L.S.

RAHEJA COLLEGE OF ARTS AND COMMERCE

ETHICS
CORPERATE GOVERNANCE

ROMIL ADANI RONAK ADANI AKSHAT AWASTHI SHREYANS CHOKSEY SANKALP GARG RAJ KESARIA YASHIL PATEL

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CORPORATE GOVERNANCE
Corporate governance is a process or a set of systems and processes to ensure that a company is managed to suit the best interests of all . The systems that can ensure this may include structural and organizational matters. The stakeholders may be internal stake holders ( promoters , members , workmen and executives ) and external stake holders ( customers , lenders , vendors , bankers ) . Corporate governance is concerned with the establishing of a system whereby the directors are entrusted with responsibilities and duties in relation to the direction of corporate affairs. It is concerned with accountability of persons who are managing it towards stakeholders. It is concerned with the morals , ethics , values , parameters of conduct and behavior of the company and its management . corporate governance is nothing but voluntary ethical code of business of companies . this is based on the core values of the top management and the guiding principles that emanate from it . The concept of corporate governance hinges on total transparency , integrity and accountability of the management. BUSINESS ETHICS AND CORPORATE SOCIAL RESPOSIBLITY

It is a system of structuring operating and controlling a company with view to achieve long term strategic goals to satisfy shareholders , creditors , employees , customers , customers and suppliers and comploying with the legal and regulatory requirements apart from meeting environmental and local community needs . Corporate governance is a way of life and not a set of rules . it is more of a way of life that necessitates taking intrests in every business decision a key element of good corporate governance is transperacy projects through a code of good governance which incorporates a system of checks and balances between key players board of management , auditors and shareholders.

GOOD CORPORATE GOVERNANCE RESULTS IN : 1. Good governance provides stability and growth to the companies 2. Good governance system, demonstrated by adoption of good corporate practices , builds confidence 3. Effective governance reduces perceived risks 4. A good corporate citizen becomes an icon an d enjoys a position of pride PRINCIPLES GOVERNING CORPORATE GOVERNANCE FRAMEWORK : 1. Accountablity - Being answerable for decisions and having meaningful mechanisms in place to ensure the agency adheres to all applicable standards 2. Transparency having clear roles and responsibilities and clear procedures for making decisions and excercising powers

3. Integrity acting impartially , ethically and in the intrest of the agency and n ot misusing information acquired through a position of trust . 4. Stewardship using every opportunity to enhance the value of the public assets and institutions that have been entrusted to care 5. Leadership - Achieving an agency wide commitment to good governance through leadership from top

THE AGENCY THEORY

Agency theory focuses on the relationship and goal incongruence between managers and shareholders. Agency relationship occurs when one partner in a transcation ( the principal) delegates authority to another (the agent) and the welfare of the principal is affected by the choices of the agent. Agency theory is directed at the ubiquitous agency relationship, In which one party (the principal) delegates work to another( the agent) , who performs that work.the agency theory is concerned with resolving two problems that can occur in an agency relationships. The first is the agency problem that arises when : a> The desires and goals of the principal and agent conflict and , b> It is difficult and expensive for the principal to verify what the agent is actually doing. The problem here is that the principal cannot verify that the agent has behaved appropriately . the second is the problem of risk sharing that

arises when the principal and agent have different attitude towards risk..the problem here is that the principal and the agent may prefer different actions because of the different risk preference. Manager can be encouraged to act in the stockholders best interest through incentives constraints and punishments. These methods, however are effective only if shareholder can observe all of the actions taken by managers. A moral hazard problem ,whereby agents take unobserved actions in their own self interest , originates because it is infeasible for shareholders to monitor all managerial actions. To reduce morale hazard problem, stock holders must incur agency cost.

ROLE OF THE CEO

Equitable treatment of shareholders: The CEO should respect the right of shareholders and help shareholders to exercise these rights. He can help shareholder exercise their rights by effectively communicating information that is understandable and accesable, and encouraging shareholders to participate in general meetings. Integrity & Ethical Behaviour ; The CEO shpuld develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand , though, that systematic reliance on integrity and ethics is bound to eventual failure.

