GOVERNANCECORPORATEUNDERSTANDING SHRAVYA 4
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Corporate governance is the system of rules, practices, and pro cesses to direct and control a company. It essentially involves balancing the interests of a company's stakeholders, such as shareholders, senior man agement executives, customers, suppliers, financiers, the government, and the community. Since corporate gov ernance also provides the framework for attaining a com pany's objectives, it encom passes practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. A company's board of directors is the primary force influencing and implementing corporate governance. It is responsible for creating the framework for corporate governance that best aligns business conduct with company’s objectives. The board of directors must ensure that the company's corporate governance policies incorpo rate the corporate strategy, risk management, accountability, transparency, environmental awareness and ethical busi ness practices. Most companies strive to have a high level of corporate governance. For many share holders, it is not enough for a company to merely be profit able. They attach significant importance to company’s dem onstration of good corporate citizenship through environ mental awareness, ethical behavior, and sound corporate governance practices. Good corporate governance creates a transparent set of rules and controls in which shareholders, directors, and officers have aligned incentives. Bad corpo rate governance can cast doubt on a company's opera tions and its ultimate profitabil Specificity. processes that can be outlined in corporate governance include action plans, performance measurement, disclosure practices, executive compensation decisions, div idend policies, procedures for reconciling conflicts of interest and explicit or implicit contracts between the company and stakeholders.
ancegoverncorporatementingandinfluencingmarythedirectorsboardcompany'sAofispri-forceimple--
Principles of GovernanceCorporate The basic principles of corporate governance are accountability, transparency, fairness, and responsibility While corporate governance structure may vary, most or ganizations incorporate the fol lowing key elements:-
• All shareholders should be treated equally and fairly; ensuring that shareholders are aware of their rights and how to exercise them.
• Upholding legal, con tractual and social obligations to non-shareholder stake holders; communicating perti nent information to employees, investors, vendors and members of the community.
• The board of directors must maintain a commitment to ensure accountability, fairness, diversity and transparency within corporate governance. Board members must also pos sess the adequate skills nec essary to review management
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•practices.Organizations should define a code of conduct for board members and ex ecutives, only appointing indi viduals if they meet that •standard.All corporate govern ance policies and procedures should be transparent or disclosed to relevant stakeholders. “
SHRAVYA 6 GOVERNANCECORPORATE FRAMEWORKINSTITUTIONAL&
• International Corporate Governance Network (ICGN): Established in 1995, ICGN is a forum for the ex change of news and infor mation, and for defining corporate governance standards throughout the world. Its mis sion is to promote effective standards of corporate govern ance and investor stewardship to advance efficient markets and sustainable economies worldwide.
In recent years, corporate governance has received in creased attention because of high-profile scandals involv ing abuse of corporate power and alleged criminal activity by corporate officers. Therefore, laws and regulations have been passed to address the components of corporate govInernance.dealing with corporate gov ernance issues, countries have used various combinations of legal and regulatory instru ments on one hand, and codes and principles on the other. Generally, corporate governance standards are included in company law and securities law. Company laws set forth the default option concerning corporate structures whose de tailed framework is determined by the company's articles and byelaws, while securities laws set out additional binding re quirements for listed companies, contributing to the enforceability of shareholder protection for regulators. Public regulators have the authority to supervise and enforce the cor porate governance practices of listed companies. Securities or financial regulators generally play the key role in most juris Atdictions.theglobal level, some coun tries have established binding corporate governance regulations. Some countries have established corporate governance codes as voluntary recommendations coupled with mandatory disclosure of whether they follow them on a “comply or explain” basis.
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• Organisation for Economic Co-operation and Development (OECD): OECD publishes Corporate Govern ance Factbook which provides easily accessible and up-todate information about the insti tutional, legal and regulatory frameworks for corporate gov ernance worldwide. The Factbook can be used by governments, regulators and the private sector to compare their own frameworks with those of other countries and also to get information on prac tices in specific jurisdictions.
GovernanceCorporate in India India relies upon own laws,
Some countries, like Costa Rica, Israel, Mexico, Saudi Ara bia and Turkey, have a mixed system with codes that provide some binding and some voluntary measures. These corpo rate governance codes are updated frequently. Some of the established institu tions working at the inter national level to promote corporate governance are:-
•are:- Ministry of Corporate Affairs
• Securities and Exchange Board of India Act 1992 (updated in 2020)
• Securities Contract (Regulation) Act 1956 (updated in 2020) Other Corporate Governance
•Codes:-SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015
• Institute of Company Secretaries of India (ICSI): Similar to ICAI, ICSI has issued secretarial guidelines for com pany secretaries to dispense their duties ethically.
