Assignment

Q1. Define corporate governance. Why has it gained so much attention in the present day business world?

Definition of 'Corporate Governance'

The system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. Corporate governance became a pressing issue following the 2002 introduction of the SarbanesOxley Act in the U.S., which was ushered in to restore public confidence in companies and markets after accounting fraud bankrupted high-profile companies such as Enron and WorldCom.

Most companies strive to have a high level of corporate governance. These days, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behavior and sound corporate governance practices.

It is gaining importance because of following factors

The issue of integrity: are the boards and management of companies carrying out their duties in an ethical way (we define business ethics here)?

Topicality - the bonus culture: could better corporate governance in financial institutions and their remuneration policies have prevented the credit crunch and resulting financial crisis?

The regulatory framework: introducing more regulation has clearly failed - we need better regulation which ensures businesses recognise the importance of corporate governance as an integral part of management, not a box ticking exercise

The importance of corporate governance in Directors' training: prevention is better than a cure, so including knowledge of the princples and practice of corporate governance in mainstream director training is essential

Q2. How does spiritual leadership help in business transformation?

At the same time, making this distinction can help identify who the spiritual leaders in your organization are. Here are six characteristics that identify most spiritual leaders: 1. They lead others into their own encounters with God. One of the most effective things about Jesus lifestyle was that He didnt switch into another mode to introduce His disciples to the reality of God. Whether standing in the synagogue or picking wheat along the path, interacting with the Father was so natural that others around Him could not help but do the same. Whether a spiritual leader is training a new employee or working through a difficult conflict resolution, his followers will discover their own connection to God more deeply in the process. 2. They lead others to discover their own purpose and identity. Spiritual leadership is characterized by great generosity. A spiritual leader genuinely wants others to fully discover who they were made to be. Workplace issues and strategic development become tools to help followers discover their own identity and overcome obstacles standing in their way. People functioning in an area of their created identity and strength will always be more productive than those who are simply trying to fill a position or role.

3. They lead others into transformationnot just production. When the goal is spiritual growth and health, production will always be a natural outcome. People function at their peak when they function out of identity. Helping your followers discover that their own transformation can happen on the job will engender loyalty and a high level of morale. Spiritual leadership fosters passion in those who follow. Passion is the ingredient that moves people and organizations from production to transformational impact. 4. They impact their atmosphere. While we may not stop a tempest with our words, spiritual leaders recognize that they can change the temperature of a room, interaction, or relationship. Changing the atmosphere is like casting vision, only it is immediate. When there is tension, fear, or apathy, a spiritual leader can transform the immediate power of these storms and restore vision, vitality and hope. A spiritual leader can fill a room with love, joy, peace, patience, kindness, goodness and gentleness, even while speaking hard things. 5. They help people see old things in new ways. Many people are stuck not in their circumstances, but in their perspectives and paradigms. The word repent means to think differently, or to think in a different way. Jesus called people to look again at old realities through new eyes. Changing ways of thinking always precedes meaningful change. 6. They gain a following because of who they arenot because of a position they hold. Spiritual leaders can be found in secular organizations, in the same way managers and organizational leaders can be found in religious ones. Spiritual leaders influence more than they direct, and they inspire more than they instruct. They intuitively recognize that they are serving somethingand Someonelarger than themselves and their own objectives.

Q3. State the salient features of the Code of Corporate Governance as suggested by the Confederation of Indian Industries(CII) Features of the Code of Corporate Governance as suggested by the Confederation of Indian Industries(CII)

The following section highlights key features and practices of corporate governance for Indian listed companies. The organizational framework for corporate governance initiatives in India consists of the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). SEBI monitors and regulates corporate governance of listed companies in India through Clause 49. This clause is incorporated in the listing agreement of stock exchanges with companies and it