Disclosure & Transparency The CEO should be ready to clarify the companies position to the shareholders and the board and the magement to provide the shareholders with the level of accountabiolity. They should also implement procedures to independently verify and safeguard the integrity of the companys financial reporting. Disclosure of material matters concerning the organization should be timely balanced to ensure that all investors have access to clear , factual information. Foster a corporate culture promoting ethical practices , encourages individual integrity and fulfill social and environmental responsibility

Constant improvement : The CEO must have the oath if you cant do it better , why do it? It underscore our drive to become ever better and bigger company.

The chairman of the board

The chairman will usually have a second of casting vote in the case of equality of votes, however, a chairman has no casting vote merely by virtue of his office. Since the chairman's position is of great importance, it is vital that his election is clearly in accordance with any special procedure laid down by the articles and that it is unambiguously minuted; this is especially important to avoid disputes as to his period in office. Usually there is no special procedure for resignation. As for removal, articles usually empower the board to remove the chairman from office at any time. Proper and clear minutes are important in order to avoid disputes.

The main features of the role of chairman are as follows: as well as being chairman of the board, he/she is expected to act as the companys leading representative which will involve the presentation of the companys aims and policies to the outside world;

to take the chair at general meetings and at board meetings, this will involve: the determination of the order of the agenda; ensuring that the board receives accurate, timely and clear information; keeping track of the contribution of individual directors and ensuring that they are all involved in discussions and decision

making. At all meetings the chairman should direct discussions towards the emergence of a consensus view and sum up discussions so that everyone understands what has been agreed;

To take a leading role in determining the composition and structure of the board. This will involve regular reviews of the overall size of the board, the balance between executive and non-executive directors and the balance of age, experience and personality of the directors

To ensure effective communication with shareholders to understand their issues and concerns

The Board of Directors

The board's key purpose is to ensure the company's prosperity by collectively directing the company's affairs, whilst meeting the appropriate interests of its shareholders and stakeholders. The objects of the company are defined in the Memorandum of Association and regulations are laid out in the Articles of Association.

Role of the board of directors

Boards can be helped greatly by focusing on four key areas:  Establish vision, mission and values Determine the company's vision and mission to guide and set the pace for its current operations and future development. Determine the values to be promoted throughout the company. Determine and review company goals. Determine company policies  Set strategy and structure Review and evaluate present and future opportunities, threats and risks in the external environment and current and future strengths, weaknesses and risks relating to the company. Determine strategic options, select those to be pursued, and decide the means to implement and support them. Determine the business strategies and plans that support the corporate strategy. Ensure that the company's organisational structure and capability are appropriate for implementing the chosen strategies.  Delegate to management Delegate authority to management, and monitor and evaluate the implementation of policies, strategies and business plans. Determine monitoring criteria to be used by the board. Ensure that internal controls are effective. Communicate with senior management.  Exercise accountability to shareholders and be responsible to relevant stakeholders

 Ensure that communications both to and from shareholders and relevant stakeholders are effective. Understand and take into account the interests of shareholders and relevant stakeholders. Monitor relations with shareholders and relevant stakeholders by gathering and evaluation of appropriate information. Promote the goodwill and support of shareholders and relevant stakeholders

RIGHT OF SHAREHOLDERS
Voting Power on Major Issues This includes electing directors and proposals for fundamental changes affecting the company such as mergers or liquidation. Voting takes place at the company's annual meeting. If you can't attend, you can do so by proxy and mail in your vote. Ownership in a Portion of the Company Previously we discussed the event of a corporate liquidation where bondholders and preferred shareholders are paid first. However, when business thrives, common shareholders own a piece of something that has value. Said another way, they have a claim on a portion of the assets

