INTRODUCTIONCorporate Governance (CG) is the set of processes, customs, policies, laws

and institutions affecting the way a corporation is directed, administered or

controlled. Corporate Governance also includes the relationships among the
many stakeholders involved & the goals for which the corporation is
governed. The principle stakeholders, the Board of directors, employees,
customers, creditors, suppliers & the community at large.
CG is a multi-faceted subject. It aims at ensuring the accountability of certain
individuals in an organisation through mechanisms that try to reduce or
eliminate the principal-agent problem.

DEFINITION OF CORPORATE GOVERNANCE According to SEBI, CG is the acceptance by management of the inalienable
rights of shareholders as the true owners of the corporation & of their own role
as trustees on behalf of the shareholders. It is about commitment to values,
about ethical business conduct & about making a distinction between personal
& corporate funds in the management of a company.
According to International Chamber of Commerce, CG is the relationship
between corporate managers, directors & the providers of equity, people &
institutions who save & invest their capital to earn a return. It ensures that the
Board of Directors are accountable for the pursuit of corporation objectives &
that the corporation itself conforms to the laws & regulations.
Kumar Mangalam Committee Report on CG, 1999 says, The fundamental
objective of CG is the enhancement value while, at the same time, protecting
the interests of other stakeholders.
Narayan Murthy, Chairman and CEO, Infosys Technologies Limited, 2001
says that, We are always striven hard for respectability, transparency and to
create an ethical organisation. There are certain expectations that we havent
1

fulfilled. But were also a very young organisation and in areas like track
record of management, we may be low because were yet to show longevity.

OBJECTIVES OF CORPORATE GOVERNANCE

The fundamental objective of CG is to enhance shareholders value and
protect the interests of other stakeholders by improving the corporate
performance and accountability. Hence it harmonizes the need for a company
to strike a balance at all times between the need to enhance shareholders
wealth out not in any way being detrimental to the interests of the other
stakeholders in the company. Further, its objective is to generate an
environment of trust and confidence amongst those having competing and
conflicting interests.
It is integral to the very existence of a company and strengthens investors
confidence by ensuring companys commitment to higher growth and profits.
Broadly, it seeks to achieve the following objectives:

A properly structured board capable of taking independent and

objective decisions is in place at the helm of affairs;

The board is balance as regards the representation of adequate number
of non-executive and independent directors who will take care of their

interests and well-being of all the stakeholders;

The board adopts transparent procedures and practices and arrives at

decisions on the strength of adequate information;

The board has an effective machinery to sub serve the concerns of

stakeholders;
The board keeps the shareholders informed of relevant developments

impacting the economy;

The board effectively and regularly monitors the functioning of the

management team;
The board remains in effective control of the affairs of the company at
all times;
2

The overall endeavour of the board should be to take the organisation

forward so as to maximise long term value and shareholders wealth.

MAIN ISSUES IN CORPORATE GOVERNANCE

CG addresses three basic issues:
1. Ethical issues: They are concerned with the problem of fraud, which is
becoming wide spread in capitalist economies. Corporations often
employ fraudulent means to achieve goals. They form cartels to exert
tremendous pressure on the government to formulate public policy,
which may sometimes go against the interests of individuals & society
at large. At times corporations may resort to unethical means like
bribes, giving gifts to potential customers & lobbying under the cover
of public relations in order to achieve their goal of maximising longrun owner value.
2. Efficiency issues: They are concerned with the performance of the
management. Management is responsible for ensuring reasonable
returns on investment made by the shareholders. In developed
countries, individuals usually invest money through mutual, retirement
& tax funds. In India, however, small shareholders are still important
source of capital for corporations. The potential return on the
investments of the shareholders is dependent upon the efficient &
effective use of the funds by the management of the company.
3. Accountability issues: This issue concentrates on the stakeholders
need for transparency of management in the conduct of the business.
Since the activities of the management influence the workers,
customers & the society at large, some of the accountability issues are
concerned with the social responsibility that a corporation must
shoulder.
3

CHARACTERISTICS OF CG
1. Discipline Corporate discipline is a commitment by a companys
senior management to adhere to behaviour that is universally
recognised and accepted to be correct and proper. This encompasses a
companys awareness of, and commitment to, the underlying principles
of good governance, particularly at senior management level.
2. Transparency Transparency is the ease with which an outsider is
able to make meaningful analysis of a companys actions, its economic
fundamentals and the non-financial aspects pertinent to that business.
This is a measure of how good management is at making necessary
information available in a candid, accurate and timely manner not
only the audit data but also general reports and press releases.
3. Independence Independence is the extent to which mechanisms
have been put in place to minimize or avoid potential conflicts of
interest that may exist, such as dominance by a strong chief executive
or large share owner.
4. Accountability Individuals or groups in a company, who make
decisions and take actions on specific issues, need to be accountable
for their decisions and actions. Mechanisms must exist and be effective
to allow for accountability.
5. Responsibility With regard to management, responsibility pertains to
behaviour that allows for corrective action and for penalizing
mismanagement. Responsible management would, when necessary, put
in place what it would take to set the company on the right path.
6. Fairness The systems that exist within the company must be
balanced in taking into account all those that have an interest in the
4

company and its future. The rights of various groups have to be

acknowledged and respected.
7. Social responsibility A well-managed company will be aware of,
and respond to, social issues, placing a high priority on ethical
standards. A good corporate citizen is increasingly seen as one that is
non-discriminatory, non-exploitative, and responsible with regard to
environmental and human rights issues.

