NEED FOR BETTER CORPORATE GOVERNANCE - Indian Academy of Law & Management

NEED FOR BETTER CORPORATE GOVERNANCE

By Mr. Ranjan R.

B.L.(Hons) Advocate

ABSTRACT

Corporate Governance (CG)(*1) is an expression which has gained great currency in legal and corporate circles during the last decade and a half. Briefly it refers to a system of rules, practices and procedures by which a company is directed and controlled. It strives to balance the interests of various Stake Holders-Shareholders, Directors, Executors, Suppliers, Financiers, Government and the Community at large in order to achieve the Companies objectives. Corporate Governance started as a voluntary initiative. However, with the failure of well-known companies like Enron in the United States Of America (US), Satyam Computers in India Governments had to step in and enact legislations like Sarbanes Oxley Act in the US. In India the new Companies Act has given legal recognition and powers to the Government and SEBI to enforce Corporate Governance. It is observed that the practice of Corporate Governance has improved the performance of companies by adding value all round and improved investors (Shareholders and Lenders) confidence in them.

INTRODUCTION

This article focuses on exploring and is affirming the Need For Better Corporate Governance at a global perspective. The author confines his study to three countries namely India, UK and US. This article provides a good opportunity for understanding the subject of Corporate Governance at the grass root level and taking stock of the present Corporate Governance scenario prevalent in several countries across the globe.

Interest in Corporate Governance has been rapidly growing both inside and outside academia, together with recognition of its importance. In the academic world, Corporate Governance is often referred to as a common platform for various professionals such as Chartered Accountants, Company Secretaries, Advocates, and Masters in Business Administration (MBA) as each of these professionals deal with different aspects of Corporate Governance, concentrating on their respective areas.

The article is divided into 7 segments. Segment 1 traces the evolution and genesis of Corporate Governance. Segment 2 attempts to provide a definition of Corporate Governance. Segment 3 traces the initiatives taken in the US, UK and India to improve Corporate Governance. Segment 4 examines the question as to why is Good Corporate Governance Indispensable? Segment 5 throws light on the factors influencing Corporate Governance and brings out its aims. Segment 6 emphasizes the Need For Better Corporate Governance and its benefits. Segment 7 provides a comparison of Corporate Governance Practices prevalent in the US and UK.

Evolution of Corporate Governance

The term Governance is derived from the Latin Word Gubernare which means to steer usually applying to the steering of a ship. The application of Governance in Corporate Houses is known as Corporate Governance. In simple terminology, the term Governance refers to a set of systems, by which an organization is run. The concept of Corporate Governance was in existence in various manifestations ever since the concept of Corporate entity was recognized. It had its genesis in the US. The Foreign Corrupt Practices Act was passed in the year 1977 which made specific provisions regarding the establishment, maintenance and review of systems of internal control.

In 1979, US Securities Exchange Commission(*2) prescribed mandatory reporting in internal financial controls. Due to high profile failures in the US, the Treadway Commission(*3) constituted in the year 1985 highlighted the need for putting in place, a proper control environment, desirability of constituting Independent Boards and Committees and objective internal audit function. The subject of Corporate Governance spread to UK in the early 1990’s and then it got adopted in many other countries, across the globe. The first committee to be established in UK with regard to the introduction of Corporate Governance Norms was the Cadbury Committee(*4).

In the US a classical piece of legislation known as the Sarbanes Oxley Act(*5) was passed in the year 2002 after a series of Corporate failures such as Enron, Maxwell, Polly Peck, World Com, Tyco, Global Crossing etc. Propelled by the recommendations made in the Cadbury Report and by the actions of the American Legislators, the Confederation of Indian Industries (CII) published a code of Corporate Governance known as the Desirable Code of Corporate Governance. The issue achieved its fame with the advent of Kumara Mangalam Birla Committee(*6) constituted under the Chairmanship of Sri. Kumara Mangalam Birla. Before embarking on the need for Corporate Governance, it is pertinent to know the definition of Corporate Governance.

Definition of Corporate Governance

“Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”(*7).

“Corporate Governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company”(*8).

