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MODULE - 4
BOARD OF DIRECTORS AND
4.1 WHO ARE THE DIRECTORS OF A COMPANY? regarding the business functioning and
As seen before a company is a separate legal entity a. The right to monitor and inspect the works of
and is a person in the eyes of law. But a company the organisation
cannot act by itself. So, in order to make it function b. The right to verify the financial statements of
the work of directors is essential for the company. the company
That is the reason why the directors of the company c. The right to arrange for meetings and
are known as the brain of the company. It is through discussing about the performance of the
these directors that the company performs and company whenever necessary
hence they are considered to be a very important d. The right to entrust work and power to the
essential for the company. other members of the organisation.
e. The right to get indemnified and the right to
The duties of the directors are to call for annual have insurance for any cases of breach of
general meetings and other meetings, to monitor and duty.
to verify and approve the financial statements of the f. They also have right to enforce statutory
company, to promote and work for the success and rules and regulations in the company.
development of the company, to enhance the g. They have right to receive reasonable
relationship of the company with the suppliers and remuneration for their work.
customers, maintaining the reputation of the h. They have the right to take part in the
company without any disruption. decision making processes and other general
Now, let us see the rights of these directors:
a) The right to receive all the information
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4.2 WHAT DOES THE MANAGEMENT OF functions and the lower level management looks into
COMPANY COMPRISE OF? the effective implementation of these plans.
Management means administrating the function
of the company. It is very essential for the 4.3 STAKEHOLDERS
company to have a very efficient and potential
management team. Management is the supreme In business, a stakeholder is any individual, group, or
strategies formulating department of the party that has an interest in an organization and the
company. Management is a in a way portrayed as outcomes of its actions.
a body that gives the company some smart and
clever logics and ideas giving life to the interests 4.3.1 Customers
and concerns of the shareholders.
Stake: Product/service quality and value
The duties of the managers are to staff well skilled
employees in their organisation, to train and develop Many would argue that businesses exist to serve their
these staffs, to properly communicate with the customers. Customers are actually stakeholders of
employees and help them, enhance employee and business in that they are impacted by the quality of
superiors’ relationship. In short the functions of service and its value. For example, passengers
managers are to plan, control, organize and direct. traveling on an airplane literally have their lives in the
company’s hands while flying with the airline.
The top level management includes the board of
directors, the chief executive officer, The middle level 4.3.2 Employees
managers are the general managers ,branch
managers and department managers who are Stake: Employment income and safety
answerable to the upper level management. The front
line management includes the supervisors, recruiters Employees have a direct stake in the company in that
and other people with similar positions. they earn an income to support themselves, as well as
other benefits (both monetary and non-monetary).
The upper level management usually will look into the Depending on the nature of the business, employees
formulation of plans and fixing targets, creating and may also have a health and safety interest (for
improving the organisational structure. While the example, transportation, mining, oil and gas,
middle level management monitors and controls the construction, etc.).
Stake: Financial returns
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Investors include both shareholders and debtholders. 4.3.6 Governments
Shareholders invest capital in the business and
expect to earn a certain rate of return on that capital. Stake: Taxes and GDP
Investors are commonly concerned with the concept
of shareholder value. Lumped in with this group are Governments can also be considered a major
all other providers of capital, such as lenders and stakeholder in a business as they collect taxes from
different classes of shareholders. the company (corporate income), as well as from all
the people it employs (payroll taxes) and another
4.3.4 Suppliers and Vendors spending the company incurs (goods and services
taxes). Governments benefit from the overall Gross
Stake: Revenues and safety Domestic Product (GDP) that companies contribute
Suppliers and vendors sell goods and/or services to
the business and rely on it for revenue generation and 4.7 RANKING/PRIORITIZING STAKEHOLDERS
on-going business. In many industries, the suppliers
also have their health and safety on the line, as they Companies often struggle to prioritize stakeholders
may be directly involved in the company’s operations. and their competing interests. Where stakeholders
are aligned, the process is easy. However, in many
4.3.5 Communities cases, they do not have the same interests at stake.
For example, if the company is pressured by
Stake: Health, safety, economic development shareholders to cut costs, it may lay off employees or
reduce their wages, which presents a difficult trade-
Communities are major stakeholders in large off.
businesses. They are impacted by a wide range of
things, including job creation, economic Jack Ma, the CEO of Alibaba, has famously said that
development, health, and safety. When a big in his company, they rank stakeholders in the
company enters or exits a small community, they will following priority sequence:
immediately feel the impact on employment,
incomes, and spending in the area. In some industries, a. Customers
there is a potential health impact, as companies may b. Employees
alter the environment. c. Investors
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Many other CEOs also tout shareholder primacy as receive fixed rate of dividend irrespective of the
their number one interest. profits of the Company.
