FACULTY OF COMMERCE

INTEGERATED B.COM+MBA
(2024 – 25)

SEMESTER 3

SUBJECT: CORPORATE GOVERNANCE AND

COMMERCIAL LAWS

UNIT-1

CONCEPTUAL FRAMEWORK OF
CORPORATE GOVERNANCE AND ESG

PREPARED BY

DR.BIMAL SOLANKI
DEFINITIONS OF CORPORATE GOVERNANCE :
• “Corporate governance is a field in economics that investigates now to
secure/motivate efficient management of corporations by the use of incentive
mechanisms, such as contracts, organizational designs and legislation. This is
often limited to the question of improving financial performance, for example,
how the corporate owners cansecure/motivate that the corporate managers
will deliver a competitive rate of return.” -www.encycogov.com, Mathiensen
[2002].
• “Corporate governance deals with the ways in which suppliers of finance to
corporations assure themselves of getting a return on their investment”. -
Shleifer and Vishny [1997].
• “Corporate governance is the system by which business corporation are
directed and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the
corporation, such as, the board, managers, shareholders and other
stakeholders, and spells out the rules and procedures for making decisions on
corporate affairs. By doing this, it also provides the structure through which
the company objectives are set and the means of attaining those objectives
and monitoring performance”.
• “Corporate governance-which can be defined narrowly as the relationship of a
company to its shareholders or, more broadly, as its relationship to society”. -
An article in Financial Times [1997],
• Corporate governance is about promoting corporate fairness, transparency
and accountability”. -I Wolfensohn.
• Sir Adrian Cadbury said, “Corporate governance is holding the balance
between economic & social goals and between individual & community goals.
The aim is to align as nearly as possible, the interests of individuals, corporate
& society”.
PRINCIPLES OF CORPORATE GOVERNANCE :

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 Key elements of goods corporate governance principles include honesty, trust
and integrity, openness, performance orientation, responsibility and accountability,
mutual respect, and commitment to the organisation.
Of importance is how directors and management develop a model of
governance that aligns the values of the corporate participants and then evalaute
this model periodically for its effectiveness. In particular, senior executives should
conduct themselves honestly and ethically, especially concerning actual or apparent
conflicts of interest, and disclosure in financial reports.
• Commonly accepted principles of Corporate Governance include
1. Rights and equitable treatment of shareholders
Organisation should respect the rights of shareholders and help
shareholders to exercise those rights. They can help shareholders exercise
their rights by effectively communicating information that is understandable
and accessible and encouraging shareholders to participate in general
meetings.
2. Interest of other stakeholders
Organisations should recognise that they have legal and other
obligations to all legitimate stakeholders.
3. Role and responsibilities of the board
The board needs a range of skills and understanding to be able to deal
with various business issues and have the ability to review and challenge
management performance. It needs to be of sufficient size and have an
appropriate level of commitment to fulfil its responsibilities and duties. There
are issues about the appropriate mix of executive and non-executive
directors. The key roles of chairperson and CEO should be held by the same
person.
4. Integrity and ethical behaviour
Organisations should develop a code of conduct for their directors and
executives that promotes ethical and responsible decision making. It is
important to understand, though, that systemic reliance on integrity and ethics
is bound to eventual failure.
5. Disclosure and transparency
Organisations should clarify and make publicity known the roles and
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 responsibilities of board and management to provide shareholders with a level
of accountability. They should also implement procedures to independently
verify and safeguard the intergrity of the company’s financial reporting.
Disclosure of material concerning the organisation should be timely and
balanced to ensure that all investors have access to clear, factual information.
SCOPE & IMPORTANCE OF CORPORATE GOVERNANCE:
1. Corporate governance ensures that a property structured Board, capable
oftaking independent & objective decisions is at the helmof the affairs of the
company. This lays down the framework for creating long-term trust between
the company & external providers of capital.
2. It improves strategic thinking at the top by inducting independent directors
who bring a wealth of experience & a host of new ideas.
3. It retionalizes the management & monitoring of risk that a corporation faces
globally.
4. Corporate governance emphasises the adoption of transparent procedures &
practices by the Board, thereby ensuring integrity in financial reports.
5. It limits the liability of top management & directors, by carefully articulating the
decision making process.
6. It inspires & strengthens investors’ confidence by ensuring that there are
adequate number of non-executive & independent directors on the Board, to
look after the interests & well-being of all the stakeholders.
7. Corporate governance helps provide a degree of confidence that is necessary
for the proper functioning of a market economy, as it contemplates adherence
to ethical business standards.
8. Finally, globalisation of the market place has ushered in an era wherein the
quality of corporate governance has become a crucial determinant of survival
of corporate. Compatibility of corporate governance practices with global
standards has also become an important constituent of corporate success.
Thus, good corporate governance is a necessary pre-requilsite for the
success of Indian corporate.
OBJECTIVE OF CORPORATE GOVERNANCE
The fundamental objective of Corporate Governance is the enhancement of
shareholder’s value, keeping in view the interest of other stake holders. This

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harmonizes the need to strike a balance at all times between the need to enhance
shareholder’s wealth whilst not being too detrimental to the interest of other
stakeholders in the company.
Factors influencing Corporate Governance : Four factors which influence
corporate governance :-
1. The ownership structure of company.
2. Financial Structure
3. The structure of the company Board
4. The Legal, political and regulatory environment within which company
operates.
THE THEORY AND PRACTICE OF CORPORATE GOVERNANCE:
Theoretical basis of Corporate Governance
There are four broad theories to explain and elucidate, corporate governance.
These are :
• Agency theory
• Stewardship theory
• Stakeholder theory
• Sociological theory
Agency theory
Recent thinking about strategic management and business policy has been
influenced by agency cost theory, though the roots of the theory can be traced back
to Adam Smith who identified an agency problem in the joint stock company. The
fundamental theoretical basis of corporate governance is agency costs.
Shareholders are the owners of any joint stock, limited liability Company, and are the
principals of the same. By virtue of their ownership, the principals define the
objectives of the company. The management, directly or indirectly selected by the
shareholders to pursue such objectives, are the agents. While the principals
generally assume that the agents would invariably carry out their objectives, it is
often not so. In many instances, the objectives of managers are at variance from
those of the shareholders. Such mismatch of objectives is called the agency
problem, the cost inflicted by such dissonance is the agency cost. The core of
corporate governance is designing and putting in place disclosure, monitoring,
oversight and corrective systems that can align the objectives of the two sets of