PRINCIPLES OF CG1. Rights and equitable treatment of shareholders: Organisations

should respect the rights of shareholders and help shareholders to
exercise those rights. They can help shareholders exercise their
rights

by

effectively

communicating

information

that

is

understandable and accessible and encouraging shareholders to

participate in general meetings.
2. Role and responsibilities of the 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 needs to be of sufficient size and have an
appropriate level of commitment to fulfil its responsibilities and
duties.
3. Integrity and ethical behaviour Ethical and responsible
decision making is not only important for public relations, but it is
also a necessary element in risk management and avoiding
lawsuits. Organisations should develop a code of conduct for their
directors and executives that promotes ethical and responsible
decision making.

4. Disclosure and transparency Organisations should clarify and

make publicly know the roles and responsibilities of board and
management to provide shareholders with a level of accountability.
They should also implement procedures to independently verify
and safeguard the integrity of the companys financial reporting.

FUNDAMENTAL PRINCIPLES OF CG
1. Transparency It involves the explaining of companys
policies & actions to those whom it owes responsibilities. It
should lead to the making of appropriate disclosures without
jeopardizing

companys

strategic

interests.

Internally,

transparency means openness in a companys relationship with

its employees as well as the conduct of its business in a manner
that will bear scrutiny.
2. Accountability It signifies that the Board of Directors are
accountable to the shareholders & management is accountable
to the Board of Directors. Both the Board & the management
must be accountable to the shareholders for the performance of
tasks assigned to them.
3. Trusteeship Large corporations have both a social and
economic purpose. They represent a mixture of interest of
shareholders, lender of capital as well as business associates &
employees. It creates a responsibility of trusteeship on the
Board of Directors who must act to protect & enhance
shareholders value.
4. Empowerment It signifies that management must have the
freedom to drive the enterprise forward. It is the process of
actualizing the potential of its employees. Empowerment
generates creativity & innovation throughout the organisation

by truly vesting decision making powers at the most

appropriate levels in the organisational hierarchy.
5. Ethics A corporation must set specific standards of ethical
behaviour both within the organisation & in its external
relationships. Deviation from ethical principles corrupts
organisational culture & undermines stakeholders value.
6. Oversight It means the existence of a system of checks &
balances. It should prevent misuse of power & facilitate timely
management response to change & risks.
7. Fairness to all stakeholders It involves a fair & equitable
treatment of all participants in the corporate governance
structure. There should be no discrimination between any
groups of stakeholders.

Corporate governance in India in pre- liberalization period

Corporate development in India was marked by the managing agency system,
which contributed to the birth of dispersed equity ownership & also gave rise
to the practice of management enjoying controlling rights disproportionately
greater than their stock ownership. The enactment of 1951 Industries
(Development & Regulation) Act & the 1956 Industrial Policy Resolution
marked the beginning of a regime & culture of protection, licensing & red tape
that encouraged corruption & stilted the growth of the Indian corporate sector.
Soon, corruption, nepotism & inefficiency became the hallmark of Indian
7

corporate sector. The corporate bankruptcy & reorganisation system was also
not free from problems. In 1985, the Sick Industrial Companies Act (SICA)
and in 1987 the Board for Industrial & Financial Reconstruction (BIFR) were
set up. According to SICA, a company is declared sick only when its entire
net worth has been eroded & it has been referred to BIFR. The BIFR usually
took over 2 years on average just to reach a decision with respect to the
companies. Only a few companies emerged successfully from the BIFR & the
legal process on average took more than 10 years by which the assets of the
company were virtually worthless. Thus, protection of the creditors rights
existed only in paper & the bankruptcy process was featured among the worst
in the World Bank survey on business climate.
Although the Companies Act 1956 provided clear instruction for maintaining
& updating share registers, but in reality minority shareholders often suffered
from irregularities in share transfers & registrations. There were cases where
the rights of the minority shareholders were compromised by the
managements private deals in case of corporate takeovers. Thus, in the preliberalization era the Indian equity markets were not sophisticated enough to
exert effective control over the companies. Listing requirements of exchanges
provided some transparency but non-compliance was not rare & was also not
punished.

Corporate governance in India in post- liberalization period

Liberalization of the Indian economy began in 1991. Since then, there have
been major changes in both laws & regulations & in the corporate governance
landscape. The most important development in the field of corporate
governance & investor protection has been the establishment of the Securities
& Exchange Board of India (SEBI) in 1992. It has played a crucial role in
establishing the basic minimum ground rules of corporate conduct in India.
The next significant event was the Confederation of Indian Industry (CII)
Code for Desirable Corporate Governance developed by a committee chaired
8

by Rahul Bajaj. The committee was formed in1996 and it submitted its
recommendation on April 1998. Later two more committees were constituted
by SEBI, one chaired by Kumar Mangalam Birla & the other by Narayana
Murthy. The Birla committee submitted its report in early 2000 and the second
committee submitted its report in 2003. The recommendation of these two
committees had been instrumental in bringing major changes in the corporate
governance through the formulation of Clause 49 of the Listing Agreement.
Along with SEBI, the Department of Company Affairs and the Ministry of
Finance, Government of India, also took some initiatives for improving
corporate governance in India. For example, the establishment of a study
group to operationalize the Birla Committee recommendations in 2000, the
Naresh Chandra Committee on Corporate Audit and Governance in 2002 and
the Expert Committee on Corporate Law (J.J. Irani Committee) in late 2004.
SEBI implemented the recommendations of the Birla Committee through the
enactment of Clause 49 of the Listing agreement. It came into effect from 31
December 2005. It looks into the following matters:
(i)

composition of the board of the directors,

(ii)

composition and functioning of the audit committee,

(iii)

governance and disclosures regarding subsidiary companies,

(iv)

disclosures by the company,

(v)

