Corporate governance

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 Corporate governance broadly refers to the
mechanisms, processes and relations by
which corporations are controlled and
directed.

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 Governance structures and principles identify
the distribution of rights and responsibilities
among different participants in the
corporation (such as the board of directors,
managers, shareholders, creditors, auditors,
regulators, and other stakeholders) and
includes the rules and procedures for making
decisions in corporate affairs

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 Corporate governance includes the processes
through which corporations' objectives are
set and pursued in the context of the social,
regulatory and market environment.
 Governance mechanisms include monitoring

the actions, policies, practices, and decisions

of corporations, their agents, and affected
stakeholders. Corporate governance practices
are affected by attempts to align the interests
of stakeholders

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

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Corporate governance is an ethically driven
business process that is committed to values
aimed at enhancing an organization's wealth
generating capacity.
 This is ensured by taking ethical business

decisions and conducting business with a

firm commitment to values, while meeting
stakeholders' expectations.

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 The publication of the Cadbury Report in the
U.K. in 1992 was a significant event in
modern corporate governance.
 The report recommended the arrangement of

company boards and accounting systems to

reduce corporate governance risks and
failures.

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 The Securities and Exchange Board of India
(SEBI) sought to amend the equity listing
agreement to bring in additional corporate
governance norms for listed entities.
 These norms provide for stricter disclosures

and protection of investor rights, including

equitable treatment for minority and foreign
shareholders.

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 Many of the amendments are effective from
October 1, 2014. The amended rules require
companies to get shareholders' approval for
related party transactions, establish
whistleblower mechanisms, elaborate
disclosures on pay packages and have at least
one woman director on their boards.

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 The amended norms are aligned with the provisions of
the Companies Act, 2013, and is aimed to encourage
companies to ‘adopt best practices on corporate
governance’.
 The capital market regulator has amended clauses --
35B and 49 -- of the listing agreement. Now, under
changed 35B norms, listed companies are required to
provide the option of facility of e-voting to
shareholders on all resolutions proposed to be passed
at general meetings.
 Under clause 49, pertaining to corporate governance,
listed entities have to get shareholders' nod for related
party transactions.

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 Besides the market watchdog has come out
with norms to ensure "equitable treatment of
all shareholders including minority and
foreign shareholders".
 Apart from providing adequate and timely

information to all shareholders, listed

companies should also facilitate the exercise
of voting rights by foreign shareholders.

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 Besides, there would be expanded role of audit
committee and enhanced disclosure of
remuneration policies.
 Separate meetings of independent directors, and
constitution of 'stakeholders relationship
committee' are also a part of the proposals.
 The watchdog has decided that the maximum
number of boards an independent director can
serve on listed companies be restricted to 7, while
the directorship would be capped at three if the
person is serving as a whole time director in any
listed company.
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 In India also, various initiatives have been taken in the past by
the Ministry of Corporate Affairs and SEBI to ascertain that
those entrusted with the responsibility of governing
shareholder wealth are adequately regulated and made
accountable. Over the past 15 years, there have been many
reforms in the corporate governance framework - starting
from constitution of the Kumar Mangalam Committee (1999),
introduction of Clause 49 in the listing agreement (2000),
revision in Clause 49 on recommendations of the Narayana
Murthy Committee (2006), issue of voluntary guidelines on
corporate governance (2009), issue of guiding principles on
corporate governance (2012) based on recommendation of the
Adi Godrej Committee, enactment of the revised Companies
Act (2013) and finally the new corporate governance norms by
SEBI (2014).

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 The board of directors is a vital link between
shareholders and management, and hence
has a very critical role and responsibility in
the overall governance framework. The recent
press release by SEBI confirms this aspect,
wherein the responsibilities of the board, its
committees and independent directors have
been the primary focus.

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•Constitution of Kumar Mangalam Committee
•1999

•Introduction of clause 49 in the listing agreement

•2000

•Revision in clause 49 in the listing agreement on recommendation of Narayan Murthy

•2006

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Issue of voluntary guidelines
on corporate governance on
the recommendation of Adi
Goderj committee in 2012
Enactment of Revised companies Act 2013

SEBI announces new corporate governance

norms in 2014

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 The 21st century began with a series of corporate events
across the world, which put the spotlight on corporate
governance. The aftermath of the global financial crisis and
the controversies surrounding the corporate landscape
even after the evolution of landmark regulations such as
Sarbanes Oxley Act, has brought the focus and attention
onto the performance of the board as never before. Today,
corporate governance involves a web of relationships
between a corporation’s management, its board,
shareholders and other stakeholders. Clearly, effective
corporate governance is more challenging and complex
than ever before. Moreover, the board, given the oversight
role, is a significant building block in the corporate
governance framework.

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Complex environment

 Independent directors are now confronted with

complex oversight accountability, corporate
performance and they might also have to endure
greater personal risks and liability. Investors,
regulators, stakeholders and the society at large are
increasingly demanding that boards demonstrate
leadership, control and deliver on their
responsibilities and their company’s results – the
expectation from the board is to go beyond
compliance. For example, large institutional investors
are becoming far more demanding in the growing
belief that good governance enhances corporate
outcomes.

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 As a result there is increased demand for
battle-tested directors – who fully understand
the company’s strategy and operations.
However, it is equally important for the board
members to be able to work as a cohesive
group to be able to engage with all aspects of
their job – strategic, succession planning and
capital allocation. The right composition of
directors with the optimum specialized skills
is the only way towards an effective board.

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 In this context, it is often seen that despite
illustrious names on boards, they fail to
deliver on the expectations due to a variety of
reasons including:

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 Lack of clarity on the roles of directors and the
board as a whole; role ambiguity slows decision-
making and causes unnecessary director conflicts
 Poor process management hinders effective
board preparation, meeting management and
communications
 Lack of alignment and agreement on company
strategy which hampers a board’s ability to
prioritize issues and set their near term agenda
 Weak team dynamics fracture boards and lead
to power struggles

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 Such failures underscore the fact that boards
must be concerned with, in addition to
organizational and management
performance, their own performance.
Companies today are facing scarcity of
talented directors who demonstrate the right
skills, courage and expertise. The growing
gap between demand and supply of
independent directors has brought the
attention to the development of talent – as
independent directors and as a board.
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Related party transactions
 An RPT is a business deal between two parties who are joined by
a special relationship prior to a transaction being carried out.
 Sebi has made prior audit committee approval mandatory for all
material RPTs. As a second-level check, all such transactions will
need shareholder approval through a special resolution, with
related parties abstaining from voting.

 Sebi, in its discussion paper, had termed transactions within

group firms or among a particular set of investors within group
firms as “abusive” if such deals were detrimental to the interests
of minority shareholders.

 Sebi observed that such transactions dent the confidence of

investors and jeopardize the process of channelizing savings
into the capital market.

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Women Directors on Board
 Gender representation on corporate boards of
directors refers to the proportion of men and
women who occupy board member positions.
Globally, men occupy more board seats than
woman. This disproportionality is being
addressed in various ways by both
governments and corporations.

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Equality of Treatment
 The desire of governments and corporations
to reduce the disproportionality on corporate
boards is rooted in the principle of equality of
treatment. Equality of treatment requires that
all people be treated equally, regardless of
societal prejudices. Equality of treatment may
mean either equality of opportunity or
equality of outcome, with the former being
the preferred interpretation by many
Governments.

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Independent director
 An Independent director (also sometimes
known as an outside director) is a director
(member) of a board of directors who does
not have a material or pecuniary relationship
with company or related persons, except
sitting fees. Independent Directors do not
own shares in the company.

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