Corporate governance includes the practices, principles and values

that guide a company and its business every day.

Corporate governance covers set of relationships between a
company's management, its board, its shareholders and other
stakeholders .
It is a control measure that can result into overall economic growth
and development of an economy plus will generate social justice, if
implemented and executed correctly.
 The definition of corporate governance most widely used is "the
system by which companies are directed and controlled"
(Cadbury Committee, 1992) .
The OECD Principles of Corporate Governance states:
"Corporate governance involves a set of relationships between
a companys management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure
through which the objectives of the company are set, and the
means of attaining those objectives and monitoring
performance are determined."
 Started as economic or financial concept
Involves lot of parties
Involves organizational & social objective
Guiding practices, process & principles
Used to motivate management to perform better
Universal approach (world wide acceptance)
framework of rules, relationships, systems, and processes
Implemented at all levels in an organization
Tool for benchmarking & controlling performance
Focuses on long term value addition (profitability, goodwill,
brand recognition etc.)
 It creates a safe environment in front of the
small investors.
It promotes the investment habits of people
by securing better return on investment .
It make the management responsible and
productive.
It ensures proper allocation of resources.
It focuses on the stakeholders betterment.
Economic development of the society through
investment etc..
1. Strengthen management oversight functions and accountability
2. Balance skills, experience and independence on the board
appropriate to the nature and extent of company operations
3. Establish a code to ensure integrity
4. Safeguard the integrity of company reporting
5. Risk management and internal control
6. Protection of minorities
7. Role of other stakeholders in management
8. System of reporting and accountability
9. Effective supervision and enforcement by regulators
10. To encourage Sustainable Development of the Company and its
stakeholders.
1. Board of directors
2. Managers
3. Workers
4. Shareholders or owners
5. Regulators
6. Customers
7. Suppliers
8. Community (people affected by the actions of the
organization)
 Executive Owner Independent
Directors Directors Directors

Board of
Directors

Supervisory &
Management enforcement
authorities

Corporate

Shareholders Stakeholders Creditors

 CSR

Effective Resource Allocation

Corporate
Business
Governance
Ethical Behavior & Entrepreneurship

Economic Growth
Followings are the instruments of corporate governance

Codes
Laws
Principles
Standards

These instruments provide wider coverage and cover the following

areas:
Share holders rights and protection
Shareholders instruments
Employees and stakeholders right protection
Company board responsibility
Transparency of corporate structures and operations, and disclosure of it
on time.
There are four theories of corporate governance
The agency theory
The stewardship theory
The stakeholder theory
The political theory
 The basis for the agency theory is the separation
of ownership and control.
Principal (shareholders) own the company but
the agents (managers) control it.
Managers must maximize the shareholders
wealth.
The main concern is to develop rules and
incentives, based on implicit explicit contracts, to
eliminate or at least, minimize the conflict of
interests between owners and managers.
 Managers as stewards
Assumed to work efficiently and honestly in
the interests of company and owners.
Self directed and motivated by high
achievements and responsibility in discharging
the duties.
Managers are goal oriented
Feel constrained if they are controlled by
outside directors
 Managers are responsible to maximize the
total wealth of all stakeholders of the firm ,
rather than only the shareholders wealth.
 The government that decides the allocation of
control, rights, responsibility, profit, etc.
between owners, managers, employees and
other stakeholders.
Each stakeholder may try to enhance its
bargaining power to negotiate higher
allocation in its favor.
 Corporate governance practiced in an
organization through the following manners
Board of directors
Audit committee
Shareholders or investors grievance committee
Remuneration committee
Management analysis
Communication
Auditors certificate on corporate governance
 The board of directors constitute the top and strategic
decision body of a company.
It is composed of executive and non executive
directors.
The board should meet frequently and all pertinent
information affecting or relating to the functioning of
the company should be placed before the board.
Some of the significant matters are:
Review of annual operating plans of business , capital expenditure
budget and updates.
Quarterly result of the company.
Minutes of the meeting of Audit committee and other
committees
Materially important show causes, demands, prosecutions and
penalty notice etc
 It is a powerful instrument of ensuring good corporate
governance in the financial matters.
The function of audit committee includes the following:
Overseeing the company's financial reporting process and
ensuring the correct , adequate and credible disclosure of
financial statements.
Reviewing the adequacy of the audit and compliance function ,
including their policies, procedures, techniques and other
regulatory requirements.
Recommending the appointment of statutory auditors.
To review the observation of internal and statutory auditors
about the findings during the audit of the company
 Companies should form a shareholders/investors
grievance committee under the chairmanship of
a non executive independent director
The committee is responsible for attending to the
grievance of shareholders and investors relating
to transfer of shares and non receipt of dividend.
 The company may appoint a remuneration
committee to decide the remuneration and
other perks etc. of the CEO and other senior
management officials as per the Companies
Act and other relevant provisions.
 Management is required to make full
disclosure of all material information to
investors.
It should give detailed discussion and analysis
of the company's operations and financial
information.
 The quarterly , half yearly and annual financial
results of the company must be send to the stock
exchange immediately after they have been
taken on record by the board
Some companies simultaneously post them on
their website.
Companies may also provide periodic event
based information to investors and the public at
large by way of press releases/intimation to the
stock exchange.
 The external auditors are required to give a
certificate on the compliance of corporate
governance requirements.
In this certification they conclude the firm
initiatives in respect of the corporate
governance and they also advise the
management for better corporate governance
practices.
 Rights and equitable treatment of shareholders : Organizations should
respect the rights of shareholders and help shareholders to exercise those
rights. They can help shareholders exercise their rights by openly and
effectively communicating information and by encouraging shareholders
to participate in general meetings.

