UNIT-1

Meaning of corporate governance

• Corporate Governance is a relationship among stakeholders that is used to determine and

control the strategic direction and performance of organizations. It is a system of checks and
balances between the board, management and investors to produce an efficiently functioning
corporation, ideally geared to produce long-term value. It is the process whereby people in
power direct, monitor and lead corporations, and thereby either create, modify or destroy the
structure Corporate Governance is about promoting corporate fairness, transparency and
accountability

It is primarily concerned with holding balance between social and economic goals and
between individual and community goals Narrowly it is defined as a relationship of a
company to its shareholders and broadly, as its relationship to society under which they
operate. A relationship among stakeholders used to determine and control the strategic
direction and performance of organizations Concerned with identifying ways to ensure that
strategic decision are made effectively Used in corporations to establish order between firm‟s
owners and its top level managers.

Definition

Corporate Governance is the system by which business corporations are directed and
controlled CG structure specifies distribution of rights and responsibilities among Board ,
Managers , Shareholders , and Other Stakeholders. CG spells out procedures for making
decisions on corporate affairs

Need to improve Corporate Governance Standard

(i) Wide Spread of Shareholders

Today a company has a very large number of shareholders spread all over the nation and even the
world; and a majority of shareholders being unorganised and having an indifferent attitude towards
corporate affairs. The idea of shareholders‟ democracy remains confined only to the law and the
Articles of Association; which requires a practical implementation through a code of conduct of
corporate governance.

(ii) Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present-day-times; with
institutional investors (foreign as well Indian) and mutual funds becoming largest shareholders in
large corporate private sector. These investors have become the greatest challenge to corporate
managements, forcing the latter to abide by some established code of corporate governance to build
up its image in society.

(iii) Corporate Scams or Scandals:

Corporate scams (or frauds) in the recent years of the past have shaken public confidence in corporate
management. The event of Harshad Mehta scandal, which is perhaps, one biggest scandal, is in the
heart and mind of all, connected with corporate shareholding or otherwise being educated and socially
conscious.
The need for corporate governance is, then, imperative for reviving investors‟ confidence in the
corporate sector towards the economic development of society.

(iv) Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of reasonable price, better
quality, pollution control, best utilisation of resources etc. To meet social expectations, there is a need
for a code of corporate governance, for the best management of company in economic and social
terms.

(v) Hostile Take-Overs:

Hostile take-overs of corporations witnessed in several countries, put a question mark on the
efficiency of managements of take-over companies. This factors also points out to the need for
corporate governance, in the form of an efficient code of conduct for corporate managements.

(vi) Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that there has been a great increase
in the monetary payments (compensation) packages of top level corporate executives. There is no
justification for exorbitant payments to top ranking managers, out of corporate funds, which are a
property of shareholders and society. This factor necessitates corporate governance to contain the ill-
practices of top managements of companies.

(vii) Globalisation:
Desire of more and more Indian companies to get listed on international stock exchanges also focuses
on a need for corporate governance. In fact, corporate governance has become a buzzword in the
corporate sector. There is no doubt that international capital market recognises only companies well-
managed according to standard codes of corporate governance.

Features of Good Governance

1. Clear Organizational Strategy

Good corporate governance starts with a clear strategy for the organization. For example, a furniture
company‟s management team might research the market to identify a profitable niche, create a
product line to meet the needs of that target market and then advertise its wares with a marketing
campaign that reaches those consumers directly. At each stage, knowing the overall strategy helps the
company‟s workforce stay focused on the organizational mission: meeting the needs of the consumers
in that target market.

2. Effective Risk Management

Even if your company implements smart policies, competitors might steal your customers, unexpected
disasters might cripple your operations and economy fluctuations might erode the buying capabilities
of your target market. You can‟t avoid risk, so it‟s vital to implement effective strategic risk
management. For example, a company‟s management might decide to diversify operations so the
business can count on revenue from several different markets, rather than depend on just one.
3. Discipline and Commitment

Corporate policies are only as effective as their implementation. A company‟s management can spend
years developing a strategy to push into new markets, but if it can‟t mobilize its workforce to
implement the strategy, the initiative will fail. Good corporate governance requires having the
discipline and commitment to implement policies, resolutions and strategies.

4. Fairness to Employees and Customers

Fairness must always be a high priority for management. For example, managers must push their
employees to be their best, but they should also recognize that a heavy workload can have negative
long-term effects, such as low morale and high turnover. Companies also must be fair to their
customers, both for ethical and public-relations reasons. Treating customers unfairly, whatever the
short-term benefits, always hurts a company‟s long-term prospects.

5. Transparency and Information Sharing

Managers sometimes keep their own counsel, limiting the information that filters down to employees.
But corporate transparency helps unify an organization: When employees understand management‟s
strategies and are allowed to monitor the company‟s financial performance, they understand their
roles within the company. Transparency is also important to the public, who tend not to trust secretive
corporations.

6. Corporate Social Responsibility

Social responsibility at the corporate level is increasingly a topic of concern. Consumers expect
companies to be good community members, for example, by initiating recycling efforts and reducing
waste and pollution. Good corporate governance identifies ways to improve company practices and
also promotes social good by reinvesting in the local community.

7. Regular Self-Evaluation

Mistakes will be made, no matter how well you manage your company. The key is to perform regular
self-evaluations to identify and mitigate brewing problems. Employee and customer surveys, for
example, can supply vital feedback about the effectiveness of your current policies. Hiring outside
consultants to analyze your operations also can help identify ways to improve your company‟s
efficiency and performance.

Main Drivers Of Corporate Governance

here are 18 drivers of good corporate governance:

1. Board Independence
2. Diversity, human and social capital within the board
3. High engagement in board processes
4. Presence of large block shareholders
5. Shareholder activism
6. Breadth and depth of public information disclosure
7. Breadth and depth of private information sharing
8. Independence of the external auditors
9. Competence of the audit committee
10. Presence of internal control systems and support of whistle blowing.
11. Long term performance-related incentives
12. Transparent and independent control of the remuneration committee
13. An active markets for corporate control
14. Transparency and protection for shareholders and stakeholders during mergers and acquisitions
15. Board power in takeover bids, subject to shareholder veto
16. Shareholder involvement within corporate governance
17. Voice mechanisms for debt holders
18. Employee participation in financial outcomes and collective voice in decision making.
The efficiency of corporate governance in a particular organization depends upon a combination of
drivers. These drivers may substitute or complement each other in terms of their efforts on
organizational outcomes including business strategy and performance.
As per my views, most important drivers of Good and Effective Corporate Governance system are :
1. Board Independence
2. Presence of large block shareholders i.e Institutional Investors
3.Shareholder Activism
As far as Board Independence in the company is concerned, in practice it can be rarely noticed.
Directors are mostly serving as Independent Directors on the Board of the Company from last 15-20
years and are just regarded as the expensive furniture of the company. There should be certain fixed
term for independent directors otherwise, they would lose their independence.
There are more committees of Board and less commitment. The question arises: Do promoters who
are leading corporates really understand the value of Corporate Governance Standards? , What is
situation of Promoters Interests vs. Shareholders Interests and how it can be tackled? The conduct of
Board Meetings is more important than the composition of Board of Directors. Board functioning is
important rather than names of high profile candidates on Board.
Rise of Shareholder‟s Activism is still a baby step in India. The shareholders are becoming more
focused now. Some of the global examples of Share holders Activism are :
1. Apple agreed to investor demands requiring a majority share vote in order for any candidate to be
elected to it s board of directors not just a simple majority.
2. Los Angeles County Employee retirement association or Lacera made it mandatory for all board of
directors to elected annually.
3.Shareholder rejected CITI CEO Vikram Pandit‟s $15 million compensation in non binding vote.
4.Merger of Sea Goa and Sterlite Industries
5.Coal India Vs. The Children Investment Fund
6.Veritas, Canadian Research Firm raised Corporate Governance and Accounting Practices issues at
Reliance Industries, Reliance Communications, Kingfisher and most recently DLF.
7.SEBI mandated AMCs to disclose their general policies and procedures for exercising the voting
rights in respect of shares held by them
More Institutional Investors should be involved. Proxy Voting Advisory firms is also emerging in
India for eg. Institutional Investors Advisory Services, In govern Research Services.
In nutshell, Corporates and Board of Directors should have fear of law. There should be strong
enforcement of laws and regulations to prevent corporate frauds. Fraud cases should be resolved
swiftly by fast track redressal forums.
Theories of Corporate Governance: Agency, Stewardship etc

There are many theories of corporate governance which addressed the challenges of governance of
firms and companies from time to time. The Corporate Governance is the process of decision
making and the process by which decisions are implemented in large businesses is known as
Corporate Governance. There are various theories which describe the relationship between various
stakeholders of the business while carrying out the activity of the business.

