Role of Ethics in

Corporate
Governance

What is corporate governance?

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
- Sir Adrian Cadbury

What is corporate governance?

Contd

The primary purpose of corporate leadership is to

create wealth legally and ethically.
This translates to bringing a high level of
satisfaction to five constituencies -- customers,
employees, investors, vendors and the
society-at-large.
The raison d'tre of every corporate body is to
ensure predictability, sustainability and
profitability of revenues year after year.
- N R Narayana Murthy

History of Corp Gov in India

Unlike South-East and East Asia, the corporate
governance initiative in India was not triggered by any
serious nationwide financial, banking and economic
collapse
Also, unlike most OECD countries, the initiative in India
was initially driven by an industry association, the
Confederation of Indian Industry

In December 1995, CII set up a task force to design a voluntary

code of corporate governance
The final draft of this code was widely circulated in 1997
In April 1998, the code was released. It was called Desirable
Corporate Governance: A Code
Between 1998 and 2000, over 25 leading companies voluntarily
followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddys
Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI
and many others

History of Corp Gov in India

Following CIIs initiative, the Securities
and Exchange Board of India (SEBI) set
up a committee under Kumar Mangalam
Birla
to
design
a
mandatory-cumrecommendatory
code
for
listed
companies
The Birla Committee Report was approved
by SEBI in December 2000
Became mandatory for listed companies
through the listing agreement, and
implemented according to a rollout plan

History of Corp Gov in India

Following CII and SEBI, the Department of Company
Affairs (DCA) modified the Companies Act, 1956 to
incorporate specific corporate governance provisions
regarding independent directors and audit committees
In 2001-02, certain accounting standards were
modified to further improve financial disclosures.
These were:
Disclosure of related party transactions
Disclosure of segment income: revenues, profits
and capital employed
Deferred tax liabilities or assets
Consolidation of accounts
Initiatives are being taken to (i) account for ESOPs, (ii)
further increase disclosures, and (iii) put in place
systems that can further strengthen auditors
independence

Fundamental Objective of
Corporate Governance
Enhancement of Shareholder
Value, keeping in view the
Interests
of
other
Stakeholders
CG a Way of Life rather than a
Code

Constituents of Corp Gov

The Board of Directors
Pivotal role
Accountable to stakeholders
Directs management

The Shareholders & Stakeholders

To participate in appointment of directors
To hold the BoD accountable for governance through
proper disclosures

The Management
To act on the direction of the BoD
To provide requisite information to the BoD for
decision making
To implement and monitor control systems

Rationale` for Disclosures

An effective disclosure based regulation
(DBR) implies greater responsibilities
on
the
company
directors,
its
management and advisers
An effective DBR promotes investor
activism
Markets believe that perceived benefits
outweigh perceived costs

Disclosure based Regulation

Components & types of disclosure
Disclosures
by whom

Disclosures
for whom

Public Listed Cos.

Intermediaries
Stock Exchanges
MARKET
Mutual Funds
Analysts & advisors

Shareholders
Investors
Intermediaries
Regulator
Government
Other stake holders

Disclosure Based Regulation

Components & types of disclosures
Initial Disclosures Disclosures for
raising capital by companies, mutual
funds in offer documents
Public Offers
Private Placement
Continuous disclosures financial / nonfinancial
Frequency of disclosure
Dissemination process electronic,
physical, centralised, dispersed
Accessibility of information

Disclosure Based Regulation

Initial Disclosures
Continuous disclosures
Corporate Governance
Financial disclosures
Risk based disclosures for
intermediaries
Disclosures for stock exchanges

Disclosures
Board of Directors: information that must be
supplied

Annual, quarter, half year operating plans, budgets and

updates
Quarterly results of company and its business segments
Minutes of the audit committee and other board committees
Recruitment and remuneration of senior officers
Materially important legal notices and claims, as well as any
accidents, hazards, pollution issues and labor problems
Any actual or expected default in financial obligations
Details of joint ventures and collaborations
Transactions involving payment towards goodwill, brand
equity and intellectual property
Any materially significant sale of business and investments
Foreign currency and other risks and risk management
Any regulatory non-compliance

Disclosures
Disclosures to shareholders in addition to balance
sheet, P&L and cash flow statement

Board composition (executive, non-exec, independent)

Qualifications and experience of directors
Number of outside directorships held by each director
(capped at director not being a member of more than 10
board-level committees, and Chairman of not more than 5)
Attendance record of directors
Remuneration of directors
Relationship (familial or pecuniary) with other directors
Warning against insider trading, with procedures to
prevent such acts
Details of grievances of shareholders, and how quickly
these were addressed
Date, time and venue of annual general meeting of
shareholders

Disclosures
Disclosures to shareholders in addition to
balance sheet, P&L and cash flow statement
Dates of book closure and dividend payment
Details of shareholding pattern
Name, address and contact details of registrars
and/or share transfer agents
Details about the share transfer system
Stock price data over the reporting year, and how
the companys stock measured up to the index
Financial effects of stock options
Financial effects of any share buyback
Financial effects of any warrants that are to be
exercised
Chapter reporting corporate governance practices

Disclosures
Disclosures to shareholders in addition to
balance sheet, P&L and cash flow statement
Detailed chapter on Management Discussion and
Analysis focusing on markets, operations,
finances, accounts, risks, opportunities and
threats, internal control systems
Consolidated financial statement, incorporating
accounts of all subsidiaries (over 50% shares
held by reporting company)
Details
of
all
significant
related
party
transactions
Detailed segment reporting (revenues, costs,
operating profits and capital employed)
Deferred tax liabilities and assets and
debit/credit in the P&L for the reporting year

