CHAPTER-5

CORPORATE GOVERNANCE IN
INDIA, ENGLAND AND
AMERICA
 CHAPTERS

CORPORATE GOVERNANCE IN INDIA, ENGLAND AND

AMERICA

A. General

Corporate Governance is a system of structuring; operating, and

controlling a company with a view to achieve long-term strategic goals to

satisfy its shareholders, creditors, employees, customers and suppliers. It aims

to comply with the legal and regulatory requirements. It include the policies

and procedures adopted by a company to achieve its objectives in relation to

its shareholders, employees, customers suppliers, regulatory authorities and

the community at large. It prescribes a code of corporate conduct in relation to

all the stake-holders. Therefore, a framework of effective accountability to the

stake holders is the essence of corporate governance.1

B. Meaning and Definition of Corporate Governance

In common parlance, the term ‘corporate governance’ simply refers to

the processes and structure by which business and affairs of corporate sector

are directed and managed. It can also be classified as a field in economics,

which studies many issues arising from the separation of ownership and

control. It provides an architecture of accountability as well as the structures

and processes to ensure that companies are managed in the interest of their
owners.2

Subhash Chandra Das “Corporate Governance in India- An Evaluation” (2009), p. 1.

Review of the role and effectiveness of non-executive directors, Higgs, The Higgs
Review (2003), together with full details of the research conducted for the Review and
related information, available at, http://wAvw.dti.gov.uk/cld/non_exec_review. (Last
visited on July 21,2009).
 211

Corporate governance has succeeded in attracting a good deal of public

interest because of its apparent importance for the economic health of

corporations and society in general. However, the concept of corporate

governance is poorly defined because it potentially covers a large number of

distinct economic phenomenon. As a result different people have come up

with different definitions that basically reflect their special interest in the field.

It is hard to see that this ‘disorder’ will be any different in the future so the

best way to define the concept is perhaps to list a few of the different

definitions rather than just mentioning one definition.

i) Corporate governance is a field in economics that investigates how 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 can secure/motive that the corporate managers will
deliver a competitive rate of return”.3

ii) “Corporate governance is the system by which business corporations 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.4

www. Encycogov. Com. Mathiesen (2002).

OECD April 1999 OECD’s definition is consistent with the one presented by Cadbury
(1992). p. 15.
 212

iii) “Corporate governance is about promoting corporate fairness, transparency

and accountability.5

iv) The term corporate governance has been defined “as the system by which

companies are directed and controlled. The basic objective of corporate

governance is to enhance and maximize shareholder value and protect the

interest of other stake holder”.0

v) A complex definition has also been provided by the Advisory Board of the

National Association of Corporate Directors (NACD), New York

“Corporate governance ensures that long term strategic objectives and plans

are established and that the proper management structure (organization,

systems and people) is in place to achieve those objectives, while at the same

time making sure that the structure functions to maintain the corporation’s

integrity reputation, and responsibility to its various constituencies.”

C. Historical Perspective of Corporate Governance

The term ‘corporate governance’ has become a buzzword these days.

There may be two factors for this development. The first is that after the

collapse of the Soviet Union and the end of the cold war in 1990, it has

become the Conventional Wisdom all over the world that market dynamics
must prevail in economic matters.7 The concept of the Government controlling

the commanding heights of the economy has been given up. This, in turn, has
made the market the most decisive factor in settling economic issues.8

J. Wolfensohn, president of the world bank, as quoted by an article in Financial Times,

(New Delhi) June 21, 1999.
This piece has been extracted from one of the speech of Sir Adrian Cadbury delivered in
India during his visit year 2000.
N. Vittal, Issues in Corporate Governance in India, available at cvc. Nic.
In/vscvc/cvcspeeches/sp 11 apso 02 pdf. (Last visited July 29,2009)
Ibid.
 213

This has also coincided with the thrust given to globalization because

Of the setting up of the WTO and every member of the WTO trying to bring
down the tariff barriers.9 Globalisation involves the movement of four

economic parameters, namely:-

i) Physical capital in terms of plant and machinery,

ii) Financial capital in terms of money invested in capital markets or in

FDL

iii) Technology, and

iv) Labour moving across national borders.10

The pace of movement of financial capital has become greater because

of the pervasive impact of information technology and the world having

become a global village. When investments take place in emerging markets,

the investors want to be sure that not only are the capital markets or enterprises

with which they are investing, run competently but they also have good

corporate governance. Corporate governance represents the value framework,

the ethical framework and the moral framework under which business

decisions are taken. In other words, when investments take place across

national borders, the investors want to be sure that not only is their capital

handled effectively and adds to the creation of wealth, but the business

decisions are also taken in a manner which is not illegal or involving moral

hazard.

But historically speaking, after the great depression of the 1930’s in

Europe and America, it was universally accepted fact that corporate reform

was the only way to achieve prosperity. For example in the USA, after the

Ibid.
Ibid.
 214

depression and the beginnings of the new deal, interest revived in corporate

reform. A vast amount of regulatory legislation was enacted, and Congress at

least contemplated the possibility of federal chartering of corporations.11 In

this context, no one explanation can suffice for the revived interest in basic

corporate reform in the 1930’s, except that most of the different stands of

thought were depression-related. That is, many believed that the business
system had failed and that corporations needed fundamental changes.12

However, current preoccupation with corporate governance can be

pinpointed at two events: the East Asian Crisis, 1997 saw the economics of

Thailand, Indonesia, South Korea, Malaysia and the Philippines severely

affected by the exist of foreign capital after property assets collapsed. Since

the emerging economics had abundant natural and human resources and had

requisite technical infrastructure, the MNCS targeted emerging economies as

potential markets.13 The investment made by these companies provided the

much needed resource for development and these companies imparted global

standards in the emerging economies. However, such countries were opaque

closed or inward oriented with market unfriendly systems. The collapse of the

South East Asian tiger brought home the fact that if there is no proper

corporate governance in the financial sector, it leads to crony capitalism and

corruption.14 The second event was the American Corporate Crisis of 2001-

2002 which saw the collapse of two big corporations: Enron and world com,

See, J. Seligman, The Transformation of wall Street: A History of Securities and

Exchange Commission and Modern Corporate Finance, (1982) pp. 208-210.
Donald E. Schwartz, Federalism and Corporate Governance, 45 Ohio St. LJ. 545, 547.
G.N. Bajpai, corporate Governance and Development: why It matters? Available at,
www.sebi.gov.in/chairmanspeech/chsp 7. pdf (Last visited August 1,2009).
14
Ibid.

/
 215

and the ensuing scandals and collapses in other corporations such as Arthur

Andersen, Global Crossing and Tyco.

The concept of corporate governance basically originated in UK in

1991 on the basis of report of a committee set up by the London Stock

Exchange (LSE) and the Financial Reporting Council (FRC) of British under
the chairmanship of Sir Adrain Cadbury.15

D. Objectives of Corporate Governance

The concept of corporate governance is multi-faceted and covers a

wide range of objectives ranging from managing and maintaining operational

transparency to something as simple as follow legal mandatory disclosure

norms. Corporate governance is the set of rules and procedures that ensure that

managers do indeed employ the principles of value based management. The

essence of corporate governance is to make sure that the key shareholder

objective-wealth maximization is implemented. Most corporate governance

provisions come in two forms. The first in the threat of removal either as a

decision by the board of directors or as the result of a hostile takeover. Second

and which is most important for the firm’s managers is the fear of loss of job

which they need not fear if they are consciously involved in maximizing the
value of the resources entrusted to them.16

E. Features of Corporate Governance

There are so many features of corporate-governance in corporate field.