Much of the prioritization will be based on the stage The funds available by the shareholders, as share
a company is at. For example, if it’s a start-up or an capital are described in the balance sheet as
early-stage business, customers and employees are subscribed and paid up capital. For a Company it is a
more likely to be first. If it’s a mature publicly traded source of raising permanent or long-term finance. It is
company, shareholders are likely to be first. raised for the life of the Company from the
Company's point of view although the shareholder is
At the end of the day, it’s up to a company, the CEO, free to sell his share at any time.
and the board of directors to determine the Since shareholders are providers of risk capital, they
appropriate ranking of stakeholders when competing will expect reasonable return and companies should
interests arise. not only provide them reasonable return but also
enhance 'shareholder value'.
Stakeholder vs Shareholder
There are certain rights of shareholders. These are
This is an important distinction to make. A the following:
stakeholder is anyone who has any type of stake in a
business, while a shareholder is someone who owns a. The right to attend shareholders' meetings.
shares (stock) in a business and thus has an equity The importance of Annual General Meeting
interest. is inherent in the nature of the businesses,
which are compulsorily required to be dealt
4.8 SIGNIFICANCE OF MAJOR STAKEHOLDERS with in an AGM. The appointment of
4.8.1 Shareholders: Directors and / or auditors of the company,
Shareholders are regarded as the owners of a adoption of annual accounts, declaration of
Company. There are mainly two types of dividend — all these are significant from the
shareholders viz. equity shareholders and preference point of view of shareholders.
shareholders. Equity shareholders provide risk
capital and a return on this type of capital viz. b. The right to vote either in person or by
dividend will depend on the profits of the Company. proxy.
As regards preference capital, shareholder will
c. The right to receive Annual Reports of the
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d. The right to receive certain information the ownership, in numerical, legal, functional and
from the Company. personal terms.
e. The right to sell the shares of the Company. Shareholders as investors of capital in a Company
In other words, the right to transfer the are major stakeholders and one of the objectives of
shares freely, without restriction, to others. Corporate Governance is regarded as
enhancement of shareholder’s value.
f. The right to be repaid paid up share capital
in the event of the winding up of the One important aspect is that; the will of majority
Company or on repayment of capital. shareholders should prevail; it is equally a valid
proposition that the majority is not always right. As
Where there is more than one type of shares in the in democracy, so too in companies, there are many
share capital of the Company, then rights attached examples of a majority having oppressed the
to the shares are mentioned in the memorandum minority and exercised the authority or power in a
and articles of association, or terms of issues and burdensome, cruel or unjust manner. While
these rights are called as 'class rights' recognizing the majority rule, the Company law has
evolved remedies to safeguard a minority of
After becoming a member of a company, through Company members form the abuse of majority rule.
the articles of association, he enters into a contract Sections 397 and 398 of the Companies Act 1956
with the company has also with all other members covers important provisions relating to prevention
or shareholders of the company. Under such type of of oppression of members of a Company.
contract, a member agrees to accept, inter alia, the
decisions of the majority members provided such It can be seen that the precise impact of the
decisions are bonafide and according to the articles shareholder’s influence on the conduct of
and the law. The question is often raised whether Directors and Management is a matter of
the shareholders really own the Company. With speculation and debate and depends, amongst
separation of ownership and control, a share is not other things, on the quality of information available
regarded as a physical asset of the Company. The to the shareholders, including that
ownership of a modern corporation is provided by the Company's auditors. Shareholders
'fractionated', and identifies other respects in which voting rights do provide them with some
share ownership differs from traditional notions of
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countervailing advantage. all activities move around his expectations.
