CERTIFICATE COURSE ON

CORPORATE GOVERNANCE

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MODULE 2: EFFECTIVITY OF
CORPORATE GOVERNANCE IN TIMES
OF MAJOR SCAMS
1. BACKDROP
 The globe has seen and been a part of many corporate scams repeatedly. India stands as
no exception to the happenings.
 Some major Indian scams include big players and MNCs like ‘Satyam’ who have
manipulated the assets and trusts of the companies and in turn have highly deteriorated
their existence as entities.
 The lifting of Corporate Veil has a handsome amount of work when it comes to the
maintenance of corporate governance and prevent the happenings of scams. This is so
because companies being the artificial persons cannot do or perform things or activities
on their own.
 The Corporate veil is lifted by the Board of directors (BOD) and hence they stand as a
very vital element for the working of a company.
 The SEBI, along with the aid and advice of multiple agencies has undertaken many
measures and activities in order to enhance a great mechanism for the corporate
governance thereby minimizing the number of scams conducted each year. It has also
strived to formulate a standard corporate governance structure from time to time and as
and when need arises and the check on corporate scams can be seen as they have
minimized.
 However due to the multiplicity of Public Companies and their gigantic activities, various
small complexities and technicalities are sometimes inevitably ignored.
 It is undoubtedly admitted that the major objective of a company involves profit making.
But this in no way means exploiting the interest of other groups and earning at their costs.
The company needs to earn profit without harming the interest of any party who has
his/her interest in that business.

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  The firm’s financial performance illustrated by its profitability, need to be magnified
through the yacht of corporate governance, so as to keep the interest of all stakeholders
safe.
 There is a need of harmony which should be maintained between the directors and the
shareholders. Shareholder’s interest is majorly involved in how any company operates.
 It involves big amount of trust and faith for investing money into any company. Modus
operandi of any company should be fully disclosed, for shareholders to trust any
organization.
 Corporate governance can be seen as an important tool for measuring any company’s
board efficiency barometer.

2. NORMS OF SEBI VIS- A- VIS CORPORATE

GOVERNANCE
 The Cadbury Report, of 1992exhaustively defined the term corporate governance as “the
system by which businesses are directed and controlled”.
 Corporate governance may safely be called a subjective device with the help of which
investors to the companies can provide an assurance to themselves w.r.t the investment.
 The definition as given by OECD in 2004(Organization for Economic Co-operation and
Development), states that, “Corporate governance includes a set of relationships between
a company’s management, its board, its shareholders and other stakeholders. Corporate
governance in addition provides for the arrangement through which the objectives of the
company are set, and the means of getting those objectives and monitoring performances
are determined. Decent and good corporate governance must present greatergain for the
board and management to achieve those objectives which are in the interests of the
company and its shareholders and should facilitate effective monitoring”.
 For listed companies, SEBI presented the idea of corporate governance through clause
49.
 The development of the concept of corporate governance by SEBI has been provided in
the following chart-

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 2012 2013
1999 2006
2000 Voluntary New
Kumar mangalam Revision Guidelines
Clause 49 Companies
committee clause 49
Act

 The latest amendments have witnessed huge overhauls in the clause 49 of the listing
agreement vide the Companies Act, 2013.
 The latest and modified clause 49 of SEBI makes a mandate that the independent director
is required to review all the compliance reports periodically and take necessary steps in
cases involving blot to such transparency.
 The companies which conform to the rule 49 of SEBI are mandated to submit annual
reports on a quarterly basis.

3. BOARD SIZE
 Board size has an important role to play with respect to the maintenance of the corporate
governance and aversion to the scams.
 Board of directors generally consists of the executive directors, non-executive
directoraand independent directors. It is hence vital to have appropriate number of
directors in board.

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  There are multiple rules that talk about different preferential board size of companies. It
is generally believed that companies with a diverse board possess all sorts of
competencies.

4. IMPORTANCE OF DISCLOSURE
 Disclosure is one of the most relied pillars of CG. Disclosure is a prima facie indicator of
transparency and the Listed companies are bound to present their just, true and fair view
of their financial and non-financial activities to their stakeholders.
 A strong disclosure system is an essential feature of market-based monitoring of
corporate conduct and is vital to the ability of shareholders to exercise their voting rights
effectively.
 In countries like India, with possess large and active equity markets a full proof
disclosure is required to ascertain their standing and apprehend any malpractice, if at all
prevails.
 Anethically sound disclosure principle can provide benefit in attracting capital and
preserve confidence in capital markets.

5. INTER- RELATIONSHIP BETWEEN CG (Corporate

Governance), BOD(Board of Directors) AND
MALPRACTICES
 The composition of a board is positively correlated to the CGof companies. The company
with more number of efficient working committee having right proportion of executive
and independent director in it depicts more transparency and better standards of CG.
 The role of executive directors in the company stands very crucial. A complete
independency invites arbitrariness and paves way for greater scams, therefore it is
essential to keep a regulated check on the activities of a company.
 The BoD may or may not be related to the aspect of profit making of a
company.However, the role of executive directors has been considered crucial as they are
the whole time active directors who invest his time and intelligence for putting a

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 company to distinctive heights. They hence passively also contribute towards increasing
the financial prospects of a company in addition to the CG.
 At the same time independent directors are also equivalently important to keep check on
executive directors’ role and also to take the company high on the scores of ethics,
transparency and accountability.

6. INFERENCE
 There is a huge effect of board governance on financial performance of the companies as
well as their ethical governance. It has been observed that almost all good companies
have disclosed and practised their corporate governance codes but the way of such
implementation is different from each other.
 Presently, many of the companies are framing corporate governance practices as their
benchmark and are developing their own way of practising corporate governance. Apart
from showing mandatory provision laid down in clause 49 of SEBI, the companies are
also focusing on disclosing most of the non-mandatory provisions.
 There is a confident relationship of composition of board (COB) and board committee
(BC) with return on assets (ROA) and return on capital employed (ROCE) both
interchangeably.
 The size of the board also requires attention. The board size with one-half independent
directors in it is considered more efficient. And the company with more number of
executive directors has greater performance rating than other companies.
 Thus a right proportion of directors in board are considered more practicable comprising
of eminent dependent & independent directors and, simultaneously complying with the
law also.

7. SUMMING UP

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  It is clear that the role of board cannot be neglected.
 The board comprises of two types of directors, independent and dependent directors,
which can further be classified into executive, non-executive and independent
nonexecutive directors.
 The SEBI in his Clause 49 and also according to Companies Act 2013 of India has stated
certain norms and regulation regarding the corporate governance which encompasses the
involvement of board of directors.
 The various literatures suggest that though there is no standard parameter of board
governance for the effective performance of companies, appropriate proportion of
independent directors is necessitated for good corporate governance.
 As observed, in some cases, dependent directors conduct business more efficiently and in
some other cases independent directors are found as the key factor for the efficient
performance of the companies.
 Just mere to fulfilling the corporate governance practices for the sake of regulation is
totally not enough. The firms voluntarily need to think on this and practise a good
corporate governance along with the eminently fulfilment of legal formalities.

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