ? Pragmatic recommendations… when will these be implemented ?

JJIR: Independent Directors (ID)

4343



The proposed Company Law should recognize the

principleof IDs & spell out their role, qualifications &

liability.

However,the role of IDs will vary from company tocompanydepending on the size & type of the company.

No single prescription to suit all companies

Thus, the no: of IDs may have to be prescribed

through rules for different categories of company.

But a definition of ID should be incorporated in the

company Law.


4444



The committee suggests that “a minimum of one third of the totalThe committee suggests that “a minimum of one third of the total

no of Directors should be adequate for a company havingno of Directors should be adequate for a company having

significant public interest, irrespective of whether the Chairman issignificant public interest, irrespective of whether the Chairman is

executive or non executive.executive or non executive.

The above should be firstly for public listed companies & The above should be firstly for public listed companies &

companies accepting public deposits.companies accepting public deposits. The requirement for other companies to be decided in dueThe requirement for other companies to be decided in due course.course.


4545



Government is yet to legislate the new Companies Bill

• The Amended Companies Act 1956 still holds good

Meanwhile all listed companies with paid up capital Rs. 3 crores

and above have started complying with SEBI Clause 49

The concept of Triple Bottom Line - non mandatory, yet to be

taken up by all

• Economic, social & environment

•Corporate Social Responsibility

Many companies in India have initiated ‘best’ CG practices on

their ownSPJIMR Study on CG in Family Managed SMEs sponsored by

NFCG

CG in India: Summing up

4646



II. Board Architecture of II. Board Architecture of

CorporatesCorporates

(Based on a study, Dynamic Directors, by(Based on a study, Dynamic Directors, by

Allan Blake, 1999)Allan Blake, 1999)

4747

O f S



Objectives of the StudyObjectives of the Study

To ensure that the Board is the best decision making team…, the

Company has to achieve it’s goals

To ensure corporate continuity taking into account the variety of

situations that the company will encounter during its life cycle.

_____________________________________________________

* Based on the author’s experience of working with 450 directors …

4848

B d A hi



Board ArchitectureBoard Architecture

Allan Blake, in his book, takes the reader through an

analysis of how board architecture can alter to reflect and

anticipate the various corporate life cycles:

Assessing the company’s current position in thedevelopment cycle

Assessing the direction the board wants the company

to move in.

Adjusting the functions of the board and the personnelon board to ensure that the company moves in the

planned direction.

4949



Board ArchitectureBoard Architecture

“…. all companies, no matter how small, need to consider the

function of their board of directors and the skills and attributes of

the individuals who should be on the board. Board architecture is akey part of running a professional business and running that

business, and ensuring the business continues to operate”

- Allan Blake, Dynamic Directors, 1999

5050

C t V i t PAPAC t V i t PAPA



Corporate Variety: PAPACorporate Variety: PAPA

GRIDGRID

Allan Blake used to chart corporate variety and the impact

the dynamics of companies has on the board of directors the

PAPA grid: Puppet: Low board control, high stakeholder control.

Adrift: Both board and stakeholder control low.

Partnership: Both Board and stakeholder control high.

Autonomous: Stakeholder control low, board control

high.

5151

cg for class , revised, feb 11

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