module_2_24_

CORPORATE
GOVERNANCE

CERTIFICATE COURSE

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DEVELOPED BY

MODULE - 2

CORPORATE GOVERNANCE-
OBJECTIVES, IMPORTANCE AND

PRINCIPLES

2.1 INTRODUCTION Also the members of the board must be proficient in
work and must be skilled enough to hold the pressure
From the previous chapter we can now understand and complete the works efficiently.
that the main aim of corporate governance is to
protect the interest of the shareholders of the A well organised board acts as a great pillar of
company. Also, we would have clearly understood support and the regulations of the corporate
about the dire need for more corporate governance governance keenly look into this aspect.
related reforms to take place in our country.
2.2.2 Independent decision making
In this chapter we would deeply examine and study
about the objective and scope of corporate Corporate governance makes sure that the board is
governance in the current economic growth situation capable enough of taking independent decisions. The
of our country. board being the main corporate player heading the
functions of the company it must have the ability to
2.2 THE MAIN OBJECTIVES independently handle the working of the company
2.2.1 Properly Organized Board and to come up with decisions that are for the
betterment of the company. The board must contain
The Board of directors are the major role players of executives and directors who are capable enough of
the company and hence there is a need for this board taking decisions keeping the interest of the
to be properly structured and planned according to stakeholders in their mind.
the short term and long term plans of the company.

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2.2.3 Transparency in the procedures He also stated that if the management failed to
complete this task in an efficient manner then it
The board must be transparent regarding its would automatically result in the force selling of the
functions and whenever required will have to Barracuda Company.
disclose true and fair financial reports. Corporate
Governance is formulated mainly with this objective The Board immediately hired FD (a financial
so that adequate information can be obtained by the consultancy service specialized in strategic
stakeholders who had taken risk to invest in the investment relations.
companies.
The Board requested FD to hold an exhaustive
2.2.4 Stakeholders research on the view or perception of the
stakeholders, on the functioning of the management,
In business, a stakeholder is any individual, group, or predicted voting, proxy proposals and a comparative
party that has an interest in an organization and the analysis on the strategies used ny the Barracuda in its
outcomes of its actions. Common examples of earlier ventures.
stakeholders include employees, customers,
shareholders, suppliers, communities, and Once this data was collected the Board discussed on
governments. Different stakeholders have different the diverse measures to stabilize the position of
interests, and companies often face tradeoffs when Barracuda and to retain the support of its investors.
trying to please all of them.
This case helps us understand the presence of mind of
2.2.4.1 CASE STUDY NO. 1 the managing director and his efficient way of making
his subordinates achieve the goal. This case also helps
A thoughtful investor to control the management us to understand the efficiency of subordinates who
Barracuda (a company providing security, took the manager’s words seriously and worked hard
networking and storage products based on network to produce results within the stipulated time.
appliances and cloud services) grew into becoming
one of the great investors during 2006. At one of the The main aspect of this case is that when the view of
meetings Barracuda’s managing director put forth to the stakeholders was understood and policies were
the committee that intense steps were to be drafted accordingly, the company was easily able to
undertaken to improve the operating performance retain the support of its investors.
and the functioning of the company.

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2.3 IMPORTANCE OF CORPORATE 2.3.3 Independence:
GOVERNANCE The corporate governance recommends
independency in the decision making of the Board.
Before knowing about the importance of the This is to prevent the influence of other departments
corporate governance it is very important for us to in the decisions taken. The board and its members
know that managing of the company is different from must have independent thinking capacity. Also this
the governance of the company. Management of the will enable the company to be fair and just with the
company tells about the carrying out the business of functioning when the decisions are not biased.
the company whereas governance sees that the
works are carried out in an efficient way. The 2.3.4 Fairness of practices:
following are the various importance of the corporate All the above importance of the Corporate
Governance: Governance can help us understand that the main
aim of the Corporate Governance is to ensure there
2.3.1 Better access to the financial statements: is fairness in practice and there is no exploitation of
any individual through the process.
Corporate Governance, mandates the transparency
in the disclosure of the financial statements and 2.3.5 Provides effective penalties for violation:
whenever any stakeholder asks for the records of When any sort of violations of rules prescribed by
financial statements must be made available to the Corporate Governance is violated then the it
person. specifies penalties such as dismissal of shareholder,
disqualification of his share, terminating employees,
2.3.2 Reducing risks, scams and scandals: filing suit against the person etc.
By enabling transparency in the disclosure of
statements fraudulent activities in the company can 2.3.6 Management information system:
be prevented. When from the base itself these The corporate governance empowers the Board to
mistakes are checked and clarified then the company take in charge of the management information
will not have to face any high risks or get stuck in big system which acts as the data ware house of the
scandals and scams that would spoil the company’s company containing all relevant information of the
goodwill and reputation.

