A

REPORT
ON
CORPORATE GOVERNANCE: GRADUATE SEMINAR
('CONTRIBUTION OF CORPORATE GOVERNANCE IN ECONOMIC DEVELOPMENT')

SUBMITTED TO:
Mr. Resham Raj Regmi

(The Faculty Member of Corporate Governance: Graduate Seminar)

Ace Institute of Management

SUBMITTED BY:
Archana Pyakurel

MBA Spring, 2015

(Submitted for the course assessment of

Master in Business Administration)

Kathmandu

May, 2017

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 ACKNOWLEDGEMENTS

In the partial fulfillment of the requirement for the degree of Masters of Business Administration, this
report has been prepared, on the topic Contribution of Corporate Governance in Economic
Development. I am extremely thankful to Pokhara University for including Corporate Governance:
Graduate Seminar as a one credit course as it has provided a platform to gain insight about corporate
governance practices in Nepalese organization. I would also like to thank our college Ace Institute of
Management for its support and supervision for this report preparation.

I would like to express my sincere gratitude to our course instructors Mr. Resham Raj Regmi, The Visiting
Faculty, Ace Institute of Management, for providing an opportunity to prepare a report and for their
valuable suggestion and guidance to complete this report successfully.

I will strive to use gained skills and knowledge in the best possible way, and I will continue to work on
their improvement, in order to attain desired career objectives.

Thanks all for your encouragement, support and warm co-operation.

With regards,

Archana Pyakurel

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Table of Contents
ACKNOWLEDGEMENTS.................................................................................................................................i
CHAPTER - 1.................................................................................................................................................1
INTRODUCTION...........................................................................................................................................1
1.1 History of Corporate Governance......................................................................................................1
1.2 History of Corporate Governance in Nepal........................................................................................1
1.3 Introduction of Corporate Governance..............................................................................................2
1.4 Benefits of Corporate Governance....................................................................................................4
CHAPTER - 2.................................................................................................................................................6
CONTRIBUTION OF CORPORATE GOVERNANCE..........................................................................................6
2.1 Contribution of Corporate Governance in Economic Development...................................................6
2.2 Examples Good Corporate Governance.............................................................................................7
2.3 Corporate Governance in Nepal........................................................................................................8
2.4 Contribution of Corporate Governance in Economic Development of Nepal....................................9
CHAPTER 3..............................................................................................................................................11
CONCLUSION.............................................................................................................................................11
Reference..................................................................................................................................................12

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 CHAPTER - 1

INTRODUCTION

1.1 History of Corporate Governance

The financial crises of Enron, WorldCom and Parmalat have heated up the discussion about the
proper governance of companies. Under the buzzword of corporate governance a lot of issues
borne by the separation of ownership and control (see Berle and Means, 1932) are treated. The
term Corporate Governance derives from an analogy between the government of nations or
states and the governance of corporations, whereas - according to James Wolfensohn, former
president of the World Bank the governance of corporations is now as important in the world
economy as the government of countries.

Corporate governance in the academic literature seems to have been first used by Richard Eells
(1960) to denote the structure and functioning of the corporate polity. But how to manage
companies and the question for the best structure to achieve an optimal allocation of resources is
as old as the history of companies. Nevertheless, the term corporate governance is inescapably
connected with (listed) corporations, as here the separation of ownership and control and the
therefore arising agency conflicts are obvious. Therefore it is instructive for the further work to
begin with a brief historical origin of the corporation.

1.2 History of Corporate Governance in Nepal

Corporate governance first came into vogue in the 1970s in the United States. Within 45 years
corporate governance had become the subject of debate worldwide by academics, regulators,
executives and investors. This paper traces developments occurring since 1970, by which point
corporate governance was well-entrenched as academic and regulatory shorthand. The paper
concludes by reviewing articles and; literatures briefly recent developments and by maintaining
that analysis of the inter-relationship between directors, executives and shareholders of publicly
traded companies is likely to be conducted through the conceptual prism of corporate governance
for the foreseeable future.