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players as closely as possible and hence minimize agency costs. Problems with
Agency theory
Total control of management is neither feasible nor required under this theory.
The underlying assumption in the trade-off that shareholders make on employing,
agents is that they must accept a certain level of self- interested behaviours in
delegating responsibility to others. The objectiveof agency theory is to check the
abuse in thus trade-off, but its limited success raises the question of its utility as an
theoretical model to promote corporate governance. Besides in agency theory the
assumption is with the complexities of investor-board relationship in large
organizations, shareholders should have correct and adequate information to wield
effective control. Equity investors rarely get these and besides they rarely make clear
their exact target returns, and yet delegate authority to meet the target. It is also to
be understood that in terms of controls, equity investors hardly have sanctions over
boards. Instead they have to rely on self-regulation to ensure that an orderly house is
maintained.
There are two broad mechanisms that help reduce agency costs and hence
improve corporate performance through better governance : (1) fair and accurate
financial disclosures and (2) efficient and independent board of directors.
Stewardship theory
The stewardship theory of corporate governance discounts the possible
conflicts between corporate management and owners and shows a preference for
board of directors made you primarily of corporate insiders. This theory assumes that
managers are basically trustworthy and attach significant value to their own personal
reputations. The market for managers with strong personal reputations serves as the
primary mechanism to control behaviour, with more reputable managers being
offered higher compensation packages.
Stewardship theory can be reduced to the following basics:
• The theory defines situation in which managers are not motivated by
individual goals, but rather they are stewards whose motives are aligned with
the objectives of their principles.
• Given a choice between self-serving behaviour and pro-organizational
behaviour, a steward’s behaviour will not depart from the interests of his
organization.

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• Control can be potentially counterproductive, because it undermines the pro-
organizational behaviour of the steward, by lowering his motivation.
The greatest barrier to the adoption of stewardship mechanism of governance
lies in the risk propensity of principals. Risk taking ownerswill assume that
executives are pro-organizations and favour stewardship governance mechanisms.
Where executives, investors cannot afford to extend board power, agency costs are
effective insurance against the self-interest behaviours of agents.
Stakeholder Theory
The stakeholder theory is grounded in many normative, theoretical
perspectives including ethics of care, the ethics of fiduciary relationships, social
contract theory, theory of property rights, and so on. While it is possible to develop
stakeholder analysis from a variety of theoretical perspectives, in practice much of
stakeholder analysis does not firmly or explicitly root itself in a given theoretical
tradition, but rather operates at the level of individual principles and norms for which
it provides little formal justification. Stakeholder theory is often criticized, mainly
because it is not applicable in practice by corporations.
Sociological Theory
The sociological approach has focused mostly on board composition and
implications for power and wealth distribution in the society. Under this theory, board
composition, financial reporting and disclosure and auditing are of utmost importance
of relative the socio-economic objectives of corporations.
A CONCEPTUAL FRAMEWORK OF CORPORATE GOVERNANCE:
Corporate Governance refers to the way in which a particular company is
governed. In the word of Adrian Cadbory of U. K. Corporate Governance basically
has to do with power and accountability, who exercise power, on behalf of whom and
how the exercise of power is control.
Corporate Governance is system of structural, procedural and cultural
safeguard designed to ensure that a corporation is run in the “best” long-term
interests of its shareholders, as well as, other stakeholders. Corporate Governance
may be elaborate as under :
Intellectual capital for growth-creative destruction-keep on innovating-
otherwise someone else will be at the top of the pecking order. Companies function
in a world of exponentially shortening product and service life cycles where customer

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preferences and technologies change in a discontinuous and non-linear fashion and
business paradigms and rulesbecome obsolete. The future winners will be those
business organizations who escape from the gravitational pull of the past on the fuel
of innovation.
In the opinion of some experts the twenty first century competition is
characterized by at least three fundamental paradigms shifts, viz.-
1. Ability of organizations and individuals to network globally and seamlessly ;
2. Ability to communicate, transmit, store and retrieve large amounts to
information including voice, data, video ; and
3. Mobility of capital to feed good projects around the world.
With the battle for market share and mind-share deepening, companies are
increasingly resorting to non-traditional resources (like knowledge) and innovative
means (like quick response) to create sustainable competitive advantage.
Objective of Good Governance
It is felt that the objective of corporate governance i.e., the overall objective of
wealth generation and competitiveness for the benefit of all can best be achieved
through the twin components of :
• An “inclusive” approach to directors’ duties which requires directors to have
regard to all the relationship on which the company depends and to the long,
as well as the short-term implications of their actions, with a view to achieving
company success for the benefit of shareholders as a whole ; and
• Wider public accountability : this is to be achieved principally through
improved company reporting, which for public and very large private
companies will require the publication of a broad operating and financial
review which explains the company’s performance, strategy and relationships
(e.g., with employees, customer and suppliers as well as the wider
community).
Why Excellence in Corporate Governance ?
Business excellence has several connotations. Excellence denotes
outstanding performance, superior quality and consistently extraordinary service
especially in the face of severe hardships. The work conveys a value-driven
approach consisting of respect for humanity, compassion and a positive and
proactive attitude towards solving problems while achieving repaid growth.

