UGC NET

Management
SAMPLE

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 Management (Sample Theory)

Corporate Governance

1. CORPORATE GOVERNANCE

Meaning and Definitions

According Cadbury Committee (UK), "Corporate Governance is the system by which companies
are directed and controlled" Adrian Cadbury emphasized," Corporate Governance basically, has to do
with power and accountability; who exercises power, on behalf of whom and how the exercise of power
is controlled.
To conclude, it may be said that corporate governance is a set of systems. Processes, principles,
rules and regulations used to govern a company's operations and to ensure accountability of Board of
directors and managerial personnel towards all the stakeholders. It is a system of directing and controlling
a company's operations with a view to promoting fairness, transparency and accountability in them with
a view to protect and enhance of all the stakeholders.
Nature/Features
Following are some of the basic features of corporate governance that help understand its
nature:
1. A Formal System : This system is developed on the basis of provisions of laws. Social
norms and ethical principles.
2. A Structural System : This system specifies the distribution of rights and responsibilities
among Board, managers, shareholders and other stakeholders.
3. A system for Direction and Control : Corporate governance is the system by which
companies are directed and controlled.
4. Aim and Objectives : It ultimately helps fulfill the following objectives :
(i) To achieve strategic goals of companies.
(ii) To serve interests of the shareholders, employees and other stakeholders of
companies.
(iii) To protect physical environment.
(iv) To maintain excellent relations with customers, employees, suppliers, local
community etc.
(v) To comply with legal requirements.
5. A Dynamic System : Corporate governance is a dynamic system. It is changing with the
change in law. Social norms and ethical principles and Values.
6. Wide Scope/Various Aspects : Corporate governance system has a very wide scope.
It includes many rules, regulations, processes and practices that help align the interest
of individuals, company and the society. It includes the following aspects:
(i) Determination of power and responsibilities (right and duties) of board of directors.
CEOs, CFOs. And other managerial personnel.
(ii) Establishing the mechanism or measures for controlling the use of powers by the
persons responsible for management of the company.
(iii) Determination of responsibility and accountability towards stakeholders.

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 Management (Sample Theory)

(iv) Determination of formal and informal processes and procedures by which

stakeholders may influence the managerial decisions.
7. Implications : Where a company adopts and follows corporate governance system, it
implies the following :
(i) Company management accepts that shareholders and other stakeholders have
certain irrevocable right in the company.
(ii) Company management accepts that they are trustees of all the stakeholders of
the company.
(iii) Company management commits to conduct business ethical, assume corporate
social responsibility and to distinguish between personal and company interest in
the management of the company.
8. Universal Concept : The concept of corporate governance is universally accepted although
its systems, procedures and practices may differ from place to place and company to
company.
9. Requisites : The establishment and success of corporate governance is not an easy
task. Its success depends on many factors including the following.
(i) All concerned must be financial literate.
(ii) All the concerned must have some technical knowledge so that the techniques of
corporate governance may be applied/used very easily.
(iii) There should be quick and a two-way communication system.
Benefits of Corporate Governance
Kumar Mangalam Birla Committee has very rightly observed, "Strong corporate governance is
indispensable to resilient and vibrant capital markets and is an important instrument of investor protection.
It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices.
The major benefits of corporate governance are listed below :
1. It helps develop appropriate strategies that result in achievement of stakeholders objectives.
2. It helps create secure and prosperous operating environment and improve operational
performance.
3. It ensures adequate disclosures and effective decision-making.
4. It ensures fairness. Transparency and accountability in the operation of companies.
Consequently. It helps protect the interests of shareholders as well as all other stakeholders.
5. It boosts investors confidence which in turn helps build strong capital markets.
6. It helps maximize shareholder's value. It is because shares of companies with good
corporate governance record are better valued by the markets.
7. It helps fulfill statutory, ethical and social responsibilities.
8. It helps compliance with legal requirements.
9. It shows commitment of management to values and ethical conduct of business.
Consequently, it helps run companies in fair, transparent and accountable manner.
10. It contributes to the goodwill and image of the directors, executives and managers who
manage a company on sound governance principles.
11. It creates goodwill and image of a company. Thereby it becomes easier for the company
to attract customers. Suppliers, employees, investors with favourable terms.
12. It helps achieve sustainable development of business, economy and all other sections of
society.