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shareholders, stakeholders, employees and other ministers of OECD member countries in order to help
people related to the company. Sometimes it even OECD and Non-OECD governments in their efforts
contains crucial information regarding the finance to create legal and regulatory frameworks for
and audit of the company. corporate governance in their countries. The six
OECD Principles are:
2.3.7 High quality reports:
Corporate Governance speaks mandates the reports 2.4.1 Ensuring the basis of an effective corporate
to be very professional and with more clarity. They governance framework
hire very skilled and efficient accountants to prepare
the financial statements of the company so that no The corporate governance framework should
issues related to misrepresentations arise. promote transparent and efficient markets, be
consistent with the rule of law and clearly articulate
2.3.8 Development of moral ethics and the division of responsibilities among different
reputation: supervisory, regulatory and enforcement authorities.

When the rules and regulations mentioned in the 2.4.2 The rights of shareholders and key
corporate governance norms are abided without ownership functions
violations then automatically the firm’s reputation
will increase in the market and it will automatically The corporate governance framework should protect
earn the respect and loyalty of investors and and facilitate the exercise of shareholders’ rights.
customers.
2.4.3 Basic shareholder rights should include the
2.3.9 Sustainable development of all right to:
stakeholders:
a. Secure methods of ownership registration;
When the basic interests of these stakeholders are b. Convey or transfer shares;
protected they will be satisfied and contribute more c. Obtain relevant and material information on
towards the profitability of the company.
the corporation on a timely and regular basis;
2.4 PRINCIPLES OF CORPORATE GOVERNANCE d. Participate and vote in general shareholder

The principles were developed and endorsed by the meetings;
e. Elect and remove members of the board; and

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f. Share in the profits of the corporation. 2.4.6 Disclosure and transparency

2.4.4 The equitable treatment of shareholders The corporate governance framework should ensure
that timely and accurate disclosure is made on all
The corporate governance framework should ensure material matters regarding the corporation, including
the equitable treatment of all shareholders, including the financial situation, performance, ownership, and
minority and foreign shareholders. All shareholders governance of the company.
should have the opportunity to obtain effective
redress for violation of their rights. The principles 2.4.7 The responsibilities of the board
also state that:
The corporate governance framework should ensure
a. All shareholders of the same series of a class the strategic guidance of the company, the effective
should be treated equally monitoring of management by the board, and the
board’s accountability to the company and the
b. Insider trading and abusive self-dealing shareholders.
should be prohibited
2.5 CORPORATE GOVERNANCE DEVELOPMENT
c. Members of the board and key executives (TIMELINE)
should be required to disclose to the board
whether they, directly, indirectly or on behalf If we closely notice, we can observe that the
of third parties, have a material interest in any corporate governance was prevalent in our country
transaction or matter directly affecting the right from the olden days where the kings and
corporation. ministers worked for the welfare of the people in
their kingdoms and promoted trade practices to
2.4.5 The role of stakeholders in corporate increase the wealth and availability of commodities in
governance their kingdoms.

The corporate governance framework should In India during the 1990’s liberalization movement
recognize the rights of stakeholders established by gained importance. The liberalization policies were
law or through mutual agreements and encourage mainly aimed at increasing private sectors and
active co-operation between corporations and
stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.

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private investments in the country. During this period a. 1947- India acquired independence and there
high economic growth was achieved and this was was a very active market and manufacturing
sectors had golden period and socialist
DID YOU KNOW? policies were enacted.

PepsiCo, Infuses, Tata, Wipro, TCS, and b. 1991- Nationalisation of banks. They also
Reliance are some of the global giants which became debt and equity providers.
have their flag of success flying high in the sky
due to good corporate governance c. 1956- Companies act came into existence and
accounting standards were postulated by the
exactly when corporate governance gave its entry Institute of Chartered Accountants of India.
and gained high importance. It was during this period
that the need for corporate governance was realized d. 1991- Fiscal crisis shook the Indian Economy
in our country. It was initially introduced by the which was immediately responded with
Confederation of Indian Industry (CII). liberalization policies.

