Becg- Mfc 4th Sem

Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

Corporate Governance and Business Ethics
UNIT -1:
Corporate Governance: Meaning, Historical Perspective, Issues in CG, Theoretical basis of
CG, CG Mechanism, CG System, Good CG.
Corporate governance is…
 A means whereby society can be sure that large corporations are well-run institutions to
which investors and lenders can confidently commit their funds.
 Corporate governance are the policies, procedures and rules governing the relationships
between the shareholders, (stakeholders), directors and managers in a company, as defined by
the applicable laws, the corporate charter, the company’s bylaws, and formal policies.
 Primarily it is about managing top management, building in checks and balances to ensure
that the senior executives pursue strategies that are in accordance with the corporate mission.
 Corporate governance governs the relationship among the many players involved (the
stakeholders) and the goals for which the corporation is governed.

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting
the way a corporation (or company) 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, customers,
creditors, suppliers, regulators, 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.
CORPORATE GOVERNANCE INITIATIVES IN INDIA / HISTORICAL
PERSPECTIVE/ CORPORATE GOVERNANCE OF INDIA HAS UNDERGONE A
PARADIGM SHIFT
There have been several major corporate governance initiatives launched in
India since the mid-1990s. The FIRST was by the Confederation of Indian
Industry (CII), India’s largest industry and business association, which came
up with the first voluntary code of corporate governance in 1998. The
SECOND was by the SEBI, now enshrined as Clause 49 of the listing
agreement. The THIRD was the Naresh Chandra Committee, which
submitted its report in 2002. The FOURTH was again by SEBI — the
Narayana Murthy Committee, which also submitted its report in 2002. Based
on some of the recommendation of this committee, SEBI revised Clause 49 of
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

the listing agreement in August 2003. Subsequently, SEBI withdrew the
revised Clause 49 in December 2003, and currently, the original Clause 49. FIFTH
was Recent Developments in India CII Taskforce on Corporate Governance – 2009 SIXTH was
Corporate Governance Voluntary Guidelines –2009.
1. THE CII CODE- :

More than a year before the onset of the Asian crisis, CII set up a committee to examine
corporate governance issues, and recommend a voluntary code of best practices. The committee
was driven by the conviction that good corporate governance was essential for Indian companies
to access domestic as well as global capital at competitive rates. The first draft of the code was
prepared by April 1997, and the final document (Desirable Corporate Governance: A Code), was
publicly released in April 1998. The code was voluntary, contained detailed provisions, and
focused on listed companies.
2. KUMAR MANGALAM BIRLA COMMITTEE REPORT AND CLAUSE 49-:

While the CII code was well-received and some progressive companies adopted it, it was Felt
that under Indian conditions a statutory rather than a voluntary code would be more Purposeful,
and meaningful. Consequently, the second major corporate governance initiative in the country
was undertaken by SEBI. In early 1999, it set up a committee under Kumar Mangalam Birla to
promote and raise the standards of good corporate governance. In early 2000, the SEBI board
had accepted and ratified key recommendations of this committee, and these were incorporated
into Clause 49 of the Listing Agreement of the Stock Exchanges.
3. THE NARESH CHANDRA COMMITTEE REPORT ON CORPORATE GOVERNANCE-:

The Naresh Chandra committee was appointed in August 2002 by the Department of Company
Affairs (DCA) under the Ministry of Finance and Company Affairs to examine various corporate
governance issues. The Committee submitted its report in December 2002. It made
recommendations in two key aspects of corporate governance: financial and non-financial
disclosures: and independent auditing and board oversight of management.
4. NARAYANA MURTHY COMMITTEE REPORT ON CORPORATE GOVERNANCE-:

The fourth initiative on corporate governance in India is in the form of the recommendations of
the Narayana Murthy committee. The committee was set up by SEBI, under the chairmanship of
Mr. N. R. Narayana Murthy, to review Clause 49, and suggest measures to improve corporate
governance standards. Some of the major recommendations of the committee primarily related to
audit committees, audit reports, independent directors, related party transactions, risk
management, directorships and director compensation, codes of conduct and financial
disclosures.
5. CII TASKFORCE ON CORPORATE GOVERNANCE – 2009-:

Satyam is a one-off incident - especially considering the size of the malfeasance. The
overwhelming majority of corporate India is well run, well regulated and does business in a
sound and legal manner. However, the Satyam episode has prompted a relook at our corporate
governance norms and how industry can go a step further through some voluntary measures.
With this in mind, the CII set up a Task Force under Mr. Naresh Chandra in February 2009 to
recommend ways of further improving corporate governance standards and practices both in
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

letter and spirit. The report enumerates a set of voluntary recommendations with an objective to
establish higher standards of probity and corporate governance in the country.
The recommendations in brief are as under:
1. Appointment of Independent
Director
a. Nomination Committee
2. Duties, liabilities and
remuneration of independent
directors
a. Letter of Appointment to
Directors
b. Fixed Contractual
Remuneration
c. Structure of Compensation to
NEDs
3. Remuneration Committee of
Board
4. Audit Committee of Board
5. Separation of the offices of the
Chairman and the Chief Executive
Officer
6. Attending Board and Committee
Meetings through Teleconferencing and
Video conferencing
7. Executive Sessions of
Independent Director
8. Role of board in shareholders
and related party transactions

9. Auditor – Company Relationship
10. Independence to Auditors
11. Certificate of Independence
12. Auditor Partner Rotation
13. Auditor Liability
14. Appointment of Auditors
15. Qualifications of Auditors
Report
16. Whistle Blowing Policy
17. Risk Management Framework
18. The legal and regulatory
standards
19. Capability of Regulatory
Agencies - Ensuring Quality in
Audit Process
20. Effective and Credible
Enforcement
21. Confiscation of Shares
22. Personal Liability
23. Liability of Directors and
Employees
24. Institutional Activism
25. Media as a stakeholder

According to the report, much of best-in-class corporate governance is
voluntary – of companies taking conscious decisions of going beyond the
mere letter of law.
6. CORPORATE GOVERNANCE VOLUNTARY GUIDELINES –2009
More recently, in December 2009, the Ministry of Corporate Affairs (MCA)
published a new set of “Corporate Governance Voluntary Guidelines 2009”,
designed to encourage companies to adopt better practices in the running of
boards and board committees, the appointment and rotation of external auditors,
and creating a whistle blowing mechanism. The guidelines are divided into the
following six parts:
1. Board of Directors
2. Responsibilities of the Board
3. Audit Committee of the Board
4. Auditors
5. Secretarial Audit
6. Institution of mechanism for Whistle Blowing
These guidelines provide for a set of good practices which may be voluntarily
adopted by the Public companies. Private companies, particularly the bigger
ones, may also like to adopt these guidelines. The guidelines are not intended to

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

be a substitute for or additions to the existing laws but are recommendatory in
nature.

