Corporate Governance Issues -

Abroad / India
By
Prof. Jiban K Mukhopadhyay
( Fmr. Chief Economic Adviser/ Chief WTO
Officer, Tata Group)
(Email ID: jiban@spjimr.org)
Mobile : +91 98 219 209 28

SPJIMR 1

Feb, ‘11
 Modules
I. C G Issues: Abroad / India
- Evolution
- Committees
- Definitions
- TBL & Sustainability
- CG Initiatives in India

II. Board Architecture of Corporates

(Ref. Allan Blake)
2
 Corporate Governance in a nutshell
“Corporate Governance is the system by
which companies are directed and controlled…”
- Sir Adrian Cadbury

 Four Pillars of Corporate Governance

- Accountability - Transparency
- Fairness - Responsibility

 Elements of good Corporate Governance

- Good board practices - Effective controls
- Transparent disclosure - Board Commitments
- Defined share owner rights 3
Corporate Governance (CG) -
Evolution
19th c :
- In USA state corporation laws enhanced
the rights of corporate boards to govern
without unanimous consent of shareholders
- Corporation in USA were incorporated

under corporate friendly Delaware Law .

- Rights of individuals owners and

shareholders got dissipated.

- Calls for CG reform.

4
 C G - Evolution
20th c:
- The Great Wall Street Crash, 1929 – many legal
experts emphasized on changing role of modern
corporation in society (e.g. Berle and Means, The
Modern Corporation and Private Property, 1932.
- Ronald Coase wrote his famous, “The Nature of the
Firm, 1937”.
- Post WW II, emergence of MNCs , several publications
from HBS- Alfred D Chandler Jr, Myles Mace , Elizabeth
Maclver, Lorsch and MacIver : corporations have
dominant control without adequate accountability /
monitoring by the board.
5
 C G - Evolution
1970s:
- Significant debate on CG in USA / World.
- Eugene Fama and Michael Jensen discussed
Agency Theory and Corporate Governance,
1983, further highlighted by Kathleen
Eisenhardt, 1989.
First half of 1990s:
- A number of CEO dismissals by their boards:
IBM / Kodak / Honeywell.
- CalPERS – led a web of institutional
shareholder activism. 6
 CG - Evolution
1997:
- East Asian financial meltdown – lack of CG
mechanisms – weakness of the institutions .
Early 2000s:
- Massive bankruptcies / criminal malfeasance by
Enron/ Worldcom/ Adelphia Communication, AOL,
Arthur Andersen, Global Crossing , Tyco.
- The enactment Sarbanes – Oxley Act, 2002
- No. of committees on CG world wide.

2008/09 :
- Financial meltdown & recession since Sept 09-
emergence of new CG initiatives. 7
 Corporate Governance –
Global Initiatives
 A number of Committees:
 Sir Adrin Cadbury Committee on Financial Aspects of
Corporate Governance, 1992
 Mervyn K. King Committee on Corporate Governance,
1994
 Greenbury Committee on Directors Remuneration
 CalPERS – Global Corporate Principles,1996
 Business Round Table,..1997
 Hampel Committee, 1998
8
 Corporate Governance –
Global Perspectives
 Blue Ribbon Committee on Audit Committees, 1999
 Combined Code of Best Practice ( LSE), 1998
 OECD Principles…, 1999
 Derek Higgs Committee, 2002
 Sarbanes Oxley Act, 2002
as so on
* Widespread initiatives all over the world due to many lapses
of the corporates
•Recommendations are being implemented… 9
India: Corporate Governance -
Committees
 CII Code of Desirable Corporate Governance, 1998
 UTI Code of Governance, 1999
 Kumar Mangalam Birla Committee on Corporate Governance,
1999
Naresh Chandra Committee, 2002
 N.R.Narayan Murthy Committee ( SEBI), 2003
Dr. JJ Irani Committee , on Company Law, 2005
__________________________________________________
* Legal instruments being set up for implementation of the
recommendation 10

* Not that all companies are very happy…!