As the Indian economic market was flourishing and e. 1992- Securities Exchange Board of India
growing with time the need for regulations to protect (SEBI) was formed. The Market, economic
the interests of stakeholders of the company raised. growth became steady and the need for rising
of capitals, shareholders, stakeholders came
Initially in India all the big establishments were up which led to the Corporate Governance
usually family undertakings and the family spending reforms.
and company expenditure were both one and the
same. In such cases the other stakeholder’s had tough f. 1998- Confederation of Indian Industry came
time to protect their interests. And when the concept up with first voluntary code of corporate
of investors, shareholders and stock exchange came governance.
into existence the dire need for separation of
management from ownership also raised. So keeping g. 1999- Committee was set up under Kumara
all these situations and problems in mind Corporate Mangalam Birla to promote and raise the
Governance gained more momentum in our country. standards of good corporate governance.

h. 2000- The recommendations of Birla
Company were accepted and were included in
Clause 49 of listing agreement of stock
exchange.

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i. 2002- Department of Company Affairs (DCA) r. 2018- Mandating disclosure of cyber security
appointed Naresh Chandra Committee to experience at the board level
look into the issues related to corporate
Governance. s. 2019 - California currently has a bill pending
if enacted, would require all public companies
j. 2003- Narayana Murthy Committee did its (including companies outside of California)
job to improvise the contents. with principal executive offices located in
California to have a minimum of one female
k. 2004- J.J. Irani committee was formed to director by December 31, 2019.
further improve the Corporate Governance
rules and regulations. 2.6 REGULATORY FRAMEWORK ON

l. 2009- Companies bill was introduced by the CORPORATE GOVERNANCE
J.J Irani’s committee
The Indian statutory framework has, by and large,
m. 2010- NASSCOM Was formed which was been in consonance with the international best
also lead by Narayana Murthy the great practices of corporate governance. Broadly speaking,
business leader. the corporate governance mechanism for companies
in India is enumerated in the following enactments/
n. 2011- Revised Companies Bill and named it regulations/ guidelines/ listing agreement:
Companies Bill,2011.
a. The Companies Act, 2013 inter alia contains
o. 2013- Companies Act was modernised and provisions relating to board constitution,
was newly enacted as Companies Act 2013. board meetings, board processes,
independent directors, general meetings,
p. 2016- Sustainable Accounting Standards audit committees, related party transactions,
Board’s materiality-focused guidelines—and disclosure requirements in financial
companies are increasingly providing statements, etc.i
voluntary information about their
sustainability practices under existing b. Securities and Exchange Board of India (SEBI)
regimes or otherwise and disclosure of Guidelines: SEBI is a regulatory authority
information relating to sustainability matters. having jurisdiction over listed companies and
which issues regulations, rules, and guidelines
q. 2017- House Bill Regulating Proxy Advisory
Firms. The House bill is intended to enhance
transparency in the shareholder proxy
system by requiring proxy advisory firms

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to companies to ensure the protection of the New Companies Act provide that every
investors. company (other than one-person company)
c. Standard Listing Agreement of Stock shall observe Secretarial Standards specified
Exchanges: For companies whose shares are as such by the ICSI with respect to general and
listed on the stock exchanges. board meetings.
d. Accounting Standards issued by the Institute
of Chartered Accountants of India (ICAI): 2.7 THE KEY LEGAL FRAMEWORK FOR
ICAI is an autonomous body, which issues CORPORATE GOVERNANCE IN INDIA
accounting standards providing guidelines for
disclosures of financial information. Section 2.7.1 The Companies Act, 2013
129 of the New Companies Act inter alia
provides that the financial statements shall The Government of India has recently notified
give a true and fair view of the state of affairs Companies Act, 2013 ("New Companies Act"), which
of the company or companies, comply with replaces the erstwhile Companies Act, 1956. The
the accounting standards notified under s 133 New Act has a greater emphasis on corporate
of the New Companies Act. It is further governance through the board and board processes.
provided that items contained in such The New Act covers corporate governance through
financial statements shall be in accordance its following provisions:
with the accounting standards.
e. Secretarial Standards issued by the Institute New Companies Act introduces significant changes
of Company Secretaries of India (ICSI): ICSI is to the composition of the boards of directors.
an autonomous body, which issues secretarial
standards in terms of the provisions of the a. Every company is required to appoint 1 (one)
New Companies Act. So far, the ICSI has resident director on its board.
issued Secretarial Standard on "Meetings of
the Board of Directors" (SS-1) and Secretarial b. Nominee directors shall no longer be treated as
Standards on "General Meetings" (SS-2). independent directors.
These Secretarial Standards have come into
force w.e.f. July 1, 2015. Section 118(10) of c. Listed companies and specified classes of public
companies are required to appoint independent
directors and women directors on their boards.