Accountability
Clarifying governance roles & responsibilities, and supporting voluntary
efforts to ensure the alignment of managerial and shareholder interests and
monitoring by the board of directors capable of objectivity and sound
judgment.
Transparency
Requiring timely disclosure of adequate information concerning corporate
financial performance..
Responsibility-: Ensuring that corporations comply with relevant laws and
regulations that reflect the society’s values
Fairness-: Ensuring the protection of shareholders’ rights and the
enforceability of contracts with service/resource providers.
Principles of corporate governance:
Key elements of good corporate governance principles include honesty, trust
and integrity, openness, performance orientation, responsibility and
accountability, mutual respect and commitment to the organization of
importance is how directors and management develop a model of
governance that aligns the values of the corporate participants and then
evaluate this model periodically for its effectiveness. In particular, senior
executives should conduct themselves honestly and ethically, especially
concerning actual or apparent conflicts of interest, and disclosure in
financial reports.
Commonly accepted principles of corporate governance include:


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 effectively
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT








communicating information that is understandable and accessible and
encouraging shareholders to participate in general meetings.
Interests of other stakeholders: Organizations should recognize that
they have legal and other obligations to all legitimate stakeholders.
Role and responsibilities of the board: The board needs a range of
skills and understanding to be able to deal with various business issues
and have the ability to review and challenge management performance.
It needs to be of sufficient size and have an appropriate level of
commitment to fulfill its responsibilities and duties. There are issues
about the appropriate mix of executive and non-executive directors.
Integrity and ethical behaviour: Ethical and responsible decision
making is not only important for public relations, but it is also a
necessary element in risk management and avoiding lawsuits.
Organizations should develop a code of conduct for their directors and
executives that promotes ethical and responsible decision making. It is
important to understand, though, that reliance by a company on the
integrity and ethics of individuals is bound to eventual failure. Because
of this, many organizations establish Compliance and Ethics Programs
to minimize the risk that the firm steps outside of ethical and legal
boundaries.
Disclosure and transparency: Organizations should clarify and make
publicly known the roles and responsibilities of board and management
to provide shareholders 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, factual information.

THEORETICAL BASIS OF CORPORATE GOVERNANCE
There are four broad theories to explain and elucidate corporate governance.
These are: (i) Agency Theory (ii) Stewardship Theory (iii) Stakeholder
Theory and (iv) Sociological Theory.
A. AGENCY THEORY
The fundamental theoretical basis of corporate governance is agency costs.
Adam Smith had identified the agency problem (managerial negligence
and profusion). Shareholders are the owners and the principals too. The
management, the board, chosen by the shareholders are the agents.
Principals may want to carry out the objectives of the company but the
agents may not quite exactly match the requirements. The cost of the
“dissonance” caused by the agency problem is the agency cost. There are
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

many a way through which the management go counter to the objectives of
the shareholders such maximizing shareholder returns. Ostentatious life
styles of directors, empire building etc. are examples.
 THE BASIS FOR THE AGENCY THEORY IS THE SEPARATION OF
OWNERSHIP AND CONTROL.
 PRINCIPAL (SHAREHOLDERS) OWN THE COMPANY BUT THE
AGENTS (MANAGERS) CONTROL IT.
 MANAGERS MUST MAXIMIZE THE SHAREHOLDERS WEALTH.
 THE MAIN CONCERN IS TO DEVELOP RULES AND INCENTIVES,
BASED ON IMPLICIT EXPLICIT CONTRACTS, TO ELIMINATE OR AT
LEAST, MINIMIZE THE CONFLICT OF INTERESTS BETWEEN
OWNERS AND MANAGERS.

The Agency problem occurs when:
The desires or a goal of the principal and agent conflict and it is difficult or
expensive for the principal to verify that the agent has behaved
appropriately.
Example: Over diversification because increased product diversification
leads to lower employment risk for managers and greater compensation
Solution: Principals engage in incentive-based performance contracts,
monitoring mechanisms such as the board of directors and enforcement
mechanisms such as the managerial labor market to mitigate the agency
problem
Mechanisms that help reduce agency costs:
1. Fair and accurate financial disclosures
2. Efficient and independent board of directors
B. THE STEWARDSHIP THEORY
The theory defines situations in which managers are not motivated by
individual goals, but rather they are stewards whose motives are aligned
with the objectives of their principals. It assumes that managers are
trustworthy and have high reputations. Therefore their behavior will not run
counter to the interests of the company. There is a significant emphasis on
the responsibility of the board to the shareholders in a corporate governance
model that is emboldened by stewardship and trusteeship. These concepts of
stewardship and trusteeship are traceable in the scriptures of India and
Christendom.
Steward is a person who manages other’s property and financial affairs
and is entrusted with the responsibility of proper utilization and
development of organization’s resources.
 MANAGERS AS STEWARDS
 ASSUMED TO WORK EFFICIENTLY AND HONESTLY IN THE
INTERESTS OF COMPANY AND OWNERS.

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

 SELF DIRECTED AND MOTIVATED BY HIGH ACHIEVEMENTS AND
RESPONSIBILITY IN DISCHARGING THE DUTIES.
 MANAGERS ARE GOAL ORIENTED
 FEEL CONSTRAINED IF THEY ARE CONTROLLED BY OUTSIDE
DIRECTORS

BASIC BEHAVIORAL DIFFERENCES BETWEEN AGENCY &
STEWARDSHIP THEORIES

Stewardship theory can be reduced to the following basics:


The theory defines situation in which managers are not motivated by
individual goals, but rather they are stewards whose motives are
aligned with the objectives of their principles.



