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					               Value Based Management and Corporate Governance

Corporate Governance: Corporate governance is the set of processes, customs,
policies, laws and institutions affecting the way in which a corporation is
directed, administered or controlled. Corporate governance also includes the
relationships among the many players involved and the goals for which the
corporation is governed.

Definition: Corporate governance is a field in economics that investigates
how to secure/motivate efficient management of corporations by the use of
incentive mechanisms, such as contracts, organizational designs and
legislation. This is often limited to the question of improving financial
performance, for example, how the corporate owners can secure/motivate that
the corporate managers will deliver a competitive rate of return

History of corporate governance:
In 19th century, state corporation law enhanced the rights of corporation
boards to govern without unanimous consent of shareholders in exchange of
statutory benefits like appraisal rights, in order to make coporate
governance more efficient. Since that time, and because most large publicly
traded   corporations   in   america   are   incorporated   under   corporate
administration friendly delaware law, and because americas wealth has been
increasingly securitized into various corporte entities and institutions, the
rights of individual owners and sharehoders have become increasingly
derivative and dissipated. The concerns of share holders over administration,
pay and stock losses periodically have led to more frequent calls for
corporte governance reforms.
In the 20th century immediately after wall street crash of 1929, legal
scholars pondred on changing role of the modern corporation in society.
American expansion after world war II through the emergence of multinational
corporations saw the establishment of managerial class. Many large
corporations have dominent control over business affairs without sufficient
accoutability or monitoring by their board of directors.
Current preoccupation of corporate governance can be pinpointed at two
events: The East Asian crisis of 1997 saw the economies of Thailand,
Indonesia, South Korea, Malaysia and The philippines severly affected by the
exit of foreign capital after property assets collapsed. The lack of corporte
governance mechanisms in those countires highlited the weakness of
institutions in their economies. The second event was the american corporate
crisis of which saw the collapse of two big corporations: Enron and World

Principles of corporate governance / OECD principles of corporate governance
/ Elements of corporate governance:
Among the various attempts to evaluate best global standards, the principles
evolved by organisation for Economic Cooperation and Development (OECD)
released in 1999 have been accepted as an international benchmark. The OECD
principles protect the interests of share holders as well as stake holders
like employees, creditors, suppliers, customers and environment.
1. The rights of shareholders: Rights of shareholder mentioned in the OECD
report cover the registration of right to ownership with the company,
conveyance or transfer of shares, obtain relevant information from the
company on a timely and regular basis, participate and vote in general share
holders meetings, elect members of the board and share in the profits of the

2. The equitable treatment of shareholders: All shareholders should be
treated equitably and the law should not make any distinction among different
shareholders holding a given class or types of shares. Any changes in voting
rights of common shareholders can be done with the consent of those
3. The role stakeholders: The rights of stakeholders as established by law
should be recognized ans active cooperation between corporations and
stakeholders in creating wealth, jobs and sustainabiity of functionally sound
enterpreses should be encouraged. While the share holders re the true
oweners, the functioning of a company is affected by several other economic
players in the society. There is a significant synergetic relationship
between the company and its employees.
4. Disclosure and transperancy: Organisations should clarify and make
publicly known the roles and responsibilities of board and management to
provide shareholders with a level of accountability. They should also
implement procedures to independenly verify and safeguard the integrity of
the companys financial reporting. Disclosure of material matters concerning
the organisation should be timely and balanced to ensure that all investors
have access to clear, factual information.
5. Roles and responsibilities of board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the
ability to review and challenge management performance. It nees to be of
sufficient size and have appropriate level of commitment to fulfil its
responsibilites and duties.
6. Integrity and ethical behaviour: Organisations should develop a code of
conduct for their directors and executives that promotes ethical and
responsible decision making.

Internal corporate governance controls:
Monitoring by board of directors

External corporate governance controls:
Government regulations
Media pressure
Managerial labour market

Telephone tapping

Corporate governance models:

Anglo american model: There are many different models of corporate governance
around the world. These differ according to the variety of capitalism in
which they are embeded. The liveral model that is common in anglo american
countries tends to give priority to the interests of shareholders. The
coordinated model that one finds in continental europe and japan also
recognizes the interests of workers, managers, suppliers, customers and the
community. The liveral model of corporate govenance encourages radical
innovation and cost competition, whereas the coordinated model of corporte
governance facilitates incremental innovation and quality competition.
In the united states, a corporation is governed by a board of directors,
which has the power to choose chief executive officer. The CEO has broad
power to manage the corporation on a daily basis, but needs to get approval
for certain major actions such as raising money, acquiring another company,
and other expensive projects. Other duties of the board may include policy
setting, decision making, monitiring managements performance or corporate
The UK has pioneered a flexible model of regulation of corporate governance
known as “to comply or explain” code of governance. This is a principle
based code that lists a dozen of recommended practices, such as the
seperation of CEO and chairman of the board, the introduction of a time limit
for CEO’s contracts, the introduction of a minimum number of non executive
directors, independent directors, the formation and composition of
remuneration, audit and nomination committees. Listed companies in the UK
have to apply those principles, if they choose not to apply those principles
they have to explain in their annual reports why they dicided not to do so.
The monitoring of these explanations is left to shareholders themselves.

Non-anglo american model: In East asian counties family owned companies
dominate corporate assests. In countries such as Pakistan, Indonesia and the
Philippines, the top 15 families controlled over 50% of publicly owned
corportion through a system of family cross-holdings, thus dominating capital
markets. Family companies also dominate the Latin model of corporate
governance     that    is     companies    in     Mexico,    Italy,    Spain,
France, Brazil, Argentina and tother countries in south america.