Which are as under :

i) It is an economic or financial concept.

ii) Involves organizational and social objectives

15 Cadbury Committee Report (1992).

16 B.R. Atre “Special Economic zone and corporate governance” SEBI and Corporate
Laws, January 11-17, 2010. p. 15.
 216

iii) Guiding practices, process and principles.

iv) Motivate management to perform better.

v) Universal approach.

vi) Framework of rules, relationships, systems and processes at all

levels in an organisation.

vii) Tool for benchmarking and controlling performance.

F. Corporate Governance : Ethical Conduct of Business

Corporate governance is all about ethical conduct of business. It is

concerned with code of values and principles which guide a person to select

between right and wrong. Good CG is about selecting that course of action

admist various alternative options and conflicting interest of various parties

which seeks to benefit greatest number of stake-holders.17

G. Elements of Good Corporate Governance

There are various elements of Corporate Governance. These elements

are:

i) Role and Powers of Board Good governance is decisively the

manifestation of personal beliefs and values which configure the

organizational values, beliefs and actions of its Board.18 The absence of clearly

designated role and powers of Board weakens accountability mechanism and

threatens the achievement of organizational goals. Therefore, the foremost

requirement of good governance is the clear identification of powers, roles,

responsibilities and accountability of the Board, CEO, and the Chairman of the

Board. The role of the Board should be clearly documented in a Board charter.

17 Dilip Kumar Sen “Corporate Governance Norms for Listed Indian Companies. Have
They changed Corporates?” SEBI and Corporate Laws March 8-14,2010. p. 43.
18 The Board as a main functionary is primary responsible to ensure value creation for its
stakeholders.
 217

ii) Legislation Clear and unambiguous legislation and regulations are

fundamental to effective corporate governance. Legislation that requires

continuing legal interpretation or is difficult to interpret on a day-to-day basis

can be subject to deliberate manipulation or inadvertent misinterpretation.

iii) Management EnvironmentManagement environment includes setting­

up of clear objectives and appropriate ethical framework, establishing due

processes, providing for transparency and clear enunciation of responsibility

and accountability, implementing sound business planning, encouraging

business risk assessment, having right people and right skill for the jobs,

establishing clear boundaries for acceptable behaviour, establishing

performance evaluation measures and evaluating performance and sufficiently

recognizing individual and group contribution.

iv) Board Skills To be able to undertake its functions efficiently and

effectively, the Board must process the necessary blend of qualities, skills,

knowledge and experience. Each of the directors should make, quality

contribution. A Board should have a mix of the following skills, knowledge

and experience:

(a) Operational or technical expertise, commitment to establish leadership;

(b) Financial skills;

(c) Legal skills; and

(d) Knowledge of Government and regulatory requirement

v) Board Skills :- To be able to undertake its functions efficiently and

effectively, the Board must process the necessary blend of qualities, skills,

knowledge and experience. Each of the directors should make quality

contribution. A Board should have a mix of the following skills, knowledge

and experience:
 218

(a) Operational or technical expertise, commitment to establish

leadership;

(b) Financial skills;

(c) Legal skills; and

(d) Knowledge of Government and regulatory requirement

vi) Board Appointments To ensure that the most competent people are

appointed in the Board, the Board positions should be filled through the

process of extensive search. A well-defined and open procedure must be in

place for reappointments as well as for appointment of new directors.

Appointment mechanism should satisfy all statutory and administrative

requirements. High on the priority should be an understanding of skill

requirements of the Board particularly at the time of making a choice for

appointing a new director. All new directors should be provided with a letter

of appointment setting out in detail their duties and responsibilities.

vii) Board Induction and Training Directors must have a broad

understanding of the area of operation of the company’s business, corporate

strategy and challenges being faced by the Board. Attendance at continuing

education and professional development programmes is essential to ensure that

directors remain abreast of all developments, which are or may impact on their

corporate governance and other related duties.

viii) Board Independence Independent Board is essential for sound

corporate governance. This goal may be achieved by associating sufficient

number of independent directors with the Board. Independence of director

would ensure that there are no actual or perceived conflicts of interest. It also

ensures that the Board is effective in supervising and, where necessary,

challenging the activities of management. The Board needs to be capable of

 219

assessing the performance of managers with an objective perspective.

Accordingly, the majority of Board members should be independent of both

the management team and any commercial dealing with the company.

ix) Meetings of Board Directors must devote sufficient time and give due

attention to meet their obligations. Attending Board meetings regularly and

preparing thoroughly before entering the Boardroom increases, the quality of

interaction at Board meetings. Board meetings are the forums for Board

decision making. These meetings enable directors to discharge their

responsibilities. The effectiveness of Board meetings is dependent on carefully

planned agendas and providing relevant papers and materials to directors

sufficiently prior to Board meetings. Also, in the present scenario, Board

meetings through modem means of communication like tele-conferencing,

video conferencing may be expressly allowed under law.19

x) Board Resources Board members should have sufficient resources to

enable them to discharge their duties effectively. It includes an access for

director to independent legal and professional advice at the company’s

expense. The costs of supporting the Board should be transparent and reported.

xi) Code of Conduct It is essential that the organizations explicitly

prescribed norms of ethical practices and code of conduct are communicated

to all stakeholders and are clearly understood and followed by each member of

the organization. System should be in place to periodically measure, evaluate

and if possible recognise the adherence to code of conduct.

xii) Strategy Setting The objectives of the must be clearly documented in

along-term corporate strategy including an annual business plan together with

achievable and measurable performance targets and milestones.

19
See, the Companies Act, 1956; section 285.
 220

xiii) Business and Community Obligations Though basic activity of a

business entity is inherently commercial yet it must also take care of

community’s obligations. Commercial objectives and community service

obligations should be clearly documented after approval by the Board. The

proposed and on going initiatives taken to meet the community obligations.

xiv) Financial and Operational Reporting The Board require

comprehensive, regular, reliable, timely, correct and relevant information in a
form and of a quality that is appropriate to discharge its function of monitoring
corporate performance. For this purpose, clearly defined performance
measures. Financial and non-financial should be prescribed which would add
to the efficiency and effectiveness of the organisation. The reports and
information provided by the management must be comprehensive but not so
extensive and detailed as to hamper comprehension of the key issues. The
reports should be available to Board members well in advance to allow
informed decision-making. Reporting should include status report about the
state of implementation to facilitate the monitoring of the progress of all
significant Board approved initiatives.
xv) Monitoring the Board Performance The Board must monitor and
evaluate its combined performance and also that of individual directors at
periodic intervals, using key performance indicators besides peer review. The
Board should establish an appropriate mechanism for reporting the results of
Board’s performance evaluation results.
xvi) Audit Committee The concept of Audit Committee came in the wake

of celebrated American case of Me Kesson v. Robbins Inc., involving auditor’s

liability. However, it was Canada, which first made the constitution of audit
committee mandatory for public companies.20

20
A.K. Majumdar Sc G.K. Kapoor “Company Law and Practice” (2003) p. 968.
 221

In our country, thoughts have gone into audit committee as a means to

attain better financial discipline in corporate sector by enhancing audit

independence and assuring proper functioning of the internal control system.