CEO/CFO certification of the financial results,

(vi)

reporting on corporate governance as part of the annual report,

(vii) Certification of compliance of a company with the provisions of

Clause 49.
Clause 49 can be referred to as a milestone with respect to the changes in
corporate governance in India. With its introduction, compliance with its
requirements is mandatory for listed companies. It has been formulated for the
improvement of corporate governance in all listed companies. But, the whole
corporate governance issue is popping its head up again after the Satyam
episode.
9

REPORT ON CORPORATE GOVERNANCE

1. There shall be a separate section on the corporate governance in the
Annual Reports of the company, with a detailed compliance report on
corporate governance. Non-compliance of any mandatory requirement
of this clause with reasons thereof and the extent to which the nonmandatory requirements have been adopted should be the extent to
which the non-mandatory requirements have been adopted should be
specifically highlighted. The suggested list of items to be included in
this report is given in Annexure IC and list of non-mandatory
requirements.
2. The companies shall submit a quarterly compliance report to the stockexchanges within 15 days from the close of quarter as per the format.
The report shall be signed either by the Compliance Officer or the
Chief Executive Officer of the company.

COMPLIANCE
1. The company shall obtain a certificate from either the auditors or the
practicing company of corporate governance as stipulated in this
clause and annex the certificate with the directors report, which is
sent annually to all the shareholders of the company. The same
certificate shall also be sent to the Stock Exchanges along with the
annual report filed by the company.

10

2. The non-mandatory requirements may be implemented as per the

discretion of the company. However, the disclosures of the compliance
with the mandatory requirements and adoption (and compliance)/nonadoption of the non-mandatory requirements shall be made the section
on corporate governance of the Annual Report.

REPORT ON CORPORATE GOVERNANCE IN THE

ANNUAL REPORT OF COMPANIES:
(1) A brief statement on the companys philosophy on code of governance.
(2) Board of Directors:

Composition and category of directors, for example, the promoter,

executive,

non-executive,

independent

non-executive,

nominee

director, which institution represented as lender or as equity investor.

Attendance of each director at the Board meetings and the last AGM.

Number of other Boards or Board Committee in which he/she is a

member or Chairperson.

Number of Board meetings held, dates on which held.

(3) Audit Committee:

Brief description of the terms of reference.

Composition, name of members and Chairperson.

Meetings and attendance during the year.

(4) Remuneration Committee:

Brief description of the terms of reference.

Composition, name of members and Chairperson.

Attendance during the year.

11

Remuneration policy.

Details of remuneration to all the directors, as per format in main

report.

(5) Shareholders Committee:

Name of the non-executive director heading the committee.

Name and designation of the compliance officer.

Number of shareholders complaints received so far.

Number of complaints not solved to the satisfaction of the

shareholders.

Number of pending complaints.

(6) General Body Meetings:

Location and time, where last three AGMs held.

Whether any special resolutions passed in the previous three AGMs.

Whether any special resolutions passed last year through postal ballotdetails of voting pattern

Person who conducted the postal ballot exercise.

Whether any special resolution is proposed to be conducted through

postal ballot.

Procedure for postal ballot.

(7) Disclosures:

Disclosures on the materially significant related party transactions that

may have potential conflict with the interest of company at large.

Details of non-compliance by the company, penalties, and strictures

imposed on the company by Stock Exchange or SEBI or any statutory

12

authority on any matter related to the capital markets, during the last
three years.

Whistle Blower policy and affirmation that no personnel have been

denied access to the audit committee.

Details of compliance with the mandatory requirements and adoption

of the non mandatory requirements of this clause.

(8) Means of communication:

AGM: Date, time and venue

Financial year

Date of Book closure

Dividend Payment Date

Listing on Stock Exchanges

Stock Code

Market Price Data: High, Low during each month in last financial year.

Performance in comparison to the broad-based indices such as BSE

Sensex, CRISIL index, etc.

Register and Transfer agents

Share Transfer System

Distributions of shareholdings

Dematerialization of shares and liquidity

Outstanding GDRs/ADRs/Warrants or any Convertible instruments,

conversion date and likely impact on equity.

Plant Locations

Address for correspondence

13

DIFFERENT COMMITTEES IN CORPORATE

GOVERNANCE

1. Grievance Committee The Grievance Committee looks after the

grievances from customers, suppliers and creditors. The grievances
concern the price, quality, discount, etc. This committee also looks
after the problems of the employees of the organisation.
2. Remuneration Committee The role of this committee is to fix the
remuneration of non-executive directors. The remuneration may
depend upon the companys performance.
3. Investment Committee The Company deals with the investment
decisions in accordance with the guidelines approved by the board.
The investment decisions should be taken judiciously and ensure
protection of the shareholders interest.
4. Nomination Committee Committees are usually set up to select the
new non-executive directors. Usually it is headed by the Chairman and
it shortlists and interviews the final candidates.
Role of Nomination Committee
Oversee board organisation, including committee assignments.
Determine qualifications for board membership.
Identify and evaluate candidates for nomination to the board.
Propose a slate of nominees for selection by the shareholders at
the annual meetings of shareholders.
Act as the contact point for shareholder input to the nomination
process.
Oversee director orientation and training.
14

 Oversee the annual assessment of the board and its committees.