Given

a

choice

between

self-serving

behaviour

and

pro-

organizational behavior, a steward’s behaviour will not depart from
the interests of his organization.


Control can be potentially counterproductive, because it undermines
the pro-organizational behaviour of the steward, by lowering his
motivation.

C. THE STAKEHOLDER THEORY
Managers are responsible to maximize the total wealth of all stakeholders of
the firm, rather than only the shareholders wealth. It deals with the
common interests of employees, customers, dealers, government, and
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

the society at large and draws all of them into corporate-mix. It is often
criticized as “wooly minded liberalism” because it is not applicable in
practice by companies. But the defense is that managers can act efficiently
only by drawing upon the resources of the stakeholders and as such there is
a “contract” between the company and the stakeholders
The primary feature of the stakeholder theory of corporate governance is
that those who have a stake in the functioning of the firm are made up of
large and diverse groups.
Simply put, stakeholders are those who seek some benefit from the optimum
running of the firm. Stakeholders have different goals and seek different
benefits from the firm. Workers seek job security, the IRS wants its tax
payments, investors want dividends, and the community wants a solid
economic base. The stakeholder theory holds that these different interests
do, in fact, control the firm in their own specific ways, and none has any
better right to have its voice heard than any other.
Function-: The stakeholder theory is both a descriptive and a normative
theory. It is descriptive in that it functions as a way of describing how
a company is constituted and controlled. In this case, one can see how
customers or investors all have their say in how the firm markets its
products, for example. It is a normative theory in that it suggests how
a firm should be run.
Benefits-: Stakeholder theory is a highly democratic and participatory
concept of corporate governance. Under this model, the firm is not
merely a profit-making machine for elite investors and major
executives. It is a profoundly social institution that is meant to serve
more than its shareholders. It is a communal institution that benefits
large segments of the local population. Thousands of lives are
potentially connected to and dependent upon the proper workings of
the firm.
D. SOCIOLOGICAL THEORY
The sociological approach has focused mostly on board composition and
implications for power and wealth distribution in the society. Under this
theory, board composition, financial reporting, and disclosure and auditing
are of utmost importance to realize the socio-economic objectives of
corporations.
MECHANISMS AND CONTROLS
Corporate governance mechanisms and controls are designed to reduce the
inefficiencies that arise from moral hazard and adverse selection. For
example, to monitor managers' behaviour, an independent third party (the
external auditor) attests the accuracy of information provided by
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

management to investors. An ideal control system should regulate both
motivation and ability.
INTERNAL CORPORATE GOVERNANCE CONTROLS

Internal corporate governance controls monitor activities and then take
corrective action to accomplish organisational goals. Examples include:
 Monitoring by the board of directors: The board of directors, with its
legal authority to hire, fire and compensate top management, safeguards
invested capital. Regular board meetings allow potential problems to be
identified, discussed and avoided. Whilst non-executive directors are
thought to be more independent, they may not always result in more
effective corporate governance and may not increase performance. [6]
Different board structures are optimal for different firms. Moreover, the
ability of the board to monitor the firm's executives is a function of its
access to information. Executive directors possess superior knowledge
of the decision-making process and therefore evaluate top management
on the basis of the quality of its decisions that lead to financial
performance outcomes, ex ante. It could be argued, therefore, that
executive directors look beyond the financial criteria.
 Internal control procedures and internal auditors: Internal control
procedures are policies implemented by an entity's board of directors,
audit committee, management, and other personnel to provide
reasonable assurance of the entity achieving its objectives related to
reliable financial reporting, operating efficiency, and compliance with
laws and regulations. Internal auditors are personnel within an
organization who test the design and implementation of the entity's
internal control procedures and the reliability of its financial reporting
 Balance of power: The simplest balance of power is very common;
require that the President be a different person from the Treasurer. This
application of separation of power is further developed in companies
where separate divisions check and balance each other's actions. One
group may propose company-wide administrative changes, another
group review and can veto the changes, and a third group check that the
interests of people (customers, shareholders, employees) outside the
three groups are being met.
 Remuneration: Performance-based remuneration is designed to relate
some proportion of salary to individual performance. It may be in the
form of cash or non-cash payments such as shares and share options,
superannuation or other benefits. Such incentive schemes, however, are
reactive in the sense that they provide no mechanism for preventing
mistakes or opportunistic behaviour, and can elicit myopic behaviour.
EXTERNAL CORPORATE GOVERNANCE CONTROLS

External corporate governance controls encompass the controls external
stakeholders exercise over the organisation. Examples include:

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

 competition
 debt covenants
 demand for and assessment of performance information (especially
financial statements)
 government regulations
 managerial labour market
 media pressure
 takeovers
CORPORATE GOVERNANCE SYSTEM:
The role of the management is to run the enterprise while the role of the
board is to see that it is being run well and in the right direction. Corporate
governance systems vary around the world. Scholars tend to suggest three
broad versions:

 The Anglo-American model
 The German model
 The Japanese model
THE ANGLO-AMERICAN MODEL
This is also known as unitary board model, in which all directors participate
in a single board comprising both executive and non-executive directors in
varying proportions. This approach to governance tends to be shareholder
oriented. It is also called the ‘Anglo-Saxon’ approach to corporate
governance being the basis of corporate governance in America, Britain,
Canada, Australia and other Commonwealth law countries including India.
The major features of this model are as follows:
 The ownership of companies is more or less equally divided between
individual shareholders and institutional shareholders.
 Directors are rarely independent of management.
 Companies are typically run by professional managers who have
negligible ownership stake. There is a fairly clear separation of
ownership and management.
 Most institutional investors are reluctant activists. They view
themselves as portfolio investors interested in investing in a broadly
diversified portfolio of liquid securities. If they are not satisfied with
a company’s performance, they simply sell the securities in the
market and quit.
 The disclosure norms are comprehensive, the rules against insider
trading tight, and the penalties for price manipulations stiff, all of
which provide adequate protection to the small investors and
promote general market liquidity. They also discourage large
investors from taking an active role in corporate governance.
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

GERMAN MODEL
Corporate governance in the German model is exercised through two
boards, in which the upper board supervises the executive board on behalf of
stakeholders and is typically societal oriented. In this model, although
shareholders own the company, they do not entirely dictate the governance
mechanism. They elect 50 percent of members of supervisory board and the
other half is appointed by labour unions, ensuring that employees and
labourers also enjoy a share in governance. The supervisory board appoints
and monitors the management board.
THE JAPANESE MODEL
This is the business network model, which reflects the cultural relationships
seen in the Japanese keiretsu network, in which boards tend to be large,
predominantly executive and often ritualistic. The reality of power in the
enterprise lies in the relationships between top management in the
companies in the keiretsu network. In this model the financial institution has
accrual role in governance. The shareholders and the main bank together
appoint board of directors and the president.
The distinctive features of the Japanese corporate governance mechanisms
are as follows:
 The president who consults both the supervisory board and the executive
management is included.
 Importance of the lending bank is highlighted.

