CU-MBA-SEM-IV-Business Ethics and Corporate Governance-Second Draft

 Philip Kotler and Nancy Lee, Corporate social responsibility: doing the most good for company and your cause, Wiley  Subhabrata Bobby Banerjee, Corporate social responsibility: the good, the bad and the ugly, Edward Elgar Publishing  Satheesh Kumar, Corporate governance, Oxford University, Press 51 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 3 CORPORATE GOVERNANCE 52 STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 Good Corporate Governance 3.2.1 Benefits of good corporate governance 3.2.2 Principles of Good Corporate Governance 3.2.3 Closing thought on Principals of Corporate Governance 3.2.4. Characteristics of Good Corporate Governance 3.2.5 Positive effects of Good Corporate Governance 3.2.6 Challenges of Good Corporate Governance 3.2.7 Closing Thoughts on Good Corporate Governance 3.3 Bad Corporate Governance 3.3.1 Risks to business due to bad corporate governance 3.3.2 Indicators of Bad Corporate Governance 3.4 Examples of failure of corporate governance in India 3.5 The Corporate Governance Mechanism 3.5.1 Internal Corporate Governance Mechanisms 3.5.2 External Corporate Governance Mechanisms 3.5.3 Issues related to Mechanisms of Corporate Governance 3.5.4 Statutory framework of corporate governance in India 3.6 Summary 3.7 Keywords 3.8Learning Activity 3.9 Unit End Questions 3.10References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to: CU IDOL SELF LEARNING MATERIAL (SLM)

 Explain why it is important for companies to good corporate governance in their operations  Discuss why it is important for companies to develop a positive image of the in terms of external stakeholders  Appreciate how the demand good corporate governance has grown  Describe why external forces are interested for companies to demonstrate good corporate governance  Explain how companies may fall into bad governance and what could be the consequences of this situation 3.1 INTRODUCTION Recap on Corporate Governance In the previous section we have come across the concept of Corporate Governance which is simply the way a business needs to commit its activities and policies to accommodate the expectations of all shareholders. It seeks to bring about a sense accountability in the actions of corporate policy makers as they utilise social resources in their pursuit of economic benefits. We also found that in its modern form it is a recent concept that gained importance due to rise of corporate frauds, debacle of banks and financial institutions and due to arbitrary actions of CEOs which takes undue advantage of their bestowed in them. In addition to seeking accountability the need for Corporate Governance was also felt to bring about transparency in business dealings and keeping the shareholders and other stakeholders informed of the management decision in the use of their investments. It is to be noted that the vast capital sums enjoyed by corporations actually belong to retail shareholders and funding received from the banks, which actually is the sum of savings of retail depositors. Therefore in an essence the entire sum of money that the board of directors manage is actually owned by big number of small depositors and investors. This is the most important realisation that makes the foundation of Corporate Governance. It seeks to establish a sense of responsibility in the corporations to utilise the borrowed money while keeping into account the ownership of the capital and also with an objective for common social benefit through ethical actions while seeking profits and economic growth. The board members and top management have a duty and responsibility towards the individual shareholders, other stakeholders and society in general, therefore they need to be governed in accordance with common laws. The other important aspect of corporate governance is the efficient utilisation of society resources. As unjust utilisation is a wastage which should be attributed to the unprofessional decisions taken by the management. We also came across that business leaders cannot 53 CU IDOL SELF LEARNING MATERIAL (SLM)

indulge in any illegal actions in their actions and all actions of business need to managed and directed in accordance with set norms and principles. Finally corporate governance encompasses the principles of rights and equal treatment towards of all stakeholders through display of ethical behaviour and integrity. “Keeping a company in good headlines comes from what is known as ‘Good Corporate Governance’\" 3.2 GOOD CORPORATE GOVERNANCE Good governance signifies that the business processes are aimed towards meeting business objectives along with satisfying the needs of society, while making use of available resources. It has become a key focus point for corporations to position their businesses favourably in respect to stakeholders and society to help withstand difficult phases of economic cycle. The need of good governance was first argued in Middle Ages along with the cause of ‘Welfare State’ to be established. The kings and monarchs carried on the wars and misused the taxpayer’s money on building expensive castles and on ceremonies. While the peasants and common people suffered hardships and even the vagaries of frequent wars, it was the kings and aristocrats who never thought of any austerity in their lavish lifestyles. With growing awareness of rights of people noted scholars and thinkers propagated the idea that monarchy was not only responsible to collect taxes and wage wars but also need to work for the welfare of the public. This was the birth of checks and balances in the society and how rulers were in fact made to be accountable for their actions. Since then the concept of good governance has emerged and has ripened in its present form with respect to business activity. Good corporate governance, through democratic functioning of companies, ensures that voices of individuals are heard and respected, irrespective of their position. It is an awareness that different perspectives result in best possible decision making. It is also important how decisions are made today and sets the tone for similar actions in future. 3.2.1 Benefits of good corporate governance Good corporate governance builds trust with all stakeholder and is comforting thought to the investors that their money is safe. In addition the other benefits can be summarised as below which go on to contribute to building value for the company. 1. Mitigation of risk Risk mitigation is not completely avoiding risks, it in fact a process to pre-empt their possibilities and analyse their effects on the current and suture state of business. As has been noted earlier the board is sitting on the funds of investors, banks and other retail depositors, therefore it is under legal and ethical obligation to safeguard their 54 CU IDOL SELF LEARNING MATERIAL (SLM)

interests. Good governance also provides rules about how investors can exit in different possibilities or new ones can invest in the company. 2. Improved capital flow Aptly repeated, yet not reducing its importance is the fact that with strong financial management and transparency in reporting data comes investor confidence. Existing investors maintaining their funds within the company or increasing stake not only reduces the stress of searching new ones, it also reduces the cost of capital formation and equity. 3. Boost to reputation of the company Good corporate governance with resulting employee commitment, lower cost of capital, better control over operations are all major contributors to the enhancement of company reputation and a strong brand value. 4. More effective and better decision-making Making decision always become easier and with availability of rules, policies and refence to past good actions. The staff do not have to keep coming back to the management for guidance for regular decisions or issues. Corporate governance also keeps the roles of owners and management distinct so there is not overlap in to one another’s domain. 5. Better reporting structure Not only the flow of orders, it is the availability of reports with relevant data that assist the board members to be aware of the effect of their decisions. Reports need to be rightly detailed depending upon the receiving office, with neither too little details nor overloaded with supporting data that may be too much to comprehend with the board members. 6. Being compliant to laws Good corporate governance is based on proper compliance of policies, laws and regulations. Compliance also helps to mitigate risks while presence of efficient control mechanism is good for reporting instances to the board. 7. Higher staff retention With presence of well-defined mission and vision statements and properly communicated to the employees, they will connected to the boarded belief of the organisation and are ready to face rough weather at times when the company is facing problems. A belief in company mission and vision therefore improves employee retention. 8. Reduction in disruptive behaviour and conflicts of interest 55 CU IDOL SELF LEARNING MATERIAL (SLM)

When employees are sure that they have a voice and their opinions will be heeded to, they stop indulging in any disruptive behaviour. Reduction disruptions is good for business continuity which add to the reputation, as discussed previously Statistical evidence proves that there is strong relation between good governance practices and stock performance in the share market for listed companies. While in the case of private limited or closely companies it is the private equity investors who are attracted to companies with cleaner image and guided by open-minded leaders with broad outlook to implement good corporate governance standards. Embracing the idea of good corporate governance is now a condition for shareholders confidence. The investors are first concerned about the track record of good governance in a company and later they consider other more aspects of its technical background. Such good companies are also at ana advantage to work closely with governments for outsourced contracts and even share their reputation in offshore markets. 3.2.2 Principles of Good Corporate Governance The principles are based on the premises that corporate governance rules contribute to higher investor confidence, improved capital availability and equitable allocation of resources. Irrespective of being either a profit seeking company or a not-for-profit organisation, the organisation’s board is always at the centre of activity. The basic principles enshrine how the board develops policies, implements them across and most importantly how it will be held accountable to its actions. 1. Define the Leadership The first aspect of principles of Corporate Governance is the selection of able leadership that will guide the entire process. The board is as good as the quality of its member directors. They need to be appointed impartially and inducted into the system with under a formal laid out process. Every organisation, irrespective of its nature of business needs to be headed by a board which is able and effective in its approach to deliver long term benefits to the company. Clear demarcation of roles and responsibilities among the board members prevents duplication of work and allows for clear accountability of actions. We come across position nomenclatures as: Director Marketing, Executive Director Operations – this is an indication of their distinct roles and in case of any eventuality everyone knows who will be answerable. This also prevents unimaginative powers to be concentrated in one hand. Having distributed responsibilities based on skills and experience, the board is headed by a Chairman. 2. Select Board members With the leadership of the board defined, now it is time to add members who will discharge their duties in their own capacities. While adding members it is to be made 56 CU IDOL SELF LEARNING MATERIAL (SLM)

sure to honour experience, skills, knowledge and also a taste of independence among them. In addition to the necessary skills it is always the flavour of thinking differently from the group that make the board mare vibrant than being composed of dull and boring businessmen. 3. Appointments to the board Now it is always not an easy task to find, select and appoint such people with necessary skills and to suit diverse backgrounds. To ensure this there is always of formal process for their appointment that is made transparent to avoid calls of favouritism. The choice in appointment of board of Directors is sometimes also mandated by lenders and even legislation. 4. Commitment to duties Once appointed the directors need to commit themselves to the fulfilment of their duties and company objectives. It is expected that the directors will place the wider interest of the company over any of their personal ones to contribute to the growth of the company. They will also overcome individual difference among themselves to work as a cohesive team to share and at times confront ideas to work for the common cause. 5. Development of skills Making a diverse group of people work with unipolar intentions is an uphill task and requires formal training create awareness of the demands of the job. Newly joined directors have to be taken through the historical background of the company to appreciate its origins and working and the present requirements. There may be times that they need to be updated on their knowledge or skills, for which membership industry associations or trade bodies is a good suggestions, platform which allows sharing of cross corporation ideas and suggestions. 6. Share Information and support Since some of the board directors are external to the company or those who are internal would not be working closely with the operational team, it is required that they keep themselves updated of company affairs. Directors working in blind information spots tend to move away from reality and the policies designed subsequently are not relevant to the situation or may not appeal to the operational team. 7. Evaluation of duties As it is very common for the staff of any company to go through an annual appraisal, it is always necessary that the board members undertake a self-evaluation of the difference that their membership has made to the value of the company. This is easier 57 CU IDOL SELF LEARNING MATERIAL (SLM)

