Business

Environment

B.N. Ghosh

© Oxford University Press 2014. All rights reserved.

 Chapter 6

Corporate Environment and

Governance

© Oxford University Press 2014. All rights reserved.

Relation with Law
1. Introduction 
2. Independent Directors 
3. Directors Duties in India 
4. Shareholders Rights and
5. Investor Protection 
6. Related Party Transaction 
7. Conclusion: Going
Forward 
8. Changes Proposed by Law
Committee Report 2016
 Learning Objectives
• The meaning and distinction between corporate management
(CM) and corporate governance (CG)

• A brief historical background, and the nature, characteristics,

and purpose of CG

• The principles and issues of CG

• Corporate governance in India

• Globalization and CG, and the emerging trend(s)

© Oxford University Press 2014. All rights reserved.

 What is corporate governance
• Corporate governance is the administration, application, and
coordination of certain rules and regulations that create an
atmosphere of transparency and accountability in a business
corporation, and at the same time look after the business interests
of stockholders and stakeholders.

© Oxford University Press 2014. All rights reserved.

 Distinction between Corporate
Management and Corporate Governance

© Oxford University Press 2014. All rights reserved.

A brief historical background of corporate
governance
• The seeds of evolution of CG can be traced back to the time of
the enactment of the Foreign Corrupt Practices Act in 1977, in the
USA.

• Owing to serious scams and scandals, the landmark Sarbanes–

Oxley Act was passed in 2002, which laid down strict codes of
conduct for business organizations in the USA.

• In India, the need for a viable and competent CG was felt after the
liberalization of the economy in 1991.

© Oxford University Press 2014. All rights reserved.

 Nature, Characteristics, and Purpose of
Corporate Governance
• Corporate bodies are artificial personalities with distinctive rights,
authorities, duties, and powers within a system of perpetual
ownership.

• In many countries, business corporations have been instrumental

in regime changes and in shaping the political future of a country.

• The key issues in CG are accountability and transparency. Both

these involve disclosure of financial statements, removal of
grapevine and asymmetric information, and making everything
crystal clear.

© Oxford University Press 2014. All rights reserved.

Nature, Characteristics, and Purpose of
Corporate Governance

© Oxford University Press 2014. All rights reserved.

 Duties and Responsibilities of a
Corporation
• The first and foremost duty of a business corporation is
maximization of profits
• One of the economic duties of a corporation is to work in such a
way that apart from satisfying its own needs, it can contribute
positively to the economic growth of a country

• A business corporation should ensure smooth supply of goods

that are demanded by customers

• Corporations are morally duty-bound to look after their own

workers, employees, customers, shareholders, and stakeholders.

© Oxford University Press 2014. All rights reserved.

 Duties and Responsibilities of a
Corporation
• Apart from maximizing profits, a corporation these days has to
proactively involve itself for the protection of environment, or what is
called natural capital.
• Business corporations, being social organizations, have to interact
with societies. Hence, they need to perform certain social duties.

• In these present days of scandals and scams, every business

corporation is designed to perform some basic ethical duties and
responsibilities. These ethical duties pertain primarily to employees,
customers, stakeholders and shareholders, society, and
environment.

© Oxford University Press 2014. All rights reserved.

 Importance of Corporate
Governance
Ensuring accountability and transparency
Ensuring social welfare and justice
Enhancing financial stability
Strengthening sustainable development
Successful and expansionary global adventure
Ensuring allocative efficiency
Better public image of business

© Oxford University Press 2014. All rights reserved.

 Principles of a good corporation
• The fundamental principles of a good corporation start from an
ethical base on which the necessary superstructure is erected. The
vision and mission statements echo ethical codes of conduct.
• A good corporation makes a compromise between greed for profit
and the need for the society.

• The attainment of economic efficiency is the top priority of a

good company but it does not adopt immoral and illegal means to
achieve it.
• Sustainable development is at the heart of a good organization, and
in order to achieve it, the corporation becomes very judicious in using
natural resources.
© Oxford University Press 2014. All rights reserved.
Principles of a good corporation
• Investments made by a good company also include social welfare,
as these are based on justice and fairness.
• A good corporation makes products that are safe and not
harmful to the users.
• Accountability and transparency are the key principles of a good
corporation.
• The achievement (and maintenance) of financial stability is the core
principle of a good corporation.
• A good corporation is engaged in creating social goodwill and
reputation. In achieving its objectives and in dealing with its
employees and customers, it follows righteousness, justice and
fairness in every matter.
© Oxford University Press 2014. All rights reserved.
 Issues in corporate governance
• Structural Issues

Structural issues mainly revolve around the structural composition of

the corporation in matters of management, types and number of
shareholders, insider–outsider ownership, prioritization of issues such
as shareholders’ interest and employees’ interest, remuneration of
directors, the degree of desirable government control, and also the
usefulness of maintaining the post of chief executive officers (CEOs).

