Key Principles of Corporate Governance and Accountability
Exploring the essence of corporate governance, this presentation delves into the fundamental principles of fairness, accountability, and transparency. It highlights the importance of balancing stakeholder interests and outlines the responsibilities of the Board of Directors in overseeing company affairs. Emphasizing the need for equal treatment and clear communication, it addresses the core components that shape effective corporate governance practices.
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PRESENTATION FOR INTERNATIONAL ROUND TABLE ON CORPORATE GOVERNANCE CONDUCTED BY ICSI, NEW DELHI AT COMMITTEE ROOM A VIGNAN BHAVAN ANNEXE, NEW DELHI ON 15-04-2016 AT 11.30 AM BY DR. K.V.ACHALAPATHI PROFESSOR, DEPARTMENT OF COMMERCE, OSMANIA UNIVERSITY, HYDERABAD
CONCEPT OF CORPORATE GOVERNANCE BASIC PRINCIPLES OF CORPORATE GOVERNANCE CORPORATE GOVERNANCE IN INDIA A REVIEW TRANSPARENCY IN ACCOUNTING AND CG CORPORATE GOVERNANCE RESEARCH FINDINGS CG - A WAY FORWARD SUM UP
The Cadbury Report which was released in the UK in 1991 outlined that "Corporate governance is the system by which businesses are directed and controlled. Corporate Governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders like shareholders, management, customers, suppliers, financiers, government and the community in a company.
Fairness for example, all shareholders should receive equal consideration for whatever shareholdings they hold. In addition to shareholders, there should also be fairness in the treatment of all stakeholders including employees, communities and public officials. The fairer the entity appears to stakeholders, the more likely it is that it can survive the pressure of interested parties Fairness - -Fairness refers to equal treatment,
Accountability obligation and responsibility to give an explanation or reason for the company s actions and conduct. Responsibility authority to act on behalf of the company. The Board of Directors are responsible for overseeing the management of the business, affairs of the company, appointing the chief executive and monitoring the performance of the company. In doing so, it is required to act in the best interests of the company. Accountability goes hand in hand with responsibility. The Board of Directors should be made accountable to the shareholders for the way in which the company has carried out its responsibilities. Accountability - Corporate accountability refers to the Responsibility - The Board of Directors are given
Transparency that stakeholders should be informed about the company s activities, what it plans to do in the future and any risks involved in its business strategies. Transparency means openness, a willingness by the company to provide clear information to shareholders and other stakeholders. For example, transparency refers to the openness and willingness to disclose financial performance figures which are truthful and accurate. Transparency - A principle of good governance is
Disclosure of material organisation s performance and activities should be timely and accurate to ensure that all investors have access to clear, factual information which accurately reflects the financial, social and environmental position of the organisation. Organisations should clarify and make publicly known the roles and responsibilities of the board and management to provide shareholders with a level of accountability Disclosure of material matters concerning the
Few New Provisions of Companies Act 2013 for Directors and Shareholders One or more women directors are recommended for certain classes of companies Every company in India must have a resident directory The maximum permissible directors cannot exceed 15 in a public limited company. If more directors have to be appointed, it can be done only with approval of the shareholders after passing a Special Resolution The Independent Directors are a newly introduced concept under the Act. A code of conduct is prescribed and so are other functions and duties The Independent directors must attend at least one meeting a year Few New Provisions of Companies Act 2013 for Directors and Shareholders
Every company must appoint an individual or firm as an auditor. The responsibility of the Audit committee has increased Filing and disclosures with the Registrar of Companies has increased Top management recognizes the rights of the shareholders and ensures strong co-operation between the company and the stakeholders Every company has to make accurate disclosure of financial situations, performance, material matter, ownership and governance
Additional Provisions in Companies Act 2013 Additional Provisions in Companies Act 2013 Related Party Transactions A Related Party Transaction (RPT) is the transfer of resources or facilities between a company and another specific party. The company devises policies which must be disclosed on the website and in the annual report. All these transactions must be approved by the shareholders by passing a Special Resolution as the Companies Act of 2013. Promoters of the company cannot vote on a resolution for a related party transaction. Changes in Clause 35B The e-voting facility has to be provided to the shareholder for any resolution is a legal binding for the company.
Corporate Social Responsibility The company has the responsibility to promote social development in order to return something that is beneficial for the society. Whistle Blower Policy This is a mandatory provision by SEBI which is a vigil mechanism to report the wrong or unethical conduct of any director of the company.