Adequate customer service is also a challenge for
4.8.2 Promoters the business. Quality of products and services is
In the Companies Act, 1956 the word promoter is crucial for sustained customer satisfaction so also
not defined. However, promoter means a person fulfilling price aspiration of customers is also a
who envisages the idea of forming a Company and challenge.
takes active steps in this regard and hence can be
termed as the first stakeholder. His venture of It is the responsibility of the corporates to provide
forming a Company may prove to be successful or uninterrupted, affordable, quality, reliable and
otherwise depending on the viability of the clean products, to millions of customers and to earn
venture. His stake is a primary one and stakes of their trust and confidence.
other stakeholders as described hereunder and
hereinabove, follow. Promoters have various 4.8.4 Creditors
responsibilities and liabilities in connection with Creditors are lenders of money or suppliers of
formation and Management of a Company. material. So long as they are paid their dues in
terms of interest and capital amounts as well as
4.8.3 Customers money for material supplied by them, they have
'Customer is the king' is true in any type of limited stake in the Company. In the event they are
business. In fact, all business activities are finally paid on time, depending on the agreement made
customer oriented. If the customer is not satisfied, with them they can have preference for repayment
the business is bound to suffer since customer vis-à-vis other stakeholders.
satisfaction is the aim of the business. Due to
globalization, customers are now spread all over 4.8.5 Financial Institutions
the world and their expectations are different in For the growth and strength of the corporate sector,
different countries. This makes functioning of the the government encouraged establishment of
concerned companies complicated because financial institutions viz., Industrial Finance
meeting expectations is tight rope walking. Corporation of India (IFCI), Industrial Development
Bank of India (IBDI), Institutional Credit and
Thus customer becomes one of the most important Investment Corporation of India (ICICI), Life
stakeholders of a company. He is at the centre and Insurance Corporation of India (LIC), Unit Trust of
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India (UT l) and various other financial institutions. It is now clarified in Annexure I of Clause 49
These financial institutions made a pioneering work [l.(A)(iv)] that nominee directors appointed by a
in the development of Corporates by providing long- financial institution which has invested in or lend to
term finance for various developmental projects of the Company shall be deemed to be independent
these corporates. These financial institutions also directors.
participated in the equity share capital of the
corporates. Section 4A. of the Companies Act, 1956 Some of the experts on company management
specifies pubic financial institutions, inter alia, those have made remarks that the institution of nominee
stated above. directors was used more to bring pressure on
industries to do certain things or to desist from
Since financial institutions have been major doing certain things as per the wishes of the ruling
source of finance for the corporates, they have political party rather than exercising independent
turned out to be the major stakeholders of the judgement about the working of the company.
corporates. In order to monitor functioning of the Nominee directors have been supported existing
companies to which they provide finance and also managements on the ground that it is necessary to
participate in equity share capital, they are provide stability.
nominating their representatives on the Board of
Directors of these companies. The role of these The nominee directors, except for honorable
nominee directors in the decision-making of the exceptions, have been silent spectators of the
Board of Directors has always been a debatable goings on in the board and have sought
issue. This is in view of the fact that, whether they government instructions on all sensitive and
try to protect the interest of the financial critical points instead of using their independent
institution they represent or whether they look judgement. As has been seen, the nominee
after the interest of the companies and other directors do not intervene even in matters
stakeholders has always been a controversial issue. involving larger public interests.
This has Jed to the issue as to whether they are to
be regarded as independent directors or not. It is 4.8.6 Banks
also felt that the nominee directors have a duty to Banks, like financial institutions have played a vital
act in the larger public interest. role in providing long-term and short-term finance
to the corporates. In fact, there is no exaggeration
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in the statement that none of the corporates has organization is overlooked. The management
been able to grow or make progress unless there is should aim maintaining cordial relationship with
financial support from commercial banks. It is said the employees at all levels, which should lead to a
that banks are 'fair-weather-friends'. This means long lasting trust between the employers and the
that banks offer credit facilities if the Company employees. The management has to create an open
does well. In the event Company starts making environment by exhibiting higher standards of
losses, its bankers reduce their facilities and in the personal integrity, genuine respect and high
extreme circumstances stop giving facilities. This is personal honour. The corporates need to have
a delicate situation that when a Company needs concern not just for their present employees but
financial support to turn the corner, bankers start for past employees as well.
squeezing their facilities. From the banker's point
of view, being a stakeholder in the Company, It is well known that employee-friendly companies
continuing giving financial facilities to a loss making are respected in a society. Employees are not
Company means further taking risk of making such necessarily happy with high levels of remuneration
Company NPA (Non Productive Asset). This but they are concerned with non-monetary factors
situation occurs because loss making companies like respect, care and confidence enjoyed by them
stop paying interest on the borrowings from the with their superiors. Human Resource
banks and there is a risk of losing principal amount Management is an extremely important factor of
lent by the bankers. Corporate Governance, but in the present era of
voluntary retirement becoming popular and that
4.8.7 Employees human resource being looked at as 'overheads', the
Corporate managers, busy with their calculations time has come to renew recognition of this most
of shareholder value and portfolio analysis, often important 'factor of production', motivate the work
forget that a Company is only as good as its people, force, and encourage them to perform
and that the staff have a much greater stake in the enthusiastically for the success of the organization.