Theories of Corporate Governance

We will discuss the following theories of corporate governance:

 Agency Theory
 Stewardship Theory
 Resource Dependency Theory
 Stakeholder Theory
 Transaction Cost Theory
 Political Theory

Agency Theory

Agency theory defines the relationship between the principals (such as shareholders of company) and
agents (such as directors of company). According to this theory, the principals of the company hire
the agents to perform work. The principals delegate the work of running the business to the directors
or managers, who are agents of shareholders. The shareholders expect the agents to act and make
decisions in the best interest of principal. On the contrary, it is not necessary that agent make
decisions in the best interests of the principals. The agent may be succumbed to self-interest,
opportunistic behavior and fall short of expectations of the principal. The key feature of agency theory
is separation of ownership and control. The theory prescribes that people or employees are held
accountable in their tasks and responsibilities. Rewards and Punishments can be used to correct the
priorities of agents.
Stewardship Theory

The steward theory states that a steward protects and maximises shareholders wealth through firm
Performance. Stewards are company executives and managers working for the shareholders, protects
and make profits for the shareholders. The stewards are satisfied and motivated when organizational
success is attained. It stresses on the position of employees or executives to act more autonomously so
that the shareholders‟ returns are maximized. The employees take ownership of their jobs and work at
them diligently.

Stakeholder Theory

Stakeholder theory incorporated the accountability of management to a broad range of stakeholders. It

states that managers in organizations have a network of relationships to serve – this includes the
suppliers, employees and business partners. The theory focuses on managerial decision making and
interests of all stakeholders have intrinsic value, and no sets of interests is assumed to dominate the
others
Resource Dependency Theory

The Resource Dependency Theory focuses on the role of board directors in providing access to
resources needed by the firm. It states that directors play an important role in providing or securing
essential resources to an organization through their linkages to the external environment. The
provision of resources enhances organizational functioning, firm‟s performance and its survival. The
directors bring resources to the firm, such as information, skills, access to key constituents such as
suppliers, buyers, public policy makers, social groups as well as legitimacy. Directors can be
classified into four categories of insiders, business experts, support specialists and community
influentials.

Transaction Cost Theory

Transaction cost theory states that a company has number of contracts within the company itself or
with market through which it creates value for the company. There is cost associated with each
contract with external party; such cost is called transaction cost. If transaction cost of using the market
is higher, the company would undertake that transaction itself.

Political Theory

Political theory brings the approach of developing voting support from shareholders, rather by
purchasing voting power. It highlights the allocation of corporate power, profits and privileges are
determined via the governments‟ favor

Corporate Governance Models: Anglo-American, German

Corporate form of business is generally managed by the Board of Directors and the board members
are elected by shareholders. The board in turn appoints the professional managers to manage the
business. Different countries have different regulations and corporate governance models differ based
on these differences.

Corporate Governance Models

The Corporate governance models are broadly classified into following categories:

1. Anglo-American Model
 2. The German Model
3. The Japanese Model
4. Social Control Model

Anglo-American Model

Under the Anglo-American Model of corporate governance, the shareholder rights are recognised and
given importance. They have the right to elect all the members of the Board and the Board directs the
management of the company. Some of the features of this model are:

 This is shareholder oriented model. It is also called Anglo-Saxon approach to corporate

governance being the basis of corporate governance in Britain, Canada, America, Australia
and Common Wealth Countries including India
 Directors are rarely independent of management
 Companies are run by professional managers who have negligible ownership stake. There is
clear separation of ownership and management.
 Institution investors like banks and mutual funds are portfolio investors. When they are not
satisfied with the company‟s performance they simple sell their shares in market and quit.
 The disclosure norms are comprehensive and rules against the insider trading are tight
 The small investors are protected and large investors are discouraged to take active role in
corporate governance.

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:

1. Supervisory Board: The shareholders elect the members of Supervisory Board. Employees
also elect their representative for Supervisory Board which are generally one-third or half of
the Board.
2. Board of Management or Management Board: The Supervisory Board appoints and
monitors the Management Board. The Supervisory Board has the right to dismiss the
Management Board and re-constitute the same.

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.

Social Control Model

Social Control Model of corporate governance argues for full-fledged stakeholder representation in
the board. According to this model, creation of Stakeholders Board over and above the shareholders
determined Board of Directors would improve the internal control systems of the corporate
governance. The Stakeholders Board consists of representation from shareholders, employees, major
consumers, major suppliers, lenders etc.

Indian Model
In India there are mainly three types of companies‟ viz. private companies, public companies and
public sector undertakings. Each of these companies has distinct kind of shareholding pattern. Thus
the corporate governance model in India is a mix of Anglo-American and German Models.

Board of Director

Board of Directors
Separation of the ownership from management is an essential feature of the company form
of organisation. To manage the affairs of the company, shareholders elect their representatives in
accordance with the laid down policy. These representatives are called as
directors of the company individually while collectively they are known as board of directors.
According to Companies Act 2013, “Board of Directors” or “Board” in relation to a
company means the collective body of the directors of the company under section 2(10). The board of
directors is authorised to exercise the powers and to perform all such acts and
things as the company is entitled to. It means the power of board of directors is coextensive
with those of company subject to the following conditions:

meeting.

memorandum of association in the company act or any regulation made by the company in any
general meeting.

Provisions of Board of Directors according to Companies Act 2013

According to the section 149 of the companies Act 2013, the following provisions would regulate the
constitution of the board of directors: Every company shall have a board of directors comprising of
the individuals and directors and shall have:
o A minimum three directors in case of public company, two in case of private companies and one in
case of one person company.
o A maximum of fifteen directors provided that a company can appoint more than fifteen directors
after passing a special resolution, provided further that such class or classes of companies as may be
prescribed shall have at least one woman director.

from such commencement comply with the requirements of the above mentioned provisions of this
act.
ed in India for a total period of not less
than one hundred and eighty two days in the previous calendar year.

independent directors and the central government may prescribe the minimum number of independent
directors in case of any class of public companies.

from such commencement or from the date of notification of th rules in this regard as may be
applicable comply with the requirements of these new provisions.

Directors
Section 2(34) of the companies Act 2013 defines the directors as „director means a director
appointed to the board of a company‟. Director includes any person occupying the position
of a director. It is mandatory by law to have directors in the company.

Independent Directors
An independent director can be defined as the non-executive director who is free from nay
business or other relationship which could materially interfere with the exercise of his independent
judgement.

Appointment of Directors
There are various modes of appointment of directors as given by the Company Act are as
follows:

Appointment by shareholders: Listed Company may have one director elected by such small by
shareholders in such manner and with such items and conditions as may be prescribed. Here small
shareholders means the shareholders holding shares of nominal value of not more than twenty
thousand rupees or such other sum as may be prescribed.

Appointment of First Directors by the Promoters: Where no provision is made in the articles
of the company for the appointment of the first director, the subscribers to the memorandum shall be
deemed to be the first directors of the company until the directors are duly appointed.

Appointment of directors in General Meeting:Except the first director shall be appointed by

company in general meeting by an ordinary resolution. It may note that 2/3 of the total number of
directors shall be liable to retire by rotation and only 1/3 can be given permanent appointment. No
person can be appointed as director of a company unless he has been allotted the Director
Identification Number under section 154.

