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.
Corporate Governance is about how an organisation is managed. This includes its corporate and other structures, its culture, policies and the
manner in which it deals with various stakeholders. Accordingly, timely and accurate disclosure of information regarding the financial situation,
performance, ownership and governance of the company is an important part of corporate governance. This improves public understanding of
the structure, activities and policies of the organisation. Consequently, the organisation is able to attract investors, and enhance the trust and
confidence of the stakeholders.
Corporate governance is beyond the realm of law. It stems from the culture and mindset of management, and cannot be regulated by
legislation alone. Corporate governance deals with conducting the affairs of a company such that there is fairness to all stakeholders and that
its actions benefit the greatest number of stakeholders. It is about openness, integrity and accountability. What legislation can and should do,
is to lay down a common framework – the “form” to ensure standards. The “substance” will ultimately determine the credibility and integrity of
the process. Substance is inexorably linked to the mindset and ethical standards of management.
Corporate governance is a key element in improving the economic efficiency of a firm. Good corporate governance also helps ensure that
corporations take into account the interests of a wide range of constituencies, as well as of the communities within which they operate. Further,
it ensures that their Boards are accountable to the shareholders. This, in turn, helps assure that corporations operate for the benefit of society
as a whole. While large profits can be made taking advantage of the asymmetry between stakeholders in the short run, balancing the interests
of all stakeholders alone will ensure survival and growth in the long run. This includes, for instance, taking into account societal concerns
about labour and the environment.
Corporate governance involves a set of relationships between a company’s 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.
If management is about running businesses, governance is about ensuring that it is run properly. All companies need governing as well as
managing. The aim of “Good Corporate Governance” is to enhance the long-term value of the company for its shareholders and all other
partners. The enormous significance of corporate governance is clearly evident in this definition, which encompasses all stakeholders.
Corporate governance integrates all the participants involved in a process, which is economic, and at the same time social. This definition is
deliberately broader than the frequently heard narrower interpretation that only takes account of the corporate governance postulates aimed at
shareholder interests.
Corporate Governance guidelines have evolved substantially over time across the globe.
In the US, the Treadway Commission, formed after a series of high profile business collapses, published its report in 1987, calling for a
proper control environment, independent audit committees and an objective Internal audit function. Similar collapses and scandals in the UK
in the 80s led the government to realise that the existing legislative framework was insufficient to prevent recurrences of such business
failures. The London Stock Exchange set up a committee under the chairmanship of Lord Cadbury in 1991, which published its Report on The
Financial Aspects of Corporate Governance in December 2002. The Report included a "Code of Best Practices".
Corporate Governance Norms evolved gradually. In India, CII took an initiative to frame a desirable code of Corporate governance in 1998.
This was followed by the setting up of a committee under the Chairmanship of Sri Kumar Mangalam Birla in May 1999 to suggest suitable
amendments to the listing agreement, improve standards of corporate governance, draft a code of corporate best practices and to suggest
safeguards to deal with insider information and trading. These recommendations were incorporated in Clause 49 of the Listing Agreement of
the Stock Exchanges in December 1999.
The Sarbanes – Oxley Act, 2002, post Enron and other failures in the USA, brought about sweeping changes in financial reporting. In UK, the
evolution continued with the Higgs Report on Non Executive Directors and the Smith Report on Audit Committees both in 2003. In the
meantime, in April 2004, the Organisation for Economic Co-operation and Development (OECD) revised its recommendations - the OECD
Principles of Corporate Governance.
In India, SEBI constituted another committee under the chairmanship of Sri H R Narayana Murthy to recommend enhancements in corporate
Governance. The recommendations of the Naryanana Murthy Committee has been incorporated by SEBI in the revision to Clause 49 of the
listing agreement which takes effect from January 2006.
In addition, in 2002 the Department of Company Affairs constituted a committee under the Chairmanship of Sri Naresh Chandra, former Indian
Ambassador to the US to examine various governance issues. The recommendations of the committee are now mandatory.
Philosophy of Good Corporate Governance
1. Satisfy the spirit of the law and not the letter of the law. Corporate Governance standards should go beyond law
2. Be transparent and maintain high degree of disclosure levels. When in doubt disclose
3. Make a clear distinction between personal conveniences and corporate resources
4. Communicate externally in a truthful manner about how the company is run internally
5. Have a simple and transparent corporate structure driven solely by the business needs
6. Management is the trustee and not the owner of the shareholder’s capital