Company than most of the shareholders. They One of the most important aspects of human
depend on it for their careers, their livelihood, and relations in an organization is that bonding
eventually, their pensions. Another important between the employees and the organization
factor that employees form an asset in the should grow more and more. There should not be
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communication barriers between various levels of a. relationship with the immediate supervisor
the organizations and the relationships should be b. Culture of the organization
cordial if not friendly. Delegation of authority and c. Training and continuing education.
responsibility leads to the development of the
people in an organization. 4.8.8 Depositors
The word depositors mainly relate to the
The recent trend in the industry particularly depositors who keep 'fixed deposits' with a
information technology industry is to globalize the Company. The deposits is one of the sources of
workforce rapidly. Companies like Infosys are in raising finance to meet the short term requirement
the process of setting up HR organizations in USA of funds especially to meet working capital needs
and Europe. Companies need to have organization of a Company. Any money received by a
structures to take on the challenges of the future. nonbanking non-financial Company, from any
Developing leadership in the young workforce in person or any money borrowed in any form, from
order to make them capable of accepting any person is a deposit under the Act and
challenges posed by the globalization is the Companies (Acceptance of Deposit) Rules, 1975,
challenge itself for HR function in a growing unless it qualifies for exemption under Rule 2(B) of
organization. the Deposit Rules. Therefore, the Company must
ensure that any money borrowed by the Company,
The recent HR surveys indicate that people are regardless of whether it is called a deposit or not, is
continually re-evaluating life/work priorities. The a deposit within the meaning of the Deposit Rules
rules have changed and employees are bringing a or whether it is eligible for exemption.
different set of expectations to work. Employees
want the opportunity to participate in things like One of the most important features of fixed
flexi time, telecommuting, onsite day-care and deposits is that it is unsecured loan and strict
community service projects. Unfortunately, 75% of compliance of deposit rules is envisaged in the act.
those companies surveyed do not offer these Being unsecured lender the position of fixed
facilities. depositors is vulnerable and to that extent, fixed
depositor as a stakeholder is to be taken care of by
Surveys have further indicated that the top three the Company with special significance. In the event
retention factors are —
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of winding up of a Company, repayment of fixed they do not pay on time or repay at all, it will affect
deposits attains a low priority. This means that any liquidity position of the company, which is so vital.
investor who wants to keep fixed deposits in a
Company will look into many factors like, 4.8.11 Directors
profitability of a Company, its future, composition Although the term director is not defined in clear
of Board of Directors, types of products of a and positive terms, in the Companies Act 1956,
Company, its image etc. Section 2(13) of the Act gives an inclusive
definition of the term by stating that Director
4.8.9 Suppliers includes any person occupying the position of
Suppliers of materials, especially raw materials, Director by whatever name called. Under the
form important stakeholders of a Company. One Companies Act, a Board of Directors can do
can imagine plight of a Company, which does not whatever the Company can do subject to the
have a regular supply of raw materials. The whole restrictions imposed by law and the articles of
further link like processing of raw materials till the association of a Company. The Board is the
finished product is manufactured will get adversely principle organ of the Company and the Board can
affected. Raw material is lifeblood of a Company. exercise all powers excepting which are specifically
The Board of Directors, therefore should properly reserved for general meetings of shareholders.
look after Company's suppliers by providing them
proper credit terms and paying for materials as per Due to divorce between ownership and control of a
the terms settled with suppliers. Company and that shareholders are scattered and
have neither time nor will nor expertise to manage
4.8.10 Borrowers its day to day affairs, the Board has collective
Borrowers and debtors owe to the company money responsibility for the running of the Company and
for material and setNices and also money has power to delegate the Company's day to day
borrowed by them or paid to them as advance. Management to managers. The importance of
They are indirect stakeholders in the company Directors as stakeholders thus cannot be
since they have dealt with the company for certain overemphasized.
transactions. Their obligation is to repay money to Many of the Directors hold substantial
the Company as per the terms settled with them. If shareholding in the Company and hence have
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enhanced stake in a Company. Since the Board Management's crucial role as the chief operators to
takes policy decisions in a Company, the future of turn policies into profitable realities should be
a Company depends on the competence of the considered in a proper perspective.
