Corporate Governance - Introduction
Corporate Governance - Introduction
Corporate Governance - Introduction
Corporate form::
1. Anglo-American Model
2. The German Model
3. The Japanese Model
Anglo-American Model
German Model
This is also called European Model. It is believed that workers are one of the key
stakeholders in the company and they should have the right to participate in the
management of the company. The corporate governance is carried out through two
boards, therefore it is also known as two-tier board model. These two boards are:
Japanese Model
Japanese companies raise significant part of capital through banking and other
financial institutions. Since the banks and other institutions stakes are very high in
businesses, they also work closely with the management of the company. The
shareholders and main banks together appoint the Board of Directors and the
President. In this model, along with the shareholders, the interest of lenders is
recognised.
Corporat governance is the term used to describe the balance among participants in the corporate structure
who have an interest in the way in which the corporation is run, such as executive staff, shareholders and
members of the community. Corporate governance directly impacts the profits and reputation of the
company, and having poor policies can expose the company to lawsuits, fines, reputational damage, and
loss of capital investment. Here are five common pitfalls your corporate governance policies should avoid.
1) CONFLICTS OF INTEREST
Avoiding conflicts of interest is vital. A conflict of interestwithin the framework of corporate governance
occurs when an officer or other controlling member of a corporation has other financial interests that
directly conflict with the objectives of the corporation. For example, a board member of a solar company
who owns a significant amount of stock in an oil company has a conflict of interest because, while the
board he or she serves on represents the development of clean energy, they have a personal financial stake
in the success of the oil industry. When conflicts of interest are present, they deteriorate the trust of
shareholders and the public while making the corporation vulnerable to litigation.
2) OVERSIGHT ISSUES
Effective corporate governance requires the board of directors to have substantial oversight of the
company’s procedures and practices. Oversight is a broad term that encompasses the executive staff
reporting to the board and the board’s awareness of the daily operations of the company and the way in
which its objectives are being achieved. The board protects the interests of the shareholders, acting as a
check and balance against the executive staff. Without this oversight, corporate staff might violate state or
federal law, facing substantial fines from regulatory agencies, and suffering reputational damage with the
public.
3) ACCOUNTABILITY ISSUES
Accountability is necessary for effective corporate governance. From the top-level executives to lower-tier
employees, each level and division of the corporation should report and be accountable to another as a
system of checks and balances. Above all else, the actions of each level of the corporation is accountable to
the shareholders and the public. Without accountability, one division of the corporation might endanger the
success of the entire company or cause stockholders to lose the desire to continue their investment.
4) TRANSPARENCY
To be transparent, a corporation must accurately report their profits and losses and make those figures
available to those who invest in their company. Overinflating profits or minimizing losses can seriously
damage the company’s relationship with stockholders in that they are enticed to invest under false
pretenses. A lack of transparency can also expose the company to fines from regulatory agencies.
5) ETHICS VIOLATIONS
Members of the executive board have an ethical duty to make decisions based on the best interests of the
stockholders. Further, a corporation has an ethical duty to protect the social welfare of others, including the
greater community in which they operate. Minimizing pollution and eschewing manufacturing in countries
that don’t adhere to similar labor standards as the U.S. are both examples of a way in which corporate
governance, ethics, and social welfare intertwine.
1) Business loss
The effect of these multiple blows to the perceived probity and integrity of
UK financial institutions was such that many feared an overly heavy-
handed response, perhaps even legislation mandating certain boardroom
practices. This was not the strategy the Committee ultimately suggested,
but even so the publication of their draft report in May 1992 met with a
degree of criticism and hostility by institution which believed themselves
to be under attack. Peter Morgan, Director General of the Institute of
Directors, described their proposals as 'divisive', particularly language
favouring a two-tier board structure, of executive directors on the one
hand and of non-executives on the other.
Sir Adrian Cadbury’s 1992 report on corporate governance is still recognised around
the world as the starting point on how companies should be managed is no surprise.
It bore his hallmarks – clarity of analysis, attention to detail, moral certainty and an
expectation that people will behave well if properly encouraged – which marked out
an exceptional business career which turned a family chocolate business into a
worldwide empire.
Cadbury, who has died aged 86, kept close to his roots, fostering Midlands industry
and commerce, promoting local charities in the family’s Quaker tradition and, as a
long-serving chancellor, helping build the new Aston university into a rival of its
older neighbour in Birmingham.
The suggestions which met with such disfavour were considerably toned
down come the publication of the final Report in December 1992, as were
proposals that shareholders have the right to directly question the Chairs
of audit and remuneration committees at AGMs, and that there be a
Senior Non-Executive Director to represent shareholders' interests in the
event that the positions of CEO and Chairman are combined. Nevertheless
the broad substance of the Report remained intact, principally its belief
that an approach 'based on compliance with a voluntary code coupled
with disclosure, will prove more effective than a statutory code'.
