Corpoate Govrnance

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NICMAR

MCM 111: Management theory- principle and practices REPORT ON Corporate governance in construction industry Submitted by Kiran patil (221122) P.L.Vinayak(221115) P.Shiva Shankar Reddy(221117) P.V.N. Rajeev.(221128)

National institute of construction Management and research

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CONTENT 1.Introduction 2.History 3.Major players in corporate governance 4.Committees 5.Conclusion 6.Reference

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INTRODUCTION Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management and the board of directors.Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focus on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world (see section 9 below).There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and WorldCom. In 2002, the US federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance corporate governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes'. O'Donovan goes on to say that 'the perceived quality of a company's corporate governance can influence its share price as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus the international organizational environment; how policies and processes are implemented and how people are led. External forces are, to a large extent, outside the circle of control of any board. The internal environment is quite a different matter, and offers companies the opportunity to 3

differentiate from competitors through their board culture. To date, too much of corporate governance debate has centered on legislative policy, to deter fraudulent activities and transparency policy which misleads executives to treat the symptoms and not the cause.' It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs. Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about Commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty.

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HISTORY: In the 19th century, state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, to make corporate governance more efficient. Since that time, and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law, and because the US's wealth has been increasingly securitized into various corporate entities and institutions, the rights of individual owners and shareholders have become increasingly derivative and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for corporate governance reforms. Since the late 1970’s, corporate governance has been the subject of significant debate in the U.S. and around the globe. Bold, broad efforts to reform corporate governance have been driven, in part, by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors’ duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners. In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. CALPERS led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated). In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia, South Korea, Malaysia and The Philippines severely affected by the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies.

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Need of proper corporate governance in construction industry: Indian and world construction industry is growing very fast .In future India will be 5th largest in the world in construction and infrastructure. so that handle such big industry , proper corporate governance is not need, it is essential because corporate governance include chairman,CEO, Board of Directors, they only take decision regarding company business strategy, policy, which converts in to profit if decision making is proper if decisions are right.

DEFINITION: In A Board Culture of Corporate Governance business author Gabrielle O'Donovan defines corporate governance as 'an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes’. Corporate governance, simply stated is therefore, a system by which corporate entities are directed and controlled.

MAJOR PLAYERS IN CORPORATE GOVERNANCE: The three major players in the area of corporate governance, within the corporation, are the corporate boards, shareholders and employees.

BOARD OF DIRECTORS (BOD): BOD’s are responsible for the governance of their corporations. The shareholders role in governance is to appoint the directors and auditors as also to satisfy themselves that an appropriate governance structure is in position. The roles of BOD and shareholders are interactive and therefore, the quality of governance depends upon the level of interface established by them. The quality of board depends upon number of other factors such as its size, its composition, the competency of the chairman of the board, power and

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position of CEO and competencies of individual directors, nominee directors and non executive directors. In India, the BOD generally comprises promoters, directors, professional directors and institutionally nominated directors. Sir Rober Brown well defined the functions of the directors of the board, when he stated that Board was responsible for laying down matters of principle and of accounting, statistical and management procedures. It was also responsible for the decision of what products to make, which markets to penetrate and determination of manufacturing capacity and its gainful utilization and investment decision. Directors are also concerned with performance and they review the budget proposals as well as monitor performance. Ideally the BOD should be the heart and soul of a corporate. Whether or not the company grows or declines depends much upon the sense of purpose and direction, the values, the will to generate customer satisfaction and the drive to achieve. BODs are also accountable in a number of ways to the stake holders in a company. The directors are required to achieve a balance between the competing interests of shareholders, customers, lending, promoters and directors. Boards, all over vary greatly in the value they add. Some boards are positive instigators and enablers of change, while others are bystanders or even obstacles to progress.

