INTRODUCTION:

A multinational corporation (MNC) or transnational

corporation (TNC), also called multinational enterprise (MNE), is
a corporation or enterprise that manages production or
delivers services in more than one country. It can also be referred as
an international corporation. ILO defined MNC as a corporation which
has his managerial head quarters in one country known as the home
country and operates in several other countries known as host
countries.
The first modern MNC is generally thought to be the Poor
Knights of Christ and the Temple of Solomon, first endorsed by the
pope in 1129. The key element of transnational corporations was
present even back then: the British East India Company and Dutch
East India Company were operating in different countries than the
ones where they had their headquarters. Nowadays many corporations
have offices, branches or manufacturing plants in different countries
than where their original and main headquarter is located.
This often results in very powerful corporations that have
budgets that exceed some national GDPs. Multinational corporations
can have a powerful influence in local economies as well as the world
economy and play an important role in international
relations and globalization. The presence of such powerful players in
the world economy is reason for much controversy.

International power:
• Tax competition
Multinational corporations have played an important role in
globalization. Countries and sometimes sub national regions must

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compete against one another for the establishment of MNC facilities,
and the subsequent tax revenue, employment, and economic activity. To
compete, countries and regional political districts sometimes
offer incentives to MNCs such as tax breaks, pledges of governmental
assistance or improved infrastructure, or lax environmental and labor
standards enforcement. This process of becoming more attractive
to foreign investment can be characterized as a race to the bottom, a
push towards greater autonomy for corporate bodies, or both.
However, some scholars for instance the Columbia economist
Jagdish Bhagwati, have argued that multinationals are engaged in a
'race to the top.' While multinationals certainly regard a low tax
burden or low labor costs as an element of comparative advantage,
there is no evidence to suggest that MNCs deliberately avail
themselves of lax environmental regulation or poor labour standards.
As Bhagwati has pointed out, MNC profits are tied to operational
efficiency, which includes a high degree of standardization. Thus,
MNCs are likely to tailor production processes in all of their operations
in conformity to those jurisdictions where they operate (which will
almost always include one or more of the US, Japan or EU) which has
the most rigorous standards. As for labor costs, while MNCs clearly
pay workers in, e.g. Vietnam, much less than they would in the US
(though it is worth noting that higher American productivity—linked to
technology—means that any comparison is tricky, since in America the
same company would probably hire far fewer people and automate
whatever process they performed in Vietnam with manual labour), it is
also the case that they tend to pay a premium of between 10% and
100% on local labor rates.[7] Finally, depending on the nature of the
MNC, investment in any country reflects a desire for a long-term
return. Costs associated with establishing plant, training workers, etc.,
can be very high; once established in a jurisdiction, therefore, many
MNCs are quite vulnerable to predatory practices such as, e.g.,
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expropriation, sudden contract renegotiation, the arbitrary withdrawal
or compulsory purchase of unnecessary 'licenses,' etc. Thus, both the
negotiating power of MNCs and the supposed 'race to the bottom' may
be overstated, while the substantial benefits which MNCs bring (tax
revenues aside) are often understated.
• Market withdrawal
Because of their size, multinationals can have a significant
impact on government policy, primarily through the threat of market
withdrawal.
For example: In an effort to reduce health care costs, some
countries have tried to force pharmaceutical companies to license
their patented drugs to local competitors for a very low fee, thereby
artificially lowering the price. When faced with that threat,
multinational pharmaceutical firms have simply withdrawn from the
market, which often leads to limited availability of advanced drugs. In
these cases, governments have been forced to back down from their
efforts. Similar corporate and government confrontations have
occurred when governments tried to force MNCs to make
their intellectual property public in an effort to gain technology for
local entrepreneurs. When companies are faced with the option of
losing a core competitive technological advantage or withdrawing from
a national market, they may choose the latter. This withdrawal often
causes governments to change policy. Countries that have been the
most successful in this type of confrontation with multinational
corporations are large countries such as United States and Brazil,
which have viable indigenous market competitors.
• Lobbying
Multinational corporate lobbying is directed at a range of
business concerns, from tariff structures to environmental regulations.