Appointment of Directors by Board of Directors:

However, the general power to appoint directors is vested in the general meeting of the shareholders,
but board of directors may also appoint directors in the following manner under section 161:

o Additional Director: The articles of a company may confer on its board of directors the power to
appoint any person other than person who fails to get appointed as director in general meeting as an
additional director at any time who shall hold office up to the date of the next meeting.

Alternative Director: The board of directors of a company if so authorised by the articles of

association, can appoint a person to act as an alternative director for a director during his absence for a
period of not less than three months from India.

o Nominee Director: Subject to the articles of company the Board may appoint any person as
director nominated by any institution in pursuance of the provisions of any law for the time being in
force or of any agreement or by central government or state government by virtue of its shareholding
in a government company.

Executive and Non Executive Director

Executive Director
An executive director is more or less the full-time working director of an organisation. Also called
internal directors, they generally have a specific role in departments like marketing or finance. They
are responsible for allocating resources to achieve the department‟s goals and may be involved in
hiring new employees and overseeing budgeting. An executive director has overall responsibility for
the day-to-day running of an organisation. They are also responsible for ensuring that everyone in
their department works towards the same goals and objectives. This can be difficult when there are
multiple departments within an organisation, but it‟s vital for the whole company‟s success.
Executive directors must have excellent organisational skills, prioritise tasks according to their
importance, and handle multiple projects without getting overwhelmed. They need to be able to think
on their feet and make decisions quickly when needed.

Non-Executive Director
A non-executive director is the non-working director of a company or non- profit organisation. While
they do not participate in day-to-day activities, they have a big say in policy making, strategic
planning and fundraising.
In most cases, non-executive directors are responsible for conducting meetings, setting agendas, and
keeping an eye out for potential conflicts of interest among other directors. They also liaise between
their organisation‟s leadership team and external stakeholders such as investors and customers.
The term “non-executive director” is not well defined, making it challenging to find just the right
person for a particular position. Many companies use the phrase “non-executive” when describing this
type of position because it could be anyone with a background in business management or outside
accounting but without an active role on their Board.

Role of Directors
Directors have to perform different role as per their position in the company. The various
positions of the director have been discussed as under which will help the students to understand the
role of directors in affairs of the company:

Role of directors as an agent: The general principles of law of agency also apply to the company
and its directors. So per this law directors are the agents of the company and they have to perform all
roles which an agent has to perform on the behalf his principal.
Role of directors as trustee: A trustee is a person who holds and manages the property and uses
the power for the benefit of owner.Directors are trustees of company‟s money, property and power
which are actually under this control. As trusts, he should properly use all these in the benefit of the
company.
Role of directors as an officer: Under section 2(59) of the Companies Act 2013, the directors
comes under the purview of definition of officer, so they have to perform the function of as an officer
of the company.
Role of directors as employees: In the strict sense, the directors of the company are not its
employees. Since they work in the company and charge certain fees and other benefits so they can be
treated as an employee of the company.
Role of directors as managing partner: Directors are appointed to manage and control the affair of
the company. Thus to that extent the position of director is also similar to that of managing partners.

Board of Directors and its Composition

The board of directors can be knowns as the brain of the company as they are responsible for taking
all the big decisions and making policy changes for the company. The decisions are taken in the
special meetings members of the board held together, which meeting is known as „Board Meetings‟.
Section 149(1) of the Companies Act,2013 talks about the minimum and maximum number of
directors in a company. The following points are in the section:
 The minimum number of directors in a Private Limited Company is 2;
 For the Public Company it is 3 directors; and,
 An OPC shall have a minimum of 1 director.
However, the maximum number of directors a company have is 15. The no of directors can raise the
number of directors beyond 15. And the change in the number of the director is by passing a special
resolution in the general meeting.

Other Requirements for Composition

 The maximum number of companies that an individual can become a director of, is 20
companies.
 At least one director, who has lived in India for a minimum of 182 calendar days of the
previous year, shall be appointed by every company‟s board. It is a mandatory rule.
 At least, a one-woman director must be there in the company.
 All listed companies must have at least one-third proportion of their board of directors as
independent directors.
Structure of Board of Directors

Board of Directors members have different places within the panel. The composition of the board
varies on the companies and state laws.
The size of the directors has certain limits as per a company as the minimum and maximum limit in
its Articles of Association. Companies commonly have 3 to 31 directors. Following are some
designations and positions common to a Board of Directors in public companies:
 Chairman of the Company: A chairman of a company leads the board and thus heads the
committee or board meetings. The chairperson is elected by the votes of the Board of Directors.
Generally, the company‟s chief executive officer is the chairman.
 Executive Director of the Company: Executive director is an individual who takes active
participation in the company‟s administration, business procedures, sales, and finances. An
executive director is a part of the board and also gets a salary for the company.
 Non-Executive Director of the Company: A non-executive director doesn‟t belong to the
organization but is a part of the board. Such directors provide critical opinions and advice by
charging a certain fee. In addition, they give voice to stakeholders outside a firm.
 Managing Director of the Company: There are no restrictions on the number of directors in
a company by law. A managing director is an individual whose selection is by the company‟s
executive directors for managing, guiding, and monitoring business functioning.
Other designations in the company are: Vice Presidents, CFOs, treasurer, zonal head, vigilance
chief, audit chief, etc., are some other designations common to a BOD.

Directors in a Listed Company

According to Regulation 17 of Securities and Exchange of India (Listing Obligations and Disclosure
Requirement) 2015, the following are the composition of the Board of Directors in a listed company:
 Board of directors shall have a mixture of executive and non-executive directors with at least
one-woman director and not less than 50% of the board of directors shall constitute non-executive
directors.
 If the chairperson of the board of directors is a non-executive director, then at least one-third
of the board of directors shall constitute independent directors and if the listed entity has an
executive chairperson, then at least half of the board of directors shall comprise of independent
directors.

Corporate Social Responsibility (CSR)

What Is Corporate Social Responsibility (CSR)?

Corporate social responsibility (CSR) is a self-regulating business model that helps a company be
socially accountable to itself, its stakeholders, and the public. By practicing corporate social
responsibility, also called corporate citizenship, companies can be conscious of the kind of impact
they are having on all aspects of society, including economic, social, and environmental.

To engage in CSR means that, in the ordinary course of business, a company is operating in ways
that enhance society and the environment instead of contributing negatively to them.

Understanding Corporate Social Responsibility (CSR)

Corporate social responsibility is a broad concept that can take many forms depending on the
company and industry. Through CSR programs, philanthropy, and volunteer efforts, businesses can
benefit society while boosting their brands.

or a company to be socially responsible, it first needs to be accountable to itself and its shareholders.
Companies that adopt CSR programs have often grown their business to the point where they can
give back to society. Thus, CSR is typically a strategy that's implemented by large corporations.
After all, the more visible and successful a corporation is, the more responsibility it has to
set standards of ethical behavior for its peers, competition, and industry.

Small and midsize businesses also create social responsibility programs, although their initiatives
are rarely as well-publicized as those of larger corporations.

Types of Corporate Social Responsibility

In general, there are four main types of corporate social responsibility. A company may choose to
engage in any of these separately, and lack of involvement in one area does not necessarily exclude a
company from being socially responsible.

Environmental Responsibility

Environmental responsibility is the pillar of corporate social responsibility rooted in preserving

mother nature. Through optimal operations and support of related causes, a company can ensure it
leaves natural resources better than before its operations. Companies often pursue environmental
stewardship through:

 Reducing pollution, waste, natural resource consumption, and emissions through its
manufacturing process.
 Recycling goods and materials throughout its processes including promoting re-use practices
with its customers.
 Offsetting negative impacts by replenishing natural resources or supporting causes that can
help neutralize the company's impact. For example, a manufacturer that deforests trees may
commit to planting the same amount or more.
 Distributing goods consciously by choosing methods that have the least impact on emissions
and pollution.
 Creating product lines that enhance these values. For example, a company that offers a gas
lawnmower may design an electric lawnmower.