Disclosures
(A) Basis of related party transactions

I. A statement in summary
form of
transactions with related parties in the
ordinary course of business shall be placed
periodically before the audit committee.
II. Details of material individual transactions
with related parties which are not in the
normal course of business shall be placed
before the audit committee.
III. Details of material individual transactions
with related parties or others, which are not
on an arms length basis should be placed
before the audit committee, together with
Managements justification for the same

Disclosures
(B) Disclosure of Accounting Treatment
To disclose in the financial statements, if
an accounting treatment other than
prescribed in Accounting Standard has
been followed alongwith explanation.
(C) Board Disclosures Risk management
Internal and external business risks
Procedures to inform Board members about
the risk assessment and minimization.
Periodically reviewed

Disclosures
(D) Proceeds from public issues, rights issues,
preferential issues etc.
To disclose to the Audit Committee, on
use/application of funds as and when any issue
is made
(E) Additional disclosures:
In the Annual Report the criteria of making
payments to NEDs to be disclosed or a reference
to be made that the same is available on the
companys website
number of shares and convertible instruments
held by NEDs.
NEDs shall disclose their shareholding (both own
or held by / for other persons on a beneficial
basis) in the company in which they are
proposed to be appointed as directors, prior to
their appointment.

Disclosures
F) Management
A Management Discussion and Analysis
report to form part of the Annual Report.
G) Shareholders
Disclosures to shareholders in case of
appointment /reappointment of directors,
quarterly results and presentations made,
shareholders grievance committee and
share transfer committee, shareholding
pattern-change

CEO/CFO certification
The CEO, i.e. Managing Director and the CFO i.e.
whole-time Finance Director or head of the finance
function to certify to the Board that:
(a) They have reviewed financial statements and the
cash flow statement for the year
and these
statements:
(i) do not contain any materially untrue statement or omit
any material fact or contain statements that might be
misleading;
(ii) together present a true and fair view of the companys
affairs and are in compliance with existing accounting
standards, applicable laws and regulations.

(b) no transactions entered into by the company

during the year which are fraudulent, illegal or
violative of the companys code of conduct.

CEO/CFO certification (contd)

(c)They accept responsibility for establishing and
maintaining internal controls and that they have
evaluated the effectiveness of the internal control
systems of the company and they have disclosed to
the auditors and the Audit Committee, deficiencies in
the design or operation of internal controls, if any, of
which they are aware and the steps they have taken
or propose to take to rectify these deficiencies.
(d)They have indicated to the auditors and the Audit
committee
(i) Significant changes in internal control during the year;
(ii) Significant changes in accounting policies during the
year and that the same have been disclosed in the
notes to the financial statements; and
(iii)Instances of significant fraud of which they have
become aware and the involvement therein, if any, of
the management or an employee having a significant
role in the companys internal control system

ETHICS-definitions
The word ethics is derived from the Greek
word ethos meaning character and latin
word mores meaning customs
To better understand ethics let us
understand and contrast the definition of
ethics and law
Law is a consistent set of universal rules
that are widely published, generally
accepted and usually enforced. These rules
describe the ways in which people are
required to act in society.
Ethics defines what is good for the
individual and for society and establishes
the nature of duties that people owe to
oneself and others in society

What are ethics

The principle of conduct professional
ethics
A system or philosophy of conduct
A discipline dealing with what is good and
bad- moral duty and obligation
A set of moral principles or values.

Relation between ethics and law

ETHICS Reflection in a companys operations of the values

and moral principles used in the communities in
which they operate
Successful markets and corporate performance are
founded on a commitment to basic ethical
principles aligned as much as possible to the
interests of individuals, corporations and society.
Ethical standards may be expressed in a
companys formal conduct requirements, or
contained in generally stated principles that guide
a companys preferred conduct or behavior.
Most companies have put in place a code of ethics
for its employees to conduct themselves in a
particular manner while doing business.

Purpose of Ethics
Ethics are the guiding principles.
Where the proposed business activity/
operation of the company borders on the
unknown, the company needs to apply the
ethics principle to decide on the project.
Ethics help make relationships mutually
pleasant and productive- imbibes a sense
of community among members- a sense of
belongingness to society.

Why have a code of ethics?

To define acceptable behavior
To promote high standards of practice
To provide a benchmark for self-evaluation
To establish a framework for professional
behavior and responsibilities
As a vehicle for occupational identity
As a mark of occupational maturity.

Code of ethics -transition

Original

Revised

Compliance

Integrity

Enforcement

Inspiration

Punishment

Motivation

Directive

Educational

Secretive

Open

Creating the Ethical Imperative

Written code of ethics

Employee commitment
Employee training
Discipline process
Full disclosure
Building expectations
Resolution process conflict management

THE INFOSYS MODEL

A formal code of business conduct and
ethics.
To be signed and adhered to by employees.
Action against any employee for violation
thereof.

THE INFOSYS MODEL -Contents

General standards of conduct

Management of conflicts of interest
Prohibition of exploitation of corporate opportunities
Protection of companys confidential information
Obligations under securities laws
Use of assets
An entire section on responsibilities to customers and
stakeholders.

THANK YOU