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LEGAL ASPECTS AND LIABILITIES OF DIRECTORS: Having discussed the position of BOD in corporate governance, the next question we must clarify is the liabilities of Directors in law. Can the directors whole time or part time, be held responsible in a court of law, for non-compliance of various laws, procedures and regulations? Directors are elected representatives of shareholders engaged in directing the affairs of the company on its behalf. As such they are not employees or servents of the company. Where a director accepts employment under the company under a contract of 8

service, in addition to the directorship, he is also treated as an employee of the company. Besides directors are also treated as officers of the company for certain matters and are bracketed with the manager, secretary etc., as “Officer in Default”. Notwithstanding the above the directors are described sometimes as agent ,sometimes as trustees or commercial trustees and sometimes they have been called managing partners. It does not matter much what we call them so long as we understand that they, in fact are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. They therefore stand in a fiduciary position towards the company in respect of their power and capital under its control. Directors are therefore, liable for negligence, breach of trust and misfeasance in either of their capacities as agents or trustees or as both. Besides the common law duties, provisions have been made in companies act to ensure that the position of director is not abused. The directors, in their capacity as trustees and agents are required to ensure that they act prudently and genuinely. There are also certain statutory liabilities like – liabilities for not vacating office, liabilities for breach of trust, liability to pay expenses for investigation, liability in contract, personal liability, liability to contempt by company. The companies act also imposes both civil and criminal liabilities for misrepresentation in offer documents and annual accounts, failure to refund subscription money to investors and also generally or contravention of the law.

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Over the years the following duties have been evolved by the court of directors under the common law: Duties of care and skills in the discharge of function as directors. Duty to attend Board meetings and devote sufficient time and attention to affairs of the company. Duty not to be negligent and not to commit or let others commit tort-liable acts.

Duty not to exceed powers.

Duty to have regard to and act in the best interest of the company and its stake holders and consumers.

Duty to creditors if business is conducted with intent to defraud them

Duty of confidentiality

Duty not to secret profit and make good losses, if occurred due to breach of duty, negligence etc.

Duty not to exceed power for collateral purposes.

Duty not to misapply company assets.

Duty not to compete with the company. 10

FUNCTIONS OF THE BOARD Good governance is the primary duty of the board. It is responsible for setting standards and ensuring that the company achieves them. The organization, the composition, the quality and motivation of its directors will considerably influence its effectiveness. More than anything else, the chairman will have major impact.

DUTIES OF BOARD OF DIRETORS: The board is, of course, accountable to the shareholders. The directors, both executive and non executive are appointed to act in interest of share holders. In the past the share holders may well have rubber stamp appointments, given little attention to directors performance and paid still lesser interest to the functioning of the company. However, the business environment is changing fast. A growing number of small, individual shareholders are showing increased interest in board appointments and performance of the company. They have, often noisily now question and voted against the directors and the management.

THE MAJOR FUNCTIONS OF BOARD ARE: (a) It is the representative of share holders to insure the company has clear goals and to measure progress against these goals. (b)The board will agree the strategy and resources to achieve it. (c) The chief executive is appointed by the board which monitors his or her performance

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(d)Because of the absolute importance of human resource to achieve the agreed

strategy

the

board

must

annual

review

succession

and

management development plans. (e) The board will need to set down and monitor the operating climate in the company through a statement of values that describes the character of the company and policies that reflect these values. All above function need to perform whilst compiling with legal obligation and social responsibilities of good citizenship. Even corporate ought to appreciate that it disregards other stakeholdersemployees, customers, suppliers, government and local communities at its own peril. There are also diverse expectations of various stakeholders. While the shareholders expect the board to provide acceptable total share holders return, the government expects greater participation by the corporate in welfare services as good citizenship. The employees ask for better pay and perks, the customers and suppliers have increasingly moved towards partnership relationship. The community at large has an economic interest in a company’s operation through the employment created services used and greater involvement in local affairs such as charities, mandirs, schools and local government. The public at large has a wild variety of items to hold the board accountable for. These are usually well published by the media and include: (a) Limiting senior executive’s compensation. (b)Full environmental protection. (c) Avoidance of fraud within the company. (d)Hiring and firing the key executives. (e) Caring for employees 12

(f) Insuring active participation in local community welfare schemes.