In India every public company having paid-up capital of not less than rupees

five crore to constitute an audit committee as a committee of the Board of

Director.21

xvii) Risk Management:- Risk is an important element of corporate

functioning and governance. There should be a clearly established process of
identifying, analyzing and treating risks, which could prevent the company
from effectively achieving its objectives. It also involves establishing a link
between risk-return and resourcing priorities. Appropriate control procedures
in the form of a risk management plan must be put in place to manage risk
throughout the organisation. The plan should cover activities as diverse as
review of operating performance, effective use of information technology,
contracting out and outsourcing.
The Board has the ultimate responsibility for identifying major risks to
the organisation, setting acceptable levels of risk and ensuring that senior
management takes steps to detect, monitor and control these risks. The Board
must satisfy itself that appropriate risk management systems and procedure are
in place to identify and manage risks. For this purpose the company should
subject itself to periodic external and internal risk reviews.
H. Specification of Relationship

Corporate governance specifies the relationships between, and the

distribution of rights and responsibilities among, the main groups of

participants :

(a) The board of directors

(b) The managers (if any)

21
See, the Companies Act, 1956, section 292.
 222

(c) The workers

(d) The shareholders or owners

(e) The regulators

(f) The customers

(g) The community (people affected by the actions of the organisation)

(h) The suppliers.

I. General Principles of Corporate Governance

Corporate governance represents the value framework, the ethical

framework and the moral framework under which business decisions are
taken.22 Corporate Governance effectively, therefore, calls for three factors:-

a) Transparency in decision-making,

b) Accountability which follows from transparency because

responsibilities could be fixed easily for actions taken or not taken and

c) The accountability is for safeguarding the interests of the stake holders

and the investors in the organisation.23

Corporate Governance also depends upon two things. The first is the

commitment of the management for the principle of integrity and transparency

in business operations. The second is the legal and the administrative

framework created by the Government. If public governance is weak, we can

not have good corporate governance.24 Thus, the Government is an important

party to corporate governance where other parties include the regulatory body

(e.g., the Chief Executive Officer, the board of directors, management and

shareholders). Other stake-holders who take part include suppliers, employees,

creditors, customers and the community at large.

22
Supra note. 7.
23
Ibid.
24
Supra note 13.
 223

Key elements of good 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 evaluate 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.

In this way the main principles of corporate governance are:

i) Rights and Equitable Treatment of Shareholders Organisations

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.

ii) Interests of Other Stake Holders Organsiations should recognise

that they have legal and other obligations to all legitimate stake holders.

iii) Role and Responsibilities of the Board The board needs a range of

skill and understanding to be able to deal with various business issues

and has the ability to review and challenge management performance.

It needs to be of sufficient size and has 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 not be held by the same

person.
 224

iv) Integrity and Ethical Behaviour Organisations should develop a

code of conduct for their directors and executives that promote ethical

and responsible decision-making. It is important to understand, that

systemic reliance on integrity and ethics is bound to eventual failure.

v) Disclosure and Transparency Organisations should clarify and

make publicly known the roles and responsibilities of board and

management to provide shareholders with a level of accountability.

They should also implement procedures to independently verify and

safeguard the integrity of the company’s financial reporting. Disclosure

of material matters concerning the organisation should be timely and

balanced to ensure that all investors have access to clear factual

information.25

J. Issues Involving Corporate Governance Principles Include

(a) Oversight of the preparation of the entity’s financial statement;

(b) Internal controls and the independence of the entity’s auditors;

(c) Review of the compensation arrangements for the chief executive

officer and other senior executives;

(d) The way in which individuals are nominated for positions on the board;

(e) The resources made available to directors in carrying out their duties;

(f) Oversight and management or risk;

(g) Dividend policy.

K. Importance of Corporate Governance

The importance of good corporate governance has also been

increasingly recognized for improving the firm’s competitiveness, better

corporate performance and better relationship with all stakeholders for which

25
Ibid.
 225

corporations are also required to adhere to the uniform and proper accounting

standards, as the standards reduce discretion, discrepancy and enhance not

only the degree of transparency in sharing of information with the stake­

holders but also reinforce the broader role the directors need to play for
achieving corporate objectives in the midst of challenges and adversities.26

The concept of corporate governance in India gains importance from

the following factors, which are proven and time-tested.27

(a) It stresses on the need of to have transparency in respect of board

matters, disclosures to shareholders and also emphasizes on the need to

have an ‘arms-length relationship’ between the promoters/owners and

the managers.

(b) It explains the need to adhere to ethical business practices.

(c) It smoothens the process of integration of India into the world

economy, thereby enabling the Indian industry to play the game by a
set standard of international rules rather than continue anachronistic
practices.
(d) It ensures that promoters of a company remain perennially accountable

and responsive to shareholders, creditors, consumers and employees.

(e) Corporate governance is a must, not only to gain credibility and trust
but also as a part of strategic management for survival, consolidation
and growth.
(f) Corporate governance strives to enhance board performance by

emphasizing on the contributions of professionally qualified and

experienced non-executive directors and board committees.

26 Tiwari, Ojha, Arun Kumar, ‘Corporate Governance in India: what it means and what it
needs? The Indian journal of Commerce, (New Delhi) October-December, 1998, p.
154.
27 Atul Mehrotra “Corporate Governance” in SEBI and Corporate Laws, March 16-22,
2009.
 226

(g) Corporate governance strives to monitor and ensure absolute

compliance with the laws of the land.

(h) The important characteristics of corporate governance, i.e., adequate

disclosures, focused approach, streamlined delegation and professional

management, ultimately result in maximizing the shareholder-value and

protecting the interest of creditors and employees.

However there is no single model of corporate governance and each, country

over the period of time has developed a wide variety of mechanisms to

overcome the agency problems arising out of separation of ownership and

control. One of the challenges policy makers are facing is how to develop a

good corporate governance framework which can secure the benefits

associated with controlling shareholders acting as direct monitors, while at the

same time ensuring that they do not impinge upon the development of equity

markets. Corporate Governance affects the development and functioning of

capital markets and exerts a strong influence on resource allocation. In era of

increasing capital mobility and globalization, it has also become an important

framework affecting the industrial competitiveness.28

Today, there is a growing dialog among different stakeholders about

corporate governance and how it should evolve to cope with the increasingly

dynamic and global nature of our capital markets. This has been happening for

the last few years, even before Satyam happened (or father came into light).

Post-Satyam, the process has gathered momentum. This dialogue is taking

place against a background of legislative and regulatory change (i.e. the

revised clause 49 and the expected changes in the company law arising from

Shilpi Thapar “Markets for Corporate Control - An Effective Mechanism of Corporate

Governance.” Chartered Secretary, March, 2009 p. 309.
 227

the Dr. J.J. Irani committee report). There has been a significant increase in the

scope of audit and other internal control, and risk management along with

increased public scrutiny. And that means a few fundamental changes for
India, Inc too.29

In this way good corporate governance, being a critical doctrine to the

global economic system, enables the business to not only effectively and
efficiently achieve its corporate objectives but also provides it the structure
and methodology to sustain its very survival in a globally competitive
environment.
L. Advantages of Good Corporate Governance
There are so many advantage of Good Corporate Governance, which
are as follow:
a) Adoption of good corporate governance practices assures stability and
growth to an enterprise.
b) Builds confidence amongst stakeholders as well as prospective stake
holders. Investors are willing to pay higher price to the corporates that
demonstrates strict adherence to internationally accepted norms.
c) In a knowledge driven economy, excellence in skills is the ultimate
requirement for the Board to excel and to take the benefit.
d) Long-term substance and strengthened stakeholders’ relationships.
e) A good corporate citizen enjoys a position of respect.
f) Potential stake holders aspire to enter into relationships with enterprises
whose governance credentials are exemplary.
M. Corporate Governance : Role in Preventing Corporate Scandals

The role of corporate governance is to ensure long-term viability, to

steward the company to fulfil its potential while adhering to high ethical

standards.