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 The future has no shelf line. If today’s technology is yesterday’s magic, there
is an imperative need to be innovative and creative to bring more excellence in vision
and mission and products and services. This is a message for Indian corporate and
the whole economy of the country, which is going through the phase of churning
where centuries old values, structures and practices are giving way to new
paradigms comprising new rules of the game. The scenario calls for bench marking
of standards of excellence in all spheres of corporate activities, as it has become
sine qua non for growth and long-term sustainability of companies.
The scenario also calls for excellence in performance which can be achieved
only through adherence to good corporate governance principles, such as
accountability, transparency, probability, quality of information and by fulfilling their
obligations towards society, the nature and the human well being.
Our success in the future will be entirely dependent upon our ability to identify
the opportunities, synergies our strengths and skills successfully and turn the
challenges into opportunities. This is more important for corporate governance than
for any other aspect of the economy. More so, when corporatization is becoming a
way of life with primary, secondary and tertiary sectors increasingly option for
corporate paradigms.
Transparency and Ethics
A key to good corporate governance is transparency. Transparency expects a
free exchange in information. Well-informed employees are the sound pillars of good
corporate governance. The dissemination of right information to the right people
(employees) not only builds up awareness among them but also enhances their
moral and productivity. Many of the wrong doings in the corporate functioning are
due to lack of information, wrong and inadequate information, misunderstood facts or
falsified information. Transparency requires enforcement of right to information-
nature, timeliness, and integrity of the information produced at each level of
interface. In fact, transparency is measured by the outsiders to assess true position
of a company - availability of firm specific information to those outside publicly traded
firms.
Transparency is an important value and values are cultivated through
awakening, convincing and persuading and shared meaning of the concept. It is
more in the form of a learning process rather than fixation andimposition of certain
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rules through coercion. However values once developed and cultivated also require
development of a system of checks and balances. Because human being are
susceptible to voice. Good governance requires a system of checks, balances,
evaluations and introspections.
Disclosure and Ethics :
As we know that better governance emphasized on transparency and
communication, dissemination of relevant information to interested parties is very
important in this respect. Corporate disclosure implies the disclosure of relevant
information to entities that are affected by the information. The different stakeholders
have different aspect of the company.
The different information which the company should provided to different
stakeholders as part of corporate disclosure is as followed :
1. The customers should be informed about product quality, product-ingredient,
product features, precautions and safety measures, etc. This type of product
information is interesting and useful to the customers as it has a direct/indirect
bearing upon the customer’s benefits.
2. The employee should be informed about their duties and responsibilities,
nature of work, wages for the work, rules and regulations relating to
performance and behaviour, leave policy, rules regarding transfer and
promotion, grievances redressal machinery, monetary and non-monetary
benefits to employees, employees’ right, welfare schemes, and rules
regarding termination of the services of employees.
3. The shareholder should be informed about the company’s profitability, safety
of their capital future prospectus and growth plans, financial position of
company, its assets and liabilities, its income and expenditure, state of
business affairs and value of investment of shareholders, etc.
4. The government should be informed about the financial results of the
company, its tax-liability and tax payment, compliance of various laws,
methods of operations, safety measures, working conditions, employee
satisfaction, environmental protection, product safety, faire prices and fair
trade practices.
5. The general public should be informed about waste disposal management
and environmental protection, employment policy ofcompany, nature of
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 company’s business and its operations, financial soundness of the company,
its products and services.
SUGGESTION FOR VALUE-BASED GOVERNANCE
Nowadays much is talked about value-based governance, a concept which
has ethical flavour. It is similar to management by values. Value base governance
involve creation and establishment of appropriate values to direct the corporate-
functioning and observing these values while exercising using and control the
corporate power and resource for performing those functions. Value based
governance requires value-creation in respect of employees, customers, investors
and society. Corporate Governance does not mean more and more regulations ; its
main focus should be on creating an environment where respectability matters.
Following are some suggestions for creation of such value based governance
environment :
1. Better balance of power between the management and the board.
2. There should be a peer evaluation for each member of the board.
3. Shareholders must actively stop us as owner and engage directors on
corporate issues.
4. Changes to mindset of manager and worker for implementation of business
ethics.
5. Corporation must integrate their value systems into their recruitment
programmes.
6. Every employee has to appreciate that the future of corporation is safe only
he/she does the right thing in every transaction.
7. Corporations have to create systems, structures and incentives to promote
transparency, since transparency brings accountability.
8. Corporate leaders believe in the value of company. They are power full role
modules.
9. Border market reforms to create incentives for good governance.
10. Acceptance of IAS-IFRS by all national will make it easy to compare the
performance of corporation in an industry across the countries, in a global
environment.
11. Senior management remuneration must be based on the principle of fairness,
transparency and accountability.
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 In India, we need to develop a robust model of CG as a fundamental
ingredient for strengthening economies and developing capital market. No doubt,
there are minimum slandered that must be observed by all corporations as enshrined
in the country’s laws or the rules of self-regulatory organization, the demand of good
governance can vary from industry to industry, firm to firm and even circumstances
to circumstances. The nation of having “one size fits all” is not only inappropriate but
undesirable too. JamshedIrani, Director, Tata Sons Ltd has rightly pointed out that
CG is not something, which can be mandated. Infect, it is a culture which has to be
built up gradually with strong link between the board and the management of
company.
WHY GOVERNANCE NEED FOR CORPORATE GOVERNANCE
Why Governance has come to the limelight ?
Practices : Bribery, Evasion, non compliance, cheating, Accounting frauds, insider
trading, market manipulators, neglect of minority shareholders, fraud lenders, abuse
of employees, sub standard quality etc.
• Why Corporate Governance ?
Investors primarily consider two variables before making investment
decisions-the rate of return on invested capital and the risk associated with the
investment. In recent years, the ‘attractiveness of developing nations’ as a
destination for foreign capital has increased, partly because of the high likelihood of
obtaining robust returns and partly because of the decreasing “attractiveness of
developed nations”. The lure of achieving a high rate of return, however, does not,
by itself, guarantee foreign investment ; the attendant risk weights equally in an
investor’s decision-making calculus. Good corporate-governance practices reduce
this risk by ensuring transparency, accountabilityand enforceability in the
marketplace.
While strong corporate-governance systems help ensures a country’s long-
term success, weak systems often lead to serious problem. In fact, some contend
that the ‘Asian financial crisis gave developing countries a lesson on the importance
of a sound corporate governance system.”
The existence of a corporate-governance system is likely a part of this
decision-making process. In such a scenario, firms that are “more open and
transparent.” and thus well governed, are more likely to raise capital successfully