 Corporate Governance –
A Perspective
“ A code of corporate governance cannot be imported from outside,
it has to be developed based on a country’s experience. There
cannot be any compulsion on the corporate sector to follow a
particular code. An equilibrium should be struck so that corporate
governance is not achieved at the cost of growth of the corporate
sector.”
- Sir Adrian Cadbury
________________________________________________
•On-going Boardroom activism for arriving at the “equilibrium”…
• The aftermath of financial crisis / recession - Emergence of CG
Initiatives
11
 Corporate Governance – Definitions
(Abroad)
“… the conduct of business in accordance with shareholder’s desires,
which generally is to make as much money as possible, while conforming
to the basic rules of the society embodied in law and local customs.”
- Milton Friedman, Noble Laureate in Economics

“Corporate Governance is about promoting corporate fairness,

transparency and accountability” – James D. Wolfensohn, Fmr.
President World Bank

“A system by which business corporations are directed and controlled”

- OECD

“… the way a company is organized and managed to ensure that all

financial stakeholders … receive their fair share of a company’s 12

earnings and assets” – Standard & Poor

 Corporate Governance – Definitions (India)
“Corporate Governance deals with the laws, procedures, practices and
implicit rules that determine a company’s ability to take informed
managerial decisions vis – a – vis its claimants – in particular, its
shareholders, creditors, customers, the State and employees…”
- CII – Desirable Corporate Governance Code

“Strong Corporate Governance is indispensable to resilient and vibrant

capital markets and is an important instrument of investors protection. It
is the blood that fills the veins of transparent corporate disclosure and
high quality accounting practices. It is a muscle that moves a viable and
accessible financial reporting structure.” – Kumar Mangalam Birla 13
Committee
 Corporate Governance – Definitions (India)
“Corporate Governance is the expectable by management of the
inalienable rights of the shareholders as the true owners of corporation
and of their own role as trustees on behalf of the shareholders. It is
about commitment to values, and ethical business conduct and about
making a distinction between personal and corporate funds in the
management of a company” – N. R. Narayan Murthy Committee…

“Corporate Governance is the application of the best management

practices, compliance of law in true letter and sprit and adherence to
ethical standard for effective management and distribution of wealth and
discharge of social responsibility for sustainable development of all
stakeholders” – The Institute of Company Secretaries of India 14
 C G-taking care of Triple Bottom
Line (TBL)
Econ Social Environment

• Sales (Top line) • Labor practices • Air/Water Quality

• Profit/ROI • Community • Waste/Pollutant
(Bottom line) impact treatment
• Taxes paid • Econ Cost- • Global Warming
• Transaction Benefit…. related issues
Flows….. • Product - Energy
• Sales creates – responsibilities Conservation
income generated • Human Rights - Non fossil fuel
technology

Based on John Elkington, Cannibals With Forks 1997 15

 Sustainability in all aspects—TBL
• Taking care of not only top and bottom lines but also recycling the
wealth created back to the society (TBL)
• “Business needs sustainable planet for its own survival”
-John Browne, CEO/BP

• Tata Trusteeship concept- an unique model

• Hershey Food Corporation/Trust.
• Ecomagination- GE/2005,Jack Walch to Jeffry Immelt.
• Du Pont – “Sustainability philosophy”…200 yrs ago.
• J&J Credo,1943
___________________________________________________________________
• Corporate Social Responsibilities –not “philanthropy” , it is business
itself
16
 Sustainability in all aspects—
TBL
+- ++

Profitability
-- -+

Social Benefit

17
 Stakeholders
A set of systems/ processes to ensure the best interest of all
stakeholders:
i. Internal: Promoters, directors, management /executives
workers,
ii. External: Shareholders, customers, lenders, dealers, vendors,
bankers, government, regulators, the
community…

• Maximisation of shareholders’ wealth is the cornerstone of

good governance.
• How to maintain an equilibrium of good corporate governance
18
& the steady growth of the company? - Boardroom dynamism
 India : Changing Business
Environment
 Sharp discontinuities between the closed economy
model of the past and increasing forces of
globalization of today.
 Role of government - shifting from the direct
control of the economy towards providing a rule
based regulatory frame work.
Reforms have unleashed opportunities for business
leading to rapid growth of entrepreneurial initiative
19
 India: Changing Business
Environment
 In a globally competitive environment, Business needs to take
care of a large no. of issues; viz.
 Increasing and sustaining consumer base
 Benchmarking in cost and quality
 Rewarding and enthusing human resources
 Satisfying all stakeholders, particularly shareholders with
increasing profitability
 Creating investor confidence
 Building capacities & capabilities all around.
20

 The unfortunate Post Satyam Saga.

