Professional Documents
Culture Documents
Meaning:
Corporate governance refers to the set of processes, customs, policies, laws and
institutions influencing the administration of a corporation.
Corporate governance includes the relationships among the many players and the goals of
the corporation.
The shareholders, management and the board of directors are the principal players. The
employees, suppliers, customers, banks, the environment and the community at large are
the other stakeholders.
Accountability of individuals and economic efficiency of the corporation are the
important aspects of corporate governance. The stakeholder view and the corporate
governance models are also the topics of concern of corporate governance. Thus
corporate governance is a multi-faceted subject.
Tata Group:
Corporate governance in Tata group is fair and civic minded, fulfilling its duties to the
stakeholders.
Integrity is an article of faith across all its operations. Jamsetji Tata gave importance to
the means and ends.
Tata wrote: "We do not claim to be more unselfish, more generous or more philanthropic
than other people, but we think we started on sound and straightforward business
principles, considering the interests of the shareholders our own, and the health and
welfare of the employees the sure foundation of our success.
The 'leadership with trust' is the philosophy of Tatas. Tata Business Excellence Model is
a framework which helps Tata companies to achieve their business objectives through
specific process.
Global Reporting Initiative (GRI) is an independent body affiliated to UNO. GRI has a
triple bottom approach, financial, social and environmental. Tata group has the
appreciation of GRI.
Independent directors are invited to join the board for their specialisation and expertise in
achieving a balance of knowledge, skills and attitudes of other directorial resources.
Neutrality of views and the quality of debate at the board level are necessary for good
governance.
Irani Committee (2005) has recommended the important advisory role of independent
directors. The independent directors should be independent in their thinking, approach
and actions.
An independent director should be independent of judgement with no pecuniary
relationship.
An independent director is required because of independent judgement, technical
expertise and to build investor confidence.
Independent directors are the cornerstones of good corporate governance. Their duty is to
provide an independent unbiased and experienced perspective to the Board of Directors.
One third of company's directors are required to be independent. The independent
directors should be really independent. The independent directors are the only hope to
instill some discipline in the murky world of corporate finance.
Board structure:
An ideal board structure is necessary for good corporate governance. Recent research has
shown that effective boards must be legitimate and credible. It should be legitimate in the
sense that stakeholders perceive the board to represent all significant interests and
perspectives. It should also be creditable in the sense the board is viewed as
knowledgeable and fair and that the board process is considered rational.
The combined code of best practices was given by Cadbury code.
The board is the link between managers and shareholders. The board is essential to good
corporate governance and excellent investor relations.
It is not possible for the directors to please all shareholders at all times. Directors should
have access to reliable information regularly. The board should be accountable to
shareholders and provide them the relevant information.
Chairman:
The chairman is responsible for the effective running of the board. The board should
meet frequently and the directors should have access to all information and all the
directors should have an opportunity to give their views at board meetings.
Company secretary:
The company secretary should facilitate the work of the board by providing the necessary
information to all the directors. The company secretary can advice the board, via the
chairman, on all governance matters. The company secretary will assist the professional
development needs of directors and induction requirements for new directors. The
company secretary must act in good faith and avoid conflicts of interest. The dismissal of
the company secretary should be a decision of the board as a whole and not the CEOor
chairman.
Audit committee:
It is a most important subcommittee. It should review the scope and outcome of the audit.
It should ensure that the objectivity of the auditors is maintained. It provides a bridge
between both internal and external auditors and the board. The board should be fully
aware of all relevant issues related to the audit. It should be able to assessthe financial
and non-financial risks of the company.
Remuneration committee:
This committee should make recommendations to the board on the company's framework
of executive remuneration and its cost. It should determine remuneration packages for
each of the executive directors, including pension rights and any compensation payments.
The establishment of a remuneration committee has prevented the executive directors
from setting their own remunerations. The remuneration of non-executive directors
should be decided by the chairman and the executive members of the board.
Nomination committee:
Directors were appointed on the basis of personal contacts in the past. At present there is
a formal, rigorous and transparent procedure for the appointments and recommendations
to the board. A majority of members of the nomination committee should be independent
non-executive directors.
This committee should evaluate the existing balance of skills, knowledge and experience
on the board. It should throw its net as wide as possible for the search of suitable
candidates.
Risk committee:
Business operations involve risks and this committee should comprehend the risks
involved in the business. The competitive advantages have to be analysed. This
committee should be consisting of more of non-executive directors.
Non-executive directors:
Non-executive directors are essential for good governance. They cannot be under the
pressure of the Board of Directors as executive directors. The non-executive directors can
add to the overall leadership and development of the company.
The non-executive directors should be independent in the presentation of their views.
They should scrutinize the performance of the management in meeting agreed goals and
objectives. The added value of a non-executive director may be experience, knowledge,
public life and reputation. The non-executive directors should bring an independent
judgement to bear on issues of strategy,
performance, resources and standards of conduct.
Director's remuneration:
The following are the six elements in director's remuneration:
(1) Basic salary
(2) Bonus
(3) Stock options
(4) Restricted share plans
(5) Pension
(6) Benefits like car and health care
The basic salary is in accordance with terms of contract. It is neither related to the
performance of the company nor the performance of an individual. The size of the
company and the experience of the individual are the major deciding factors.
The bonus is linked to the accounting performance of the firm. The stock options give the
directors to purchase shares at a specified exercise price over a specified time period.
Performance measures:
The following are the important performance measures:
• Shareholder return
• Share price
• Profit related measures
• Return on capital
• Earnings for share
• Performance of individual director
Accounting standards:
Accounting standards regulate accounting policy so as to use the suitable accounting
principles and methods. Accounting standards also ensure adequate disclosures in
financial statements. The use of uniform accounting policy improves comparability.
Hence the quality of financial report is determined by the quality of accounting standards
and the level of compliance.
In 1977, the Institute of Chartered Accountants of India (ICAI) constituted the
Accounting Standards Board (ASB). ASB organised a workshop in 1983 to hold a
dialogue with the industry on the implementation of the accounting standards.
At present nearly fifty items of disclosure are available. The nature of business, size of
the company, accounting standards, profit data, strategies and investment pattern are
important.
The value of brand equity, the economic value added (EVA) and the value of human
assets are themost popular disclosures.
Summary
(1) Meaning of corporate government - It refers to the set of processes, customs, policies,
laws and institutions influencing the administration of a corporation.
(2) Principles of corporate governance.
(3) Issues involved in corporate governance principles.
(4) Rights of corporation.
(5) Need for corporate governance.
(6) Theories of corporate governance - Agency theory - Transaction cost economies -
Stakeholder theory - Stewardship theory.
(7) Role of independent directors.
(8) Board structure.
(9) Training and development of Directors.
(10)Accounting standards.
Questions
Section 'A'
(1) Define corporate governance.
(2) What is agency theory?
(3) Define stakeholder theory.
(4) Define stewardship theory.
Section 'B'
(1) What are the principles of corporate governance?
(2) What is the need for corporate governance?
(3) What is transaction cost economics?
(4) What is the role of independent directors?
(5) Explain the various committees in corporate governance.
(6) Explain the importance of training to the directors.
(7) What are accounting standards?
Section 'e'
(1) Examine the need, features and challenges of corporate governance in the corporate
world.