INDIAN MODEL OF GOVERNANCE
Indian corporate is governed by the Company’s Act 1956 which follows
more or less the UK model. The pattern of private companies is mostly that
of closely held or dominated by a founder, his family and associates. India
has adopted the key tenets of Anglo-American external and internal control
mechanisms after economic liberalization.
ANGLO AMERICAN

GERMAN

JAPANESE

Share holders

Shareholders
/unions

Elects

Elects

Elects

Board of Directors

Supervisory Board

Supervisory Board appoints
President And President

Appoints

Appoints

Appoints

Officers/Executive

Management Board

Executive Board

and

employeesShareholders and banks

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

Manage

Manage

Manage

Company

Company

Company

INDIAN MODEL = ANGLO AMERICAN MODEL +GERMAN
MODEL
ELEMENTS OF GOOD CORPORATE GOVERNANCE

Good corporate governance is characterized by a firm commitment and
adoption of ethical practices by an organization across its entire value chain
and in all of its dealings with a wide group of stakeholders encompassing
employees, customers, vendors, regulators and shareholders (including the
minority shareholders), in both good and bad times. To achieve this, certain
checks and practices need to be whole-heartedly embraced. Good
governance deals with certain obligation to society at large, obligation to
investors, obligation to employees, obligation to customers & Managerial
obligations which are as follow -:
OBLIGATION TO SOCIETY AT LARGE
A corporation is a creation of law as an association of persons forming part
of a society in which it operates. Its activities are bound to impact the
society as the society’s value would have an impact on the corporation.
Therefore, they have mutual rights and obligations to discharge for the
benefit of each other.
 National interest: A company (and its management) should ne
committed in all its actions to benefit the economic development of the
countries in which it operates and should not engage in any activity that
would militate against such an objective.
 Political non-alignment: A company should be committed to and
support a functioning democratic constitution and system with a
transparent and fair electoral system and should not support directly or
indirectly any specific political party or candidate for political office.
 Legal compliances: The management of a company should comply
with all applicable government laws, rules and regulations. Legal
compliance will also mean that corporations should abide by the tax
laws of the nations in which they operate and these should be paid on
time and as per the required amount.
 Rule of law: Good governance requires fair, legal frameworks that are
enforced impartially. It also requires full protection of rights, particularly
those of minority shareholders. Impartial enforcement of laws requires
an independent judiciary and regulatory authorities.
 Honest and ethical conduct: Every officer of the company including its
directors, executives and non executive directors, managing director,
CEO, CFO and CCO should deal on behalf of the company with

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

professionalism, honesty, commitment and sincerity as well as high
moral and ethical standards.
 Corporate citizenship: A corporate should be committed to be a good
corporate citizen not only in compliance with all relevant laws and
regulations but also by actively assisting in the improvement of the
quality of life of the people in the communities in which it operates with
the objective of making them self reliant and enjoy a better quality of
life.
 Ethical behaviour: Corporations have a responsibility to set exemplary
standards of ethical behaviour, both internally within the organizations,
as well as in their external relationships.
 Social concern: The Company should have concerns towards the
society. It can help the needy people & show its concern by not polluting
the water, air & land. The waste disposal should not affect any human or
other living creatures.
 Healthy and safe working environment: A company should be able to
provide a safe and healthy working environment and comply with the
conduct of its business affairs with all regulations regarding the
preservations of environment of the territory it operates in.
 Competition: A company should market its products & services on its
own merits & should not resort to unethical advertisements or include
unfair & misleading pronouncements on competitors’ products &
services.
 Timely responsiveness: Good governance requires that institutions &
processes try to serve all stakeholders within a reasonable time frame.
 Corporations should uphold the fair name of the country.
OBLIGATION TO INVESTORS
The investors as shareholders and providers of capital are of paramount
importance to a corporation. A company has following obligations to
investors:
 Towards shareholders: A company should be committed to enhance
shareholder value and comply with all regulations and laws that govern
shareholders rights. The boa5rd of directors of the company shall and
fairly inform its shareholders about all relevant aspects of the company’s
business and disclose such information in accordance with the respective
regulations and agreements. Every employee shall strive for the
implementation of and compliance with this in his professional
environment. Failure to adhere to the code could attract the most severe
consequences including termination of employment or directorship as
the case may be.
 Measures promoting transparency and informed shareholder
participation: A related issue of equal importance is the need to bring
about greater levels of informed attendance and meaningful participation
by shareholders in matters relating to their companies without such
freedom being abused to interfere with management decision. An ideal
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