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 Management (Sample Theory)

"Corporate governance can be defined as a set of system and processes which ensure that a
company is managed to the best interests of all the stakeholders, the set systems that help the task
of corporate include certain structural and organisational aspects, the process that helps corporate
governance embrace how things are done with in such structure and systems.
Mechanisms of Corporate Governance
In our country, there are six mechanisms to ensure corporate governance
Companies Act
Companies in our country are regulated by the companies Act, 1956 amend up to The companies
Act is one of the biggest legislations with 658 sections and 14 schedules. The arms of the Act are quite
long and touch every aspect of a company's insistence. But to ensure corporate governance, the Act
confers legal rights to shareholders to
 Vote on every resolution placed before an annual general meeting;
 To elect directors who are responsible for specifying objectives and laying down policies;
 Determine remuneration of directors and the CEO;
 Removal of directors and
 Take active part in the annual general meetings.
Securities Law
The primary securities law in our Country is the SEBI Act. Since its setting up in 1992, the board
has taken a number of initiatives towards investor protection One such initiative is to mandate information
disclosure both in prospectus and in annual accounts. While the companies Act it self mandates certain
standards of information disclosure, SEBI Act has added substantially to these required in an attempt
to make these documents more meaningful.
Statutory Audit
 Statutory audit is yet another mechanism directed to ensure good corporate governance.
Auditors are the conscious-keepers of shareholders, lenders and other who have financial
stakes in companies.
 Auditing enhances the credibility of financial reports prepared by any enterprise. The
auditing process ensures that financial statements are accurate and complete, thereby
enhancing their reliability and usefulness for making investment decisions.
Committees of Corporate Governance
According to the Cadbury Committee's Report, the following committees govern the corporate
functioning of an organisation
 Board of directors  Non-executive director
 Chairman  Professional advisors
 Company secretary  Internal controls
 Audit committees
Corporate Governance Developments Abroad
The major break-through came when the London Stock Exchange and the Accountancy Profession
set up the Cadbury Committee in may, 1991 to report on the Financial Aspects of Corporate Governance.
The Committee submitted its report in 1992. The report reviewed and suggested the structure and
responsibilities of Board of directors; rights and responsibilities of shareholders; the role of auditors etc.
This report has become a reference code for stock exchanges.
Again in 1995 in UK, the Greenbury Committee gave its report which focused on directors'
remuneration. In 1995, the Hampel Committee was constituted to consolidate the recommendations of
the Cadbury Report and the Greenbury Report, This committee prepared a 'combined code, on corporate
governance in 1998 the listed companies were mandatorily required to comply with this combined code.
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 Management (Sample Theory)