said than done, as with nobody to report to board members are seldom subject to inspection, although in cases of sustained misconduct there would be statutory audits of their decisions. Yet good governance demands that they setup examples on their own for the organisation. 8. Re-election of members It is to be noted that the members to boards in not perennial and no members should be allowed to make himself permanent. There is a democratic process among the members and also major stakeholders to re-elect existing members, based on their good performance or replace them with more promising talent to guide the affairs of the company. All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. 9. Financial and business reporting It is a major accountability of the board to ensure the preparation of fair reports on the performance of the company to be shared with other stakeholders. Working in secrecy while concealing performance data is detrimental to trust of other stakeholders, who always want to be updated of regular company affairs. Correct reporting of financial and other information is all the more important to deal away with any secretive deals and unethical dealings with business partners. 10. Manage risks and undertake internal control With the quantum of funds being managed by the board members and the type of resources being committed to the business, it is expected that they make sound decisions to hedge from known and unforeseen risks. It is among the skills of the board members to be aware of possibilities of nature of both opportunities and risks that currently face the business or may emerge in due course of time. The board members also need to make the stakeholders aware of emerging risks and make the company ready for such situations. 11. Relations with committees and auditors There are certain activities that require the board to ensure transparency while:  Preparing reports for internal and external sharing  Preparation for managing business risks  Policies relevant to internal quality control, and  Define relationships with external auditors 3.2.3 Closing thought on Principals of Corporate Governance These basic principles of Corporate Governance are superseded by the superlative principle of ‘Comply and Explain’. It means that it is the utmost duty of the board is to comply with all 58 CU IDOL SELF LEARNING MATERIAL (SLM)

the requirements of law and also those which are recommended out of good practices while also look to ensure broader representation in democratic process. There cannot any event of cutting corners while meeting requirements or unhealthy practices to meet economic goals or the distant possibility of securing personal interests. All board members, irrespective or their origin and background have to universally comply with the relevant guidelines. Secondly there is also the element of sharing information whenever required for internal sharing or for external audits. A recent addition to Comply and Explain has been the emergence of the concept of ‘apply and explain’. The other non-formal characteristic of corporate governance is the element of flexibility policy making and operations. Managing business is not a text book exercise, there cannot be out of the book solutions to many problems faced in business decision making. Board members have to be open to suggestions, even criticism and flexible enough to accept the need to change in approach, even when there are laid down principles. It is not intelligent to blind folded follow written rules when the situation at hand demands ingenious solutions. 3.2.4 Characteristics of Good Corporate Governance Good Corporate governance has many important characteristics which may mean different things to different people and at different times. To be effective in propagating the idea of good corporate governance within the company or any other organisation the leaders need to take responsibility and ownership of their decisions and its overall performance. The major characteristic of good governance can be enumerated as follows: 1. Clear Organizational Strategy A clear strategy for the organization is the cornerstone for Good corporate governance. It is the prime responsibility of the directors to plan strategically in respect to the broader mission, vision and the value statement of the company. The process of strategic planning allows the boards to understand the way the business is headed and how it will get there. It also helps to gather the efforts of all the stakeholders towards a common direction. Strategic planning is a combination of action plans, budgets, forecasting and analysis of past performance and actions. This process when done formally and shared with all makes the board members accountable for such decisions and results. Knowledge of strategic goals helps the employees, shareholders, suppliers and even the government stay focussed on the organisational objectives while meeting customer needs. 2. Effective Risk Management Business are constantly subject to market risks of competitors copying original ideas, unexpected natural calamities or effect of economic fluctuations all of which have a detrimental effect on the operations and the long term fulfilment of strategic corporate goals. In this scenario well-structured risk management strategies always act as vital 59 CU IDOL SELF LEARNING MATERIAL (SLM)

resource points where management can turn for guidance. In presence of policies with respect to managing a company in various risks the management and staff do not need to panic and make abrupt or hasty decisions, which may seem to solve the current situation but may harm the long term status of the company. 3. Commitment for Implementation Commitment to implement the policies, resolutions and strategies of good corporate governance policies is the backbone of the entire idea. Policies and strategies are good only when they are implemented effectively. In absence of this corporate governance is nothing but an eyewash to showcase false commitment to it by the management. On the contrary even if the management is committed to it but does not prepare a plan to make it percolate down, or awareness programs to its effect are absent, all the hard work its design and preparation will be a wastage. 4. Fairness towards all stakeholders Strategic and operational systems which exist within a company need to be balanced by taking into account interest of all stakeholders for current and future time periods. Rights of all the groups within an organisation need to be recognized and respected. Fairness is also applicable while designing the workload and remuneration structure for staff. Uneven workload along with unstructured PayScale are causes of low morale, resentment and even high turnover. Fairness also has to be considered towards the customers by providing value for money and unspurious products. Treating any stakeholder unfairly hurts a company’s long-term strategic interests. 5. Maintain Transparency and Information Sharing Transparency in business is how easily any relevant information is made available by the management to those who are entitled for it. It may be sharing of economic fundamentals or any other non-financial information being sought for genuine purposes. It is also the ease at which information is shared within the organisation, for e.g., flow of policies from top to bottom or reports and logs from bottom to top. Needless to say that good corporate governance is a reflection of free sharing of information without affecting the secrecy of the company. 6. Accountability As previously covered accountability is a strong pillar of good corporate governance which makes the board members and top management answerable for their policies and actions. 7. Corporate Social Responsibility Well managed corporations are aware of current issues and how the business can intervene there and make a positive contribution to the society. Good Corporate Social Responsibility is marked by being non-discriminatory, non-exploitive and 60 CU IDOL SELF LEARNING MATERIAL (SLM)

showing regard to environmental and human issues. Working towards a sustainable economy, companies today are investing heavily to reduce CO2 emissions, build renewable energy options and focussing their attention towards recycle of resources and waste. More than being just good efforts towards building a healthy society, such measures create a positive image of the company and also are rewarded by the government. 8. Regular Self-Evaluation Another aspect that closely follows the company’s commitment to implement corporate governance in its true spirit is a need to undertake regular self-evaluation exercises. An investigation of how far the system is being followed in the organisation. This can be undertaken either by an internal audit or by hiring an independent evaluation body that may observe the organisation and its functioning under cover to get the real picture. Self-evaluation also helps identify current and possible issues with regard to employee satisfaction or third party views with respect to the image of the organisation. 9. Equal Participation Some of the best corporate governance policies are designed and some of the best implementation happen when the top management ensures open participation at multiple levels. This is the basis of open discussion, sharing of ideas and also emergence of multiple perspectives about issues at hand or in future. It is also the duty of all members to be present and share ideas openly whenever such forums are created. 10. Rule of Law Last but not the least all principle and laws have to be impartial and common to all, irrespective of the position of a person or any other individual characteristics. Rule of law demands boards to be fair and impartial in their decision-making. Special circumstances may require involvement of external guidance from special counsels to deal with specific situations. Boards have to ethical, honest and display integrity to ensure good corporate governance. 3.2.5 Positive effects of Good Corporate Governance The practice of following good corporate governance reaps for the business as well as for the economy and the financial market. 1. Increase in Shareholders’ confidence Reassurance to shareholders and investors in the form of reflections due to good corporate governance increases their confidence towards the ability of the board and the top management while handling their funds. Ensuring that the shareholders 61 CU IDOL SELF LEARNING MATERIAL (SLM)

receive copies of financial reports, all their doubts are answered, audit processes are independent and transparent are also steps towards keeping the interest of shareholders while it may also lead to positive references and increase the numbers who would be interested to invest in the company. 2. Inorganic growth of business In addition to the normal growth of revenue and profits, a business will always be on look out to enter new segments and new markets and most efficient way to do so is to buy out an existing company with established products, distribution lines or production facilities. The required capital for all such inorganic growth can be easily generated with proved track record of company performance and good corporate governance practices. At times owners of reputed companies are themselves on the lookout to tie-up with like-minded well managed companies, where again good governance plays a vital role to highlight the attractiveness of the company. 3. Economic value of the company Lack of adherence towards governance principles by the executive and management may result in unsound business decisions that go on for bad financial results. Sustained poor performance leads to negative influence on the industry and finally with many such instances, the economy as a whole is adversely effected. Good governance is an insurance for long term economic growth, creating jobs and improving the overall value of the company. 4. Public Perception towards the business Strategies of good corporate governance have positive impact on how general public or the society perceives the business, the way they consider business functions, it’s the ‘either good or bad’ image of the business in the minds of the public. Good practices marked by fair treatment towards employees, responsibility in spending decisions and enhanced concern towards environment and societal issues create suitable goodwill with the society, while ignorance and disregard to social issues is not appreciated by the people and create general dis-trust. This mistrust is also shared by the government resulting in frequent raids or forced inspections over company financials and physical facilities 3.2.6 Challenges of Good Corporate Governance Whatever the merits of good corporate governance, the implementation of it is as evasive as understanding human behaviour. It is among those ideas which are challenged by its proponents, maybe not openly, yet it is the board itself which shows laxity in making it applicable upon itself. Everyone wants others to be governed by laws while seek exceptions for themselves. 62 CU IDOL SELF LEARNING MATERIAL (SLM)

In the recent decades there has been increasing demands for board of directors to be subject to the same guidelines and principles which are enshrined for those lower in the corporate ladder. Similarly there is growing expectation for the board to implement policies without exceptions. It is also expected that it will promote a culture of overall good governance across the enterprise, as it has been realised after innumerable experiences that good corporate governance can only be implemented with due cultural awareness. Following policies of good corporate governance and compliance to regulations need to become a skillset of the employees Good corporate governance will be consigned to mere lawbooks and will not become a culture, as stated above, unless they are supported by the top level mission, vision statements or manage to appeal to the willingness of the board. We present here the challenges of conducting good corporate governance, not for highlighting their effects but as an awareness to the board, why it must undertake all efforts for their seamless implementation. 1. Compliance is a challenge Whatever may be the wish of the board, any slackness always results in staff members finding ways to circumvent ways to avoid restrictions. In addition more recently governments and department of company affairs want to increase the purview of organised good corporate governance to small private limited companies. These companies as not as organised large organised public limited corporations, neither they have resources to design such policies, yet it is very much relevant for them to also be bounded by similar good governance. 2. Dynamic composition of the board members Creating a diversity of skills and equal representation of all groups among the board members has always been a significant challenge. With the prime motive of the board for economic growth and to enhance shareholders capital, it seeks to select candidates who would drive these major objectives. This leaves immense room to search candidates who also be experts in emerging technologies in the relevant industry, who be knowledgeable about HR practices or would have enough experience in the field of corporate governance itself. The leader of the board or the promoters have the difficult task of being on the lookout or such mix of talent and also how adjustable they would be to work in the existing culture of the organisation. 3. Avoiding conflict of interest There are possibilities that some non-executive directors would also be on board of other companies also. In that case their decision making capacity will be surely affected by the interests in another company. For e.g. A director in an automobile company will be very reluctant to promote the concept green technology if he is on a similar role in an oil company, as development of green technology is an alternative 63 CU IDOL SELF LEARNING MATERIAL (SLM)