The Board needs to ensure that its findings are
4.8.12 Management aligned with Management's activities. This may
While the Board of Directors provides an effective involve:
policy making body, the Company has to have an
efficient Management with operational drive. a. The development of a strategic plan,
Senior managers at the level next to the Board approved by the Board;
work closely with the executive director or the
managing director. The Board formulates strategy b. Production of operating plans and budgets,
and the Management translates the vision of the which align with the strategic plan;
Company into profitable reality. The challenge
here is to balance the roles to ensure coordinated c. Establishment and maintenance of internal
relationships at the managerial level, which will control systems, including financial,
benefit the Company. Senior operational heads operational and compliance controls and risk
have to provide an active support to achieve the Management; and
goals set out in the strategic planning of the Board
of Directors. In order to achieve the short term and d. Procedures available for Director to obtain
long term targets, several tactical moves are independent professional advice at the
expected at the managerial level in view of the Company' expense.
fiercely competitive national and international
markets. Code of conduct for Directors and members of
Due to the strategic importance of Management, It is recommended that Directors and senior
its role as stakeholder can be appreciated. From managers shall observe the highest standards of
the point view Corporate Governance, ethical conduct and integrity and shall work to the
best of their ability and judgement. Directors and
senior Managers shall be governed by the rules and
Regulation of the Company as are made applicable to
them from time to time.
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The following code of conduct is recommended — position of responsibility with any
a. Directors and senior managers shall ensure organization for remuneration or
that they use the company's assets, otherwise. In case of whole-time Directors,
properties and services for official purpose such prior approval must be obtained from
only or as per the terms of appointment. the Board of Directors of the Company.
b. Directors and Senior managers shall not c. Directors and senior managers shall
receive directly or indirectly any benefit declare information about their relatives
from the Company's Business associates, (spouse, children and parents) employed in
which is intended or can be perceived as the company.
being given to gain favor for dealing with d. Senior managers shall follow all prescribed
the Company. safety and environment-related norms.
c. Directors and senior managers shall ensure
the security of all confidential information 4.8.13 Auditors
available to them in the course of their The need for independent audit cannot be over-
duties. emphasized. An auditor will be considered
d. No Directors or senior managers, other independent only if he avoids any relationship,
than the designated spokespersons shall which might lead to the suspicion that such
engage with any member of press and relationship had prevented an impartial attitude of
media in matters concerning the company. mind. An auditor should not only be free from
impropriety but also from the appearance of it. This
In such case, they should direct the request to the is the crux of the function of auditors Vis-à-vis the
designated spokespersons. practice of Corporate Governance.
a. Directors and Senior managers shall not Independence of auditors does not mean that the
engage in any material business auditor should assume the attitude of hostility and
relationship or activity, which conflict with proceed like a prosecutor. It only points to the need
their duties towards the Company. for his functioning in a fair and impartial manner
with a sense of obligation not only to the Board of
b. Senior managers shall not, without the Directors, Management and those concerned or
prior approval of the Managing Director of
the company, accept employment or a
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interested in the company's Business but also to The collapse of the mighty Enron Corporation in
those other stake holders like shareholders and 2001, WorldCom in 2002, Comrade, a navigation
creditors. technology company in Germany, Xerox in 2002 —
all these cases have raised important questions
Recent debacles in the corporate giants like Enron pertaining to the credibility of the Auditing
and Xerox was due to the failure of the auditors to profession, its own Corporate Governance and
point out accounting errors relating to the institutional arrangements for its regulations.
transactions. This has resulted into the downfall of Action was taken against a number of firms
the world known auditing firms. Moreover, the charged with audit failure. Andersen, then well-
function of auditors is being looked at with great known audit firm was described by the Prosecution
suspicion as if auditors have been functioning with as "lapdog rather than a watchdog". "Andersen's
hand-in-glove with the operating Management and failure to comply with professional standards was
also Executive Directors. There are suggestions to not due to the actions of one 'rogue' partner or
rotate appointment of auditors. There is also a 'out-of-control' office, but the structure and
debate about the type of services, which can be corporate climate that created a lack of integrity
offered by the auditor’s firms, which may come in and objectivity." (Times of India, February 25,
the way of their independence as auditors. 2002) A question, which requires serious
consideration, js whether audit firms should be
The issues pertaining to audit shortcomings, permitted to provide other services such as
irregularities and even connivance with the consultancy to their clients. Andersen, for instance,
management are as serious in India as they are in earned $25 million as audit fee, $2 million less than
US and elsewhere. As the study made by Global what it earned from its consultancy work.
