Cgbe.docx

1 > What is Good Corporate Governance ? Corporate Governance is the art of directing and controlling the organization by balancing the needs of the various stakeholders. This often involves resolving conflicts of interest between the various stakeholders and ensuring that the organization is managed well meaning that the processes, procedures and policies are implemented according to the principles of transparency and accountability. Whenever one speaks about corporate governance, it has to be borne in mind that the organizations have duties and responsibilities towards their shareholders and stakeholders and hence they need to be governed in accordance with the law and keeping in mind the interests of the stakeholders and shareholders. The next aspect of corporate governance is that the notion of economic efficiency must be followed when directing, managing and controlling organizations. For instance, it is truism that corporations exist to make profits and hence the profitability and revenue generation ought to be the aim for which the corporates must strive for. Theoritical basis of corporate governance 1. Stewardship Theory: The stewardship theory of corporate governance discounts the possible conflicts between corporate management & owners and shows a preference for a board of directors made up primarily of corporate insiders. This theory assumes that managers are basically trustworthy and attach significant value to their own personal reputations. 2. Stakeholder Theory: Stakeholder theory has a lengthy history that dates back to 1930s. The theory represents a synthesis of economics, behavioral science, business ethics and the stakeholder concept. The theory considers the firm as an input-output model by explicitly adding all 1

interest groups – employees, customers, dealers, government and the society at large - to the corporate mix. 3. Sociological Theory: The sociological approach to the study of corporate governance has focused mostly on board composition and the implications for power and wealth distribution in society. Problems of interlocking directorships and the concentration of directorships in the hands of a privileged class are viewed as major challenges to equity and social progress. Under this theory, board composition, financial reporting, disclosure and auditing are necessary mechanisms to promote equity and fairness in society. Machanism of corporate governanc Internal Mechanism The foremost sets of controls for a corporation come from its internal mechanisms. These controls monitor the progress and activities of the organization and take corrective actions when the business goes off track. Maintaining the corporation's larger internal control fabric, they serve the internal objectives of the corporation and its internal stakeholders, including employees, managers and owners. These objectives include smooth operations, clearly defined reporting lines and performance measurement systems. Internal mechanisms include oversight of management, independent internal audits, structure of the board of directors into levels of responsibility, segregation of control and policy development. External Mechanism External control mechanisms are controlled by those outside an organization and serve the objectives of entities such as regulators, governments, trade unions and financial institutions. These objectives 2

include adequate debt management and legal compliance. External mechanisms are often imposed on organizations by external stakeholders in the forms of union contracts or regulatory guidelines. External organizations, such as industry associations, may suggest guidelines for best practices, and businesses can choose to follow these guidelines or ignore them. Typically, companies report the status and compliance of external corporate governance mechanisms to external stakeholde

Models of CG Anglo-US Model The Anglo-US model is based on a system of individual or institutional shareholders that are outsiders of the corporation. The other key players that make up the three sides of the corporate governance triangle in the Anglo-US model are management and the board of directors. This model is designed to separate the control and ownership of any corporation. Therefore the board of most companies contains both insiders (executive directors) and outsiders (non-executive or independent directors). Traditionally, though, one person holds the position of CEO and chairman of the board of directors. This concentration of power has led many companies to include more outside directors now. Japanese Model The Japanese model involves a high level of ownership by banks and other affiliated companies and "keiretsu," industrial groups linked by trading relationships and cross-shareholding. The key players in the Japanese system are the bank, the keiretsu (both major inside shareholders), management and the government. Outside shareholders 3