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because investors will have “the information and confidencenecessary for them to
lend funds directly” to such firms. Moreover, well- governed firms likely will obtain
capital more cheaply than firms that have poor corporate-governance practices
because investors will require a smaller “risk premium” for investing in well-governed
firms.
Also, sound corporate-governance practices enable management to allocate
resources more efficiently, which increases the likelihood that investors will obtain a
higher rate of return on their investment. Finally, leading indices show that
developing countries that have good governance structures consistently outperform,
developing countries with poor corporate-governance structures. Thus, in an efficient
capital market, investors will invest in firms with better corporate-governance
frameworks because of the lower risks and the likelihood of higher returns. At a
macro level, if firms in developing countries attract investment, they will stimulate
growth in the local economy. If they “cannot attract equity capital, they are doomed
to remain on a small, inefficient scale”, and they will be unable to stimulate growth in
their host country.
Good corporate governance benefits developing countries in a number of
ways. According to at least one scholar, good corporate-governance practices can
decrease the “likelihood of a domestic financial crisis” and the severity if such a crisis
does occur. Additionally, scholars have found strong “evidence linking corporate
governance to corporate efficiency” and have shown that “corporate governance
creates more efficient corporate management.” Finally, research shows that well-
governed firms are valued significantly higher than firms with imperfect corporate-
governance practices. It has been estimated that, by the end of this century, “funds
seeking trustworthy, productive companies in today’s developing countries are likely
to top $500,000 billion.” The policy challenge that exists for governments in
developing countries is to provide a hospitable environment for such funds ; a sound
corporate-governance framework can play a decisive role in creating this hospitable
environment.
Strong corporate governance has beneficial consequences even for countries
that choose to allow a development strategy that does not focus on attracting foreign
investment. Many developing countries are home to strong distribution cartels that
waste scarce resources. Good corporate governance can reduce this wasteful
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behaviour and, thus, “overcome the obstacles to productivity growth.” Moreover,
corporate governance canplay a role in reducing corruption, and decreased
corruption significantly enhances a country’s developmental prospects. Ultimately,
corporate governance “is not just one of those imported western luxuries ; it is a vital
imperative.”
In India, the governance of most of the country’s industrial and business
organizations thrived on unethical practices at the market place and showed scant
regard for the timeless human and organizational values while dealing with their
shareholders, employees and other stakeholders.
An overwhelmingly large number of Indian corporation used several illegal
tactics such as cornering of industrial licences with a view to keeping away
competitors, using import licences to make a quick profit, illegally holding money
aboard, and indulging into bribery, corruption and other unethical practices with
impunity.
The reasons for the corporate mis - governance in India were many : A closed
economy, a sheltered market, limited need and access to global business, lack of
competitive spirit and an inefficient regulatory framework. These were responsible for
poor governance of companies in India for well over 40 years, between 1951 and
1991.
1. No information is given to investors regarding diversification, expansion, and
change in business, loss of business etc. and instead used by promoters and
top management for insider trading at the cost of small investors.
2. Many large companies are known to manipulate rules and even Govt. Policies
with the help of bureaucracy and political meddling.
3. It investors, Fll and general public, put their money, they have every right to
ask information about company.
Factors calling for Corporate Governance
• Two major changes over the past scenario
* variety of stakeholders in a modem corporation, apart from the stake of
the legal equity holders ; and
* Thanks to capital markets, majordiversificationoftheequity capital
leading to ever larger distance between the owners of capital and the
managers.
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• The decline of banking and the rise of the institutional investor.
• Increasing power and size of enterprises.
* Complex markets
* Globalization
* Worldwide Shareholders
* Institutional investors
• Systems of corporate governance should be reconciled with ground realities
of the country in question :
* Corporate ownership and control not uniform in emerging markets and
developed capital markets.
* Emerging markets are dominated by “family enterprises”
Major Corporate Misdeeds and Consequences
• Governance failures in the US
* To numerous to relate
• Governance failures in Europe
* Royal Dutch Ahold : Accounting irregularities
* Vivendi : Rapid growth through incautious acquisitions
* Fimalac/Mannesmann : Preferential treatment of favouredBoard
member/senior executives in bonus payments
* Parmalat : Accounting irregularis including forged letter, covering
upfunds diversion and losses
CORPORATE GOVERNANCE PRACTICES : AN INTERNATIONAL
COMPARISON

Sr. Features Anglo- German CG. Japanese Indian CG.

No American CG CG.
.
1. Corporate Shareholder Long-term Long-term Shareholder
objective. value corporate corporate value.
value. value
2. Government Capital Corporate Kieretsu or Maximize
focus. Market body. business surplus.
network.
3. Shareholding Diffused Banks, Financial, Directors and
. institutional promoter non- financial relatives
investors, families, other corporates. Other
significant corporates. corporates
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 block holders. foreign
investors.
4. Measure of Return on Return on Return on Return on
success. financial human capital. social capital financial
capital capital.
5. Decision Checks and Within the Within the Management,
making. balance network of network- outside
between stakeholders includes stakeholders
voice and exit including business excluded.
options. employees associates
local and banks as
community. stake
holders.
6. Control of Separated Linked with Linked with Linked with
corporate. from ownership. ownership. ownership.
ownership.
7. Orientation. Short-term Long term. Long term. Short term
driven by gains.
market prices.
8. Long-term Physical Plant and R&D Physical
investment in capital, R&D equipment, employee capital
human employee training.
capital. training.
9. Capital Liquid. Less Less Less
market important, due important, important due
(primary). to close ties due to close to institutional
with banks. ties with funding.
banks.
10. Capital Important, Not important, Not Not important,
market frequent hostile important, hostile
(secondary). hostile takeovers hostile takeovers
takeovers rare. takeovers rare.
possible. rare.
11. Investor Low. High, High, Low.
commitment. important in important in
difficult times. difficult times.
12. Major Institutional Banks, Government, Directors and
investors. shareholders, Government, individual relatives other
individual individual shareholders corporate,
shareholders, shareholders and foreign
business and Institutional investors,
network, Institutional shareholders, institutional
employees. shareholders. main bank. investors
(UTI).
13. Board Executive and Two-tier Executive Executive and
composition non¬executiv boards and non- non¬executiv
e directors. (supervisory executive e directors.
board and directors

