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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 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 differentiate from competitors through their
board culture. To date, too much of corporate governance debate has centred 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.
Objectives
The broader objective of this research is to understand the Corporate Governance processes of Indian
Companies and to see the impact of Corporate Governance on the Financial Performance. These
objectives can be summarized as under:
To understand the concept of corporate governance practices in true sense and in Indian context.
To study the corporate governance practices and measure in terms of corporate governance score.
Corporate Governance deals with the ways in which suppliers of Finance to Corporations
assure themselves of getting a return on their investment.
Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders exercise their
rights by openly and effectively communicating information and by encouraging shareholders to
participate in general meetings.
Interests of other stakeholders: Organizations should recognize that they have legal, contractual,
social, and market driven obligations to non-shareholder stakeholders, including employees, investors,
creditors, suppliers, local communities, customers, and policy makers.
Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size and
appropriate levels of independence and commitment
Integrity: Integrity should be a fundamental requirement in choosing corporate officers and board
members. Organizations should develop a code of conduct for their directors and executives that
promotes ethical and responsible decision making.
Disclosure and transparency: Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide stakeholders with a level of accountability. They
should also implement procedures to independently verify and safeguard the integrity of the
company's financial reporting. Disclosure of material matters concerning the organization should be
timely and balanced to ensure that all investors have access to clear information.
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 1970s, 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
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.
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.
Methodology
A: Ratios (For measuring the Financial Performance)
To evaluate a financial performance has been a difficult task for any researcher. However, we have
considered the following ratios as key financial performance indicator. There are several parameters
to evaluate any financial statement. However, as the focus of the research is on Corporate
Governance, the following financial parameters are considered. They are as under:
i) Earning Before Tax / Sales
ii) Sales / Total Assets
iii) Earnings Per Share
iv) Price Earning Ratio (P/E Multiple)
B: Questionnaire (For estimating Corporate Governance Code)
The present study aims to examine the governance practices prevailing in the corporate sector within
the Indian regulatory framework. The study is conducted to assess governance practices and process
followed by Indian corporate houses. The study also aims to assess the substance and quality of
reporting of Corporate governance practices in annual reports. The study aims to evaluate the state of
compliance of various governance parameters in these companies. The parameters include the
Statutory and Non-mandatory requirements stipulated by revised Clause 49 of the listing agreement as
prescribed by Securities and Exchange Board of India (SEBI) and relative amendments in the
Companies Act, 1956.
Conceptual Framework
Clause 49 of the listing agreement: SEBI revise Clause 49 of the Listing Agreement pertaining to
corporate governance vide circular date October 29th, 2004, which superseded all other earlier
circulars issued by SEBI on this subject. All existing listed companies were required to comply with
the provisions of the new clause by 31st December 2005.
The major provisions included in the new Clause 49 are:
The board will lay down a code of conduct for all board members and senior management of the
company to compulsorily follow.
The CEO an CFO will certify the financial statements and cash flow statements of the company.
If while preparing financial statements, the company follows a treatment that is different from that
prescribed in the accounting standards, it must disclose this in the financial statements, and the
management should also provide an explanation for doing so in the corporate governance report of the
annual report.
The company should lay down procedures for informing the board members about the risk
management and minimization procedures.
Where money is raised through public issues etc., the company should disclose the uses/
applications of funds according to major categories (capital expenditure, working capital, marketing
costs etc) as part of quarterly disclosure of financial statements.
Further, on an annual basis, the company will prepare a statement of funds utilized for purposes other
than those specified in the offer document/ prospectus and place it before the audit committee. The
company will have to publish its criteria for making its payments to non-executive directors in its
annual report. Clause 49 contains both mandatory and non-mandatory requirements.
In today's globalised world, corporations need to access global pools of capital as well as
attract and retain the best human capital from various parts of the world. Under such a
scenario, unless a corporation embraces and demonstrates ethical conduct, it will not be able
to succeed.
The credibility offered by good corporate governance procedures also helps maintain the
confidence of investors both foreign and domestic to attract more long-term capital. This
will ultimately induce more stable sources of financing.
Corporation is a congregation of various stakeholders, like customers, employees, investors,
vendor partners, government and society. Its growth requires the cooperation of all the
stakeholders. Hence it imperative for a corporation to be fair and transparent to all its
stakeholders in all its transactions by adhering to the best corporate governance practices.
Good Corporate Governance standards add considerable value to the operational performance
of a company by:
1. Improving strategic thinking at the top through induction of independent directors who
bring in experience and new ideas;
2. Rationalizing the management and constant monitoring of risk that a firm faces globally;
limiting the liability of top management and directors by carefully articulating the
decision-making process.
3. Assuring the integrity of financial reports, etc.
Effectiveness of corporate governance cannot merely be governance legislated by law neither can any
system of corporate system be static. As competition increases, the environment in which firms
operate also changes and in such a dynamic environment the systems of corporate governance also
need to evolve. Failure to implement good governance procedures has a cost in terms of a significant
risk premium when competing for scarce capital in today's public markets.