Sei sulla pagina 1di 27



Corporate governance to the system by which operations are directed and controlled. The
governance structure specifies the distribution of rights and responsibities among different
participants in the corporation (such as the board of directors, managers, shareholders,
creditors, auditors, regulators and other stakeholders) and specifies the rules and procedures
for making decisions in corporate affairs. Governance provides the structure through which
corporations set and pursue their objectives, while reflecting the context of the social,
regulatory and market environment. Governance is a mechanism for monitoring the actions,
policies and decisions of corporations. Governance involves the alignment of interests
among the stakeholders.
Corporate governance has also been defined as a system of law and sound approaches by
which corporations are directed and controlled focusing on the internal and external
corporate structures with the intention of monitoring the actions of management and
directions and thereby agency risks which may stem from the misdeeds of corporate

officers. In contemporary business corporations, the main external stakeholders, debt

holders, trade creditors, suppliers, customers and communities affected by the corporations
activities. Internal stakeholders are the board of directors, executives, and other employees.
Much of the contemporary interest in corporate governance is concerned with mitigation or
preventing these conflicts of interests include include the processes, customs, policies, laws,
and institutions which have an impact on the way a company is controlled. An important
theme of governance is the nature and extent of corporate accountability.
A related but separate thread of discussions focuses on the impact of a corporate governance
system on economic efficiency, with a strong emphasis on shareholders welfare. In large
firms where there is a separation of ownership and management and no controlling
shareholder, the principal-agent issue arises between upper-management (the agent)
which may have very different interests, and by definition considerably more information,
than shareholders (the principles). The danger arises that rather than overseeing
management on behalf of shareholders, the board of directors may become insulated from
shareholders and beholden to management. This aspect is particularly present in
contemporary public debates and developments in regulatory policy.
Economic analysis has resulted in a literature on the subject. One source defines corporate
governance as the set of conditions that shapes the ex post bargaining over the quasi-rents
generated by a firm. The firm itself is modeled as a governance structure acting through the
mechanisms of contract. Here corporate governance may include its relation to corporate
Corporate governance is "the system by which companies are directed and
controlled". It involves regulatory and market mechanisms, and the roles and
relationships between a companys management, its board, its shareholders and
other stakeholders, and the goals for which the corporation is governed. In
contemporary business corporations, the main external stakeholder groups are




trade creditors,




communities affected by the corporation's activities.

Internal stakeholders are the board of directors, executives, and other
Corporate Governance is a multi-Faceted subject.
An important theme of corporate governance is to ensure the accountability of
certain individuals in an organization through mechanisms that try to reduce or
eliminate the principal-agent problem. A related but separate thread of
discussions focuses on the impact of a corporate governance system in
economic efficiency, with a strong emphasis on shareholders' welfare. There are
yet other aspects to the corporate governance subject, such as the stakeholder
view and the corporate governance models around the world.
Corporate governance as defined by SEBI committee (India)
is the Acceptance by management of the inalienable rights of shareholders
as the true owners of the corporation and of their own role as trustees on behalf
of the shareholders. It is about commitment to values, about ethical business
conduct and about making a distinction between personal & corporate funds in
the management of a company. The definition is drawn from the
Gandhian principle of trusteeship and the Directive Principles of the Indian
Constitution. Corporate Governance is viewed as business ethics and a moral
duty. See also Corporate Social Entrepreneurship regarding employee who are
driven by their sense of integrity (moral conscience) and duty to society. This
notion stems from traditional philosophical ideas of virtue (or self governance)
and represents a bottom-up approach to corporate governance (agency) which
supports the more obvious top-down (systems and processes, i.e. structural)

Corporate Governance as 'an internal system encompassing policies, processes
and people, which serves the needs of shareholders and other stakeholders, by
directing and controlling management activities with good business savvy,
objectivity, accountability and integrity. Sound corporate governance is reliant
on external market place commitment and legislation, plus a healthy board
culture, which safeguards policies and processes'


Corporate Governance is concerned with holding the balance between

economic and social goals and between individual and communal goals.
The corporate governance framework is there to encourage the efficient
use of resources and equally to require accountability for the stewardship
of those resources.
The aim is to align as nearly as possible the interests of individuals,
corporations and society.
The primary purpose of corporate governance is to create wealth legally
and ethically.
This translates to bringing a high level of satisfaction to five
consultancies- customers, employees, investors, vendors and the societyat-large