is compulsory for listed companies to comply with its provisions. MCA through its various appointed committees and National Foundation for Corporate Governance (NFCG), a not-forprofit trust, facilitates exchange of experiences and ideas amongst corporate leaders, policy makers, regulators, law enforcing agencies and non- government organizations. Regulation In India, the Companies Act 1956 was the principle legislation providing the formal structure for corporate governance. Apart from this, the Monopolies and Restrictive Trade Practices Act, 1969 (which is replaced by the Competition Act 2002), the Foreign Exchange Regulation Act,1973 (which has now been replaced by Foreign Exchange Management Act,1999), the Industries (Development and Regulation) Act, 1951 and other legislations also have a bearing on the corporate governance principles. Till May 1992, the office of the Controller of Capital Issues was the regulation authority for the capital market. Thereafter, SEBI has assumed a primary role in this regard. In addition to various acts and guidelines by the regulator, non-regulatory bodies have also published codes and guidelines on Corporate Governance. For example, Desirable Corporate Governance Code by the Confederation of Indian Industries (CII). The issue of corporate governance for listed companies came into prominence with the report of the Kumar Mangalam Birla Committee (2000) set up by SEBI in the to suggest inclusion of a new clause, Clause 49 in the Listing Agreement to promote good corporate governance. On 21 August 2002, the Ministry of Finance appointed the Naresh Chandra Committee to examine various corporate governance issues primarily around auditor company relationship, rotation of auditors and defining Independent directors. This was followed by constitution of the Narayana Murthy Committee (2003) by SEBI which provided recommendations on issues such as audit committees responsibilities, audit reports, independent directors, related parties, risk management, independent directors, director compensation, codes of conduct and financial disclosures. Many of these recommendations were then incorporated in the Revised Clause 49 that is seen as an important statutory requirement. Recently the Ministry of Corporate Affairs has placed before the Indian parliament, Companies Bill 2008 that provides for greater shareholder democracy and less government intervention. The new legislation will try to promote protection of rights of minority shareholders, self-regulation with adequate disclosure and accountability, and lesser government control over internal corporate processes. Board of Directors The Desirable Corporate Governance Code by CII (1998) for the first time introduced the concept of independent directors for listed companies and compensation paid to them. The Kumar Mangalam Birla Committee (2000) then suggested that for a company with an executive Chairman, at least half of the board should be independent directors, else at least one-third. The Revised Clause 49 based on the report by the Narayana Murthy Committee further elaborates the definition of Independent Directors. The Revised Clause 49 now also states that all compensation paid to non executive directors, including independent directors shall be fixed by the Board and shall require prior approval of shareholders in the General meeting and that limit shall be placed

on stock options granted to non executive directors. The Board is also required to draft a Code of Conduct and affirm compliance to the same annually. Audit Committee The audit committees role flows directly from the boards oversight function. It acts as a catalyst for transparent, effective anti-fraud and risk management mechanisms, and efficient Internal Audit and External Audit functions financial reporting. In India, section 292A of the Companies Act 1956 requires every company with paid up capital above Rs. Five crore to have an Audit Committee which shall consist of not less than three directors and such number of other directors as the Board may determine of which two thirds of the total number of members shall be directors, other than managing or whole-time directors. The Desirable Corporate Governance Code by CII (1998) also recommended listed companies with either a turnover of over Rs.100 crores or a paid-up capital of Rs.20 crores to set up Audit Committees within two years. In furtherance to the same the Kumar Mangalam Birla Committee, Naresh Chandra Committee and the Narayana Murthy Committee recommended constitution, composition for audit committee to include independent directors and also formulated the responsibilities, powers and functions of the Audit Committee. The Audit Committee and its Chairman are also entrusted with the ethics and compliance mechanisms of an organization, including review of functioning of the whistleblower mechanism, where it exists. Subsidiary Companies The rationale behind having separate provisions with respect to subsidiary companies in the Revised Clause 49 was the need for the board of the holding company to have some independent link with the board of the subsidiary and provide necessary oversight. Hence the recommendation of Narayana Murthy Committee to make provisions relating to the composition of the Board of Directors of the holding company to be made applicable to the composition of the Board of Directors of subsidiary companies and to have at least one independent director on the Board of Directors of the holding company on the Board of Directors of the subsidiary company, were incorporated in the Revised Clause 49 of the Listing Agreement. Besides the Audit Committee of the holding Company is to review the financial statements, in particular investments made by the subsidiary and disclosures about materially significant transactions ensures that potential conflicts of interests with those of the company may be taken care of. Role of Institutional Investors Fast growing countries like India have attracted large shareholding by international investors and large Indian financial institutions with global ambitions. This has resulted in a significant progress in the standards of corporate governance in the investee companies. Many research reports published in recent years show that companies with good governance system have generated high risk-adjusted returns for their shareholders. So, if a company wants institutional investor participation, it will have to convincingly raise the quality of corporate governance practices. Indian companies thus need to adopt the best practices such as the OECD Corporate Governance Principles (revised in 2004) that serve as a global benchmark. In countries like India

