Topics

**Syllabus:**

1. **Corporate Governance: Conceptual Framework**

- Governance and Management
- Purpose of Corporate Governance
- Benefits of Corporate Governance
- Stakeholders in Corporate Governance
- Theory and Practice of Corporate Governance
- Models of Corporate Governance
- Approaches to Corporate Governance
- Principles of Corporate Governance
- Pillars of Corporate Governance
- Framework of Corporate Governance

2. **Corporate Boards**
- Constitution
- Power, Role, Duty, and Responsibility
- Board Committees and Their Functions
- Key Management Personnel
- Shareholder Activism
- Class Action
- Insider Trading
- Whistleblowing

3. **Corporate Governance Framework in India**

- History and Evolution
- SEBI Guidelines and Clause 49
- Various Committees on Corporate Governance and Their Recommendations
- Companies Act, 2013
- National Companies Law Tribunal
- Corporate Governance in Public Sector Enterprises (PSEs) and Banks
- Challenges to Good Corporate Governance in India
4. **International Perspective on Corporate Governance**
- Important Milestones in the Evolution of Corporate Governance
- Cadbury Committee (UK)
- OECD Principles of Corporate Governance
- Sarbanes-Oxley Act (USA)
- Framework of Corporate Governance in the UK, USA, Germany, and Japan

5. **Major Corporate Governance Failures**

- Bank of Credit and Commerce International (UK)
- News of the World (UK)
- Enron (USA)
- WorldCom (USA)
- Arthur Andersen (USA)
- Satyam (India)
- Sahara (India)
- Kingfisher Airlines (India)
- Other Failures in India
- Important Case Laws on Corporate Governance in India

6. **Corporate Social Responsibility (CSR)**

- Corporate Responsibility vs. Philanthropy
- CSR and Corporate Governance
- Triple Bottom Line Approach to CSR
- Evolution of CSR
- CSR Drivers
- Codes and Models of CSR
- CSR in India: Evolution, Initiatives, and Practices
- CSR in Public Sector Enterprises (PSEs)

INTRODUCTION :

Corporate Governance is the way a company manages and controls itself, similar to how a
government runs a country with its own rules and policies. In a business, corporate governance
involves rules, processes, and laws that guide the company’s activities, with the board of directors
responsible for ensuring the company’s goals and values align with good governance practices.

Good corporate governance has gained importance due to high-profile scandals in recent years,
which showed how poor governance can harm a company’s reputation and finances. The structure of
corporate governance includes the Board of Directors, Management, and Shareholders—each with
distinct roles:

1.Shareholders: invest in the company and possess voting rights, but they do not manage
daily operations. They receive reports to stay informed about the company's performance
and to make decisions on important issues..

2.Board of Directors: They set the company’s direction and make major decisions. They are
responsible for ensuring the CEO is performing well, addressing shareholder interests, and
avoiding conflicts of interest.
 3. Management: Led by the CEO, they handle day-to-day operations, including strategic
planning, managing risks, and financial reporting, with a focus on long-term success.

Principles of Corporate Governance include:

 Fairness: Treating all shareholders equally.

 Transparency:

 Transparency means sharing clear, honest, and timely information about the company’s
activities and performance.

 In corporate governance, transparency builds trust by keeping stakeholders informed about

the company’s financial results and operations.

 To be transparent, companies should regularly publish relevant information about their

performance, ideally through quarterly, half-yearly, or annual reports in leading newspapers.

Accountability:

 Accountability means being responsible for actions and decisions, especially those that
impact others.

 In corporate governance, it means that the Chairman, Board of Directors, and CEO are
responsible for using the company’s resources effectively and in the best interest of the
company and its stakeholders.

Independence:

 Independence means that the company’s top management, especially the Board of
Directors, should be free from undue influence.

 For good corporate governance, the board should make decisions objectively, without bias,
and based solely on what’s best for the business. Without an independent board, achieving
good corporate governance is challenging.

Benefits of Good Corporate Governance

1. Improved Compliance: Everyone in the company follows clear rules, creating a responsible
and ethical work culture.

2. Better Communication: Good governance fosters strong communication and quick access to
information, helping the company make sound decisions.