The history of the development of Indian corporate laws has been marked by
interesting contrasts. At independence, India inherited one of the worlds
poorest economies but one which had a factory sector accounting for a tenth of
the national product: four functioning stock markets (predating the Tokyo Stock
Exchange) with clearly defined rules governing listing, trading and settlements;
a well-developed lending norms and recovery procedures. Interims of corporate
laws and financial system, therefore, India emerged far better endowed than
most other colonies. The 1956 Companies Act as well as other laws governing
the functioning of joint-stock companies and protecting the laws governing the
functioning of joint-stock companies and protecting the investors rights built on
this foundation.

The beginning of corporate developments in India were marked by the

managing agency system that contributed to the birth of dispersed equity
ownership but also give rise to the practice of management enjoying control
rights disproportionately greater than their stock ownership. The turn towards
socialism in the decades after independence marked by the 1951 Industries
(Development and Regulation) act as well as the 1956 Industrial Policy
Resolution put in place a regime and culture of licensing, protection and
widespread red-tape that bred corruption and stilled the growth of the corporate
sector. Exorbitant tax rates encouraged creative accounting practices and
complicated emolument structures to beat the system.

In absence of a developed stock market, the three all-India development finance

institutions (DFIs)- the Industrial Finance Corporation of India, the Industrial
Development Bank of India and the Industrial Credit and Investment
Corporation of India- together with the state financial corporations became the
main providers of long-term credit to companies. Along with the government
owned mutual fund the Unit Trust of India, they also held large blocks of
shares in the companies they lent to and invariably had representations in their
boards. In this respect, the corporate governance system resembled the bankbased German model where these institutions could have played a big role in
keeping their clients on the right track. Unfortunately, they were themselves
evaluated on the quality of their lending and thus had little incentive for either

proper credit appraisal or effective follow-up and monitoring. Their nominee

directors routinely served as rubber-stamps of the management of the day. With
their support, promoters of businesses in India could actually enjoy managerial
control with very little equity investment of their own. Borrowers therefore
routinely recouped their investment in a short period and then had little
incentive to either repay the loans or run the business. Frequently they bled the
company with impunity, siphoning off funds with the DFI nominee directors
mute spectators in their boards.

This sordid but increasingly familiar process usually continued till the
companys net worth was completely eroded. This stage would come after the
company has defaulted on its loan obligations for a while, but this would be the
stage where Indias bankruptcy reorganization system driven by the 1985 Sick
Industrial Companies Act (SICA) would consider it sick and refer it to the
Board for Industrial and Financial Reconstruction (BIFR). As soon as a
company is registered with the BIFR it wins immediate protection from the
creditors claims for at least four years. Between 1987and 1992 BIFR took well
over two years on an average to reach a decision, after which period the delay
has roughly doubled. Very few needed to be liquidated, the legal process takes
over 10years on average, by which time the assets of the company are
practically worthless. Protection of creditors rights has therefore existed only
on paper in India. Given this situation, it is hardly surprising that banks flush
with depositors funds routinely decide to lend only to blue chip companies and
park their funds in government securities.

Financial disclosure norms in India have traditionally been superior to most

Asian countries though fell short of those in the USA and other advanced
countries. Noncompliance with disclosure norms and even the failure of
auditors reports to confirm to the law attract nominal fines with hardly any
punitive action. The Institute of Chartered Accountants in India has not been
known to take action against erring auditors.

While the Companies Act provides clear instructions for maintaining and
updating share registers, in reality minority shareholders have often suffered

from i9rregularities in share transfers and registrations deliberate or

unintentional. Sometimes non-voting preferential shares have been used by
promoters to channel funds and deprive minority shareholders of their dues.
Minority shareholders have sometimes been defrauded by the management
undertaking clandestine side deals with the acquirers in the relatively scarce
event of corporate takeovers and mergers.

Boards of directors have been largely ineffective in India in monitoring the

actions of management. They are routinely packed with friends and allies of the
promoters and managers, in flagrant violations of the spirit of corporate law.
The nominee directors from the DFIs, who could and should have played a
particularly important role, have usually been incompetent or unwilling to step
up to the act. Consequently, the boards of directors have largely functioned as
rubber stamps of the management.