where corporate ownership still continues to be highly concentrated, it is important that all shareholders including domestic and foreign institutional investors are treated equitably. Shareholders' Grievance Committee As one of its mandatory recommendations, the Kumar Mangalam Birla Committee propounded the need to form board committee under the chairmanship of a non-executive director to specifically look into the redressing of shareholder complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. The Committee believed that the formation of shareholders grievance committee would help focus the attention of the company on shareholders grievances and sensitise the management to redress their grievances. The Revised Clause 49 now mandates the formation of such a committee in light of the recommendations of these committees and any defaults by the company in payments to shareholders (in case of dividend de Risk Management The Kumar Mangalam Birla Committee report included mandatory Management Discussion & Analysis segment of annual report that includes discussion of industry structure and development, opportunities, threats, outlook, risks etc. as well as financial and operational performance and managerial developments in Human Resource /Industrial Relations front. Risk Management was however propounded for the first time by the Narayana Murthy Committee (2003) in its report by which it required that the company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. This is incorporated in the Revised Clause 49 as a part of internal disclosures to the Board. Ethics Every organization whether it is a company, club or a fraternal order, has expectations of how its members should act among each other and with those outside its organization. A code of conduct creates a set of rules that become a standard for all those who participate in the group and exists for the express purpose of demonstrating professional behaviour by the members of the organization. The Naresh Chandra Committee for the first time recommended that companies should have an internal code of conduct. The Report by Narayana Murthy Committee further recommended that a company should have a mechanism (whistle blower) to report on any unethical or improper practice or violation of code of conduct observed and that Audit Committee would be entrusted with the role of reviewing functioning of the mechanism. The Revised Clause 49 incorporated these recommendations further mandating directors of every listed company to lay down a Code of Conduct and post the code on their companys websi te. The Board members and all senior management personnel are required to affirm compliance with the code annually and include a declaration to this effect by the CEO in the Annual Report.

The Whistleblower still remains a non-mandatory recommendation though the Revised Clause provides protection to the whistle blower from victimization and direct access to the Chairman of the Audit Committee. The recommendation of Narayana Murthy Committee to make Audit Committee responsible for reviewing the functioning of the whistle blower mechanism, where it exists, is incorporated in the Revised Clause 49. Executive Remuneration The overriding principle in respect of directors remuneration is that of openness and shareholders are entitled to a full and clear statement of benefits available to the directors. Though the Revised Clause 49 does not mandate formation of a Remuneration Committee, Section 309(1) of the Companies Act, 1956 requires that the remuneration payable both to the executive as well as non-executive directors be determined by the board in accordance with and subject to the provisions of section 198 either by the articles of the company or by resolution or if the articles so require, by a special resolution, passed by the company in a general meeting. Further, Schedule VI of the Act requires disclosure of Director's remuneration and computation of net profits for that purpose. The Desirable Corporate Governance Code by CII (1998) also mandated the disclosure of each directors remuneration and commission as a part of Directors Report. It also allowed commission and stock options for non-executive directors, subject to the attendance being presented before shareholders. The Kumar Mangalam Committee then in its report included a non-mandatory requirement to constitute a Remuneration Committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the companys policy on specific remuneration packages for executive directors including pension rights and any compensation payment. It also required compulsory disclosures to be made in the section on corporate governance of the annual report:

All elements of remuneration package of all the directors i.e. salary, benefits, bonuses, stock options, pension etc. Details of fixed component and performance linked incentives, along with the performance criteria. Service contracts, notice period, severance fees. Stock option details, if any and whether issued at a discount as well as the period over which accrued and over which exercisable.

The Naresh Chandra Committee further recommended on remuneration of Independent directors. Presently, under Revised Clause 49, all fees/compensation, if any paid to non-executive directors, including independent directors, are to be fixed by the Board of Directors and require previous approval of shareholders in general meeting. The shareholders resolution is to specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate. CEO/CFO Certification

Internal control is a process, effected by an entitys board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations, Reliability of financial reporting, and Compliance with applicable laws and regulations. The Naresh Chandra Committee for the first time required the signing officers, to declare that they are responsible for establishing and maintaining internal controls which have been designed to ensure that all material information is periodically made known to them; and have evaluated the effectiveness of internal control systems of the company. Also, that they have disclosed to the auditors as well as the Audit Committee deficiencies in the design or operation of internal controls, if any, and what they have done or propose to do to rectify these deficiencies. The Revised Clause 49 requires the CEO and CFO to certify to the board the annual financial statements in the prescribed format and the establishment of internal control systems and processes in the company. CEOs and CFOs are, thus, accountable for putting in place robust risk management and internal control systems for their organizations business processes.