Data Services, a wholly owned subsidiary of the According to a news report, the Securities and
Credit Rating and Industrial Services India Limited Exchange Commission (SEC) has said that Ernst
(crisil), shows a large number of companies have and Young, another of the big five accounting firms,
overstated their profits while reporting their was auditing the books of People Soft marketing a
accounts for the year 2000-01 of the 139 software product with the company (Economic
companies covered, as many as 139 had overstated Times, May 22, 2002). The second question is of
their profits. (The Economic Times, June 28, 2002).
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conflict of interest. For example, a large number of spirit. Auditors have to follow certain standards,
former employees of Andersen, helped top which have been laid down for the chartered
financial job in Enron. According to one report, accountants. The auditors have fiduciary
black lists were circulated round the city of London relationship with the Company, shareholders and
and Wall Street. One of them listed all companies Board of Directors. Auditor is a watchdog and not a
whose chief financial officers had been recruited bloodhound. He is expected to be vigilant although
from one of the big five accounting firms. The third he does not sit on judgement on Management
is whether, in supersession of the present practice decision, policies or the commercial prudence of
of each company appointing its auditor, the transactions. Auditors' position thus is a caretaker
appointment should be done by an independent stakeholder of a company.
public agency so that the auditor will have greater
independence in his work. The payment to the 4.8.14 Competitors
auditor could also be made by such an agency. The Competitors as stakeholders could be an
fourth is the proposal before the US federal innovative concept in the global Business Scenario;
regulators that the chief executive officer of a competition is the order of the day. In fact,
company should be made personally responsible competition keeps an entrepreneur on his toes. If
for satisfying himself about and certifying the he does not maintain quality of his products, does
correctness of his company's quarterly and annual not keep the prices competitive, does not ensure
financial statement. It is also proposed to reduce flow of his supply of products according to the
the time limits for submission of such reports. The market demand he will get extinguished in due
US Senate has already approved legislation to course. The role of the competitor should thus be
create an accounting oversight board to set appreciated in the light of current global
standards and discipline wayward auditors. conditions.
The institute of chartered accountants of India has 4.8.15 Society
prescribed self-regulatory guidelines as part of Society or the community is a stakeholder in a
code of ethics for its members. Although the typical sense. Prosperity of the citizens depends on
Companies Act prescribes powers and duties of many factors, one of which is the growth and
auditors, these need to be practiced in law and prosperity of the corporate sector itself. With the
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globalization, privatization and liberalization the will no doubt benefit the state in terms of
trend of the young generation is not only to seek investments, large potentials of employment,
jobs in the private sector but also to venture into direct and indirect tax revenues, development of
their own manufacturing units, which may be ancillaries etc. A common man anywhere in the
ancillary units to the big manufacturing units. The country will have a four-wheeler at a affordable
information technology sector is also growing fast cost. Here again, unless Tata’s will follow
and it is anticipated that our country will have a meticulous governance practices, they will not be
proud place in the world in the top ranking in this able to achieve the target of ' Rs. 1 lakh car'.
sector in the next decade or so. All this means that Community will also have a strong interest in the
the corporates will have to follow good success of the project.
Governance practices, which are 4.8.16 Government
universally respected, Corporates have a Government as stakeholder will have many
responsibility to maintain economic viability as dimensions. Apart from the direct and indirect taxes
producer of quality goods and services and this which the corporates will pay to the state and
should be regarded as a social obligation. central Government, the impact of social and
Along with the manufacturing sector, services environmental issues is some of the most influential
sector is gaining importance. Moreover, forces in the world today. Moreover, law abiding
corporates will have to take care of environment, corporates or otherwise are bound to affect all
which is so important to the community. stakeholders including the government. As regards
tax rates are concerned, if they are too high, there
The recent instance as to how the corporate can will be tendency to avoid taxes resulting into
influence the development of state is the following reduced revenue for the Government and that
announcement in the Times of India of 18th may, evasion of taxes is bound to result into litigations.
