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Assignment

Q1. Define corporate governance. Why has it gained so much attention in the present day business

world?

Definition of 'Corporate Governance'

The system of rules, practices and processes by which a company is directed and controlled.

Corporate governance essentially involves balancing the interests of the many stakeholders in a

company - these include its shareholders, management, customers, suppliers, financiers,

government and the community. Since corporate governance also provides the framework for

attaining a company's objectives, it encompasses practically every sphere of management, from

action plans and internal controls to performance measurement and corporate disclosure.

Corporate governance became a pressing issue following the 2002 introduction of the Sarbanes-

Oxley Act in the U.S., which was ushered in to restore public confidence in companies and

markets after accounting fraud bankrupted high-profile companies such as Enron and

WorldCom.

Most companies strive to have a high level of corporate governance. These days, it is not enough

for a company to merely be profitable; it also needs to demonstrate good corporate citizenship

through environmental awareness, ethical behavior and sound corporate governance practices.

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It is gaining importance because of following factors

The issue of integrity: are the boards and management of companies carrying out theirduties in an ethical way (wedefine business ethics here)?

Topicality - the bonus culture: could better corporate governance in financialinstitutions and their remuneration policies have prevented the credit crunch and resulting

financial crisis?

The regulatory framework: introducing more regulation has clearly failed - we needbetter regulation which ensures businesses recognise the importance of corporate

governance as an integral part of management, not a box ticking exercise

The importance of corporate governance in Directors' training: prevention is better thana cure, so including knowledge of the princples and practice of corporate governance in

mainstream director training is essential

Q2. How does spiritual leadership help in business transformation?

At the same time, making this distinction can help identify who the spiritual leaders in yourorganization are. Here are six characteristics that identify most spiritual leaders:

1. They lead others into their own encounters with God. One of the most effective thingsabout Jesus lifestyle was that He didnt switch into another mode to introduce Hisdisciples to the reality of God.

Whether standing in the synagogue or picking wheat along the path, interacting with theFather was so natural that others around Him could not help but do the same. Whether a

spiritual leader is training a new employee or working through a difficult conflict

resolution, his followers will discover their own connection to God more deeply in theprocess.

2. They lead others to discover their own purpose and identity. Spiritual leadership ischaracterized by great generosity. A spiritual leader genuinely wants others to fully

discover who they were made to be.

Workplace issues and strategic development become tools to help followers discover

their own identity and overcome obstacles standing in their way. People functioning in an

area of their created identity and strength will always be more productive than those whoare simply trying to fill a position or role.

http://www.applied-corporate-governance.com/define-business-ethics.htmlhttp://www.applied-corporate-governance.com/define-business-ethics.html

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3. They lead others into transformationnot just production. When the goal is spiritualgrowth and health, production will always be a natural outcome. People function at their

peak when they function out of identity.

Helping your followers discover that their own transformation can happen on the job will

engender loyalty and a high level of morale. Spiritual leadership fosters passion in thosewho follow. Passion is the ingredient that moves people and organizations from

production to transformational impact.

4. They impact their atmosphere. While we may not stop a tempest with our words,spiritual leaders recognize that they can change the temperature of a room, interaction,

or relationship.

Changing the atmosphere is like casting vision, only it is immediate. When there is

tension, fear, or apathy, a spiritual leader can transform the immediate power of thesestorms and restore vision, vitality and hope. A spiritual leader can fill a room with love,

joy, peace, patience, kindness, goodness and gentleness, even while speaking hard things.

5. They help people see old things in new ways. Many people are stuck not in theircircumstances, but in their perspectives and paradigms. The word repent means to

think differently, or to think in a different way. Jesus called people to look again at oldrealities through new eyes. Changing ways of thinking always precedes meaningfulchange.

6. They gain a following because of who they arenot because of a position they hold.Spiritual leaders can be found in secular organizations, in the same way managers andorganizational leaders can be found in religious ones.

Spiritual leaders influence more than they direct, and they inspire more than they instruct.They intuitively recognize that they are serving somethingand Someonelarger than

themselves and their own objectives.

Q3. State the salient features of the Code of Corporate Governance as suggested by the Confederation

of Indian Industries(CII)

Features of the Code of Corporate Governance as suggested by the Confederation of Indian

Industries(CII)

The following section highlights key features and practices of corporate governance for Indianlisted companies.

The organizational framework for corporate governance initiatives in India consists of theMinistry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI).

SEBI monitors and regulates corporate governance of listed companies in India through Clause

49. This clause is incorporated in the listing agreement of stock exchanges with companies and it

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is compulsory for listed companies to comply with its provisions. MCA through its various

appointed committees and National Foundation for Corporate Governance (NFCG), a not-for-

profit trust, facilitates exchange of experiences and ideas amongst corporate leaders, policymakers, regulators, law enforcing agencies and non- government organizations.