29 Shrikanth G & Urvashi Kani “Transparency Through IT” Dataquest A Cyber Media
Publication more enquiry see, dqindia.com. February 15,2009.
 228

The role of corporate governance, is three-fold :-

a) Ensuring the long-term health and viability of the company;

;% _ b) Stewarding the company to fulfil its potential and to become as great as

it can be; and

• c) Adherence to the highest standard of ethics, statutory compliance and

social responsibility.

In the case of Satyam, there was an undue concentration of power with

1 the founders, disproportionate to their low shareholding. The board was far

less independent than required. The core issue, clearly, is balance of power.

The Satyam episode has allowed us to look at the fundamental aspects of

corporate governance: on whose behalf the company is governed, and how we

, ■- _ can distribute power to ensure the longevity and effectiveness of the

i'
J
... if)
institution.

• In Harikishore Bhattad v. Union of India, the SEBI, as a part of its

efforts to improve governance in stock exchanges notified a scheme, namely,

Hyderabad Stock Exchange Ltd. (Corporatisation and Demutualisation) scheme,

y " 2005. In terms of clause 9(ii) of said scheme, company is to ensure that at least 51
percent of equity share are held by public other than shareholders having trading
rights in manner and period specified in section 4B(8) of Securities Contracts
(Regulation) Act, 1956. The petitioners who were member-broker of Hyderabad

• Stock Exchange Ltd. (HSEL) filed instant writ petition challenging impugned
J proceedings on the ground that same were arbitrary illegal and contrary to the

provisions of the Act as regulations were issued belatedly and more time should
be granted by SEBI for completing demutualisation process. The Andhra Pradesh
High Court held that the essence of the corporatisation and demutualisation was to

30
j
Ibid.
31
(2010)97 SCL 261 (AP).
 229

segregate trading, ownership and management of exchanges, thereby ensuring

independence of the stock exchanges from potential conflicts between the brokers
and investment communities. In this way High Court dismissed the writ petition
of the petitioners.

N. Corporate Social Responsibility (CSR) and Corporate Governance

(a) General Corporate social responsibility (CSR) is essentially a concept
whereby companies integrate social and environmental concerns in their business
operations and in the interaction with their stakeholders on a voluntary basis.
Through voluntary commitment to CSR, companies send a positive signal of their
behaviour to their various stakeholders, viz. shareholders, employees, investors,
creditors, suppliers, customers, regulators, government, and the society at large. In
doing so, they make an investment towards future and increase their profitability.
In fact, corporate governance and corporate responsibility towards society are
inextricably interlinked, intertwined and inseparable from each other.
(b) Meaning of Corporate Social Responsibility Corporate social
responsibility (CSR) can be described as an approach by which a company:

(i) recognises that its activities have a wider impact on the society and that
development in society, in turn, supports the company to pursue its

business successfully; and

(ii) actively manage the economic, social, environmental and human rights

impact of its activities.

This approach is derived from principles of sustainable development and good
‘Corporate Governance’.

Subhash Chandra Das “Corporate Governance in India - An Evaluation” (2009) p.

48.
33
Dr. Justin Paul and Pramod Potti “Business Environment : Text and Cases” (2008) p.
368.
 230

(c) Relevance of Corporate Social Responsibility :-The relevance of corporate

social responsibility is increasingly crucial to success because it gives companies
a mission and strategy around which multiple constituents can rely. The business
most likely to succeed in today’s rapidly evolving global environment will be

those best able to balance the often conflicting interests of their multiple
stakeholders.34
(d) Importance of Corporate Social Responsibility (CSR) There are many

factors that have compelled the corporates to recognize and attach tremendous

important to CSR in discharging their day to day activities. Some of these are:

(i) New concerns and expectations from various stakeholders in the context

of large-scale industrial change due to globalization;

✓
(ii) Increased influence of social criteria on the investment decisions of

individuals and institutions, both as consumers and as investors;

(iii) Increased concern about the damage to the environment caused by

economic activities;

(iv) Transparency of business activities brought about by the modem

information and communication technologies.

In the present era of intense competition, it is imperative for the corporates to

generate and sustain ‘Goodwill’ among their stakeholders and the community at

large. Therefore, active participation in various social welfare projects is surely

going to improve the corporates visibility and place them on a pedestal of high

public esteem. The business firms should understand the fact that economic goals

Suresh K. Chadha, Paramjit Kaur & Deeksha “An Empirical Analysis of Corporate
Social Responsibility Practices of Selected Companies”. Productivity A Quarterly
Journal of the National Productivity Council. P. 227.
35
Supra note. 33.
 231

and social responsibility objectives need not be contradictory to each other rather

both can co-exist and both can be achieved simultaneously.36

In fact, corporate governance and corporate responsibility towards society

are inextricably interlinked, intertwined and inseparable from each other.
Therefore, it is a well-conceived fact that good corporate governance itself is part
•37
and parcel of corporate responsibility towards society.
(e) E-Form for Filing Corporate Social Responsibility ReportThe ministry
of corporate affairs had released voluntary guidelines on Corporate Social

Responsibility (CSR) during the ‘Indian Corporate Week’ organized in

December, 2009. A number of corporates have stated that they would like to have
an effective framework for reporting their responsible business practices. Keeping
in view this feedback from the corporate sector, Shri R. Bandyopadhyay,

Secretary, Ministry of corporate Affairs, stated that the ministry is in the process
of designing an e-form under MCA-21 which will enable the corporates to file
their CSR report on the portal of the ministry. The availability of these reports at a
single place will enable the ministry to take policy decisions on this front and also

to showcase the responsible business practices of Indian Corporate Sector to the

whole world.

O. Corporate Governance in India - A Background

The history of the development of Indian corporate laws has been marked
by interesting contracts. At independence, India inherited one of the world’s
poorest economies but one which had a factory sector accounting for a tenth of
national product; Four functioning stock markets (predating the Tokyo Stock
Exchange) with clearly defined rules governing listing, trading and settlements; a
well-developed equity culture only among the urban rich; and a banking system

36
Id, at 49.
37
Supra note. 33.
38
PIB Press Release, New Delhi, March 11, 2010.
 232

■2Q

replete with well-developed lending norms and recovery procedures. In terms of

corporate laws and financial system therefore, India emerged far better endowed
than most other colonies. The 1956 Companies Act as well as other laws
governing the functioning of joint-stock companies and protecting the investor’s
rights built on this foundation.40 —

But the turn towards socialism in the decades after independence marked
by the 1951 Industries (Development and Regulation) Act as well as the 1956
Industrial Policy Resolution put in place a regime and culture of licensing,
protection and widespread red-tape that bred corruption and stilted the growth of
the corporate sector.41 The situation grew from bad to worse in the following

decades and corruption, nepotism an inefficiency became the hallmarks of the

Indian corporate sector. Exorbitant tax rates encouraged creative accounting
practices and complicated emolument structures to beat the system.42

For most of the post-independence era, the Indian equity markets were not
liquid or sophisticated enough to exert effective control over the companies.
Listing requirements of exchanges enforced some transparency, but non-
compliance was neither rare nor acted upon. All in all, therefore, minority
shareholders and creditors in India remained effectively unprotected in spite of a
plethora of laws in the books.43

(a) Role of SEBI in Corporate Governance :- The years since liberalization

have witnessed wide-ranging changes in both laws and regulations driving

corporate governance as well as general consciousness about it. Perhaps the single

Omkar Goswami, Corporate Governance in India, Taking action against corruption in

Asia and the Pacific, Asian Development Bank, Manila, Chapter 9,2002.
Ibid.
Rajesh Chakrabarti, “Corporate Governance in India - Evolution and Challengers”,
available at unpanl.un.org / intradoc / groups / public / document / APCITY /
UNPANO 23826.pd and (Last visited August 3,2009).
42
Ibid.
43
Ibid.
 233

most important development in the field of corporate governance and investor

protection in India has been the establishment of the Securities and Exchange
Board of India (SEBI) in 1992 and its gradual empowerment since then.
Established primarily to regulate and monitor stock trading, it has played a crucial
role in establishing the basic minimum ground rules of corporate conduct in the
country. In the Indian context, the need for corporate governance has been
highlighted because of the scams we have been having almost as an annual
feature ever since we had liberalization from 1991. We have the Harshad Mehta
Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam and so on.44
Recent Satyam Scam45 is the largest scam in the history of corporate India. These

concerns about corporate governance stemming from the corporate sandals as

well as opening up to the forces of competition and globalization gave rise to
several investigations into the ways to fix the corporate governance situation in
India.

