MBA I - 428

BUSINESS ETHICS
UNIT - IV: CORPORATE GOVERNANCE
Meaning
Corporate governance is "the system by which companies are directed and controlled".
It involves the following:
 Regulatory and market mechanisms,
 Roles and relationships between a company’s management, its board, its shareholders
and other stakeholders
 Goals for which the corporation is governed.
SEBI in India defines corporate governance as 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."
It has been suggested that the Indian approach is drawn from the Gandhian principle of
trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of
corporate objectives is also prevalent in Anglo-American and most other jurisdictions.
Principles
Contemporary discussions of corporate governance tend to refer to principles raised in three
documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate
Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury
and OECD reports present general principals around which businesses are expected to operate
to assure proper governance.

 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.

 Interests of other stakeholders: Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders,
including employees, investors, creditors, suppliers, local communities, customers, and
policy makers.
 Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs
adequate size and appropriate levels of independence and commitment
 Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing
corporate officers and board members. Organizations should develop a code of conduct
for their directors and executives that promotes ethical and responsible decision making.
 Disclosure and transparency: Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide stakeholders with a level
of accountability.
 They should also implement procedures to independently verify and safeguard the
integrity of the company's financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors have access to clear,
factual information.
Code of Corporate Governance
The Securities and Exchanges Board of India came up with a code of corporate governance
in 2002. The code provided guidelines in respect of the following
(a) Constitution of board of directors and its functioning.
(b) Chief financial officer and company secretary
(c) Corporate and financial reporting framework
(d) Audit committee
Board of Directors - All listed companies shall have competent people as members of
Board. There should be one independent nonexecutive director, to provide an impartial view on
policy matters. Executive directors, i.e. working or whole time directors, constitute 75% of the
elected directors including the Chief Executive. A person serving as a director of ten other listed
companies, is not eligible to be on the Board. The tenure of office of Directors shall be three
years. The directors shall exercise their powers and carry out their fiduciary duties with a
sense of objective judgment and independence in the best interests of the listed company.
Avision/mission statement and Statement of Ethics and Business Practices’ areto be prepared
and circulated annually to establish a standard of conduct for directors and employees. The
overall corporate strategy and significant policies ( risk management; human resource
management including preparation of a succession plan; procurement of goods and services;
marketing; determination of terms of credit and discount to customers; write-off of bad/
doubtful debts, advances and receivables; acquisition/ disposal of fixed assets; investments;
health, safety and environment etc) are to be recorded and maintained. The Board of Directors
of a listed company shall meet at least once in every quarter of the financial year.
Chief Financial Officer and Company Secretary
The appointments of Chief Financial Officer (CFO), the Company Secretary and the head of
internal audit shallbe made byCEO with the approval of the Board of Directors. The CFO and
the Company Secretary shall attend meetings of the Board of Directors.
Corporate and financial reporting framework
Directors’ Report, is to be prepared according to section236 of the Companies Ordinance, 1984.
The financial statements, present fairly its state of affairs, the result of its operations, cash flows
and changes in equity. Proper books of account have to be maintained. Accounting policies and
standards are to be established. Matters relating to bonus, dividends and payment on account of
taxes, duties, levies and charges is outstanding, etc., are to be disclosed with a brief description
and reasons for the same. The quarterly un-audited financial statements of listed companies
shall be published and circulated along with directors’ review on the affairs for the quarter.
Half-yearly financial statements are subjected to a limited scope review by the statutory
auditors
Audit Committee
Audit Committee, comprising not less than three members, including the chairman is to be
established. Majority of the members of the Committee shall be from among the non-executive
directors and the chairman of the Audit Committee shall preferably be a non-executive director.
The names of members of the Audit Committee shall be disclosed in each annual report of the
company.
The Audit Committee shall meet at least once every quarter of the financial year. These
meetings shall be held prior to the approval of interim results of the company by its Board of
Directors and before and after completion of external audit. The CFO, the head of internal audit
and a representative of the external auditors shall attend meetings of the Audit Committee at
which issues relating to accounts and audit are discussed. Provided that at least once a year, the
Audit Committee shall meet the external auditors without the CFO and the head of internal
audit being present.
The Audit Committee shall be responsible for recommending to the Board of Directors the
appointment of external auditors.The terms of reference of the Audit Committee shall also
include the following:(a) determination of appropriate measures to safeguard the listed
company’s assets; (b) review of preliminary announcements of results prior to publication; (c)
review of quarterly, half-yearly and annual financial statements of the listed company, (d)
ensuring coordination between the internal and external auditors of the listed company; (e)
instituting special projects, value for money studies or other investigations on any matter
specified by the Board of Directors, (f) determination of compliance with relevant statutory
requirements; etc.
Internal Audit
There shall be an internal audit function in every company. The head of internal audit shall
have access to the chair of the Audit Committee.The internal audit reports are to be provided
for the review of external auditors. The auditors shall discuss any major findings in relation to
the reports with the Audit Committee, which shall report matters of significance to the Board of
Directors.
Corporate Excellence - Case of Tatas

One of the initiatives in the business excellence movement is a framework known as the Tata
Business Excellence Model (TBEM), which has been adapted from the renowned Malcolm
Baldrige archetype. The essence of this framework is a proactive attitude rather than a reactive
one. It is about changing the business and running it effectively and efficiently. The TBEM
assessment covers seven core aspects of business operations:

 leadership;
 strategic planning;
 customer focus;
 measurement, analysis and knowledge management;
 workforce focus;
 process management and outcomes of financial and non-financial parameters; and
 Business results.
The model works under the aegis of Tata Quality Management Services (TQMS), an in-house
organisation mandated to help different Tata companies achieve their business excellence and
improvement goals. In recent years, the TBEM framework has been adapted to include new
business and societal initiatives such as governance, safety, climate change and innovation.