Interests of other stakeholders : Organizations should recognize that they

have legal, contractual, social, and market driven obligations to non-
shareholder stakeholders, including employees, investors, creditors,
suppliers, local communities, customers, and policy makers.

Role and responsibilities of the board : The board needs sufficient

relevant skills and understanding to review and challenge management
performance. It also needs adequate size and appropriate levels of
independence and commitment to fulfill its responsibilities and duties.
 Integrity and ethical behavior : Integrity should be a fundamental
requirement in choosing corporate officers and board members.
Organizations should develop a code of conduct for their directors
and executives that promotes ethical and responsible decision
making.

Disclosure and transparency : Organizations should clarify and

make publicly known the roles and responsibilities of board and
management to provide stakeholders with a level of accountability.
They should also implement procedures to independently verify
and safeguard the integrity of the company's financial reporting.
Disclosure of material matters concerning the organization should
be timely and balanced to ensure that all investors have access to
clear, factual information.
 Corporate Governance Obligations
towards society at large:
National Interest: A company (and its management) should
be committed in all its actions to benefit the economic
development of the country in which it operates and should
not engage in any activity that would militate against such an
objective.

Political Non-alignment: A company should be committed to

and support a functioning democratic constitution and system
with a transparent and fair electoral system and should not
support directly or indirectly any specific political party or
candidate for political office.
 Legal Compliances: The management of a company should
comply with all applicable government laws, rules and
regulations. Violation of such laws, rules and regulations may
subject them to individual criminal or civil liability as well as
subjecting the company itself to civil or criminal liability or
loss of business.

Rule of Law: Good governance requires fair, legal frameworks

that are enforced impartially. It also requires full protection of
rights, particularly those of minority shareholder.

Honest and ethical conduct: Every officer of the company

including its Directors, executive and non-executive directors,
managing director, CEO, CFO and COO should deal on behalf
of the company with professionalism, honesty, commitment
and sincerity as well as high moral and ethical standards.
 Corporate citizenship: A corporation should be committed to
be a good corporate citizen not only in compliance with all
relevant laws and regulations, but also by actively assisting in
the improvement of the quality of life of the people in the
communities in which it operates with the objective of making
them self reliant and enjoy a better quality of life.

Ethical Behaviour: Corporations have a responsibility to set

exemplary standards of ethical behaviour, both internally
within the organisation as well as in their external
relationships. The board of directors have a great moral
responsibility to ensure that the organisation does not derail
from an upright path to make short-term gains.
 Social concerns: New paradigm about social concerns is that
the company should not only think about its shareholders but
also think about its stakeholders and their benefit. A
corporation should not give undue importance to any one
class and should treat all investors equally and equitably.

Corporate Social responsibility: While creating an ideal

corporate the emphasis should be laid on corporate social
responsiveness and ethical business practices seeking what
might well turn out to be not only the first small steps for
better governance on this front but also the promise of a
more transparent and internationally respected Corporates of
the future.
 Trusteeship: Corporates represent a coalition of interests,
namely, those of the shareholders other providers of the
capital, business associates and employees. This belief,
therefore casts a responsibility of trusteeship on the
companys board of directors. They are to act as trustees to
protect and enhance shareholder value, as well as to ensure
that the company fulfills its obligations and responsibilities to
its other stakeholders.
Accountability: Accountability is a key requirements of good
governance. Not only governmental institutions but also the
private sector and civil society organisations must be
accountable to the public and to their institutional
stakeholders. In general, an organisation or institution is
accountable to those who will be affected by its decisions or
actions. Accountability cannot be enforced without
transparency and the rule of law.
 Effectiveness and efficiency: Good governance means that
processes and institutions produce results and serve all
stakeholders within a reasonable timeframe while making the
best use of resources at their disposal.