d. New Companies Act for the first time codifies
the duties of directors.

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e. Listed companies and certain other public Board is a non-executive director, at least one-third
companies shall be required to appoint at of the Board shall comprise of independent directors
least 1 (one) woman director on its board. and where the Chairman of the Board is an executive
director, at least half of the Board shall comprise of
New Companies Act mandates following committees independent directors. A relative of a promoter or an
to be constituted by the board for the prescribed executive director shall not be regarded as an
class of companies: independent director.

a. Audit committee 2.7.1.2 Audit Committee
b. Nomination and remuneration committee
c. Stakeholders relationship committee The Audit Committee to be set up shall comprise of
d. Corporate social responsibility committee minimum three directors as members, two-thirds of
e. Listing agreement – Applicable to the listed which shall be independent.

companies 2.7.1.3 Disclosure Requirements

SEBI has amended the Listing Agreement with effect Periodical disclosures relating to the financial and
from October 1, 2014, to align it with the New commercial transactions, remuneration of directors,
Companies Act. etc., to ensure transparency.

Clause 49 of the Listing Agreement can be said to be 2.7.1.4 CEO/ CFO Certification
a bold initiative towards strengthening corporate
governance amongst the listed companies. This To certify to the Board that they have reviewed the
Clause intends to put a check over the activities of financial statements and the same is fair and in
companies in order to save the interest of the compliance with the laws/ regulations and accept
shareholders. Broadly, cl 49 provides for the responsibility for internal control systems.
following:
2.7.1.5 Report and Compliance
2.7.1.1 Board of Directors
A separate section in the annual report on
The Board of Directors shall comprise of a such compliance with Corporate Governance, quarterly
number of minimum independent directors, as compliance report to stock exchange signed by the
prescribed. In the case where the Chairman of the compliance officer or CEO, company to disclose

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compliance with non-mandatory requirements in Committee have been referred to various
annual reports. governmental agencies/professional bodies for
further deliberations.
2.7.2 CURRENT-DAY SCENARIO
The press release issued by SEBI only sets out an
In the present day situation corporate governance is indicative list; one should wait for the fine print for a
being given more importance and more complete picture of changes to the LODR.
improvements are being made related to the
regulations The judicial system in our country also 2.7.5 Recommendations without any
plays a major role in supporting corporate
governance in our country. In order for the modifications
companies to take high risks and develop further it is
necessary for Corporate Governance. 2.7.5.1 Independent director (ID) appointments

2.7.3 KOTAK COMMITTEE REPORT (From 1 April 2018): Individuals from the

SEBI, in its board meeting on 28 March 2018 promoter group or appointed pursuant to a
considered the Kotak Committee report (Report) on
corporate governance. The Kotak Committee 'board inter-lock' arrangement (i.e., cross
(Committee) had submitted the Report proposing
amendments to the SEBI (Listing Obligation and directorship arrangements) cannot be
Disclosure Requirements) Regulations, 2015 (LODR)
with the objective of enhancing fairness and appointed as IDs. Board to certify that each
transparency in the corporate governance landscape
in India. individual appointed as ID fulfils eligibility

2.7.4 SEBI's views on the Reportii criteria mentioned in the LODR. Similarly, IDs

SEBI has accepted several reforms suggested by the are required to provide declaration to this
Committee both with and without modifications.
Certain recommendations (such as internal financial effect.
controls, roles of ICAI, adoption of IND-AS etc.) of the
2.7.5.2 Expertise / skills of directors (Initial

disclosure without names by 31 March 2019,

and detailed disclosure by 31 March 2020):