 India: Changing Business
Environment

 Overall transparency and accountability

 Consistency in achievements, irrespective of

the changes in political and economic
environment, etc.
 In such a complex and dynamic environment,
corporate governance has assumed serious
importance
 An experience globally shared
21
 India: Factoring
Corporate Governance
“…Corporate Governance as the acceptance by
management of the inalienable rights of shareholders
as the true owners of the corporation and of their own
role as trustees on behalf of the shareholders. It is
about commitment to values, about ethical business
conduct and about making a distinction between
personal & corporate funds in the management of a
company.”
- SEBI , India
- Influenced by the Gandhian principle of trusteeship
and Directive Principles, Indian Constitutions.
- CG = Ethics and Moral Duty 22
 India: Factoring Corporate
Governance
 Due to several market scams, Government has been under
pressure to take drastic action enforcing good corporate
governance.
 Based on the recommendation of several committees on
Corporate Governance, the Companies Act. 1956 has been
amended many times
 New legislation (2008 Bill in Parliament) replacing the old
Companies Act, 1956 is yet to be done.
 SEBI Clause 49 of the listing norms.
- Ongoing revisions
23
 SEBI Clause 49 : CG Compliance
Criteria
 Mandatory & Non- mandatory Compliance with the Regulatory norms
for Corporate Governance as covered under the SEBI Clause 49 on
Corporate Governance.

13 major Mandatory criteria with over 21 sub – criteria.

+
8 Non - mandatory compliance criteria (eg. remuneration
committee, whistle blower policy, etc) .
+
 CG Practices Beyond Compliance : 23 criteria (e.g. company
philosophy, values and obligations, goals and objectives, contribution of
independent directors, board level/ other committees, risk management,
human resource development, environment protection, innovation, CSR,
etc ).
24
SEBI Clause 49 -the listing norms

• Listed companies in India (with paid-up capital of Rs.3 crore and

more) have to comply with the corporate governance related

provisions of Clause 49 of the Listing Agreement of Stock

Exchanges. (2004)

Implemented from January 1, 2006

___________________________________________________

• Legal Compliance 25
 SEBI Clause 49 - Provisions
 Composition of Board of Directors: 50% non-executive directors
 Exact number of Independent Directors (ID) would depend
whether the Chairman is non-executive(= at least one third of
board should be IDs) or executive (= at least half of the board
member be IDs)
 A director shall be a member in no more than 10 committees or
act as Chairman in no more than 5 committee
 Number of other compliances regarding: Renumaration
/Compensation, Code of Conduct, Audit Committee, Disclosures,
Management , shareholders etc. 26
 SEBI Clause 49 :Board of
Directors
Board – Role and Power Code of Conduct
Independence Strategy Setting
Resources Business & community obligation
Skills Financial & operational reporting
Appointments Monitoring the Board performance
Induction & training
Audit Committees

Risk Management
Legislation/ Regulations
27
Management Environment
 SEBI Clause 49 provisions
Board of directors:

•Composition
•Non executive/ Independent Directors
•Remuneration
•Board procedurals
•Management
•Code of Conduct etc.

Audit committee:

•Qualified and independent member

•Role & power
•Meetings 28

•Review of Information etc.

 SEBI Clause 49 provisions
 Whistle Blower Policy

 Subsidiary Companies

 Disclosures
•Accounting treatment
•Board of directors
•Risk Management
•Procedurals of Issue
•(eg. Public/writes/preferential)
29
 SEBI Clause 49 Provisions
 Shareholders

 CEO/CFO Certification

 Report on CG
- To be published in the Annual Report

 Compliance

(SEBI website for details)

30
 India: Management & Board
Governance
The board of directors has to exercise strategic oversight over
business operations:
 Measuring & rewarding management’s performance.
Ensure compliance with the legal framework.
Integrate financial accounting and reporting systems.
Credibility in the eyes of the stakeholders through proper &
timely disclosures.