THE CHAIRMAN: While each company will have its own need and criteria for selection of chairman, it is generally vied that it is proper to separate the role of chairman from chief executive in the interest of providing checks and balances. While the board will be finally responsible for setting up of strategy, the initiator will normally be the chief executive. The chairman however, is the leader of the group and therefore must set the standards requires from the board colleagues. For these he is accountable publically. As the chairman, is also the link between board and shareholders, he or she needs to satisfy with the corporate reporting to them. These will include the interim and annual results, annual reports, AGM and the periodic reports on special occasions’ such as during take over’s. Reporting of results to analysts and institution is also an important event where the chairman presents an involvement is expected.

MATTERS RESERVE FOR THE BOARD: The Cadbury comity has recommended that the board should have the formal schedule of matters reserve for his decision, thus ensuring that the direction and control of the company remain firmly in its hands. The committee investigated that the schedule would include at least: (a) Acquisition and disposal of assets of the company or its subsidies that are material to the company. (b)Investments, capital projects, authority levels, treasury policies and risk management policies

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COMMITIES OF THE BOARD ROLE: In order to ensure greater depth of understanding committees of the board are an effective way to raise standards provide the required level of reassurance and obtain greater coverage by directors. The most important three committees which are normally constituted are:

Audit committee Remuneration committee Nomination committee

THE AUDIT COMMITTE: This is the most important committee for providing checks against the executive with the ability to review systems and internal control and control or system have been agreed. Some of the other functions it could perform are:

(a) Review fully the interim and final account. (b)Keep the board fully informed of the quality of the financial reporting and many areas of disagreements with the auditors. (c) If required, to decide impartially over any dispute between management and external auditor. In this role these act like a court of arbitration to reinforce the independence of the auditors.

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(d)Establish that the audit fee is appropriate and that the auditors work plan is adequate.

THE REMUNIORATION COMMITTEE: The most important rule of remuneration committee, therefore, is to have an appropriate reward policy that can attract retain and motivate directors to achieve the long term goals of the company. Many companies operate in worldwide theater and reward policies must policies must keep these in mind. Committee members will of course need to be sensitive to wider community concerns. It is, therefore, important that: (a) The committee is and seen to be, independent with access to its In the recent time there has been considerable debate on putting a cap on total income of directors and senior executives. The lack of transparency in these regard has added another dimension to these concern. On the other hand there is a section of the committee who believe that main job of the committee members is to keep the lid on executive remuneration. On the other hand, institution and some other section of society feel that remuneration policy must be more closely aligned with the interest of shareholders and that the company’s remuneration policies must be set in the board environment which prohibits unjustified increases or excessive total

remuneration.

The

debate,

of

Corse,

centers

around

the

reasonableness. In a view of different perceptive, various stake holders will different expectation from these committee and hence the importance of the remuneration committee. own external advice. (b)It has a clear policy of remuneration that is well understood and has the support of shareholders. (c) Performance packages are aligned with long term shareholder interest and have challenging targets. 15

(d)Reporting is clear, concise and gives the reader of the annual report a birds eye view of policy payments and the rationale behind them.

THE NOMINATION COMMITTEE: This committee is third important committee of the board of director. It is usually chaired by companies chairmen and is the vehicle by which new non-executive directors are brought for selection. Usually they will discuss and agree the brief, choose the search firms, agree the short list and interview the final candidates. It is also fact that often appointments are made from within the circle of chairman to offer him or her support, especially if time turn difficult. However, these practice is changing and financial institution and more active shareholders are beginning to exert their views rather than just rubber stamping the new appointment in the AGM(Annual General Meeting).