Corporations should uphold the fair name of the country:

When companies export their products or services , they
should ensure that these are qualitatively good and are
delivered on time. They have to ensure maintenance of the
quality of their products, which should be the brand
ambassadors for the country.
 Environment friendliness: Corporations tend to be intervening in
altering and transforming nature. In all such activities, a piece of
nature is taken from where it belongs and processed into a new
form. So companies have a moral responsibility to save and protect
the environment. All the pollution standards have to be followed
meticulously and organizations should develop a culture having
more concern towards environment.

Competition: A company should play its role in the establishment

and support a competitive, open market economy and cooperate to
promote the progressive and judicious liberalization of trade and
investment by a country. A company should market its products
and services on its own merits and should not resort to unethical
advertisements or include unfair or misleading pronouncements on
competitors products and services.
 Corporate Governance Obligations
towards investors:
Towards shareholders: A company should be committed to
enhance shareholder value and comply with all regulations
and laws that govern shareholders rights. The board of
directors of the company shall and fairly inform its
shareholders about all relevant aspects of the companys
business and disclose such information in accordance with the
respective regulations and agreements.

Transparency: Transparency means that decisions taken and

their enforcement are done in a manner that follows rules
and regulations. It also means that information is freely
available to those who will be affected by such decisions and
their enforcement.
 Measures promoting transparency and informed
shareholder participation: A related issue of equal
importance is the need to bring about greater levels of
informed attendance and meaningful participation by
shareholders in matters relating to their companies without,
however, such freedom being abused to interfere with
management decision.

Financial reporting and records: A company should prepare

and maintain accounts of its business affairs fairly and
accurately in accordance with the accounting and financial
reporting standards, laws and regulations of the country in
which the company conducts its business affairs.
 Corporate Governance Obligations towards
Employees:
Fair employment practices: An ideal corporate should commit
itself to fair employment practices, and should have a policy
against all forms of illegal discrimination. A company should
provide equal opportunities without regard to their race,
caste, religion, colour, marital status, gender, age, nationality,
disability and veteran status. By providing equal access and
fair treatment to all employees on the basis of merit, the
success of the company will be improved while enhancing the
progress of individuals and communities.

Participation: Participation by both men and women is a key

cornerstone of good governance. Participation needs to be
informed and organised. This means freedom of association
and expression on the one hand and an organised civil society
on the other.
 Encouraging whistle blowing: It is generally felt that if whistle
blower concerns have been addressed to some of the recent
disasters, they could have been avoided, and that in order to
prevent future misconduct, whistle blowers should be
encouraged to come forward. So an ideal corporate is one
that deals pro-actively with whistle blowers and to make sure
employees have comfortable reporting channels and are
confident that they will be protected from any form of
retribution.
Empowerment: Empowerment is an essential element of any
companys principle of governance that management must
have the freedom to drive the enterprise forward.
Empowerment is a process of actualising the potential of its
employees. Empowerment unleashes creativity and
innovation by truly vesting decision making powers at the
most appropriate levels in the organisational hierarchy.
 Equity and inclusiveness: A corporation is a
miniature of society whose well being
depends on ensuring that all its employees
feel that they have a stake in it and do not feel
excluded from the mainstream. There should
not be any kind of human exploitation in the
company. The management should cultivate
the culture where employees should feel they
are secure, being given equal opportunity and
are being well taken care of.
 Corporate Governance Obligations
towards Customers:
Quality of products and services: The company should be
committed to supply goods and services of the highest quality
standards, backed by efficient after sales service consistent
with the requirements of the customers to ensure their total
satisfaction.

Products at affordable prices: Companies should ensure that

they make available to their customers quality goods at
affordable prices. While making normal profit is justifiable,
profiteering and fattening on the miseries of the poor
customers is unacceptable.
 Unwavering commitment to customer satisfaction:
Companies should be fully committed to satisfy their
customers and earn their goodwill to stay long in the business.
They should respect in letter and spirit whatever promises
they are making in respect of the products and services and
should always fulfill them.
 Corporate Governance - Managerial
Obligations:
Protecting companys assets: The assets of the company
should not be dissipated or misused but invested for the
purpose of conducting the business for which they are duly
authorized. This applies to both tangible as well as intangible
assets.