In 1997, the CaIpers' board adopted a set of global governance principles with a view to encouraging
a debate on best governance practices globally. The CaIpers' investment committee revised these
principles and released in late 1999.
In 1998, Blue ribbon committee was set up by securities and exchange commission (SEC), U.S.
The committee published 'the report on improving the effectiveness of corporate audit committee' or the
blue ribbon report. The recommendations of this Report were declared mandatory by the New York
stock exchange (NYSE), the American stock exchange (AMEX), National association of securities dealers
(NASDAQ) and American institute of certified public accountants (AICPA), Moreover, these stock
exchanges also revised their listing standards relating to audit committees of the listed companies.
King committee on corporate governance was appointed on the initiative of the institute of
directors in South Africa. The committee gave its report in 2002. The report sets the standards of
corporate governance in South Africa.
In U.S.A the Sarbanes-Oxley Act, 2002 was enacted. The act provided at almost every area of
corporate governance and particularly about auditor's independence, conflict of interest, corporate
responsibility and enhanced financial disclosures.
In 2003, 'the combined code on corporate governance' was developed in U.K. This code
supersedes and replaces the combined code issued by the Hampel Committee in 1998.
Again in 2003, Higgs Report was submitted in U.K. This report reviewed the role and effectiveness
of non-executive directors in the U.K.
Further in 2003 the ASX Corporate Governance Council, Australia, released the "principles of
good corporate governance and best practices recommendations".
The Organisation for Economic Cooperation and Development (OECD) developed principles of
corporate governance in 1999. These were revised in 2004. These principles are intended to assist
governments in their efforts to evaluate and improve the legal, Institutional and regulatory framework for
corporate governance in their countries. These principles also provide guidance and suggestions for
stock exchanges, investors. Corporations and other parties that have a role in the process of developing
good corporate governance.
Corporate Governance Developments in India
Perhaps the single most important development in the field of corporate governance in India has
been the establishment of 'the Securities and Exchange Boards of India' (SEBI) in 1992.
Confederation of Indian Industry (CII) was the first to take initiative for development of a code of
corporate governance. The CII appointed a committee in 1996 under the chairmanship of Rahul Baja.
The committee submitted a 'Code for Desirable Corporate Governance' in April, 1998. The committee
recommended that code be adopted and followed by all Indian companies in public and private sector.
Following CII's initiative, the SEBI constituted a committee under the Chairmanship of Kumar
Mangalam Birla for developing standards of corporate governance. The committee submitted its report
in 1999. This report was the first formal and comprehensive attempt to evolve a code of corporate
governance. The recommendations of the Birla committee were accepted by SEBI and incorporated
them in clause 49 of the listing Agreement of all stock exchanges in India.
In the year 2022, the Department of Company Affair (DCA, now MCA) constituted Naresh Chandra
Committee under the chairmanship of Naresh Chandra. Its task was to examine and recommend on
the issues relating to auditor-client (company) relationship, role of independent directors, disciplinary
mechanism for auditors committing irregularities and the CEO/CFO certification included by Sarbanes-
Oxley Act or SOX of U.S.
After analyzing the statistics and facts disclosed by companies under the clause 49 by the listed
companies, SEBI felt the need to look beyond the mere systems and procedures for effective corporate
governance. SEBI, therefore, constituted a committee under the chairmanship of N.R.Narayana Murthy

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 Management (Sample Theory)

for reviewing implementation of the corporate governance code by listed companies. The committee
submitted its Report in 2003 which suggested improvements in clause 49 of the listing agreement.
Accordingly, the clause 49 was amended and made effective from January. 1, 2006. Since then all the
listed companies are adopting and following the provisions of this clause.
Mandatory provisions of the Clause 49 are required to be complied with by all the listed companies
as well as new companies seeking listing except mutual funds with a paid up capital of Rs.3 crores and
above or net worth of Rs. 25 crores or more at any time in the history of the company.
Recently in December 2009, the MCA has released the 'Corporate Governance Voluntary
Guidelines'
The MCA has recently (December,2009) issued 'Voluntary Guidelines for Corporate Governance'.
Keeping in view various mechanisms/guidelines, it is suggested that all the companies should take the
following measures for ensuring better corporate governance.
1. Proper composition of board of directors : Effective corporate governance largely depends
on Board of directors. Therefore, Board should be carefully constituted by taking into account the
following factors :
(i) The Board should have optimum non-executive directors. The Board should comprise of
at least of fifty per cent non-executive directors i.e. the directors who do not take-part in
the day-to-day operations of company.
(ii) Board should comprise of about fifty per cent of the independent directors.
(iii) Vacancies in the Board should be filled in within very reasonable period of time.
(iv) Board meetings should be regularly held at least four times in a year with a maximum
gap of three months.
(v) All the members of the Board should regularly and actively attend the Board meetings.
The primary role of the Board of directors should be that of trusteeship. It therefore, protects and
enhances shareholders' value through strategic supervision of the company.
2. Separation of office of chairman and CEO : Good governance requires that the office of
Chairman of the Board and CEO should be separated. There should be a clear demarcation of roles
and responsible of both Chairman and CEO. Care should be taken to maintain balance of power
between them.
3. Able, Competent and Committed Directors : In order to ensure good corporate governance,
the directors should be able, competent and committed to values. Therefore, it should be ensured that
the candidate for the directorship should have expertise, experience, foresight, managerial skills and
ethical values, Moreover, he should able to read and understand financial statements.
4. Declaration of Rights, Duties, Remuneration etc : Every company should clearly state and
declare the rights, duties, responsibilities and remuneration of all the directors and other managerial
personnel. Company should also clearly state its expectations from them. It will be better if all of them
particularly non-executive and independent directors are made aware of all these throught a formal letter
of appointment. This will make them more accountable to the company and its stakeholders.
5. Limit on Number of Directorships : Every company should a fix limit on number of
directorships that an individual director of it can hold. For reckoning the maximum number, all the public
and private companies and their subsidiaries should be included. Only those individuals should be
appointed as director who have directorship within that limit so that they may devote sufficient time to
the company. More care should be taken in fixing this limit for individuals in the capacity of managing
director or whole-time directors. Expert suggests that for the number should be restricted to seven.
However, the number of directorships for other directory may be restricted to seven. However, the
number of directorships for other directory may be restricted to fifteen.