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 management (representing
board). outside
finance
institutions).
14. Goal of the To promote To promote To promote Short term
board. shareholder long term long term gains.
wealth. organizational orgainzationa
health. l health.
15. Board Little. High. Little Little
intdependem formally,
over more
management formally.
16. Executive High. Moderate. Low. Moderate,
competition. (government
approval).
17. Dividend. High. Low. Low. Low,
uncertain.
18. Strength. Dynamic, Long-term Long-term Recent
marketbased, industrial industrial government
liquid capital, strategy, strategy, and
internalization stable capital, stable orgainzational
non- strong capital. activism (CII)
problematic. overseas towards
investment. corporate
governance
practices.
19. Weakness. Instability, Internation- Secretive, Lack of
short- alizationdifficul corrupt proper
termism. t ; vulnerable practices, disclosure ;
to global growth in secretive
capital market. institutional corrupt
activism and practices ;
financial instabilities.
speculation
in recent
times.

Distinguishing Corporate Governance from Other Concepts Corporate

governance = corporate/financial management
Accountability and Supervision Corporate Governance
Strategic Management
Executive Management – Decision and Corporate Management
Control Operational Management

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Corporate governance = corporate social responsibility or business ethics
If management is about running the business, corporate governance is about
seeing that it is run properly. All companies need managing and governing.
Corporate governance must not be confused with corporate management.
Corporate governance focuses on a company’s structure and process to ensure fair,
responsible, transparent and accountable corporate behaviour. Corporate
management on the other hand focuses on the tools required to operate the
business. Corporate governance is in fact situated at a higher level of direction that
ensures that the company is managed in the interest of its shareholders. One area of
overlap is strategy, which is dealt with at the corporate management level and is also
a key corporate governance element. Figure 3 below illustrates the difference
between corporate governance and corporate management. Corporate Governance
must also not be confused with “real” governance, which deals with the governance
structures and systems within the public sector.
Corporate governance must further be distinguished from good corporate
citizenship, corporate social responsibility and business ethics. Good corporate
governance will certainly reinforce these important concepts. But while companies
that do not pollute, invest in socially responsible projects or run charitable
foundations often benefit with superior reputation, public goodwill and even better
profitably, corporate governance is and remains distinct from these concepts.
Issues in Corporate governance
Corporate governance practices are a set of structural arrangements that are
emerging in free market economies to align the management of companies with the
interest of their shareholders (in particular) and other stakeholders, and society at
large. Corporate governance addresses three basic issues :
Ethical issues - Ethical issues are concerned with the problem of fraud, which is
becoming wide spread in capitalist economies. Corporations often employ fraudulent
means to achieve their goals ; They form cartels to exert tremendous pressure on
the government to formulate public policy, which may sometimes go against the
interests of individuals and society at large. At times corporations may resort to
unethical means like bribes, giving gifts to potential customers and lobbying under
the cover of public relations in order to achieve their goal of maximizing long-term
owner value.
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Efficiency issues: Efficiency issues are concerned with the performance of
management. Management is responsible for ensuring reasonable returns on
investment made by shareholders. In developed countries, individuals usually invest
‘money through mutual, retirement and tax funds. In India, however, small
shareholders are still an important source of capital for corporations as the mutual
funds industry is still emerging. The issues relating to efficiency of management is of
concern to shareholders as there is no control mechanism through which they can
control the activities of the management, whose efficiency is detrimental for returns
on their (shareholders) investments.
Accountability issues - The management of a corporation is accountable to its
various stakeholders.
“Accountability issues” emerge out of the stakeholders” need for transparency of
management in the conduct of business. Since the activities of a corporation
influence the workers, customers and society at large, some of the accountability
issues are concerned with the social responsibility that a corporation must shoulder.
The growing scale of corporations and their style of functioning have raised many
new issues that must be addressed by corporate governance. Some of these issues
are :
• The growth of private companies
• The magnitude and complexity of corporate groups
• The importance of institutional investors
• Rise in hostile activities of predators (take over)
• Insider trading
• Litigations against directors
• Need for restructuring of boards
• Changes in auditing practices
Corporate Governance is-
• Business Ethic
• Philosophy of Business
• Culture of Organization
• Corporate Social Responsibility
• Shareholder Value Creation
• Dynamic Leadership
18
• Clean and Green World
Corporate Governance is not merely about “ethical conduct of business” as
the SEBI report on the subject says. It is about leadership. For Governance means
leadership, especially top leadership at the level of CEO & CFO and the board of the
Directors. The manifesto of Corporate Governance must not be merely a manual of
procedure or a legal document or even an ethical code.
Corporate Governance is about maximizing shareholders value legally,
ethically and on a sustainable basis while ensuring fairness to every stakeholder-
customer, employee, investor, vendor-partners, the govt, of the land and community.
N. R. Narayana Murthy has mentioned corporate governance as a reflection of
company’s culture policies, how it deals with its stakeholders and its commitment to
value.
In short, good Corporate Governance practices enhance companies’ value of
stakeholders’ thrust resulting into robust development of capital market, the economy
and also help in the evaluation of a vibrant and constructive shareholders’ activism.
Webster dictionary has given a more elaborate and comprehensive
description of “Ethics”. It states that ethics is the discipline dealing with what is good
or bad. rightor wrong or moral duty or obligation. It is agroup of moral principles or
set of values. These principles govern the conduct or an individual or a profession.
Most people believe that ethics and morality are relevant only to individual.
However, one must remember, that the norms of conduct which apply to common
men, should also apply to businessmen. Business is the part of society and as such
ethics is also relevant in the context of business. The business ethics, however,
should be given special attention due to specific problems and opportunities faced by
the businessmen. The society, in general, is unlikely to fact such situations. Though
the basic ethical standards are universal, the difference lie in the application of
ethical principles in business situations. The increasing number of Corporate
Scandals in the last few years have stained Corporate Governance reputation and
questioned the effectiveness of its current structure. In light of this, a discussion on
Corporate Governance as well as Business Ethics in the changing scenario shall be
as under :
Changing Scenario of CG in India
The rapid scientific technological advancements are reshaping the world.
19
Developments in information and communication technology have revolutionized
every activity, be it scientific or business and commerce or individual and personal.
For business and commerce, they have facilitated improvements in productivity and