Oversee the development of and recommend corporate govern
and principles for adoption by the full board.
Oversee CEO succession and succession planning for other
senior management positions.
Important rules for disclosure of nomination committee
Whether its board has a dedicated nominating committee, and if
not the reasons why it did not form such a committee and a
description of the process adopted to determine director
nominees.
Whether nominating committee members satisfy independent
requirement imposed by national exchange or inter dealer
qualification system.
Whether a company pays any third parties a fee to assist in the
process of identifying and evaluating candidates and what
functions these search firms perform.
The minimum qualifications and standards a company seeks for
director nominees.
Whether candidates put towards by shareholders are considered
for director nominees are the processes for identifying and
evaluating such candidates.
Whether a company has rejected any candidates nominated by
large long-tem shareholders or group of shareholders.
5. Audit Committee The terminology for Accountants defines an audit
committee, a committee of directors of a corporation whose specific
responsibility is to review the annual financial statements before
submission to the board of directors.
Functions and Significance of Audit Committees
15

An audit committee is generally entrusted with some or all of the

following functions
1. To consider the appointment of the external auditor, the audit
fee, and any questions of resignation or dismissal.
2. To discuss the nature and scope of the audit with the external
auditor before the audit commences and ensure co-ordination
where more than one audit firm is involved.
3. To review the half-yearly and annual financial statements
before submission to the board, focussing particularly on :

Any changes in accounting policies and practices;

Major judgemental areas;

Significant adjustments resulting from the audit;

Appropriateness of the going concern assumption;

Compliance with accounting standards;

Compliance with requirements of law and of stock

exchanges.

4. To discuss problems and reservations arising from the interim

and final audits, and any matters that the auditor may wish to
discuss (in the absence of management, where necessary).
5. To review the external auditors management letter and
managements response.
6. To review the companys statement on internal control systems
prior to endorsement by the board.
7. To review the internal audit programme, ensure co-ordination
between the internal and external auditors, and ensure that the
internal audit function is adequately resourced and has appropriate
standing within the company.
16

8. To consider the major findings of internal investigations and

managements response.
9. To consider other matters, as decided by the board.

Corporate Governance-The Infosys Way

Infosys had accepted the recommendation of both the Confederation of Indian
Industries CII and the Kumar Mangalam Birla Committee. This section
provides an overview of corporate governance practices followed by Infosys.
Infosys had an executive chairman and chief executive officer (CEO) and a
managing director, president and chief operating officer (COO). The CEO was
responsible for corporate strategy, brand equity, planning, external contacts,
acquisitions, and board matters. The COO was responsible for all day-to-day
operational issues and achievement of the annual targets in client satisfaction,
sales, profits, quality, productivity, employee empowerment and employee
retention.
The CEO, COO, executive directors and the senior management made
periodic presentations to the board on their targets, responsibilities and
performance.

Infosys-A Benchmark for Corporate Governance

Some analysts felt that Infosys corporate governance practices offered
many lessons to corporate India. Infosys had shown that increasing
shareholder wealth and safeguarding the interests of other stakeholders
was not incompatible. Infosys had given its non-executive directors the
mandate to pass judgement on the efficacy of its business plans. Every
17

non-executive director not only played an active role in decision making,

but also led or served on at least one of the three (Nomination,
Compensation and Audit) committees.

Satyam fiasco
Satyam scam had been the greatest scam in the history of corporate world of
India. Satyam Computer Services Ltd, the fourth largest IT Company in India,
was founded in 1987 by Ramalinga Raju. The company was offering
information technology (IT) services spanning various sectors, and was listed
on the New York Stock Exchange and Euronext. Satyams network covered 67
countries across six continents. The company employed 40,000 IT
professionals across development centres in India, and abroad. It was serving
over 654 global companies, 185 of which were Fortune 500 corporations.
Satyam had strategic technology and marketing alliances with over 50
companies. Apart from Hyderabad, it had development centres in India at
Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar,
and Visakhapatnam. In September 2008 the World Council for Corporate
Governance honoured the Satyam with a Golden Peacock Award for global
excellence in corporate sector.
On January 7, 2009, Satyam scandal was publicly announced & Mr.
Ramalingam confessed and notified SEBI of having falsified the account. Raju
confessed that Satyams balance sheet as on 30 September 2008 contained:
1. Inflated (non-existent) cash and bank balances of Rs5,040 crore (as against
Rs5,361 crore reflected in the books) on the balance sheet as on September 30,
2008.
2. An accrued interest of Rs376 crore which is non-existent
3. An understated liability of Rs1, 230 crore on account of funds
4. An overstated debtors position of Rs490 crore (as against Rs2,651 reflected
in the books).
18

For the September quarter, Satyam fraudently reported a revenue of Rs 2,700

crores and an operating margin of Rs649 crore (24% of revenues) as against
the actual revenues of Rs 2,112 crores and an actual operating margin of Rs 61
crore (3% of revenues). This has resulted in artificial cash and bank balances
going up by Rs588 crore in Q2 alone.
Raju acknowledged that the gap in the balance sheet had arisen on account of
inflated profits over a period of last several years.
The scandal came to light with a successful effort on the part of investors to
prevent an attempt by the minority shareholding promoters to use the firms
cash reserves to buy two companies owned by them i.e. Maytas Properties and
Maytas Infra. Raju wanted to buy the entire stake in Matyas Properties for $
1.3 billion and 51% stake in Maytas Infra for $ 300 million to cover the scam
he was cooking. As a result, this aborted an attempt of expansion on Satyams
part, which in turn led to a collapse in price of companys stock following with
a shocking confession by Raju, The truth was its promoters had decided to
inflate the revenue and profit figures of Satyam thereby manipulating their
balance sheet consisting non-existent assets, cash reserves and liabilities.

