Chapter 3: Corporate Governance 53

CHAPTER 3
CORPORATE GOVERNANCE

3.1 Corporate governance: Concept and Definition

3.2 History of Corporate Governance in India

3.3 Highlights of Clause 49

3.4 Latest Reforms in Corporate Governance framework for listed

companies

3.5 Latest provisions of Corporate governance in Companies Act, 2013

3.6 Objectives of good Corporate Governance

3.7 Details of Disclosures required under Corporate Governance

3.8 Benefits and Limitations of Corporate Governance

3.9 Corporate Governance Ratings

3.10 Corporate Governance Practices in Indian Companies

 Highlights at ITC

 Highlights at BHEL

 Highlights at Infosys

3.11 Study of Sample Companies

Chapter 3: Corporate Governance 54

CORPORATE GOVERNANCE

3.1 CORPORATE GOVERNANCE: CONCEPT AND DEFINITION

Corporate Governance may be defined as ―A set of systems, processes

and principles which ensure that a company is governed in the best interest of

all its stakeholders‖. It is the system by which companies are directed and

controlled. Corporate governance essentially involves balancing the interests

of the stakeholders of a company, management, customers, suppliers,

financiers, government and the community. Corporate governance

encompasses practically every sphere of management, from action plans and

internal controls to performance measurement and corporate disclosure. It

thus provides a framework for attaining company's objectives, promoting

corporate fairness, transparency and accountability.

It is quiet often said that 'good corporate governance' is simply 'good

business'.

Some other definitions of corporate governance are as:

"the whole set of legal, cultural, and institutional arrangements that

determine what public corporations can do, who controls them, how that

control is exercised, and how the risks and return from the activities they

undertake are allocated." (Blair, 1995).

Chapter 3: Corporate Governance 55

According to another definition: Corporate governance is the system

by which business corporations are directed and controlled. The corporate

governance structure specifies the distribution of rights and responsibilities

among different participants in the corporation, such as, the board,

managers, shareholders and other stakeholders, and spells out the rules and

procedures for making decisions on corporate affairs. By doing this, it also

provides the structure through which the company objectives are set, and the

means of attaining those objectives and monitoring performance (OECD,

1999).

3.2 HISTORY OF CORPORATE GOVERNANCE IN INDIA

The fundamental objective of corporate governance is to enhance

shareholders' value and protect the interests of other stakeholders by

improving the corporate performance and accountability.

Corporate governance initiatives in India began in 1998 with the

Desirable Code of Corporate Governance – a voluntary code published by the

CII.

Later in May, 1999, SEBI had constituted a Committee under the

chairmanship of Shri Kumarmangalam Birla, then Member of the SEBI Board

―to promote and raise the standards of corporate governance‖. Based on the

recommendations of this Committee, a new clause 49 was incorporated in the

Stock Exchange Listing Agreements (―Listing Agreements‖) in February

Chapter 3: Corporate Governance 56

2000. The term ‗Clause 49‘ refers to clause number 49 of the Listing

Agreement between a company and the stock exchanges on which it is listed

(the Listing Agreement is identical for all Indian stock exchanges, including

the NSE and BSE). This was the first formal regulatory framework for listed

companies specifically for corporate governance.

Under this clause, SEBI has prescribed a format in which the

information shall be obtained by the Stock Exchanges from the companies.

Corporate governance covers a wide range of arrangements. Scholars

classify these arrangements into internal and external mechanism. With

internal mechanisms; the ownership structure of the firm, the board of

directors, the auditor and the audit committee, other committees of the board

like nomination committee, remuneration committee acquire special

significance. Within external mechanisms; the market for corporate control

and product market competition play a significant role in improving corporate

governance. The internal and external mechanisms in turn are shaped by the

overall legal and institutional structures of the country

Broadly the companies have to submit compliance status on eight sub-

clauses namely:

 Board of Directors;

 Audit Committee;

 Shareholders / Investors Grievance Committee;

Chapter 3: Corporate Governance 57

 Remuneration of directors;

 Board procedures;

 Management;

 Shareholders and ownership structure; and

 Report on Corporate Governance

Clause 49, when it was first added, was intended to introduce some

basic corporate governance practices in Indian companies and brought in a

number of key changes in governance and disclosures (many of which we

take for granted today). It specified the minimum number of independent

directors required on the board of a company. The setting up of an Audit

committee, and a Shareholders‘ Grievance committee, among others, were

made mandatory as were the Management‘s Discussion and Analysis

(MD&A) section and the Report on Corporate Governance in the Annual

Report, and disclosures of fees paid to non-executive directors. A limit was

placed on the number of committees that a director could serve on.