Board’s responsibilities inherently demand the exercise of

judgement. Therefore, the Board necessarily has to be vested
with a resonable level of discretion.

31
 India: Company Law
Corporates have to function as economic persons within the union
of India in a manner that contributes to the social & economic well
being of the country as a whole & as such must be subject to the laws
pronounced by the Parliament for the welfare of its citizens.

Corporate governance goes far beyond the access to capital.

Taking a narrow view of the Corporate Governance as limited to
public issue of capital & the processes that follow would be to the
detriment of corporate entities themselves.
_____________________________________________________
Harmonious blend of the State & the regulatory agencies – the
environment for the corporates to function. 32
India: The Companies Act 1956

The Companies Act, 1956, based on the recommendations of

Bhabha Committee Report, 1950, repealing the companies act,
1913

The Companies Act, 1956

 Undergone 24 amendments
 Major amendments in 1988, 1998, 2000, 2002 ( based on
Eradi Committee).

33
India: The Companies Act 1956
Unsuccessful attempts were made in 1993, 1997 to replace the
present Companies Act with a new law.

The Companies ( Amendment) Bill, 2004, containing important

provisions regarding corporate was introduced, but was held
back.

Piecemeal reforms continued through amendments, but

comprehensive, new legislation has not yet been possible.

34
 India: Corporate Governance
(Need for New Legislation)
 The proposed Companies (Amendment) Bill, 2003 provides a
number of significant amendments relating to independence of
directors, audit committee, meeting, accounts, audit holding and
subsidiary companies, accountability of officers role. Major
proposals are:
Piecemeal reforms confined through amendments, but
comprehensive & new legislation yet to be enacted.
The Concept paper on New Company law in the legislative format
Dr J J Irani Committee evaluated the suggestions made in
the Concept Paper.
The new company law bill,2008 is yet to be legislated before Lok
35

Sabha.
 Cyber Laws: A Perspective
 Separating the cyber world from “real world” of
atoms
 Territorially based law making / enforcing – many
challenges
 Common Cyber crimes
 Why Cyber law/s ? - basic approaches -
national/global
 Cyber laws in India
 Internet – new/complex legal issues
 Cyber ethics/ governance
36
 J J Irani Committee Report

 Government has taken up a fresh exercise for the

comprehensive revision of the Companies Act, 1956 on the
basis of broad based consultative exercise.
 Thus, a concept paper on the company law has been drawn
up in the legislative format.
 Exposed for viewing on the electronic media for
feedback
 Comments & suggestions from a large no. of
professional bodies received.
 Government set up Dr. J J Irani Committee on Dec. 2,
2004 to evaluate the concept Papers as well as the
large no. of comments received.
37
 JJIR: Management & Board
Governance
Obligation to constitute Board of Directors i.e;
Obligation on the part of a Company to constitute &
maintain a Board of Directors as per the law to disclose
particulars of the directors so appointed in the public domain
through statutory filing of information.

________________________________
Covers all aspects of Corporate Governance

38
 JJIR: Management & Board
Governance
Law should include an enabling provision to prescribe
specific categories of companies for which different minimum
norms may be laid down.

Limit to maximum no: of directors should be decided by the

company by/in the Articles of Association.

Appoint Managing director who “suits best for the job”.It can
be from within India, or from other countries with the
approval of Central Government under the Companies Act.

No age limit need to be precribed as per the law. There

should be adequate disclosure of age in the companies
documents. 39
 JJIR: Corporate Governance
In the current national ( post reform) & international ( i.e
globalised) context, there is a need for a new simplified and
relevant Corporate law.

In a highly competitive & technology driven business

environment when corporates require greater autonomy of
operation & opportunity of self regulation with optimum
compliance costs, there is a need to bring about transparency
through better disclosures & greater responsibility for the
corporates.