The annual report is required to contain a

matrix setting out the competencies /

expertise that the board believes its directors

should possess. Subsequently, a list of skills of

each of the individuals on the board is also

required to be disclosed. Greater awareness

and training of the promoters and directors

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about the benefits of governance to all the 2.7.5.6 Increase in disclosures
stakeholders is critical to the success of these
measures. The change of mind-set is key to Disclosure Compliance
the success of corporate governance than
some of the optical measures accepted by date
SEBI.
2.7.5.3 Enhanced role of certain board committees Details of utilisation of capital From 1
(From 1 April 2018): Audit committee is
required to scrutinise end use of funds raised raised through preferential April 2018
from primary issuances. Nomination and
remuneration committee is required to issues/QIPs in annual report
recommend payments of senior management
employees (one level below the board). Risk Half yearly disclosures of RPTs
management committee is required to
consider cyber security threats. on consolidated basis (similar to
2.7.5.4 Reduction in the maximum number of listed
entity directorships: Reduction in the limit of annual disclosure)
maximum number of directorships (including
alternate directorships) to 8 listed companies Details of transactions with any
(of which independent directorships shall not
exceed 7) by 1 April 2019 and no more than 7 person (including promoter
listed companies by 1 April 2020.
2.7.5.5 Permission to related parties to vote against group) which holds 10% or more
RPTs: The blanket restriction on related
parties from voting on any and all related shares in annual report
party transactions has been removed.
Related parties can now cast a negative vote Details of credentials, basis of
on transactions on RPT matters.
recommendation and fees

payable to auditors in notice

seeking auditors' appointment

2.7.5.7 Unlisted 'material' subsidiaries and
Secretarial Audit: Material subsidiary to now
include subsidiaries who account for 10% of
the consolidated income or net worth of the
listed company. Further, the listed company is
required to appoint at least one ID as a
director on the board of its off-shore material
subsidiaries. In the latter case, the earlier
threshold of 20% of the consolidated income
or net worth continues to apply. Further,

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secretarial audit has been made mandatory staggered applicability of this requirement –
for listed companies and their unlisted Indian top 500 listed companies (by market cap) to
material subsidiaries from 1 April 2018. comply by 1 April 2019 and top 1000 listed
companies (by market cap) to comply by 1
2.7.6 Recommendations with Modifications April 2020.
2.7.6.1 Separation of key positions: Kotak 2.7.6.3 Royalty/brand payments to related parties:
Kotak Committee recommended that
Committee recommended that all listed payments made by listed companies to
companies with more than 40% public related parties with respect to brands usage /
shareholding are required to have different royalty which exceeds 5% of annual
individuals appointed as chairperson and consolidated turnover, requires a prior
managing director/CEO by 1 April 2020. SEBI approval from the shareholders on a
has limited applicability to the Top 500 listed "majority of minority" basis by 1 October
companies by market capitalisation, meeting 2018. SEBI while accepting this has taken a
the public shareholding criteria. stricter approach and reduced the threshold
2.7.6.2 Woman ID: Kotak Committee recommended from 5% to 2%.
appointment of at least one independent 2.7.6.4 Procedural changes on board and
woman director for all listed companies by 1 shareholder meetings:
October 2018. SEBI has provided for a

Recommendation KOTAK Committee SEBI

Board of Directors All listed companies to Top 1,000 listed

Quorum: Higher of 3 or 1/3 comply by 1 October companies to comply by

of total strength 2018 1 April 2019; and Top

Board size: At least 6 2,000 listed companies

directors to comply by 1 April

2020

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Annual General Meetings (i) from FY 2018-19, (i) after the end of FY

(AGMs) i.e., applicable from 31 2018-19, i.e., by 31

For the top 100 listed August 2018 August 2019

companies, (ii) 1 April 2018 for all (ii) from FY 2018-19 for

(i) AGMs to be held within 5 shareholder meetings AGMs

months as opposed to 6

months currently

(ii) one-way live webcast of

the meeting proceedings.

i Anooj Shrivastava, An Analytical Study of Corporate ii Khaitan & Co., Corporate governance: SEBI’s go ahead to
Governance in India, Corporate Governance(Jan.1,2019, kotak committee recommendations Lexology
12:00AM), (April,2,2018,12:00AM),
https://www.scribd.com/document/345138692/Corporate- https://www.lexology.com/library/detail.aspx?g=2bff7559-
Governance a167-4c50-9a7f-3ef6b7517844

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