This Clause 49 went through a number of amendments before gaining

the present status. Clause 49 of the SEBI guidelines on Corporate Governance

was amended on 29 October 2004. The amendment made major changes in

the definition of independent directors, strengthening the responsibilities of

audit committees, improving quality of financial disclosures, including those

relating to related party transactions and proceeds from public/ rights/

Chapter 3: Corporate Governance 58

preferential issues, requiring Boards to adopt formal code of conduct,

requiring CEO/CFO certification of financial statements and for improving

disclosures to shareholders. Certain non-mandatory clauses like whistle

blower policy and restriction of the term of independent directors were also

introduced.

3.3 HIGHLIGHTS OF CLAUSE 49

As per Clause 49, for a company with an Executive Chairman, at least

50 per cent of the board should comprise independent directors. In the

case of a company with a non-executive Chairman, at least one-third of

the board should be independent directors.

It would be necessary for chief executives and chief financial officers

to establish and maintain internal controls and implement remediation

and risk mitigation towards deficiencies in internal controls, among

others.

Clause VI (ii) of Clause 49 requires all companies to submit a quarterly

compliance report to stock exchange in the prescribed form. The clause

also requires that there be a separate section on corporate governance

in the annual report with a detailed compliance report.

A company is also required to obtain a certificate either from auditors

or practicing company secretaries regarding compliance of conditions

as stipulated, and annex the same to the director's report.

Chapter 3: Corporate Governance 59

The clause mandates composition of an audit committee; one of the

directors is required to be "financially literate".

It was mandatory for all listed companies to comply with the clause by

31st December 2005

SEBI issued a modified Clause 49 on 29 October 2004 (the ‗revised

Clause 49‘) which came into operation on 1 January 2006.

The revised Clause 49 has suitably pushed forward the original intent

of protecting the interests of investors through enhanced governance practices

and disclosures. Five main highlights of the amended Clause were with

reference to the following points

o The independence criteria for directors have been clarified.

o The roles and responsibilities of the board have been enhanced.

o The quality and quantity of disclosures have improved.

o The roles and responsibilities of the audit committee in all matters

relating to internal controls and financial reporting have been

consolidated.

o The accountability of top management—specifically the CEO and

CFO—has been enhanced.

Within each of these areas, the revised Clause 49 moves further

towards improving its practices and meeting global parameters.

Chapter 3: Corporate Governance 60

Thus, we can say that a large number of governance reforms have

taken place before corporate governance could take its present shape. Once

again by Circular dated 8 April 2008, the Securities and Exchange Board of

India amended Clause 49 of the Listing Agreement to extend the 50%

independent directors rule to all Boards of Directors where the Non-Executive

Chairman is a promoter of the Company or related to the promoters of the

company.

3.4 LATEST REFORMS IN CORPORATE GOVERNANCE

FRAMEWORK FOR LISTED COMPANIES

During the period September 2012, to September 2013, the following

changes have been made to the CG framework for listed companies.

a). Disclosure of price sensitive information to the stock exchanges

Instances were seen where certain listed companies were giving

monthly disclosures of certain price sensitive information like sales/ turnover/

production to their respective industry associations, without disclosing the

same to stock exchanges. To curb this practice, the Securities and Exchange

Board of India (SEBI) has made it mandatory for listed companies to disclose

such price sensitive information first to the Stock Exchanges.

b). Amendment to the ESOP guidelines

This has been done to prohibit companies from acquisition of own

stocks in secondary markets. The revision to the guidelines was done because
Chapter 3: Corporate Governance 61

it was observed by SEBI that a few companies had set up Employees Welfare

Trusts (EWTs), which purchased companies‘ own shares in secondary market

for issuance to the employees.

c). Tightening of conflict of interest rules for market entities

All the market entities like stock exchanges, rating agencies, brokers,

depositories, etc have been directed by SEBI to adhere to a strong system to

manage conflict of interest. This has been done to maintain "high standards of

integrity" in conduct of their business.

d). Stock exchanges to have stronger redress mechanism

This aims at achieving faster resolution of investor grievances and to

provide for immediate grant of monetary relief to investors after arbitration

procedures. SEBI has decided to give monetary relief to investors having

claims up to INR10 lakh, during the course of proceedings from the Investor

Protection Funds (IPF) of stock exchanges.

e). SEBI asks stock exchanges to amend bye-laws to enforce listing

conditions

SEBI has done this to avoid suspension of trading by the recognized

stock exchanges on grounds of non compliance with listing norms.