to conventional petrol driven motors. Possibilities of conflict in interests demean the position of the directors and may even open up possibilities of neglect of duties and litigation. 4. Upkeep of board meeting minutes Board meetings are solemn affairs and a in significant details, often overlooked is the maintenance if minutes of meetings. At times in absence of proper minutes many important decisions are not recorded and often forgotten. Proper upkeep of MoM is a requirement of good governance that is to followed for any strategic or operational meeting at all levels in an organisation. Needless to say MoMs are at times a vital reference points in times of court cases and criminal proceedings. 5. Assuring communication with management It is an accepted fact that although managing company affairs is spread between committees and management, it is the board which is finally accountability for all strategy and policy decisions. In this case the importance of proper communication cannot be neglected to make sure all levels of employees are aware of policy level decision and there are systems in place for downward flow of policies and decisions and upward flow of reports and performance logs. 6. Record keeping of communications and written documents All sort of communications need to be recorded for future references. Be it boardroom minutes or decisions or inter department memos or complaints or third party incoming and outgoing communications, these are all valuable documents. These are always reference points anytime in future or as evidences in times of litigations. 3.2.7 Closing Thoughts on Good Corporate Governance Given the fact that good corporate governance is so multidimensional it difficult to be understood by one company leave alone by one board. The concept of governance is not just managing the affairs of business, it is about creating a system that ensures that the affairs are managed similar or better in the future also. The concept concerns itself with good management practices about inclusion of talent at the top so there is diversity in planning out strategies. Good corporate governance will be successful through commitment of management to be ethical and make itself accountable to the jurisdiction of shareholders. Moreover the concept in its modern form is not too old and there is no doubt that it has completely matured as yet. As business practices change and outlook of society develops towards business, it will keep on evolving. We may look at times when corporate governance may work to demand good political governance by the ruling government. Like the affairs of a company are tied to that of the industry; and that of industry are tied with the policies made by the governments, there are possibilities that industry may in turn seek to make governments accountable to the taxes collected from it. Till that happens it will continue to 64 CU IDOL SELF LEARNING MATERIAL (SLM)

evolve further in scope and effects, and till then every corporation should endeavour to follow principles of good corporate governance. 3.3 BAD CORPORATE GOVERNANCE There is nothing like bad corporate governance, it is just the absence of good corporate governance. Like you do not need to plan to be bad, you do not need to work hard to be bad, it’s just you stop being good, you stop being on the right path which makes you shift to the wrong path. Now there is argument that before the advent of good corporate governance in its modern form, were all corporates BAD?Well, that may not be correct, as we have good market practices were present since people started trade. Business activity is ever evolving and does not waits to be guided, in absence of directions it settles down on self-evolved principles and practices, when people in industry forums were not talking about good Corporate Governance, or when academicians were not writing or publishing texts on the topic there were enlightened industrialists and industry captains who made sure that all sections of stakeholders got representation on the board, they made sure that their investors were kept informed of the company performance, they made sure that there was no or minimal disturbances to the society due to their economic activity and if there were any they made sure that the losses were reimbursed. All these acts may be defined that of kindness or being big hearted, but in reality they were pure business oriented and due to an enlightenment of good business practices. Companies or smaller business which thrive on profit motive at whatever costs have always a very short shelf life. Cutting corners, exploitation of manpower, deceiving the investors may result in short term gains, yet there is always a time to such malpractices. Corporate failure do not happen all of a sudden, there is deep loss of positive thinking that makes companies lose their customers and stop being innovative in face of competition. More important failures do not happen without warning signs, which companies however choose to ignore and focus on pure profit maximisation or cost reduction. The most important case that is always highlighted as a glaring example of bad corporate governance or to say absence of good governance is that of Enron Corporation in the US. This one incident contributed more to the development of modern day good corporate governance than any other company or incident. The ‘Enron Scandal’, as it is more commonly known came to the forefront in October 2001. This was very reputed company engaged in the business of power generation based in Houston, USA, which later went on to have dubious distinction of the biggest bankruptcy case in history till that time. It was not that the company didn’t had Corporate Governance structure, it was a case of open disregard to good practices and the audit process turning its back on such unholy practices and violation of established code of conducts. For a time the board was not aware of the dealings made by the CEO, when the executives continued to lie 65 CU IDOL SELF LEARNING MATERIAL (SLM)

about the financial position of the company to prevent their personal stock options loosing value. In the month of December of the same year the company filed for bankruptcy and the nation and the world business community were shocked that such a big and strong corporation collapsed purely due to disregard to basic principles of honesty, transparency, openness and accountability. The entire event highlights one important fact that disregard to existing policies and standard practices will be biggest contributor to Bad governance. Trustworthiness is replaced by doubts, honesty leads the way to corruption, seeking corporate objectives is dumped for securing personal objectives. All of this arrives to this final boiling point dur the board not being concerned with the performance of the management and failure to make it accountable of its activities. This brings us to identify some major issues that replace good to bad governance:  Ineffective board structure: when board members are not selected to represent diverse interest groups or the board is not just broad enough, it is comprised of insufficient numbers.  When the board is not independent or when the CEO overshadows the board in terms of power, in such a scenario there is a total absence of audit on the CEO’s actions and the board is at the mercy of the senior executives. Last of the vice is that the executives may themselves double up as board members.  The senior executives deliberately ignore established internal controls and misrepresent facts to the board and all the stakeholders. This is when the board keeps itself totally at the mercy of the executives and not being in direct touch with operations of the company.  Rampant favouritism while nominating board members. It is a common practice to appoint family members to the board, those who lack any formal experience or qualifications are just appointed to sign documents and fulfil requirements of specific number of members on the board. Similarly appointing sub-standard auditors and analysts for the job, which require a specific amount of professionalism, also makes the detection of wrong practices go unnoticed.  Ignorance or complete denial of unethical practices by the auditors and the board. 3.3.1 Risks to business due to bad corporate governance While a strong and good corporate governance is a hedge to existing and emerging risks, a weak structure opens up risks to the company and its stakeholders. Some of the risks that emanate due to bad corporate governance are as follows:  Due to absence of fairness in representation of interests, there is possibility of some groups getting undue advantage in the distribution of benefits and also another possibility 66 CU IDOL SELF LEARNING MATERIAL (SLM)

of getting higher representation as compared to other interests groups. This may be a cause of resentment among the stakeholders.  In absence of proper accountability executives may indulge in arbitrary and inefficient use of funds that may not have been properly approved by the board. Such misuse of funds may lead to pile up of debt that would have been taken to finance the funds or later possibilities of unavailability of funds for meeting payment obligations  Repeated violations of regulations make the company under strict supervision by authorities and even the possibility of appointment of government representative on the board to oversee the past misuse of funds and resources  Damage to the reputation of the company, subsequently to the brand, possibility of higher turnover and later closure of operations also  Loss of revenue coupled with mounting debt leads to situation when the only solution is for the company to declare itself as bankrupt and insolvent in its ability to meet payment obligations to its creditors.  Loss of confidence in the shareholder community Companies who fail to follow good principles of corporate governance face the risk of having reduced shareholder confidence in the performance of the company. In absence of transparency in sharing financial data, investors feel let down in the way they are treated by the management. With a realisation that the management at the helm of affairs is not capable of leading the company towards better performance and the value of their investments may be eroded, the shareholders make immediate decision to remove the money and put it places more secure and with possibility of better appreciation.  Difficulty in raising additional capital Lowering of investor perception is among the worst thing that may happen to a company. It finds it increasingly difficult to raise money from new sources and even from the existing pool of investors. Backed by instance of mismanagement, a perception is created that the company leadership lacks suitable talent to manage operations and drive growth. This creates the stock prices to be severely affected and the company’s stocks lose value with existing and future investors.  Absence of proper risk management Bad governance is absence or policies to manage uncomfortable situations or oversight and complete disregard to established policies. In either case the management fails to estimate the risks associated with the particular nature of the business. It may also lead to creating unsecured investments in unsteady business projects. As the nature of risk with existing lines of business rises or more 67 CU IDOL SELF LEARNING MATERIAL (SLM)

investments in unsecured businesses rise the business becomes unsecured and proof of this maybe creditors demanding immediate payments and banks not ready to fund any further the activities of the business. 3.3.2 Indicators of Bad Corporate Governance Bad governance does not happen overnight and neither its inception is hidden from the board. There are enough indicators, which if properly noted on time will allow for corrective actions to be taken and secure the future of the company, else there may disastrous effects to the existence of business and may lead to final closure. The key indicators which signal poor corporate governance practices are listed here as follows: 1. The most visible sign is the presence of a weak leadership at the board. The senior executives virtually take over the ownership of the board and indulge in arbitrary actions without even caring to inform the board. This initial point of breakdown of good corporate governance and any responsible board member should immediately take control of actions of the executives and align the support of other members to immediately rectify the emerging problem 2. Even if the executives are not out of control, a more dangerous indication is when only member or few members take over all board level decisions and completely overlook the opinions of all other members. This could lead to extreme favouritism or putting personal interests above that of the organisation. In this situation all other stakeholders need to immediately come together to confront this undemocratic conduct of the board and in extreme cases should ask for government intervention. 3. The board loses its intention to keep the executives under due accountability and becomes too much dependent upon them even for explanation of reports. This usually happens in family owned business with the patriarch growing old and becoming inefficient to monitor business operations or growing too fond of the executives. 4. The board gives the executives a free hand in their pursuit of profits possibly at the cost of rules and regulations. Since the executives are more concerned about their performance and sales related incentives. They may commit huge sums of money for marketing and sales commissions which in turn may cause a liquidity crisis 5. Companies with inadequate accounting and financial systems tend to over borrow to fund unrealistic growth targets. New projects are constantly being added without considering the effect on the cash flow. The end result of which could be inability to even pay salaries, as a cure they resort to further loans to pay even the operational expenses. Regular control on cash flow management by the board will make this visible at the start. 68 CU IDOL SELF LEARNING MATERIAL (SLM)