Regulation

In India, the Companies Act 1956 was the principle legislation providing the formal structure for

corporate governance. Apart from this, the Monopolies and Restrictive Trade Practices Act, 1969(which is replaced by the Competition Act 2002), the Foreign Exchange Regulation Act,1973

(which has now been replaced by Foreign Exchange Management Act,1999), the Industries

(Development and Regulation) Act, 1951 and other legislations also have a bearing on thecorporate governance principles. Till May 1992, the office of the Controller of Capital Issues

was the regulation authority for the capital market. Thereafter, SEBI has assumed a primary role

in this regard.

In addition to various acts and guidelines by the regulator, non-regulatory bodies have also

published codes and guidelines on Corporate Governance. For example, Desirable CorporateGovernance Code by the Confederation of Indian Industries (CII). The issue of corporate

governance for listed companies came into prominence with the report of the Kumar MangalamBirla Committee (2000) set up by SEBI in the to suggest inclusion of a new clause, Clause 49 in

the Listing Agreement to promote good corporate governance. On 21 August 2002, the Ministry

of Finance appointed the Naresh Chandra Committee to examine various corporate governance

issues primarily around auditor company relationship, rotation of auditors and definingIndependent directors. This was followed by constitution of the Narayana Murthy Committee

(2003) by SEBI which provided recommendations on issues such as audit committees

responsibilities, audit reports, independent directors, related parties, risk management,independent directors, director compensation, codes of conduct and financial disclosures. Many

of these recommendations were then incorporated in the Revised Clause 49 that is seen as an

important statutory requirement.

Recently the Ministry of Corporate Affairs has placed before the Indian parliament, CompaniesBill 2008 that provides for greater shareholder democracy and less government intervention. The

new legislation will try to promote protection of rights of minority shareholders, self-regulation

with adequate disclosure and accountability, and lesser government control over internalcorporate processes.

Board of Directors

The Desirable Corporate Governance Code by CII (1998) for the first time introduced the

concept of independent directors for listed companies and compensation paid to them. TheKumar Mangalam Birla Committee (2000) then suggested that for a company with an executive

Chairman, at least half of the board should be independent directors, else at least one-third. The

Revised Clause 49 based on the report by the Narayana Murthy Committee further elaborates the

definition of Independent Directors. The Revised Clause 49 now also states that all compensationpaid to nonexecutive directors, including independent directors shall be fixed by the Board and

shall require prior approval of shareholders in the General meeting and that limit shall be placed

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on stock options granted to non executive directors. The Board is also required to draft a Code

of Conduct and affirm compliance to the same annually.

Audit Committee

The audit committees role flows directly from the boards oversight function. It acts as acatalyst for transparent, effective anti-fraud and risk management mechanisms, and efficient

Internal Audit and External Audit functions financial reporting. In India, section 292A of the

Companies Act 1956 requires every company with paid up capital above Rs. Five crore to havean Audit Committee which shall consist of not less than three directors and such number of other

directors as the Board may determine of which two thirds of the total number of members shall

be directors, other than managing or whole-time directors. The Desirable Corporate GovernanceCode by CII (1998) also recommended listed companies with either a turnover of over Rs.100

crores or a paid-up capital of Rs.20 crores to set up Audit Committees within two years.

In furtherance to the same the Kumar Mangalam Birla Committee, Naresh Chandra Committee

and the Narayana Murthy Committee recommended constitution, composition for audit

committee to include independent directors and also formulated the responsibilities, powers andfunctions of the Audit Committee. The Audit Committee and its Chairman are also entrusted

with the ethics and compliance mechanisms of an organization, including review of functioningof the whistleblower mechanism, where it exists.

Subsidiary Companies

The rationale behind having separate provisions with respect to subsidiary companies in the

Revised Clause 49 was the need for the board of the holding company to have some independentlink with the board of the subsidiary and provide necessary oversight. Hence the

recommendation of Narayana Murthy Committee to make provisions relating to the composition

of the Board of Directors of the holding company to be made applicable to the composition ofthe Board of Directors of subsidiary companies and to have at least one independent director onthe Board of Directors of the holding company on the Board of Directors of the subsidiary

company, were incorporated in the Revised Clause 49 of the Listing Agreement. Besides the

Audit Committee of the holding Company is to review the financial statements, in particularinvestments made by the subsidiary and disclosures about materially significant transactions

ensures that potential conflicts of interests with those of the company may be taken care of.

Role of Institutional Investors

Fast growing countries like India have attracted large shareholding by international investors andlarge Indian financial institutions with global ambitions. This has resulted in a significant

progress in the standards of corporate governance in the investee companies. Many research

reports published in recent years show that companies with good governance system havegenerated high risk-adjusted returns for their shareholders. So, if a company wants institutional

investor participation, it will have to convincingly raise the quality of corporate governance

practices. Indian companies thus need to adopt the best practices such as the OECD CorporateGovernance Principles (revised in 2004) that serve as a global benchmark. In countries like India

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where corporate ownership still continues to be highly concentrated, it is important that all

shareholders including domestic and foreign institutional investors are treated equitably.