3. Enhanced Reputation: Companies with strong governance gain trust from stakeholders,
which can lead to easier access to loans and investment at lower interest rates.

4. Increased Investment: Good governance attracts investors who value transparency and
stability, positively affecting share prices and brand value.

5. Attraction of Foreign Investment: Well-governed companies appeal to international

investors, contributing to economic growth.

6. Corporate Social Responsibility: Good governance encourages practices like environmental

and social responsibility.
 7. Prevention of Insider Trading: Effective governance reduces opportunities for insider trading
and corruption.

 Good corporate governance ensures corporate success and economic growth.

 Strong corporate governance maintains investors’ confidence, as a result of which, company
can raise capital efficiently and effectively.
 It lowers the capital cost.
 There is a positive impact on the share price.
 It provides proper inducement to the owners as well as managers to achieve objectives that
are in interests of the shareholders and the organization.
 Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
 It helps in brand formation and development.
 It ensures organization in managed in a manner that fits the best interests of all.

SEBI GUIDELINES ON CORPORATE GOVERNANCE

To promote good corporate governance, SEBI (Securities and Exchange Board of India) constituted a
committee on corporate governance under the chairmanship of Kumar Mangalam Birla. On the basis
of the recommendations of this committee, SEBI issued certain guidelines on corporate governance;
which are required to be incorporated in the listing agreement between the company and the stock
exchange.

1. Board of Directors:

 The Board must have a balance of executive and non-executive directors.

 (a) Board of directors shall have an optimum combination of i) executive and non-executive
directors with at least one- woman director and ii) not less than 50% of the board of
directors shall comprise of non-executive directors.
If the chairman is non-executive, one-third of the board should be independent directors; if
the chairman is executive, half should be independent.

2. Audit Committee
Composition: The audit committee must have at least three non-executive members, with
the majority being independent and one member having financial expertise. An
independent director will be the chairman of the committee and The Chairman shall be
present at the Annual General Meeting to answer shareholders’ queries.
Powers: The committee can investigate activities within its scope, request information from
employees, seek external professional advice, and invite experts when needed.

Roles:

 Oversee financial reporting and ensure accurate disclosures.

 Recommend the appointment/removal of external auditors.
 Review internal audit function.
 Discuss audit plans and findings with external auditors.
 Review financial and risk management policies.

3. Remuneration of Directors:
  The Annual Report must disclose director remuneration details, including salary, bonuses, and
performance-linked incentives.

4. Board meetings:

The board should meet at least four times a year with a maximum four-month gap between
meetings.

 Directors should not hold more than 10 committee memberships or five chairmanships across
all companies.

5. Management:

6. A Management Discussion and Analysis (MDA) report must be included in the Annual Report,

 Opportunities and threats

 Segment-wise or product-wise performance
 Risks and concerns
 Discussion on financial performance with respect to operational performance
 Material development in human resource/industrial relations front.
7. Shareholders:

In case of appointment of a new director or reappointment of a director, shareholders must be

provided with the following information:

1. A brief resume (summary) of the director

2. Nature of his expertise

3. Number of companies in which he holds the directorship and membership of committees of

the Board

4. A Board Committee under the chairmanship of a non-executive director shall be formed

( ‘Shareholders / Investors Grievance Committee’) to specifically look into the issues &
complaints of shareholders and investors such as transfer of shares, non-receipt of Balance
Sheet, etc.

8. Report on Corporate Governance:

 A dedicated section on corporate governance must be included in the Annual Report,

detailing the company’s practices and adherence to governance principles.

9. Compliance:

 The company must get a compliance certificate from auditors regarding adherence to governance
guidelines, to be included with the Directors’ Report and sent to the stock exchange.

BASIC FEATURES OR ELEMENTS OF GOOD GOVERNANCE

Participation: Involves both men and women in decision-making, ensuring civil society's engagement
in development strategies.

Rule of Law: Ensures fairness, impartiality, anti-corruption measures, Fair and impartial enforcement
of laws, protecting human rights, especially for minorities, with an independent judiciary and
incorruptible law enforcement.

