Essential Ingredients of good Corporate Governance

Key Points of Kumar Mangalam Birla Committee Report

1. CG is an important instrument of investor protection and it is therefore a priority on SEBI’s agenda. To improve the level of CG , need was felt  for a comprehensive approach at the stage of development of the capital market, to accelerate the adoption of globally acceptable practices of CG.

2. Fundamental objective of CG is enhancement of shareholder value, keeping in mind interests of other stakeholders.

3. Imperative for CG lies not merely in drafting a code but in practicing it. What is important is the way in which the standards, rules, codes are put to use.

4. The code should not be treated as a mere structure but as a way of life.

5. Real onus in achieving good CG lies in the Proactive initiatives taken by the companies and not in the extent of the code or stringency of enforcement norms.

6. The extent of discipline, transparency and fairness, and the willingness shown by the companies themselves in implementing the code, will be the crucial factor in achieving shareholders confidence and fulfilling goals of the companies.

N.R. Narayan Murthy Committee Report on CG

1. CG deals with conducting the affairs of a company in a way that there is fairness to all stakeholders.

2. There should be openness, integrity, and accountability.

CII Code on CG

1. Code of CG cannot be static. It must be reviewed periodically, say, every 5 years.

2.CG refers to an economic, legal and institutional environment that allows companies to diversify, grow, restructure and exit and do everything necessary to maximize long-term shareholder value.

3. CG is an interplay between companies, shareholders, creditors, capital markets, financial sector institutions and company law. Hence, a code of CG must attempt to address all these issues.

Institute of Chartered Accountants in England & Wales- Response to Initial Consultation of the CG Committee  (This Report has reviewed Cadbury, Greenbury and Blue Ribbon Report)

1. The prime responsibility for effective Governance lies with the Board of the company. Shareholders and auditors can only play a secondary role.

2. Observance of standards should be based on transparency, disclosure and effective communication with stakeholders.

3. The approach to CG must focus on the quality of the Board and to ensure that the right Board is in place.

OECD Report

1. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.

2. While a multiplicity of factors affect the governance and decision making processes of firms, and are important to their long-term success, the Principles focus on governance problems that result from the separation of ownership and control. However, this is not simply an issue of the relationship between shareholders and management, although that is indeed the central element. In some jurisdictions, governance issues also arise from the power of certain controlling shareholders over minority shareholders. In other countries, employees have important legal rights irrespective of their ownership rights. The Principles therefore have to be complementary to a broader approach to the operation of checks and balances.

3. The Principles are evolutionary in nature and should be reviewed in light of significant changes in circumstances. To remain competitive in a changing world, corporations must innovate and adapt their corporate governance practices so that they can meet new demands and grasp new opportunities.

4. The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

5. Moreover, in developing a corporate governance framework in each jurisdiction, national legislators and regulators should duly consider the need for, and the results from, effective international dialogue and cooperation. If these conditions are met, the governance system is more likely to avoid over-regulation, support the exercise of entrepreneurship and limit the risks of damaging conflicts of interest in both the private sector and in public institutions.

6. The legal and regulatory requirements that affect corporate governance practices in a jurisdiction should be consistent with the rule of law, transparent and enforceable.

7. Corporate governance requirements and practices are typically influenced by

an array of legal domains, such as company law, securities regulation, accounting and auditing standards, insolvency law, contract law, labour law and tax law. Under these circumstances, there is a risk that the variety of legal influences may cause unintentional overlaps and even conflicts, which may frustrate the ability to pursue key corporate governance objectives. It is important that policy-makers are aware of this risk and take measures to limit it.

Effective enforcement also requires that the allocation of responsibilities for supervision, implementation and enforcement among different authorities is clearly defined so that the competencies of complementary bodies and agencies are respected and used most effectively. Overlapping and perhaps contradictory regulations between national jurisdictions is also an issue that should be monitored so that no regulatory vacuum is allowed to develop (i.e. issues slipping through in which no authority has explicit responsibility) and to minimize the cost of compliance with multiple systems by corporations.