In order to maintain consistency and uniformity of approach, SEBI has

prescribed the following additions to the bye-laws of the recognized stock

exchanges:
Chapter 3: Corporate Governance 62

i) Uniform fine structure for non-compliance of certain clauses of the

listing agreement; and

ii) Standard Operating Procedure (SOP) for suspension and revocation of

suspension of trading in the shares of such listed entities.

3.5 LATEST PROVISIONS OF CORPORATE GOVERNANCE IN

COMPANIES ACT, 2013

The enactment of the companies Act 2013 was major development in

corporate governance in 2013. The new Act replaces the Companies Act,

1956 and aims to improve corporate governance standards and is likely to

have significant impact on the governance of companies in India. Following

are the main highlights related to corporate governance that have been

incorporated in the Companies Act, 2013.

 The Companies Act, 2013 introduces new definitions relating to

accounting standards, auditing standards, financial statement,

independent director, interested director, key managerial personnel,

voting right etc. The concept of ‗one person company‘ (OPC) has been

introduced to the existing classes of companies, namely public and

private.

 Board of Directors (Clause 166): The new Act provides that the

company can have a maximum of 15 directors on the Board. For

appointing more than 15 directors a shareholder approval shall be

needed. The new Act also prescribes academic and professional

Chapter 3: Corporate Governance 63

qualifications for directors. The duties of directors have been clearly

defined in the Act making them more accountable.

 Independent Director (Clause 149): The concept of independent

directors (IDs) has been introduced for the first time in the Company

Law in India. It prescribes that all listed companies must have at least

one-third of the Board as IDs. IDs may be appointed for a term of up to

five consecutive years.

 Related Party Transactions (RPT) (Clause 188): The new Act requires

that no company should enter into RPT contracts pertaining to — (a)

sale, purchase or supply of any goods or materials; (b) sale or dispose

of or buying, property of any kind; (c) leasing of property of any kind;

(d) availing or rendering of any services; (e) appointment of any agent

for purchase or sale of goods, materials, services or property; (f) such

related party's appointment to any office or place of profit in the

company, its subsidiary

Any RPT if done requires prior approval and has to be disclosed in

Board‘s Report along with the justification for entering into such

contract or arrangement.

 Corporate Social Responsibility (CSR) (Clause 135): The new Act has

mandated the profit making companies to spend on CSR related

activities. (more has been discussed in chapter related to CSR)

Chapter 3: Corporate Governance 64

 Auditors (Clause 139): A listed company cannot appoint or reappoint

(a) an individual as auditor for more than one term of five consecutive

years, or (b) an audit firm as auditor for more than two terms of five

consecutive years. The Act has also spelled out the services that an

auditor cannot render, directly or indirectly, to the company, which

include: accounting and book-keeping services, internal audit,

investment banking services, investment advisory services, management

services etc.

 Disclosure and Reporting (Clause 92): In the new Act, there is

significant transformation in non-financial annual disclosures and

reporting by companies as compared to the earlier format in the

Companies Act, 1956.

 Serious Fraud Investigation Office (SFIO) (Clause 211): The Act has

proposed statutory status to SFIO. Investigation report of SFIO filed

with the Court for framing of charges shall be treated as a report

 Class action suits (Clause 245)

Although India has been rather slow in establishing corporate

governance principles over the last two decades, 2012-13 was a positive year

for progress in the sphere of Indian corporate governance.

The foundation of the new Indian corporate governance model is based

on the the Anglo-Saxon governance model. The UK based model is being

Chapter 3: Corporate Governance 65

used as reference for the Indian corporate market despite the fact that both the

markets are very different to one another. Although it is clear that the

proposals stem from the Anglo-Saxon corporate model, in some instances

they go further and introduce new initiatives to suit the needs of the Indian

market.

