Corporate Governance

Garima Dadhich
Asstt. Professor
National Law University
Jodhpur
 Introductory framework

• What is Corporation?

• What is Governance?
 What is Corporation
 A corporation is a means whereby the
wealth of innumerable individuals has
been concentrated into huge aggregates
and whereby control over this wealth has
been surrendered to a unified direction.
 Evolution of Indian corporate
sector
 The early history of joint stock companies
in India is the history of managing agency
houses. They not only promoted the
companies but also nurtured them for
years
 The economic activities during these
period were largely communities based
which led to concentration of trade and
banking in few communities like, Parsees,
Gujarati and Marwaris
 1850-1956
– Managing agents and joint stock companies
grew rapidly
– It was not compulsory for the company to
have board of directors
– Control over the company was retained
through issue of disproportionate voting
shares
– The Companies Act 1913 imposed some
minimum restrictions on powers of managing
agents
 1956-1970
– Enactment of the Companies Act, 1956 and
subsequent amendments in 1969 made
elaborate provisions for disclosure to Registrar
of Companies and shareholders and rights of
shareholders
– Few more legislation were enacted and
existing ones were amended to strengthen
the hold of the State over the business
including FERA 1973, MRTPA 1969
 1970-1980
– Dutt Committee in 1970s recommended active
role of financial institution in corporate boards
and capital market
– Role of nominee director also came into sharp
focus
– Sachar Committee and Patel Committee
revisited The Companies Act 1956 and
provided valuable recommendations for active
interface between stock market and Indian
corporate sector
 1980-1990
– Legislations conferring dominance to State
were diluted
– Company Law Board was vested with power
to ratify or disapprove the refusal of transfer
of shares by the management
– Hectic takeover activities witnessed after the
amendments in the Companies Act 1956 in
1988
 1990 onwards
– With spurt in stock market activities and
vibrant economic environment, Indian industry
felt the pinch of competitive pressures from
invasion of multinational companies
– SEBI was set up to regulate and develop
Indian capital market
– Mergers, acquisitions and corporate
restructuring exerted pressures on Indian
corporate boards to perform in new
environment of larger disclosures and activism
of institutions and shareholders
– These factors lead to a renewed debate on CG
 Governance : a broader view
 Governance means supervising and
managing the company to the best
interest of everyone
 In India, governance has been extensively
discussed in our popular epics like
Mahabharata and Ramayana. These epics
have highlighted the relationship between
society, polity and business
 Corporate Governance: A
developmental perspective
 Corporate entity – corporate governance
 The seeds of modern corporate
governance were probably sown by the
Watergate scandal in US.
 To highlight the control failures, US
regulatory and legislative bodies led to the
development of FCPA 1977.
 The Foreign Corrupt Practices Act 1977
made specific provisions regarding
establishment, maintenance and review of
systems of internal control
 In 1979, US Securities Exchange
Commission prescribed mandatory
reporting on internal financial controls
 In 1999, OECD ministers endorsed the
principles of corporate governance based
on the existing legal and regulatory
arrangements as well as the best
prevailing practices followed by market
participants in the OECD countries
 The OECD revised its principles in 2004 to
reflect a global consensus on critical
importance of good corporate governance
 After the Enron debacle of 2001, came
other scandals such as WorldCom, Qwest,
Global Crossing and Arthur Andersen
 In July 2002, the Sarbanes-Oxley Act was
enacted
 In late 1980s, UK Government recognised
insufficiency of implementable governance
practices
 As a result, In 1991 Cadbury Committee
was set up by the London Stock Exchange
to help raise standards of corporate
governance
 Subsequently Paul Ruthman Committee
to some extent watered down the Cadbury
proposal
 In 1995, Greenbury Committee addressed
the issue pertaining to director’s
remuneration
 In 1998, Rom Hampel Committee
assessed the impact of Cadbury and
Greenbury recommendations and
suggested one super code
 Combined Code was formulated and its
compliance was made mandatory by all
listed companies
 Developments in India
 In India, corporate governance began in
1998 with the desirable code of corporate
governance i.e. a voluntary code
published by the CII
 Securities Exchange Board of India (SEBI)
appointed the committee on corporate
governance under the chairmanship of
Kumar Mangalam Birla (1999) to promote
and raise standards of corporate
governance
 In 2000, DCA formed a study group under
the chairmanship of Dr. P.L. Sanjeev
Reddy to operationalise the concept of
corporate excellence on a sustained basis
 The enactment of Sarbanes Oxley Act led
the Indian Government to set up Naresh
Chandra Committee (2002) to recommend
amendments to the law involving the
auditor-client relationships and the role of
independent directors
 In 2002 itself, to protect the interest of
investors, SEBI constituted a Committee
under the Chairmanship of Shri N.R.
Narayan Murthy
 In 2004, the Government constituted a
committee under the Chairmanship of Dr.
J.J.Irani with the task of charting out the
road map for a flexible, dynamic and user-
friendly new company law
 The Ministry of Corporate Affairs, has set
up National Foundation for Corporate
Governance (NFCG) in partnership with
CII, ICSI and ICAI to make India the best
in corporate governance practices
 Corporate governance concern the
enhancement of corporate performance
via supervision and monitoring of
management performance and ensuring
management’s accountability to
shareholders and other stakeholders
 Corporate governance is the social, legal
and economic process in which companies
function and held accountable. It is a
system by which companies are run
 Hence, the model of corporate governance
can not be universal as they need to be
adopted in context of socio-economic
political and cultural context
 Benefits of Good Governance:
 Good governance leads to congruence of
interests of board, management including
owner managers and shareholders
 Good governance provides stability and
growth to the company
 Good governance system builds
confidence among investors
 Good governance reduces perceived risks,
consequently reducing cost of capital
 Well governed companies enthuse
employees to acquire and develop
company specific skills
 Adoption of good corporate practices
promotes stability and long-term
sustenance of stakeholders’ relationship
 Potential stakeholders aspire to enter into
relationships with enterprises whose
governance credentials are exemplary