6. On the other hand complacent board or executives focus only on existing projects and ignore creation of future prospects to grow the business. 3.4 EXAMPLES OF FAILURE OF CORPORATE GOVERNANCE IN INDIA PNB-Nirav Modi Scam The Punjab National Bank scam involves the issue of fake letters of undertaking. The jeweller and designer Nirav Modi, his uncle Mehul Choksi, their relatives and some PNB employees are among the major accused in the case. Nirav along with his relatives evaded arrest and escaped the country in early 2018, before the case could be reported and investigations could start. PNB scam has been named as the biggest fraud in the history of India's banking. The employees issued fake Letters of Undertakings to fund his import of pearls. While as per RBI norms such LOUs can be used for 90 days, the bank staff used them for period of one year. PNB employees manipulated the SWIFT network used to transmit messages to Banks on fund requirement. While all this was done, the transactions were never recorded in the bank’s record system, this kept the ongoings to be unknown to PNB management for years. The scam started with the first fraudulent guarantee issued from PNB in March 10, 2011 and continued for over 6 six years. Finally by May 2018, when the scam got noticed it was worth more than 14,000 cores. The Satyam scandal Satyam being a leading IT firm at one time, and also won the Golden Peacock Award for Good Corporate Governance. While all was going good the management went in for fraudulent accounting practices and went into a deal with the auditors and the chartered accountants that this not be reported to the investors or other stakeholders and even the board was kept in dark of this connivance. The scam came to light in December 2008. The Chairman Ramalinga Raju attempted to falsify the accounts of the company to about Rs. 7,000 crores. A scam which went on for more than 7 years involved creating 7,561 fake bills which could not be detected by the auditors. Through this he managed to inflate the revenue of company by more than Rs. 4,700 cores and was successful to drive up the stock prices of the company. With this inflated revenue he wanted to invest in firm Maytas Properties and Maytas Infrastructure both of which were owned by his family members. The board cleared the investments, however the news got leaked and the investors vehemently opposed the idea and went on to file lawsuits against this decision. It was later that Raju himself admitted to confessed to public about the misrepresentation to the accounting practices that had been 69 CU IDOL SELF LEARNING MATERIAL (SLM)

done by him. He stepped down from the position and he along with 10 others were convicted for 7 years in prison. The company was later taken over by Tech Mahindra. The Satyam case was a major turning point in Indian industry and major industry associations like CII, SEBI and others began to look for implementation of stricter corporate governance norms. 3.5 THE CORPORATE GOVERNANCE MECHANISM As we seen Corporate Governance has been an emerging concept, partly motivated by self- realisation of the leadership and board members to streamline the processes of the organisation and partly due to presence of scams and mismanagement of company affairs. It has been seen that if the executive is not subject to accountability and transparency in operations there are possibilities of bypassing rules and laws of good governance processes for short term profitability and also for personal gains, all at the expense of robust company image. Therefore to support this effort of ensuring that good governance policies are properly framed, disseminated, implemented and audited for desired effects, fairly and uniformly across the organisation, there need to be a formal structure to this effect. As we have the scope of corporate governance runs across the frontiers of economic objectives, social benefits, legal obligations, through organisational relationships. So any mechanism that aims to support the process of good corporate governance needs to be sensitive to the requirements and also work in complete unity of such domains. Any mechanism that will be used to suffice this purpose also should ensure the responsibility:  of the board and its members towards the shareholders,  of the large shareholders towards small and minor ones  of the company management before the board  of the company management before its employees and customers and the society in general The main objective of corporate governance mechanism is to ensure that the rights of stakeholders are not curtailed by either the board or the top management. It also necessitates the company management to be held accountable towards the stakeholder to build trust and safeguard stakeholder’s interest. The corporate governance mechanism should also be subject to inspection and audits and how it can be improved while regulating business activity. Simply stated, corporate governance mechanism is a system of checks and balances which may influence the decision making by management, it also seek to completely eliminate or reduce the discretionary power of the executive so it is aligned to rules and policies that are in existence. Based on the influence which they create and their relative importance there are 70 CU IDOL SELF LEARNING MATERIAL (SLM)

two types of different mechanisms, the internal corporate governance mechanism and the internal corporate governance mechanism. 3.5.1 Internal Corporate Governance Mechanisms Internal mechanism is more concerned with how the business weaves across processes to enhance shareholder capital it is composed of promoters, board of directors, internal financial and HR auditors and other internal processes to support the functioning of the company. The internal mechanism is the first line of monitoring and control when corrective measures can be taken whenever it is found that the business processes are deviating from the rules and regulations.  The Board of Directors are the pivot on which the affairs of the company function. There are typically three types of directors on the board:  Internal directors: are the major stakeholders of the company, who work from within and may own some part of the company  External directors: are not stakeholder of the company, who may be appointed by major external stakeholders like banks or government, they may be on the board of other companies also  Independent directors: do not have a relationship with the company, are not part of the company's executive team, and not involved with the day-to-day activities. They meet on important matters and present their opinions and decisions, independently. For smaller and closely held companies they are most important and the sole decisions making group. They have more authority than any other group or individual and through regular motoring they keep a control on the company activities. It is their prime duty to safeguard the interest of shareholders’ capital and that of other stakeholders as well. Irrespective of their type, the board is accountable for their decisions and are authorised to make direct appointments and intervene in any executive order.  Board Committees: are small groups, consisting of original board members, identified for some specific task based on their expertise. For e.g. There can be a board committee on governance or research or liaison with government agencies. At times the committees are temporary an are dissolved as the task if completed while others continue to work in close coordination for more regular assignments. It is not mandatory to appoint committees, yet it helps focused group efforts to find expert solutions and advice. Board committees are bounded by company and government regulations.  Financial Statements and Auditors: are the prime documents which record all the transactions and ownership information of any company. While auditors are external party involved in checking the authenticity of the records, this is for every quarter and 71 CU IDOL SELF LEARNING MATERIAL (SLM)

finally at the end of the accounting year. Auditors need to maintain the authenticity of their reporting and work independent to the board or any other management staff of the company.  Ownership Structure: companies have different types of ownership that range from sole proprietorship, partnership to big joint-stock corporations. With growing complexity of structure the need for monitor and control becomes more vital while the process becomes more indirect. 3.5.2 External Corporate Governance Mechanisms External mechanism is how interest groups and society wants the company to be governed. These are due to the recommendations of external stakeholders or at times regulations laid down under legislations. Major components of external mechanism are external auditors, competitors, department of Company affairs, market factors, trade unions and labour market etc. External mechanisms are recommended by external stakeholders such as industry associations who would be interested in laying guidelines for best practices.  The Financial Market: Stock market is the reflection of the company’s current earning position and what the investors perceive it to be in future. The share of the company fluctuates as the market changes its outlook towards the company, this happens either due to changes internal policies of the company or changes in external factors. With good governance and positive outlook investors may want to buy stocks of the company, with higher demands the stock prices rise, while with not a very encouraging prospect for the company existing investors would start selling the stocks, that would pull the prices down.  The Competitive Market: Competition affects the business in way that that the company will always want to offer better products as compared to competition. This results in research for improving the quality of offerings or lowering the cost of producing. Competition is also a restraining factor when its keeps a check on false claims by business  The Labour Market: The labour market is both a supplier of skilled talent to the company and also it harms the company interest if more people may want to leave the company. Company management has to be aware of prevailing remuneration norms and benefits to staff, in case the internal norms do not match the outside attractions people will be bound to leave for better prospects. Similarly, when staff feel insecure due to poor governance and do not see a future in the organisation they would still leave even if their current salary levels are comfortable. 72 CU IDOL SELF LEARNING MATERIAL (SLM)

3.5.3 Issues related to Mechanisms of Corporate Governance With respect to Indian corporate sector, corporate governance is not very profound as most of the business are either closely held or family owned. Most of the shareholders for such companies are either family members or close associates who rarely care about the way the business is managed, they have personal trust with the owners or the leadership and consider the executive to be outsiders. Therefore, for them there is no need for a monitor and control mechanism to be place. 3.5.4 Statutory framework of corporate governance in India With a vision to ensure that companies resort to appropriate mechanism of governance, the Indian government has legislated certain standards which need to be followed: 1. Standard listing agreements with stock exchanges carrying: Companies listed on stock exchanges need to sign certain listing agreements 2. The Companies Act, 2013 seeks accountability and transparency and following statutory provisions under conduct of board meetings, board committees, audit, financial transactions and disclosures of financial information 3. Accounting norms and standards: The Institute of Chartered Accountants of India under the New Companies Act, Section 129 demands transparency in all company accounts and policies. ICAI also seeks to ensures entries in financial statements should comply to the accounting norms and standards. 4. Securities and Exchange Board of India (SEBI): issues regular guidelines for listed companies regarding rules and regulations for governance, to keep the interest of investors protected. 5. The Companies Act 2013, in its latest update has increased the number of topics which that can be covered under board meetings. The new suggested topics aim to improve the diversity of the board, increase delegation of CSR Work, increased commitment to minority shareholders and improving the levels of corporate governance. 3.6SUMMARY  In the current increasing global environment, there is a need to create higher commitment to good corporate governance mechanism.  Higher commitment to corporate governance improves faith, clarity and answerability among business operations.  Good corporate governance is the medium through which it is possible to make sure that voices of stakeholders, irrespective of their position are heard by the board. 73 CU IDOL SELF LEARNING MATERIAL (SLM)

 Good corporate governance, through democratic functioning of companies, ensures that voices of individuals are heard and respected, irrespective of their position. It is an awareness that different perspectives result in best possible decision making. It is also important how decisions are made today and sets the tone for similar actions in future.  Good corporate governance is marked by the benefits of: risk mitigation; improved flow of capital; improvement to the company’s reputation; enhanced effectiveness in decision making process; more responsive reporting structure; higher compliance to the law process; resulting lower employee attrition and marked reduction in troublemaking behaviour  Investors are always watching the governance structure of companies and today they are equally interested in the long term appreciation of the stock prices as with short term profitability. Therefore companies marked with good corporate governance tend to have strong presence at the stock market.  Presence of a strong leadership, skilled based selection of board members, keeping the interest of the company before personal interests among others are important principles, upon which an effective structure of good governance is established.  As much as it is important to setup process of good governance within corporations, similar is to make sure that the principles and policies are shared among all the stakeholders. This reduces the chances of executive misusing their powers and conduct activities detrimental to the long term success of the company.  The board is bounded with the concept of ‘Comply and Explain’, that is to commit 100% to meet the regulatory requirements and also show 100% to share information or explain for any queries that may come up at a later stage in the audit process.  Contributions of good corporate governance are defined by, yet not limited to: enhanced confidence among shareholders; ease at securing additional capital to power inorganic growth; positivity in perception of society towards the company.  The challenges to commit to the sound policies of good governance are more profound to be the internal commitment of the board rather than the effect of external factors.  Bad governance is not planned, it simply happens in the absence of good governance.  Weakness at the board level or over reliance on the executive for reporting and feedback make the board members to be disconnected with regular operational decision making, this reduces the accountability standards of the management which may indulge in unethical practices.  Major international and national examples of corporate scams have proven that the top management needs to subject to stricter norms or accountability and transparency to avoid repetition of such incidents. 74 CU IDOL SELF LEARNING MATERIAL (SLM)