Lessons from Satyam episode

Satyam fiasco has put spotlight on some of the corporate governance practices
and has exposed the weaknesses: Lax Regulatory systems; the imperious and
machiavellians promoters/ CEOs and their unbridled greed; connivance and
collusion of Auditors and poor auditing practices and timid and independent
directors.
The silver lining to this whole episode was the ascendancy of the Shareholders
Activism. The institutional shareholders and investment analyst reacted to
19

information of buying Matyas by Satyam Computers. Ramalinga Raju was left

with no option but to abandon the plan of buying Matyas. He also had to put in
his papers, confessing cooking of the books for several years.
The good thing about the multi- crores scandal is that the lessons learnt from
Satyam saga will help improve the level of corporate governance in India in
the years to come. Role of Satyams independent directors is termed as
unpardonable, it means acting against the interest of large shareholders
especially when the promoters themselves owned a little more than 8 per cent
stake in the company and institutional investors owned more than 45 per cent.
Independent directors of Satyam computers, who agreed to the companys
proposal of buying out two promoter-related companies, failed to be
independent in spirit. Role of independent directors was under close scrutiny.
They felt to be more active and felt the need to maintain their independent
spirit. They felt the need to be vigilant in protecting minority interest and be
brave enough to take adequate steps.
Fingers are also pointed out at the possibility of the auditors Price Waterhouse
Coopers (PWC) being hand in glove with the conspirators in the multi- crores
scam. It is highly unlikely that auditors did not have any idea about the scam
brewing for so many years. Credibility of audit firms has come into question
as the amount was too big for any audit firm not to notice. Therefore, now the
auditing firms will be very careful while auditing the accounts of companies.

Conclusion
In the present study, status of corporate governance in pre and post
liberalization period in India has been talked about. After that, Satyam fiasco
has been discussed. The lessons learnt from Satyam saga will help in
improving the corporate governance in India in the years to come. Role of
independent directors will be under close scrutiny and the auditing firms will
be very careful while auditing the accounts of the companies in future. From,
the Satyam episode it is concluded that more training of audit committee
20

members is required. The challenge is to design and sustain a system that

imbibes the spirit of corporate governance and not merely the letter of the law.
Thus, this brings us to the conclusion that Corporate Governance plays
an very important role as far as any business is concerned.

CORPORATE GOVERNANCE IN

INDIAN

BANKING

SECTOR
The corporate governance practice is important for banks in India because
majority of the banks are in public sector, where they are not only competing
with one another but with other players in the banking system. Further, with
restrictive support available from the government for further capitalization of
banks, many banks may have to go for public issues, leading to transformation
of ownership.
The banks form an integral part of the economy of the country and any failure
in a bank might have a direct bearing on the financial health of the country.
The Basel committee on banking supervisory authorities was established by
the Central Bank Governors of the G10 developed countries in 1975. The
Basel committee in the year 1999 had brought out certain important principles
on corporate governance for banking organizations which, more or less have
been adopted in India. The minimum impact of recession on Indian economy
was because of strong and effective nature of banking sector in India.

NEED FOR CORPORATE GOVERNANCE IN BANKING

AND NON BANKING FINANCIAL INSTITUTIONS

1. Most countries, including members of the International Monetary Fund

(IMF), have experienced problems within their banking community
from time to time. The fact that these problems can still occur after the
introduction and indeed implementation of both national and

21

international standards and regulation gives the subject of the corporate

governance of banks crucial importance.
2. It is necessary to have a clear idea, to anyone in financial management,
whether micro or macro and interest in good market practice that banks
are extremely important for the development of a successful economy;
indeed the corporate governance of such institutions is integral to that
development.
3. Banks are in the unique position of effectively collecting and allowing
the use of fund in a given manner of enterprise. Whether such funds
are used in proper and consistent manner, this can lead to stable
market, lower the cost of capital and accordingly stimulate growth in
an economy as a whole.
4. Corporate Governance Guidelines to the bankers (i.e. directors and
senior management of banks) to allocate capital efficiently, to exert
good and effective corporate governance in their own institutions and
also to promote good practices for their customers. This ultimately
helps to generate built-in discipline in the relations of the banks with
their customers.
5. Corporate Governance provides proper attention towards weak or
improper supervision of banks which can have the disproportionate
effect of destabilizing a countrys economy and indeed reducing
market confidence.
6. Corporate Governance checks on the various banking crisis which are
reasons for crippling economies, destabilized governments and in a
macro sense, held back the development of less sophisticated
economies and emerging nations and this results in intensified poverty.

MEASURES TAKEN BY RBI FOR IMPLEMENTATION OF

CORPORATE GOVERNANCE NORMS IN BANKS

22

RBI had advised, on the suggestion from the SEBI, that the Indian commercial
banks (both public and private sector) which are listed on the stock exchanges,
should adopt the guidelines of SEBI committee on corporate governance.
They are as follows
1. Optimum combination of executive and non-executive
directors in the Board.
2. Pecuniary relationship or transactions of the non executive
directors vis-a-vis the bank.
3. Independent

audit

committees,

their

constitution,

chairmanship, power, roles and responsibilities, conduct of

business, etc.
4. Remuneration of Directors
5. Periodicity/no. of Board meetings.
6. Disclosure by management to the board about the conflict of
interest.
7. Information/reappointments of directors, display of quarterly
results/presentation to analysis on the web-site.
8. Maintenance of office by non-executive chairman.
9. Reviewing with the management by the audit committee of the
board the annual financial statements before submission to the
board, focusing primarily on
a) Any changes in accounting policies and practices.
b) Major accounting entities based on exercise of
judgement of management.
c) Qualifications in draft audit report.
d) Significant

adjustments

arising

compliance with standards.

e) The going concern assumption.
23

out

of

audit

10. The audit committee of the Board may look into the reasons
for default in payment to deposits debenture shareholders (nonpayment of dividend) & creditors wherever there are any cases of
defaults in payment.

SEBI committees recommendations on other additional functions to

be entrusted to the Audit committee may be complied with by the listed banks
as per listing agreement.
11. As regards the appointment and removal of external auditors, the
practise followed in banks is more stringent that the recommendations
of the committee and hence will continue as it is.
12. With a view to further improving corporate governance standards
in banks, the following new measures are recommended
i) In the interest of the stakeholders, the private sector and
public sector banks which have issued shares to the public may
form committees on the same lines as listed companies under
the chairmanship of a non-executive director to look into
redressal of shareholders complaints.
ii) All listed banks may provide and audited financial results on
half-yearly basis to their shareholders with summary of
significant development.