Shareholders' Grievance Committee

As one of its mandatory recommendations, the Kumar Mangalam Birla Committee propoundedthe need to form board committee under the chairmanship of a non-executive director to

specifically look into the redressing of shareholder complaints like transfer of shares, non-receipt

of balance sheet, non-receipt of declared dividends etc. The Committee believed that theformation of shareholders grievance committee would help focus the attention of the company

on shareholders grievances and sensitise the management to redress their grievances. The

Revised Clause 49 now mandates the formation of such a committee in light of therecommendations of these committees and any defaults by the company in payments to

shareholders (in case of dividend de

Risk Management

The Kumar Mangalam Birla Committee report included mandatory Management Discussion &Analysis segment of annual report that includes discussion of industry structure and

development, opportunities, threats, outlook, risks etc. as well as financial and operational

performance and managerial developments in Human Resource /Industrial Relations front.Risk Management was however propounded for the first time by the Narayana MurthyCommittee (2003) in its report by which it required that the company shall lay down procedures

to inform Board members about the risk assessment and minimization procedures. These

procedures shall be periodically reviewed to ensure that executive management controls riskthrough means of a properly defined framework. This is incorporated in the Revised Clause 49 as

a part of internal disclosures to the Board.

Ethics

Every organization whether it is a company, club or a fraternal order, has expectations of how its

members should act among each other and with those outside its organization. A code of conduct

creates a set of rules that become a standard for all those who participate in the group and exists

for the express purpose of demonstrating professional behaviour by the members of theorganization.

The Naresh Chandra Committee for the first time recommended that companies should have aninternal code of conduct. The Report by Narayana Murthy Committee further recommended that

a company should have a mechanism (whistle blower) to report on any unethical or improper

practice or violation of code of conduct observed and that Audit Committee would be entrusted

with the role of reviewing functioning of the mechanism.

The Revised Clause 49 incorporated these recommendations further mandating directors of everylisted company to lay down a Code of Conduct and post the code on their companys websi te.

The Board members and all senior management personnel are required to affirm compliance

with the code annually and include a declaration to this effect by the CEO in the Annual Report.

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The Whistleblower still remains a non-mandatory recommendation though the Revised Clause

provides protection to the whistle blower from victimization and direct access to the Chairman of

the Audit Committee. The recommendation of Narayana Murthy Committee to make AuditCommittee responsible for reviewing the functioning of the whistle blower mechanism, where it

exists, is incorporated in the Revised Clause 49.

Executive Remuneration

The overriding principle in respect of directors remuneration is that of openness andshareholders are entitled to a full and clear statement of benefits available to the directors.

Though the Revised Clause 49 does not mandate formation of a Remuneration Committee,

Section 309(1) of the Companies Act, 1956 requires that the remuneration payable both to theexecutive as well as non-executive directors be determined by the board in accordance with and

subject to the provisions of section 198 either by the articles of the company or by resolution or

if the articles so require, by a special resolution, passed by the company in a general meeting.

Further, Schedule VI of the Act requires disclosure of Director's remuneration and computation

of net profits for that purpose.

The Desirable Corporate Governance Code by CII (1998) also mandated the disclosure of eachdirectors remuneration and commission as a part of Directors Report. It also allowed

commission and stock options for non-executive directors, subject to the attendance being

presented before shareholders. The Kumar Mangalam Committee then in its report included anon-mandatory requirement to constitute a Remuneration Committee to determine on their

behalf and on behalf of the shareholders with agreed terms of reference, the companys policy on

specific remuneration packages for executive directors including pension rights and any

compensation payment. It also required compulsory disclosures to be made in the section oncorporate governance of the annual report:

All elements of remuneration package of all the directors i.e. salary, benefits, bonuses,stock options, pension etc.

Details of fixed component and performance linked incentives, along with theperformance criteria.

Service contracts, notice period, severance fees. Stock option details, if any and whether issued at a discount as well as the period over

which accrued and over which exercisable.

The Naresh Chandra Committee further recommended on remuneration of Independent directors.Presently, under Revised Clause 49, all fees/compensation, if any paid to non-executive

directors, including independent directors, are to be fixed by the Board of Directors and require

previous approval of shareholders in general meeting. The shareholders resolution is to specify

the limits for the maximum number of stock options that can be granted to non-executivedirectors, including independent directors, in any financial year and in aggregate.

CEO/CFO Certification

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Internal control is a process, effected by an entitys board of directors, management and other

personnel, designed to provide reasonable assurance regarding the achievement of objectives in

the following categories:

Effectiveness and efficiency of operations,

Reliability of financial reporting, and

Compliance with applicable laws and regulations.

The Naresh Chandra Committee for the first time required the signing officers, to declare that

they are responsible for establishing and maintaining internal controls which have been designedto ensure that all material information is periodically made known to them; and have evaluated

the effectiveness of internal control systems of the company. Also, that they have disclosed to

the auditors as well as the Audit Committee deficiencies in the design or operation of internal

controls, if any, and what they have done or propose to do to rectify these deficiencies.

The Revised Clause 49 requires the CEO and CFO to certify to the board the annual financial

statements in the prescribed format and the establishment of internal control systems and

processes in the company. CEOs and CFOs are, thus, accountable for putting in place robust riskmanagement and internal control systems for their organizations business processes.