Transparency: Decisions and their enforcement follow rules and are communicated clearly, making
information accessible and understandable.

Responsiveness: Institutions must address the needs of all stakeholders in a timely manner,
considering diverse societal interests and focusing on sustainable development.

Equity and Inclusiveness: All members, especially vulnerable groups, should have opportunities to
improve or maintain their well-being.

Effectiveness and Efficiency: Processes should yield results that meet societal needs while optimizing
resources, including sustainable use of natural resources.

Accountability: Both public and private entities must be accountable to the public and stakeholders,
enforced through transparency and the rule of law.
4. Responsibilities of the Board
  Establishing Corporate Culture and Ethical Standards:
The board plays a vital role in fostering a strong corporate culture by setting ethical
guidelines and promoting values like integrity, transparency, and social responsibility. They
may develop a code of ethics and establish policies that encourage ethical behavior across
the organization.

 Monitoring and Evaluating Management Performance:

Directors set performance expectations for the CEO and senior management and periodically
assess their performance against these metrics. They may use KPIs (key performance
indicators) such as revenue growth, market share, and profitability. The board has the
authority to reward high performance or replace leaders if goals are not met.

 Financial Oversight and Budget Approval:

Boards review the company's financial statements and budgets to ensure accuracy and
transparency. They work closely with the audit committee and external auditors to detect
financial irregularities, verify compliance with accounting standards, and maintain investor
confidence.

 Compliance and Risk Management:

The board ensures that the company complies with all relevant laws, including labor laws,
environmental regulations, and corporate governance codes. Directors are responsible for
identifying and managing risks, like cybersecurity threats or operational risks, that could
threaten the company’s stability.

 Succession Planning for Leadership:

Planning for future leadership needs is essential. Boards prepare for executive transitions to
ensure the company’s continuity. This involves developing internal talent and, if necessary,
planning external hires for key positions.

 Stakeholder Relations and Communication:

The board is responsible for fostering relationships with key stakeholders, including investors,
employees, and the public. They may be involved in the company’s annual reports and public
statements, ensuring transparent communication about company performance and
strategies.

The Fiduciary Duty: One of the fundamental responsibilities of the Board is to act
in the best interests of the company and its shareholders. This duty, often referred to
as the fiduciary duty, requires the Board to make decisions that maximize
shareholder value over the long term. However, this does not imply that other
stakeholders are ignored or disadvantaged in the process.

Balancing Stakeholder Interests: Effective corporate governance entails striking

a delicate balance between the interests of different stakeholders. While
shareholders seek profitability and value appreciation, employees desire job security
and fair treatment, customers expect quality products and services, and
communities look for responsible and sustainable practices. The Board must consider
and address these diverse interests without compromising the company’s overall
performance and integrity.

Ethical and Responsible Leadership: The Board sets the tone for the company’s
ethical and responsible conduct. It establishes a corporate culture that promotes
transparency, accountability, and compliance with legal and ethical standards. It is
essential for the Board to lead by example and ensure that ethical behavior is upheld
throughout the organization.

Risk Management and Sustainability: Stakeholders, including shareholders, are

increasingly concerned about the long-term sustainability of companies. Boards are
responsible for identifying, assessing, and mitigating risks that may impact the
company’s ability to deliver sustainable returns and fulfill its obligations to all
stakeholders. This includes environmental, social, and governance (ESG) factors that
have gained prominence in recent years.

Engagement and Communication: Open and effective communication between

the Board and stakeholders is crucial. Shareholders and other stakeholders should
have access to relevant information about the company’s performance, strategy, and
decision-making processes. Engaging with stakeholders through channels such as
annual meetings, reports, and feedback mechanisms helps build trust and
transparency.