owned by the company. As these assets generate profits, and as the profits are reinvested in additional assets, shareholders see a return in the form of increased share value as stock prices rise. The Right to Transfer Ownership Right to transfer ownership means shareholders are allowed to trade their stock on an exchange. The right to transfer ownership might seem mundane, but the liquidity provided by stock exchanges is extremely important. Liquidity is one of the key factors that differentiates stocks from an investment like real estate. If you own property, it can take months to convert your investment into cash. Because stocks are so liquid, you can move your money into other places almost instantaneously. An Entitlement to Dividends Along with a claim on assets, you also receive a claim on any profits a company pays out in the form of a dividend. Management of a company essentially has two options with profits: they can be reinvested back into the firm (hopefully increasing the company's overall value) or paid out in the form of a dividend. You don't have a say in what percentage of profits should be paid out - this is decided by the board of directors. However, whenever dividends are declared, common shareholders are entitled to receive their share. Opportunity to Inspect Corporate Books and Records This opportunity is provided through a company's public filings, including its annual report. Nowadays, this isn't such a big deal as public companies are required to make their financials public. It can be more important for private companies. The Right to Sue for Wrongful Acts Suing a company usually takes the form of a shareholder class-action lawsuit. A good example of this type of suit occurred in the wake of the accounting scandal that rocked WorldCom in 2002, after it was discovered that the company had grossly overstated earnings, giving

shareholders and investors an erroneous view of its financial health. The telecom giant faced a firestorm of shareholder class-action suits as a result. Shareholder rights vary from state to state, and country to country, so it is important to check with your local authorities and public watchdog groups. In North America, however, shareholders rights tend to be more developed than other nations and are standard for the purchase of any common stock. These rights are crucial for the protection of shareholders against poor management.

Conclusion Buying a stock means ownership in a company and ownership gives you certain rights. While common shareholders might be at the bottom of the ladder when it comes to liquidation, this is balanced by other opportunities like share price appreciation. As a shareholder, knowing your rights is an essential part of being an informed investor - ignorance is not a defense. Although the Securities and Exchange Commission and other regulatory bodies attempt to enforce a certain degree of shareholder rights, a well-informed investor who fully understands his or her rights is much less susceptible to additional risks.

Corporate Governance From Cadbury Committee to Narayan Murthy Committee This committee published its report titled The financial aspects of Corporate Governance in 1992 and was the first of its kind. The committees Were focused on the control and reporting functions of boards and on the role of auditors. This reflects the committees purpose, which was to review those aspects of corporate governance specifically related to financial accounting and reporting. It seeks to contribute positively to the promotion of corporate governance. At the heart of the recommendations was a Code of Best Practice designed to achieve the necessary high standards of corporate behavior. The London stock exchange intended to require all the listed companies registered in the United Kingdom , as a continuing obligation of listing , to state whether they are complying with the Code and to give reasons for their non-compliance. This requirement thus enabled shareholders to know where the companies in which they have invested stand in relation to the Code. By adhering to the Code, listed companies were supposed to strengthen both their control over their business and their accountability. In doing so , they would be striking the right balance between meeting the standards of corporate governance expected of them and retaining the essential spirit of enterprise. BOARD OF DIRECTORS : y The board should meet regularly, retain full and effective control over the company and monitor the executive management.

y There should be a clearly accepted division of responsibilities at the head of the company, which will ensure a balance between power and authority, such that no one individual has unfettered power of decision. y The board of directors should include non-executive directors of sufficient caliber. y Thee should be agreed procedure for directors in the furtherance of their duties to take independent professional advice if necessary , at companys expense. y All directors should have access to the advice and services of the company secretary , who is responsible to the board for ensuring that board procedures are followed and that applicable rules and regulations are complied with. Any question of the removal of the company secretary should be a matter for the board as a whole. Non-Executive directors : y They should bring an independent judgment on issue of strategy. performance, resources, including key appointments and standards of conduct. y The majority should be independent of management and free from any business or other relationship, which could materially interfere with the exercise of their independent judgment. y They should be appointed for specific terms and reappointment should not be automatic. y Non-executive directors should be elected through a formal process.

Executive Directors : y Their service contracts should not exceed more than three years without shareholders approval.

y There should be full and clear disclosure of directors total emoluments. Separate figures should be given for salary and performance-related elements and the basis on which performance is measured should be explained. Reporting and Control: y It is boards duty to present a balanced and understandable assessment of the companys position. y The board should ensure that an objective and professional relationship is maintained wit the auditors. y The board should establish an audit committee of at least three nonexecutive directors with written terms which clearly deal with its authority and duties y The directors should report on the effectiveness of the companys system of internal control

Kumar Mangalam Birla committee report on Corporate Governance:

According to the report the issue of corporate governance involves besides shareholders, all other stakeholders. The committees recommendations have looked at corporate governance from point of view of stakeholders and in particular that of the shareholders and investors. The control and reporting functions of the board, roles of various committees of the board, and role of management all assume special significance when viewed from this perspective.