CORPORATE GOVERNANCE IN STATE BANK OF INDIA

State Bank of India is the countrys largest commercial bank in terms of
profits, assets, deposits, branches and employees. With over 200 years of
existence, State Bank group has a presence in 33 countries and extensive
network of more than 18,000 branches and 26,000 plus ATMs and 100 million
accounts across the country. The only Indian Bank to feature in the Fortune
500 list, SBI has 5 Associate banks and 7 Subsidiaries arguably the largest in
the world. With millions of customers across the country, SBI offers a
24

complete range of banking products and services with cutting edge technology
and innovative banking model.
State Bank of India is committed to the best practices in the area of corporate
governance. The sound corporate governance practice in State Bank of India
would lead to effective and more meaningful supervision and could contribute
to a collaborative working relationship between bank management and bank
supervisors.
Based on different elements like boards practices, stakeholders services and
transparent disclosure of information the practice of corporate governance in
state bank of India was assessed.

BOARD PRACTICES
Central Board
The central board of directors was constituted according to the SBI Act 1955.
The banks central board draws its powers from and carries out its functions in
compliance with the provisions of State Bank of India Act & Regulations
1955. Its major roles include, among others, overseeing the risk profile of the
bank; monitoring the integrity of its business and control mechanisms;
ensuring expert management, and maximising the interests of its stakeholders.
The central board has constituted seven board level committees.

1.

Audit Committee of the Board: ACB provides direction as well as

oversees the operation of the total audit function in the bank. Total
audit function implies the organizational, operational, quality control
of internal audit and inspection within the bank, follow-up on the
statutory audit and compliance with RBI inspection.
It also appoints statutory auditors of the bank and reviews their
performance from time to time. ACB reviews the banks financial, risk
management, IS audit policies and accounting policies of the bank to
ensure greater transparency.
25

2.

Risk Management Committee of the Board: RMCB was constituted

to oversee the policy and strategy for integrated risk management
relating to credit risk, market risk and operational risk.

3.

Shareholders/Investors Grievance Committee of the Board:

SIGCB was formed to look into the redressal of shareholders and
investors complaints regarding transfer of shares, non-receipt of
annual report, non-receipt of interest on bonds/declared dividends, etc.

4. Special Committee of the Board for Monitoring of Large Value

Frauds: The major functions of the committee are to monitor and
review all large value frauds with a view to identifying systemic
lacunae, if any, reasons for delay in detection and reporting,
monitoring progress of CBI / Police investigation, recovery position
and reviewing the efficacy of remedial action taken to prevent
recurrence of frauds.

5.

Customer Service Committee of the Board: CSCB was constituted

to bring about ongoing improvements on a continuous basis in the
quality of customer service provided by the bank.

6.

IT Strategy Committee of the Board: With a view to tracking the

progress of the banks IT initiatives, the SBIs central board
constituted a technology committee of the board. The committee has
played a strategic role in the banks technology domain.

7.

Remuneration Committee of the Board: It was constituted for

evaluating the performance of whole time directors of the bank in
connection with the payment of incentives, as per the scheme advised
by Government of India.
26

It is found that in SBI, these committees are providing effective

professional support in the conduct of board level business in key
areas.

STAKEHOLDERS SERVICES
The SBI strongly believes that all stakeholders should have access to complete
information on its activities, performance and product initiatives.
1. Shareholders: The SBI is providing different types of services and
facilities to the shareholders. Share transfers in Physical form are
processed and returned to the shareholders within stipulated time. SBI
has the distinction of making uninterrupted dividend payment to the
shareholders at an increasing rate for many years. In accordance with
the SEBI guidelines on green initiative in corporate governance, SBI is
issuing annual report in electronic form to shareholders who opt for
receiving the same in electronic form through their e-mails. To meet
various requirements of the investors regarding their holdings, the
Bank has a full-fledged department i.e. shares and bonds department
and shares and bonds cells at the 14 local head offices.
2. Customers: With a large network and number of branches throughout
India and abroad SBI is providing different types of services and
facilities to the customers.

a) ATMs: State Bank group has in its stable, variants of ATMs. The
number of ATMs of the SBI group was 25,005 in March 2011 and
they increased to 27,286 in March 2012. The number of ATMs of SBI
was 20,084 in 2011 and they are 22,141 in 2012. The total debit cards
issued by SBI were 728 lakhs in 2011 and they increased to 910 lakhs
in 2012.
b) Mobile Banking: There were 10.13 lakh registered mobile customers
in 2011 and they increased to 36.45 lakhs in 2012. The customers
27

were using the service with more than 1.20 lakhs daily transactions,
around 46% of which are financial transactions amounting to Rs.2.45
crores. SBI has launched mobile technology based prepaid payment
services under the brand name of State Bank Mobi Cash.
c) Internet Banking: Internet banking service is available through
www.onlinesbi.co.in for both retail and corporate customers of the
bank. The number of customers in March 2011 was 62.57 lakhs and
they increased to 89.63 lakhs in March 2012. The number of
transactions during 2010-2011 was 1437.46 lakhs and in 2011-12 it
increased to 2610.32 lakhs.
d) Foreign Offices: The SBI is operating 173 branches in 34 countries,
including 2 OBUs in India to run their operations on a common
banking applications software, with their databases connected to a
central data centre backed up by a synchronized disaster recovery site.
All foreign offices use internet banking channel and 130 ATMs at
various locations abroad cater to the banks overseas customers with
most of the ATMs connected to the centralized ATM switch in India.
e) Customer Complaints: The number of complaints received from the
customers during the year 2010-11 was 30,904 and they increased to
462,381 during 2011-12.