bottom-line of the business and commerce besides opportunities for better customer
service. The productivity improvements come out of the increased speed, accuracy
and ability to handle big volumes that technology offers. For the financial sector and
banking, the developments in information technology have spelt very special
benefits.
In today's globally competitive market, knowledge constantly makes itself
obsolete with the result that today’s advanced knowledge is tomorrow’s ignorance.
One has to be on the learning curve and continuously move up. All the knowledge
workers have to leverage
Introduction to XBRL [Extensible Business Reporting Language]
XBRL is the open international standard for digital business reporting
managed by a global not for profit consortium, XBRL international. It is committed to
improving reporting in the public interest. XBRL is used around the world in more
than 50 countries. Millions of XBRL, documentsare created every year, replacing
order, paper based reports with more useful, more effective and more accurate
digital versions.
In a nutshell XBRL provides a language in which reporting terms can be
authoritatively defined. Those terms can then be used to uniquely represent the
contents of financial statements or other kinds of compliance, performance and
business reports. XBRL lets reporting information more between organisations
rapidly, accurately and digitally.
The change from paper, PDF and HTML based reports to XBRL ones is a
little like the change from film photography in digital photography, or from paper
maps to digital maps. The new format allows you to do all the things that used to be
possible, but also opens up a range of new capabilities because the information is
clearly defined, platform-independent, testable and digital. Just like digital maps,
digital business reports. In XBRL format, simplify the way that people can use, share,
analyse and add value to the data.
What does XBRL do ?
Ofternterned ‘bar codes for reporting’. XBRL makes reporting more accurate
20
and more efficient. It allows unique tags to be associated with reported facts
allowing:
• people publishing reports to do so with confidence that the information
contained in them can be consumed and analysed accurately.
• people consuming reports to test them against a set of business and logical
rubles, in order to capture and avoid mistakes at their source.
• people using the information to do so in the way that best suits their needs,
including by using different languages, alternative currencies and in their
preferred style.
• people consuming the information to do so confident that the data provided to
them conforms to a set of sophisticated pre-defined definitions.
Comprehensive definitions and accurate data tags allow the
• preparation
• validation
• publication
• exchange
• consumption, and
• analysis
of business information of all kinds, information in reports prepared using the
XBRL standard is interchangeable between different information systems in entirely
different organisations. This allows for the exchange of business information across
a reporting chain. People that want to report information, share information, publish
performance information and allow straight through information processing all rely on
XBRL.
In addition to allowing the exchange of summary business reports, like
financial statements, and risk and performance reports, XBRL has the capability to
allow the tagging of transactions that can themselves be aggregated into XBRL,
reports. These transactional capabilities allow system-independent exchange and
analysis of significant quantities of supporting data and can be the key to
transforming reporting supply chains.
Who are the users of XBRL ?
The international XBRL, consortium is supported by more than 600 member
organisations from both the private and public sectors. The standard has been
21
developed and refined over more than a decade and supports almost every kind of
conceivable reporting, while providing a wide range of features that enhance the
quality and consistency of reports, as well as their usability XBRL is used in many
different ways, for many different purposes, including by
* Regulators
• Financial regulators that need significant amounts of complex
performance and risk information about the institutions that they
regulate.
• Securities regulators and stock exchange that need to analyse the
performance and compliance of listed companies and securities and
need to ensure that this information is available to markets to consume
and analyse.
• Business registrars that need to receive and make publicity available a
range of corporate data about private and public companies, including
annual financial statements.
• Tax authorities that need financial statements and other
complianceinformation from companies in order to process and review
their corporate tax affairs.
• Statistical and monetary policy authorities that need financial
performance information from many different organisations.
* Companies
• Companies that need to provide information to one or more of the
regulators mentioned above.
• Enterprises that need to accurately more information around within a
complex group.
• Supply chains that need to exchange information to help manage risk
and measure activity.
* Governments
• Governments agencies that are simplying the process of businesses
reporting to government and reducing red tape by either harmonrising
data defintornsor consolidating reporting obligations (or both).
• Government agencies that are improving government reporting by
standardising the way that consolidated or transactional reports are
22
 prepared and used within government agencies and/or published into
the public domain.
* Data Providers
• Specialist data providers that use performance and risk information
published into the market place and create comparisons, ratings and
other values-added information products for other market participants.
* Analysts and Investors
• Analysis that need to understand relative risk and performance.
• Investors that need to compare potential investments and understand
the underlying performance of existing investments.
What are some of the most important features of XBRL ?
Clear Definitions
XBRL allows the creation of reusable, authoritative definitions, called
taxonomies, that capture the meaning contained in all the reporting terms used in a
business report, as well as the relationship between all of the terms. Taxonomies are
developed by regulators, according standards betweenoil of the terms. Taxonomies
are developed by repulators, accounting standards setters, government agencies
and other groups that need to clearly define information that needs to be reported
upon XBRL doesn’t limit what kind of information is defined it’s language that can be
used and extended as needed.
Testable Business Rules
XBRL. allows the creation of business rules that constrain what can be
reported. Business rules can be logical or mathematical or both and can be used, for
example to. These business rules can be used to :
• stop poor quality information being sent to a regulator or third party, by being
run by the preparer while the report is in draft.
• stop poor quality information being accepted by a regulator or third party by
being run the point that the information is being received. Business reports
that fail critical rules can be bounced back to the preparer for review and
resubmission.
• flagging or highlighting questionable information, allowing prompt follow up
correction or explanation.
• create ratios, aggregations and other kinds of value-added information, based
23
 on the fundamental data provided.
* Multi-lingual Support
XBRL allows concept definitions to be prepared in as many languages as
necessary. Translations of definitions can also be added by third parties. This means
that it’s possible to display a range of reports in a different language to the one that
they were prepared in, without any addition work. The XBRL community makes
extensive use of this capability as it can automatically open up reports to different
communities.
Strong Software Support
XBRL is supported by a very wide range of software from vendors large and
small, allowing a very wide range of stakeholders to work with the standard.
LONG QUESTIONS:

1. Define corporate governance and write a note on Evolution of CG.

2. Explain the principles of CG.
3. Explain the CG comparison between – USA- GERMANY-JAPAN-INDIA
4. Explain in detail XBRL
5. State the Entice Conceptual frame work for CG.
6. Explain various theories of CG.
7. Explain the scope of CG in detal.

SHORT QUESTIONS
1. State the nature and evolution of CG.
2. Explain the scope of CG.
3. Explain the Importance of CG.
4. State the three basic issues with CG’
5. Explain the users of XBRL.
6. State important features of XBRL.

MULTIPLE CHOICE QUESTIONS:

1. Corporate Governance include the following:……………..

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(a) respect (b) integrity (c) good judgement (d) all the above

2. Kumar Mangalam Birla Committee Report was constituted in the year…………….

(a) 1999 (b) 2009 (c) 2019 (d) 1989

3. The corporate governance model in US and UK is ...................... oriented.

(a) Government
(b) Market
(c) Society
(d) Bank

4. The corporate governance model in Germany and Japan is ...................... oriented.

(a) Government
(b) Market
(c) Society
(d) Bank

5. Outsider system of CG is dominant in .

(a) UK
(b) USA
(C) Both A and B
(d) None of these

6. Insider system of CG is dominant in .

(a) Europe
(b) Japan
(c) Both A and B
(d) None of these

7. The model of CG is India, Hongkong, Brazil and developing countries is of

type.
(a) pure
(b) hybrid
(c) both A and B
(d) None of these

8. Three broad models of CG are

(a) Anglo-Saxon
(b) German
(c) Japanese
(d) All of the above

9. CG in US, UK, Canada, Australia and Common wealth countries follows

Model.
(a) Anglo-Saxon
(b) German
(c) Japanese
(d) Family-based

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10. German Model is known as Model.
(a) Continental – Europe
(b) Continental – Asia
(c ) Continental – America
(d) None of these

11. Model is also referred as Relationship Model.

(a) Japan
(b) Germany
(c) US
(d) UK

12. scandal is one of the largest in US Corporate history.

(a) Enron
(b) Kodak
(c) Nokia
(d) Satyam

13. Which of the following is not a code of CG?

(a) Cromme
(b) Vienot
(c) King
(d) The Sarbanes-Oxley

14. Which of the following is not a responsibility of Audit Committee?

(a) Monitoring Management
(b) Relations with the Independent Auditor
(c) Management Compensation
(d) Reviewing Corporate Reporting Process

15. Common stock that is widely distributed among individuals describes what type
of CG structure?
(a) Public
(b) Supervisory
(c) Market
(d) Network

16. East Asian Financial Crisis took place in the year

(a) 1995
(b) 1996
(c) 1997
(d) 1998

17. Due to East Asian Financial Crisis Economies of were severely

affected
(a) Thailand
(b) Korea
(c) Phillipines
(d) All of these
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18. Sarbanes-Oxley Act is popularly known as
(a) SOX

(b) SAR
(c)OXL
(d)XOR

19. Corporate Governance is related to the extent to which companies are

(a) transparent
(b) accountable
(c) both A and B
(d) None

20. Watergate scam of 80’s in the US led to a formation, which is now popularly
called Committee.
(a) Nestle
(b) Brittania
(c) Cadbury
(d) Hersheys

21. In India concept of Corporate Governance took its birth after the stock market
scam in the 90s led by .
(a) Vijay Malya
(b) Nirav Modi
(c) Harshad Mehta
(d) Arun Modi

22. SEBI constituted the committee on Corporate Governance under the

chairmanship of .
(a) Narendra Modi
(b) Rahul Gandhi
(c) Kumarmangalam Birla
(d) Mukesh Ambani

23. Corporate Governance has various constituents namely .

(a) Shareholder
(b) Board of Directors
(c) Management
(d) all of the above

24. Corporate Governance is a synonym for .

(a) sound management
(b) transparency
(c) disclosure
(d) all of the above

25. is a system by which business corporations are directed

and controlled.
(a) Corporate governance
27
 (b) Internal governance
(c) External governance
(d) Corporate Restructuring

Corporate governance helps provide the degree of confidence that is necessary for the functioning of
.
(e) Market research
(f) Market structuring
(g) Market Economy
(h) Market segmentation

26. Good corporate governance is a for success of Indian

Corporate.
(a) pre-requisite
(b) post requisite
(c) both A and B
(d) None of these

27. The fundamental objective of CG is .

(a) enhancement of shareholders value
(b) increase in creditors value
(c) Both A and B
(d) None of the above