In Nepal, in the support of World Bank, the Financial Sector Reformation Project is started in
2002. Then, Nepal Rastra Bank Act-2058, Bank and Financial Institutions Act-2063 and
Company Act-2063 are enforced. That has fully empowered Nepal Rastra Bank with the power
relating to licensing, supervising and regulating Nepals all Bank and Financial Institutions,
except cooperative organizations, Employee Provident Fund and Citizens Investment Fund.

The Nepal Rastra Bank Act-2058 has, in this regard, laid down the basic legal and operational
propositions by which it can be run as an independent and autonomous central banking
organization. The Bank and Financial Institutions Act -2063 has made the Nepal Rastra Bank
more powerful. It has repealed five statutory laws and the powers are lain down in the single
Umbrella Act for the purpose of improving the Nepal Rastra Bank as a central bank of Nepal.
The Company Act-2063 has emphasized on Good Corporate Governance among its major
Characteristics.

1.3 Introduction of Corporate Governance

Corporate governance is nothing more than how a corporation is administered or controlled.
Corporate governance takes into consideration company stakeholders as governmental
participants, the principle participants being shareholders, company management, and the board
of directors. Adjunct participants may include employees and suppliers, partners, customers,
governmental and professional organization regulators, and the community in which the
corporation has a presence.

Because there are so many interested parties, its inefficient to allow them to control the
company directly. Instead, the corporation operates under a system of regulations that allow
stakeholders to have a voice in the corporation commensurate with their stake, yet allow the
corporation to continue operating in an efficient manner. Corporate governance also takes into
account audit procedures in order to monitor outcomes and how closely they adhere to goals, and
to motivate the organization as a whole to work toward corporate goals. By using corporate
governance procedures wisely and sharing results, a corporation can motivate all stakeholders to
work toward the corporations goals by demonstrating the benefits, to stakeholders, of the
corporations success.

Corporate governance may include:

Control and direction processes

Regulatory compliance
Active ownership and investment in a company

Primarily, though, corporate governance refers to the framework of all rules and relationships by
which a corporation must abide, including internal processes as well as governmental regulations
and the demands of stakeholders. It also takes into account systems and processes, which deal
with the daily working of the business, reporting requirements, audit information, and long-term
goal plans.

Corporate governance provides a roadmap for a corporation, helping the leaders of a company
make decisions based on the rule of law, benefits to stakeholders, and practical processes. It
allows a company to set realistic goals, and methodologies for attaining those goals.
 Fig : Fundamental Pillars of Corporate Governance

1.4 Benefits of Corporate Governance

Good corporate governance ensures corporate success and economic growth.

Strong corporate governance maintains investors confidence, as a result of which,

company can raise capital efficiently and effectively.

It lowers the capital cost.

There is a positive impact on the share price.

It provides proper inducement to the owners as well as managers to achieve objectives

that are in interests of the shareholders and the organization.

Good corporate governance also minimizes wastages, corruption, risks and

mismanagement.

It helps in brand formation and development.

It ensures organization in managed in a manner that fits the best interests of all.
 It Improves access to capital and financial markets.
Better corporate governance can also provide Shareholders with greater security on their
investment.
The adoption of corporate governance principles can play a significant role in increasing
the corporate value of a company.
Adopting good corporate governance practices leading to better internal control systems,
greater accountability, and better profit margins.

CHAPTER - 2

CONTRIBUTION OF CORPORATE GOVERNANCE

2.1 Contribution of Corporate Governance in Economic Development
Good corporate governance is based on four main principles: fairness, transparency,
accountability and responsibility; and besides reducing the vulnerability to financial crises, these
principles reflect the standards necessary to provide legitimacy to the corporate sector and to
broaden and deepen access to capital. This is bound to have a positive, ultimate impact on
growth. It has also shown that countries can undergo better development and have higher living
standards when the rule of the law prevails, contracts are enforceable, barriers to entry into new
business are low and monetary and fiscal policies are prudent and appropriate.