The other core elements of the Tata business excellence movement are the Tata Code of Conduct
(TCoC), a mandatory pan-Tata policy that defines how Tata employees can conduct themselves,
and the Management of Business Ethics, a programme that helps Tata companies drive ethics
and values in the organization.

As a result, the business excellence processes have come to characterize the Tata way of
enhancing and conducting its business endeavours, and to a great extent, have helped define
the Tata brand. The TBEM movement in Tata has a built-in reward and recognition mechanism
wherein companies that have achieved a score of 600 on the TBEM framework are felicitated
with the JRD QV Award.

Protection of Stakeholders
The aim of "Good Corporate Governance" is to ensure commitment of the board in managing
the company in a transparent manner for maximizing long-term value of the company for its
shareholders and all other partners. Good corporate governance is simply 'good business'. It
ensures:

 Adequate disclosures and effective decision making to achieve corporate objectives;

 Transparency in business transactions;
 Statutory and legal compliances;
 Protection of shareholder interests;
 Commitment to values and ethical conduct of business.

Changing Roles of Corporate Boards with changing times

The Spencer Stuart 2011 India Board Index, done annually, provides an overview of governance
practices in India's largest listed companies. The study shows that four broad areas of change
are emerging.

1. Chairman and CEO - Companies are increasingly splitting the role of the chairman and
the CEO - a trend which till recently was largely limited to the MNCs in India.
According to the India Board Index 2011, except one company, every BSE-100 company
has split the roles.

2. Non-executive chairman - Also, a growing number of companies have a non-executive

chairman. This makes for better board governance because it allows the chairman to
focus on effective running of the board while the CEO is responsible for managing the
business.
3. Foreign directors - Many Indian companies arerealizing the need for global inputs in
their boardrooms. As a result they are actively inducting foreign directors on board.
 The percentage of foreign directors has been steadily going up - from 24% in 2009 to 29%
in 2010 to 33% in 2011. Not surprisingly, percentage strength of foreign directors to the
total number of directors of BSE-100 has gone up from 4.55% in 2009 to 7.28% in 2011.
"What is even more impressive is the fact there is interest among foreign nationals to
consider board positions in Indian companies," says Bansal.
4. Women directors- The percentage strength of women directors to the total number of
directors on BSE-100 companies has been rising, albeit slowly. From 5.04% in 2009, it has
gone up marginally to 5.51% in 2011. About three to four years back it was around 2.5%.
While directionally it is getting better, Indian boards have a lot of catching up, especially
when the number of women in senior positions in companies has been rising.
Corporate Governance for Market capitalism.
Free markets are a medium and consequence of capitalism.Free-markets are still viewed as
materialistic, unjust, callous, selfish, savagely competitive, cruel and therefore immoral by a
great number of people, irrespective of the North-South divide.
Free markets do not directly violate the rights of others; but the market system may cause to
violate the rights of others indirectly. Perhaps, the clearest example is the environmental
hazards caused or promoted indirectly by free market economy. Capitalist affluence corrupts
the moral sense of people; advertisements appeal to the worst in citizens; markets create envy;
promote bourgeois and ‘philistine’ taste among people, etc
The contemporary market economy is not free of business conspiracy. Some authors hold that
the entire point of modern marketing is to avoid competition based on price.i This implies that
there will be some tacit agreement between manufacturers and their market agents.

Globalization’s effect comes from capital markets’ pressure on corporate governance.

Firms have new reasons to turn to public capital markets. High tech firms following the US
model want the ready availability of an initial public offering for the venture capitalist to exit
and for the firm to raise funds. Firms expanding into global markets often prefer to use stock,
rather than cash, as acquisition currency.
If they want American investors to buy and hold that stock, they are pressed to adopt
corporate governance measures that those investors feel comfortable with.

Internationalization of capital markets has led to more cross-border investing. New

stockholders enter, and they aren’t always part of any local corporate governance consensus.
They prefer a corporate governance regime they understand and often believe that reform will
increase the value of their stock. Similarly, even local investors may make demands that upset
a prior local consensus.

Globalization affects performance levels. Poor performance shows up more quickly when a
competitor takes away market share, or innovates quickly. National decision makers must
consider whether to protect locally favored corporate governance regimes if they regard the
local regime as weakening local firms in product markets or capital markets. Concern about
comparative economic performance induces concern about corporate governance.
The drive towards functional convergence was supported by the development of
international codes and standards of corporate governance. It is well recognized that it is the
dispersed ownership with shareholder foci is right for achieving competitiveness and
enhancing any economy in a globalize world. The OECD, World Bank, IMF, Asian
Development Bank and other international agencies, while they have recognized the
existence of different governance systems and suggested they would not wish to adopt a one-
size-fits-all approach, have nonetheless consistently associated the rules-based outsider mode
of corporate governance.

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