3. Employees: The SBI had a total permanent staff strength of 2,15,481

in the March, 2012. Of this, 80,404 (37.32%) were officers,
95,715(44.42%) were clerical staff and the remaining 39,362 (18.26%)
were sub-staff. It has been decided to recruit 9500 new clerical staff
during the year 2012-13 to meet the growing business needs of the
bank.
The SBI has transferred Rs 49,518 crores to the SBI employees
pension fund trust from the special provision account, during the year
2011-12. An amount of Rs 4531.83 crores is recognised as an expense
towards the provident fund scheme of the bank. The bank has
28

implemented a defined contribution pension scheme (DCPS). The

contributions of the bank of Rs.452.47 crores have been retained as a
deposit with the bank and earn interest at the same rate as that of the
current account of provident fund. An amount of Rs.4531.33 crores
(previous year 4775.74 crores) is provided towards long term
employee benefits.

4. Society: The executive committee of the central board has approved a

comprehensive policy for corporate social responsibility in August
2011. During the year 2011-12 the SBI has spent Rs.71.18 crores for
various social service activities like supporting education (Rs.35.33
crores), Healthcare (Rs.15.03 crores) and donations (Rs.5.50 crores).

DISCLOSURE AND TRANSPARENCY

Disclosure and transparency are the important pillars of a corporate
governance framework enabling adequate information flow to various
stakeholders and leading to informed decisions. The SBI was implementing all
the provisions of corporate governance and disclosure in the important and
confidential information. Table 1 shows confidential information of SBI as a
part of transparent disclosure of information.

1. Primary Business Segment Information of SBI: In the primary

segment the treasury segment includes the entire investment portfolio
and trading in foreign exchange contracts and derivative contracts; the
corporate /whole sale banking segment comprises the lending activities
of corporate accounts group, mid-corporate account group and stressed
assets management group and the retail banking segment comprises of
29

branches in national banking group, which primarily includes personal

banking activities including lending activities to corporate customers.
This segment also includes agency business and ATMs.

2. Secondary Geographic Segments information of SBI: In this

segment domestic operations are branches/ offices having operations in
India. Foreign operations are branches/offices having operations
outside India and offshore banking units having operations in India.

3. Earnings per share of SBI: The basic earnings per share are
computed by dividing the net profit after tax by the weighted average
number of equity shares outstanding for the year. The net profit in
2010-11 was Rs.8264.52 crores and it increased to Rs.11,707.29 crores
in 2011-12. Basic earnings per share in 2010-11 is Rs.130.16 and it
increases to Rs.184.31 in 2011-12.

4. Details of Different Provisions and Contingencies: The provisions

and contingencies of SBI during 201112 are explained in table 2. The
total provisions are Rs. 17,071.05 crores in 2010-11 and they increased
to Rs. 19,866.25 crores during 2011-12.

5. Details of Concentration of Advances, Exposures & NPAs

Information of SBI: Table 3 demonstrates the concentration of
deposits, advances, exposures and NPAs information during 2010-11
and 2011-12. The table explains the operational weaknesses in the SBI
regarding issue of advances to twenty largest borrowers, concentration
of exposure with twenty largest borrowers and concentration of NPAs
with four NPA accounts.

GOOD CORPORATE GOVERNANCE PRACTICES

30

Each member of the Board of Directors and core management of the

bank should adhere to the following so as to ensure compliance with good
Corporate governance practices.
DOS

Attend Board meetings regularly and participate in the deliberations

and discussions effectively.

Study the Board papers thoroughly and enquire about follow-up

reports on definite time schedule.

Involve actively in the matter of formulation of general policies.

Be familiar with the board objectives of the band and the policies laid
down by the government and the various laws and legislations.

Ensure confidentiality of the banks agenda papers, notes and minutes.

DONTS

Do not interfere in the day to day functioning of the bank

Do not reveal any information relating to any constituent of the bank to

anyone

Do not display the logo/distinctive design of the bank on their personal

visiting cards/letter heads.

Do not sponsor any proposal relating to loans, investments, buildings

or sites for banks premises, enlistment or empanelment of contractors,
architects, auditors, doctors, lawyers and other professionals etc.

Do not do anything, which will interfere with and/or be subversive of

maintenance of discipline, good conduct and integrity of the staff.

31

FINDINGS AND CONCLUSION

The study found that, the SBI is implementing all the provisions of corporate
governance according to the RBI/GOI directions. It is found that State Bank of
India, the countrys largest commercial bank, performed well in every aspect
in terms of profits, assets, deposits, branches, employees and services to
customers.
The study found that the SBI conducted different board meetings regularly to
provide effective leadership, functional matters and monitors banks
performance. It is found that the SBI established clear documentation and
transparent management processes for policy development, implementation,
decision making, monitoring, control and reporting.

32

Even though the SBI is showing good performance and implementing

provisions of corporate governance, some lapses have to be rectified for
increasing the performance.

Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the
inefficiencies that arise from moral hazard and adverse selection. There are
both internal monitoring systems and external monitoring systems. Internal
monitoring can be done, for example, by one (or a few) large shareholder(s) in
the case of privately held companies or a firm belonging to a business group.
Furthermore, the various board mechanisms provide for internal monitoring.
External monitoring of managers' behaviour, occurs when an independent
third party (e.g. the external auditor) attests the accuracy of information
provided by management to investors. Stock analysts and debt holders may
also conduct such external monitoring. An ideal monitoring and control
system should regulate both motivation and ability, while providing incentive
alignment toward corporate goals and objectives. Care should be taken that
incentives are not so strong that some individuals are tempted to cross lines of
ethical behaviour, for example by manipulating revenue and profit figures to
drive the share price of the company up.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take
corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with

its legal authority to hire, fire and compensate top management,
safeguards invested capital. Regular board meetings allow potential
problems to be identified, discussed and avoided. Whilst non-executive
directors are thought to be more independent, they may not always
result in more effective corporate governance and may not increase
performance. Different board structures are optimal for different firms.
Moreover, the ability of the board to monitor the firm's executives is a
33

function of its access to information. Executive directors possess

superior knowledge of the decision-making process and therefore
evaluate top management on the basis of the quality of its decisions
that lead to financial performance outcomes, ex ante. It could be
argued, therefore, that executive directors look beyond the financial
criteria.

Internal control procedures and internal auditors: Internal control

procedures are policies implemented by an entity's board of directors,
audit committee, management, and other personnel to provide
reasonable assurance of the entity achieving its objectives related to
reliable financial reporting, operating efficiency, and compliance with
laws and regulations. Internal auditors are personnel within an
organization who test the design and implementation of the entity's
internal control procedures and the reliability of its financial reporting.

Balance of power: The simplest balance of power is very common;

require that the President be a different person from the Treasurer. This
application of separation of power is further developed in companies
where separate divisions check and balance each other's actions. One
group may propose company-wide administrative changes, another
group review and can veto the changes, and a third group check that
the interests of people (customers, shareholders, employees) outside
the three groups are being met.

Remuneration: Performance-based remuneration is designed to relate

some proportion of salary to individual performance. It may be in the
form of cash or non-cash payments such as shares and share options,
superannuation or other benefits. Such incentive schemes, however, are
reactive in the sense that they provide no mechanism for preventing
mistakes or opportunistic behaviour, and can elicit myopic behaviour.

Monitoring by large shareholders and/or monitoring by banks and

other large creditors: Given their large investment in the firm, these
stakeholders have the incentives, combined with the right degree of
control and power, to monitor the management.
34

In publicly traded U.S. corporations, boards of directors are largely chosen by

the President/CEO and the President/CEO often takes the Chair of the Board
position for him/herself (which makes it much more difficult for the
institutional owners to "fire" him/her). The practice of the CEO also being the
Chair of the Board is fairly common in large American corporations.
While this practice is common in the U.S., it is relatively rare elsewhere. In the
U.K., successive codes of best practice have recommended against duality.

External corporate governance controls

External corporate governance controls encompass the controls external
stakeholders exercise over the organization. Examples include:

competition

debt covenants

demand for and assessment of performance information (especially

financial statements)

government regulations

managerial labour market

media pressure

takeovers

GLOBAL STRATEGIES OF CORPORATE GOVERNANCE1. Corporate Objective The overriding objective of the corporation
should be optimizing over time the return to its shareholders.
Corporate objective should be clearly stated and disclosed. To achieve
this objective, the corporation should endeavour to ensure the long

35

term viability of its business, and to manage effectively its relationship

with stakeholders.
2. Communication and Reporting Corporation should disclose
accurate, adequate and timely information especially on the issues of
acquisition, ownership obligation, and sale of shares.
3. Voting Rights Corporations should act to ensure the owners right to
vote. Regulations and law should facilitate voting rights and timely
disclosure of the level of voting.
4. Corporate Boards The Board of Directors are accountable to the
shareholders. Each member of the Board should stand for election on a
regular basis.
Boards should include a sufficient number of independent NonExecutive Directors with appropriate competencies. Responsibilities
should include monitoring and contributing effectively to the strategy and
performance of management, staffing key committees to Board and
influencing the conduct of the Board as a whole.
Audit, remuneration and nomination should be composed wholly or
predominantly Independent Non- Executive Directors.
5.Corporate Remuneration Policies: Remuneration of corporate directors
or supervisory board members and key executives should aligned with the
interest of shareowners.
Corporations should disclose in each annual report or proxy statement
the boards policies or remuneration and break-ups of individual board
members and top executives.
6. Strategic Focus: Major strategic modifications to the core business of a
corporation should not be made without prior shareholders approval of the
proposed modification.

36

Shareholders should be given sufficient information about any such

proposal sufficiently early to allow them to make an important judgement
and exercise their voting rights.
7. Operating Performance: Corporate Governance practices should focus
boards attention on optimising over time the companys operating
performance. In particular the company should strive to excel in specific
sector peer group comparison.
8. Shareowner Returns: Corporate Governance practices should also
focus Boards attention on optimising profits to pay good returns to their
shareholders.
9. Corporate Citizenship: Corporate should adhere to all applicable laws
of jurisdiction in which they operate.
Boards that strive for achieving the co-operation between corporations
and stakeholders will be most likely to create wealth, employment and
sustainable economists. They should disclose their policies on issues
involving stakeholders. Such as workplace and environment matters.
10.Corporate Governance implementation: Where codes of best practices
exist, they should be applied pragmatically. Where they do not yet exist,
investors and others should endeavour to develop them.

CONCLUSION
Thus the above study shows that corporate governance is nothing but
adherence to certain norms with the objective of maximising shareholder value
while ensuring fairness to all shareholders. It is about creating an
outperforming organisation which leads to increased customer satisfaction and
shareholder value. It primarily involves transparency, full disclosure,
independent monitoring, the state of affairs and being fair to all shareholders.
Corporate Governance has a role to ensure that the directors of a company are
subject to their duties, obligations, accountability and responsibilities to act in
37

the best interest of the company, to give the directions and to remain
accountable to their shareholders and other beneficiaries for their corporate
actions. Thus compliance of corporate governance rules acts as a very
important aspect in the corporate world.

38