The OECD principles define corporate governance as involving "a set of relationships between a
company's management, its board, its shareholders, and other stakeholders". If implemented
properly, corporate governance benefits companies in many aspects, such as improving access to
capital, attracting premium valuations and financing on improved terms. Moreover, it improves
company performance by producing superior leadership, oversight and strategic direction,
efficient information flows and work processes and better compliance, accountability and less
conflict.

Banks, of course, play a vital role in the economy, and the continued strength and stability of the
banking system is a matter of general public interest and concern both in regard to its linkages
with the real sector and for providing the payment and settlement systems.

Effective corporate governance is essential then to achieving and maintaining public trust and
confidence in the banking system, which are critical to the proper functioning of the banking
sector and the economy as a whole. Poor corporate governance may contribute to bank failures,
which can pose significant public costs and consequences due to their potential impact on any
applicable deposit insurance systems and the possibility of broader macroeconomic implications
such as contagion risk and its impact on the payment system.

It emphasizes improving transparency through better disclosure of financial information,

enhancing regulatory oversight and implementing measures that increase accountability and
better align shareholder and managerial interests.
Generally, there are several avenues that the literature identifies through which corporate
governance might affect growth. They are:

Increased access to external financing by firms, which can lead to greater investment,
higher growth and more employment creation.
Lower cost of capital and the associated higher firm valuation, which makes investment
more attractive and again furthers growth and employment.
Better operational performance through better allocation of resources and better
management, which creates and adds to wealth.
Reduction in the risk of financial crises and just as important in the large economic
and social costs that they usually entail.
Better relationships with all stakeholders, which helps improve social and labor
relationships and deals more favorably with issues such as environmental protection, etc.

2.2 Examples Good Corporate Governance

Following are some of the examples of the companies that have good corporate governance
practices:

At EMC, a data storage specialist, nine of its 11 directors are independent, and it lets
shareholders have an advisory vote on executive compensation. Directors must be elected with a
majority vote, and they're elected annually. In a letter last month, CEO Joe Tucci said,
"Experience has shown us that good governance increases EMC's competitive power, enhances
the Company's performance, and improves our ability to create more value for shareholders. And
that is why EMC strives continually to improve its governance."

Xerox's corporate governance features a 90%-independent board of directors and a long list of
guidelines. Directors are expected to serve on no more than four other boards, and are expected
to hold a "meaningful equity ownership" in the company. Xerox's four standing committees, on
audits, compensation, finance, and governance, are filled solely with independent directors.

Advanced Micro Devices also has a set of governance principles, which include having directors
stand for reelection every year, and having no more than two employees as directors at any time.
Members of the Audit and Finance and the Compensation committees are expected to serve on
no more than two other public boards, and all directors are expected not to overcommit
themselves to many other boards.

Exelon, a major electric and gas utility with substantial nuclear energy operations, requires all of
its directors, except the CEO, to be independent. Its governance standards include requiring
directors to own at least 5,000 shares of company stock (recently worth about $180,000).
Directors are also expected to disclose any conflicts of interest regularly.

Occidental Petroleum's governance policies include requiring at least two-thirds of directors to

be independent ones. Directors are elected annually and must own at least 5,000 shares, which
translates to about $400,000 these days. Key committees, such as Audit, Compensation, and
Governance, are to be filled solely with independent directors.

2.3 Corporate Governance in Nepal

Liberalization after 1990 and open for corporate sector
Emphasis on private sector led economic development
Privatization of government corporation
Industrial and Commerce Policy -2049 BS for trade liberalization
Foreign Investment Policy -2049BS for attracting foreign investment
Opening banking sector and opening of development bank, commerce bank, and micro
loan company etc.
Foreign currency transaction open to private bank along with freedom to fix interest and
exchange rate
Bank and Financial Institution Management Act -2063BS
Company Act -2063BS
Corporate investment on infrastructure development
Commerce Policy -2065, Industry Policy -2067, Tourism Policy -2065
WTO (World Trade Organization), BIMSTEC (The Bay of Bengal Initiatives for Multi-
Sectorial Technical and Economic Cooperation) and other regional and international
membership to promote trade liberalization
Import Policy, Consumer Right Protection Act
Active in providing policy inputs or feedback to government
2.4 Contribution of Corporate Governance in Economic Development of Nepal
A company that has good corporate governance has a much higher level of confidence amongst
the shareholders associated with that company. Active and independent directors contribute
towards a positive outlook of the company in the financial market, positively influencing share
prices. Corporate Governance is one of the important criteria for foreign institutional investors to
decide on which company to invest in.