“Corporate Governance is a concept rather than an individual instrument. It includes debate on the appropriate management and control structures of a company. Further it includes the rules relating to the power relations between owners, the Board of Directors, Management and last but not the least the stakeholders such as employees, suppliers, customers and the public at large”(*9).

“Corporate Governance is defined as the system by which business corporations are directed and controlled. It specifies the distribution of rights and responsibilities among different participants in the Corporation such as Board, Managers, Share Holders and other Stake Holders and spells out the procedures for making decisions on corporate affairs. By doing this, it also provides, the structure through which the company’s objectives are set and the means of attaining those objectives and monitoring performances”(*10).

Initiatives taken to improve Corporate Governance in US, UK and India

The initiatives taken by the US government with regard to the act of ensuring a sound Corporate Governance practice was the passing of the Foreign Corrupt Practices Act in the year 1977 as it largely dealt with the establishment, maintenance and review of systems of internal control. With the emergence of high profile failures Treadway Commission was constituted in the year 1985 highlighting the need for constituting Independent Boards and Commitees. The fundamental principle of establishing Independent Boards is to ensure transparency with regard to the financial position of the company and other vital issues. Finally the classic initiative taken by the US Legislators after the Enron Collapse was the enactment of the Sarbanes Oxley Act in the year 2002 which mainly dealt with auditors independence and financial disclosures.

On the other hand the UK Government made its debut into the limelight of Corporate Governance in the year 1990 by way of promulgating a Committee known as the Cadbury Committee under the Chairmanship of Adrian Cadbury. After a series of Corporate Debacles, the UK Government was forced to improve its state of affairs with regard to Corporate Governance. As a result of which it established the Higgs Report and Smith Report, in the year 2003.

In India initiatives have been taken from time immemorial to improve the standards of Corporate Governance. At the outset, SEBI appointed a committee on Corporate Governance on May 7 1999 under the Chairmanship of Shri. Kumara Mangalam Birla known as the Kumara Mangalam Birla Committee with a view to promote and raise the standards of Corporate Governance. This Committee focused on instituting safeguards within the companies to deal with insider information and insider trading and also to draft a code of best corporate governance practices. Secondly the committee took the initiative to identify three key constituents of Corporate Governance namely the Share Holders, Board of Directors and the Management. The committee identified their roles and responsibilities as well as their rights in the context of good Corporate Governance.

SEBI as part of its endeavor to improve the standards of Corporate Governance in line with the needs of a dynamic market, constituted another committee known as the Narayana Murthy Committee, under the Chairmanship of N.R.Narayana Murthy to review the progress of the Corporate Sector in meeting the norms of Corporate Governance. However based on the recommendations of the Committee and public comments SEBI took further initiatives to revise Clause 49 of the Listing Agreement by a circular(*11) so as to raise and promote the standards of Corporate Governance.

Clause 49 of the Listing Agreement states that the company shall obtain a certificate from either the practicing Company Secretary or Auditor regarding the compliance of conditions of Corporate Governance. The certificate must be sent to the Stock Exchanges along with Annual Report filed by the company, and also to the Share Holders. The Companies Act, 1956 was amended in the year 2000 and has inserted a proviso to sub section(1) of Section 383 A of the Act. The Sub Section states that:

Every Company having a paid up capital of rupees ten lakhs or more is required to file with the R.O.C a compliance certificate from a Secretary in whole time practice and also attach a copy of that certificate with the Boards Report.

In order to ensure high quality accounting standards, the Indian Legislation requires the companies to keep the books of accounts on an accrual basis and to comply with mandatory accounting standards issued by ICAI. Section 211 of the former act states that where the financial statements do not comply with the accounting standards, the company shall disclose the deviation from the accounting standards and the reasons for such deviation. Due to the emergence of various Corporate Frauds initiatives have been taken to establish a Corporate Serious Fraud Office (CSFO) in the Ministry of Corporate Affairs.

The National Association of Software and Services Company(NAAASCOM), also formed a Corporate Governance and Ethics Committee, chaired by N.R.Narayana Murthy, a leading figure in Indian corporate governance reforms. The Committee submitted its recommendations in mid-2010 focusing on stakeholders, audit committee, whistle blower policy and shareholders rights.