Ethical Responsibility

Ethical responsibility is the pillar of corporate social responsibility rooted in acting in a fair, ethical
manner. Companies often set their own standards, though external forces or demands by clients may
shape ethical goals. Instances of ethical responsibility include:
  Fair treatment across all types of customers regardless of age, race, culture, or sexual
orientation.
 Positive treatment of all employees including favorable pay and benefits in excess of
mandated minimums. This includes fair employment consideration for all individuals
regardless of personal differences.
 Expansion of vendor use to utilize different suppliers of different races, genders, Veteran
statuses, or economic statuses.
 Honest disclosure of operating concerns to investors in a timely and respectful manner.
Though not always mandated, a company may choose to manage its relationship with
external stakeholders beyond what is legally required.

Philanthropic Responsibility

Philanthropic responsibility is the pillar of corporate social responsibility that challenges how a
company acts and how it contributes to society. In its simplest form, philanthropic responsibility
refers to how a company spends its resources to make the world a better place. This includes:

 Whether a company donates profit to charities or causes it believes in.

 Whether a company only enters into transactions with suppliers or vendors that align with
the company philanthropically.
 Whether a company supports employee philanthropic endeavors through time off or
matching contributions.
 Whether a company sponsors fundraising events or has a presence in the community for
related events.

Financial Responsibility

Financial responsibility is the pillar of corporate social responsibility that ties together the three areas
above. A company make plans to be more environmentally, ethically, and philanthropically focused;
however, the company must back these plans through financial investments of programs, donations,
or product research. This includes spending on:

 Research and development for new products that encourage sustainability.

 Recruiting different types of talent to ensure a diverse workforce.
 Initiatives that train employees on DEI, social awareness, or environmental concerns.
 Processes that might be more expensive but yield greater CSR results.
 Ensuring transparent and timely financial reporting including external audits.

Some corporate social responsibility models replace financial responsibility with a sense of
volunteerism. Otherwise, most models still include environmental, ethical, and philanthropic as types
of CSR.

Benefits of Corporate Social Responsibility

As important as CSR is for the community, it is equally valuable for a company. CSR activities can
help forge a stronger bond between employees and corporations, boost morale, and aid both
employees and employers in feeling more connected to the world around them. Aside from the
positive impacts to the planet, here are some additional reasons businesses pursue corporate social
responsibility.

Brand Recognition
According to a study published in the Journal of Consumer Psychology, consumers are more likely
to act favorably towards a company that has acted to benefit its customers as opposed to companies
that have demonstrated an ability to delivery quality products.3 Customers are increasingly
becoming more aware of the impacts companies can have on their community, and many now base
purchasing decisions on the CSR aspect of a business. As a company engages more in CSR, they are
more likely to receive favorable brand recognition.

Investor Relations

In a study by Boston Consulting Group, companies that are considered leaders in environmental,
social, or governance matters had an 11% valuation premium over their competitors.4 For
companies looking to get an edge and outperform the market, enacting CSR strategies tends to
positively impact how investors feel about an organization and how they view the worth of the
company.

Employee Engagement

In yet another study by professionals from Texas A&M, Temple, and the University of Minnesota, it
would found that CSR-related values that align firms and employees serve as non-financial job
benefits that strengthen employee retention.5 Works are more likely to stick around a company that
they believe in. This in turn reduces employee turnover, disgruntled workers, and the total cost of a
new employee.

Risk Mitigation

Consider adverse activities such as discrimination against employee groups, disregard for natural
resources, or unethical use of company funds. This type of activity is more likely to lead to
lawsuits, litigation, or legal proceeds where the company may be negatively impacted financially and
be captured in headline news. By adhering to CSR practices, companies can mitigate risk by
avoiding troubling situations and complying with favorable activities.

CSR strategies may be difficult to strategically assess because not all benefits may be financially
translatable back to the company. For example, it might be very difficult to assess the positive
impact to a company's brand image that planting 1 million trees may have.

ISO 26000

In 2010, the International Organization for Standardization (ISO) released ISO 26000, a set of
voluntary standards meant to help companies implement corporate social responsibility. Unlike other
ISO standards, ISO 26000 provides guidance rather than requirements because the nature of CSR is
more qualitative than quantitative, and its standards cannot be certified.6

ISO 26000 clarifies what social responsibility is and helps organizations translate CSR principles
into practical actions. The standard is aimed at all types of organizations, regardless of their activity,
size, or location. And because many key stakeholders from around the world contributed to
developing ISO 26000, this standard represents an international consensus.6

Examples of Corporate Social Responsibility

Starbucks

Starbucks has long been known for its keen sense of corporate social responsibility and commitment
to sustainability and community welfare. According to its 2020 Global Social Impact Report, these
milestones include reaching 100% of ethically sourced coffee, creating a global network of farmers
and providing them with 100 million trees by 2025, pioneering green building throughout its stores,
contributing millions of hours of community service, and creating a groundbreaking college program
for its employees.7

Home Depot

As part of its annual reporting on ESG, Home Depot highlighted its achievements on focusing on its
employees, operating sustainably, and strengthening its communities. In fiscal year 2020, it invested
over $2 billion in increased salaries and benefits to enhance its employee well-being. It also reduced
energy consumption by 14% from the year prior and are on track to reduce company-wide emissions
by 40% by 2030.8

General Motors

In 2021, General Motors was placed on the Bloomberg General Equality Index for a fourth
consecutive year as well as being placed in Diversity Inc.'s top 50 companies for diversity for a sixth
consecutive year. In addition, it has planned for a $35 billion investment from 2020 to 2025 in
electric vehicles and aims for 100% renewable electricity at U.S. sites by 2025.9

Why Should a Company Implement CSR Strategies?

Many companies view CSR as an integral part of their brand image, believing that customers will be
more likely to do business with brands that they perceive to be more ethical. In this sense, CSR
activities can be an important component of corporate public relations. At the same time, some
company founders are also motivated to engage in CSR due to their convictions.

Why Is CSR Important?

The movement toward CSR has had an impact in several domains. For example, many companies
have taken steps to improve the environmental sustainability of their operations, through measures
such as installing renewable energy sources or purchasing carbon offsets. In managing supply chains,
efforts have also been taken to eliminate reliance on unethical labor practices, such as child labor
and slavery.

Although CSR programs have generally been most common among large corporations, small
businesses also participate in CSR through smaller-scale programs, such as donating to local charities
and sponsoring local events.

What Are the Benefits of CSR?

CRS initiatives strive to have a positive impact on the world through direct benefits to society, nature
and the community in which a business operations. In addition, a company may experience internal
benefits through the initiatives. Knowing their company is promoting good causes, employee
satisfaction may increase and retention of staff may be strengthened. In addition, members of
society may be more likely to choose to transact with companies that are attempting to make a
more conscious positive impact beyond the scope of its business.

What Are the 4 Types of CSR?

CSR initiatives are often broken down into four categories: environmental, philanthropic, ethical,
and economic responsibility. Environmental initiatives focus on preservation of natural resources,
while philanthropic initiatives focus on donating to worthy causes that may not relate to a business.
Ethical responsibility ensures fair and honest business operations, while economic responsibility
promotes the fiscal support of the goals above.

What Companies Have the Best CSR?

There is no single defining rubric for evaluating the CSR of all companies. Various sources will review
and compile rankings differently. Since 1999, Corporate Responsibility Magazine has ranked the top
100 Best Corporate Citizens each year among the 1,000 largest U.S. public companies. Rankings are
determined based on employee relations, environment impact, human rights, governance, and
financial decisions.

In 2021, the top five ranked companies on the list included Owens Corning, General Motors, H.P.,
Cisco, and Intel.10

The Bottom Line

Companies striving to measure success beyond bottom line financial results may adopt corporate
social responsibility strategies. These strategies may target environmental, ethical, philanthropic,
and fiscal responsibility that extend beyond the products they sell. CSRs aim to make the world a
better place beyond transacting with customers and may result in company-specific benefits as well.

WHAT IS THE TRIPLE BOTTOM LINE?