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There is no unified multinational perspective on any of these issues.
Companies that have invested heavily in pollution control mechanisms
may lobby for very tough environmental standards in an effort to
force non-compliant competitors into a weaker position. Corporations
lobby tariffs to restrict competition of foreign industries. For every
tariff category that one multinational wants to have reduced, there is
another multinational that wants the tariff raised. Even within the U.S.
auto industry, the fraction of a company's imported components will
vary, so some firms favor tighter import restrictions, while others
favor looser ones. Says Ely Oliveira, Manager Director of the MCT/IR:
This is very serious and is very hard and takes a lot of work for the
owner.
Multinational corporations such as Wal-mart and McDonald's benefit
from government zoning laws, to create barriers to entry.
Many industries such as General Electric and Boeing lobby the
government to receive subsidies to preserve their monopoly.
Patents
Many multinational corporations hold patents to prevent
competitors from arising. For example, Adidas holds patents on shoe
designs; Siemens A.G. holds many patents on equipment and
infrastructure and Microsoft benefits from software patents. The
Pharmaceutical companies lobby international agreements to enforce
patent laws on others.
Government power
In addition to efforts by multinational corporations to affect
governments, there is much government action intended to affect
corporate behavior. The threat of nationalization (forcing a company to
sell its local assets to the government or to other local nationals) or
changes in local business laws and regulations can limit a multinational's

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power. These issues become of increasing importance because of the
emergence of MNCs in developing countries.[

Micro-multinationals

Enabled by Internet based communication tools, a new

breed of multinational companies is growing in numbers. ("How startups
go global".) These multinationals start operating in different countries
from the very early stages. These companies are being called micro-
multinationals. ("Technology Levels the Business Playing Field".) What
differentiates micro-multinationals from the large MNCs is the fact
that they are small businesses. Some of these micro-multinationals,
particularly software development companies, have been hiring
employees in multiple countries from the beginning of the Internet era.
But more and more micro-multinationals are actively starting to market
their products and services in various countries. Internet tools like
Google, Yahoo, MSN, EBay and Amazon make it easier for the micro-
multinationals to reach potential customers in other countries.
Service sector micro-multinationals, like Face book, Alibaba etc.
started as dispersed virtual businesses with employees, clients and
resources located in various countries. Their rapid growth is a direct
result of being able to use the internet, cheaper telephony and lower
traveling costs to create unique business opportunities
Criticism of multinationals

Main article: Anti-corporate activism

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Anti-corporate activism in New York

The rapid rise of multinational corporations has been a topic of

concern among intellectuals, activists and laypersons that have seen it
as a threat of such basic civil rights as privacy. They have pointed out
that multinationals create false needs in consumers and have had a long
history of interference in the policies of sovereign nation states.
Evidence supporting this belief includes invasive advertising (such
as billboards, television ads, adware, spam, telemarketing, child-
targeted advertising, guerilla marketing), massive corporate campaign
contributions in democratic elections, and endless global news stories
about corporate corruption (Martha Stewart and Enron, for example).
Anti-corporate protesters suggest that corporations answer only to
shareholders, giving human rights and other issues almost no
consideration. Films and books critical of multinationals
include Surplus: Terrorized into Being Consumers, The
Corporation, The Shock Doctrine, Downsize This and others.
Multinational companies are the organizations or enterprises
that manage production or offer services in more than one country.
And India has been the home to a number of multinational companies.
In fact, since the financial liberalization in the country in 1991, the
number of multinational companies in India has increased noticeably.
Though majority of the multinational companies in India are from the

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U.S., however one can also find companies from other countries as
well.