Behaviour towards government agencies: A companys

employees should not offer or give any of the firms funds or
property as donation to any government agencies or their
representatives directly or through intermediaries in order to
obtain any favourable performance of official duties.
 Control: Control is a necessary principle of governance that
the freedom of management should be exercised within a
framework of appropriate checks and balances.

Consensus oriented : Good governance requires mediation

of the different interests in society to reach a broad consensus
on what is in the best interest of the whole community and
how this can be achieved.

Gifts and donations: The companys employees should

neither receive nor make directly or indirectly any illegal
payments, remunerations, gifts, donations or comparable
benefits, which are intended to or perceived to obtain
business or uncompetitive favors for the conduct of its
business.
 Role and responsibilities of corporate board and directors:
The role of corporate board of directors as stewards of their
stakeholders has gained significant importance in recent
decades. On one hand the executive management should
create wealth competently and through legitimate means and
on the other it should distribute the created wealth equitably
to all shareholders after meeting the due aspirations of and
obligations to other stakeholders.
 In essence good corporate governance consists of a system of
structuring, operating and controlling a company such as to achieve
the following:
a culture based on a foundation of sound business ethics
fulfilling the long-term strategic goal of the owners while taking into
account the expectations of all the key stakeholders, and in particular:
consider and care for the interests of employees, past, present and
future
work to maintain excellent relations with both customers and
suppliers
take account of the needs of the environment and the local
community
maintaining proper compliance with all the applicable legal and
regulatory requirements under which the company is carrying out its
activities.
 Code of corporate practice..!!
Written guidelines
issued by an official body
or
professional association
to its
members to help them
comply with its ethical
standards.
 Example of code of corporate
practice!!
The International Council of Toy Industries (ICTI), an
association of associations, is committed on behalf of its
member companies to the operation of toy factories in a
lawful, safe, and healthful manner.
It upholds the principles that no underage, forced, or prison
labor should be employed; that no one is denied a job
because of gender, ethnic origin, religion, affiliation or
association, and that factories comply with laws protecting
the environment.
Mission: To act as a center of discussion and information exchange on
trends and issues important to the toy industry, to promote safety
standards, to reduce or eliminate barriers to trade, and to advance
social responsibility in the industry with programs to address
environmental concerns, fair and lawful employment practices and
workplace safety.
 Supply agreements with firms manufacturing on
behalf of ICTI members must also provide for
adherence to these principles.
The role of ICTI is to inform, educate, and survey its
members so that individual member companies can
adhere to its Code of Business Practices.
As an association, it also acts to encourage local
and national governments to enforce wage and
hour laws and factory health and safety laws
 Specific operating conditions
that member companies are
expected to meet and obtain
contractor agreement in advance
are as follows:
 Labor..!!
That working hours per week, wages and overtime pay
practices comply with the standards set by law or, in the
absence of a law, address humane, safe and productive
working conditions;
that no one under the legal minimum age is employed in any
stage of toy manufacturing; that a minimum age of 14
applies in all circumstances, but notwithstanding the
foregoing, that C138 Minimum Age Convention (1973) and
C182 Worst Forms of Child Labor Convention (1999) of the
International Labor Organization apply;
that no forced or prison labor is employed, that workers are
free to leave once their shift ends, and that guards are
posted only for normal security reasons;
that all workers are entitled to sick and maternity benefits
as provided by law;
that all workers are entitled to freely exercise their rights of
employee representation as provided by local law.
 THE WORKPLACE.!!
That toy factories provide a safe working environment for their
employees and comply with or exceed all applicable local laws
concerning sanitation and risk protection;
that the factory is properly lighted and ventilated and that aisles and
exits are accessible at all times;
that there is adequate medical assistance available in emergencies,
and that designated employees are trained in first aid procedures;
that there are adequate and well-identified emergency exits, and that all
employees are trained in emergency evacuation;
WORKPLACE CONTINUED!!
that protective safety equipment is available
and employees are trained in its use;
that safeguards on machinery meet or exceed
local laws;
that there are adequate toilet facilities which
meet local hygiene requirements, and that
they are properly maintained;
that there are facilities or appropriate
provisions for meals and other breaks;
if a factory provides housing for its
employees, it will ensure that dormitory
rooms and sanitary facilities meet basic
needs, are adequately ventilated and meet
fire safety and other local laws;
 Compliance..!!
The purpose of this Code is to establish a standard of
performance, to educate, and to encourage commitment to
responsible manufacturing, not to punish.
To determine adherence, ICTI member companies will evaluate
their own facilities as well as those of their contractors. They will
examine all books and records and conduct on-site inspections