• Companies Act 2013: The Companies Act has fair corporate governance guide lines, covering issues like the independence of the board of directors, fair opinion of the au ditors, related-party trans actions, disclosure of facts in financial statements related to corporate governance. It was last updated in 2020.
• Institute of Chartered Accountants of India (ICAI): The constitutional body for chartered accountants (CAs) stipulates the accounting standards and do’s & don’ts for the CAs. Auditors and forensic au ditors, who play crucial roles in corporate governance compli ance, are expected to adhere to these rules.
• Whistle-Blowers Protection Act, 2014 provides protection of identity and against victimization for a whis tleblower. It is meant to work in tandem with governance rules set by SEBI for listed, private and government sector com panies and the Companies Act.
• Securities and Exchange Board of India (SEBI): SEBI is the regulatory body of Indian financial mar kets. It acts as a watchdog and regulates the companies through various regulations to protect the interest of the shareholders.
SHRAVYA 8 regulations and listing rules as the legal corporate governance framework. Main regulators of corporate governance in India
The relevant laws in India are:-
SHRAVYA 9 HOW FROMGOVERNMENTTHECANBENEFITBETTERCORPORATEGOVERNANCE
The firms have moved over time through the phases of re luctance, hesitation, acqui escence, acceptance, and finally celebration of the idea of good corporate governance.
Indian capital markets have progressed tremendously, on multiple dimensions, since 1991, which is consid ered as the beginning of a lib eral and capital-attractive economy. The public capital markets were opened up to for eign portfolio investors (FPIs) in 1992. This did lead to a significant amount of portfolio cap ital flows into the country and in turn, led to increased availabil ity of funds to the economic agents, boosting of foreign ex change reserves, and improve ment in the trading volumes and liquidity on the stock ex changes. Around the same time, the mutual fund (MF) industry was opened up to the private sector. This helped in channelising a significant amount of savings of the household sector into the cap ital markets.
There are still wide variations in the standards demonstrated by the firms across various promoter groups. The two key factors that could lead a firm to embrace the idea of a strong corporate govern ance framework are:• Compulsion on account of various laws and regulations; leading to a compliance-driven •attitude.Realisation of the firm that adopting a higher standard would, in the long term, reward the management and the controlling shareholders far more than the cost of adoption for them; leading to a happier em brace of the higher standards.
Laws and institutional framework have also significantly strengthened over the years.
Management and the control ling shareholders have the key control over the practices fol lowed by the firm. They have often gained at the cost of other stakeholders, using dubious methods benefitting the management. However, they are also increasingly realising that, in the long run, the stock mar kets reward the firms with pro gressive corporate governance standards. High levels of dis
There has been another very significant impact of the open ing up of the stock markets to FPIs and Mutual Funds. The firms listed on the stock ex changes have been subjected to a higher level of scrutiny and market discipline than earlier.
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SHRAVYA 11 closure, transparency, and efficiency have improved corpo rate governance practices. The public sector undertakings (PSUs) which are institutionally 50% share of the convenience fee revenue earned by IRCTC. Within a day, it reversed its own decision. The planned increase in the revenues shared by IRCTC with the government would have increased the in controlling shareholders, in cluding the government, understand how to arrive at the deci sions that maximise their benefits? Do they adopt logical frameworks, or just follow their instincts or adopt simplistic ap
SHRAVYA 12 GOOD & GOVERNANCECORPORATEPOOR
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Good corporate governance is a well-defined and enforced structure that works for the benefit of all stakeholders by ensuring that the enterprise adheres to ac cepted ethical standards, best practices and formal laws. On the contrary, bad corporate governance is seen as poorlystructured, ambiguous and noncompliant, which could damage the image or financial health of a business.
Good GovernanceCorporate
According to a report on Indian corporate governance by the BSE Ltd., IFC and Institutional Investor Advisory Services, HDFC Bank Ltd., Infosys Ltd. and Wipro Ltd. have the best corporate governance prac tices. PepsiCo too is reputed for practising good corporate governance.