have little or no voice and there are few truly independent or outside directors. German Model As in Japan, banks hold long-term stakes in corporations and their representatives serve on boards. However they serve on boards continuously, not just during times of financial difficulty as in Japan. In the German model, there is a two-tiered board system consisting of a management board and a supervisory board. The management board is made up of inside executives of the company and the supervisory board is made up of outsiders such as labor representatives and shareholder representatives. What is SEBI: SEBI is a market regulator which tries to create a balance in the day to day stock market activities and for this there are regulatory frameworks established by SEBI. There are 17 exchanges currently operational in Indiaand all exchanges, including NSE and BSE are regulated by SEBI guidelines. Securities and exchange Board of India has headquarters in Mumbai, and has regional offices in New Delhi, Kolkata, Chennai and Ahmedabad. SEBI has also opened local offices in Jaipur, Bangalore, Guwahati, Bhubaneswar, Patna, Kochi and Chandigarh. SEBI has also commenced regulating the commodity derivatives market under the Securities Contract Regulation Act (SCRA) 1956 with effect from September 28 2015, and the Forward Contracts Regulation Act (FCRA) 1952 got replaced with effect from September 29 2015. When was SEBI established: SEBI was established in the year 1988 and subsequently was given the constitutional validity on 30th January 1992 by Government of India by passing the SEBI Act, 1992 in the parliament of Indi

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Powers of SEBI:     

To regulate and approve by-laws of stock exchanges Inspect the books of accounts of recognized stock exchanges and call for periodical returns Inspect the books of financial Intermediaries. Compel certain companies to get listed on one or more stock exchanges To handle the registration of brokers Role and Functions of SEBI:

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Primary Markets: SEBI has regulated the primary market through

1. The regulation of issuers’ access to market 2. Regulation of information production at the time of issue 3. Regulation of processes and procedures relating to issuance of securities 

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Disclosure: Disclosure standards are not limited to accounting information but was extended to other issue related communications such as advertisements. Corporate Governance: SEBI has made a constant effort to improve the standards of Corporate Governance in India. Settlement Systems Dematerialization of securities Institutionalization of Trading and ownership of securities Market Integrity and Insider Trading To help in developing the capital market so that the business activities doesn’t get hampered To bring companies and organizations under its regulation so that the interests of investors are not harmed To curtail unethical trading which includes insider trading also To get done the registration of Mutual Funds and Systematic Investment Plans(SIPs) and all such funds comply with laid down rules and regulations of Mutual funds and SIPs To impart training to market participants on regular basis 5

Role of sebi 1. Issuers of securities These are corporate entities which raise funds from the financial market. SEBI ensures that they get a transparent and healthy environment for their needs. 2. Investor These are the ones who keep the financial market alive. They earn from these markets thus it is the responsibility of SEBI to ensure that investors don’t fall prey to any manipulation or fraud in the market. 3. Financial Intermediaries These intermediaries act as a mediator in the financial market. Their presence brings smoothness and safety in financial transactions What is ethics ethics is the study of proper business policies and practices regarding potentially controversial issues such as corporate governance, insider trading, bribery, discrimination, corporate social responsibility and fiduciaryresponsibilities. Law often guides business ethics, while other times business ethics provide a basic framework that businesses may follow to gain public acceptance. ethics ensure that a certain required level of trust exists between consumers and various forms of market participants with businesses. For example, a portfolio manager must give the same consideration to the 6

portfolios of family members and small individual investors. Such practices ensure the public receives fair treatment. Importance and needs of ethics 1. Satisfying Basic Human Needs: Being fair, honest and ethical is one the basic human needs. Every employee desires to be such himself and to work for an organization that is fair and ethical in its practices. 2. Creating Credibility: An organization that is believed to be driven by moral values is respected in the society even by those who may have no information about the working and the businesses or an organization. Infosys, for example is perceived as an organization for good corporate governance and social responsibility initiatives. This perception is held far and wide even by those who do not even know what business the organization is into. 3. Uniting People and Leadership: An organization driven by values is revered by its employees also. They are the common thread that brings the employees and the decision makers on a common platform. This goes a long way in aligning behaviors within the organization towards achievement of one common goal or mission. 4. Improving Decision Making: A man’s destiny is the sum total of all the decisions that he/she takes in course of his life. The same holds true for organizations. Decisions are driven by values. For example an organization that does not value competition will be fierce in its operations aiming to wipe out its competitors and establish a monopoly in the market. 5. Long Term Gains: Organizations guided by ethics and values are profitable in the long run, though in the short run they may seem to lose money. Tata group, one of the largest business conglomerates in India was seen on the verge of decline at the beginning of 1990’s, which soon turned out to be otherwise. The same 7

company’s Tata NANO car was predicted as a failure, and failed to do well but the same is picking up fast now.