corporate should address this issue and relate it to more meaningful and
transparent accounting and reporting.
Transparency means that information is freely available and directly
accessible to those who will be affected by such decisions and their
enforcement. It also means that enough information is provided and that
it is provided in easily understandable forms and media.
 Financial reporting and records: A company should prepare and
maintain accounts of its business affairs fairly and accurately in
accordance with the financial and accounting reporting standards, laws
and regulations of the country in which it conducts the business affairs.
Wilful material misrepresentation of and/or misinformation on the
financial accounts and reports shall be regarded as the violation of the
firm’s ethical conduct and also will invite appropriate civil or criminal
action under the relevant laws.
OBLIGATION TO EMPLOYEES
In the context of enhanced awareness of better governance practices,
managements should realize that they have their obligations towards their
workers too.
 Fair employment practices: An ideal corporate should provide equal
access and fair treatment to all employees on the basis of merit; the
success of the company will be improved while enhancing the progress
of individuals and companies. The applicable labour and employment
laws should be followed wherever it operates.
 Equal opportunities: A company should provide equal opportunity to
all its employees and all qualified applicants for employment without
regard to their race, caste, religion, colour, marital status, sex, age,
nationality and disability.
 Humane treatment: Companies should treat employees as their first
customers and above all as human. They have to meet the basic needs of
all employees in the organization. There should be a friendly, healthy
and competitive environment for the workers to prove their ability.
 Participation: Participation of both men and women is a key
cornerstone of corporate governance. Participation could be either direct
or through representatives. It needs to be informed and organized. This
means freedom of association and expression on one hand and an
organized civil society on the other.
 Empowerment: Empowerment unleashes creativity and innovation
throughout the organization by truly vesting decision making powers at
the most appropriate levels in the organizational hierarchy.
 Equity and inclusiveness: A corporation is a miniature of a society
whose well being depends on ensuring that all its employees feel that
they have a stake in it and do not feel excluded from the main stream.
This requires all groups, particularly the most vulnerable, have
opportunities to improve or maintain their well being.
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Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT



Participative and collaborative environment: There should not be any
form of human exploitation in the company. There should be equal
opportunities for all levels of management in any decision-making. The
management should cultivate the culture where employees should feel
they are secure and are being well taken care of. Collaborative
environment would bring peace and harmony between the working
community and the management, which in turn, brings higher
productivity, higher profits and higher market share.
OBLIGATION TO CUSTOMERS
A company’s existence cannot be justified without its catering to the needs
of its customers. The companies have an obligation to its employees,
without whose assistance they cannot realize their objectives.
 Quality of products and services: The Company should be committed
to supply goods and services of the highest quality standards, backed by
efficient after sales service consistent with the requirements of the
customers to ensure their total satisfaction. The quality standards of
company’s goods and services should meet not only the required
national standards but also should endeavour to achieve international
standards.
 Products at affordable prices: Companies should ensure that they
make available to their customers quality goods at affordable prices
while making normal profit is justifiable, profiteering and fattening on
the miseries of the poor consumers is unacceptable. Companies must
constantly endeavour to update their expertise, technology and skills of
manpower to cut down costs and pass on such benefits to customers.
They should not create a scare in the midst of scarcity or by themselves
create an artificial scarcity to make undue profits.
 Unwavering commitment to customer satisfaction: Companies should
be fully committed to satisfy their customers and earn their goodwill to
stay long in the business. They should encourage the warranties and
guarantees given on their products and in case of harmful or substandard products should replace them with good ones.
MANAGERIAL OBLIGATIONS
 Protecting company’s assets: The assets of the company should not be
dissipated or misused but invested for the purpose of conducting the
business for which they are duly authorized. These include tangible as
well as intangible assets.
 Behaviour toward government agencies: A company’s employees
should not offer or give any of the firm’s funds or property as donation
to any government agencies or their representatives directly or through
intermediaries in order to obtain any favourable performance of official
duties.
 Control: control is a necessary principal of governance that the freedom
of management should be exercised within a framework of appropriate
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT





checks and balances. Control should prevent misuse of power, facilitate
timely management response to change and ensure that business risks
are pre-emptively and effectively managed.
Consensus oriented: Good governance requires mediation of the
different interests in society to reach a broad consensus on what is in the
best interest of the whole community and how this can be achieved.
Gifts and donations: The Company’s employees should neither receive
nor make directly or indirectly any illegal payments, remuneration, gifts,
donations or comparable benefits which are intended to or perceived to
obtain business or uncompetitive favours for the conduct of its business.

Unit- II
Land mark in the emergence of CG: CG Committees, World Bank on CG,
OECD Principle, Sarbanes, Oxley act-2002, Indian Committees and
guidelines, CII Initiatives.
Landmarks in the Emergence of Corporate Governance
 Over a period of time, a change had come in the perception of people
about corporate governance from the exclusive benefits of shareholders
to the benefit of all stakeholders.
 Developments in the US -: Corporate governance gained importance in
the US after the Watergate scandal that involved US corporate making
political contributions and offering bribes to government officials.
 Developments in the UK -: In England, seeds of modern corporate
governance were sown in the aftermath of the Bank of Credit and
Commerce International (BCCI) scandal. BCCI, a global bank was
made up of holding companies, affiliates, subsidiaries, banks-with-inbanks. The BCCI entities flagrantly evaded legal restrictions in the
movement of capital and goods almost on a daily routine.
 Another landmark that heightened people’s awareness and sensitivity on
the issue and resolve the rot of corporate misdeeds. Which leads to
failure of Barings Bank, Britain’s oldest merchant bank failed because of
unhealthy trades on behalf of its customers and lost $1.4 billion and
pulled its shutter down.
CG COMMITTEES
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

Throughout the US, UK, and other countries a number of committees got
appointed to recommend reforms and regulations in corporate governance.
They are all known by the names of the individuals that had chaired the
committees.
The Cadbury Committee on Corporate Governance, 1992 - Sir Adrian
Cadbury
 Stated Objective was “to help raise the standards of corporate
governance and the level of confidence in financial reporting and
auditing by setting out clearly what it sees as the respective
responsibilities of those involved and what it believes is expected of
them”.
 The Cadbury committee investigated the accountability of the board of
directors to shareholders and to the society. The Cadbury Code of best
Practices had 19 recommendations in the nature of Guidelines to the
board of directors, nonexecutive directors, executive directors and such
other officials.
CORPORATE GOVERNANCE COMMITTEES
1. Cadbury committee Report

The report was mainly divided into three parts:A. Reviewing the structure and responsibilities of Boards of Directors
and recommending a Code of Best Practice
B. Considering the role of Auditors and addressing a number of
recommendations to the Accountancy Profession
C. Dealing with the Rights and Responsibilities of Shareholders
A. Reviewing the structure and responsibilities of Boards of Directors
and recommending a Code of Best Practice
1. Board of directors:
 meet regularly, retain full and effective control over the company
and monitor the executive management
 balance of power and authority
2. Non-Executive Directors
 independent judgment
 independent of management and free from any business
3. Executive Directors
 full and clear disclosure of directors’ total emoluments
4. Financial Reporting and Controls
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

 a balanced and understandable assessment of their company’s position
should report that the business
 should ensure that an objective and professional relationship is
maintained with the auditors.