© Oxford University Press 2014. All rights reserved.

Issues in corporate governance
• Ethical Issues
• Insider trading
• Falsification of financial accounting statements
• Reflecting inflated profits (Satyam case) to the
stakeholders in order to attract big investors
• Breach of confidential information
are cases of some corrupt practices which have become the norm
today.

© Oxford University Press 2014. All rights reserved.

 The Indian scenario
• Corporate scandals flooded India in the 20th century and the
new century may not be any different.

• The paradox manifests in the fact that the financial organizations

in India are not customer-friendly as their international
counterparts.

• It must be realized that being ethical and performing in good

faith create a stock of social capital that can equip any organization
to achieve its vision and mission.

© Oxford University Press 2014. All rights reserved.

The Indian scenario

© Oxford University Press 2014. All rights reserved.

 Corporate governance in India
The introduction of liberalization in 1991 opened the Indian economy
to the outside world in a much bigger and broader way. It resulted in
two important developments:

• The liberalization–privatization–globalization(LPG) philosophy

created more interactions of Indian companies with their foreign
counterparts, which led to an urgent need for a strong and efficient
system of CG.

• The failure of many corporate houses around the world, especially

in countries including the UK and the USA, made the government of
India and the responsible corporate houses more concerned for a
thorough refurbishment of the Indian CG system

© Oxford University Press 2014. All rights reserved.

Main features of corporate
governance system in India

© Oxford University Press 2014. All rights reserved.

Main Features of Corporate
Governance System in India

© Oxford University Press 2014. All rights reserved.

 Globalization and corporate
governance
• The growing awareness of a body’s corporate liabilities as also
the knowledge of an organization’s functions have sent apt signals
to improve the corporate image.
• The Sullivan Principles (1999) suggested CG through social
responsibilities, thereby stressing on equality in human rights and
social justice, and environment protection.
• The introduction of the LPG model(liberalization–
privatization–globalization) has created a strong capitalist base
in India.
• At the core of CG are issues of transparency and accountability.

© Oxford University Press 2014. All rights reserved.

 Globalization and corporate
governance
• The macro environment factors affecting a business organization
have never been as critical to CG as now.

• Globalization has led to many far-reaching changes in the area

of corporate management and operation.

• The linkage with the external sector and the degree of capitalist
integration, as the examples of the East Asian countries reveal, can be
very beneficial for the developing countries of our times.

© Oxford University Press 2014. All rights reserved.

 Globalization and corporate
governance
• With the development of the trade unions and the labour laws in
place, the Tripartite Declaration of the International Labour
Organization lays stress on the employability factors and fair
treatment of workers across nations. This idea was also favoured in
India and other developing countries.
• Globalization, which started in the 1980s, has been in many ways
influencing the working of CG in all types of economies, both
developed and developing.

© Oxford University Press 2014. All rights reserved.

 Emerging trends in corporate
governance
• Corporate governance in the contemporary world is passing
through many criss-crosses, and it is indeed hazardous to pinpoint
any particular discernible trend.

• However, in a very general way, some commonly accepted

emerging norms and trends can be spotted out in the horizon.

© Oxford University Press 2014. All rights reserved.

Emerging trends in corporate
governance

© Oxford University Press 2014. All rights reserved.

OECD Principles of corporate
governance

© Oxford University Press 2014. All rights reserved.

 VEDANTA’S MINING CONTROVERSY IN
ORISSA
• CASE STUDY
• HQ UK, MAINLY IN INIDA.
• STERILITE MALCO BALCO HZL VAL
• COPPER MINES IN AUSTRALIA AND ZAMBIA
• UD$7.9 BILLION WORTH
• ANIL AGARWAL 1976 OVER 50% SHARES
• BAUXITE MINES IN LANJIGARH IN ORISSA

© Oxford University Press 2014. All rights reserved.

 VEDANTA’S MINING CONTROVERSY IN
ORISSA
• SUPREME COURT IN SAMATHA VS STATE OF AP
SCHEDULE V ALSO APPLIES TO TRANSER OF
PRIVATE OR GOVERNMENT LAND TO NON
TRIBAL. 2002 ORISSA GOVT. DECIDED
JUDGEMENT WAS NOT RELEVANT IN ORISSA
• OPPOSITION TO MINING PROJECT : DONGRIA
KONDH TRIBE – OPPOSITION CBI INQUIRY
• IMPACT – ENVIRONMENT – DISALLOWED BY
ENVIRONMENT MINISTRY
© Oxford University Press 2014. All rights reserved.