DESTINATION INDIA:
The multinational companies in India represent a diversified
portfolio of companies from different countries. Though the American
companies - the majority of the MNC in India, account for about 37%
of the turnover of the top 20 firms operating in India, but the
scenario has changed a lot off late. More enterprises from European
Union like Britain, France, Netherlands, Italy, Germany, Belgium and
Finland have come to India or have outsourced their works to this
country. Finnish mobile giant Nokia has their second largest base in
this country. There are also MNCs like British Petroleum and Vodafone
that represent Britain. India has a huge market for automobiles and
hence a number of automobile giants have stepped in to this country to
reap the market. One can easily find the showrooms of the
multinational automobile companies like Fiat, Piaggio, and Ford Motors
in India. French Heavy Engineering major Alstom and Pharma major
Sanofi Aventis have also started their operations in this country. The
later one is in fact one of the earliest entrants in the list of
multinational companies in India, which is currently growing at a very
enviable rate. There are also a number of oil companies and
infrastructure builders from Middle East. Electronics giants like
Samsung and LG Electronics from South Korea have already made a
substantial impact on the Indian electronics market. Hyundai Motors
has also done well in mid-segment car market in India.

WHY ARE MNC IN INDIA?

There are a number of reasons why the multinational companies
are coming down to India. India has got a huge market. It has also got
one of the fastest growing economies in the world. Besides, the policy
of the government towards FDI has also played a major role in
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attracting the multinational companies in India.
For quite a long time, India had a restrictive policy in terms of
foreign direct investment. As a result, there was lesser number of
companies that showed interest in investing in Indian market. However,
the scenario changed during the financial liberalization of the country,
especially after 1991. Government, nowadays, makes continuous efforts
to attract foreign investments by relaxing many of its policies. As a
result, a number of multinational companies have shown interest in
Indian market.

FOLLOWING ARE THE REASONS WHY MNC CONSIDERED

INDIA AS PREFERRED DESTINATION FOR BUSINESS:

• Huge market potential of the country

• FDI attractiveness
• Labor competitiveness
• Macro-economic stability
LIST OF MNC IN INDIA:
The list of multinational companies in India is ever-growing as a
number of MNCs are coming down to this country now and then.
Following are some of the major multinational companies operating
their businesses in India:
• British Petroleum
• Vodafone
• Ford Motors

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• LG
• Samsung
• Hyundai
• Accenture
• Reebok
• Skoda Motors
• ABN Amro Bank

Multinational Corporations: Myths and Facts by Gary M.

Quinlivan:
Many religious leaders are increasingly troubled by the growing
presence of multinational corporations around the world, especially in
poor and developing nations. In truth, such concern is warranted, but
only if the allegations against multinational corporations are true. Such
allegations include the charge that profit-motivated multinational
corporations are engaging in destructive competition and insidious plots
to economically and politically manipulate entire economies. Further,
multinational corporations are perceived to be methodically eliminating
domestic firms in order to exploit their monopoly powers, exporting
high-wage jobs to low-wage countries, undermining the world’s
environment, augmenting the external debt problems of developing

9
countries, perpetuating world poverty, and exploiting child labor. But
are such allegations, in fact, true? Religious leaders should examine the
data so that they can draw reasonable conclusions about the impact of
multinational corporations. Such an examination reveals that
multinational corporations, in fact, have actualized numerous moral
goals: the advancement of human rights, the improvement in the world
environment, and, most importantly, the reduction of world poverty
rates.
Critics of multinational corporations often profess to have a
higher moral vision and to be pursuing a world with laudable goals of
just wages and a clean environment. On the other hand, the extreme
left conveniently ignores the socially destructive behavior of those
economies that rely heavily on governmental regulations and state-
operated monopolistic enterprises. These economies have incurred
extreme rates of poverty, repressed human rights, and excessive
environmental damage. For reasons mentioned below, the problem
countries have almost no multinational corporations and are
concentrated in sub-Saharan Africa, South Asia, North Africa, and the
Middle East.
Paradoxically, the extreme left is hindering the momentum
to decrease world poverty rates and is deaf to the continued suffering
of the extreme poor. The left is quick to offer welfare to developing
countries but, unfortunately, this hinders poor nations from becoming
self-supporting. The extreme right, on the other hand, offers no
charity and joins the left in denouncing trade.
To be open minded, we must also consider the views of the
developing countries, which almost in unison believe that the movement
against multinational corporations will not only hinder their economic
progress but will also most likely reverse it. As Nobel Peace Prize
Laureate and former president of Costa Rica, Oskar Arias, exclaimed