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 Management (Sample Theory)

6. Remuneration of Directors : The level and composition of remuneration should be reasonable

and sufficient to attract, retain and motivate directors. Remuneration package should maintain a balance
between fixed and incentive pay. Remuneration of executive directors should be linked to corporate and
individual performance. The remuneration of all the directors should be based on the recommendations
of the Remuneration Committee. The remuneration package should be disclosed to the shareholders
in the Annual Report of the company.
7. Training and Information : To ensure good governance, companies should arrange for
imparting training to its directors. This is necessary for familiarization to directors with them roles,
responsibilities and liabilities, Training should be imparted to enhance the ability to understand basic
financial statements and information related documents.
Directors should also be supplied with all the information well within time that is necessary for
discharging their duties efficiently and effectively.
Moreover, every company should also timely inform its directors about the risk assessment and
minimization procedures.
8. Sound Auditing System : One of the most significant measures is the establishment of
sound auditing system. It should consist of internal as well as statutory auditing system. In order to
ensure independence and credibility of the internal audit system, the Board should appoint an internal
auditor who should not be an employee of the company.
It is mandatory for every company to appoint statutory auditors. A company's audit committee
should recommend the names of audit firms only after considering the profile of the auditors, their
strengths and weakness and qualifications. Company should also obtain a certificate from the audit firm
certifying its independence. To maintain effective audit system, a company should rotate audit firms after
a period of three to five years.
9. Code of conduct : Every company should develop and lay down a code of conduct for all
its directors and other managerial personnel. It should be posted on the website of the company. Every
director and other managerial personnel should be required to affirm compliance with the code on an
annual basis. Annual Report of each company should contain a declaration to this effect signed by the
CEO.
10. Disclosure and reporting system : Every company should have a sound system of
disclosures and reporting with a view to ensure transparency of its operation. There should an inbuilt
and automatic system to disclose and report every such matter which materially affects company's
performance. More specifically, every company should make disclosure and report about the following:
(i) Criteria of appointment of directors.
(ii) Appointment of new directors and reappointment of directors.
(iii) All elements of remuneration of directors.
(iv) Relationships between the directors.
(v) Any accounting treatment that is different from an Accounting Standard.
(vi) Quarterly financial results.
(vii) Share-transfer agent and his address.
(viii) Details of all material contracts with related parties.
(ix) Risk assessment and minimization processes
(x) Proceeds from issue of shares and debentures.
(xi) Management Discussion and Analysis Report i.e. a report containing discussion on matters
that shows the company's competitive position. These matters include industry structure
and developments; opportunities and threats; segment-wise or product-wise performance;
outlook; risks and concerns; internal control systems and their adequacy; discussion on