Bad corporate governance can cast doubt on a company's re liability, integrity, or obligation to shareholders; all of which have implications on the firm's finan cial health.Some examples of poor corporate givernance are;Volkswagen AG: In 2015, it was revealed that for years the Volkswagen AG had deliberately and systematically rigged engine emission equip ment in its cars in order to ma nipulate pollution test results in America and Europe. It came to be known as "Dieselgate". Volkswagen saw its stock shed nearly half its value in the days following the start of the scandal. VW's board structure was a reason for the emissions rig ging. In the two-tier board sys tem, comprising of management board and supervisory board, the supervisory board was meant to monitor management and approve cor porate decisions. But it lacked the independence and au thority to be able to carry out these roles.
Enron: Corporate governance became a pressing issue in the US at the beginning of 21st century, after fraudulent prac tices bankrupted Enron Corpo ration, a high-profile energy, commodities, and services company. Enron’s board of di rectors waived many rules re lated to conflicts of interest by allowing the chief financial of ficer (CFO), Andrew Fastow, to create independent, private partnerships to do business with Enron. These private partnerships were used to hide Enron's debts and liabilities, which would have reduced the company's profits significantly.
Poor GovernanceCorporate
Through deceiving accounting tricks, Enron was able to trick its investors into thinking that the firm was doing much better than it actually was. The Enron scandal resulted in the 2002 passage of the SarbanesOxley Act, which imposed more stringent recordkeeping re quirements on companies, along with stiff criminal penal ties for violating them and other securities laws. when Chanda Koch har was the CEO and Manag ing Director of the ICICI Bank. Videocon group controlled by the industrialist Venugopal Dhoot had made 28 proposals to the ICICI Bank, of which, eight were sanctioned. Chanda Kochhar was part of the sanc tioning as well as recommend ing committee in four such proposals made by the Videocon group. The ICICI Bank sanctioned loans worth ₹1,875 crore to the Videocon Group and the companies associated with it between 2009 and 2011. Most of these loans were in complete violations of banking regulations and ICICI Bank pol icies. Within months of sanc tioning of the loans, Dhoot's Supreme Energy had granted a loan of ₹64 crore to NuPower Renewables, in which husband of Chanda Kochhar had 50% quidstake.pro
quo deal. Satyam Scandal: Satyam was a public-listed company and enjoying a good reputation, even winning the Golden Pea cock Global Award for corpo rate governance at one point. However, the company col luded with auditors in fraudu lent accounting practices to mislead the investors, regulators, board and other stakeholders. The scandal was unravelled when the com pany’s Chairman Ramalinga Raju confessed about the misrepresentation in the accounting practices. The issue started with Satyam’s attempt to invest Rs. 7,000 crores in Maytas Properties and Maytas Infras tructure. These firms were owned by the family members of Raju. The investments were cleared by the board on 16th December 2008 but wereSatyam.opthe Maytas deal and subsequent lawsuits, the decision of Satyam board was reversed. The World Bank banned Satyam for 8 years to conduct any kind of business while four independent direc tors resigned. The Satyam case led to a number of changes regarding Audit, Shareholder Rights & Whistleblower policy etc in India.
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SHAREHOLDERACTIVISM&CORPORATEGOVERNANCE
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Shareholder activism is a way that shareholders can influence a company’s behavior by exer cising their rights as partial owners. Classes of shares allow for distinct voting privi leges, in addition to dividend entitlements. While minority shareholders don't run the dayto-day operations, several ways exist for them to influence a company’s board of directors and executive management ac tions. These methods can range from dialogue with man agers to formal proposals, which are voted by all share holders at a company's annual general meeting. The policy of allowing shareholders to elect a board of directors is critical. The board’s prime directive is to be always seeking the best interests of shareholders. The board of directors hires and oversees the executives who comprise the team that man ages the day-to-day operations of a company. Thus, effectively shareholders have a direct say in running of a company.
Shareholder activism in India is taking varied forms and shapes. It initially started with hedge funds and a few activist investors. But over the years, other institutional investorsmutual funds, pension funds, insurance companies, foreign portfolio investors, have be come very visible participants. Retail investors are also follow ing the suit. A strict regulator in form of Mini stry of Corporate Affairs and SEBI, and a new corporate governance law in the Com panies Act of 2013 have con tributed to this rise. e-voting was one key turning point. The e-voting became a reality as a part of the new Companies Act of 2013. It gave shareholders a sense of empowerment and ensured each vote was counted. As a result of it, res olutions started to get defeated, much to the astonishment of many a management. There is a lot more information and guidance available to in vestors to exert their rights, including through recommendations on voting made by proxy advisory firms. A positive engagement be tween investors and com panies is also forcing
One of the most important principles of corpo rate governance is the recognition of shareholders. The recognition is two-fold. First, there is the basic rec ognition of the importance of shareholders to any company. Second, from the basic recognition of shareholder importance follows the principle of responsibility to shareholders.