The triple bottom line is a business concept that posits firms should commit to measuring their social
and environmental impact—in addition to their financial performance—rather than solely focusing
on generating profit, or the standard “bottom line.” It can be broken down into “three
Ps”: profit, people, and the planet

Profit

In a capitalist economy, a firm’s success most heavily depends on its financial performance, or
the profit it generates for shareholders. Strategic planning initiatives and key business decisions are
generally carefully designed to maximize profits while reducing costs and mitigating risk.

In the past, many firms’ goals have ended there. Now, purpose-driven leaders are discovering they
have the power to use their businesses to effect positive change in the world without hampering
financial performance. In many cases, adopting sustainability initiatives has proven to drive business
success.

People

The second component of the triple bottom line highlights a business’s societal impact, or its
commitment to people.
It’s important to make the distinction between a firm’s shareholders and stakeholders. Traditionally,
businesses have favored shareholder value as an indicator of success, meaning they strive to generate
value for those who own shares of the company. As firms have increasingly embraced sustainability,
they’ve shifted their focus toward creating value for all stakeholders impacted by business decisions,
including customers, employees, and community members.

Some simple ways companies can serve society include ensuring fair hiring practices and
encouraging volunteerism in the workplace. They can also look externally to effect change on a
larger scale. For instance, many organizations have formed successful strategic partnerships with
nonprofit organizations that share a common purpose-driven goal.

The Planet

The final component of the triple bottom line is concerned with making a positive impact on
the planet.

Since the birth of the Industrial Revolution, large corporations have contributed a staggering amount
of pollution to the environment, which has been a key driver of climate change. A recent report by the
Carbon Majors Database found that 100 companies in the energy sector are responsible for roughly 71
percent of all industrial emissions.

While businesses have historically been the greatest contributors to climate change, they also hold
the keys to driving positive change. Many business leaders are now recognizing their responsibility
to do so. This effort isn’t solely on the shoulders of the world’s largest corporations—virtually all
businesses have opportunities to make changes that reduce their carbon footprint. Adjustments like
using ethically sourced materials, cutting down on energy consumption, and streamlining shipping
practices are steps in the right direction.

WHY IS THE TRIPLE BOTTOM LINE IMPORTANT?

To some, adopting a triple bottom line approach may seem idealistic in a world that emphasizes
profit over purpose. Innovative companies, however, have shown time and again that it’s possible to
do well by doing good.

The triple bottom line doesn’t inherently value societal and environmental impact at the expense of
financial profitability. Instead, many firms have reaped financial benefits by committing to
sustainable business practices.

Related: Why You Need Sustainability in Your Business Strategy

“In many situations, it's possible to do the right thing and make money at the same time,” Harvard
Business School Professor Rebecca Henderson says in Sustainable Business Strategy. “Indeed, there's
good reason to believe that solving the world's problems presents trillions of dollars worth of
economic opportunity.”

Case in point: Research by Nielsen found that 48 percent of US consumers would change their
consumption habits to lessen their impact on the environment. In 2018 alone, this sentiment
translated to roughly $128.5 billion in sales of sustainable, fast-moving consumer goods.
Beyond helping companies capitalize on a growing market for sustainable goods, embracing
sustainable business strategies can be highly attractive to investors. According to Sustainable
Business Strategy, evidence has increasingly shown that firms with promising environmental, social,
and governance (ESG) metrics tend to produce superior financial returns. As a result, more investors
have begun focusing on ESG metrics when making investment decisions.

DOING WELL BY DOING GOOD

As the world’s most pressing challenges evolve, purpose-driven leaders are needed to spearhead
initiatives that can spur positive change—but making those changes isn’t an easy task.

“Finding these opportunities and making them successful takes both real courage and grindingly
hard work,” Henderson says in Sustainable Business Strategy. “It’s often the firms that have a
purpose—beyond simply making money—that make the first move.”

Although the road ahead is long and uncertain, it’s important not to be discouraged. The first steps
toward sustainability start with the individual. Little by little, firms can unite around a common cause
and have a real, measurable impact.

“It’s not only OK to take your values to work; it's required,” Henderson says. “A shared purpose can
make firms both more productive and more innovative. But what's most important is that, in the
end, [our values] are all we have.”

Unit 2

Objective: To ensure proper utilization of fund.

Composition of Finance Committee:

The Principal (Chairman).

One person to be nominated by the Governing Body of the college for a period of two years.

Finance Officer of the affiliating University

One senior-most teacher of the college to be nominated in rotation by the Principal for two years.

Term : Term of the Finance Committee will be two years.

Meetings : The Finance Committee will meet at least twice a year

Meeting Schedule and Process of convening a meeting:

The member secretary is expected to issue a circular with the schedule and agenda one week in
advance, with the consent of the Chairman. However, the Chairman reserves the right to conduct
any emergency session under certain circumstances that can be deemed to be an emergency
situation.

If it is not possible for the member secretary to convene a meeting because of any academic
or administrative reasons, one of the senior members of the committee can take up the
responsibility of convening the meeting with the prior approval of the Chairman. Tentative schedule
of the meetings during the academic year has to be drawn by the convener in consultation with the
Chairman.

Quorum and other standard tenets;

Attendance of 1/3 of its total strength is considered the quorum for the meeting.

The committee may prepare a draft plan for items to be presented for further processing by the
relevant bodies.

If any member comes up with an innovative proposal, he/she may be advised to prepare a full-
stretch document of the project put forward with projected financial commitment with relevant
documents failing which such open suggestions can deferred to the next meeting by requesting the
members to be more focused in their approach.

The deliberations are strictly confidential and shall be confined to in-house circulation, and if any
member is found leaking the information to external agencies, the matter shall be reported for
correctional administration.

Functions of the Finance Committee:

The Finance Committee shall act as an advisory body to the Governing Body, to consider:

Budget estimates relating to the grant received/receivable from UGC, and income from fees, etc.
collected for the activities to undertake the scheme of autonomy; and

Audited accounts for the above.

To recommend fixation/revision of fees and other charges payable by the students to the College
Governing Council.

see that expenses incurred have budgetary provision recommend for approval financial proposals
made by other committees with or without modification

check that necessary formalities have been observed in incurring expenses

check process bills placed for payment

consider proposal for enhancement of wage/allowance or engagement of temporary staff

Audit Committee

A group comprising a company’s directors who are responsible for supervising the process of
financial reporting

What is an Audit Committee?

An audit committee is a sub-group of a company’s board of directors responsible for the oversight of
the financial reporting and disclosure process. To be successful, the audit committee should be aware
of the processes and internal controls in the organization.
he audit committee must coordinate with the management team, independent auditor, and internal
auditors to monitor the choice of accounting policies and principles and to ensure compliance with
laws and regulations.

Audit Committee Regulations

As mandated by the Sarbanes-Oxley Act of 2002, the US Securities and Exchange Commission (SEC)
adopted rules and requirements that a company needs to fulfill to get its securities listed on a
national exchange. The requirements include the following:

The audit committee must consist of independent members.

The audit committee is given the responsibility of selecting and overseeing the
company’s independent auditor.

Compensation is provided to any outside auditors or independent auditor engaged by the audit
committee.

The audit committee is given the authority to engage advisors.

Processes must be in place for managing complaints related to the accounting practices.

Roles and Responsibilities of an Audit Committee

The audit committee assesses the analysis of important issues and judgments made by management
in the financial reports. The effects of accounting and regulatory initiatives on the financial
statements are also reviewed by the audit committee.

The audit committee ensures that appropriate policies and processes are in place for the prevention
and identification of fraud, such as asset misappropriation, corruption, and financial statement
fraud. The audit committee works with management to make sure that necessary steps are taken on
the detection of fraud.

The audit committee should understand the responsibilities of management regarding laws
governing anti-corruption and determine whether appropriate policies and controls are in place for
the detection and mitigation of risks related to corruption. They should be aware of the laws
regarding anti-corruption, such as the U.S. Foreign Corrupt Practices Act (FCPA).