MODELS OF CORPORATE GOVERNANCE

 Social Control Model
The Social Control Model of corporate governance emphasizes the inclusion of a
diverse set of stakeholders in the corporate governance structure, especially within
the board of directors. This model argues that corporate governance should go
beyond the traditional shareholder-centric approach, which primarily focuses on
maximizing shareholder value. Instead, it advocates for a broader representation,
including various stakeholders who have an interest in the company’s operations and
outcomes.
According to the Social Control Model:
 A Stakeholders Board would be established in addition to the conventional Board of Directors,
which primarily represents shareholders. This additional board would aim to strengthen the
internal control mechanisms within the company, enhancing the overall corporate governance
framework.
 The Stakeholders Board would comprise representatives from different interest groups, such as:
o Shareholders (traditional board members).
o Employees, who contribute directly to the company's success and would benefit
from job security and fair treatment.
o Major Consumers, who depend on the company’s products and services.
o Major Suppliers, whose long-term partnerships are crucial for the company’s supply
chain.
o Lenders, who provide financial backing and are interested in the company’s solvency
and stability.
This model seeks to achieve a more balanced governance structure by aligning the
company’s objectives with a range of stakeholders’ interests. It suggests that involving these
diverse stakeholders in decision-making can lead to more sustainable and ethical corporate
practices, benefiting not only the shareholders but also the broader community associated
with the company.
1. THE STAKEHOLDERS OF CORPORATE GOVERNANCE
2. THEORIES OF CORPORATE GOVERNANCE
3. ESG DISCLOSURE PRACTICES
 1. INTERNATIONAL PERSPECTIVE ON CORPORATE GOVERNANCE

Two Key Dimensions of Corporate Governance:

1. External Country-Level Dimension:

o This dimension involves the quality and enforcement of a country's legal

frameworks. Strong laws protect investor rights, reduce risks, and make returns more
reliable (Copeland et al., 2005).

o Example: In the U.S., the Sarbanes-Oxley Act ensures rigorous financial disclosures,
protecting shareholders and promoting trust.

2. Internal Firm-Level Dimension:

o This focuses on a company’s governance policies, like transparency and limitations

on insider control. Strong internal governance promotes ethical behavior, reducing
exploitation risks for outside investors (Elton et al., 2003).

o Example: A firm with an independent board and regular financial disclosures is likely
to attract more investors due to perceived reliability.

Corporate Governance - Importance & Challenges

Importance of Corporate Governance

1. Investor Confidence: Good corporate governance builds trust by protecting shareholder

rights and ensuring transparency.
 o Example: Apple’s transparent reporting reassures investors about its financial health,
making it an attractive investment.

2. Risk Mitigation: Governance practices help manage risks by establishing checks and
balances.

Example: The Sarbanes-Oxley Act in the U.S. was introduced to prevent financial scandals like
Enron’s, improving corporate accountability.

3. Long-Term Sustainability: Strong governance fosters ethical practices, helping companies

avoid legal issues and remain sustainable.

Example: Unilever’s focus on sustainability in governance attracts eco-conscious investors and

customers.

4. Operational Efficiency: Clear governance structures improve decision-making, making

organizations more efficient.

Example: Google’s board structure and clear roles help streamline complex operations.

5. Enhanced Reputation: Good governance enhances brand reputation, which can lead to
customer loyalty.

Example: Johnson & Johnson’s commitment to ethics boosts its brand image, especially in
crisis management.

Challenges in Corporate Governance

1. Conflicts of Interest: Sometimes, board members may prioritize personal or insider interests
over shareholders.
Example: Family-owned businesses can struggle with balancing family interests with external
investors' needs.
2. Regulatory Complexity: Navigating different countries' legal requirements is challenging for
multinational corporations.
Example: Amazon faces unique tax and data regulations in each country, complicating
governance.
3. Lack of Independence: Boards may lack enough independent directors, reducing objectivity
in decision-making.
Example: Tesla’s early board composition, including close associates of Elon Musk, raised
independence concerns.
4. Transparency Issues: Insufficient transparency in financial reporting can erode trust.
Example: WeWork’s lack of financial disclosure before its IPO damaged investor confidence.
5. Adapting to Technology: Rapid digital advancements create cybersecurity and data
governance challenges.
Example: Facebook (Meta) has faced criticism over data privacy practices, highlighting the
importance of adapting governance to protect user data.