10
at an August 2000 lecture to United Nations delegates and heads of
state, “We [the developing countries] don’t want your [the developed
countries] handouts; we want the right to sell our products in world
markets!” President Arias is referring to a right possessed by all
developed countries and purposely denied to almost all developing
countries for more than five decades.
Now let’s address some of the myths that critics of
multinational corporations claim to be facts. This article does not,
however, deny that there are specific cases that reflect badly on all
multinational corporations (Nike’s past problems with child labor and
other media evidence of the wanton disregard of environmental
responsibilities are but two examples). Such cases, however, are rare,
given that there are over 60,000 multinational corporations.

Monolithic Monopoly Power?

Competition is not destructive; it has compelled multinational
corporations to provide the world with an immense diversity of high-
quality and low-priced products. Competition, given free trade, delivers
mutually beneficial gains from exchange and sparks the collaborative
effort of all nations to produce commodities efficiently. As a
consequence, competition improves world welfare while dampening the
spirit of nationalism and, thus, promoting world peace.
Has the monopoly power of multinational corporations
grown?
Granted, some multinational corporations are very large: As of
1998, they produced 25 percent of global output, and, in 1997, the top
one hundred firms controlled 16 percent of the world’s productive

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assets, and the top three hundred controlled 25 percent. Firm size and
market power, however, are dynamic. The Wall Street Journal annually
surveys the world’s one hundred largest public companies ranked by
market value. Comparing the rankings in 1999 to that of 1990, there
were five new firms (Microsoft, Wal-Mart, Cisco Systems, Lucent
Technologies, and Intel) in the top ten, and four of these firms were
not in the top one hundred in 1990. More remarkably, there were
sixty-six new members in the 1999 list. Similarly, the United Nations
tracks the one hundred largest nonfinancial multinational corporations
ranked by foreign assets. Although not as dramatic as the change in
the Wall Street Journal rankings, the United Nations reported a 25
percent change in the composition of its top one hundred from 1990 to
1997. According to the conventional wisdom, an increase in monopoly
power should also lead to fewer and larger multinational corporations,
but, as reported by the United Nations, the number of multinational
corporations tripled from 1988 to 1997.
Has the increase in foreign direct investment by
multinational corporations harmed domestic investment?
(Foreign direct investment occurs whenever a firm locates a
factory abroad or purchases more than ten percent of an existing
domestic firm.) The United Nations’ World Investment Report 1999
cited two recent studies. The first, by Eduardo Borensztein, José de
Gregorio, and Jong-Wha Lee, found that an additional dollar of foreign
direct investment increases domestic investment in a sample of sixty-
nine developing countries by a factor of 1.5 to 2.3. The second study,
conducted by the United Nations, reached the same conclusion as the
first for countries in Asia, but it offered some disputable evidence of
a possible negative impact on Latin America.
Notably, coordinated international manipulations of markets are
rarely conducted by large multinational corporations but are almost