The audit committee meets with management and the independent auditor to discuss the quarterly
and audited annual financial statements of the company. They also review the news releases on
earnings, along with the financial details and recommendations given to external rating agencies and
analysts.

The management team assesses and manages the risk a company is exposed to. The audit
committee should not be overburdened with the responsibility of risk oversights. They are only
responsible for discussing and reviewing the related policies. The audit committee in some
organizations may also be given the responsibility of cyber risk oversight.
In an M&A transaction, the insights provided by the audit committee on a company’s financials,
internal controls, and risk analysis provide confidence about the accuracy and completeness of the
financial information. Furthermore, according to SEC rules under the Sarbanes-Oxley Act, post-
merger, companies should adopt a successful integration of the financial reporting controls and
disclosure controls. Otherwise, deficiencies and control problems may exist. The audit committee is
responsible for administering the integration to ensure a successful M&A transaction.

The audit committee appoints, oversees, and compensates the independent auditor. Several
national exchanges – such as NASDAQ and NYSE – list various ways of communications to be
followed by the audit committee while overseeing independent auditors. The committee and the
independent auditor usually hold quarterly meetings to discuss the financial reporting, internal
controls, and audit of the firm.

Some national securities exchanges may require the audit committee to oversee internal auditors,
evaluate their performance, and include any performance-related issues in the report presented to
the board. The audit committee is required to hold separate meetings with the internal auditors.

The audit committee administers compliance with rules and legislation. They work with
management to ensure that the company’s policies on the code of conduct and ethics satisfy the
requirements.

The audit committee must coordinate with other committees to understand the risks and
responsibilities and the effect on financial reporting. It needs to understand and address the impact
of non-GAAP metrics used for compensation on risk assessment.

mpensation committees provide specific duties and committee members bring specific skills to the
table. We examine their roles and responsibilities.

A compensation committee is the portion of a corporate or nonprofit board that selects and reviews
salary and other forms of compensation. It must balance the organization’s financial realities with
investor expectations and ultimately create competitive retention strategies. Compensation
committee responsibilities include advising the board and strategically selecting what to include in a
compensation package.

What is a compensation committee?

A board of directors’ compensation committee is a set of independent directors who set pay rates
for senior management. But a compensation committee oversees more than just the number on a
paystub. It is responsible for all the pieces that make up overall compensation, like profit sharing,
bonuses, stocks, and so on. It must use these to predict and stay in line with an organization’s future
goals.

The work of a compensation committee is broken down into three primary functions:

Advisory. It must stay abreast of industry best practices and guide the board and organization to the
best action

Strategic. It needs to intertwine the compensation strategy with corporate growth strategy
Administrative. As a means of transparency, the compensation committee needs to share its sources
with the rest of the board. What research did it use to craft its compensation plan?

These three areas can serve as general guidelines for a compensation committee’s tasks and
responsibilities. If it can divide its time equally between each aspect, it will succeed.

Who serves on a compensation committee?

Compensation committees function best with independence from the rest of the board.
Today, independent compensation committees are standard practice to keep everyone away from
unethical boundary-crossing. Appointed members need to have at least a bit of industry knowledge
or business skills in order to function effectively. The compensation committee directors should also
be assessed for biases before an appointment.

What does a compensation committee do?

So now you have an independent compensation committee selected and its high-level duties
outlined. But what does a compensation committee do?

Committees in corporate governance need to include compensation committees to develop

compensation packages and identify ways to measure and evaluate the success as a result of those
compensation packages. It is important for the committee to ask questions like:

What are the KPIs for the performance of executives?

How can senior management show it is actively achieving its goals?

What results are directly measurable and what results are part of larger business objectives?

Setting up systems to define and measure success can help the organization reach its desired future
state.

What does a compensation plan include?

Compensation is far more than a number. Retention of strong leaders requires a holistic
compensation plan. Creating a robust compensation plan shows your organization values more than
just output from your senior leaders; it shows commitment to them as people. A compensation
committee can create an objectively balanced plan.

A compensation plan includes:

C-suite baseline salaries

Bonuses based on short-term goals

Bonuses based on long-term wins

Benefits like the different types of insurance, vacation time, retirement plans and parental leave

Access to perks that have fiscal value, like using a company car or travel discounts.
Compensation plans are not limited to this list. They are the backbone of your leadership retention.
A compensation committee should always be horizon-scanning to find the most competitive
offerings and ways to make life for employees more sustainable.

Roles and responsibilities of a compensation committee

Developing a compensation philosophy is a day-one priority for a compensation committee.

Members need to agree how people should be paid and evaluated, the values of the organization
and its review strategies. If one director believes in bonuses as an incentive for work and another
sees raises as the best means of reward, then the committee will need to reconcile its philosophy of
compensation.

The Companies Act, 2013

The new Companies Law contains many provisions related to good corporate governance like
Composition of Board of Directors, Admitting Woman Director, Admitting Independent
Director, Directors Training and Evaluation, Constitution of Audit Committee, Internal
Audit, Risk Management Committee, SFIO Purview, Subsidiaries Companies Management,
Compliance center etc. All such provisions of new Company Law are instrumental in
providing a good Corporate Governance structure.

1. Section 134, which mandates to attach a report to every Financial statement by

Board of Directors containing all the details of the matter including the statement
containing director‟s responsibility.
2. Section 177, which requires Board of Directors of every listed company or any other
class of committee to constitute an Audit Committee. It also provide the manner to
constitute the committee.
3. Section 184, which mandates the Director disclose his interest in any company or
companies, body corporate, firms, or other association of Individuals. The director
is required to disclose any such interest at the first meeting of the board and if there
is any change in the interest then the first meeting held after such change.

Securities and Exchange Board of India (SEBI) guidelines

SEBI is a regulatory authority established on April 12, 1992. SEBI was established with the
main purpose of curbing the malpractices and protecting the interest of its investors. Its main
objective is to regulate the activities of Stock Exchange and at the same time ensuring the
healthy development in the financial market. In order to ensure good corporate governance
SEBI came up with detailed Corporate Governance Norms.

1. As per the new rules the companies are required to get shareholders approval for
RPT (Related Party Transactions), it established whistle blower mechanism, clear
mandate to have at least one woman director in the Board and moreover it
elaborated disclosures on pay packages.
 2. Clause 35B of the Listing Agreement is being amended by the regulatory authority.
Now as per the amended clause, Listed companies are required to provide the
option of e-voting to its shareholders on all proposed or passed at general meetings.
Those who do not have access to e-voting facility, they should be provided to cast
their votes in writing on Postal Ballot. There was the need to amend the provision
so that the provisions of the listing agreement can be aligned with the provisions of
Companies Act, 2013. By doing so an additional requirement can be provided to
strengthen the Corporate Governance norms in India with respect to Listed
companies.
3. Clause 49 of the Listing Agreement was also amended by SEBI in order to
strengthen the Corporate Governance framework for Listed companies in India. The
revised clause forbids the independent directors from being eligible for any kind of
stock option. Whistle blower policy is also added in the revised clause whereby the
directors and employees can report any unethical behavior, any fraud or if there is
violation of Code of Conduct of the company. By the amendment Audit Committee
is also enhanced, now it will include evaluation of risk management system and
internal financial control, will keep a check on inter-corporate loans and
investments. The amendment now requires all the companies to form a policy for
the purpose of determination of „material subsidiaries‟ and that will be published
online.