There is a great need for a universal corporate governance model

because of diverse shareholding pattern in companies arising from foreign

investments. If India wants to further develop itself and promote the corporate

market to attract long term foreign investments then it should adhere to good

and regulated corporate governance standards. The adoption of a corporate

governance model based on the Anglo-Saxon model will be a useful starting

point provided it takes into account the structure of Indian businesses.

3.6 OBJECTIVES OF GOOD CORPORATE GOVERNANCE

CORPORATE GOVERNANCE is integral to the very existence of a

company and strengthens investor's confidence by ensuring company's

commitment to higher growth and profits. Broadly, it seeks to achieve the

following objectives.

The overall endeavor of the board should be to take the organisation

forward so as to maximize long term value and shareholders' wealth.

Chapter 3: Corporate Governance 66

Good corporate governance also helps ensure that corporations take

into account the interests of a wide range of constituencies, as well as of the

communities within which they operate. In other words, corporate governance

gives recognition to the unassailable rights of shareholders as the true owners

of the corporation.

Corporate governance can be said to ensure the following:

 Adequate disclosures, statutory and legal compliance;

 Commitment to values and ethical conduct of business;

 Maintain the confidence of investors – both foreign and domestic –so

as to attract more ―patient‖, long-term capital. This is achieved because

of the credibility offered by good corporate governance induce more

stable sources of financing.

 Transparency in business transactions;

 Promoting corporate fairness, transparency and accountability.

 Protection of shareholder interests;

 Corporate governance is a key element in improving the economic

efficiency of a firm

 To create a properly structured board capable of taking independent

and objective decisions is in place at the helm of affairs;

 To ensure that the board is balance as regards the representation of

adequate number of non-executive and independent directors who will

take care of their interests and well-being of all the stakeholders;

Chapter 3: Corporate Governance 67

 To ensure that the board adopts transparent procedures and practices

and arrives at decisions on the strength of adequate information;

 To ensure that the board keeps the shareholders informed of relevant

developments impacting the company;

 To ensure that the board effectively and regularly monitors the

functioning of the management team;

 To ensure that the board remains in effective control of the affairs of

the company at all times.

3.7 DETAILS OF DISCLOSURES REQUIRED UNDER CORPORATE

GOVERNANCE

DISCLOSURES DISCLOSURES
REQUIRED IN REQUIRED TO
ANNUAL BE MADE TO
REPORT THE STOCK
DISCLOSURES EXCHANGE
REQUIRED TO
BE POSTED ON
COMPANY‘S
WEBSITE

Disclosures required in the Annual Report:

Disclosures relating to accounts

Disclosure related to financial statements u/s217 (1)

Business related information u/s217 (2)

Reporting information on key employees u/s217 (2A) (a)

Relationship with directors u/s 217 (2A) (b)

Chapter 3: Corporate Governance 68

Reporting on remarks/ qualifications of Auditor u/s217

Disclosure relating to audit committee

Composition of audit committee u/s292A

Disclosures relating to clause 49 of the listing agreement;

Particulars Clause Management

Discussion and analysis C49 IV (F)
Reporting on compliance with Clause 49 requirements C49 VI / VII (1)
Director‘s holding C49 IV (E) (iv)
Compliance to code of conduct C49 I (D) (ii)
Compliance with accounting standards C49 IV (B)
Directors transaction with company C49 IV (E) (i)
Directors remuneration C49 IV (E) (ii)
Criteria for payment to non-executive directors C49 IV (E) (iii)
Certification of compliance C49 VII (1)

Disclosures required to be posted on company’s website:

Particulars Clause
Code of conduct C49 I (D)
Criteria for payment to Non-executive directors C49 I (D)
Quarterly results C49 IV (G)

Disclosures required to be made to the Stock Exchange:

Particulars Clause
Quarterly results C49 IV (G)
Quarterly compliance report on Clause 49 C49 VI
Chapter 3: Corporate Governance 69

Effectiveness of corporate governance system cannot merely be

legislated by law neither can any system of corporate governance be static. As

overall competition is increasing and the environment in which corporates are

operating is very dynamic, there is greater need for corporate governance also

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.