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 Management (Sample Theory)

financial performance with respect to operational performance and material developments

in human resources/industrial relations front including number of people employed.
11. Specialized committees of the board : Every company should constitute specialized
committees of the Board. Such committees may include the audit committee, remuneration committee,
nomination committee, investor service committee, corporate management committee etc. These should
consist of the expert members. Role of these committees is discussed in the next heading.
12. Whistle blowing mechanism : Every company should establish a mechanism for employees
to report concerns about unethical behaviour, actual or suspected fraud, or violation of the company's
code of conduct or ethics policy.

2. VALUE BASED ORGANIZATION

By value we mean the motive and/or the basis for choosing between alternative courses of
action when a critical decision needs to be taken. High values lead to objective, fair, altruistic decisions
and actions, and ensure the welfare of all concerned. Low values do exactly the opposite. This can be
extended to all facets our organisations faces.
Value influence the behaviour of individuals in the following manner
 Values influence an individual's perception about the problems he faces and consequently
the decisions he makes to overcome those problems.
 Values influence the way in which an individual looks at other individuals and groups of
individuals, i.e., interpersonal relationships. Values become the basis of such interpersonal
interactions.
 Individuals judge organisational success as well as its achievement on the basis of their
value systems. Thus, for some individuals, organisational success may be in the form
of high-profit earning irrespective of the means adopted whereas, this may be a mean
thing for other individuals.
 Individuals set limit for the determination of what is ethical or unethical behaviour for
themselves as well as for others.
 Values determine the extent to which individuals accept organisational pressures and
goals, If these do not match the values hold by them, they thwart the organisational
pressures and goals, and even leave the organisation.
Allport Etal's Classification of Values
Allport Etal have classified personal values into six categories based on the orientation of people
towards certain things:
 Economic People having values of economic orientation attach importance to what is
useful. They concerned with the practical affairs of the work and are material minded
people.
 Theoretic People having values of theoretic orientation involve themselves in the use of
rational, critical and empirical processes. They strive to explore truth.
 Political People having values of political orientation place great emphasis on power. They
remain interested in gaining power and using it to influence others.
 Social People having values of social orientation attach importance to love and affection.
They are for interests of people around and are sympathetic to them.
 Aesthetic People having values of aesthetic orientation put emphasis on artistic values
and harmony. It not necessary that they themselves are creative or artistic but have love
for these.

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 Management (Sample Theory)

 Religious People having values of religious orientation attach importance to unity.

Environmental Pressure
Various internal and external environment factors put pressure on the organisation to behave
ethically. Such organs are customers, suppliers, financiers, trade unions and government. Therefore,
the organisation has to refrain from unethical behaviour. Because of this in-built control mechanism of
the society, there are chances of ethical behaviour.
Credibility
Credibility of an organisation can be increased by way of ethical behaviour. Through it, the
organisation protect its identity. Credibility of the organisation depends on trustworthiness, transparency,
and honesty. High credibility, the trust that the people have in the policies and practices of an organisation,
can be maintained through continuous ethical behaviour.
Moral Consciousness
Every individual is morally conscious. Since an organisation is a collectivity of individuals for
certain specified objectives, it tends to behave ethically even if there is a pressure from external forces
to behave unethical. Organisations tend to feel that their long-term survival depends on ethical conduct
and any unethical behavior is a short-term aberration.
Legal Pressure
Ethical behaviour is evolved from the social system. Thus, ethical behaviour is evolutionary. In
this evolution process, there is a possibility that, sometimes, it may not be clear to people whether a
particular behavior is ethical or unethical, In order to avoid this dilemma, most of the societies enact
laws which define ethical and unethical behaviour. Penal provisions are also made to curb unethical
behaviour. These penal provisions refrain people and organisations from engaging in unethical behaviour.