Following are some of the contribution of Corporate Governance in Nepalese Economy:

There are a number of regulations in place that governs the activities of companies in Nepal and
some of these are: Securities act 2063 and security rules 1993 are the basic law which provides
protection for investors, regulate markets, dealings and related matters, and conserving from
frauds.

Nepal Rastra Bank, the central bank of Nepal issued regulation to the financial institution to
maintain certain standard for corporate governance; hence peoples trust has been increased. In
terms of banking Act 2014, the Nepal Rastra Bank, now has a strong legal basis for supervising
banking institutions. It has been noted that licensing function has been stopped; merging process
has been initiated as each and every bank needs to increase its capital to Rs 8,000 million. The
bank should increase this amount either by issuing right share or by merging with another
financial institution. Additionally, Banking Act regulates financial institutions to disclose their
financial statement on each quarter for the information of the public. This has helped
significantly in instilling discipline and good corporate governance among the financial
institutions. Similarly, company Act 2006 establishes the rules for the governance and regulation
of companies based on this act.

Company Act Confines that a company listed in Nepal Stock Exchange with a paid up capital of
rupees thirty million or more or a company which is fully or partly owned by the government of
Nepal should form an audit committee under the chairmanship of a director who is not involved
in daily work of the company consisting of at least three members. It ensures that companies
running under this act bounded to make their accounting transparent. Company should prepare
bylaws for audit committee. This committee should review the firms financial position, internal
controls, financial activities performed by those companies and information revealed by internal
auditor.

Transparency, accountability, information disclosures and stringent ethics practiced by

companies are fundamental in winning investors' confidence. Capital market and so the corporate
sector cannot develop with weak minority shareholders, inadequate or non-disclosures, violation
of laws, non-compliance to the rules and regulations and lack of independent oversight of the
directors. Nepalese corporate sector has yet to establish good governance practices and become
more competitive sector of the economy.

As a regulator, Securities Board (SEBO) wants to see improved image of Nepalese corporate
sector. It is presently involved in implementing government's capital market reform program that
affects many aspects of corporate governance.

The government has signed a contract with the Asian Development Bank to implement a
Financial and Corporate Governance Project. Modernization of NEPSE would allow it to
facilitate low cost and efficient transactions. Accounting and Auditing Standards are converging
towards international best practices with the progress in the activities of Accounting Standards
Board and Auditing Standards Board under the umbrella of the Institute of Chartered Accountant,
Nepal, Act.

OECD (2004) establishes certain principles of corporate governance, which have adopted by
member countries. As per OECD, corporate governance involves a set of relationship between
companys management, its board, its shareholders and other stakeholders.

CHAPTER 3

CONCLUSION

Conclusion

In conclusion, awareness of the importance of the corporate governance is growing in Nepal. The
government has adopted corporate governance for the reduction of poverty and economic
development targets. The central bank has introduced higher corporate governance standards for
banks and other financial institutions as part of a wider program of financial sector reform.
Accounting and auditing standards have been developed. Also a number of draft laws have been
prepared to deepen and accelerate the reform process. However, the legal framework contains
large and significant gaps. Critical institutions, including the securities board and company
registrar, have few resources and little authority. Most importantly, political uncertainty and the
current security situation have weakened the economy and delayed the passage of draft
legislation.

Reference
http://www.managementpilot.com

https://www.slideshare.net

http://gulfnews.com/business/economy/corporate-governance-and-economic-growth
http://loksewamcq.com

Focus_1_Corp_Governance_and_Development