28. The theories of CG are .

(a) Stewardship
(b) Stakeholders
(c) Sociological
(d) All of the above

29. Roots of the CG theory are traced back to .

(a) Philip Kotler
(b) Adam Smith
(c) Fisher
(d) Laspears

30. Stewardship theory states are stewards of the company.

(a) employees
(b) government
(c) managers
(d) shareholders

31. CG ensures that a corporation is run in the interest

of its shareholders.
(a) long-term
(b) short-term
(c) mid-term
(d) none of the above

32. The overall objective of CG is generation.

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(a) wealth
(b) economic
income
(c) none of the above

33. Through improved company reporting is achieved.

(a) public accountability
(b) private answerability
(c) private partnership
(d) none of the above

34. CG is an approach.
(a) inclusive
(b) conclusive
(c) exclusive
(d) none of the above

35. A key to good CG is .

(a) transparency
(b) secrecy
(c) privacy
(d) none of the above

36. Well-informed are the sound pillars of good CG.

(a) members
(b) shareholders
(c) owners
(d) employees

37. CG is of right information.

(a) dissemination
(b) elimination
(c) analysis
(d) none of the above

38. Many of the wrong doings of CG are due to lack of .

(a) information
(b) coordination
(c) expectation
(d) none of the above

39. Transparency is measured by the outsiders to assess

position of a company.
(a) true
(b) fake
(c) both A and B
(d) None of the above

40. Good governance requires .

29
(a) checks
(b) evaluations

30
(c) introspections
(d) all the above

41. As a part of corporate disclosure information is to be

provided to customers
(a) product quality
(b) duties and responsibilities
(c) profitability
(d) financial results

42. As a part of corporate disclosure information is to be

provided to employees
(a) product quality
(b) duties and responsibilities
(c) profitability
(d) financial results

43. As a part of corporate disclosure information is to be

provided to shareholder
(a) product quality
(b) duties and responsibilities
(c) profitability
(d) financial results

44. As a part of corporate disclosure information is to be

provided to government
(a) product quality
(b) duties and responsibilities
(c) profitability
(d) financial results

45. Concept of CG came into vogue in the US in late .

(a) 1950
(b) 1960
(c) 1970
(d) 1980

46. Concept of CG came into vogue in the UK in late .

(a) 1950
(b) 1960
(c) 1970
(d) 1990

47. The was the first with its version of Audit Committee.
(a) CII
(b) CME
(c) CSE
(d) none of the above

31
48. Main object of CG is protecting interest.
(a) Owner’s interest
(b) Investor’s interest
(c) Both A and B
(d) None of the above

49. The KumarMangalam Birla Committee made

recommendations.
(a) 19
(b) 20
(c) 22
(d) 25

50. The KumarMangalam Birla Committee made

mandatory recommendations.
(a) 19
(b) 20
(c) 22
(d) 25

51. The recommendations of KumarManagalam Birla Committee are applicable to

companies.
(a) All
(b) listed
(c) non-listed
(d) statutory

52. The framework for establishing good corporate governance was originally set up
by committee.
(a) Cadbury
(b) Thorton
(c) Nestle
(d) Britannia

53. External audit of accounts of a company is required

(a) to detect fraud
(b) by Companies Act
(c) demanded by Company bankers
(d) at the discretion of shareholders
54. Directors responsibilities are unlikely to include .
(a) fiduciary duty
(b) duty to propose high dividend
(c) duty of care
(d) duty of proper accounting record

55. A company can become insolvent if .

(a) cannot meet its budgeted level of profit
(b) cannot pay its creditors in full
(c) has negative working capital
32
(d) is making a loss

56. Disqualification of director may result from breach under

(a) Health and Safety at work Act 1974
(b) Companies Act 2013
(c) Sale of goods Act 1979
(d) Financial services Act 1986

57. Directors may not be disqualified for

(a) Continuing the trade when company is insolvent
(b) Paying inadequate attention to company’s finances
(c) Persistent breach of company’s legislation
(d) Being convicted of drunken driving

58. The is not the underlined principles of CG and

combined code of practice.
(a) Accountability
(b) Openness
(c) Integrity
(d) Acceptability

59. Directors responsibilities are unlikely to include .

(a) fiduciary duty
(b) duty to propose high dividend
(c) duty of care
(d) duty of proper accounting records

60. The primary stakeholders are

(a) customers
(b) suppliers
(c) shareholders
(d) creditors

61. Goal of CG and Business ethics is

(a) change the way ethics is taught
(b) increase the workload of accounting standards
(c) create more ethics standard by which corporate professionals must operate
(d) none

62. The CG structure reflects system of the company.

(a) cultural and economic
(b) legal and business
(c) social and regulatory
(d) all of the above

63. The internal audit function is least affected when department is

(a) non-independent
(b)competent
(c)objective
33
 (d) none of the above

64. Under theory both internal and external CG mechanisms are

intended to induce managerial actions to maximize shareholders value.
(a) Shareholders
(b) Stakeholders
(c) agency
(d) CG

65. is the objective of SARBANESE-OXLEY Act.

(a) Increase compliance burden for small companies
(b) Improve quality and transparency for financial reporting
(c) both A and B
(d) None

66. An organization’s appropriate tone at the top promoting ethical conduct is an

example of .
(a) ethics sensitivity
(b) ethics insensitivity
(c) ethical behaviour
(d) consequentialist

68.Independent director is one who .

(e) did not attend school supported by the company
(f) does not have outside relationship with other directors
(g) does not have any other relationship with the company other than his/her
directorship
(h) all of the above

69.The chairperson of the BOD and CEO should be leader with

(i) vision and problem solving skills
(j) ability to motivate
(k) business acumen
(l) all of the above

70.A board that is elected in a classified system is known as .

(m) diversified
(n) staggered
(o) rotating
(p) dis-classified
References,
1.Study material-ICAI
2.Law of Corporate Governance – Dipankar Sharma
3.Corporate governance in India – Shubhash Chandra Das.
4.Governance, constitution, and social justice- Salman Kurshid
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