One of the first among such endeavours was the CII Code for Desirable
Corporate Governance developed by a committee chaired by Rahul Bajaj.46 The

committee was formed in 1996 and had submitted its code in April 1998. Later,
SEBI constituted two committees to look into the issue of corporate governance,
the first chaired by Kumar Manglam Birla47 that submitted its report in early 2000
and the second by Naryan Murthy three years later.48 A committee headed by Shri

Naresh Chandra was constituted in August 2002 to examine corporate audit, role

N. Vittal, “Issues in Corporate Governance in India”, available at CVC. Nic. In

WSCVOCVC speechs/sp 11 apr 02. pdf. (Last visited July 29, 2009)
Satyam (Scandal) http ://enunipipedia.orwiki/satyam-scandal.
R. Bajaj, Chairman, Draft code on corporate governance, “Confederation of Indian
Industry”, 1997.
Naryan Murthy Committee to Review Existing Code of Coiporate Governance,
Securities and Exchange Board of India, August, 2002.
Shri Kumar Mangalam committee to Promote and Raise the standard of corporate
Governance in India Securities and Exchange Board of India, May 1999.
 234

of auditors, relationship of company and auditor.49 The recommendations of the

Birla Committee have been implemented by the insertion of clause 49 in the

listing Agreement with the Stock Exchanges. The following table summarises the
recommendations of the above committees on corporate governance

Table 1

(b) A Comparison of the Recommendations of the Various Committees*

Birla Committee N. Murthy Committees Shri Naresh Chandra

Recommendations Recommendations Committee Report

(a) Applies to listed (a) Strengthening the (a) Recommended a list

companies with paid up responsibilities of audit of disqualifications for

capital of Rs. 3 crore committee audit assignments like

and above direct relationship with

company, any business

relationship with

company, any business

relationship with client,

personal relationship

with director.

(b) Composition of (b) Improving quality of (b) Audit firms not to

board of directors financial disclosures provide services such as

optimum combination of accounting internal audit

executive & non­ assignments, etc., to

executive directors audit clients

Committee headed by Shri Naresh Chandra to Examine Corporate Audit, Role of

Auditors, Relationship of Company & Auditor, August 2002.
www.sebi.gov.in/investor//reeog.html (Last visited on March 30,2010)
 235

(c) Audit committee (c) Utilisation of (c) Auditor to disclose

with 3 independent Proceeds from IPO contingent liabilities and

Directors with one highlight significant

having financial and accounting policies.

accounting knowledge

(d) Board procedures at (d) To assess disclose (d) Audit committee to

least 4 meetings of the business risks. be first point of

board in a year with reference for

maximum gap of 4 appointment of auditors

months between 2

meetings. To review

operational plans,

capital budgets,

quarterly results,

minutes of committees

meeting.

(e) Director shall not be (e) Formal code of (e) CEO and CFO of

a member of more than conduct for board listed company to certify

10 committee and shall on fairness, correctness

not act as chairman of of annual audited

more than 5 committees accounts

across all companies

(f) Management (f) Whistle blower (f) Redefinition of

discussion and analysis policy to*be placed in a independent directors-

report covering industry company providing does not have any

 236

structure, opportunities, freedom to approach the material, pecuniary

threats, risks, outlook, audit committee relationship or

;V-\. internal control system transaction with the

company

(g) Information sharing (g) Subsidiaries to be (g) composition of board

with shareholders reviewed by audit of directors

committee of holding
r - company

(h) Non-mandatory (h) Statutory limit on the

recommendations of the ' sitting fee to non-

committee executive directors to be

reviewed.
j'

Source www.sebi.gov.in/mvestor//recog.htmI (Last visited on March 30,

2010)
The concept of corporate governance (initiated by the SEBI on the

basis of recommendations of various committees such as Naresh Chandra

2000, Shri Kumar Mangalam Birla 2002 and Shri Narayana Murthy 2003)

hinges on complete transparency, integrity and accountability of management,

which also includes the non-executive directors. The main aim of corporate

governance is to handle corporate frauds and scandals, and it is a system of

making directors accountable to shareholders for the effective management of

the company and also with adequate concern for ethics and value.50

Moreover, SEBI has given effect to the Kumar Mangalam Committee’s

recommendations by a direction to all the Stock Exchanges to amend their

50 Neetu Prakash “Role of SEBI in Corporate Governance (with special reference to Scams
of Capital Market since 1991) SEBI and Corporate Laws January 25-31,2010, p. 29.
 237

listing agreement with various companies in accordance with the ‘mandatory’

part of the recommendations. With its list of recommendations the SEBI

clearly addresses the rights, responsibilities and obligations of the different

groups of stakeholders in the company. Although these changes are being

implemented, one needs to consider that in many cases the most important

stakeholder of an Indian company is likely to be the owner/proprietor himself.

The owner usually controls management and typically member of the family

are involved in the day-to-day supervision of the company. Even though the

company may be listed on the stock exchange, shares are mostly held within

the family. The Board of Directors may be comprised of family members and
close friends of the family.51

(c) Role of Stock Exchanges in Corporate Governance In India, stock

exchange are formed either as associations or companies under the Companies

Act.52 At present, there are 23 stock exchanges in India. Out of them three, i.e.

the Bombay Stock Exchange, the National Stock Exchange and Over-The-

Trade-Counter Exchange are in Bombay itself. The Bombay Stock Exchange

(‘BSE’) is the oldest in Asia, even older than the Tokyo Stock Exchange. It

was established in the year 1875 and is the most active stock exchange in

India, Seventy percent of the listed companies of India are listed on the BSE

and one-third cf the total turnover in securities in India is done on the BSE.

The Stock exchanges play an important role in improving the corporate

governance in a business organisation by performing the various functions

(a) A strong domestic stock exchange performance forms the basis for

well-performing domestic corporate to raise capital in the international

Vibha Mahajain “Improving the Efficiency of Corporate Governance” in P.P. Arya, B.B.
Tandom and A.K. Vashist (edited) “Corporate Governance” (2003) p. 51.
52
See, the Companies Act, 1956; section 25.
 238

market.53 This implies that the domestic economy is opened up to

international competitive pressures, which help to raise efficiency. It is

also very likely that existence of a domestic securities market will deter

capital outflow by providing attractive investment opportunities within

domestic economy.54

(b) In the face of great discrepancies in rate of return, the accumulation of

capital does not contribute much to development.55 A developed stock

exchange successful monitors the efficiency with which the existing

capital stock is deployed and thereby significantly increases the average

return.56

(c) The stock exchanges provide a fast-rate breeding ground for the skills

and judgment needed for entrepreneurship, risk bearing, portfolio

selection and management.