Corporate Governance in India:
In India, the Confederation of the Indian Industry (CII) took the lead in
framing a desirable code of Corporate Governance in April 1998. This was
followed by the recommendations of Kumaramangalam Birla Committee in
Corporate Governance appointed by the Securities and Exchange Board of India
(SEBI) the recommendations were accepted by SEBI in December 1999 and are now
enshrined in Clause 49 of the Listing Agreement of every Indian stock
Corporate Governance can be defined as a systematic process by which
companies are directed and controlled to enhance their wealth generating
capacity. Since large corporate employs a vast quantum of societal resources,
the governance process should ensure that these resources are utilized in a
manner that meets stakeholders aspirations and societal expectations. Thus,
corporate governance structure, system and process are based on two core
1. Management must have excutive freedom to drive the enterprese forward
without undue restraints.
2. This freedom of management should be exercised within a framework of
effective accountability.

CII Code of Desirable Corporate Governance:

1. As the key to good corporate governance lies with effective functioning of
the board of directors, the full board should meet at intervals of two months
and atleast 6 times a year.
2. The non executive directors should at least be 30% of the board.

3. No individual should be director on the boards for more than 10 companies
at any given time.
4. Non executive directors must be active, have defined responsibiity and be
conversant with profit and loss account, balance sheet, cash flow statement,
financial ratios and have some knowledge of company law.
5. Non executive directors should be paid commission and offered stock option
for their professional inputs besides their sitting fees.

6. Directors who have not been present for at least 50% of the board meetings
should not be reappointed.
7. The board should be informed of the operating plans and budgets, long term
plans, quarterly divisional results and internal audit reports.
8. Details of defaults, payments for intangibles and foreign exchange
exposures should be reported to access to all financial information.
9. Incase, multiple credit ratings are obtained, all the ratings should be
disclosed with comparisions explaining their significance.
10. Major Indian stock exchanges should gradually insist upon compliance
certificate signed by CEO and CFO clearly stating that accounting policies
and standards have been followed.
11. The government must allow for greater funding to the corporate sector
against the security of shares and other papers.
12. Companies that default on fixed deposits should not be permitted to
accept further deposits, make intercorporate loans or investments and declare
dividens until the default is made good.
Recommendations of Birla Committee:

1. Board of Directors: There should be a combination of executive and non
executive directors. The board should consist of not less than 30% of non
executive directors.
2. Audit Committee:
      a. The board should appoint a qualified and independent audit
committee. The committee should have      minimum three members all being non
executive directors with majority being independent and at least one
director having financial and accounting knowledge.
      b. The chairman of committee should be an independent director and
should be present at the companies annual general meeting.
      c. The chairman should invite finance director, head of internal audit
and representatives of external     auditor for committee meetings. The
company secretary should act as secretary of the committee.
3. Powers of the audit committee: The audit committee should look into the
rasons for substantial default to depositors, creditors, debenture holders
and shareholders.

4. Frequency of the meetings and quorum: The committee should meet at least
thrice a year, once before finalization of annual accounts and once
compulsority every 6 months. Quorum should be either two members or 1/3rd of
audit committee, which ever is higher.
5. Remuneration of non executive directors:
      a. The board of directors should decide remuneration of non executive

      b. All elements of the package inclusive of salary benefits, bonuses,
stock options, etc. should be disclosed.
6. Committee membership of directos: Directors should not be members of more
than ten committees and chairman of not more than 5 committees. Directors
need to disclose about their membership with other committees, to the
7. Shareholders committee: This committee would be framed to attend to
shareholders grievances and board of directors should delegete power of
checking share transfer to either officer or committee or to registrar and
share transfer agent.
List of items to be included in the report on Corporate Governance:

1. A brief statement on companies philosophy on code of governance.
2. Board of Directors:

     a. Composition and category of directors
      b. Attendance of each director at the Board of Directors meetings and
the last Annual General Meeting
      c. Number of other Board of Directors or Board Committees in which
he/she is a member.
     d. Number of Board of Directors meetings held, dates on which held.
3. Audit Committee:

     a. Brief description of terms of reference
     b. Composition, name of members and chairperson
     c. Meetings and attendance during the year.
4. Remuneration Committee:
     a. Brief description of terms of reference
     b. Composition, name of members and chairperson
     c. Attendance during the year

     d. Remuneration policy
      e. Details of remuneration to all the directors, as per format in main
5. Shareholders Committee:
     a. Name of non executive director heading the committee
     b. Name and designation of compliance officer
     c. Number of shareholders complaints received so far.

     d. Number not solved to the satisfaction of shareholders.
     e. Number of pending complaints.
6. General Body Meetings:
     a. Location and time, where last three AGM’s held
      b. Whether any special resolution passed last year through postal
      c. Person who conducted the postal ballot exercise
      d. Procedure of postal ballot
7. Disclosures
      a. Disclosures on materially significan related party transactions that
may have potential conflict with    the interests of company at large.
      b. Disclosures of accounting treatment with explanation
      c. Details of non compliance by the company, penalties imposed on
company by stock exchange or SEBI or any statutory authority on any matter
relating to capital markets.
8. Means of communication:
      a. Half yearly report sent to each household of shareholder

      b. Quarterly results
      c. Newspapers wherein results normally published.
      d. Any website, where displayed
      e. Whether it also displays official news releases
      f. The presentations made to institutional investors or to the analysts
9. General shareholder information
      a. AGM: date, time, venue

      b. Financial calander
      c. Date of book closure
      d. Dividend payment date
      e. Listing on stock exchanges
      f. Stock code
      g. Market price data
10. Performance in comparision to broad based indices such as BSE Sensex,
CRISIL, etc.
      a. Registrar and Transfer Agents
      b. Share transfer system
      c. Distribution of shareholding
      d. Dematerialization of shares and liquidity
      e. Plant locations
f. Address for correspondence

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