10 Key Areas of Corporate Governance Influencing International Investment (Ajami, et al., 2006):

 Decision Systems: These refer to the processes and structures that guide how decisions are
made within an organization. Effective decision systems ensure that choices align with
corporate goals and consider stakeholders' interests.
 Performance Monitoring Systems: Mechanisms for tracking and evaluating how well the
business and its executives are performing. These systems help maintain accountability and
allow for improvements where necessary.
 Incentive-Based Compensation: This includes compensation tied to performance goals,
encouraging managers and employees to work toward the company’s best interests. It aims to
motivate individuals to perform effectively and achieve organizational objectives.
 Bankruptcy Proceedings: Legal processes that come into play when a company cannot meet its
financial obligations. Bankruptcy proceedings protect the interests of creditors and provide a
structured way to address financial distress.
 Ownership Structures: This involves how ownership is divided within the organization,
including proportions held by shareholders, families, or other entities. Ownership structure
influences governance, power distribution, and accountability.
 Creditor Systems: The framework for managing relationships with creditors and addressing
financial obligations. Strong creditor systems protect lenders’ rights and maintain the flow of
capital to companies.
 Capital Structures: The balance between debt and equity financing that a company uses to
support its operations. A well-structured capital mix can provide stability and optimize financial
performance.
 Markets for Corporate Control: Systems that manage corporate ownership changes through
mergers, acquisitions, and takeovers. This ensures an orderly process for shifts in control,
protecting shareholders and enhancing efficiency.
 Markets for Management Services: Availability and access to skilled managers and leaders.
This area influences the quality of leadership, which is essential for corporate governance and
achieving business goals.
 Product Market Competition: The level of competition in the market where the company
operates. Healthy competition drives companies to improve governance practices, innovate,
and operate more efficiently.

KEY THEMES IN INTERNATIONAL CORPORATE GOVERNANCE

Ownership Structure:

 Family-owned businesses are common in emerging markets. They’re typically run by

founding family members, who often prioritize long-term stability.

 Publicly traded companies are seen more in developed economies, with shares available to
the public, requiring more accountability to shareholders.

 State-owned enterprises are partially or fully government-owned, often in sectors with heavy
government involvement.

Board Composition and Structure:

 A balance between executive (managers) and non-executive directors (not involved in daily
operations) is crucial for good governance.

 Independent directors bring an unbiased view, helping to make decisions objectively.

 Board committees specialize in different areas like audit, nominations, and remuneration,
ensuring focused oversight.
 Disclosure and Transparency:

 Financial reporting involves publishing timely, accurate financial data so investors can make
informed decisions.

 Corporate Social Responsibility (CSR) entails sharing environmental and social performance
data, reflecting a company’s social impact.

 Related party transactions (deals with entities or individuals linked to the company) require
transparency to avoid conflicts of interest.

 Stakeholder Engagement:

 Shareholders have certain rights and roles in governance, such as voting on key issues.

 Employees may influence governance through unions or committees that represent their
interests.

 Other stakeholders include customers, suppliers, and communities whose interests can
impact the company’s governance approach.

 Regulatory Framework:

 Securities regulations govern the issuance and trading of stocks to protect investors.

 Corporate laws set the guidelines for forming and running companies, ensuring they operate
legally and fairly.

core principles of corporate governance by Morck & Steier (2005):

1. Promote Equitable Treatment and Protect Stakeholder Rights: All shareholders should be
treated fairly, with their rights protected. This principle ensures that no one group of
shareholders (e.g., majority shareholders) benefits at the expense of others.

o Example: Many companies have policies to give equal voting rights to all
shareholders, ensuring fair decision-making.

2. Recognize the Interests of Other Stakeholders: Companies should consider the interests of
not only shareholders but also employees, customers, and the community. This broad view
of stakeholders helps build trust and support.

o Example: A company that prioritizes employee welfare and customer satisfaction

fosters a positive work environment and customer loyalty.

3. Define Roles and Responsibilities of the Board of Directors: The board’s duties, including
overseeing management and ensuring accountability, should be clearly outlined. A well-
defined board structure improves oversight and decision-making.

o Example: Most corporations establish audit committees within their boards to focus
on financial oversight, increasing transparency.