SEBI ALSO IMPLEMENTED VARIOUS REGULATIONS FOR EFFECTIVE WORKING

OF THE COMPANIES, FEW OF THESE REGULATIONS ARE AS FOLLOWS-

1. SEBI (Issue of Capital and Disclosure Requirements) regulation, 2009. This

Regulation contains provisions for public issue wherein the issuer shall satisfy the
conditions mentioned under the regulation, it also contains provisions regarding
restriction on right issue. It also contains provisions regarding listing of Securities
on stock exchange wherein in-principle is to be obtained by the issuer from
recognised stock exchange.Part A of schedule XI of this regulations talks about
disclosure in Red Herring prospectus, Shelf prospectus, and Prospectus wherein it is
the duty of issuer to ensure that all material information and reports were submitted
prior to the issue.It also makes it very clear that underwriting obligations would not
be restricted to any kind of minimum subscription level but it would be applicable
to the whole issue. All such rules are instrumental in ensuring good corporate
governance.
2. SEBI (Listing obligations and Disclosure Requirements), 2015. The LODR
Regulations were notified with the aim of simplifying the existing provisions of
listing agreements for different segment of capital markets like convertible and non-
convertible debt securities, equity shares etc. it requires all listed entities to make
disclosure and abide by the provisions of these regulations. Listed entities shall
ensure that directors, KMP or any other person related to the company shall adhere
to the responsibilities assigned to them under this regulation. The intent here is to
ensure that once the shares of a company is listed on a Stock Exchange they are
easily accessible to the normal public. The company secretary who will be the
„Compliance Officer‟ of the company shall ensure compliances and should also
provide the „Compliance certificate‟ to Stock Exchanges. Listed companies shall
have a policy for „Preservation of Documents‟ approved by Board.
 3. SEBI (Prohibition of Insider Trading) Regulations,2015. Insider trading per se is not
a violation of Law but what is prohibited is trading by an insider on the basis of
Non-public information. To prevent such trading SEBI came up with this
regulation. Under this, the restriction is corporate insiders who arrive at trading
decisions by using the price sensitive information directly or indirectly. Under this
the disclosure mandated at two different levels, one is the immediate disclosure of
material facts while the other is regarding disclosure of transactions undertaken.
While the former prevents insider trading, the latter reveals the insider trading.
Under this Insiders may be restricted from dealing in securities for a specific time
period in order to prevent them taking advantage of any material information before
the shareholders or public. A condition can be imposed upon the insiders to obtain a
prior approval before dealing in securities of a company.
4. SEBI came up with many other regulations like Regulation on Fraudulent and Unfair
Trade Practices, Regulations on Substantial Acquisition of Shares and Takeovers,
Issue of Sweat Equity etc. The main aim behind coming up with such Regulation,
rules etc is to ensure good corporate governance in a company.

Standard Listing Agreement of Stock Exchanges

It is for all those companies whose shares are listed on Stock Exchange. All companies are
required to file the listing agreement of the Stock exchange where its shares are listed.

Accounting standards issued by the ICAI (Institute of Chartered Accountants of India)

ICAI is a statutory body established by Chartered Accountants Act, 1949. It issues
accounting standards for disclosure of financial information. Section 129 of the Companies
Act, 2013 states that financial statements of a company shall comply with the accounting
standards notified under section 133 of the Act. it also states that the financial statement shall
give true and fair view of the state of affairs of the company. Section 133 states that Central
government may prescribe the accounting standards as recommended by ICAI. accounting
standards are provided so that good corporate governance can be ensured in a company.
Some accounting standards issued by ICAI are: Disclosure of Accounting policies followed
in preparation of Financial statement, Determination of values at which the inventories are
carried in a financial statement, cash flow statements for assessing the ability of an enterprise
in generating cash, standard to ensure that appropriate measurement bases are applied to
provisions and contingent liability, standard prescribing accounting treatment of cost and
revenue associated with construction contracts.

Secretarial standards issued by ICSI (Institute of Company Secretaries of India)

It is an autonomous body constituted by the Company Secretaries Act, 1980. It is a body to
regulate and develop the profession of Company Secretaries in India. It issues secretarial
standards as per the provision of the Companies Act,2013. Section 118(10) of the Companies
Act states that every company shall observe secretarial standards specified by Institute of
Company Secretaries of India with respect to General and Board meetings.

1. Secretarial standard-1 on Meeting of the Board seeks to prescribe a set of principles

for conducting meetings of Board of Directors. These principles are equally
applicable to the meetings of committees as well.SS-1 principles are applicable to
the Meeting of Board of Directors of all companies except one person company.
 2. Secretarial standard-2 prescribes a set of principles for conducting and convening
general meetings. This standard also deals with the procedure for conducting e-
voting and postal ballot. SS-2 is applicable to all types of General meetings of all
companies except one person company incorporated under the act. The principles in
SS-2 are applicable mutatis-mutandis to meetings of creditors and debenture
holders moreover it also prescribes that any meeting of members or creditors or
debenture-holders of a company under the direction of CLB (Company Law
Board), NCLT (National Company Law Tribunal) or any other authority shall be
governed by the provisions of this standard.

Accounting Standards

Accounting standards are the written statements consisting of rules and guidelines, issued
by the accounting institutions, for the preparation of uniform and consistent financial
statements and also for other disclosures affecting the different users of accounting
information.
Accounting standards lay down the terms and conditions of accounting policies and
practices by way of codes, guidelines and adjustments for making the interpretation of the
items appearing in the financial statements easy and even their treatment in the books of
account.

Nature of Accounting Standards:

On the basis of forgoing discussion we can say that accounting standards are guide,
dictator, service provider and harmonizer in the field of accounting process.
(i) Serve as a guide to the accountants:
ccounting standards serve the accountants as a guide in the accounting process. They
provide basis on which accounts are prepared. For example, they provide the method of
valuation of inventories.
(ii) Act as a dictator:
Accounting standards act as a dictator in the field of accounting. Like a dictator, in some
areas accountants have no choice of their own but to opt for practices other than those
stated in the accounting standards. For example, Cash Flow Statement should be prepared
in the format prescribed by accounting standard.
(iii) Serve as a service provider:
Accounting standards comprise the scope of accounting by defining certain terms,
presenting the accounting issues, specifying standards, explaining numerous disclosures
and implementation date. Thus, accounting standards are descriptive in nature and serve as
a service provider.
(iv) Act as a harmonizer:
Accounting standards are not biased and bring uniformity in accounting methods. They
remove the effect of diverse accounting practices and policies. On many occasions,
accounting standards develop and provide solutions to specific accounting issues. It is thus
clear that whenever there is any conflict on accounting issues, accounting standards act a s
harmonizer and facilitate solutions for accountants.
Advantages of accounting standards

1] Attains Uniformity in Accounting

Accounting Standards provides rules for standard treatment and recording of transactions. They
even have a standard format for financial statements. These are steps in achieving uniformity
in accounting methods.

2] Improves Reliability of Financial Statements

There are many stakeholders of a company and they rely on the financial statements for their
information. Many of these stakeholders base their decisions on the data provided by these
financial statements. Then there are also potential investors who make their investment decisions
based on such financial statements.

So it is essential these statements present a true and fair picture of the financial situation of
the company. The Accounting Standards (AS) ensure this. They make sure the statements are
reliable and trustworthy.

3] Prevents Frauds and Accounting Manipulations

Accounting Standards (AS) lay down the accounting principles and methodologies that all
entities must follow. One outcome of this is that the management of an entity cannot manipulate
with financial data. Following these standards is not optional, it is compulsory.

So these standards make it difficult for the management to misrepresent any financial
information. It even makes it harder for them to commit any frauds.

4] Assists Auditors

Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a
written format. These policies have to be followed. So if an auditor checks that the policies have
been correctly followed he can be assured that the financial statements are true and fair.

5] Comparability

This is another major objective of accounting standards. Since all entities of the country follow
the same set of standards their financial accounts become comparable to some extent. The users
of the financial statements can analyze and compare the financial performances of various
companies before taking any decisions.

Also, two statements of the same company from different years can be compared. This will
show the growth curve of the company to the users.

6] Determining Managerial Accountability

The accounting standards help measure the performance of the management of an entity. It can
help measure the management‟s ability to increase profitability, maintain the solvency of
the firm, and other such important financial duties of the management.

Management also must wisely choose their accounting policies. Constant changes in the
accounting policies lead to confusion for the user of these financial statements. Also, the
principle of consistency and comparability are lost.

Limitations of Accounting Standards

There are a few limitations of Accounting Standards as well. The regulatory bodies keep
updating the standards to restrict these limitations.