 Prolonged incidents of bad governance leads to the company loosing shareholder confidence, with likely effect on raising additional capital for growth or expansion.  Good mechanism of corporate governance seeks to ensure that the rights of stakeholders are not curtailed by top management.  The mechanism of corporate governance is composed of Internal and External components.  Internal mechanism is about the responsibility towards policies and procedures, while external mechanism is about effect of authorities imposing norms and conditions on the business operations. 3.7 KEYWORDS  Corporate Governance; it is about the affairs are managed to maximise shareholder wealth, through integration of effort of all stakeholders while following the principles of accountability and transparency.  Statutory Framework: the set of laws and regulations as defined by the government for that particular point of time.  Shareholders Rights and Interest: Disclosure of information, effective use of capital and maximise returns to investments.  Information Transparency and Disclosure: the right to know about the affairs of the company through voluntary disclosure or being answerable whenever a query is raised  Accountability: the prime feature of the executive that makes them answerable to the board and the society for decisions and actions made by them  Corporate Governance Mechanisms: external authorities and internal responsibilities having power to influence management decisions and eliminates the discretionary power. It acts to control and create a balance to safeguard stakeholders’ interests. 3.8 LEARNING ACTIVITY 1. Mention the benefits ofGood corporate governance and how it can help improve shareholder confidence to the company? ___________________________________________________________________________ ___________________________________________________________________________ 2. What is the role of Board of Directors to ensure the Internal Mechanism of Corporate Governance? ___________________________________________________________________________ ___________________________________________________________________________ 75 CU IDOL SELF LEARNING MATERIAL (SLM)

3.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Good corporate governance. 2. How the reputation of a company can be defined? 3. What is the composition of board of directors? 4. Differentiate between organic and inorganic growth in business. 5. List down the components of external mechanism of corporate governance. Long Questions 1. How has the need of good corporate governance emerged with the growth of business complexity? Do you feel it may be a restriction in the growth of a business? 2. Why are shareholders equally interested in the management of company affairs, when their prime motive is to increase returns on capital invested? 3. Comment on the role and composition of board members to ensure strong corporate governance principles. Why is it required to have a democratic process to be followed during election of board members? 4. Is it correct for the board to completely delegate all operational responsibilities to the top executive and only focus on planning for the long term growth of the company? 5. Discuss the challenges that threaten the implementation of good governance strategies in big corporations. 6. Why do you believe that smaller; family owned and closely held businesses also need to think big in terms of maintaining a robust system of corporate governance? 7. Do you think that there had been a collapse of control by the board in some recent big corporate scams? Support your answer with live industry examples. 8. Elaborate on the risks which a company will be subject to if the management fails to implement a good governance structure within. 9. Do you agree that failure of corporate governance mechanism is not an overnight incident? Discuss factors that could indicate its degradation from a very early time. 10. Discuss the components of internal mechanism of corporate governance, by giving relevant examples. B. Multiple Choice Questions 1. In the long run investors are always interested in 76 CU IDOL SELF LEARNING MATERIAL (SLM)

a. maximising the value of their investments b. good governance of the company c. compliance to all statutory requirements d. All of these 2. Public perceptions towards business is _____________________ a. Interest of society towards business activity b. How the public looks at the company c. Seeking benefits from the business d. Interest to harm the business activity 3. ________________________ is the commitment of business to meet all government rules and regulations. a. Compliance to regulations b. Interference in affairs c. Democracy in appointments d. Transparency in operations 4. The interest of companies seeking only high returns is called ______________ a. Growth oriented b. Success oriented c. Profit oriented d. Compliance oriented 5. The prime objective of corporate governance mechanism is to guarantee ___________ a. payment of taxes on time b. no harm is done to the society c. rights of stakeholders are not curtailed d. full cooperation of all board members Answers 77 1-d, 2-b, 3-a, 4-c, 5-b 3.10 REFERENCES CU IDOL SELF LEARNING MATERIAL (SLM)

Text Books:  S.A. Sherlekar, Ethics in Management, Himalaya Publishing House  William B. Werther and David B. Chandler, Strategic corporate social responsibility, Sage Publications Inc  Robert A.G. Monks and Nell Minow, Corporate governance, John Wiley and Sons Reference Books:  W.H. Shaw, Business Ethics, Cengage Learning  Beeslory, Michel and Evens, Corporate Social Responsibility, Taylor and Francis  Philip Kotler and Nancy Lee, Corporate social responsibility: doing the most good for company and your cause, Wiley  Subhabrata Bobby Banerjee, Corporate social responsibility: the good, the bad and the ugly, Edward Elgar Publishing  Satheesh Kumar, Corporate governance, Oxford University, Press 78 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 4 STRUCTURE AND PROCESS OF CORPORATE GOVERNANCE STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 Issues in corporate governance 4.2.1 Issues related to Board and Board members 4.2.2 Measures to solve issues of Corporate Governance 4.3 Globalisation and corporate governance 4.3.1 Globalisation – an introduction 4.3.2 How Global is Corporate Governance? 4.3.3 What drives corporate governance globally? 4.3.4 The multinational dimensional of Corporate Governance 4.3.5 Developing a Framework for International Corporate Governance 4.3.6 Introduction of ISO 2600 4.3.7 Closing thoughts on Globalisation and Corporate Governance 4.3.8 The emerging trends in corporate governance 4.3.9 Advantages of Corporate Governance 4.3.10 Disadvantages of Corporate Governance 4.4 Summary 4.5 Keywords 4.6 Learning Activity 4.7 Unit End Questions 4.8References 4.0 LEARNING OBJECTIVE After studying this unit, you will be able to:  State the current issues being faced by Corporate Governance and how building the correct board structure can solve them. 79 CU IDOL SELF LEARNING MATERIAL (SLM)

 Explain the how Globalisation has grown to be the most important development in world economy  Appreciate how the growth of globalisation has impacted the rise of awareness about sound corporate governance policies even in developing countries  Explore the recent trends and developments in the concept of corporate governance around the world.  Discuss how the benefits of Corporate governance can be used as advantages by companies to face competition 4.1 INTRODUCTION Corporate governance is the term used to describe the balance among participants in the corporate structure who have an interest in the way in which the corporation is run, such as executive staff, shareholders and members of the community. Corporate governance directly impacts the profits and reputation of the company, and having poor policies can expose the company to lawsuits, fines, reputational damage, and loss of capital investment. 4.2 ISSUES IN CORPORATE GOVERNANCE The past chapters on Corporate Governance have introduced us to the importance of the concept to the nature of business activity. Business cannot survive in isolation and also cannot commit itself solely to the objective of profit making. The past few decades have seen the rise of globalisation, how it has grown from an emerging concept of 1980’s to the current level where no business, small of big, conducted by organised boards or held solely by a proprietor are all reaping the benefits of connected market place. People want to be constantly on the lookout for new opportunities. Buyers and sellers rarely meet in person, even the sizable portion of work force has adjusted to work remotely, making the internet a vast workplace. Such a scenario all the more demands presence of good governance, where trust between unseen business partners is of supreme importance. To support this, there have been many changes in the way even governments look at the functioning of companies. Various committees and task force have been setup, either directly by government action or by industry associations or quasi government agencies. The common objective of all is to ensure better regulatory framework among companies to build trust towards investors and other stakeholders. The last two decades have been specially marked by increasing occurrences of corporate frauds and failure by government agencies to pre-empt such possibilities. At times, as we have seen in the PNB-Nirav Modi or the Kingfisher-Vijay Mallya cases, the culprits have 80 CU IDOL SELF LEARNING MATERIAL (SLM)

even managed to evade arrest and till today they are settled abroad while the country’s judiciary is still considering options to get them to stand trial. Although the legal framework has become tighter and to achieve good governance and ensure the results of such good practices is the top priority of the government, it is still full implementation is still eluded due to issues very much inherent to the business structure and past practices. While we have already connected ourselves with how with lack of good governance companies may in fact, unintentionally, turn towards Bad governance. This section will explore major issues faced towards the design and implementation of Good Corporate Governance. Following are major issues which affect corporate governance practices: 4.2.1 Issues related to Board and Board members 1. The right composition of Board No one denies the importance of board, its members towards the design and practice of good governance. Good practices and even legislation demands a healthy board to be a mix of talent and back ground, it is also recommended to appoint at least one women member to create diversity on the board. Industry experience is a proof that companies led by a capable board comprised of diverse and active members ensure some very strong governance practices. The real issue is to transfer the commitment and compliance from mere paper work to be ‘from the heart’. Till board members are selected from among family members or close acquaintances or even of recommendations of existing members, such a professionalism will not be possible. The interesting fact is that even with such unprofessional attitude towards the selection of members, they still are able meet the legal requirements. Therefore is a need to some up with innovative answers that would meet statutory requirements yet ensure professional mix of talents. Some such measure could be rate the diversity of the board based on experience and skills and publish the results along with other company information, so the stakeholders will be aware of the qualifications of the leaders who have been entrusted to guide the company which is setup on their funds. 2. Performance Evaluation of Directors Performance evaluation of directors may have been on the regulatory wish-list, its real need has been felt off lately. SEBI decided to release a document on Board Evaluation in January 2017, through which it aimed to lay down criteria to frame objectives of performance evaluation and also how this will be conducted for the board members. There is valid dilemma among the industry, whether to publicise the findings of such 81 CU IDOL SELF LEARNING MATERIAL (SLM)

performance evaluation to the open public or keep them secure only for purview based review. While all the stakeholders would be interested to be aware of such findings, it correct to say that too much publicity of such a confidential document may be detrimental to the interest and reputation of board members. Especially when there are external directors or those who represent themselves on boards of other companies as well. While there is no doubt of the need for such evaluations, however their findings, even if quasi confidential should be acted upon, especially during the process of re-election of directors. 3. The role of Independent Directors The step towards appointment of independent directors was a decisive and major step to ensure presence of faces who would not be under any duress or coercion to toe the line with the in-house directors. It was believed that independent directors will stand up against the possible actions of internal ones if they tried to circumvent any rules or tried go against the interest of stakeholders. The idea was good, however in practice independent directors would rarely be committed to represent the interest of other stakeholders. In such situation of disagreement there is a high probability that the intention of promoters will be final and their arguments will mostly rule over independent directors’. Regulations and norms have been tightened, their roles have been defined more clearly and the audit committees have also been defined, yet there is still a lot of be achieved from this step. A logical next step could be that of restraining the powers of promoter in the appointment of independent directors and possibility of giving some veto power to them. 4. Removal of Independent Directors Closely related to their appointment, mostly done as a tick bow exercise, the removal of independent directors has also been a subject of controversy. At times whenever there has been difference in opinions and conflicts among the members and they have stood against the promoters or groups led by the promoters, independent directors have axed from their positions, as under the current law they can be removed easily. Such arbitrary actions by promoters further demeans their fragile position and supports their attitude to just attend meetings and comply with formalities, rather contribute in their true efforts. There has been a demand by SEBI to add transparency in their appointment and removal, that there need to be checks for either of these actions. A possibility that is being considered that it may be subject to approval of majority of shareholders. While agencies could go on adding further checks and balances, this will be weak link in the functioning of independent directors in particular and the board members in general. 82 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Accountability towards Stakeholders Even if we consider the vulnerability of independent directors or the heavy handedness of the promoters, it is a common understand that either of them has been entrusted with important task. In case the independent directors have to empowered more, they need to be also subject to higher standards of accountability. In reality they have been invited to contribute their special skills and experience to the betterment of the company, if they spend their time merely to the formality to conduct meetings or succumb to the pressure of promoters, they have not done justice to their profile. In all these situations, the true loser would the stakeholders, who are directly not represented on the board. The revamped version of Indian Company Law in 2013 specifies that directors are dutybound not only towards the shareholders and the interest of the company, but their responsibility is also towards the staff, the society and also towards the protection of environment. This carries the standards of accountability to even greater heights, yet the same question of enforcement casts a doubt on its effectiveness. This leaves the opportunity of Annual General Meetings where common shareholders can confront the directors and pose direct queries. 6. Design of Compensation for Executive Given the fact that the board in limited to designing objectives and regular monitoring, the onus of work and execution of strategies is on the executive. While the board and members are usually subject any practical accountability, the executive is always under the eye of board and also the shareholders how the company operations are conducted. The first line of blame also falls upon the executive in case of failure of policies, rarely the board is held responsible for wrong policy making. It is normal that the executive remuneration packages be commensurate to the work being done and also to attract and retain best talent. There also needs to be a comfort buffer in earnings that would provide them support in case they may be removed for any reason. Although the claim of transparency requires compensation packages to be made public, there are always ways remuneration can be manipulated through fringe benefits, this is yet another way to wrongly report a vital information to stakeholders. The current version of Company law requires the presence of a committee on nominations and remuneration. This committee comprised of mix of directors is required to frame compensation policies for employees at top level. A logical next step to be considered could be getting the compensation packages of top management approved by majority shareholders. 83 CU IDOL SELF LEARNING MATERIAL (SLM)