2006 — 'Tata’s to make Rs. 1 Lakh Car in West On the other hand, experience has shown that
Bengal'. This state has offered to Tata’s vast pieces lesser rates of taxation have resulted into increased
of land along with immense fiscal incentive for the revenue for the government, there will be less
project and product. The plant will have an litigations and the corporates have demonstrated
investment of around Rs. 1200 cores. The project
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higher growth and prosperity. educational factors in the rural sector,
environmental changes, change from agricultural
The corporates have a two-way relationship with sector to industrial sector, etc. etc., they are
government. Law abiding corporate citizens need to bound to get outdated and this danger should be
have minimum relationship with the government avoided.
since there are hardly any litigations and from the
Government side there is bound to be a favourable Corporates in the sunrise sector like information
approach towards 'straightforward' corporates. technology with good corporate governance
practices (e.g. Infosys, Wipro, TCS etc.) will have
The role of the government should be that of a great future. Those corporates, which are not
facilitator. Government should also intervene futuristic, may go into oblivion, one day or the
decisively in favor of certain sections of society like other
children, the aged, the disabled, tribals and victims
of natural calamities. Besides performing its 4.8.18 Environment
sovereign functions, government should invest in
the production of public good, especially education Environment has attained one of the most
and health care. In all other areas, the private sector
should provide need-based supplements. important factors in the Corporate Governance
4.8.17 Future Generations due to obvious reasons. In fact, there have been
The above discussions regarding various
stakeholders vis-à-vis the corporates will lead to several confrontations between
the question — what about future generations?
The present generation, as has been pointed out environmentalists and the corporates.
above, is bound to be benefited by good
corporates. However, unless corporates plan for Environmental pollution, water pollution,
the future taking into consideration global
factors, scientific developments, social changes vehicular pollution resulting into several health
including changing attitudes and fashions,
possible political developments, influence of problems, have been justifiably severely criticized
by the media.
In recent years there has been an abundance of
environmental pressure groups, green peace and
friends of the earth being prominent, present at
every ecological event to highlight potential or
actual dangers. These groups have often been
criticized for being extremist, and antibusiness,
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and so have tended to be viewed as obstructive of Companies, which followed good Corporate
rather than constructive. While there is clearly a Governance practices, were also came down
need for tight environment accountability, the substantially. Several reasons were put forth
attitude should plainly be one of working with including inflow of funds of the foreign financial
businesses, not fighting against them, to clean up institutions, CBDT announcements regarding tax
corporate practices. Conversely, company’s rates on HIS, market correction, regulatory
extremism and obstinacy as the green groups; environment, high oil prices, rising metal prices,
only they are the ones who, guilty or not of rising rates of interest etc. However, the most
charges brought against them, are the source of important point has been the sentiments of the
the controversy. brokers.
At any cost, the corporates should take care of the
environment and should adhere to the When the market prices go up, everybody cheers.
environment standards to make the product and When the markets crash, everybody moans and a
process environment-friendly and gradually move hunt for culprits ensues. So such hunt is ever
towards the three "R's"reduce, reuse and recycle. announced when the markets are rising. In past
scams, when manipulators like Harshad Mehta and
4.8.19 Stock Brokers and Stock Exchanges Ketan Parekh sent share prices through the roof,
Transactions in shares are carried out through the they were hailed as geniuses and became
stockbrokers who are members of the Stock celebrities. Some market experts cautioned that
Exchanges and registered with SEBI. The Indian the market had shot up to insane levels. But this
market recently witnessed sensational plea for sanity was widely dismissed.
developments in the stock markets. The Sensex fell
1800 points during a period of two weeks in May06 The lesson from the recent developments in the
from its peak of 12612. The broking community stock market is... exuberance is no substitute for
had a tough time and struggled hard to keep judgement. The question that the regulators have
themselves afloat. The developments in the stock to answer is whether the sudden increase in
markets indicated sensitive role of the brokers Vis- volatility margins makes market safer at all. What
à-vis shareholders. On 22nd May 2006 there was a clearly needed is some kind of multi-disciplinary
complete shut down in the market. The share prices crisis Management team that ensures a constant
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flow of information from the ground up with Whether SEBI is genuinely protecting the interest
appropriate emergency powers for making of the investors' remains a question in view the
decisions in a crisis. There must also be a formal recent development SEBI as stakeholder will have
process of briefing the media to avoid to be considered from this point of view.