3.8 BENEFITS AND LIMITATIONS OF CORPORATE GOVERNANCE

The concept of corporate governance has been in buzz for quite some

time now. It has been finding wide public attention and acceptance due to its

relevance and importance to the industry and economy. Corporate governance

is about commitment to values and ethical business conduct. Most of the

companies in present day corporate markets in India have instituted good

corporate governance for the following reasons:

 India has to find a place for itself in the globalised world for which the

corporations need to access global funds by way of attracting foreign

investments 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.

 Many national and international studies have indicated that markets as

well as investors are always inclined towards well managed companies

Chapter 3: Corporate Governance 70

and respond positively to them. Such companies have a system of good

corporate governance in place, which allows sufficient freedom to the

board and management to take decisions towards the progress of their

companies while remaining within the framework of effective

accountability.

 The credibility offered by good corporate governance helps to create

and maintain investor confidence of both foreign and domestic

investors. This helps to attract more long-term capital. This will

ultimately induce more stable sources of financing.

 It is 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. i.e.

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;

3. Limiting the liability of top management and directors by

carefully articulating the decision making process;

4. Assuring the integrity of financial reports, etc.

It also has a long term reputational effects among key stakeholders,

both internally and externally.

Chapter 3: Corporate Governance 71

 Also, the instances of financial crisis have brought the subject of

corporate governance to the surface. It has been seen that the concept

of corporate governance assumes great impetus during periods of

financial crisis. This was also seen during the Asian crisis where after

intellectual honesty and integrity became important and relevant in

corporate practices. This is because financial and non-financial

disclosures made by any firm are only as good and honest as the people

behind them.

 When a good governance system and good corporate governance

practices are in place then it builds greater confidence amongst

stakeholders as well as prospective stakeholders. Investors are willing

to pay higher prices to the corporates demonstrating strict adherence to

internally accepted norms of corporate governance.

 Effective governance reduces perceived risks because of the proactive

approach. This helps to reduce cost of capital.

 It enables board of directors to take quick and better decisions which

ultimately improves bottom line of the corporates.

 Adoption of good corporate governance practices provides long term

sustenance and strengthens stakeholders' relationship.

 Potential stakeholders aspire to enter into relationships with enterprises

whose governance credentials are exemplary.

Chapter 3: Corporate Governance 72

 Adoption of good corporate governance practices provides stability

and growth to the enterprise.

The aim of "Good Corporate Governance" is to ensure commitment of

the board in managing the company in a transparent manner for maximizing

long-term value of the company for its shareholders and all other partners. It

integrates all the participants involved in a process, which is economic, and at

the same time social. Further, its objective is to generate an environment of

trust and confidence amongst those having competing and conflicting

interests.

3.9 CORPORATE GOVERNANCE RATINGS

Corporate governance covers a wide range of arrangements. Scholars

classify these arrangements into internal and external mechanism. The

significant internal mechanisms include the ownership structure of the firm,

the board of directors, the auditor , the audit committee, other committees of

the board like nomination committee, remuneration committee etc. Within

external mechanisms, the market for corporate control and product market

competition play a significant role in improving corporate governance. The

internal and external mechanisms are further shaped by the overall legal and

institutional structures of the country. Hence it can be seen that there are large

number of facets that are covered by corporate governance. For a layman, it

Chapter 3: Corporate Governance 73

would not be easy to understand the overall state of corporate governance of a

company. A variety of variables need to be quantified.

Quantitative ratings on corporate governance come as an aid and can

help stakeholders in screening, compliance and risk monitoring in the

companies of interest. Here, it is to be understood that ccorporate governance

is about commitment to values and ethical business conduct. Good corporate

governance is reflected in fair, transparent and responsible interactions

between a company's management, its board of directors, shareholders and

other stakeholders. It is because of this reason that it is essential to have a

corporate governance rating by a ratings agency in India.

Rating systems on corporate governance serve as a quick reference

point to get an objective and quantitative view of key accounting and

corporate governance aspects. Some of the global rating data providers are

already offering corporate governance ratings for key Indian companies and

such ratings are also being offered by local rating agencies such as CRISIL,

ICRA etc.

The rating models on corporate governance are good indicators to get a

measurable sense of corporate governance initiatives. However, they should

not be misunderstood as a solution to governance woes.