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 Management (Sample Questions)

Sample Questions With Solutions

1. The law of Equi marginal utility is an extension of

(A) Law of Demand (B) Law of Supply
(C) Law of diminishing marginal utility (D) Law of variable proportions

2. Which of the following triggers unethical behaviour?

(A) Conflicting values (B) Pressure from society
(C) Extreme regulations (D) All of the above

3. "Corporate Governance is the system by which companies are directed and controlled" was
defined by which of the following?
(A) Cadbury Committee (B) Kumar Mangalam Birla Committee
(C) Narayan Murthy Committee (D) None of the above

4. Price elasticity of demand for a product is measured by

(A) Ed = Q/ Q × P/ P (B) Ed = Q/Q ÷ P/ P
(C) Ed = P/Q ×QP (D) Ed = P/ P ÷ Q/ Q

5. Which of the following is not a part of Carroll's model of Corporate Social Responsibiliy?
(A) Ethical (B) Legal
(C) Philanthropic (D) Political

6. Business ethics does not include which of the following principles?

(A) Principle of humanity (B) Principle of dissatisfaction
(C) Principle of autonomy (D) Principle of universality

7. The phrase 'cogs in a machine' is intended to refer to which of the following theories?
(A) Theory Y (B) Theory Z
(C) Bureaucracy Theory (D) Theory X

8. Which of the following statements is true?

Statement I: Managers must use their imagination rather than simply relying on factual evidence
to come up with suitable options or alternatives for decision-making.
Statement II: Once a suitable alternative it chosen, the managers must immediately execute it
before consulting others.
Statement III: Managers must only rely on their own abilities and judgements to come up with
alternatives without the need of a second opinion
(A) Statement I is correct (B) Statement II is correct
(C) Statement III is correct (D) State II and III are correct

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 Management (Sample Questions)

9. Which of the following best describes the "Global Sullivan Principles".

(A) To support economic, social and political justice by companies at all levels of employment,
including racial and gender diversity on decision-making committees and boards.
(B) To promote principled business leadership and the belief that business has a crucial role
in identifying and promoting sustainable and equitable solutions to key global issues
affecting the physical, social and economic environments.
(C) To serve as a reference tool that companies (and investors) can use to benchmark or
monitor their own policies or those of the companies in which they invest.
(D) To support the participation of both the private sector and other social factors to advance
responsible corporate citizenship and universal social and environmental principles to
meet the challenges of globalization.

10. Which of the following parties can be a whistleblower trying to report a fraudulent activity?
(A) Former employee (B) Current employee
(C) Competitor (D) All of the above

ANSWER KEY

1 2 3 4 5 6 7 8 9 10
C D A B D B D A A D

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 Management (Sample Questions)

SOLUTIONS

1. (C) The law of Equi marginal utility is an extension of the Law of diminishing marginal utility.
The consumer can get maximum utility by allocating income among commodities in such
a way that last dollar spent on each item provides the same marginal utility.
2. (D) All of the above
3. (A) Cadbury Committee
4. (B) A formal definition of price-elasticity of demand (Ed) is given as
%changein quantity demanded
Ed 
% change inprice

Q / Q
Price elasticity of demand = 
P / P
5. (D) The four components of Archie B. Carroll's pyramid of Corporate Social Responsibility
are:
 Philanthropic responsibility: Be a good corporate citizen; contribute resources
to the community, improve quality of life
 Ethical responsibility: Be ethical; obligation to do what is right, just and fair, avoid
harm.
 Legal responsibility: Obey the law; law is society's codification of right and wrong,
play by the rules of the game.
 Economic responsibility: Be profitable; the foundation upon which all the others
rest.
6. (B) Principle of dissatisfaction
7. (D) Theory X
8. (A) Statement I is correct
9. (A) To support economic, social and political justice by companies at all levels of employment,
including racial and gender diversity on decision-making committees and boards.
10. (D) All of the above

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