For most of the post-Independence era the Indian equity markets were not liquid
or sophisticated enough to exert effective control over the companies. Listing
requirements of exchanges enforced some transparency, but non-compliance
was neither rare nor acted upon. All in all therefore, minority shareholders and
creditors in India remained effectively unprotected in spite of a plethora of laws
in the books.



1. Corporate governance is concerned with how companies are controlled

and managed.
2. It involves appropriate supervision and control over the top management.
3. It requires fair, transparent and efficient administration and effective
internal monitoring.
4. It is meant to serve the interests of all the stakeholders in a company.
5. It requires a legal and institutional framework within which companies
are to be managed.
6. Corporate governance goes beyond law, it requires high level of business
ethics and a sense of corporate social responsibility.
7. Corporate governance embraces as to how the set systems and processes
and how are the things are done within certain structural and
organizational systems.
8. It is an interplay between a company, its between a company, its
stakeholders the capital market and corporate laws.

The corporate governance practice in the Company is built in conformity with
the best international standards and recommendations set in the Code of
Corporate Behavior of the Federal Financial Markets Service, as well as the
provisions of the Code of Corporate Governance of PJSC Enel Russia ratified
by the company in 2006.

Corporate governance in the Company is based on the following principles:

Rights and equitable treatment of shareholders
Organizations should respect the rights of shareholders and help shareholders to
exercise those rights. They can help shareholders exercise their rights by openly
and effectively communicating information and by encouraging shareholders to
participate in general meetings.
The Code of Corporate Governance envisages accountability of the Board of
Directors of the Company before all shareholders in accordance with the
legislation in force, and is the governing document for the Board of Directors in
issues related to strategy planning, administration and control over the
Companys body executives.
The Company undertakes to protect the rights of its shareholders and treat all
shareholders on an equal basis. The Board of Directors enables its shareholders
to receive efficient protection if their rights are violated.
The Company shall provide timely disclosure of credible information on all the
important facts related to its activities, including information on its financial
condition, social and environmental measures, results of activities, ownership
and management structures the Company shall provide free access to such
information for all interested parties.
The Company acknowledges the rights of all interested parties envisaged by the
legislation in force, and aims at cooperation with such parties in order to
provide steady development and ensure financial stability of the Company.
Good governance is integral to the very existence of a company. It inspires and
strengthens investors confidence by ensuring companys Commitment to higher
growth and profits. It seeks to achieve following objectives.

That a properly structured Board cable of taking independent and objective

decisions is in place at the helm of affairs.
That the Board is balanced as regards the representation of adequate number
of non-executive who will take care of the interests and well-being of the
independent directors and all the stakeholders,
That the Board adopts transparent procedures and practices and arrives at
decisions on the strength of adequate information,
That the Board has an effective machinery to sub serve the concerns of
That the Board keeps the shareholders informed of relevant developments
impacting the company,
To study the Regulatory Disclosures under different laws and its actual
Implementation by Companies,
To understand the impact of CG in Socio- Economic Development,
To understand the significance of CG on the Shareholders interests and
Corporate Governance is important for the following reasons:

Changing ownership structure- complex ownership structure involving

promoters, public financial instns, institutional shareholders (foreign in
terms of their FDI and Indian), banks, insurance companies and small
private investors. It is a challenge for management of companies.
Social Responsibilty- An effective corporate governance provides for
regulating the duties of directors so that they act in the best interests of
customers, lenders, suppliers, and local community.
Scams- Corporate scams like Harshad Mehta, Satyam etc have shaken the
public confidence, hence need for corporate governance.
Corporate obligarchy- i.e. Only a small group of people govern an
organization. It has given rise to need for mechanisms and systems for
corporate governance.Also, shareholders activism and shareholders
democracy have also developed.
Globalisation- Rise of international markets and need to get listed on
international stock exchanges have prompted corporate to focus on
corporate governance.
International organizations like EC, GATT and WTO have all contributed
to rising awareness.

It lays down the framework for creating long-term trust between

companies and the external providers of capital.
It improves strategic thinking at the top by inducting independent
directors who bring wealth of experience and a host of new ideas.