The central components of this voluntary code, the Cadbury Code, are:
that there be a clear division of responsibilities at the top, primarily
that the position of Chairman of the Board be separated from that
of Chief Executive, or that there be a strong independent element
on the board;
The provisions of the Code were given statutory authority to the extent
that the London Stock Exchange required listed companies to 'comply or
explain'; that is, to enumerate to what extent they conform to the Code
and, where they do not, state exactly to what degree and why. The detail
of this explanation, and the level of implied censure on companies which
do not adhere to the Code, have both varied over time, but the basic
'comply or explain' principle has endured over the intervening years and
become the cornerstone of UK corporate governance practice.
Hampel Report
The Hampel Committee was formed in 1996 under the chairmanship of Sir Ronald Hampel.
Committee was formed in 1996 and its final report was generated in 1998.The Hampel
report reviewed the recommendations of the Cadbury report and Green bury report. The Hampel
Committee also suggested that the recommendations of all three committees should be combined
together and a single code should be generated from in the form of Combined Code. The Hampel
report was the one of final report that gives importance to principles of good governance over explicit
rules. And Hampel also admired the shareholder involvement in the company matters.
The Corporate Governance Committee meets 2 times a year and is composed of representatives from the 36 OECD member
countries, participants and associates. It is led by Masato Kanda (Chair, Japan), Gabriela Figueiredo Dias (Vice-chair,
Portugal), Carmine Di Noia (Vice-chair, Italy) and Carl Westphal (Vice-chair, the United States), and serviced by the
Corporate Governance and Corporate Finance Division in the OECD Directorate for Financial and Enterprise Affairs.
The Sarbanes-Oxley Act of 2002 is a federal law that established sweeping auditing and
financial regulations for public companies.
Lawmakers created the legislation to help protect shareholders, employees and the
public from accounting errors and fraudulent financial practices.
The legislation, commonly referred to as SOX, sought to both improve the reliability of
the public companies' financial reporting as well as restore investor confidence in the
wake of high-profile cases of corporate crime. Former U.S. President George W. Bush,
who signed the act into law on July 30, 2002, called the act "the most far-reaching
reforms of American business practices since the time of Franklin Delano Roosevelt."
SOX primarily sought to regulate financial reporting and other business practices at
publicly traded companies. However, some provisions apply to all enterprises, including
private companies and not-for-profit organizations.
Key provisions
The Sarbanes-Oxley Act is arranged into 11 sections, or titles. Two sections of particular
note are Section 302 and Section 404.
Section 404 deals with "Management Assessment of Internal Controls" and requires
companies to publish details about their internal accounting controls and their
procedures for financial reporting as part of their annual financial reports. Section 404
requires corporate executives to personally certify the accuracy of their company's
financial statements and makes them individually liable if the SEC finds violations.
SOX states that employees (and even contractors) who report fraud and/or testify about
fraud committed by their employers are protected against retaliation, including dismissal
and discrimination.
Among its many requirements, SOX requires public corporations to hire independent
auditors to review their accounting practices.
SOX also created rules for separation of duties by detailing a number of nonaudit
services that a company's auditor cannot perform during audits.. These rules are
designed to further guard against fraudulent financial practices.
Furthermore, SOX led to the creation of the Public Company Accounting Oversight
Board (PCAOB), which sets standards and rules for audit reports. Under SOX, all
accounting firms that audit public companies are required to register with the PCAOB.
The PCAOB investigates and enforces compliance at the registered accounting firms.
Whistle blowing
Definition: A whistleblower is a person, who could be an employee of a company, or a
government agency, disclosing information to the public or some higher authority about any
wrongdoing, which could be in the form of fraud, corruption, etc.
CII has identified key areas that are disrupting the MSME sector viz.
disruptions in cash flows, wage bills and payments, and inventory
management, among others. It has drafted recommendations in two key
areas which are, cash flow and working capital, and welfare measure, that
could safeguard the sector.
Board of Directors
1. Appointment of Directors – recommended by Nomination Committee An
active, well-informed and independent Board is necessary to ensure highest
standards of corporate governance.
Getting the right people is crucial; as is the process of seeking, vetting and
appointing such people. The report thus recommends constitution of the
Nomination Committee comprising a majority of independent directors,
including its chairman to search for, evaluate, shortlist and recommend
appropriate independent directors, NEDs as well as executive directors.