(d) Listing on the Stock Exchange Listing of securities means the

admission of a security for trading in a particularly stock exchange. As the

dealing in securities in fiduciary in nature and is being susceptible to fraud and

undesirable practices. Hence, before granting admission to a security, the stock

exchange authorities verifies that the securities must confirm to its standards,

and share are widely distributed to offer an assurance that an adequate auction

market will exist therein, if it is listed. The company whose securities are

listed has to comply with the terms and condition of the concerned stock

exchange. The company has to furnish the information about the company to

See Raj G. Javalagi & Vijay S. Talluri, “The emerging role of India in International
Business”, Bus Harizons (Sept-Oct. 1996) p. 79.
Id at 81.
Michael C. Jensen & William H. Mechkling, Theory of the Firm : Managerial Behaviour,
Agency costs, and ownership structure, 3 J Fin.Econ.305 (1976).
See, Richard L. Holman, World Wire; Wall St. J., Jan 30,1995 p. 14.
 239

the stock exchange not only at the time of listing but afterwards also till its
security is listed in a stock exchange concerned.57

The listing helps the investors in taking their investment decisions as

continued information about the company is easily and readily available to the

investors, financial advisors and consultants. The stock exchanges ensures that

the material information about the listed companies is available to all the
investor easily.58

Procedure for Listing The company seeking listing on the stock exchange

make a letter of application first. The letter of application is a request of the

company for the securities specified therein to be listed on the stock exchange.

Then the application form is to be submitted giving out detailed information

about the company to the exchange along with the supporting documents. The

information to be supplied in the application form should give a complete and

fair picture of the company and include Memorandum and Articles of

Association, debenture trust deed, prospectus, underwriting agreements,

promoters and collaboration Agreements, Directors’ Report, Balance Sheet

and Profit & Loss Account and short history of the company giving out the

details of its activities and other related matters. Finally, the company has to

enter into a listing agreement with the Stock Exchange in a specified form and
pay the initial listing fees.59

Objective of Listing Agreementi) The broader objective of the agreement

is to provide a forum of continuing relations between the stock

exchange and company and to promote the interest of the shareholders

and the general public. Under this agreement, the company is under an

57
Bal Krishan & S.S. Narta, “Security markets in India”. (1997) p. 345, 346.
58
Ibid.
59
V.A. Avadhani, “Investment and Securities Markets in India” (2008) p. 261.
 240

obligation to perform certain acts, make certain disclosures of its affairs

and activities, both financial and otherwise, and to provide facility for

the free transfer of its share among the public. The protection of the

interest of the non-management shareholders in the event of a take-over

is also provided for. The company has also to disclose its affairs, its

future plans and present performance and publish its financial position
in the public interest.60

ii) Under the listing agreement, the company is obliged to provide facilities

for prompt transfer, registration, sub-division and consolidation of

securities, notify the exchange of any attachment or prohibitory orders,

to give due notice of closure of transfer books and record dates, to

forward copies of annual reports, balance sheet etc. The company

undertakes to notify promptly to the exchange the total turnover, the

gross and net profits for the year together with the appropriations and

tax liabilities, proposed issue of bonus or right shares or any other

exchange in the capital structure. The exchange has to protect the

interests of the investors and shareholders and to ensure that fair and
prefer practices are followed by the company in this direction.61

iii) It will thus be seen that the listing agreement is an important document

laying down the relations between the stock exchange and the company

and to ensure that fair practices are followed by the company in the

interests of the investing public in general and of the shareholders in

particular.62

60
Ibid.
61
Supra, n. 59 p. 262.
62
Ibid.
 241

Recent Changes in Listing Agreement i) Clause 41 of the listing

agreement was amended to make listed companies furnish to Stock

Exchange, segment-wise returns, income, capital employed etc., along

with the quarterly un-audited financial results from the quarter-ended,

as per the prescribed formed.63

ii) Clause 32 of the listing agreement was also amended for furnishing

consolidated Financial Statement in the annual report in addition to

compliance with the accounting standard on “Related Party

Disclosures”.64

(e) Clause 49 of the Listing Agreement and Corporate Governance SEBI

amended clause 49 of the listing agreement to bring about improvements in

corporate governance practices.65

(i) All compensation paid to none executive directors to be fixed by board of

directors and approved by shareholders.
(ii) Code of conduct for board members and senior management should be
laid down by company boards.
(iii)Chief executive and chief finance officer should certify the balance sheet,

profit and loss account and cash flow statements in the directors’ report.
In this clause 49 was added to the Listing Agreement, to impose on the
listed companies an obligation to observe all norms of good corporate
governance.
, A new clause 50 was added to provide that companies shall mandatorily
comply with all the accounting standards issued by ICAI. The Listing Agreement

was also amended to incorporate provision on buy back of shares and to ensure

Ibid.
Ibid.
The revised clause 49 thus has come into effect from January 1, 2006.
 242

that 7 days notice is given to the Stock Exchange about the Board meeting on the
proposal for buyback. Stock exchanges were given penal powers to impose
penalties upto Rs. 5 Lakhs on companies for any violation of listing provisions.
To establish uniformity in listing rules, practices and procedures in all Stock
Exchanges in India, a listing authority of India was set up by the government; on
the initiative of the SEBI.66

In this way Stock Exchanges play a very important role in improving the
quality of corporate governance.

(f) Role of Reserve Bank of India (RBI) in Corporate Governance A

standing committee under the chairmanship of Dr. Y.Y. Reddy, the then Deputy
Governor of RBI was set up by the then Governor of the Reserve Bank of India
(RBI) on 8th December 1999. The standing committee in its first meeting on 13th

January 2000, constituted non-official advisory groups in ten major subject areas,

of which ‘corporate governance’ was identified as one of the areas. Accordingly,

an advisor group on corporate governance under the chairmanship of Dr. R.H.

Patil, Managing Director, National Stock Exchange (NSE), Mumbai was
constituted on 8th February 2000. They submitted report on 24th March, 2001. The

report contained several recommendation on coiporate governance.67 The

Advisory Group of RBI observed : “a distinguishing feature of the Indian

Diaspora is the implicit acceptance that corporate entities belong to founding

families”. “.....in the Indian scenario, the promoters dominate governance in

every possible way.”68

(g) Role of Accounting in Good Corporate Governance Accounting plays a

vital role in corporate governance because of its fundamental role in any

disclosure regime concerning information about companies’ activities. A strong

66
Supra n. 59 p. 262.
67
Subhash Chandra Das “Corporate Governance in India an Evaluation” (2009) p. 28.
68
Id, at 32.
 243

disclosure regime is essential for the exercise of shareholder rights, for monitoring
corporate activity and for imposing discipline on management.69 In this context it

is relevant to note that despite the seven statutes under which SEC in America
operates, the recurrent theme throughout (is) disclosure, again disclosure, and still
more disclosure.70 Without effective and uniform accounting standards and

practices, however meaningful, disclosure can not take place.

P. Corporate Governance Models Around the World

There are many different models of corporate governance around the
world. These differ according to the variety of capitalism in which they are
embedded. The liberal model that is common in Anglo-American countries tends

to give priority to the interests of shareholders. The coordinated model that one
finds in Continental Europe and Japan also recognizes the interests of works,
managers, suppliers, customers, and the community. Both models have distinct
competitive advantages, but in different ways. The liberal model of corporate
governance encourages radical innovation and cost competition, whereas the
coordinated model of corporate governance facilitates incremental innovation and

quality competition.