It rationalizes the management and monitoring of risk that a firm faces

It limits the liability of top management and directors, by carefully
articulating the decisions making process.

It has long term reputational effects among key stakeholders, both







political/regulatory agents).

Corporate governance mechanisms and controls are designed to reduce
the inefficiencies that arise from hazard and adverse selection. There are both
internal monitoring system and external monitoring systems. Internal monitoring
can be done, for example, by one (or a few) large shareholder(s) in the case of
privately held companies or a firm belonging to a business group. Furthermore
the various board mechanisms provide for internal monitoring. External
monitoring of managers behavior occurs when an independent third party (e.g.
the external auditor) attests the accuracy of information provided by management
to investors. Stock analysis and debt holders may also conduct such external
monitoring. An ideal monitoring and control system should regulate both
motivation and ability, while providing incentive alignment toward corporate
goals and objectives. Care should be taken that incentives are not so strong that

some individuals are tempted top cross lines of ethical behavior, for example by
manipulating revenue and profit figures to drive the share price of the company
up. It can be further controlled with the help of two methods:
1. Internal corporate governance controls
2. External corporate governance controls


Internal corporate governance controls monitor and then take
corrective action to accomplish organizational goals. Examples include:
1. Monitoring by the board of directors:
The board of directors, with its legal authority to hire, fire and
compensate top management safeguards invested capital. Regular
board meetings allow potential problems to be identified, discussed
and avoided. Whilst non-executive directors are thought to be more
independent, they may not always result in more effective corporate
and may not increase performance outcomes, ex ante. It could be
argued, therefore, that executive directors look beyond the financial
2. Internal control procedures and internal auditors:
Internal control procedures are policies implemented by an entitys
board of directors, audit committee, management and other personnel
to provide reasonable assurance of the entity achieving its objectives

related tp reliable financial reporting, operating efficiency and

compliance with laws and regulations. Internal auditors are personnel
within an organization who test the design and implementation of the
entitys internal control procedures and the reliability of its financial

3. Balance of power: The simplest balance of power is very common;

require that the President be a different person from the Treasurer.
This application of separation of power is further developed in
companies where separate division checks and balances each others
actions. One group may propose company-wide administrative
changes, another group review and can veto the changes and a third
that the interests of people (customers, shareholders, employees)
outside the three groups are being met.
4. Remuneration:
Performance-based remuneration is designs to relate some proportion
of salary to individual performance. It may be in the form of cash or
non-cash payments such as shares and share options, superannuation
or other benefits. Such incentive schemes however are reactive in the
sense that they provide no mechanisms for preventing mistakes or
opportunistic behavior, and can elicit myopic behavior.


External corporate governance controls encompass the controls external

Stakeholders exercise over the organization. Examples include:
Debt covenants
Demand and assessment of performance information (esp.

financial statements)
Government regulations
Managerial labor market
Media pressure


Demand for information: In order to influence the directors, the shareholders

must combine with others to form a significant voting group which can pose a
real threat of carrying resolutions or appointing directors at a general meeting.
Monitoring costs: A barrier to shareholders using good information is the cost
of processing it, especially to a small shareholder. The traditional answer to
this problem is the efficient market hypothesis (in finance, the efficient market
hypothesis (in finance markets are efficient), which suggests that the small
shareholder will free ride on the judgments of larger professional investors.
Supply of accounting information: Financial accounts form a crucial link in
enabling providers of finance to minor directors. Imperfections in the financial
reporting process will cause imperfections in the effectiveness of corporate
governance. This should, ideally be corrected by the external auditing process.
Role of the Accountant & Auditors: Financial reporting is a crucial element
necessary for the corporate governance system to function effectively.
Accountants and auditors are the primary providers of information to capital
and participants. The directors of the company should be entitled to expect the
management prepare the financial information in compliance with statutory
and ethical obligations and rely on auditors competence.

Current accounting practice allows a degree of choice of method in determining the

method of measurement, criteria for recognition, and even the definition the
accounting entity. The exercise of this choice to improve apparent performance
(popularly known as creative accounting) imposes extra information costs on users.
In the extreme, it can involve non-disclosure of information.