B. Considering the role of Auditors and addressing a number
of recommendations to the Accountancy Profession
o external and objective check
o professional and objective relationship between the board of directors and
auditors should be maintained
o to design audit
o regular rotation of audit partners to prevent unhealthy relationship.

Accountancy Profession should take the lead in:(i) Developing a set of criteria for assessing effectiveness;
(ii) Developing guidance for companies on the form in which directors
should report; and
(iii) Developing guidance for auditors on relevant audit procedures and the
form in which auditors should report.

C. Dealing with
Shareholders

the

Rights

and

Responsibilities

of

• Elect the directors to run the business on their behalf
• Appoint the auditors to provide an external check
• Committee's report places particular emphasis on the need for fair and
accurate reporting of a company's progress to its shareholders
• TO make greater use of their voting rights and take positive interest in the
board functioning
• Effectiveness of general meetings could be increased.
2. The Paul Ruthman Committee
The committee was constituted later to deal with the said controversial point
of Cadbury Report. It watered down the proposal on the grounds of
practicality. It restricted the reporting requirement to internal financial
controls only as against “the effectiveness of the company’s system of
internal control” as stipulated by the Code of Best Practices contained in the
Cadbury Report.
The final report submitted by the Committee chaired by Ron Hampel had
some important and progressive elements, notably the extension of
directors’ responsibilities to “all relevant control objectives including
business risk assessment and minimizing the risk of fraud….”
3. The Greenbury Committee 1995
This committee was setup in January 1995 to identify good practices by the
Confederation of British Industry (CBI), in determining directors’

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

remuneration and to prepare a code of such practices for use by public
limited companies of United Kingdom.
The committee aimed to provide an answer to the general concerns about
the accountability by the proper allocation of responsibility for determining
directors’ remuneration, the proper reporting to shareholders and greater
transparency in the process.
The committee produced the Greenbury Code of Best Practice which was
divided into the four sections : Remmuneration Committee, Disclosures,
Remuneration Policy and Service Contracts and Compensation.
The Greenbury committee recommended that UK companies should
implement the code as set out to the fullest extent practicable, that they
should make annual compliance statements, and that investor institutions
should use their power to ensure that the best practice is followed.
4. The Hampel Committee 1995
The Hampel committee was setup in November 1995 to promote high standards
on Corporate Governance both to protect investors and preserve and enhance
the standing of companies listed on the London Stock Exchange. The
committee developed further the Cadbury report. And it made the following
recommendations.
i) The auditors should report on internal control privately to the directors.
ii) The directors maintain and review all controls.
iii) Companies should time to time review their need for internal audit
function and control.
It also introduced the combined code that consolidated the recommendation of
earlier corporate governance reports (Cadbury Committee and Greenbury
Committee).
5. The Combined Code 1998
The combined code was subsequently derived from Ron Hampel
Committee’s Final Report, Cadbury Report and the Greenbury Report. The
combined code is appended to the listing rules of the London Stock
Exchange. As such, compliance of the code is mandatory for all listed
companies in UK. The stipulations contained in the Combined Code require,
among other things, that the boards should maintain a sound system of
internal control to safeguard shareholder’s investments and the company’s
assets. The directors should, at least annually, conduct a review of the
effectiveness of the group’s system of internal control covering all controls,
including financial, operational and compliance and risk management, and
report to shareholders that they have done so.
6. The Turnbull Committee
The Turnbull Committee was set up by the Institute of Chartered Accountants in
England and Wales (ICAEW) in 1999 to provide guidance to assist companies
in implementing the requirements of the Combined Code relating to internal
control.

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

The committee
 Provided guidance to assist companies in implementing the
requirements of the Combined Code relating to internal control.
 It recommended that where companies do not have an internal audit
function, the board should consider the need for carrying out an
internal audit annually.
 The committee also recommended that board of directors confirm
the existence of procedures for evaluation and managing key risks.
Corporate Governance is constantly evolving to reflect the current corporate
economic and legal environment. To be effective, corporate governance
practices need to be tailor to particular needs, objectives and risk
management structure of an organization.
7. World Bank on Corporate Governance
The World Bank, involved in sustainable development was one of the
earliest economic organization o study the issue of corporate governance
and suggest certain guidelines. The World Bank report on corporate
governance recognizes the complexity of the concept and focuses on the
principles such as transparency, accountability, fairness and responsibility
that are universal in their applications.
Corporate governance is concerned with holding the balance between
economic and social goals and between individual and communal goals. The
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,
organizations and society.
The foundation of any corporate governance is disclosure. Openness is the
basis of public confidence in the corporate system and funds will flow to
those centers of economic activity, which inspire trust. This report points the
way to establishment of trust and the encouragement of enterprise. It marks
an important milestone in the development of corporate governance.

OECD PRINCIPLES
Organization for Economic Co-operation and Development (OECD) was
one of the earliest non-governmental organizations to work on and spell out
principles and practices that should govern corporate in their goal to attain
long-term shareholder value.
The OECD were trend setters as the Code of Best practices are associated
with Cadbury report. The OECD principles in summary include the
following elements.
1. The rights of shareholders
2. Equitable treatment of shareholders
3. Role of stakeholders in corporate governance
4. Disclosure and Transparency
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

5. Responsibilities of the board
THE RIGHTS OF SHAREHOLDERS
THE CORPORATE GOVERNANCE
SHAREHOLDERS’ RIGHTS.

FRAMEWORK

SHOULD

PROTECT

A. Basic shareholder rights include the right to:
1. Secure methods of ownership registration;
2. Convey or transfer shares;
3. Obtain relevant information on the corporation on a timely and regular
basis;
4. Participate and vote in general shareholder meetings;
5. Elect members of the board; and
6. Share in the profits of the corporation.
B. Shareholders have the right to participate in, and to be sufficiently
informed on, decisions concerning fundamental corporate changes such as:
1. Amendments to the statutes, or articles of incorporation or similar
governing documents of the company;
2. The authorization of additional shares; and
3. Extraordinary transactions that in effect result in the sale of the
company.
C. Shareholders should have the opportunity to participate effectively and
vote in general shareholder meetings and should be informed of the rules,
including voting procedures that govern general shareholder meetings:
1. Shareholders should be furnished with sufficient and timely information
concerning the date, location and agenda of general meetings, as well as
full and timely information regarding the issues to be decided at the
meeting.
2. Opportunity should be provided for shareholders to ask questions of the
board and to place items on the agenda at general meetings, subject to
reasonable limitations.
3. Shareholders should be able to vote in person or in absentia, and equal
effect should be given to votes whether cast in person or in absentia.
D. Capital structures and arrangements that enable certain shareholders to
obtain a degree of control disproportionate to their equity ownership
should be disclosed.