This August, Eicher Motors' MD Siddhartha Lal, the man cred ited with the turnaround of the company, was given the thumbs down by shareholders for a reappointment to the job with a pay hike of 10 per cent. This was when the median showed an increase of just 1 per cent. Finally, he was back but with a maximum salary cap of 1.5 per cent of profits. The message from the share holders was stern and clear. An early instance was Tata Mo tors, when in mid-2014, its shareholders rejected a remu neration hike for the then MD Karl Slym and two executive directors. For a Tata group company to be associated with shareholder activism was a Inshocker.another instance in 2014, Maruti Suzuki, the country's largest passenger car maker, issued a press statement that announced the decision of Suzuki Motor Corporation to set up a greenfield project in Guja rat. At first, Maruti faced flak for not getting approval from its own shareholders. It reached a point where some institutions challenged the transaction and eventually the terms were modified. The company had to acrelated-party transaction and only then did the shareholders approve it. The entire process took about a year. These incidents set the tone for many more to follow over time.
Activist shareholders ex ercise their rights to im prove and increase shareholder value by ensuring a high level of corporate governance. Through such activism, shareholder activists aim to create value by acting as a positive catalyst in the growth of the company.
The recent developments in Indian law have led to (among other things) increased corpo rate governance standards, creation of new shareholder remedies and improvement in shareholders' rights. Due to the ease of exercising, and en forcement of shareholders' rights, shareholders are now more willing to voice their opinion, resulting in increased shareholder activism.
SHRAVYA 17 companies to be concerned about corporate governance and adopt measures that are shareholder friendly. As per Sandeep Parekh, a former ED of SEBI and Manag ing Partner, Finsec Law Advi sors, a combination of the rising contribution of institutional investors, coupled with an increased scope of activities that need shareholders ap proval "contributes to a stronger scrutiny of a wider va riety of company actions". He says an additional impetus has been provided to shareholder activism by the regulatory reforms introduced by the government. "This inter alia includes increased corporate governance standards, crea tion of new shareholder remedies and improvement in shareholders' rights. Due to the ease of exercising and enforce ment of shareholders' rights, shareholders are now more willing to voice their opinion, resulting in increased share holder activism." There have been many in stances where activist share holders have gained Board seats or forced changes in cor porate influencewhoinstitutionalshareholders,handserableThislowedpromoter,relatedshareholders,thetransactionsSignificantactions.related-partynowrequireapprovalofthewheretheparty,suchasaisdisalfromvoting.placesconsidpowerintheoftheminoritysuchasinvestors,canexercisemuchmoreindecisionmaking.
Names like Neeraj Kanwar, Apollo Tyres' Vice Chairman & MD and, most recently, Zee Entertainment's MD & CEO Punit Goenka were confronted with a crisis on a proposed hike in salary. In the case of the latter, it marked the beginning of a battle with the company's largest shareholder, Invesco, which shows no signs of abat ing. Starting with two directors stepping down, it has turned into a situation where allegations are flying thick and fast, with anything except a res olution in sight. There are many more such in cidents of shareholder activism in India and abroad.
This in-house journal** has been conceptualised, designed and edited by Aniket Singh Chauhan (19/564) for an assignment of Media Industry and Management (MIM); which is a part of the BA (H) Journalism course offered by Maharaja Agrasen College, University of Delhi (DU). The journal has been made has been conceptualised as a Corporate Communcation centric publication with a special focus on the trends in this growing industry. The journal’s name ‘Shravya’ is a Sanskrit word which translates into the ‘One Which is worthy of being heard’. This word was chosen for the journal due to the importance of effective communication skills and abilities required in feild of Corporate Communi cation. The journal’s primary editing and designing has been done with the help of QuarkXPress (2021 edition). Adobe Photoshop was also used for the purpose of cover page designing and some additional editing of the pictures used in the journal.
Maharaja Agrasen College, established in 1994 as a constituent college of the Univer sity of Delhi and is located at Vasundhara Enclave, New Delhi. The college is one of the only two co-educational DU colleges to offer Journalism as a field of study at bach elors’ level. The alumni of the college have made a name for themselves and work in reputed national and international organisations like The Washington Post, ABP News, Al Jazeera, Business Standard, India TV, etc. **This Journal has been purely made for academic assignment purpose and is in no way used for commercial endeavours.