Corporate Governance and Law Reforms in India

Corporate governance has been a buzzword in India since 1998. But the need to
have a good mechanism started since the beginning of 1990s when the Indian
stock market rocked with many scams. On account of the interest generated by
Cadbury Committee Report (1992) in UK, the Confederation of Indian
Industries (CII), the Associated Chambers of Commerce and Industry
(ASSOCHAM) and the Securities and Exchange Board of India (SEBI)
constituted Committees to recommend initiatives in Corporate Governance. The
recommendations of the Kumar Mangalam Birla Committee, constituted by
SEBI, led to the addition of Clause 49 in the Listing Agreement. These
recommendations, aimed at
Governance, are divided


the standards



of Corporate

recommendations. The recommendations have been made applicableto all listed

companies, their directors, management, employees and professionals
associated with such companies. The ultimate responsibility for putting the
recommendations into practice lies directly with the Board of Directors and the
management of the company. The latest developments include constitution of a
high-powered Committee by Department of Company Affairs, Government of
India, headed by Shri Naresh Chandra, on August 21, 2002, to examine
various corporate governance issues. Other developments include the
constitution of a Committee by SEBI under the Chairmanship of
Shri N.R.Narayana Murthy, for reviewing implementation of the corporate
governance code by listed companies and issue of revised clause 49 based on its
recommendations; setting up of a proactive Standing Company Law Advisory
Committee by Department of Company Affairs to advise on several issues like
inspection of corporate for wrong doings, role of independent auditors
and directors and their liability and suggesting steps to enhance imposition of
penalties. Another Committee has been constituted by the Department of
Company Affairs known as the Working Group for examination of suggestions

received on good corporate governance. A High Powered Central Coordination

and Monitoring Committee (CCMC), co-chaired by Secretary, Department of
Company Affairs and Chairman, SEBI was set up to monitor the action taken
against the vanishing companies, and unscrupulous promoters who misused
the funds raised from the public. It was decided by this Committee that Seven
Task Forces be set up at Mumbai, Delhi, Chennai, Kolkata, Ahmadabad,
Bangalore and Hyderabad with Regional Directors/Registrar of Companies of
respective regions as convener, and Regional Offices of SEBI and Stock
Exchanges as Members.
The main task of these Task Forces was to identify the companies, which have
disappeared, or which have mis-utilised the funds mobilized from the investors,
and suggests appropriate action in terms of Companies Act or SEBI Act.
SEBI says that the Corporate governance norms introduced for listed companies
vide clause

49 of

the listing

agreement on

the basis

of the Kumaramanagalam Birla Committee Report, 1999 have met with

encouraging success, since most of the A Group companies listed on BSE and
NSE have complied with the Norms. However, the corporate governance has
remained more on paper is clear from the Report on Corporate Governance by
the Advisory Group constituted by the Standing Committee on International
Financial Standards and Codes of the Reserve Bank of India.

The following facts emerged from the report:

The predominant form of corporate governance in India is insider model

wherepromoters dominate governance in every possible way. Indian corporate
which reflect the pure outsider model are relatively small in number.
A distinguishing feature of the Indian Diaspora is the implicit acceptance that
corporate entities belong to founding families.
The listing agreement, the main instrument, through which SEBI ensures
implementation of corporate governance, is a weak instrument, as its penal
provisions are not stringent. The maximum penalty a stock exchange can
impose on any company that does not follow the corporate governance norms is


trading in its shares. This penalty hurts the investor community more than the
management of the company that violates the listing agreement.
Regional stock exchanges where a large number of companies are listed lack
effective organization and skills to monitor effective compliance with corporate
governance norms.
A vast majority of companies that are not listed remain outside the purview of
SEBIs measures.
The financial institutions that have large shareholdings in most of the listed
companies have been passive observers in the area of corporate governance and
do not effectively exercise their rights as shareholders.
The autonomy of the Boards of Public Sector Units and public sector banks
has been seriously eroded due to special legislative provisions or notifications
and day to day interference by the concerned administrative ministries. It is

interesting to note that despite corporate governance in the form of clause 49

was already introduced in the year 2000; it could not prevent securities scam of
2002. Events in the stock exchanges have exposed the lack of ethical conduct by
many Indian corporate:
Rampant insider trading by the promoters in league with big market players.
Massive price rigging/ manipulation by the promoters in league with big
market players prior to mergers and takeovers.
Gross misuse of bank funds for clandestine stock market operations.
Criminally motivated investment in violation of laid down norms.
Many companies, which raised money from the capital market through public
issues, have not paid any dividend for more than five years.
The total amount of money (collected through public offerings) duped by the
vanishing companies is calculated to be Rs 66,861 billion;
Non-performing assets of scheduled commercial banks amounted to Rs
58,554billion as on 31 March 2003.