Unethical behaviour and issue 1. Misusing company time Whether it is covering for someone who shows up late or altering a time sheet, misusing company time tops the list. This category includes knowing that one of your co-workers is conducting personal business on company time. By "personal business" the survey recognizes the difference between making cold calls to advance your freelance business and calling your spouse to find out how your sick child is doing. 2. Abusive behavior Too many workplaces are filled with managers and supervisors who use their position and power to mistreat or disrespect others. Unfortunately, unless the situation you're in involves race, gender or ethnic origin, there is often no legal protection against abusive behavior in the workplace. To learn more, check out the Workplace Bullying Institute. 3. Employee theft According to a recent study by Jack L. Hayes International, one out of every 40 employees in 2012 was caught stealing from their employer. Even more startling is that these employees steal on average 5.5 times more than shoplifters ($715 vs $129). Employee fraud is also on the uptick, whether its check tampering, not recording sales in order to skim, or manipulating expense reimbursements. Ethical alert: The FBI recently reported that employee theft is the fasting growing crime in the U.S. today. 4. Lying to employees 8

The fastest way to lose the trust of your employees is to lie to them, yet employers do it all the time. One of out every five employees report that their manager or supervisor has lied to them within the past year.

5. Violating company internet policies Cyberslackers. Cyberloafers. These are terms used to identify people who surf the Web when they should be working. It's a huge, multibillion-dollar problem for companies. A survey conducted recently by Salary.com found that everyday at least 64 percent of employees visit websites that have nothing to do with their work. FOOD & LIFESTYLE The good news from the ERC study is that most American workers and employers do the right thing. The survey reveals that most of us follow our company's ethical standards of behavior, and we are willing to report wrongdoing when we see it (unless it's the company's Internet use policy). But for those of us who track ethical behavior in the workplace, there are some troublesome trends in the ERC survey. CSR Movement aimed at encouraging companies to be more aware of the impact of their business on the rest of society, including their own stakeholders and the environment. [1] Corporate social responsibility (CSR) is a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders. CSR is a concept with many definitions and practices. The way it is understood and implemented differs greatly for each company and country. Moreover, CSR is a very broad concept that addresses many and various topics such as human rights, corporate governance, health 9

and safety, environmental effects, working conditions and contribution to economic development. Whatever the definition is, the purpose of CSR is to drive change towards sustainability. Although some companies may achieve remarkable efforts with unique CSR initiatives, it is difficult to be on the forefront on all aspects of CSR. Considering this, the example below provides good practices on one aspect of CSR – environmental sustainability. Advantage and disadvantage Improvement in the image of the Corporation The most obvious advantage that a corporation can obtain by implementing CSR policies is that of an increased goodwill value. This serves a dual purpose – Firstly, people will want to buy the product that the corporation is selling because of its good and clean image. Secondly, other enterprises will want to do business and be associated with the corporation. This increases the corporation’s prestige to such a high level that its name may become synonymous with reliability and goodness. 

People always want to be associated with the best and the most popular, so in that respect, the corporation rises in stature and becomes an important player in its market. Increased Attraction and Retention of Employees Companies having solid CSR commitments find it easier to recruit and retain employees. People want to work for companies that care about the well-being of their employees and provide good working conditions. Compassionate attitude towards employees is highly desired by both new recruits and old employees alike. Appraisals, financial assistance in times of need, and attention given to personal achievements and special days (like birthdays) make employees want to remain with the company. 

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This is a huge advantage when there is a tight labor market situation. This will reduce the cost of training new recruits and free up incentives for existing employees. Incentives induce efficient work out from employees. In short, if the company’s workforce is happy, the company gets more profits due to increased efficiency in production. Regulatory Authorities become less hostile A corporation with strong CSR programs will not be scrutinized by regulatory authorities as much as companies without CSR programs. The authorities will be lenient in their regulation because they feel that the company must be complying with all regulations as it is supported by firms and people alike for its welfare work. A company with strong CSR programs will always work within regulations to get benefits (other than profits) from these CSR programs. 