4. Uphold Integrity and Ethical Behavior: Integrity and ethical conduct are vital to building
trust with investors and the public. Companies should create ethical guidelines for decision-
making.
 o Example: Codes of conduct guide employees and leaders in maintaining honesty,
especially when handling sensitive information or financial reporting.

key governance practices highlighted by Denis & McConnell (2003):

1. Separation of Chairman & CEO Roles:

o Having different individuals as Chairman and CEO can prevent power concentration
in one person’s hands. However, Denis & McConnell observed that separating these
roles alone doesn’t always guarantee better governance.

o Example: PepsiCo separates the Chairman and CEO roles to ensure independent
oversight and balance in decision-making.

2. Appointment of Outside CEOs and Independent Directors:

o Hiring an external CEO and appointing independent directors can enhance

objectivity, bringing in fresh ideas and unbiased oversight.

o Example: Microsoft’s board includes independent directors who offer guidance and
provide an external perspective on company strategy and performance.

3. Smaller Board Size:

o Smaller boards are often more effective, as they can communicate better and make
decisions more efficiently than larger boards.

o Example: Google’s board has a streamlined structure, allowing quicker responses and
reducing complexity in decision-making.

MAJOR FAILURES

The Tata-Mistry fallout was a high-profile corporate conflict between Tata Sons, one of India's largest
conglomerates, and Cyrus Mistry, who was appointed as its chairman in 2012 and removed in 2016.
This dispute has been a significant moment in Indian corporate history, with wide-ranging
implications on governance, corporate law, and boardroom dynamics. Here’s a brief overview:

1. Background:

o Cyrus Mistry was appointed as chairman of Tata Sons in 2012, succeeding Ratan Tata.
Mistry, who came from the Shapoorji Pallonji Group (Tata Sons’ largest shareholder),
was expected to bring a fresh perspective to the Tata Group.

o Mistry initially focused on reducing losses in underperforming businesses and

making the group more profitable, questioning long-term investments and non-
performing assets in Tata’s vast portfolio. His approach diverged from traditional Tata
strategies, which had prioritized stability and a broader view of profitability.

2. The Dispute:
 o In October 2016, Mistry was abruptly removed as chairman by Tata Sons' board,
leading to a legal and public relations battle.

o Tata Sons cited a loss of confidence in Mistry’s leadership. Mistry, however, claimed
that his removal was because he resisted certain actions he believed were against
the interests of Tata Sons, alleging that he was pushed out for questioning past
decisions.

o The fallout led to allegations from both sides. Mistry alleged that certain board
members and Ratan Tata undermined his leadership, while Tata Sons argued Mistry
was not aligned with the company’s values and vision.

3. Legal Battle:

o The conflict led to a prolonged legal battle, with Mistry and his family’s firm,
Shapoorji Pallonji, taking Tata Sons to court, claiming oppressive practices and
mismanagement.

o The case eventually reached the Supreme Court of India, which, in 2021, ruled in
favor of Tata Sons, upholding Mistry’s removal. However, the court acknowledged
broader issues of governance and transparency, which have become key topics in
corporate governance.

4. Corporate Governance Implications:

o The Tata-Mistry fallout highlighted the importance of clarity in roles and authority
within a conglomerate, particularly concerning boardroom independence,
transparency, and the balance between ownership and management.

o It also raised questions about the responsibilities of independent directors,

shareholder rights, and the role of ethics in decision-making in family-owned or -
controlled businesses.

5. Aftermath:

o After the ruling, Mistry continued to be involved in the Shapoorji Pallonji Group until
his untimely death in 2022.

o Tata Sons has since moved on under the leadership of N. Chandrasekaran, who has
focused on refocusing and growing the conglomerate’s portfolio.

The Tata-Mistry fallout serves as a case study on the complexities of leadership transition,
governance, and corporate values in family-controlled businesses, especially when professional
management structures clash with traditional ownership roles. It remains a pivotal example of
boardroom dynamics and corporate governance challenges in Indian business.