In addition small investors have lost their hard earned money in the stock
markets for the following reasons:

Lack of ethics, selfish conscience, and breach of trust on the part of the
Lack of adequate compliance mechanism, supervision, proper inspection,
effective regulation and preventive action by regulators like Department
of Company Affairs, Registrar of Companies, Board of Stock Exchanges
as well as SEBI.
Lack of professional ethics on the part of professionals, like Chartered
Accountants, Company Secretaries etc, who are holding onerous
positions in companies. It all establish that no matter that most of the
companies may be fully complying with the corporate governance norms
laid down by clause 49, but absence of good conscience on the part of the
promoters to observe ethical practices have created little impact in
practice. A number of proposals have been made to improve corporate

The various suggested reforms include:

strengthening the position of internal and outside auditors;
allowing mergers and acquisitions approved by a panel;
requiring more independent outside directors on boards;
introducing the supervisory board or two- tier system;


Ministry of Corporate Affairs has set up National Foundation of

Corporate Governance (NFCG) as a non-profit body to deliberate and
advise on good corp. governance.
NFCG has made action plan for corp. governance norms on 3 themes i. For institutional investors.
ii. For independent directors on board.
iii. For Audit
CII & SEBI have developed codes for corp. gov.

Reserve Bank of India has taken various steps furthering corporate governance
in the Indian Banking System. These can broadly be classified into the
following three categories: a) Transparency b) Off-site surveillance c) Prompt
corrective action Transparency and disclosure standards are also important
constituents of a sound corporate governance mechanism. Transparency and
accounting standards in India have been enhanced to align with international
best practices. However, there are many gaps in the disclosures in India vis-vis the international standards, particularly in the area of risk management
strategies and risk parameters, risk concentrations, performance measures,
component of capital structure, etc.

Hence, the disclosure standards need to be further broad-based in consonance

with improvements in the capability of market players to analyse the
information objectively.
The off-site surveillance mechanism is also active in monitoring the movement
of assets, its impact on capital adequacy and overall efficiency and adequacy of
managerial practices in banks. RBI also brings out the periodic data on "Peer
Group Comparison" on critical ratios to maintain peer pressure for better
performance and governance.
Prompt corrective action has been adopted by RBI as a part of core principles
for effective banking supervision. As against a single trigger point based on
capital adequacy normally adopted by many countries, Reserve Bank in keeping
with Indian conditions have set two more trigger points namely Non-Performing
Assets (NPA) and Return on Assets (ROA) as proxies for asset quality and
profitability. These trigger points will enable the intervention of regulator
through a set of mandatory action to stem further deterioration in the health of
banks showing signs of weakness.


Corporate Governance has become the latest buzzword today. Almost every country
has institutionalized a set of Corporate Governance codes, spelt out best practices
and has sought to impose appropriate board structures. Despite the Corporate
Governance revolution there exists to universal benchmark for effective levels of
disclosure and transparency. There are several corporate governance structures
available in the developed world but there is no one structure, which can be singled
out as being better than the others. There is no one size fits all structure for
corporate governance. Corporate governance extends beyond corporate law.
Its fundamental objective is not the mere fulfillment of the requirements of law but
in ensuring commitment of the board in managing the company in a transparent
manner for maximizing long term shareholder value. Effectiveness of corporate
governance system cannot merely be legislated by law. As competition increases,
technology pronounces the death of distance and speeds up communication. The
environment in which companies operate in India also changes. In the dynamic
environment the systems of corporate governance also need to evolve.
The recommendations made by different expert committees will go a long way in
raising the standards of corporate governance in Indian companies and make them
attractive destinations for local and global capital. These recommendations will also
form the base for further evolution of the structure of corporate governance in
consonance with the rapidly changing economic and industrial environment of the
country in the new millennium.