At the heart of the reports were the set of recommendations, which distinguishes between the responsibilities and obligations of the boards and the management in instituting the system of good corporate governance. Many of the recommendations are mandatory. For reasons stated in the report, these recommendations were to be enforced by the listed companies. The companies were also required to disclose separately in their annual reports, a report on corporate governance. The implementations were to be phased.

The company recognized that India had in its place a basic system of corporate governance and the SEBI had already taken a number of steps to towards raising the existing standards. The committee divided the recommendations into mandatory and nonmandatory categories and those recommendations, which were absolutely mandatory for corporate governance, were defined with precision. Others which were either desirable or required change of law were listed as nonmandatory.

Some of the recommendations of the committee are: y The committee recommends that the board of a company have an optimum combination of executive and non-executive directors. The number of independent directors would depend on the nature of the chairman of the board. In case a company has a non-executive chairman, at least one-third of board should compromise of independent directors and in case of executive chairman, at least half of board should be independent. y Given the importance of chairmans role, the committee recommends that a non-executive chairman should be entitled to

maintain a chairmans office at the companys expense as also allowed reimbursement of expenses incurred in performance of his duties. This will allow him to discharge the responsibilities effectively. y The committee therefore recommends that the board of a company should set up a qualified and independent audit committee. This would go a long way in enhancing the credibility of the financial disclosures of a company and promoting transparency. y The audit committee should have minimum three members, all being non-executive directors with the majority being independent, and with at least one director having financial and accounting knowledge. y The chairman should be present at the Annual General Meeting to answer shareholder querie. y The company secretary secretary should act as a secretary to the committee. y A management discussion and analysis report should form a part of the annual report to the shareholders. This management discussion and analysis should include discussion on the following matters within the limits et by the companyss position: 1. Industry nature and developments 2. Opportunities and threats 3. Segmentiwise and productwise developments. 4. Outlook 5. Risks and concerns 6. Internal control system and their adequacy 7. Material development in human resource/industrial relations front, including number of people employed. Likewise such recommendations were made to make corporate govenance strong in India.

Harshad Mehta Scam

He was known as the BIG BULL. However his bull run did not last for a long time. He triggered a rise in the Bombay Stock Exchange in the year 1992 by trading in shares at a premium across many segments. Taking advantage in the loopholes of the banking system harshad and his associates triggered a securities scam diverting the funds worth 4000 crore from the banks to the stockholders between April 1991 to May 2002. Harshad Mehta worked with the New India Assurance Company before he moved away to try his luck in the stock markets. Mehta soon learned the tricks of the trade and set out dangerous game plan. Mehta has siphoned off huge sums of money from several banks and millions of shareholders and conned in the process. His scam was exposed and he was arrested and was banned for life to trade in stock markets. Harshad Mehta along with his brother and six other associates were later charged with 72 criminal offences and where behind the bars for a period of ranging from 1 to 10 years on the charge of duping State Bank of India worth Rs. 600 crores .

Ketan Parekh Scam

Ketan Parekh followed Harshad Mehtas footsteps to swindle crores of rupees from the banks. Ketan however had bigger plans in his minds and targeted smaller stock exchanges such as Allahabad Stock Exchange and the Calucutta Stock Exchange and bought shares in fictious names. His dealings involved around shares of companies like Himachal Futuristic, Global Telesystems, SSI Ltd, DSQ Software,ZEE Telefilms, Silverline, Pentamedia and Satyam computers. Ketan managed to get Rs 250 crores from Global Trust Bank to fuel his ambitions and along with his associates he managed to get 1000 crores from Madhavura Mercantile Co-coperative Bank. According to RBI a broker is allowed only Rs 15 crores loan. There was evidence of price rigging in the scripts such as Global Trust Bank Zee Telefilms, HFCL and Lupin Laboratories.

Bibliographyhttp://www.brefigroup.co.uk/acrobat/boardroles.com
http://www.iod.com/MainWebSite/Resources/Document/roleofthechairman_1006.pdf http://www.investopedia.com/articles/01/050201.asp#axzz1XG02vtRW