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

E. Markets for corporate control should be allowed to function in an
efficient and transparent manner.
F. Shareholders, including institutional investors, should consider the costs
and benefits of exercising their voting rights.
THE EQUITABLE TREATMENT OF SHAREHOLDERS
The corporate governance framework should ensure the equitable treatment
of all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redress for
violation of their rights.
A. All shareholders of the same class should be treated equally.
1. Within any class, all shareholders should have the same voting rights.
All investors should be able to obtain information about the voting rights
attached to all classes of shares before they purchase. Any changes in
voting rights should be subject to shareholder vote.
2. Votes should be cast by custodians or nominees in a manner agreed upon
with the beneficial owner of the shares.
3. Processes and procedures for general shareholder meetings should allow
for equitable treatment of all shareholders. Company procedures should
not make it unduly difficult or expensive to cast votes.
B. Insider trading and abusive self-dealing should be prohibited.
C. Members of the board and managers should be required to disclose any
material interests in transactions or matters affecting the corporation.
THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE
The corporate governance framework should recognize the rights of
stakeholders as established by law and encourage active co-operation
between corporations and stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.
A. The corporate governance framework should assure that the rights of
stakeholders that are protected by law are respected.
B. Where stakeholder interests are protected by law, stakeholders should
have the opportunity to obtain effective redress for violation of their
rights.

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

C. The corporate governance framework should permit performanceenhancing mechanisms for stakeholder participation.
D. Where stakeholders participate in the corporate governance process, they
should have access to relevant information.
DISCLOSURE AND TRANSPARENCY
The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation,
including the financial situation, performance, ownership, and governance
of the company.
A. Disclosure should include, but not be limited to, material information on:
a) The financial and operating results of the company.
b) Company objectives.
c) Major share ownership and voting rights.
d) Members of the board and key executives, and their remuneration.
e) Material foreseeable risk factors.
f) Material issues regarding employees and other stakeholders.
g) Governance structures and policies.
B. Information should be prepared, audited, and disclosed in accordance
with high quality standards of accounting, financial and non-financial
disclosure, and audit.
C. An annual audit should be conducted by an independent auditor in order
to provide an external and objective assurance on the way in which
financial statements have been prepared and presented.
D. Channels for disseminating information should provide for fair, timely
and cost-efficient access to relevant information by users.
THE RESPONSIBILITIES OF THE BOARD
The corporate governance framework should ensure the strategic guidance
of the company, the effective monitoring of management by the board, and
the board’s accountability to the company and the shareholders.
A. Board members should act on a fully informed basis, in good faith, with
due diligence and care, and in the best interest of the company and the
shareholders.
B. Where board decisions may affect different shareholder groups
differently, the board should treat all shareholders fairly.
C. The board should ensure compliance with applicable law and take into
account the interests of stakeholders.
D. The board should fulfill certain key functions, including:

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

1. Reviewing and guiding corporate strategy, major plans of action, risk
policy, annual budgets and business plans; setting performance
objectives; monitoring implementation and corporate performance; and
overseeing major capital expenditures, acquisitions and divestitures.
2. Selecting, compensating, monitoring and, when necessary, replacing key
executives and overseeing succession planning.
3. Reviewing key executive and board remuneration, and ensuring a formal
and transparent board nomination process.
4. Monitoring and managing potential conflicts of interest of management,
board members and shareholders, including misuse of corporate assets
and abuse in related party transactions.
5. Ensuring the integrity of the corporation’s accounting and financial
reporting systems, including the independent audit, and that appropriate
systems of control are in place, in particular, systems for monitoring
risk, financial control, and compliance with the law.
6. Monitoring the effectiveness of the governance practices under which it
operates and making changes as needed.
7. Overseeing the process of disclosure and communications.
The OECD guidelines are somewhat general and both the Anglo-American
system and Continental European (or German) system would be quite
consistent with it.
SARBANES- OXLEY ACT, 2002
The Sarbanes-Oxley Act (SOX) is a sincere attempt to address all the issues
associated with corporate failure to achieve quality governance and to
restore investor’s confidence. The Act was formulated to protect investors
by improving the accuracy and reliability of corporate disclosures, made
precious to the securities laws and for other purposes. The act contains a
number of provisions that dramatically change the reporting and corporate
director’s governance obligations of public companies, the directors and
officers. The important provisions in the SOX Act are briefly given below.
i) Establishment of Public Company Accounting Oversight Board
(PCAOB): SOX creates a new board consisting of five members of whom
two will be certified public accountants. All accounting firms have to get
registered with the board. The board will make regular inspection of firms.
The board will report to SEC. The report will be ultimately forwarded to
Congress.
ii) Audit Committee: The SOX provides for new improved audit
committee. The committee is responsible for appointment, fixing fees and
oversight of the work of independent auditors. The registered public
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

accounting firms should report directly to audit committee on all critical
accounting policies.
iii) Conflict of Interest: The public accounting firms should not perform any
audit services for a publically traded company.
iv) Audit Partner Rotation: The act provides for mandatory rotation of lead
audit or co-ordinating partner and the partner reviewing audit once every 5
years.
v) Improper influence on conduct of Audits : According to act, it is unlawful
for any executive or director of the firm to take any action to fraudulently
influence, coerce or manipulate an audit.
vi) Prohibition of non-audit services : Under SOX act, auditors are prohibited
from providing non-audit services concurrently with audit financial review
services.

vii) CEOs and CFOs are required to affirm the financials: CEOs and
CFOs are required to certify the reports filed with the Securities and
Exchange Commission (SEC).
viii) Loans to Directors: The act prohibits US and foreign companies with
Securities traded within US from making or arranging from third parties any
type of personal loan to directors.
ix) Attorneys : The attorneys dealing with publicly traded companies are
required to report evidence of material violation of securities law or breach
of fiduciary duty or similar violations by the company or any agent of the
company to Chief Counsel or CEO and if CEO does not respond then to the
audit committee or the Board of Directors.
x) Securities Analysts: The SOX has provision under which brokers and
dealers of securities should not retaliate or threaten to retaliate an analyst
employed by broker or dealer for any adverse, negative or unfavorable
research report on a public company. The act further provides for disclosure
of conflict of interest by the securities analysts and brokers or dealers.
xi) Penalties: The penalties are also prescribed under SOX act for any
wrong doing. The penalties are very stiff. The Act also provides for studies
to be conducted by Securities and Exchange Commission or the
Government Accounting Office in the following area:
I.
II.
III.
IV.