Q. Corporate Governance in England

(a) GeneralAlthough Companies have always had governance in one form or
another, a review of corporate governance was not conducted in the England
(U.K.) until the establishment of the Cadbury Committee in 1991.71 The so-called

The corporate governance framework should ensure that timely and accurate disclosure is
made on all material matters regarding the corporation, including the financial situation
performance, ownership and governance of the company. Art IV, OECD Principles of
Corporate Governance.
See, Jim Kelly, signaling the Advance on Global Harmonization, Fin. Times, (New
Delhi) May 25, 1995, at 13 discussing dissatisfaction with U.S. and U.K. accrual
accounting principles).
Committee on the Financial Aspects of Corporate Governance also, Sir Adrian Cadbury
Committee, available at, http://wwwecgi.org/codes/countr-pages,o\codes_uk.htm.
(Last visited August 3,2009)
 244

Cadbury Committee, chaired by Sir Adrian Cadbury and set up by the Financial
Reporting Council, the London Stock Exchange and the accountancy profession,
was established because of perceived concern over the level of confidence in
financial reporting and the ability of auditors to provide the necessary safeguards.
The Cadbury Report, titled Financial Aspects of Corporate Governance, is a
report by Adrian Cadbury that sets out recommendations on the arrangement of
company boards and accounting systems to mitigate corporate governance risks

and failures.
In the wake of certain events involving corporate scandal, namely, Polly
Peck, BCCI and the Robert Maxwell affairs, the scope of the report was widened
and the committee recommended that the code of best practice should be
addressed to all listed companies registered in the England. But it also

recommended that ‘....as many other companies as possible...’ should be

encouraged ‘... to aim at meeting its requirements’. After the Cadbury
Committee, a number of other committees were established in the England,

prominent among which are - The Greenbury Report (1995) and the Hampel
Committee 1998.72 The Hampel Report was charged with producing a combined

code on corporate governance. The London Stock Exchange took the consultation
forward and in June 1998 the Principles of Good Governance and Code of Best
practice was published. The resulting combined code deals with directors’
conduct and remuneration, relations with shareholders, accountability, audit and

institutional investors. Next in the line of reforms was the Higgs Review where,
as a result of the findings of the Company Law Review73 steering group, Derek

Higgs was asked by the Department of Trade and Industry (DTI) to conduct a

Information on the Company Law Review (2001) and the Company Law white paper
(2002) available at, http:// www.dti.gov.uk/cld/ (Last visited August 2,2009).
 245

review of the role and effectiveness of non-executive director later becoming

known as the Higgs Review.74 Higgs was tasked with assessing

i) the population of non-executive directors in the England (U.K.) - who

are they, how are they appointed, how the pool might be widened, etc;

ii) their independence;

iii) their effectiveness;

iv) accountability; their relationship - actual and potential - with
institutional investors;
v) issues relating to non-executive directors’ remuneration;
vi) the role of the combined code;
vii)what, if anything, could be done - by individual boards, by institutional

investors, by the Government or otherwise - to strengthen the quality,

independence and effectiveness of non-executive directors.
Following up a recommendation in Chapter 10 of the Higgs Review,
Professor Laura Tyson was asked to lead a group to look at how companies might
draw on broader pools of talent with varied and complementary skills, experience
and perspectives to enhance board effectiveness. The Tyson Report ‘Recruitment
and Development of Non-Executive Directors’ was published in June 2003.75 A

month later the new combined code on Corporate Governance was published,
superseding the combined code published as a result of the Hampel Committee in
nr

1998. For most listed companies, the primary obligations for corporate
governance stem from the combined code. The code is annexed to the listing

The Higgs Review (2003), together with full details of the research conduct for the
review and related information, available at, http://www.dti.gov.uk/dd/
nonexecreview, (Last visited August 4, 2009)
The Tyson Report on the Recruitment and Development of Non-Directors (2003),
available at, http://www.london. Edu/tysonreport/Tyson_Report_June_2003 pdf. (Last
visited August 4,2009)
The combined code on Corporate Governance, July 2003, available at,
http://wwTv.fsa.gov.uk/pubs/ukIa/lr_comode 2003.pdf (Last visited July 4,2009).
 246

rules, which are published by the UK (England) Listing Authority (UKLA), and
with which listed companies in the UK must comply.77
(b) Principles for Good Governance in England (UK)78 (i) shareholders have

a right and an obligation to exercise and responsibilities as a corporate owner.

(ii) Existing England (UK) codes of Best Practice should be strengthened not
weakened
(iii) Periodic review and updating of best practice guidelines should continue
and reviewing bodies should include investors board outside the United
Kingdom.
(iv) A Board’s structure should be built upon the twin concepts of

independence from management and accountability to corporate owners.

. (v) Best governance and practices in the United Kingdom (England) should
include several elements that strengthen management accountability to
corporate owners through the director shareholders relationship.
R. Corporate Governance in America (USA)
(a) GeneralLike the UK, the USA has a well-developed market with a diverse

shareholder base including institution investors, financial institutions and

individuals. It also has many of the agency problems associated with the
separation of corporate ownership from corporate control.79 The present corporate

reform movement in the United States is the third such serious effort during this

century. In the early 1900’s, active consideration was given to federalizing the
law of corporations, and both presidents, Theodore Roosevelt and William

Howard Taft, made proposals. Following World War I a mood of euphorbia about
American business swept the country and scant attention was paid to reform. But

77 The Financial Services Authority’s Listing Rules (2002), available at

http://www.fsa.gov.uk/pubs/ukla/ (Last visited July 3,2009).
78 Swami Parthasarthy, “Corporate Governance - Principles, Mechanisms and
Practice” (2007) p. 255.
79 Christine A. Mallin “Corporate Governance” Indian Edition (2007) p. 36.
 247

after the depression and the beginnings of the New Deal, interest revived in
corporate reform. A vast amount of regulatory legislation was enacted, and
Congress at least contemplated the possibility of federal chartering of
corporations.80 IN the 1970’s new advocated of fundamental corporate reform

urged federal chartering, or at least an enhanced federal role. These reform efforts
were not brought on by economic failings, at least not at the start of the decade,

but were mainly a social reform movement. Probably the most important group to
focus on reform of the corporations was the consumer movement, led by Ralph
Nadar and others who sought to demonstrate the connection between ordinary
business activity and a wide range of social problems, including unsafe products,
pollution, and race and sex discrimination.81 As mentioned above, the effort to

reform the corporations has gained much importance in recent years and has been
the topic of numerous symposia and has received much scholarly attention.82

The USA (America) is somewhat unusual in not having had a definitive

corporate governance code in the same way that many other countries have and
do. Rather there have been various state and federal developments over a number

of years. Some idiosyncratic features include : the Delware General Corporation

Law, which essentially gives companies incorporated in Delaware certain

Donald E. Schwartz, Federalism and Corporate Governance, 45 Ohio St. L. J. 545, 547.
Ralph Nadar and his colleagues popularized the idea in 1976. R. Nadar, M. Green, & J,
Seligman, Taming the Giant Corporation (1976). This well-publicized effort prompted
congressional interst and senate hearings were held. Corporate Rights and
responsibilities: Hearings before the committee on Commerce, XJ.S. Senate, 94th Cong.,
2nd Sess. (1976). Other academic writings also urged new federal law to govern
corporations. Cary, Federalism and Corporation Law: Reflections upon Delaware, 83
Yale L.J. 663 (1974) ; Schwartz, A case for Federal Chartering of corporations, 31 Bus.
Law. 1125 (1976).
See, Dent, the Revolution in Corporate Governance, the Monitoring Board, and the
Director’s Duty of Care, 61 B.U.L. Rev. 623 (1981); Earle, Corporate Governance and
the Outside Director - A modest proposal, 36 Wash. & Lee L. Rev. 787(1979); Fischer,
Corporate Governance Movement, 35 V and L. Rev. 1259 (1982); Knauss, Corporate
Governance - A moving Target, 79 Mich. L. Rev. 478 (1981); Parkinson, the
modification of directors’ duties, 1981 J. Bus. L. 335; small, the Evolving Role of the
Director in Corporate Governance, 30 Hastings L.J. 1353 (1979); Weiss, Socal
Regulation of Business Activity: Reforming the Corporate Governance System to
Resolve an Institutional Impasse, 28 Ucla L. Rev 343 (1981).
 248

advantages, and the Employee Retirement Income Security Act 1974 (ERISA),
which mandates private pension funds to vote their shares.83