CODE OF CORPORTE GOVERNANCE In the resent years, there have been considerable concerns in India and other countries above standard of corporate governance. While the company law and in common law directors are obliged to act in a best interest of shareholders, there have been many instances of board room behavior difficult to reconcile with these ideal. There have been many cases of excessive debate financing laced with fraud, generosity with which they reward leading executive, dis-proportionating pay increases for executive and procedures which have been less transparent. In the train of these and many scandals there has been increasing and violent demand for greater transparency and good corporate governance. 16

But legislation alone is not enough. The end note of the report of Kumar Mangalam Birla committee report on corporate governance sums up the issue well. It states corporate governance extends beyond corporate law. Its fundamental objective is not the mere fulfillment of requirement of law but ensuring the board’s commitment to managing the company in a transparent manner for maximizing long term shareholders value. The effectiveness of corporate governance is still cannot nearly be legislative bylaw, neither can any system of corporate governance be static. In such an environment it would be naïve to assume that company would voluntarily adopt the best corporate practices. The Kumar Mangalam Birla committee on corporate governance assumes under Indian conditions a statutory rather than a voluntary code would

be

for

more

purposive

and

meaningful.

There

other

recommendation flows from this premise. Raguveer Srinivasan in his comments on the committee report (October 1991, investment word) points out that these recommendation certainly run the risk of being branded as a micro managing team but it needs to be pointed out that there is a no other way of introducing the concept in the country. A start has to be made from somewhere to push Indian companies into adopting best governance practices and these recommendations serve that purpose. India too had its share of scams and scandals and there was all round disquiet, and public concern and demand for a best corporate governance. Expected improvement after liberalization, due to international competition, also did not come about. In reorganization of the key importance of corporate governance and public concern, at that time when Indian economy is integrating with global economy and Indian economy is striving for international competitiveness, the confederation of Indian industry (CII) took a special initiative. A national task for 17

corporate governance was set up in mid 1996 under the leadership of Rahul Bajaj, past president, CII and CMD, Bajaj auto limited. On the board of directors, CII has made the following recommendation: (a) A simple board structure can maximize shareholders as well as to tier board. (b)The full board must meet six times a year, preferably at a interval of two months and meeting must have an agenda of at least half days meeting. (c) Listed companies with a turnover in a excess of rupees two hundred crores and above should have professionally competent and acclaim non executive directors. (d)Non-executive directors should account for at least thirty percent of board, if the chairman is a non-executive director. (e) No single director should hold directorship in more than ten companies. (f) Non[-executive directors to play an important role in maximizing long term shareholders value, should become active participants and not be passive advisors. (g)Pay a commission over and above sitting fees and offer stock option as incentives. (h)Director who doesn’t attend fifty percent or more of meetings must not be considered for reappointment, generally. (i) All key permission players must be placed before the board of directors. (j) Audit committee must be appointment to assist the BOD of the company and must have full access to all financial information.

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THE FOLLOWING RULES OF CONDUCT FOR GOVERNANCE OF COMPANIES HAVE BEEN RECOMMENDED BY CII: (a) Companies with paid up capital of more than rupees 20crs should provide the same information towards domestic investors which they provide to GDR investor. (b)Companies with a turnover of rupees 100crs or a paid up capital of rupees 20crs should set up audit committees with in 2years. (c) The member of board should have clear responsibilities. (d)The board should not be boll dozed by the nominees of management. (e) FIs should divest there stake in companies where they have less than 10% stake: or progressively smaller role for the FIs expect in the case of habitual defaulters. (f) Creditors should desist from appointing a nominee on a company board if its loan interests are being paid in time. (g)Companies should not accept for the deposits if they have defaulted on fixed deposits. (h)The key information such as annual operating plans and budgets, quarterly results, internal audit reports etc must be regularly reported to the board. (i) The takeover board should be modified to reflect international norms. (j) The triggers should increase to 30% and the minimum bid should reflect at least 50% takeover.

CONCLUSION: 19

For construction industry it is essential to have good, effective, efficient, corporate governance. Today construction industry is biggest industry in world, so run such industry; the higher level management must be capable to take appropriate decision regarding company on behalf of shareholders. Corporate governance can only decide future of company by managing, decision making, and controlling.

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REFERENCE: BOOK REFERENCE 1) Business ethics and corporate governance BY ICFAI. 2) Corporate governance and restructuring of industries –Dr M.K. Sehgal. 3) Corporate governance, concepts and dimension.

E-Reference 1) www.mytasinfra.com 2) www.relianceinfra.com 3) www.hcc.com

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