7. Succession Planning and Control given to Founders Big businesses usually grow from humble beginnings, where the role of promoter is most important. As companies grow the owner occupies the position of promoter director and his influence of company affairs remains as strong. Due to the personal clout enjoyed by him, his personal opinions may be challenged even by the other board members. This is fact that identity of the company and that of the founder are usually unified. Irrespective of the presence of board the founders or the patriarchs refuse hand over management decision making to the board. Even with capable hands present in the board the promoters continue to impress upon them for decisions and control. They also fail to nominate successors to the business. It is recommended that the promoters should spot talent early during the appointment of directors and start to groom the talent for later handover of company decision making to new generation. A recommendation could be that when PE funds are pumped in the new shareholders should demand for distribution of power and nomination of eligible successors. 8. Risk Management As the company operations get bigger the board members increase their dependence on the executive for monitoring and reports. The media is also interested in even slightest of changes in big corporations and any slight change, good or bad is immediately highlighted as news. This has a huge effect on the risk bearing capacity of companies. Gone are the days when management could manipulate auditors or even stocks, today such incidents will either reported by the press or by investors themselves. Therefore it is necessary to frame appropriate policies for managing risks in the business. The role of independent directors is quite important here to objectively asses’ risks and involve the other board members to work for an effective system reduce day-to-day occurrences of business risks. 9. Privacy and Data Protection A normal extension of business risks is the privacy and security of confidential data. In absence of well-defined policies to manage this very sensitive issue there can be serious leak of data, or with undue strictness necessary data will not find its way to support decision making leading to delays and loss of precious time. The board members need to improve their knowledge and understanding about emerging issues in digitalisation and cyber security so they can be directly involved to understand the current status at the company and also guide for possible changes that may be needed. With the approval of board decent amount also needs to be invested in maintaining data centres or being outsourced to specialist third party vendors. 84 CU IDOL SELF LEARNING MATERIAL (SLM)

10. Board's commitment to spending on Corporate Social Responsibility Companies in India are bounded to spend 2% of average of three years of profit on projects related to social benefits. This is a mandate to run Corporate Social Responsibility (CSR) activities. While they can claim tax benefits on such spends they are also accountable in case they mis to spend the mandatory amount in these activities. The board of directors is then liable to disclose this along with reasons in the annual report. In the year 2018, more than 5,000 companies received notices for not spending in accordance to the requirements, while in the same year the total CSR spends reached about Rs. 50,000 crores. While the spend on this account may not immediately or directly help the company, this is reflection of commitment of the board towards caring for the society. The above are some of the issues of related to board of directors which effect corporate governance, besides there are some others, which have been addressed under similar topics in previous chapters, but are just being given here for reference.  Fairness in treatment towards stakeholders to ensure equality while violations should be treated with punitive action.  Transparency in operations and willingness to share information of financial transactions to meet legal requirements.  Leadership that is committed to lead a healthy culture of corporate governance and promotes the concept through self-commitment and actions.  Stakeholder engagement with business activities, all stakeholders should all time be kept involved to improve their commitment to the business, the least of which is to be kept informed regularly  Accountability is by far the cornerstone of good corporate governance, be it members of board, the top executive or other staff, each one is answerable for their individual and group decisions or actions 4.2.2 Measures to solve issues of Corporate Governance Following identification of issues that face corporate governance, the board needs to take sufficient steps to overcome and involve the support of executive. Both the board and executive need to share information, ideas and information and work together to avoid possible clashes and create harmony within the organisation. Following are some measure to avoid emergence of issues in proper governance: 1. Awareness that good governance is not just due to compliance The board needs to balance the conformance towards corporate governance with its actions to formulate policies that improve the performance of the company. The board 85 CU IDOL SELF LEARNING MATERIAL (SLM)

also needs to demarcate major functions which will be performed by it and those by executive. Clear understanding of each-others roles and responsibilities go on to maintain good relations between both the parties. 2. Clarify the board’s role in strategy There is a universal realisation that the strategic direction of a company is through the willingness of the board. Strategy development at board levels ranges from giving approval to the development and it must be clear with the management to its implementation. Usually the board members are not involved beyond the point of strategy development and in real sense they need be also as it is the domain of the management or the executive. There should not be any overlap is this regard as then there will be question of whose accountability is to considered. 3. Monitoring performance of the organisation Another way of to rectify the issues is through regular monitoring performance of organisational activities. As the board is responsible for all legal compliances, it needs to be updated of latest trends within the company. Regular monitoring also helps to align the corporate strategies to the expectations or the promoters and the board. An important aspect of reporting by management is following similar formats to help the board members compare latest ones with historical data, it becomes tedious and sometimes defeats the purpose of reporting itself when data flows in ununiformly or reports fail to capture the relevant information. 4. Understand that the board employs the CEO In big corporations when the CEO grown through the hierarchy, he acquires the identity of being above the purview of the board. The board always remains above any of the executive and is responsible for the appointment, review of performance and if the need arise for the replacement of the CEO. Both have need to work to support each other, the board to provide strategic direction and the executive to achieve defined objectives. 5. Risk governance is board responsibility Another major responsibility of board is the establishment of effective risk management system to ensure proper control of internal processes. Even while being engaged in provide strategic direction to the organisation, the board should never lose sight of imminent risks that may harm the functioning of the company. 86 CU IDOL SELF LEARNING MATERIAL (SLM)

6. Directors to have ready and sufficient information It is duty of the executive to provide regular reports to the board in whichever format or method they may like. Report requirements may differ among directors depending upon their knowledge and experience, however as discussed previously pre- determined formats are always good to capture the same data without omissions and also good for later dare comparisons. In addition to reports directors should also spend time on interaction with staff and visit company facilities to be in regular touch with the organisation and people. They also need to invest to improv their skills and capabilities or seek professional advice in times of doubt. 7. Build and maintain an effective governance infrastructure Since both the board and executive work together, there is need to have precise delineation of policies regard to each other roles and responsibilities. The board needs to prepare guidelines for organisational behaviour and for proper delegation of work between layers of management and itself. Lack of such guidelines may result in improper sharing of information or lack of communication that may hamper decision making. Effective management requires well set communication channels and the board of directors are the vital starting point for this. 8. Appoint a competent chair Research suggests lack of trust and bad culture associated to the leadership are greater reasons for violation in corporate governance as compared to the structure of the board or the presence of rules and regulations. The chairperson or the board leadership needs to nurture a positive culture and trust among all the members of the board as well as with the management and staff to prevent wrong practices at middle and lower levels of management and employees. 9. Build skills of board members There is always a gap in the skills present and those required to accomplish designated tasks. Who else to better understand this than the board members themselves? While building the first board structure the promoters have to be very clear of the skill requirement from the board members and accordingly select member. While for family owned businesses the choice is somewhat restricted to family members or close associates, it becomes responsibility of the board to improve their skills through regular training and skill upgradation programs. As we see earlier, independent directors are usually chosen for their specific skills in those areas which 87 CU IDOL SELF LEARNING MATERIAL (SLM)

are of core interest to the company or those which may not be but where the promoters lack knowledge and need external help and support. 10. Evaluate and plan for performance improvement of board and directors Like all other employees, right from COE, the board also has to be subject to performance appraisal. Not only to be treated as a good practice, performance appraisal of board members can be through self-appraisal or through help of independent agencies. This brings out their strengths and weaknesses and their working style. There is also harm in sharing the results with the executive so a proper improvement program can be planned. There may not be surprises that gaps visible in the skills of directors may be reflected in that of the employees also, as it is the directors who make policies for recruitment also, so if they themselves lack some skills there is high chance that they will not look for the same in the appointment of the executive. 4.3 GLOBALISATION AND CORPORATE GOVERNANCE 4.3.1 Globalisation – an introduction Globalisation is an interesting concept and today everybody or anybody has an opinion about it. It means different to different people, for a student globalisation is access to international universities either through in-campus admission or thorough online learning. For a banker it means access to funds in international markets and also destinations where capital can be parked in diverse forms for lucrative returns. For a manufacturer it is the ability outsource raw material at cheap cost and similarly find a market where the finished product can be sold at the highest price considering currency exchange rates. For others it is watching latest movies sitting here on Star Movies or on Netflix. Close to business globalisation is the unrestricted movement of goods, services, capital and skills across international boundaries. It also joins ins different economies, technology, cultures and even governance. It is not limited to economic domain only, the effect of globalization has spread to religious, social, environmental and cultural dimensions. It is the duty of board of each company and largely that of governments also to protect themselves from the negative effects of globalization. Yet is so pervasive that none can stop it from affecting themselves, the only way we can deal with globalization is through being competitive and planning for superior returns to the stakeholders. It’s not only that the sales of a company will be affected by international, better returns lead to skilled people moving to places with new countries, companies themselves may prefer to deal with international consultancy firms due to their broader experience. Globalisation has also opened new investment opportunities to investors. Banks, financial institutions have always been funding offshore markets, now companies into manufacturing, services and consultancy are free 88 CU IDOL SELF LEARNING MATERIAL (SLM)

moving around the world seeking existing companies with whom they can tie up and operate in foreign countries. While economic goals are the first to be considered while investing in foreign markets, the most important aspect that investors consider is the good governance of the target companies. So we have come to the point that makes us realise that good governance is not just about satisfying the needs to local stakeholders it is also the key to survive and grow in the global market place. 4.3.2 How Global is Corporate Governance? In a survey conducted by McKinsey in 1996 across corporations in US, nearly two thirds considered giving advantage to well governed companies and were ready to pay a higher price to acquire them than what the economic rate commands for them. A similar survey was repeated again in the year 2000 and the results had not changed. This suggests that investing companies would like the comfort of good governance to be deciding factor when they want to expand by buying in other existing ones, no one would be interested to buy companies plague with internal unrests, unhappy investors or those under litigations. Investors would rather spend their energy in growing the business rather than being tied up in solving pre- existing issues. 4.3.3 What drives corporate governance globally? The end of the twentieth century saw some happenings which have created a greater interest in corporate governance globally, these can be viewed as: 1. Growth of Corporations: the entire past century saw the emergence of huge and dynamic companies, which have efficiently managed shareholders worth thousands of billions of dollars in destinations around the world. Multinationals have perfected the art of selling same or differentiated products in multiple countries with astonishing results, at places their power and clout even rivals that of governments. On one side these corporations have managed to sell their products while on the other they have also introduced good corporate governance practices wherever they have either acquired or set up their business 2. Deregulation or removal of tariffs and customs duties on imports, and opening of markets supported by new technologies in communication, distribution and investments have made countries come together. The erstwhile WTO laid the foundation of free trade by removing barriers, duties and quotas. Emergence of new trade blocks of NAFTA, EU and SAFTA are proof of economies opening up. Working under new norms of openness is another shot in the arm for fairness, transparency and corporate governance as in general. 3. The rise of Foreign Institutional Investors (FIIs), these are banks, finance companies and even pension or insurance, are often termed as corporate owners. While these funds may not buy a company they invest heavily in stock markets around world. 89 CU IDOL SELF LEARNING MATERIAL (SLM)