12
always government supported and directed (for example, opec, the
Association of Coffee Producing Countries, and the Cocoa Producers
Alliance). Further, government-sponsored cartels are not concerned
about the poor. In the 1970s, opec’s price distortions were a major
source not only of world recession but also of the increased external
debt and poverty of developing countries. Free markets protect the
poor from the prolonged abuses of cartels.
Rapacious Economic Exploitation?
Concerns about multinational corporation infringements on
national sovereignty lack substance. Multinational corporations do not
operate with immunity; they are heavily monitored both in the United
States and abroad. From 1991 to 1998, according to the United
Nations, there were 895 new foreign direct investment regulations
enacted by more than sixty countries.
Further, multinationals are not siphoning jobs from high- to
low-wage countries; in fact, they tend to preserve high-wage jobs in
developed countries; in 1998, 75 percent of foreign direct investment
went to developed countries. Besides, labor costs alone do not
determine where multinational corporations base their affiliates; other
variables–such as political stability, infrastructure, education levels,
future market potential, taxes, and governmental regulations–are more
decisive. In 1998, multinational corporations had eighty-six million
employees–nineteen million in developing countries– and were also
responsible, indirectly, for another 100 million jobs. The jobs created
abroad also tend to pay far more than the domestic employers do.
Based on an August 4 2000, discussion with both the general manager
of Chesterton Petty and the senior manager of Price Waterhouse
Coopers in Beijing, their Chinese employees average approximately
$10,000 per year–a small fortune in China, where an upper-middle-class

13
full professor or medical doctor brings home slightly more than $200
per month in the city of Jinan.
Evidence supplied by the World Bank and United Nations
strongly suggests that multinational corporations are a key factor in
the large improvement in welfare that has occurred in developing
countries over the last forty years. In sub-Saharan Africa and South
Asia, where the presence of multinational corporations is negligible,
severe poverty rates persist and show little sign of improvement.
For example, from 1980 to 1998, world child labor rates
(the percentage of children working between the ages of ten and
fourteen) tumbled from 20 to 13 percent. Child labor rates dropped
from 27 to 10 percent in East Asia and the Pacific, from 13 to 9
percent in Latin America and the Caribbean, and from 14 to 5 percent
in the Middle East and North Africa. Interestingly, regions lacking
multinational corporations had the worst child labor rates and the
smallest reductions: Sub-Saharan Africa’s and South Asia’s child labor
rates dropped from 35 to 30 percent and from 23 to 16 percent,
respectively. This reduction in rates was attributable to increased
family income, which has permitted families to improve their diets, to
have better homes, and to provide their children with more educational
opportunities. School enrollment rates for ages six to twenty-three
rose for all developing countries from 46 percent in 1960 to 57
percent in 1995. Only sub-Saharan Africa had an enrollment ratio
below 50 percent in 1995.
Moreover, multinational corporations are not committed to
the destruction of the world’s environment but instead have been the
driving force in the spread of “green” technologies and in creating
markets for “green products.” Market incentives such as threat of
liability, consumer boycotts, and the negative impact on reputation
have forced firms to police their foreign affiliates and to maintain

14
high environmental standards. The United Nations’ World Investment
Report 1999 notes several studies that confirm foreign affiliates
having higher environmental standards than their domestic
counterparts across all manufacturing sectors. The United Nations also
positively reflected on the efforts initiated by multinational
corporations to assist domestic suppliers (“regardless of ownership”)
to qualify for eco-labeling and to meet environmental standards
currently supported by more than five thousand multinational
corporations.
Multinational corporations have also advanced several
programs (the Global Environmental Management Initiative and the
Global Sullivan Principles, among others) to establish industry codes
dedicated to achieving high levels of social responsibility. A United
Nations survey of multinational corporations revealed that the primary
reason multinational corporations do not invest in certain countries is
the presence of extortion and bribery; not surprisingly, the main
source of the corruption is governmental officials. Both the
International Chamber of Commerce and the International
Organization of Employers have established social codes and standards
that attempt to establish principles for responsible environmental
management.
The Crucial Role of Peace and Freedom:
When multinational corporations make profits, this does not
mean that developing countries are being exploited. Both the
multinational corporations and domestic country are better off–the
developing country receives jobs, an expanded tax base, and new
technologies. If the investment does not do well, the multinational
corporations may lose their investment and the developing country
does not receive the aforementioned benefits, but the developing
country owes no restitution. As a result, multinational corporation