In November 2009, SEBI announced that they would amend the listing agreement to address disclosure and accounting concerns. SEBI also made some policy changes for better governance of listed companies.

In March 2012 , Ministry of Corporate Affairs (MCA) constituted a committee under the Chairmanship of Mr. Adi Godrej, Chairman Godrej Industries Limited, to formulate policy document on Corporate Governance. In September 2012, the Committee submitted its document, specifying seventeen guiding principles on corporate governance.

Why is Good Corporate Governance Indispensable?

Policy Makers, Practioners and Theorists have adopted a general stance that Corporate Governance reform is worth pursuing, supporting initiatives such as splitting the role of Chairman / Chief Executive Officer, introducing non – executive directors to boards, curbing excessive executive performance related remuneration, improving institutional investor relations, increasing the quality and quantity of corporate disclosures etc. However is there real evidence to support these initiatives? Do they really improve the effectiveness of Corporations and their accountability? There are certainly those who are opposed to the ongoing process of Corporate Governance Reform. Many Company directors oppose the loss of individual decision making power, which comes from the presence of non executive directors and independent directors on their boards. They consider that many of the initiatives aimed at improving Corporate Governance in the UK have simply slowed down the process of decision making and added unnecessary levels of bureaucracy and redtapism.

The Cadbury Report emphasized the importance of avoiding excessive control and recognized that no system of control can eliminate the risk of fraud without hindering the companies abilities to compete in a fair market. This is an important point because the human nature cannot be altered through regulation of checks and balances. Nevertheless, there is a growing perception in the financial markets, that good Corporate Governance is associated with prosperous companies. The research done by Solomon.J and Solomon. A, showed some evidence to support the agenda for Corporate Governance reform.

The findings indicated that the institutional investment community considered both company directors and institutional investors welcomed Corporate Governance reform, viewing the reform process as a help rather than an hindrance. Their findings endorsed many of the issues relating to the agenda for Corporate Governance reform in UK. The result also indicated significant support from the institutional investment community for the continuance of a voluntary environment for Corporate Governance. Lastly the institutional investors perceived a role for themselves in Corporate Governance reform, as they agreed that the institutional investment community should adopt a more active stance.

Parties to Corporate Governance

Parties involved in Corporate Governance include the Regulatory Body, Chief Executive Officer, Board of Directors, Management and Share Holders. Other Stake Holders who take part include suppliers, employees, creditors, customers, and community at large. In Corporations, the Share Holders delegates decision rights to the manager to act in the principals best interests. All the parties to Corporate Governance have an interest, whether direct or indirect, in the effective performance of the organization. Directors , Workers and Managers receive salaries, benefits and reputation while shareholders receive dividends.

On the other hand customers receive goods and services, while suppliers receive money for the supply of goods and services. In return these individuals provide value in the form of natural human, social and other forms of capital. A key factor in an individual’s decision to participate in an organization is to receive fair share of the organizational returns. If some parties are receiving more than their fair return then participants may choose not to continue participating leading to organizational collapse.

Factors influencing Corporate Governance and its aims

A good Corporate Governance is influenced by a variety of factors like the integrity of management, quality of corporate reporting and disclosures, participation of stake holders in the business of enterprises etc. If any of these factors is not properly complied with it results in weak functioning of the enterprises. These factors play a vital role in ensuring smooth and efficient functioning of the Corporate Houses.

The main aim of Corporate Governance is to ensure transparency in the Board process and independency in the functioning of Boards, with a view to enhance the shareholders confidence and reputation of the company.

Need For Better Corporate Governance and its Benefits

A Corporation is an entity having a legal status different from that of the persons who have created it. It is formed by way of a congregation of various people known as the Share Holders. Corporations too have certain limitations with regard to raising of funds like several other business entities like Sole Proprietorship, Partnership, Limited Liability Partnership(LLP) etc. A Corporation cannot solely rely on its share holders for the purpose of raising money, it has to necessarily depend on other sources as well. Diversification of sources for capital generation is a vital factor for Corporations to survive in the market.