Chapter 3: Corporate Governance 74

Corporate governance ratings were first undertaken by Crisil Ltd, an

associate of global ratings agency Standard and Poor‘s, in 2003. Two other

ratings agencies, Icra Ltd and Credit Analysis and Research Ltd, or CARE,

followed. The trio has rated around 50 firms, but only 19 have disclosed their

ratings to the public. The others have preferred to keep them secret. Infosys

Technologies Ltd has been rated by both Icra and Crisil and received the

highest ratings from both the agencies

There is unanimity among all three agencies on the fact that corporate

governance practices in India are improving.

These ratings assess corporate governance practices at companies with

respect to their impact on all stakeholders who deal with the company such as

employees, suppliers, shareholders, lenders and society.

CRISIL's analysis of corporate failures reveals that they are largely

attributable to shortcomings in corporate governance practices. The broad

areas of failure are:

 Accounting frauds carried out in collusion with statutory auditors

 Lack of independence of the board with board members having

significant financial linkages with the companies

 Insider trading

 Disproportionate compensation paid to executive board members and

senior management
Chapter 3: Corporate Governance 75

 Fiduciary failure by the board to exercise care and diligence in

approving proposals, even though all the information was provided by

the management

 Weak internal control mechanisms and lack of supervision Corporate

governance has thus become a critical area of focus for various market

participants and stakeholders.

The aim of "Good Corporate Governance" is to ensure commitment of

the board in managing the company in a transparent manner for maximizing

long-term value of the company for its shareholders and all other partners. It

integrates all the participants involved in a process, which is economic, and at

the same time social. Further, its objective is to generate an environment of

trust and confidence amongst those having competing and conflicting

interests.

3.10 CORPORATE GOVERNANCE PRACTICES IN INDIAN

COMPANIES

Since the commencement of the liberalisation process, India's

economic scenario has begun to alter radically. Globalisation has significantly

increased the players in the corporate market and consequently increased

business risks. This has had a positive impact too because it has compelled

Indian companies to adopt international norms of transparency and good

governance. More freedom has been given to executive management which

Chapter 3: Corporate Governance 76

enhances its ability to respond to the dynamics of a fast changing business

environment.

Good corporate governance practices are the feature of Indian

corporate.

Highlights at ITC

ITC defines Corporate Governance as a systemic process by which

companies are directed and controlled to enhance their wealth generating

capacity. Since large corporations employ vast quantum of societal resources,

ITC believes that the governance process should ensure that these companies

are managed in a manner that meets stakeholders' aspirations and societal

expectations.

ITC's Corporate Governance initiative is based on two core principles.

These are:

Management must have the executive freedom to drive the enterprise

forward without undue restraints; and this freedom of management

should be exercised within a framework of effective accountability.

ITC believes that any meaningful policy on Corporate Governance

must provide empowerment to the executive management of the

Company, and simultaneously create a mechanism of checks and

balances which ensures that the decision making powers vested in the

executive management is not only not misused, but is used with care
Chapter 3: Corporate Governance 77

and responsibility to meet stakeholder aspirations and societal

expectations.

Highlights at BHEL

BHEL has also established a sound framework of Corporate

Governance which underlines commitment to quality of governance,

transparency disclosures, consistent stakeholders' value enhancement and

corporate social responsibility. BHEL endeavors to transcend much beyond

the regulatory framework and basic requirements of Corporate Governance

focusing consistently towards building confidence of its various stakeholders

including shareholders, customers, employees, suppliers and the society at

large. The company has developed a framework for ensuring transparency,

disclosure and fairness to all, especially minority shareholders.

The Corporate Governance Policy of BHEL rests upon the four pillars

of Transparency, Full Disclosure, Independent Monitoring and Fairness to all.

To strengthen this, BHEL has signed a MoU with Transparency International

to adopt 'Integrity Pact'.

Highlights at Infosys

Corporate governance at Infosys is a value-based framework to

manage the Company affairs in a fair and transparent manner. It has evolved

guidelines and best practices over the years to ensure timely and accurate

disclosure of information regarding the financials, performance, leadership

Chapter 3: Corporate Governance 78

and governance of the Company. The corporate governance philosophy at

Infosys is based on the following principles:

Satisfy the spirit of the law and not just the letter of the law. Corporate

governance standards should go beyond the law.

Be transparent and maintain a high degree of disclosure levels. When

in doubt, disclose.