The authorities will give fast-track preference to this company. It may also forego cumbersome paperwork that is required to set up projects if it thinks that this project is going to help the community to improve. Attracts more Capital Inflow from Various Sources A company’s image plays a huge role in attracting investors. If the company is engaged in CSR programs, its image gets a massive boost, and so, people invest in its operations heavily. This company will attract capital even from abroad in the form of FII, thus, helping the country to get valuable foreign exchange. It will also attract investment from other firms and industries, and it will become a name that can be trusted easily 

Disadvantage Disadvantages Corporate Social Responsibility Now we will see why CSR is criticized in business circles. 

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Shift from the Profit-Making Objective Milton Friedman, an economist, is the biggest critic of CSR. He says that CSR shifts the focus of the company from the objective that made it a financial entity in the first place – profit-making. The company forgets about its obligations towards its shareholders that they have to make profits for them. Instead of focusing on making profits, they engage in CSR programs and use up funds for community welfare. 

So basically, instead of an income, the company is effecting an outflow of cash and not fulfilling its profit-making obligations. 

Company Reputation takes a hit According to CSR policies, companies have to disclose shortcomings of even their own products if they are found to violate the CSR program. For example, car manufacturing companies calling back their vehicles in large numbers when they find glitches in the model after having sold them wallops their reputation. 

This creates inconvenience to the customers, and they lose trust in the manufacturer. Customer Conviction Initially, customers like to see the companies that they trust are engaged in social welfare programs. They like the fact that these programs are for a good cause. Later, they grow wary of it. If they don’t see instant results from these programs, they think that these are nothing but PR stunts. So it becomes difficult to convince customers that the results will take some time in coming and that they should continue believing in the good intentions of the company. 

These attempts of convincing become fruitless day by day because some customers are impatient and have a constant desire to be appeased.

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Increase in Cost of Production More often than not, CSR programs increase the expenditure of the company. This increased expenditure is reflected in the increased prices of the product for which, ultimately, the customers have to pay. 

Large corporations can absorb this increased expenditure. They may not increase their products’ prices, but small businesses have no other option but to increase their products’ prices to meet their increased expenses. Legislation and Provisions Related to CSR Legislation and provisions imposed on organization regarding CSR vary from one place to another. The value of CSR differs in various contexts, depending on the geographical location, environmental conditions, culture and most importantly legal framework imposed by the different countries. Here we discuss the influencing legal factors that affect an organization in three different geographical locations: Australia, UK and USA. General Policies: While supporting the general policies of OECD, an enterprise should take fully into consideration established general policies in the nations that operate, and consider the opinions of various other stakeholders like employees, suppliers, investors, etc. To maintain the general policies, the organizations should —   

Play its part to contribute to environment, social and economic progress intending to achieving sustainable development Respect human rights and national human rights affected by different countries Encourage local growth by maintaining a close relation with the local communities including business interest. The organization

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should expand organizational activities in the domestic and foreign market to attain more exposure Support good corporate governance policies; develop, apply and practice good governance principles Avoid seeking exemptions from the statutory or regulatory framework imposed by the federal government concerning human rights, health, environmental, safety, labor, financial incentives, taxation and other issues Develop and enforce effective management systems and selfregulatory practices and attempt to establish a relationship and mutual trust between the organization and the society they operate Make workers employed by the multinational companies aware of the organization’s policies through proper dissemination of those policies and thorough training and programs Refrain discrimination among employees Carry out risk-based due diligence. For example, incorporating it into the risk management systems of the organizations to identify, prevent and mitigate the potential and actual adverse effects. The nature and extent of due diligence depend on the situation they handle. Avoid causing and contributing to negative impacts on subjects covered in the OECD guidelines through the business and take immediate action when adverse situation arises Enforce the necessary plan to reduce the adverse impacts where they have not contributed the adverse impacts directly, but it is some way directly related to a business accord in the field of operations, products and services

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