misunderstanding caused by off the record
statements from regulators and bourses. 4.9 BALANCING INTERESTS OF ALL
The role of brokers, Stock Exchanges and investors STAKEHOLDERS
should be viewed in proper perspective in relation
to Corporate Governance. Corporate Governance should bring about balance
and equilibrium between various stakeholders like
4.8.20 Securities Exchange Board of India owners, promoters, employees, shareholders,
Securities Exchange Board of India (SEBI) was customers, creditors, bankers, investors,
established in the year 1992 by passing the SEBI government and society. In fact, this is the greatest
Act. The objectives of SEBI are - to protect the challenge for the entrepreneurs to balance
interest of investors in securities and to promote interests of various stakeholders in the most
the development of and to regulate the securities optimum manner. For example, in order to
market. Clause 49 of the Listing Agreement, which maximize his profitability, charging of prices for his
governs the compliance requirements of products on the higher side may result in losing
Corporate Governance, has been amended by SEBI customers; however, taking into consideration the
several times and indicates SEBl's concern for good quality of products and demand for the products if
Governance practices by listed companies. The the customers have to bear higher prices, the
norms and practices to be followed by the shareholders can be pleased with higher dividend.
stockbrokers and the listed companies are All stakeholders have different concerns and
meticulously being monitored by SEBI. different priorities. It's a question of balance to be
In spite of good intensions and strict regulatory
role of SEBI, upheavals in the Stock Exchanges Proper dialogue with all stakeholders is the key
resulting into very wide price variations in the ingredient to delivering the desired value to the
shares have sent shock waves as discussed above concerned stakeholder. The Corporate Governance
(Sr. no. 19). framework should recognize the legal, moral and
equitable rights of all stakeholders and encourage
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active co-operation not only with them but also precisely.
amongst themselves for the purpose of creation of
wealth and its optimum distribution. Stakeholders may include the employees who
depend totally on the company, the bond holders who
The challenge involved in balancing the apparent are obliged to the company, Customers who depend
conflicting interests of various stakeholders is purely on the services or products that are provided
indeed a difficult and delicate task! There are pulls by the company, suppliers, vendors and other
and pressures from all concerns and to face them business people who rely on the company for their
simultaneously is not easy. Particularly when the day to day earnings and revenue.
organization grows and it becomes more and more
essential to coordinate activities of all stakeholders, Shareholders relation with the company is through
to fulfil aspirations of all of them proves to be almost the shares and stock of the company that they had
impossible. Under the circumstances, if Corporate bought. The Board mainly consists of the
Governance principles and practices are followed in shareholders who having the voting rights as their
the true spirit, solutions do get evolved in the member. So when discussions take place in the board
process. Balancing interests of all is an onerous task, it must be done keeping in mind the interest of
no doubt. There are no set formulae to solve the stakeholders as well. The corporate Governance
intricate problems. Every scenario is by itself a norms provides for this.
challenge. However, companies like Infosys, Wipro,
Reliance, Tata Motors, Hindustan Lever, Bharat 4.9.2 Regular monitoring of the management
Forge and many of them, which have strong
Corporate Governance have successfully balanced The frequent and periodical watch in the work of the
apparent conflicting interests of all stakeholders. management is essential because there are chances
of miscommunications and frauds taking place in the
4.9.1 Protect interest of stake holders: management functions. The management is the
backbone of the company. If this very essential part
Firstly, it is essential for us to know the difference of the company is not well monitored, then there are
between the shareholders and the stakeholders chances of collapse of the entire system. Hence
which will help us to understand the concept corporate governance suggests proper monitor and
control of the management.
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4.9.3 Good management environment c. Regarding appointment of directors who can act
on independent capacity.
The management system efficiency can be attained
only if proper environment supporting their needs is d. Training and evaluation of the directors.
provided. When there is no proper management e. New provisions were brought about related to
environment then there will be miscommunications,
disputes and chaos that would eventually affect the the nomination and remuneration of the
growth of the company. Corporate Governance committee.
mandates providing a calm and chaos free f. There was provision for framing a risk
management environment. management committee.
4.10 THE PROVISIONS THAT BENEFIT THE Section 134 of the Act stated that in every financial
STAKEHOLDERS, DIRECTORS AND THE statements produced to a company by the directors
MANAGEMENT IN THE COMPANIES ACT, 2013 should have documents attached to it that contains
specifications and details regarding the functioning
Important provisions related to Stakeholders were of the company.
included in the companies’ act of 2013 where the
following things were included: Section 177 of the Act states that there must be an
auditing committee in every company and also states
a. Inclusion of women directors in the board. The the manner by which this company must be
Act stated that at least one woman director must constituted.
be a part of the board.
Section 184 of the Act specifies the time intervals and
b. Regarding the composition of the board it stated the process to be followed by the director to
that non-executive directors must also be a part postulate his interest and concerns regarding the
of the board. company.
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