Make a clear distinction between personal conveniences and corporate

resources

Communicate externally, in a truthful manner, about how the Company

is run internally

Comply with the laws in all the countries in which we operate

Have a simple and transparent corporate structure driven solely by

business needs

The Management is the trustee of the shareholders‘ capital and not the

owner

Similar corporate governance policy and procedures are being

followed at various big and well established corporate.

3.11 STUDY OF SAMPLE COMPANIES

Corporate Governance has gained a lot of importance and momentum

world over. The objective of any corporate governance system is to

simultaneously improve both corporate performance and accountability as a

Chapter 3: Corporate Governance 79

means of attracting financial and human resources on the best possible terms

and of preventing corporate failure. In short, Corporate Governance is about

promoting corporate fairness, transparency and accountability.

Here an attempt has been made to review the various developments in

Corporate Governance in India. Data has been collected from the annual

reports of 6 companies. These are;

 BHEL (Bharat Heavy Electricals Ltd)

 ONGC(Oil and Natural Gas Corporation)

 RIL(Reliance Industries Ltd)

 ITC(Indian tobacco co.)

 INFOSYS(Infosys Technologies Ltd)

 HUL(Hindustan Unilever Ltd)

The selection of annual reports has been done randomly from period

2006-07 to 2010-2011. Fourteen parameters have been considered for analysis

of corporate governance.
Chapter 3: Corporate Governance 80

DISCLOSURE OF CORPORATE GOVERNANCE PARAMETERS BY

SELECTED COMPANIES
Corporate Governance Total Company Points Scored
Disclosures Points BHEL ONGC RIL ITC INFOSYS HUL
1. Statement of companies
philosophy on code of 1 1 1 1 1 1 1
governance
2. Structure and strength of Board 2 2 2 2 2 2 2
3. Tenure & age limit of directors 2 2 2 2 2 2 2
4. Definition and selection criteria
2 1 0 0 0 2 0
for independent directors
5. Post Board meeting follow up
1 0 1 1 1 1 0
system
6. Appointment of lead independent
1 0 0 1 0 1 0
director
7. Disclosure of committees &sub-
1 1 1 1 0 1 0
committees of Board
8. Disclosure of remuneration of
1 1 1 1 1 1 1
directors
9. Code of conduct 1 1 1 1 1 1 1
10. Audit committee 1 1 1 1 1 1 1
11. Related party transactions 1 1 1 1 1 1 1
12. General body meeting 1 1 1 1 1 1 1
13. CEO/CFO Certification 1 1 1 1 1 1 1
14. Compliance of corporate
governance guideline and clean 1 1 1 1 1 1 1
auditors certificate

An analysis of the above table:

1. In the CG score, the first point is about Statement of company’

philosophy on governance. The point has been assigned a weight of 1.

It is observed that all the six sample companies have adequately made

the disclosure and hence get the expected score.

2. In the CG score, the second point is about structure and strength of the

board. The part has been equally divided into 2 points i.e.

i) disclosure about structure of board

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ii) disclosure about strength of the board

All the companies get the expected score as they have sufficiently

disclosed the composition of the board.

3. In CG score, the third point is about disclosure of tenure and age limit

of directors. This part has been assigned weightage of 2 distributed

equally between both disclosures. All companies have sufficiently

made the disclosure and scored 2 points.

4. In CG disclosure, the fourth point has been assigned to definition and

selection criteria for independent directors. The point has been

assigned a weight of 2 distributed equally between:

i) definition of independent director

ii) selection criteria for independent directors

It is to be noted that none of the companies (except Infosys)has

disclosed the selection criteria for board members.

BHEL and INFOSYS are the only companies that have disclosed the

definition of independent directors. All the other companies have

scored nil.

5. In CG disclosure, the fifth point has been assigned to post board

meeting follow-up system. The systematic disclosures are not available

in annual reports of BHEL and HUL.

6. In the CG score, the sixth point is about disclosure about appointment

of lead independent director. Among the sample none of the companies

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except INFOSYS and RIL have formally appointed lead independent

director. Hence only these two companies have achieved the expected

score of 1.

7. In the CG score, the seventh point has been assigned to disclosure

about committees and sub-committees of board. The point was given a

weight of 1. It is observed that HUL and ITC did not make disclosure

with regard to this and hence could not score the expected. All other

companies have made adequate disclosure as required.

8. With regard to all other corporate governance disclosure parameters,

all the companies have scored well.