40
 JJIR: Corporate Governance
Ensuring easy & unambiguous interpretation enabling greater
procedural flexibility through rule making , so that with the
change of time, the legal framework may adopt without
amendment of the substantive or time consuming enactment.

Addressing the experience of the Stock Market scams of the

1990s, the phenomenon of vanishing companies was
incorporated in the recommendations of the joint Parliamentary
Committee on Stock Market Scams.

Enabling measures to protect the interest of stake holders &

investors, including small investors through legal basis for sound
corporate governance practices.

41
 JJIR: Corporate Governance

Providing a framework for responsible self regulation through

determination of corporate matters through decisions by
shareholders in the background of clear accountability for such
decisions.

 Recognizing the relevance of climate that:

 Encourages people to set up businesses & make them grow,
 Addresses the practical concerns of small businesses so as to
enhance confidence of people in such companies,
 Promote int’l competitiveness of Indian businesses &
 Provide flexibility to meet the challenges of the global
economy.
42
 JJIR: Independent Directors (ID)
 Presence of IDs for balancing various interests
 IDs would bring in an element of objectivity to
board process in the General interest of the
company to the benefit of rivalry interest of the
smaller shareholders.
 Independence –not from “Promoter interests”- but
for the vulnerable shareholders…

Pragmatic recommendations… when will these be implemented ?

43
JJIR: Independent Directors (ID)
The proposed Company Law should recognize the
principleof IDs & spell out their role, qualifications &
liability.
However,the role of IDs will vary from company to
companydepending on the size & type of the company.
No single prescription to suit all companies
Thus, the no: of IDs may have to be prescribed
through rules for different categories of company.
But a definition of ID should be incorporated in the 44

company Law.
 JJIR: Independent Directors (ID)
 The committee suggests that “a minimum of one third of the total
no of Directors should be adequate for a company having
significant public interest, irrespective of whether the Chairman is
executive or non executive.
 The above should be firstly for public listed companies &
companies accepting public deposits.
 The requirement for other companies to be decided in due course.

45
 CG in India: Summing up
Government is yet to legislate the new Companies Bill
• The Amended Companies Act 1956 still holds good

Meanwhile all listed companies with paid up capital Rs. 3 crores

and above have started complying with SEBI Clause 49

The concept of Triple Bottom Line - non mandatory, yet to be

taken up by all
• Economic, social & environment
•Corporate Social Responsibility

Many companies in India have initiated ‘best’ CG practices on

their own
SPJIMR Study on CG in Family Managed SMEs sponsored by
NFCG 46
 II. Board Architecture of
Corporates

(Based on a study, Dynamic Directors, by

Allan Blake, 1999)

47
 Objectives of the Study

 To ensure that the Board is the best decision making team…, the

Company has to achieve it’s goals

 To ensure corporate continuity taking into account the variety of

situations that the company will encounter during its life cycle.

_____________________________________________________
* Based on the author’s experience of working with 450 directors …

48
 Board Architecture

 Allan Blake, in his book, takes the reader through an

analysis of how board architecture can alter to reflect and
anticipate the various corporate life cycles:
 Assessing the company’s current position in the
development cycle
 Assessing the direction the board wants the company
to move in.
 Adjusting the functions of the board and the personnel
on board to ensure that the company moves in the
planned direction.
49
 Board Architecture

“…. all companies, no matter how small, need to consider the

function of their board of directors and the skills and attributes of
the individuals who should be on the board. Board architecture is a
key part of running a professional business and running that
business, and ensuring the business continues to operate”
- Allan Blake, Dynamic Directors, 1999

50
 Corporate Variety: PAPA
GRID

 Allan Blake used to chart corporate variety and the impact

the dynamics of companies has on the board of directors the
PAPA grid:
 Puppet: Low board control, high stakeholder control.
 Adrift: Both board and stakeholder control low.
 Partnership: Both Board and stakeholder control high.
 Autonomous: Stakeholder control low, board control
high.
51
HIGH
PAPA GRID
PUPPET PARTNERSHIP

ADRIFT AUTONOMOUS
C RE DL OHE R AHS

LOW HIGH

BOARD OF DIRECTORS CONTROL 52