They are also preferring companies with strong records of corporate governance and mark them as destinations of lower risks. 4. The Asian crisis, the financial crisis that began on Malaysia towards the end of the century spread rapidly to Brazil and even Russia and other countries. This brough to light the effects of weak market regulations, and absence of measures to protect investor capital. Such collapse of individual companies contributed to compound effects on economies and countries. Within days the financial markets in these countries crashed and the effects were felt across the world. The findings were for all to see, the counties had opened their market to foreign investment without working to ensure the health of internal industry. Insufficient disclosure of financial data, absence of capital market regulation, lack of protection of minority shareholder and the failure of board of directors to control the executive and lack of accountability were glaring aspect that led to the mismanagement of funds and resulted in FIIs leaving overnight. Increasing competition due to rising globalisation makes running business more challenging, the consolation is that now competition will not have any bad effect on corporate behaviour. With growing awareness resultant of globalisation, companies have started giving give equal importance to ethical, social and environmental issues as compared to the pursuit of economic motive. 4.3.4 The multinational dimensional of Corporate Governance With globalisation not only corporations have come closure, it is also the governments that have come together to explore better ways to regulate business locally and also the governance of MNCs. When multinationals move out of native countries they area ware that they will not find similar environment in foreign countries, therefore they move out with the intention to create similar environment even in foreign countries. However the legal setup in foreign lands may be different and may not be conducive to the working styles of MNCs, therefore certain common systems need to be created to attract foreign direct investments (FDI), while also maintaining autonomy of host countries. Certain systems need to be in place as follows: 1. A well developed and regulated stock market; that allows institutions and retail investors to come together in pursuit of putting their savings to fund growth of corporates. 2. Local laws that recognise the true ownership of companies as that of shareholders and protects the interests of small and foreign investors. Equitable and fair treatment to overseas shareholders in times of company disputes. 3. Not just laws, but ensuring enforcement of laws towards protection of shareholder’s interests. 90 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Clear, easy and transparent mechanism for repatriation of profits to the host countries. The local directors should not create hurdles in profit sharing and return of profits to the original country of the MNCs. 5. MNCs usually look at acquiring local companies that may have sizable assets but are down with operational issues. They look for established laws regarding bankruptcy, this would allow the local company to be easily bought by the foreign partner. 6. One of the biggest challenges that MNCs face in foreign lands is the possibility of lack of transparency and corruption at the higher levels. Many foreign collaborations have fallen apart due to government departments in local countries dragging proposals for extended times or even cases of bribery or corruption. These all need to be regulated to create a safe governance environment for local as well and foreign companies. 7. Presence of corporate laws and redressal system, which has to be fair to all the parties. Business dealings at times attract differences and may become litigations. A established and fair legal systems always creates confidence among the investors 8. Presence of other supportive systems such as: association of auditors / directors / company secretaries / executive / rating agencies, they all are support functions to the business environment. 9. Permission to source funds from local institutional investors as well as FIIs 10. Unbiased and trustworthy media , whose services can be used to advertise, disseminate information and also to attract investors The past two decades have seen many private and government promoted institutions being committed to ensuring corporate governance reforms in their respective countries, the benefits of which have also been felt globally. They have successfully issued guidelines or codes of conduct for the protection and regulation of the industry. Subject to local laws and customs these guidelines are somewhat uniform to promote higher accountability of board towards shareholders, transparency in dealings, rights of independent directors among others. Following is a partial list of guidelines and codes of best practice being developed internationally: International agencies:  European Association of Securities Dealers (EASD)  Euro shareholders  European Association of Securities Dealers Automated Quotations (EASDAQ)  Commonwealth Association for Corporate Governance (CACG)  International Corporate Governance Network (ICGN) 91 CU IDOL SELF LEARNING MATERIAL (SLM)

 Organisation for Economic Cooperation and Development (OECD)  OECD Business Sector Advisory Group on Corporate Governance  European Bank for Reconstruction and Development (EBRD)  Centre for European Policy Studies (CEPS), Indian agencies:  Securities & Exchange Board of India (SEBI)  Confederation of Indian Industry (CII) 4.3.5 Developing a Framework for International Corporate Governance The first step towards realisation of corporate governance was the Cadbury Report of 1991 in the UK. The committee was constituted based on rising concerns about financial reporting and accountability. This has been followed by steps being taken in American and European markets to regulate business. UK and other European countries prefer a system of codes and principles, while the American approach in this regard is more clear rules and regulations. Implementation of principles is much slower and more of voluntary in nature while rules can be implemented more stringent. Rules draw a line between what is acceptable and what is not unacceptable, but one thing rules become obsolete with emergence of new situations, where principles are more effective. In addition there are some models of corporate governance which differ with the customs and traditions of the countries where they emerged:  The liberal model: which is more common in UK and American continent gives importance to the interests of shareholders, it encourages innovation and promotes competition on cost based approach  The coordinated model prevalent more in mainland Europe, Japan, in addition to priority of shareholders works for the interests of other stakeholders also, viz: employees, executive, suppliers, customers and the society in general. It encourages incremental innovation and competition based on quality of products and service 4.3.6 Introduction of ISO 2600 As step to make and measure commitment to CSR more scientific the ISO 26000 was introduced in 2010. It was developed as a guidance note for corporations for CSR, unlike other ISO standards it is not used for issuing certification. It seeks to provide guidance on issues like:  social responsibility and ways to identify and engage with stakeholders;  explore ways to promote the idea of CSR within the organisation 92 CU IDOL SELF LEARNING MATERIAL (SLM)

4.3.7 Closing thoughts on Globalisation and Corporate Governance Over the past decade the latest of addition to good governance in the sustainability of business. This is a normal offshoot due to immense pressure on natural resources and awareness about environmental degradation. The aim of sustainability is choices to be made about use of resources should not limited to the choices which are being made now, it’s about what choices our children will have about using resources in future. Corporate governance now has to make sure that organisations are equally concerned about preservation of the environment, shift towards use of renewable resources, reducing emissions. Tracking carbon footprints and regulations of CO2 emissions are examples of heightened awareness about the issue. As we have seen that globalisation has shaped the modern definition of corporate governance. Due importance to future of planet necessitates it to be more than just regulations or principles and concern itself with CSR and sustainability of future generations. 4.3.8 The emerging trends in corporate governance With the universal acceptance of corporate governance growing, the way the concept is treated has become more diverse than it was imagined when it all began. The doors of board of directors are now open for outsiders and professionals with special skills and experience. Even when family members are chosen they are being groomed for professionalism. Agenda for board meetings has now broadened to include stakeholder’s interests. Board members now prefer background of strong governance while choosing for senior executives to lead the company operations. Such developments were not expected maybe a decade ago, as previously pointed Corporate governance has not yet matured enough and will keep on evolving as new concerns of doing business in global environment, protection and sustenance of environment, involving interests of stakeholders in distant countries keep on coming up. Although it would be limiting the growth of the concept too early, but certain emerging trend can be summarised here as below: 1. Promoters have realised that it is no longer enough to have only trustworthy members at the board or as top executives. There has been a recent trend of ex IT professionals coming together as start-ups in completely unrelated businesses. That solves the query that only people with previous skills can start a new business. A new trend in corporate governance is thus to hire talent and let it adjust to the requirements of the business. The lack trust can be complemented through well laid out accountability principles. The success of the board and the organisation now depends on doing new things or old ones in a new way. 2. Something which goes against the complacency of being the best run company is the realisation that just being best at corporate governance is not good. As we have seen, it is itself an evolving subject matter, therefore being satisfied while having met some part of it does not makes the business ahead of the competitors and sustain 93 CU IDOL SELF LEARNING MATERIAL (SLM)

shareholders’ interest. Enough scams have been made in companies previously known for good governance, it was when the management lost sight of the stakeholders needs, they failed to monitor properly. Therefore board and management should be happy and satisfied just by achieving good governance in part of operations, while other part being neglected and susceptible for errors and prone to risks. 3. Board meetings have changed from being closed door affairs and proceedings being kept in secrecy to a more social event. Today boards prefer to meet at least 5 – 7 times a year, to be regularly kept updated of status of the business, their tone have also changed from a pure tie and suit affair to relaxed and enjoyment, it’s not surprising that the members meet at a beach resort and spend time with family members in the evenings while being involved in meetings and discussions during the greater part of the day. 4. The role of special committees has also increased, the promoters have realised the importance of delegating work to people with specific talents to consider issues and submit their advice in turn to the board. Same members can be nominated to multiple committees depending on the need and their experiences. At any time a board can have 2 – 7 committees working independently on different issues like: performance audit, compensation design, Governance and Social responsibility. Allowing committees to do the necessary research work and come to solutions after deep arguments is always a beneficial help to the board for strategic decision making. 5. Companies and their board do not any longer consider hiding information for the fear of competition. While at special times like new launches, possible takeovers it is recommended to keep the idea under wraps, today no company can hide their performance or mistakes, thanks to the mandatory guidelines for transparency or the presence of media that is always on the lookout for to report anything of interest to the market. Similarly information is available to employees freely or under request, but there is no deliberate attempt to hide or conceal it. 6. The value of lead indicators has been increasing for board members to decisions for the future of the company Lead indicators are measures that predict the future of the company. Examples like: index of consumer confidence, Early Return of Investment, new product planning point to trends which can predict the future. Even non exiting indictors like index of customer problems are important to judge the mood, maybe during new product development or even for decision to drop product, brand or a whole business division. 7. Boards have realised that managing one line business may be focussed but given chances of growing risks, board members today spend time to search for new: related or diversified lines of business. 94 CU IDOL SELF LEARNING MATERIAL (SLM)

