THE LAW OF CORPORATE

GOVERNANCE -
INTRODUCTION
Course Instructor: Prof. V. Shyam Kishore
VIT School of Law, VIT University, Chennai.
WHAT IS CORPORATE GOVERNANCE
(CG)?
• A dynamic concept!
• Drawn from diverse fields like laws, economics, ethics,
politics, management, finance etc.…
• Hence a proper understanding requires familiarity with
all these disciplines.
Prof. V. Shyam Kishore VIT School of Law
DEFINITIONS:
• “CG is the process by which corporation is made responsive to the
rights and wishes of the stakeholders”. – Ada Demb & Friedrich
Neubauer.
• CG is “the relationships among various participants in determining
the direction and performance of a corporation”. – Robert Monks &
Nell Minow.
• “CG is about promoting corporate fairness, transparency and
accountability”. James Wolfensohn (Former President, World Bank).

Prof. V. Shyam Kishore VIT School of Law

DEFINITIONS (Contd.):
• Cadbury committee: “(CG) is the system by which companies
are directed and controlled” [OECD also provides a similar
definition]
• CII code refers to CG as “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”.

Prof. V. Shyam Kishore VIT School of Law

Scope of CG:
• Structuring of boards
• Board procedures
• Enhancing shareholder’ participation, disclosure of
financial information and fulfilling shareholder’s rights.
• Industrial democracy – representation of all stakeholders
on boards like institutional investors, small shareholders
etc.
Prof. V. Shyam Kishore VIT School of Law
Evolution in India:
Three stages.
Managing agency system (1850 – 1956)

• They acted as promoters, capitalists and managers. Earlier British, later

on Parsis, Marwaris, Chettiars in TN, Banias in UP, Khatris in Punjab,
Syrian Christians in Kerala are notable communities that took to being
managing agencies.
• Complete control, took a huge remuneration.
• The formal mechanism was through a managing agency contract.
Shareholder value was not exactly a priority!

Prof. V. Shyam Kishore VIT School of Law

THE PROMOTER SYSTEM (1956 – 1991)

• The companies Act 1956 – removed the managing agency system

– replaced them with the promoter system also provided various
managing options like manager, MD, WTD, BOD etc.…

• Thus the formal mechanism of governance transformed from

managing agency contracts to board of directors. Other rules
as per the Act on disclosure, AGM etc.…

Prof. V. Shyam Kishore VIT School of Law

THE ANGLO-AMERICAN SYSTEM (1992 ONWARDS)

• Fiscal crisis of 1991 – led to the liberalization of the

economic policies which meant that changes had to be
brought to the CG framework as well.
• The path: CII code (1998); Birla Committee (2000); RBI
Report (2001); Naresh Chandra Committee (2002);
Narayana Murthy Committee (2003); J J Irani
Committee (2005), Companies Act 2013.
Prof. V. Shyam Kishore VIT School of Law
ANGLO – AMERICAN EVOLUTION:
UNITED STATES OF AMERICA:
• Watergate scandal!
• Resulted in the fraud and corrupt practices act 1977
Specific provision regarding establishment, maintenance and review of systems of internal
controls.
• 1979 – SEC proposal for mandatory reporting of internal financial controls.
• 1985 - Treadway Commission (National Commission on Fraudulent Financial Reporting)
Role was to identify the main causes of misrepresentation in financial reports and to
recommend ways to reduce the incidence thereof.

Prof. V. Shyam Kishore VIT School of Law

Evolution in the US (Contd.):
• 1987 – report of the Treadway Commission
Highlighted the need for a controlled environment, independent audit committees
Called for published reports on the effectiveness of internal controls
• Committee of Sponsoring Organizations (COSO) was formed to sponsor the Treadway
Commission.
• 1992 – COSO came up with a 4 volume report titled “Internal Control – An Integral
Framework”
This report has been endorsed and refined in the UK reports that were to come
subsequently.
• Sarbanes Oxley Act, 2002 – establishing of the Public Company Accounting Oversight
Board.
Prof. V. Shyam Kishore VIT School of Law
Evolution in the United Kingdom:
• 1991 – Cadbury Committee
Requirement that the directors to report on the effectiveness of the company’s internal
control systems – controversy.
• 1992 - Ruthman Committee to deal with the controversy that was generated
It restricted the reporting requirement to internal financial controls only as against ‘the
effectiveness of the company’s system of internal control’.
• 1998 - Hampel Committee – a consolidated Combined Code
• 1999 – Turnbull Committee
To provide guidance to assist companies in implementing the requirements of the combined
code relating to internal control.

Prof. V. Shyam Kishore VIT School of Law

CORPORATE GOVERNANCE & MANAGEMENT

• CG: concerned with the intrinsic nature, purpose, identity of the

institution with focus on entity’s relevance, continuity and the
fiduciary aspects.
Consists of process, structure and relationships through which the
board oversees what the executives do.
• CM: means what the executives do to define and achieve the
objectives of the company.

Prof. V. Shyam Kishore VIT School of Law

CORPORATE GOVERNANCE & MANAGEMENT (Contd.)

• Managers operate within the hierarchy of delegated responsibility and

authority – board members have equal responsibility.
• Responsibility of the board is to govern whereas that of the managers
is to run the business.
• CG has an external focus – CM internal.
• CG is strategy oriented – CM is task oriented.
• CG concerned with the where the co is going; CM is how to get the
co there.
Prof. V. Shyam Kishore VIT School of Law
CORPORATE GOVERNANCE & MANAGEMENT (Contd.)

4 principal activities of CG:

• Direction – formulation of strategic decisions
• Executive action – involvement in crucial executive decisions
• Supervision – monitoring and overseeing management
performance
• Accountability – recognition of responsibilities and ensuring
accountability.
Prof. V. Shyam Kishore VIT School of Law
CORPORATE GOVERNANCE & MANAGEMENT (Contd.)

Direction Supervision
Corporate Governance
Accountability

Strategic
Managem
ent
Corporate Management
Executive &
operational Decision &
management Control

Prof. V. Shyam Kishore VIT School of Law

OBJECTIVES OF CG:
• Installation of a proper board structure capable of taking decisions
objectively and independently.
• Adoption of transparent procedures & practices in decision making
• Effective and regular monitoring
• Effective and regular disclosure to shareholders.
Overall objective is to maximise long term value and shareholder
wealth.
Prof. V. Shyam Kishore VIT School of Law