1] Difficulty between Choosing Alternatives

There are alternatives for certain accounting treatments or valuations. Like for example, stocks
can be valued by LIFO, FIFO, weighted average method, etc. So choosing between these
alternatives is a tough decision for the management. The AS does not provide guidelines for the
appropriate choice.

2] Restricted Scope

Accounting Standards cannot override the laws or the statutes. They have to be framed within
the confines of the laws prevailing at the time. That can limit their scope to provide the best
policies for the situation.

Corporate Disclosure-

It refers to the action of making all relevant information about a business available to the
public in a timely manner. Disclosure, in financial terms, basically refers to the action of
making all relevant information about a business available to the public in a timely manner.

What Does “Relevant Information” Mean?

Relevant information about a business refers to any and every piece of information, including
facts, figures, dates, procedures, innovations, and so on, that can potentially influence an
investor‟s decision.

Any and every piece of information includes all relevant data, whether advantageous or
disadvantageous, positive or negative, fortunate or unfortunate, that could affect the business
and, in turn, its investors‟ decisions.

How Disclosures Work

In the finance and investment world, disclosures are required to be issued by businesses
and corporations, disclosing all relevant information that can potentially influence an
investor‟s decision. It helps investors make informed decisions and choose stocks or bonds
that may suit their investment needs and investment portfolio.
Such information disclosures are issued via a disclosure statement, containing all relevant
information about the corporation, positive or negative. The disclosures are footnotes at the
end of a research report, which provides vital information that one may want to consider
while making investment decisions. Investment research analysts and strategists also issue
disclosure statements in research reports they publish.

Importance of Disclosures

The importance of full disclosure in the corporate and financial world is essential. It is
because:

1. Ensures transparency

Increased transparency in the corporations‟ operations and management makes it easier for
investors to make informed decisions. It also cuts down on the possibility of manipulation or
misuse of investors‟ funds.

2. Avoids financial and economic crises

Severe financial and economic crises can be avoided with increased transparency. The 2008
Global Financial Crisis is an excellent example of a financial/economic crisis that was
largely, if not entirely, the product of the lack of transparency and accountability in the
market. It led to the mishandling of investors‟ funds by corporations and financial
organizations.

3. Eliminates insider trading and window dressing

Full disclosure prevents agents with “inside information” in the market from misusing it for
personal gain and profit. It also prevents the chance of window dressing and manipulation of
accounts, thereby further increasing transparency in the market.

4. Allows investors to make informed decisions

Full disclosure of relevant information by businesses helps investors make informed

decisions. It decreases the sentiment of mistrust and speculation and increases investor
confidence as they feel fully prepared to make investment decisions with transparency in
information at hand.

5. Reduces uncertainty in the market

Full disclosure also reduces uncertainty to a great extent in the market. Uncertainty is one of
the most prominent reasons for market volatility. When there is full disclosure by businesses
in the market, there is an increased level of overall certainty in the market, thereby decreasing
volatility levels and bringing in stability, to some extent, in the market.

Limitations with Disclosures

There are some limitations associated with company disclosures. One of the limitations
relates to financial jargon.
 Disclosures generally contain verbose information full of financial and legal jargon, which
investors usually find not easy to read. The language used is complicated and difficult to
decipher, making it extremely complicated for investors not belonging to the field to make
sound investment decisions.

Regulation

The disclosure clause is strictly regulated by the Securities and Exchange regulation bodies of
each country for all businesses listed on the respective national stock exchanges.

For example, in the U.K, the Financial Conduct Authority (FCA) oversees financial
disclosure regulation. The FCA‟s counterpart in the U.S. is the Securities and Exchange
Commission (SEC). In India, it is overseen by the Securities and Exchange Board of India
(SEBI), and so on.

Insider Trading

Insider Trading Definition

Insider Trading is the act of purchasing, selling, underwriting, or agreeing to underwrite

the securities or stocks of an organization by key executives/personnel of the company
who have access to UPSI - Unpublished Price Sensitive Information regarding the
company.

Insider Trading Meaning

This is malpractice in which a company's unpublished sensitive information is used to

trade in the company's securities. Using this information to make an improper profit or
loss is called Insider Trading. The information is said to be "price sen sitive" because it
can affect a company's share price in the market.

Who is an Insider?

An insider is a person who is a part of the company whose shares he trades. He can be a
person who owns more than 10% of the company's stock, for example, a company's
directors, presidents, and senior executives. Sometimes the insider can be someone who
isn't a part of the company but still has ample confidential information on stock
performance from a real company executive. Some NSE Insider Trading examples are:

 Officers, directors, and employees of the company who trade in the securities of the company
after becoming aware of important and confidential business developments
 Friends, peers, or relatives of such officers, directors, and employees, who exchanged
securities after receiving such information
 Employees of legal, banking, and press firms who acted on information obtained about the
provision of services to the company whose securities they trade
 Government employees who have exchanged confidential information learned from their
office
 Political intelligence consultants who can make suggestions or act on material non-public
information obtained from government employees
 Others have misused and abused confidential information from their employers, family,
friends, and others.

Types of Insider Trading

This can be legal or illegal, depending on the type of material information available to
the insider. If the insider has non-public information, they are prohibited by law from
trading their existing stock for that company. On the other hand, if the information is
already public, these people can trade safely without taking legal action against them.

What Are The Effects Of Insider Trading?

Misuse of inside information is discouraged for several reasons:

1. Insiders take unfair advantage of the person whose information has been withheld
2. It creates a conflict of interest because it is in the insider's interest and not in the company's
best interest.
3. It damages the prestige of the market and discourages investment.

Who Regulates Insider Trading in India

Several countries have objected to this practice. The USA was the first country to take
action against Insider Trading. The UK, too, followed suit and imposed many restrictions
on administrators to control the practice.
The Securities and Exchange Board of India SEBI, under the Companies Act and SEBI
Regulations 1992, and the SEBI (Prohibition of Insider Trading) ("PIT") Regulations,
1992, strictly regulates NSE Insider Trading in India today. Any merchant or insider
caught violating the various regulations imposed by the government agency can be
subject to hefty fines.
The penalty under SEBI Act 1992 (Section 15G) and Companies Act 2013 (Section 195)
cannot be less than INR 10 lakhs and may extend to INR 25 crores or 3 times the profit
of the tort of 'insider' as the case may be.

SEBI regulations

The SEBI has drafted the SEBI Regulations 2015, which sets out the rules for the
prohibition and restriction of Insider Trading in India.
The Insider Trading regulations provide that the transmission of any confidential
information related to a company by an insider is prohibited unless authorized.
The information misused by the person or another person on their behalf will be
considered a violation, which will be treated as a criminal offence under the law. This
offence is punishable by imprisonment of up to 10 years or a fine of up to 25 crores,
whichever is greater. Under the SEBI rules, the arbitrator may impose a penalty on
anyone who violates the provisions of the rules other than the offence committed under
section 24 of the act.
 The Restrictions/Prohibitions imposed by SEBI

The Insider Trading regulations impose the following restrictions:

The Regulations restrict/prohibit Insiders from communicating, providing, or providing
access to UPSI related to any publicly traded company or security to any person,
including other Insiders.
These regulations restrict/prohibit a person from purchasing a UPSI from an insider
related to a publicly traded company or securities to any person, including other insiders.
The Regulation restricts/prohibits an insider, when in possession of UPSI, from dealing
in securities listed or proposed for listing on a recognized stock exchange.
SEBI also has the authority to investigate NSE Insider Trading and related matters. SEBI
may exercise investigative powers for two main reasons:

 Investigate complaints from investors, intermediaries, or other persons regarding matters

relating to allegations of this practice; and,
 Investigations based on its knowledge or information in its possession to protect the interests
of securities investors against violations of these regulations.
Under the Insider Trading regulations, company founders will be held liable regardless
of their shareholder status if they violate Insider Trading standards by using price -
sensitive unpublished information. Of society without a legitimate purpose.
Legal Insider Trading and Exceptions to the Rule

 Disclosure is permitted for a legitimate purpose, to comply with a duty, or to comply with a
legal obligation.
 Disclosure is permitted where it is in the best interest of the company.