15
investments do not contribute to the external debt problems of
developing countries.
According to the United Nations, in 1998, $166 billion, or 25.8
percent of the world foreign direct investment went to developing
countries. Only $2.9 billion of foreign direct investment was obtained
by the least developed countries, which are primarily composed of the
sub-Saharan African countries. Given risk conditions, capital flows to
where it can earn the highest rate of return. The required risk
premium is much higher when a developing country is experiencing civil
wars, suffers from over-regulation, has a weak infrastructure, is
politically unstable, keeps its markets closed to foreign competition,
has inflexible labor markets, and imposes high taxes.
The Heritage Freedom Index measures the degree of economic
and political repression present in developing countries. As predicted,
foreign direct investment is smaller in developing countries that are
repressed. Based on the 2000 Heritage Freedom Index, of the
eighteen economies in the Middle East and North Africa, ten are
either mostly unfree or repressed, and only Bahrain is free. The
results are more dismal for sub-Saharan Africa; thirty-five (make that
thirty-six, given Robert Mugabe’s policy of land-grab terrorism) of the
forty-two economies in the region are mostly unfree or repressed.
Developing countries must be allowed to further themselves
economically through free markets and the expansion of multinational
corporations. Such countries want jobs, not welfare. Furthermore,
what is comforting but not easily understood is that the promotion of
trade increases the welfare not only of developing countries but also
of developed ones; free trade is a positive-sum game.
Gary M. Quinlivan, Ph.D., is the executive director of the
Center for Economic and Policy Education, chair of the economics,
political science, and public policy departments at Saint Vincent
16
College, and a contributing editor to Religion & Liberty. He has
coedited or authored eleven books, including his most recent, Public
Morality, Civic Virtue, and the Problem of Modern Liberalism, coedited
with T. William Boxx, (Eerdmans).

CORPORATE GOVERNANCE
INTRODUCTION:
Recently the terms "governance" and "good governance" are being
increasingly used in development literature. Bad governance is being
increasingly regarded as one of the root causes of all evil within our
societies. Major donors and international financial institutions are
increasingly basing their aid and loans on the condition that reforms
that ensure "good governance" are undertaken.

Definition of corporate governance:

"Corporate Governance is concerned with holding the
balance between economic and social goals and between individual and

17
communal goals. The corporate governance framework is there to
encourage the efficient use of resources and equally to require
accountability for the stewardship of those resources. The aim is to
align as nearly as possible the interests of individuals, corporations and
society."
"Corporate governance is about promoting corporate fairness,
transparency and accountability" J. Wolfensohn, president of the
Word bank, as quoted by an article in Financial Times, June 21, 1999.
Corporate governance comprises the systems and processes
which ensure the efficient functioning of the firm in a transparent
manner for the benefit of all the stakeholders and accountable to
them. The focus is on relationship between owners and board in
directing and controlling companies as legal entities in perpetuity. A
company’s ability to create wealth for its owners however, depends on
the role and freedom given to it by society.

Sir Adrian Cadbury in his preface to the World Bank publication,

Corporate Governance: A Framework for Implementation; states that,
“Corporate Governance is…holding the balance between economic and
social goals and between individual and community goals. The
governance framework is there to encourage the efficient use of
resources and equally to require accountability for the stewardship of
these resources. The aim is to align as nearly as possible the interest
of individuals, corporations and society. The incentive to corporations
is to achieve their corporate aims and to attract investment. The
incentive for state is to strengthen their economies and discourage
fraud and mismanagement.

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 The focus on corporate governance arises out of the large
dependencies of companies on financial markets as the preeminent
source of capital. The quality of corporate governance shapes the
future and the growth of the capital market. Strong corporate
governance is indispensable to resilient and vibrant capital market. In
the context of globalization, capital is likely to flow to markets which
are well regulated and practice high standards of transparency,
efficiency and integrity.

BENEFITS OF CORPORATE GOVERNANCE:

➢ Good governance leads to congruence of interests of boards,

management including owner managers and shareholders.
➢ Good governance provides stability and growth to the company.
➢ Good governance system builds confidence among investors.
➢ Good governance reduces perceived risks, consequently reducing
cost of capital.
➢ Well governed companies enthuse employees to acquire and
develop company specific skills.
➢ Adoption of good corporate governance practices promotes
stability and long term sustenance of stakeholder’s relationship.
➢ Potential stakeholders aspire to enter into relationships with
enterprises whose governance credentials are exemplary.