It has become imperative in today’s globalised business world, where corporations need to pool out resources in order to attract and retain the best human capital from various parts, across the globe. Unless and until embraces ethical conduct it will not be able to succeed. The concept of Globalization has played a vital role in promoting and uplifting the need for stringent Corporate Governance measures. The emergence of modern financial instruments like the American Depository Receipts (ADR’S) and Global Depository Receipts (GDR’S) which are commonly used by the companies to raise funds at a global spectrum is an outcome of globalization. In order to raise such funds strong Corporate Governance System is needed.

Where a company has weak Corporate Governance systems then it is sure to lose among its competitors in the market, which is very true as majority of the Corporate failures are due to weak governance systems. This subject has assumed immense importance in the modern world because several business enterprises have emerged in the form of Corporate enterprises and such enterprises have resorted to fraudulent practices which are in vogue today. The need for Corporate Governance gained momentum in the background of worldwide privatization moves, increasing the number of mergers and acquisitions, deregulation of capital markets and scandals and failures of major corporations.

Beyond a particular point of time, it was felt by the Legislators and Corporate experts that company legislations alone could not control the operations of the companies in an effective manner. As a result Corporate Governance was introduced. The stressing need for better Corporate Governance system is that the Corporations function through human agencies and not in isolation. The human agencies in Corporate Parlance are known as Stake Holders. The expression Stake Holders include Share Holders, Customers, Auditors, Employees, Investors, Regulatory Authorities and the Society. Better Corporate Governance Norms are seemingly important as it will be helpful for the companies to improve its financial position in an indirect way as it can raise its capital in the form of Equities and Debts. It is a vital tool to improve investors confidence.

From the above discussion, we can conclude that Corporate Governance is a means whereby steps are taken to ensure that large companies are well run with sufficient safeguards against corruption and mismanagement, while promoting fundamental values of market economy in a democratic way so that investors and lenders can confidently invest their funds. In other words, Corporate Governance paves the way for a sincere commitment to creating and sustaining an ethical business culture in Private and Public Sectors.

Enron was a Houston – based energy company founded by a brilliant entrepreneur, Kenneth Lay. The company was created in the year 1985 by a merger of two American Gas Pipeline Companies. In a period of 16 years, the Company was transformed from a relatively small concern, involved in gas pipelines and oil and gas exploration to the world’s largest energy trading company. In 1997 Enron wrote off 573 million US Dollars in order to settle a contractual dispute over North Sea Gas. The company started relying heavily on non-recurring items such as assets sales, to reach its target of 15% annual growth in earnings.

In August 2001, it became clear that Enron was suffering from serious financial problems and Moody’s Credit Rating Agency cut Enron’s rating to barely junk bonds. Unfortunately, Enron’s debt contracts included clauses stipulating that the company would have to make additional payments to debt holders if the company was downgraded. In the midst of November 2001, more than 20 class action law suits had already been filed. The main accusations covered fraud and material misstatements in the company’s financial reports. Furthermore, the company was accused of Insider Trading(*12). Finally on December 2nd Enron filed for Chapter 11 Bankruptcy(*13).

The judgment on the Enron case was passed by a jury comprising of eight women and four male judges. They convicted Enron’s former Chief Executive Jeffrey Skilling and Founder Kenneth Lay on the ground that they were guilty of conspiracy and fraud. They mislead the general public about the financial health of Enron whose collapse in late 2001, symbolized the wave of corporate fraud that swept the US early this decade. Skilling was found guilty on 19 counts of conspiracy and Lay was found guilty on counts of Insider Trading. Both were sentenced to imprisonment for a period of 20 years.

With the advent of the Enron Debacle in the year 2001 the UK Government was spurred to re-evaluate the Corporate Governance issues pertaining to the role and effectiveness of non-executive directors, thereby establishing a committee known as the Higgs Committee which passed its report in the year 2003 known as the Higgs Report(*14). In the same year Smith Report(*15) was also passed to deal with the same problem.

In the US after the Enron Debacle several other scams emerged, and these scams triggered another set of reforms in Corporate Governance, Accounting Practices and Disclosures. It lead to the enactment of the Sarbanes Oxley Act which was passed in the year 2002. The Act made fundamental changes virtually in all aspects of Corporate Governance in general and auditors independence, corporate responsibility, enhanced financial disclosures and severe penalties for willful default by managers and auditors in particular. The Act laid emphasis on financial reporting, internal accounting control, whistle blowing and destruction of documents. Sections 906, 1102& 806 of the Act are noteworthy. They deal with penalties for wrongly certifying a statement, willful destruction of any record or documents and whistle blowing mechanism.