However the main thrust on Corporate Governance in the United States

has come by the passing of the Sarbanes - Oxley Act in 2002 by the Federal
Government of the United State of America.84 These reforms came in the wake

of a number of major corporate and accounting scandals including those affecting

Enron, Tyco International and World com (now MCI). These scandals resulted in
a decline of public trust in accounting and reporting practices. The Sarbanes -
Oxley Act 2002 is wide ranging and establishes new or enhanced standards for all
U.S, public company Boards, management and public accounting firms. The Act
contains 11 titles or sections, ranging from additional corporate Board
responsibilities to criminal penalties, and requires the Securities and Exchange

Commission (SEC) to implement rulings on requirements to comply with the new

law. The effects of this new law are yet to be seen in the corporate domain;
although some critics believe that the new law does more economic damages than
it prevents, yet others observe how essentially modest in the Act is compared to
the heavy rhetoric accompanying it.

(b) The Sarbanes Act, 2002 Oxley Act provides for far-reaching reform and
has caused much disquiet outside the USA because the Act applies equally to US
and non-US firm with a US listing. However, some of the provisions of the
Sarbanes-Oxley Act are in direct conflict with provisions in the law/practice of
other countries. In reality, this has led to some companies delisting from the
NYSE and has deterred other non-US firms from applying to be listed on the
NYSE85

Supra n. 67.
Sarbanes - Oxley Act, 2002 was drafted by Senator Paul Sarbanes and Representative
Michael G. Oxley, the Act was approved by the House by a vote of 423.3 and by the
Senate 99-0.
85
Supra n. 79 at p. 39.
 249

The Sarbanes - Oxley Act 2002 provides the following provisions86:

i) Penalty for corporate fraud. It includes up to twenty years imprisonment

for altering/destroying documents which are subject to federal inquiries.
ii) CEOs are liable to ten to twenty years of imprisonment with fines one to
five million US dollars if they certify false accounts.
iii) Time period for engaging in law suits by defrauded investors was

enhanced.
iv) Accounting firms are prohibited from providing consultancy and any non­

auditing service to their client organization.

v) New rules to be framed for financial analysts by the Security and
Exchange Commission in order to highlight conflict in interest, in
particular, in investment banking system.
vi) Accounting profession to be under strict scrutiny by a five-member
private sector board which will have disciplinary as well as

court/subpoena powers.
(c) Whistle Blowing Policy In America whistle blowing is defined as

disclosing information that an employee reasonably believes is evidence of

illegality, gross waste or fraud, gross mismanagement abuse of power, or a
on
substantial and specific danger to public health and safety. Whistle Blowing
policy may include:
i) Reporting wrong-doing or a violation of the law to the proper authorities.
ii) Refusing to participate in a workplace of wrong-doing.
iii) Testifying in a legal proceeding.
iv) Leaking evidence of wrong-doing.

Kesho Prasad, “Corporate Governance” (2006) p. 94.

Dr. Neetu Prakash “Managing Corporate Frauds : Need of the Millennium” SEBI and
Corporate Laws September 3-9, 21007, p. 88.
 250

A whistle blowing policy helps better corporate governance through:88

i) early detection of wrong doings, wastages, illegal activities etc.

ii) check on senior executive and functionaries
iii) fair dealing with employees -
iv) check on compliance with code of conduct.
In this way in England and America there are various legislations on
corporate governance. In both these countries stock exchanges also played a very
crucial role in improving the standards of corporate governance. In England the
London Stock Exchange played a very important role in strengthening the
corporate governance norms by constituting the Cadbury Committee and Ron
Hampel Committee on Corporate Governance. Both these committees made

various recommendations regarding the corporate governance in the companies in

England. Some recommendations of there committees were mandatory. In

America also some famous Stock Exchanges like New York Stock Exchange,
NASDAQ played a very important role in improving the standard of corporate
governance in the companies by making the listing agreement more stringent.
Listing requirements are vigorous for the NYSE. The listing requirements
for NYSE include a track record of profitability for three years by the company,
minimum value of tangible assets (say $ 16 million and an acceptable level of
market capitalization, minimum earnings record, adequate floating stock and wide

ownership. Their disclosure requirements are also rigorous for companies with
four quarterly earnings reports, in a year.89

The NASDAQ is a self-regulatory organization (SRO). The dealers who

are members to trade on OTC, have to pass a qualifying test and observe a code Of

Lalit Jain, “Corporate Policies and Praxes - Key to Improved Governance” Chartered .
Security, February 2009 p. 173.
V.A. Avadhani, “Investment and Securities Markets in India” (2008) p. 480.
 251

conduct and code of procedure. They register themselves either as principal dealer
or representative (agent).90

These tight listing rules and regulations ensure good corporate governance
in corporates. In this way the stock exchanges in England and America played a
very important role in improving the standards Of corporate governance.
In regard to market for corporate control unlike the USA and the UK, the
capital market and stock exchanges in India are not strong enough or developed
due to high level of concentration of control rights and dominance of internal
capital market system. Even the takeover market is not developed in India as
compared to these countries for check and removal of inefficient management.91

S. Epilogue
Corporate Governance is getting greater attention with the series of
corporate failings after which the markets, investors and the society have begun to
lose faith in the corporate sector. This concept was basically developed in the
form of surveillance of system to be enforced under the corporate laws; but in
actual sense, it does not take care of the spirit of the concept nor the extent of
coverage required since the role of directors including independent director, audit

committee, disclosure made by the corporate sector, etc., has been questioned in a

number of cases. Realistically speaking, corporate governance is concerned with

wider accountability and responsibility of the director including non-executive
directors, auditors towards every stakeholder of the corporation. Now-a-days, the
conduct of those who take care of public money is being questioned. They are
being tested on ethical standards, therefore re-look on corporate governance is
urgently required. In this connection, some suggestions are given below:-

Subhash Chandra Das, “Corporate Governance in India - An Evaluation” (2009) p.

97.
 252

i) There should be adequate law relating to the functioning of business

enterprises, covering the entire spectrum from registration of
s'1'"'

!. companies, their structure, and settlement of disputes, laws relating to

the capital and punishment for bad practices like insider trading.
ii) The corporate sector should understand that corporate governance and
ethical conduct in business stems from the culture and mindset of the

management, and it is beyond the realm of law.

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iii) There should be greater awareness on the part of directors regarding

their duties and responsibilities not only under the law but also
towards the society and outsiders.
iv) There should be an effective association with Department of Company
;v' - Affairs (DCA) and different industry associations like (CIT, FICCI),

ASSOCHAM, ICAI, etc., to frame policies and guidelines for. the

overall growth and development of the industries and the economy.

v) There should be genuine annual report by the audit committee without

being influenced by the board of directors or chairman.

y ~ vi) The role of media should be increased and it should constantly

highlight the good and bad corporate governance practices of various
companies so that corporate sector may have compliance with all the
regulatory framework.
vii) There is need for stronger corporate governance norms to prevent
recurrence of scandals like Satyam in future.

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