• It should have delegated responsibility for setting the remuneration for all
executive directors and the executive chairman, including any
compensation payments, such as retiral benefits or stock options. It should
also recommend and monitor the level and structure of pay for senior
management, i.e. one level below the Board.
The Task Force recognised the ground realities of India. Keeping these in
mind, it has recommended, wherever possible, to separate the office of the
Chairman from that of the CEO.
The Task Force also recommends separate executive sessions of the Audit
Committee with both internal and external Auditors as well as the
Management.
10. The role of the board and shareholders in related party transactions
Audit Committee, being an independent Committee, should pre-approve all
related party transactions which are not in the ordinary course of business
or not on “arms length basis” or any amendment of such related party
transactions. All other related party transactions should be placed before
the Committee for its reference.
No more than 10% of the revenues of an audit firm singly or taken together
with its subsidiaries, associates or affiliated entities, should come from a
single corporate client or group with whom there is also an audit
engagement.
Every company must obtain a certificate from the auditor certifying the
firm’s independence and arm’s length relationship with the client company.
The Certificate of Independence should certify that the firm, together with
its consulting and specialised services affiliates, subsidiaries and associated
companies or network or group entities have not / has not undertaken any
prohibited non-audit assignments for the company and are independent
vis-à-vis the client company, by reason of revenues earned and the
independence test are observed.
The Board, its audit committee and its executive management must
collectively identify the risks impacting the company’s business and
document their process of risk identification, risk minimisation, risk
optimization as a part of a risk management policy or strategy. The Board
should also affirm that it has put in place critical risk management
framework across the company, which is overseen once every six months by
the Board.
The Task Force suggests that the Government and the SEBI as a market
Regulator must concur in the corporate governance standards deemed
desirable for listed companies to ensure good corporate governance.
In the interest of investors, the general public and the auditors, the Task
Force recommends that the Government intervenes to strengthen the ICAI
Quality Review Board and facilitate its functioning of ensuring the quality
of the audit process through an oversight mechanism on the lines of Public
Company Accounting Oversight Board (PCAOB) in the United States.
Securities and Exchange Board of India (SEBI) in 1999 set up a committee under Shri
Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of
good corporate governance.
The primary objective of the committee was to view corporate governance from the
perspective of the investors and shareholders and to prepare a ‘Code’ to suit the Indian
corporate environment.
Mandatory Recommendations
The mandatory recommendations apply to the listed companies with paid up
share capital of 3 crore and above.
Composition of board of directors should be optimum combination of executive &
non-executive directors.
Audit committee should contain 3 independent directors with one having
financial and accounting knowledge.
Remuneration committee should be setup
The Board should hold at least 4 meetings in a year with maximum gap of 4
months between 2 meetings to review operational plans, capital budgets,
quarterly results, minutes of committee’s meeting.
Director shall not be a member of more than 10 committee and shall not act as
chairman of more than 5 committees across all companies
Management discussion and analysis report covering industry structure,
opportunities, threats, risks, outlook, internal control system should be ready for
external review
Any Information should be shared with shareholders in regard to their
investments.
Non-Mandatory Recommendations
The committee made several recommendations with reference to:
Role of chairman
Remuneration committee of board
Shareholders’ right for receiving half yearly financial performance.
Postal ballot covering critical matters like alteration in memorandum
Sale of whole or substantial part of the undertaking
Corporate restructuring
Further issue of capital
Venturing into new businesses
In June 2011, government of India had announced setting up a high-powered task force to review
the defense management in the country and make suggestions for implementation of major
defense
projects. The 14-member task force was headed by Naresh Chandra, a former bureaucrat who has
held top administrative jobs in the Ministry of Defence and Prime Minister’s Office. The
committee was formed after a decade of the Kargil Review Committee and a Group of Ministers
that attempted the first major revamp of defence management in the country, during the NDA
Government. The Naresh Chandra Committee was to try to contemporaries the KRC’s
recommendations in view of the fact that 10 years have passed since the report was submitted. It
was also expected to examine why some of the crucial recommendations relating to border
management and restructuring the apex command structure in the armed forces have not been
implemented, especially in view of the fact that the KRC had stated: “The political, bureaucratic,
military and intelligence establishments appear to have developed a vested interest in the status
quo.” Naresh Chandra Committee has submitted its final report on national security to the prime
minister in May 2012. The salient recommendations are as follows:
Creation of a new post of Intelligence Advisor to assist the NSA and the National
committee
important decisions about defence equipment acquisition, so that they are not harassed
Measures to augment the flow of foreign language experts into the intelligence and
deputation of armed services officers up to director level in the Ministry of Defence should
be considered.
Early establishment of a National Defence University (NDU) and the creation of a separate