In India the Satyam Case which took place in the year 2009 was perhaps the biggest corporate fraud case where M/S Satyam Computer Services Ltd. caused loss to the investors to the tune of Rs. 14162 Crores. The Company head, Ramalinga Raju and members of his family secured illegal gains to the tune of about Rs. 2743 crores by various tricks. The fraud was perpetrated by inflating the revenue of the company through false sales invoices and showing corresponding gains by forging the bank statements with the connivance of the Statutory and Internal Auditors. The annual financial statements of the company with inflated revenue were published for several years and this lead to the higher price of the scrip in the market. In the process, innocent investors were lured to invest in the company. Attempts were made to conceal the fraud by acquiring the companies of kith and kin.

After the scam took place the Ministry Of Corporate Affairs (MCA) based on the recommendations made by the Confederation Of Indian Industries (CII) issued a set of voluntary guidelines in the year 2009. The National Association of Software and Services Company (NAASCOM)(*16), also formed a committee known as the Corporate Governance and Ethics Committee, chaired by Mr. N.R.Narayana Murthy, a leading figure in Indian corporate governance reforms. The Committee submitted its recommendations in mid-2010 focusing on stake holders, audit committee, whistle blower policy and share holders rights.

With the advent of major corporate collapses like the Satyam Scam the Indian Legislators have introduced a series of new sections under the Companies Act, 2013 which lays its emphasis on stringent Corporate Governance Norms. Sections 149(4), 149(12), 177, 178(5) deals with the subject of Corporate Governance. Section 149(4) of the said Act portrays the concept of Independent Directors as enshrined under Clause 49 of the Listing Agreement. This act also prescribes a Code for Independent Directors which is contained in Schedule IV of the Act. Section 149(12) imposes liability on Independent Directors. Section 177 embraces the establishment of an Audit Committee which fixes the roles and responsibilities of auditors. Section 178(5) talks about the establishment of Nomination and Remuneration Committee and Stake Holders Relationship Committee. Nomination and Remuneration Committee is to be mandatorily established by every listed company. The above named Act also contains provisions pertaining to the concept of Corporate Social Responsibility.

Though the subject of Corporate Governance in its inception was regarded as a bane by many of the Company Directors the globe, it has proved to be a boon and a boost to many of the companies as it helps in improving the goodwill of the companies and also in attracting funds from investors abroad with a view to improve its business. Secondly it ensures that their boards are accountable to the shareholders and acts as a protective shield to all stake holders.

Comparison between the Corporate Governance Systems prevailing in

India, UK and US

Issue

UK

India

Director’s duties Codified by the Companies, Act 2006 -Currently rely on common law duties – Codification of director’s duties is proposed by the Companies Bill, 2009, though extent of proposed codification is not as extensive as in the UK.
Board composition -Half of the board of larger quoted companies must comprise of independent non-executive directors smaller quoted companies (below FTSE 350) must have at lease two independent non-executive directors. Same individual must not be the chairman and chief executive – Requires format, rigorous annual evaluation of board performance. performance of committees and directors. The search for board candidates should be conducted and appointments made on merit, against objective criteria and with due regard for the benefits diversity on the board including gender – All directors of FTSE 350 companies must be annually elected by the shareholders. -There is no distinction between large and small quoted companies. Half of the board of all quoted companies must comprise of non-executive directors. If the chairman of the board is an independent director, 1/3 rd of the non-executive directors must be independent and if the chairman is not independent, half of the non-executive directors must be independent. Same individual can act as chairman and chief executive. No requirement for a board evaluation process. There is no requirement for annual re-election of all directors. Appointment and election of directors is governed by the companies Act 1956.
Nomination committee -Nomination committee leads the process for board appointments and makes recommendations to the board. Must consist of a majority of independent non-All members of the audit committee must be independent non-executive directors. -Nomination committee is not mandatory though some companies have voluntarily set up a nomination committee.
Audit committee -Quoted companies must have an audit committee comprising of 3 members. Audit committee of smaller quoted companies need only have 2 members. All members of the audit committee must be independent non-executive directors. -There is no distinction between small and large quoted companies. All quoted companies must have an audit committee comprising of 3 members. Unquoted public companies with a paid up capital of more than Rs. 50,000,000 mus also have an audit committee – 2/3rd of the audit committee must comprise of independent directors.
Remuneration committee -Quoted companies must have a remuneration committee comprising of 3 members (2 members for below FTSE 350 companies) and all members must be independent. Chairman must be an independent. non-executive director. The committee should have delegated responsibility of setting remuneration for all executives the chairman, and senior management. The Code discourages all forms of performance related remuneration for non-executive directors, not only share options. -Remuneration of directors of public companies (listed or unlisted) within specified limits, must be approved by a remuneration committee if the company has no or inadequate profits. Committee must consist of at least 3 non-executive independent directors including nominee directors.