Auditor’s Rotation
Off balance Sheet Transactions
Consolidation of Accounting firms & its impact on industry
Role of Credit Rating Industry
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

V. Role of Investment Bank and Financial Advisers.
CONFEDERATION OF INDIAN INDUSTRY (CII) Initiatives
The Confederation of Indian Industry (CII) is an association of Indian
businesses which works to create an environment conducive to the growth
of industry in the country.
CII is a non-government, not-for-profit, industry-led and industry-managed
organization, playing a proactive role in India's development process.
Founded in 1895, CII has over 7200 members, from the private as well as
public sectors, including SMEs and MNCs, and an indirect membership of
over 1,00,000 enterprises from around 242 national and regional sectoral
industry bodies
CII works closely with Government on policy issues, interfacing with
thought leaders, and enhancing efficiency, competitiveness and business
opportunities for industry through a range of specialized services and
strategic global linkages.
Confederation of Indian Industry 'has 57 offices in India, 1 each in Australia,
Austria, China, France, Singapore, UK, USA.
It has also forged partnerships with 240 organizations in 101 countries.
The ' Confederation of Indian Industry ' maxim of "Competitiveness for
Sustainable and Inclusive Growth" reflects its commitment towards
balanced development that includes all sections of society and industry.
The contribution of ' Confederation of Indian Industry ' in the booming
MNC sector is worth mentioning. Mr Kamal Nath, Union Minister for
Commerce and Industry, praised CII's initiatives and contribution in
nurturing Indian MNCs. Mr D.S. Brar, Chairman, CII National Committee
on Indian MNCs and Chairman, GVK Biosciences Private Limited, said
"there was tremendous growth potential for Indian MNCs".
In short, the body of ' Indian Industry Confederation 'popularly known as '
Confederation of Indian Industry ' or CII pioneers and champions growth of
Indian industry.
UNIT III
Agents & Institutions in CG, Rights & Privileges of Shareholders, Investors
Problems & Protection, CG & other Stakeholders, Role of Regulators &
Government
AGENCY THEORY
It involves the problem of directors controlling a company whilst
shareholders own the company. In the past, a problem was identified
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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

whereby the directors might not act in the shareholders (or other
stakeholders) best interests. Agency theory considers this problem and what
could be done to prevent it.
What is agency theory?
Key concepts of agency theory
A number of key terms and concepts are essential to understanding agency
theory.
An agent is employed by a principal to carry out a task on their behalf.
Agency refers to the relationship between a principal and their agent.
Agency costs are incurred by principals in monitoring agency behavior
because of a lack of trust in the good faith of agents.
By accepting to undertake a task on their behalf, an agent becomes
accountable to the principal by whom they are employed. The agent
is accountable to that principal.
AGENCY THEORY AND CORPORATE GOVERNANCE
Agency theory can help to explain the actions of the various interest groups
in the corporate governance debate.
Examination of theories behind corporate governance provides a foundation for
understanding the issue in greater
depth and a link between an historical
perspective and its application in
modern governance standards.
 Historically, companies were
owned and managed by the
same people. For economies
to grow it was necessary to
find a larger number of
investors to provide finance
to assist in corporate
expansion.
This led to the concept of limited
liability and the development of stock
markets to buy and sell shares.








Limited liability:
limited risk and so less

interest in the firm.
Stock market: wide and limited individual ownership and the ability to simply sell
without the need to take any interest in the firm.
Delegation of running the firm to the agent or managers.
Separation of goals between wealth maximization of shareholders and the personal
objectives of managers. This separation is a key assumption of agency theory.
Possible short-term perspective of managers rather than protecting long-term
shareholder wealth.
Divorce between ownership and control linked with differing objectives creates
agency problems.

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

RIGHTS OF SHAREHOLDERS
These rights are conferred on the shareholders either by the Indian
Companies Act of 1956 or by the Memorandum of Articles of Association of
the company or by the general law, especially those relating to contracts
under the Indian Contract Act of 1872. Following are some of the rights of
the shareholders based on the above acts of the country:
1. To obtain copies of the memorandum of association , Articles of
Association, and copies of certain resolutions and agreements on
request, on payment of prescribed fees
2. To get the share certificates within 3 months of the allotment
3. The right to transfer the shares or other interests in the company
subject to the provisions in the articles of the company
4. The right to appeal to the Company Law Board if the company
refuses/fails to register the transfer of shares
5. Has the preferential right to purchase the share on a pro-rata basis in
case of further issue of shares and holds the right to renounce all or a
part of the shares in favor of any other person
6. Holds the right to apply to the Company Law Board for the
rectification of the register of members
7. Is entitled to receive notices of general meetings and to attend such
meetings and vote either in person or by proxy
8.

Is entitled to receive a copy of the statutory report

9. Entitled to receive copies of the annual report of directors, annual
accounts, and auditor’s report
10. Has the right to participate in the appointment of auditors and the
election of directors at the AGMs of the company
11. Has the right to request the Company law board for calling AGM in
case the company does not convene the meeting
12. Can request the directors to convene extra-ordinary AGMs
13. Is entitled to inspect and obtain copies of the minutes of the AGMs

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Corporate Governance –MFC – 4th Sem.
Mr. Rashmiranjan Panigrahi, Lecturer in Finance, ASMIT

14. Has the right to participate in declaration of dividends and receive
dividends duly
15. And many more

29