CORPORATE GOVERNANCE IN INDIA:

Factors influencing Corporate Governance:

SEBI website has summarized the factors which influence

quality of governance in Indian companies.

19
 a. Integrity of the Management: A Board of Directors with a low
level of integrity is tempted to misuse the trust, reposed by
shareholders and other stakeholders, to take decisions that
benefit a few at the cost of others.
b. Ability of the Board: The collective ability, in terms of knowledge
and skill, of the Board of Directors to effectively supervise the
executive management determines the effectiveness of the
board.
c. Adequacy of the process: Board of directors cannot effectively
supervise the effective management if the process fails to
provide sufficient and timely information to the Board, necessary
for reviewing the plans and the performance of the enterprise.
d. Commitment level of individual board of members: The quality of
a board depends on the commitment of individual members to
tasks, which they are expected to perform as board members.
e. Quality of corporate reporting; the quality of corporate
reporting depends on the transparency and timeliness of
corporate communication shareholders. This helps the
shareholders in making economic decisions and in correctly
evaluating the management in its stewardship function.

f. Participation of Stakeholders in the management: The level of

participation of stakeholders determines the number of new
ideas being generated in optimum utilization of resources and for
improving the administrative structure and the process.
Therefore an enterprise should encourage and facilitate
stakeholders’ participation.

RBI ADVISORY GROUP:

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 The report of the Advisory Group Corporate Governance (March
2001) appointed by RBI defines corporate governance as the system by
which business entities are monitored, managed and controlled.
According to the advisory group a good structure of corporate
governance is one that encourages symbiotic relationship among
shareholders, executive directors and the board of directors so that
the company is managed efficiently and the rewards are equitably
shared among shareholders and stakeholders.

COMMITTEE ON CORPORATE GOVERNANCE BY CHAIRMAN,

KUMAR MANGALAM BIRLA, 1999:

The Securities and Exchange Board of India (SEBI) appointed the

Committee on Corporate Governance on May 7, 1999 under the
Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to
promote and raise the standards of Corporate Governance. The
Committee’s detailed terms of the reference are as follows:
a. to suggest suitable amendments to the listing agreement
executed by the stock exchanges with the companies and any
other measures to improve the standards of corporate
governance in the listed companies, in areas such as continuous
disclosure of material information, both financial and non-
financial, manner and frequency of such disclosures,
responsibilities of independent and outside directors;
b. to draft a code of corporate best practices; and
c. To suggest safeguards to be instituted within the companies to
deal with insider information and insider trading.
The Recommendations of the Committee :

21
 This Report is the first formal and comprehensive attempt to
evolve a Code of Corporate Governance, in the context of prevailing
conditions of governance in Indian companies, as well as the state of
capital markets. While making the recommendations the Committee has
been mindful that any code of Corporate Governance must be dynamic,
evolving and should change with changing context and times. It would
therefore be necessary that this code also is reviewed from time to
time, keeping pace with the changing expectations of the investors,
shareholders, and other stakeholders and with increasing
sophistication achieved in capital markets.

THE THREE ANCHORS OF CORPORATE GOVERNANCE:

The three anchors of corporate governance are board of
directors, management and shareholders. While each of them has
important responsibilities of its own, it is their interaction with each
others that is the key to effective governance. The system can
become unbalanced if any one of them is not functioning well.
BOARD AND MANAGEMENT:
The changes introduced by focusing on board and Audit
Committee composition have not succeeded in establishing a healthy
distance between the management and Board. The Board should be
free to monitor and the management free to manage. If the two
functions are combined as under a system of Chief Executive Officer
being Chairman, there is no separation of powers and functions. The
policy making, strategy formulation and monitoring is done by the same
person who is supposed to execute them. The efficiency of all these
measures to distance Board from management would be lost if we let a
person wear two hats at the same time that of Chairman of the Board
and Chief Executive Officer of management.