8. Recently the awareness for good corporate governance has been felt by small and unlisted companies. The presence of online sales platforms like: Amazon, Myntra or Flipkart have given opportunities to reach out to distant customers which are beyond their potential, here it is necessary to be truthful of the nature of product, pricing, or even issues of return and payment refunds. The nature of corporate governance is still growing and it is reliving to see that from being recommendations it is now being considered as a necessity for multinationals and small businesses alike. 4.3.9 Advantages of Corporate Governance Previously in the program we have seen the benefits of corporate governance. While benefits are the help or aid that the companies get through corporate governance, advantages are the presence of any opportunity, or circumstances that are favourable for success. Advantages are opportunities that can be converted to for the welfare of all parties involved. Similarly good corporate governance also provides benefits, now it is the smart thinking of business to convert them into meaningful advantages and improvements for the business and its stakeholders. Some major advantages can be presented as follows:  Compliance with laws: The first and foremast advantage that corporate governance provided to business is to improve its ability to comply with all legal requirements. Since governance itself is adhering to principles and rules within the company and as we have discussed earlier good governance starts with the willingness of the board to demonstrate working under principles laid down. Good governance is not enforced but it is developed, therefore when companies and their management come under a habit of working in self-discipline there compliance towards external laws becomes understandably easier. Company laws, obligations towards shareholders, ensuring secretarial compliances are among the many rules that companies have to follow. Governments also keep on make amendments and additions to existing set of rules and regulations. It is therefore the duty of management to itself updated with all such new versions of the law. Companies have their own chartered accountants and company secretaries whose job is to ensure that the management is aware of all new developments that may have come up. Certain changes to rules are due to emerging trends while some are enforced after bad experiences of the society or the government. Compliance to laws also makes companies to be safe from any default or be under any form of litigation directly by the government or through complaint from any of the stakeholders. This avoids inconveniences of been involved in legal hassles and saves time and money of the companies so they may focus on more productive efforts. 95 CU IDOL SELF LEARNING MATERIAL (SLM)

 Less probability of fines and penalties A logical next step of not being compliant to legal requirements is being subject to penalties. Such fines and penalties are imposed upon defaulters to they may not repeat the same mistake next time and it also is a deterrent to others that they may not copy the wrong practices of those who have defaulted. Being legally compliant gives peace to the running of business activity it prevents being levied fines and penalties therefore saving immense amounts of money. These fines may range to either management missing deadlines to submit financial returns on time, non-payment of dividend to shareholders, missing deadlines of payment of taxes, provident fund contributions. Late payment of utility bills like electricity, water, net connection also attract fines and penalties. In these cases it are at time procedural delays, when directors may not be available to sanction the amounts required. However the accounts and finance departments need to be aware of deadlines and ensure that all formalities are completed within time to make payments to agencies or the government. Repeated cases of default affect the reputation of the company also.  Less occurrence of conflicts and frauds Presence of rules and regulations makes the employees more conscious of their working styles. There is a heightened awareness for the employees to put in their best efforts for the organisation and self-restraint to commit felony. Presence of rules and a strict monitoring mechanism is also a deterrent as people are aware that any time their actions will be noticed and they will be subject to penal action. The clean image of the promoters and that of the board members is also a strong restraint for the staff to be truthful in their work. Companies known for staying away from frauds or conflict of interest of any sort emerge as industry leaders. Their opinions are respected, when they take a stand on particular issues it is followed by others, be it their competitors also. Such companies are looked upon for guidance in similar events maybe at later point in time.  Reputation and relationships Reputations build over time and lead to relationships through which companies take advantage. Good governance is a strong plank on which corporations build relations with investors for seeking additional sums of investment, relations with customers for repeat purchases, relations with government agencies for preferential treatment for contracts, relations with other stakeholders. Good governance is the foundation stone 96 CU IDOL SELF LEARNING MATERIAL (SLM)

of building trust with the society. Not only with external parties, good relations with staff also leads to lower employee turnover, getting their commitment for higher productivity and most important word of mouth publicity. Transparency in governance is also a strong contributor to improved reputation and in building relationships. All stakeholders feel relieved when regular information is being shared with them to reinforce their belief in the company, that their investments have been put to best possible use, the products being offered are of superior quality and safe for consumption. Not only being good in governance, it also needs to be publicised for greater benefits to accrue to the company. Directors attend seminars and industry associations to talk about the good things within the company and create success stories which are used to highlight the importance of good governance in the industry.  Positive effect on the stock prices Stock market is the reflection of the perspective that investors have about the company. Companies with good reputation do not need to work hard for raising capital from the market, we have seen the Initial Public Offerings (IPOs) of good companies getting subscribed many times within minutes of them being available on for dealings, this means that if the company has targeted to raise for example Rs. 1,000 crores, investors would have put in many times the money in the company (over-subscribed). While the company can keep only the Rs. 1,000 cores of the first to invest and the balance will be returned back, this is a proof of the huge reputation that the companies enjoy due to good governance.  Builds brand power Companies with good track of governance enjoy brand power that is unmatched to their to their rivals. SBI has no issues in selling a new mutual fund, once a corporates name is established of delivering good products and services customers will always be on the lookout for new offerings which considered to be a reflection of the strong image of the company  Good governance is sustainable to environment With the promoters and management committed to improving process and care towards the society, they are bound to come up with solutions which will be caring to the environment. Good governance is not harming the stakeholders in any way and working to find better and cleaner solutions for production and distribution. 97 CU IDOL SELF LEARNING MATERIAL (SLM)

 Clarity in roles of board and management Corporate governance also ensures that there is clarity of roles and responsibilities among the board of directors, promoters and management. As family owned business move towards more organised form of business structure, authorities may sometimes overlap between promoters and executive. But good policies ensure that each one is aware of their own roles and has been made accountable to their actions.  Timely Decisions A decision not taken on time is a poor decision. Clarity in roles and responsibilities helps the decision makers address issues in time. On-time decisions also reduce the possibility of escalation of costs, as with time differences between taking estimates and actual work the cost of inputs may increase.  Better Management The combination of all the advantages mentioned above results in better management of the company affairs. Regular compliance for laws and regulations, fairness in treatment towards staff, commitment to rights of big and small shareholders alike and absence of frauds develops a positive work environment. This much more effective than any monetary incentive scheme to drive performance. It drives teamwork, builds unity, leads to efficiency at work and drives the company efforts towards success. 4.3.10 Disadvantages of Corporate Governance Corporate governance comes with its own limitations, which in real sense are not disadvantages but emanate from the reluctance of promoters to give up more of operational issues. As smaller companies grow from sole proprietor ship to being private limited and then joint stock, the original promoters find it difficult to stay away from day-to-day functioning of the business and may indulge in unnecessary interference with the executive. Which may give rise to the following issues: 1. The burden of legal compliance: Legal compliances at times can be time consuming and require the involvement of board members, senior executives and external lawyers or consultants. With challenges of availability of directors at the same time along with that of other parties, it becomes difficult to get a joint decision. On the other hand,slightly, worded laws may be subject to different interpretations, here also the board may need to consult external experts to decipher the true meaning and objective of the law. 98 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Cost of meeting compliance: Businesses have to commit resources to prepare all the documents and proofs to be submitted to meet different forms of legal, financial compliances. Commitment of internal resources to this unproductive task means the similar employees will be prevented from undertaking other productive activities. While on the other hand if external experts are hired it will be an additional cost. 3. Maintaining segregations of responsibilities: Good and effective governance wants that the working and board should be separate, once the board has finalised strategies and objectives, it is the executive who should be allowed a free hand in their implementation. While this may sound effective, at times lack of regular monitoring may lead the executive to cross lines and make changes in key strategies to suit their working styles. To the extreme there are possibilities of them working against the interest of the organisation as we have earlier in the scams being committed. 4. The conflict between the principal and the agent: Very often high performance and similarly high-priced managers area appointed to lead the company executive. These managers have the prime intent of setting unrealistic target, committing additional amounts of sums as budgets in the hope of reaping benefits of resulting compensation and incentive. They may have no regard to the amount of effort that may have gone by the promoters and founding directors. Their prime motives are personal and following very different objectives and perspectives. This leads to clashes which affects the smooth and efficient conduct of operations. 4.4 SUMMARY  Some of the major issues of corporate governance are: ensure correct composition of board members; conduct performance evaluation of directors; ensure proper role of independent directors and deal with their removal; create and maintain accountability towards stakeholders; finalise proper compensation design for employees; succession planning and reduce control of promoters; undertake proper risk management activity; design strategies for data protection and privacy; create platform for commitment of Board towards spending on CSR.  Fairness, accountability and transparency continue to be other major issues in the proper implementation of good corporate governance.  While issues may emerge at any time while following corporate governance, directors have to parallel work for its seamless implementation across the organisation. 99 CU IDOL SELF LEARNING MATERIAL (SLM)

 Board members need to consider the following measures to deal with the issues of corporate governance: create awareness that good governance is not just for compliance; involve the board members in strategy formulation; undertake regular monitoring performance of organisation; create understanding between board and the CEO; educate the board that proper governance is its main responsibility; by ensuring that directors have sufficient information for decision making; by creating an effective infrastructure for corporate governance; select and appoint a responsible person to chair the board leadership; undertake efforts to improve upon the skills of board members; finalise plans for performance improvement self and other board members.  Globalisation is now a way of life and no corporation can ignore its value while they choose to operate in the most local way to conduct business. It presents innumerable opportunities for businesses to grow, reduce costs, improve capabilities and build earnings.  Governments around the world have tightened the legal framework that supports corporate governance while the full implementation is still thwarted due to issues which are inherent to business structure and existing practices.  Growing globalisation has mandated good corporate governance at firm, industry and level of economy to reap its benefits. International trade partners primarily look at ethical commitments of local partners along with other economic objectives.  Privately and state owned institutions are working on corporate governance reforms in different countries to create codes of conduct to regulate industry and provide fairness in operations in international markets.  Corporate governance in its most recent and global form is concerned about sustainable environments. The realisation that resources need to be exploited responsible, that future decision should not be limited how they have been used now.  Corporate governance is a new and emerging concept till today. Changes are being felt to modify the relationship of promoters with other directors and executive. Growing concerns about the skill, experience of board members, giving autonomy to independent board committees are new trend in this field.  Along with benefits that come from good corporate governance, there are advantages which any company can use to build its reputation, create a strong presence at the stock market, build strong brands and achieve overall positive difference in the management approach. 4.5 KEYWORDS  Corporate accountability: concept that company in addition to giving profits also needs to be accountable to its employees and the society  Promoter: A person who is associated to have started the business from the beginning, he invitees’ investments and partner to the business activity. 100 CU IDOL SELF LEARNING MATERIAL (SLM)