Comparison between Corporate Governance Systems in US and UK

Main provisions of SOX

UK equivalent

1. Establishment of the Public Company Accounting oversight Board (PCAOB) to oversee the audit of public companies subject to US securities laws and registration with the PCAOB of all auditors of companies subject to US securities laws. The Financial Reporting Review Panel will be granted powers under the Companies (Audit Investigations and Community Enterprises) Act 2004 (the 2004 Act) to require companies, their officers, employees and auditors to provide information it needs to carry out investigations into company accounts it believes are defective.The Secretary of State (acting through the Professional Oversight Board for Accountancy) will under the 2004 Act have greater powers to monitor and direct the recognized supervisory bodies of which company auditors must be members.
2. Provisions to enhance the independence of external auditors including mandatory rotation of audit partners, restrictions on the non-audit services external auditors can provide etc. Mandatory rotation – not currently law in the UK but is a proposal in a current White Paper for reform. Under the 2004 Act the Secretary of State can require more detailed disclosure by listed companies of the audit and non-audit services provided by heir auditors. This will apply to Company accounts for financial years beginning on or after 1 October 2005.
3. Measures to enhance the independence of audit committees and their effectiveness. Very similar provisions in the UK under the Combined Code and the Smith Guidance.
4. CEO/CF’s must personally certify the contents of periodic reports (criminal penalties for false certification) Form 6 April 2005 under the 2004 Act, directors are required to state in their director’s report that there is no relevant audit information that they know of and which the auditors are unaware of. It is a criminal offence to make a false statement.
5. CEO/CFO’s must also certify annual quarterly reports and give assurances re effectiveness of internal controls. Combined Code and the Turnbull Guidance – no certification requirement but a statement and assurances re internal controls are expected as a matter of best practice.
6. Forfeiture of compensation by CEO/CFO’s of companies making accounting restatements due to material non-compliance with securities laws. No obvious equivalent.

7.
Ability of SEC to prohibit persons from serving as directors and officers. Company Directors Disqualification Act 1986 has similar powers.
8. Prohibition on insider trades during pension fund blackouts. Though not specifically referring to pension fund blackouts, the UK has insider dealing legislation in Part V of the Criminal Justice Act 1993 and the Market Abuse regime.
9. Rules requiring disclosure of off-balance sheet transactions and use of pro forma financial information. In relation to off-balance sheet transactions, refer to the disclosure obligations for fully listed companies in the UK Listing Rules, Regarding use of pro forma information, fully listed companies must comply with paragraphs 12.30 to 12.35 of the UK Listing Rules.
10. Rules requiring management reports on the effectiveness of internal controls for the Auditors to attest to the management report. No direct UK equivalent.
11. Adoption of codes of ethics for senior financial officers. N0 direct UK equivalent.
12. Prohibition on loans etc. to directors and executive officers of public companies. The 1985 Act section 330 but UK law restricts loans to directors and persons connected with them, whereas US law extends to senior executive officers who are not board members. UK general prohibition is also subject to various exemptions, whereas the US rule has nod de minimis exceptions.
13. SEC obligation to review each public company’s periodic reports at least once every 3 years. No direct UK equivalent, however from 1 January 2005, pursuant to the 2004 Act, the Secretary of State can appoint a body to review interim and non-company accounts of fully listed public companies and to disclose any relevant information to other bodies such as the FSA.
14. Requirement for real time disclosure of material changes in the financial condition/operations of public companies. Similar obligations of disclosure for fully listed companies under the UK Listing Rules (paragraphs 9.1 and 9.2)