22
 At the outset it should be noted that letting management
personnel be members of the Board how so ever senior they member
by calling them full time Directors / Executive Directors has
confounded the concepts of transparency and Accountability. Good
Corporate Governance demands the separation of the Board and
Management. Even in the case of promoters whose personal wealth is
tied to the company they have to make a choice to be satisfied by
being a member of the Board or Management team. This of course goes
against the grain of Indian Corporate Governance, the founding family
as “owners” being the Board as well as Management. Management
Accountability will be nonexistent to the shareholders in such
circumstances.
BOARD AND SHAREHOLDERS:
The regulatory efforts and operation of market force have left
out this relationship in the third anchor of corporate governance. By
and large shareholders do no know what the directors are doing and
directors do not know what the shareholders want.
Board members are elected by shareholders to serve as their
agents but in practice shareholders have not exerted much influence
over directors. The exchange of information between the two anchors
is poor and directors are not accountable to shareholders. There is no
way for shareholders to know whether the directors have acted in
their interests. Although they have the right to elect board, there is
no efficient mechanism to nominate or even endorse director
candidates.
Shareholders on their part are apathetic and mute. Their
communication is limited to formal proxy votes which historically
ratified board’s wishes. Shareholders have access to no mechanism
through which to effect changes, except for calling an extra ordinary
general body meeting. The relationship between the two anchors,

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board and shareholders is not linked together in any manner or by any
method except for the provision of annual general meeting. The
absence of the link has created an imbalance in the governance
mechanism. It has also encouraged a closer relationship and stronger
link between board and management who fill the void. Directors can be
effective in taking care of shareholders interests if we set up a strong
structure of board shareholder relationship through ensuring
transparent operation of the board meetings and enfranchisement of
shareholders. Three steps mooted in this connection are record of
voting at board meetings, letting shareholders put up as well as elect a
director on their behalf and make resolutions passed at shareholders
meeting binding.
TRANSPARENCY:
If the individual directors’ votes on corporate resolutions in key
corporate proxy statements are recorded, the directors become
accountable to shareholders. When people are held re-countable for
their actions as individual rather than as a group they tend to weigh
their choices more carefully. Directors would have greater incentive to
air their views if individual votes are published. Such accumulated
information to create directors’ score boards would supplement board
self evaluation.
➢ Separate the position of CEO and Chairman of the Board as is
the practice in UK and Canada.
CORPORATE GOVERNANCE IN INDIAN SETTING:
Corporate Governance when strictly followed / enforced would
not allow the payments to agencies with which a company has to deal
with. While political contributions are allowed extra legal payments are
not allowed as payments. They can be financed only by inflating

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expenditure or understanding receipts. But such practices cannot be
limited and the door would open wide for manipulation of accounts.
It is not just the integrity of the market that is at stake but the
probity of the nation. We rank high among corrupt nations. Let us
reform corporate governance but by doing so we have a much bigger
job of limiting the insane greed that is eating away like cancer the
vitals of our nation.
Aspects of corporate governance that require attention are
strengthening the board, and reducing the sweeping powers of
executive directors / fulltime directors whose position undermines the
balance of power between shareholders, directors and managers,
accountability of management and promoting shareholders
participation.
GOVERNANCE REFORMS IN INDIA:
First, after the Report of the Committee on Corporate
Governance (Chairman, Kumar Mangalam Birla) 1999, guidelines were
issued in 2000. Companies are also required to furnish statements and
reports for the Electronic Data Information Filing and Retrieval
(EDIFAR) system maintained by SEBI.
To further improve the guidelines SEBI constituted a Committee
on Corporate Governance (Chairman, N.R. Narayana Murthy) whose
report was presented on 08.02.2003. The report has also set out
recommendations of Naresh Chandra Committee (2003) on Corporate
Audit and governance set up by Department of Company Affairs.

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