of the facilities, and request that their contractors follow the
same practices with subcontractors.
An annual statement of compliance with this Code must be
signed by an officer of each manufacturing company or
contractor.
 Contracts for the manufacture of toys should provide that a
material failure to comply with the Code or to implement a
corrective action plan on a timely basis is a breach of
contract for which the contract may be canceled.
Because of the great diversity in the kinds of toys
manufactured and the manufacturing methods used, as well
as the wide range in factory sizes and numbers of
employees, three annexes are attached to this Code to
provide guidelines for determining compliance. A rule of
reason must be used to determine applicability of the annex
provisions.
This Code should be posted or available for all employees in
the local language.
 CORPORATE SOCIAL REPORTING..!!
Consequent to increasing
globalization, greater
environmental and social
awareness, and more efficient
communication, the concept of
companies responsibilities
beyond the purely legal or profit-
related has gained new impetus.
In order to succeed, business now
has to be seen to be acting
responsibly towards people,
planet and profit (the so-called
3Ps) sometimes also known as
the triple-bottom line.
 The perspective taken is that for an organisation (or a community) to be
sustainable (a long run perspective) it must be financially secure (as evidenced
through such measures as profitability);
it must minimise (or ideally eliminate) its negative environmental impacts;
and, it must act in conformity with societal expectations.
These three factors are obviously highly inter-related.
Many companies now report regularly on the subject producing
Sustainability and/or CSR (Corporate Social Responsibility) reports whose
content is increasingly scrutinized by investors and financial institutions.
 Since 2000 the CSR concept has pushed further
and further up the corporate agenda as business
strives to act responsibly towards people, planet
and profit (the so-called 3Ps). Some driving
forces pushing CSR up the corporate agenda are:
Informed investors recognize that the business
risk (both internal and external) for companies
that successfully manage their social and
environmental impact is lower than the business
average;
Consumers prefer products that are produced in a
socially responsible way
Increased concern about the damage caused by
economic activity to the environment
 Transparency of business activities brought about
by the media and modern information and
communication technologies
Search for new forms of global governance
 Measurement of progress toward
sustainable development:
Companies that already produce CSR
reports have found that the process of
developing a sustainability report provides
a warning of trouble spots and
unanticipated opportunities in supply
chains, in communities, among regulators,
and in reputation and brand management.
Reporting helps management evaluate
potentially damaging developments
before they develop into unwelcome
surprises.
 Reporting and external communication is a
significant part of CSR and one that is no longer
restricted to the largest multinationals. Recent
statistics indicate that up to half of the UKs top
250 companies produce some sort of CSR
report.
The UN sponsored Global Reporting Initiative
(GRI) has developed a set of reporting
guidelines for CSR reporting.
These Guidelines organise sustainability
reporting in terms of economic,
environmental, and social performance (also
known as the triple bottom line).
This structure has been chosen because it
reflects what is currently the most widely
accepted approach to defining sustainability.
 The Global Reporting Initiative
(GRI) is a multi-stakeholder process
and independent institution whose
mission is to develop and
disseminate globally applicable
Sustainability Reporting Guidelines.
These Guidelines are for voluntary
use by organisations for reporting
on the economic, environmental,
and social dimensions of their
activities, products, and services
 ISO is also planning to
develop an International
Standard for social
responsibility. The objective
is to produce "a guidance
document, written in plain
language which is
understandable and usable
by non-specialists" and not
intended for use in
certification.
 Board of Directors
A board of directors is a body of
elected or appointed members
who jointly oversee the activities
of a company or organization. The
body sometimes has a different
name, such as board of trustees,
board of governors, board of
managers, or executive board. It
is often simply referred to as "the
board."
 Rights of Directors ..!!
Directors have the right to:
Participate in corporate decisions
and inspect corporate books and
records.
Compensation (usually a nominal
sum) and indemnification.
If a director is sued for acts as
director, the corporation should
guarantee reimbursement
(indemnification) or purchase
liability insurance to protect the
board from personal liability
 A board's activities are
determined by the powers,
duties, and responsibilities
delegated to it or conferred on it
by an authority outside itself.
These matters are typically
detailed in the organization's
bylaws.
The bylaws commonly also
specify the number of members
of the board, how they are to be
chosen, and when they are to
meet.
 Typical duties of boards of directors include

governing the organization by

establishing broad policies and
objectives;
Selecting, appointing,
supporting and reviewing the
performance of the chief
executive;
ensuring the availability of
adequate financial resources;
Approving annual budgets;
Accounting to the stakeholders
for the organization's
performance.
 The legal responsibilities of
boards and board members
vary with the nature of the
organization, and with the
jurisdiction within which it
operates.
For public corporations, these
responsibilities are typically
much more rigorous and
complex than for those of
other types.