Conclusion

In conclusion it may be said that Corporate Governance affects all the Stake Holders in a company – Board of Directors, Share Holders, Executive Management, Employees, Bankers, Customers, Suppliers, Regulators, and Environment and Community at large. Good Corporate Governance may not be the engine for growth, but is essential for transparent and proper functioning of the Corporate Sector. It helps to build confidence of foreign and national investors. These actions of the Governments, Parliament, Regulatory Bodies and Corporate Experts re-affirm the need for better Corporate Governance at the National and International Level.

By Ranjan R.

B.L.(Hons) Advocate (ranjanravichandran @gmail.com)

…………………………………………………………………………………………………………………………………………….

*1. Ranjan. R – B.L.(Hons) Advocate.

*2. US Securities and Exchange Commission is an agency of the United States Federal Government. It holds primary responsibility for enforcing the federal security laws and regulating the security industry.

*3. Treadway Commission is a commission formed by way of joint initiative of five private sector organizations, established in the US dedicated to providing thought leadership to executive management and governance entities on critical aspects of organizational governance, business ethics and financial reporting.

*4. The Cadbury Committee was set up by London Stock Exchange (LSE) and it was introduce after a spate of scandals and financial collapses in the late 1980’s and in early 1990’s which made the shareholders and banks worry about their investments. The recommendations made by the committee through its reports the titled “The Cadbury Report” under the chairmanship Sir Adrian Cadbury kindled the Indian companies to develop a code of corporate governance.

*5. It is an Act which was enacted in the year 2002 after a series of corporate failures in the US by a Democrat Senator named Paul Sarbanes and a Congress Republican Micheal Oxley. It laid emphasis on whistle blowing mechanisms and financial reporting control mechanisms.

*6. Kumara Mangalam Birla Committee was set up in the year 1999 under the Chairmanship of Shri. Kumara Mangalam Birla. The main objective of the committee is to view Corporate Governance from the perspective of investors and shareholders and to prepare a Code Of Corporate Governance to suit the Indian Environment.

*7. Institute of Company Secretaries Of India is a statutory body established by way of an Act of the Parliament known as the Company Secretaries Act,1980.

*8. SEBI is a regulatory authority regulating the stock market . It is a statutory body established in the year 1992 by way of an Act called the SEBI Act.

*9. N.R. Narayana Murthy founder and chairman of Infosys and a corporate expert. He has acted as a chairman of several committees which aimed at improving Corporate Governance.

*10. Organization for Economic Co-Operation and Development (OECD) is an international economic organization of 34 countries founded in the year 1961 to stimulate economic progress and world trade by ensuring sound corporate governance principles. It has formulated a comprehensive definition of Corporate Governance.

*11. SEBI/MRD/SE/31/2003/26/08.

*12. Insider Trading is defined as a malpractice wherein trade of a company’s security is undertaken by people who by virtue of their work have access to the otherwise non-public information, which can be crucial for making investment decisions. It is highly discouraged by SEBI, with a view to promote fair trading in the market for the benefit of the common investor.

*13. Chapter 11 Bankruptcy is a form of bankruptcy wherein the bankrupt entity would sit along with its creditors and formulate a new formula of restructuring the entity without closing it. It is named after the US Bankruptcy Code 11.

*14. Higgs Report is a report which is passed by a committee known as the Higgs Committee under the Chairmanship of Mr. Higgs. The report builds on the Combined Code which constituted the framework of Corporate Governance, which itself results from three different reports namely the Cadbury Report Greenburg Report and Hampel Report.

*15. Smith Report was a report on corporate governance focusing on auditors independence.

*16. NAASCOM is a trade association established in the year 1988.It is a non-profit organization with its head quarters in New Delhi. It is a global trade body engaged in the business of software development, software products, software services, IT enabled/BPO services and E- Commerce. It is registered under the Indian Societies Act, 1860.

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