Ineffective corporate governance may result in financial crisis both for the company and the stakeholders. Shareholders lose confidence in the company and share prices will decline. The high profile corporate governance failure scams like stock market scam, the UTI scam, Ketan Parekh scam, Satyam scam which were severely criticized by the shareholders called for a need to make corporate governance in India transparent as it greatly affects the development of the country. (James Mc Ritchie, May 12, 2015)
Good corporate governance helps in improving the competitiveness of the firm strengthening the relationship with the interested and all contracting parties. Over 60 percent of investors cite Good Corporate Governance Practices in corporations as a key factor in their investment decisions (Mc Kinsey study ,2002
Corporate Governance in India Corporate governance is not so matured in South Asia like it is in U.S. or U.K. In India, the effective initiative for corporate governance companies and industrial association, Confederation of Indian Industry (CII) in 1997. Ever since India s biggest ever corporate fraud and governance failure unearthed at Satyam Computer Services Limited, the concerns about good corporate governance have increased phenomenally. (Vaish Associates Advocates (8 January, 2016) came from the listed
In 1999, The Securities and Exchange Board of India (SEBI) made it mandatory for all listed companies in phases. From April 2003, all the listed companies were brought under mandatory requirement to follow the SEBI corporate governance code.
The objective of accountants is to ensure good corporate governance by reducing the gap between insiders and outsiders to a corporation through the disclosure of right and timely information. (Nikhil Chandra Shil (2008) Accounting standards assumed greater importance with the growing concern for effective corporate governance. Almost all the high profile failures of large global corporations are the result of the combined effect of failures in business, failures in governance and failures in reporting. (Mohit Baijal). The practice of proper accounting standards is more relevant issue of good corporate governance in the present competitive era as the standards provide a useful mechanism to restructure the core corporate values. (Dr.K.Shankaraiah and D.N.Rao (June 2004).
Corporate Governance requirements imposed internationally as part of the New International Financial Architecture (NIFA) include compliance with International Financial Reporting Standards (IFRS). (Ronita D.Singh & Susan Newberry (Dec, 2009 The focus of IFRS is to provide the necessary financial information to the primary users of financial statements who cannot get any financial information from any other source (other than the financial statements. IFRS strives for transparency. Substance over form is one of the principles of IFRS that brings out the essence of the transaction and how it is to be reported in the financial reports. Time value of money is also an important principle of IFRS.
The results of regression show that when the number of Independent directors on the board is higher, discretionary accruals are lower. This finding is consistent with past research and illustrates a setting in which a large proportion of independent directors is associate with better monitoring (Govind and others in JIAA Vol XLVII (2) Dec 2015) Financial leverage is significantly related to discretionary accruals as the literature supports that earnings management is carried out in order to avoid debt covenants or to meet contractual obligations. The results evidenced that higher the leverage, lesser are the chances of earnings management. More debt in the capital structure of the company will force the company to limit its earnings management activities as the lenders fully scrutinize the financials of that company. (Govind and others in JIAA Vol XLVII (2) Dec 2015)
Major key factors that influence the CG System are: Disclosures in Annual Report, Quality of Corporate Reporting, Adequacy of Processes, Involvement of Managers in CG activities, Management continuous interaction with functional departments, Board and Corporate ethics, Role of Independent Directors, Quality of Board and CSR and CG System a tool or developing managerial activities ( S.Mohan unpublished PhD thesis of JNTU Hyderabad)
Empirical investigation of the relationship between ownership/control structure, in terms of identity of the shareholder, and firm performance essentially attempts to test the managerial/agency theory propositions that different ownership control structure result in different performance (Short and others 1994). There is lot of evidence to show that institutional shareholders do not adopt a monitoring role, preferring to sell their holding in problem companies rather than intervening in the management of the company (Hirschman 1970, Myners 2001)
Summers C 1982, Masahiko Aoki 1983 say that after industrialization the shift in the factors of production shows that the employees should have a greater say in CG. Drucker 2000 emphasize that emergence of the knowledge worker as the key player in the knowledge economy, has implications for the governance of corporation in the future. Raghuram Rajan and others 2000 state the when most of the value was embedded in assets that could be owned, the boundaries were fixed and there was nothing directors could or were required to do, to guard them. But now most of the value comes from the assets that cannot be easily appropriated, like information or human capital. This raises new challenge to the directors in CG. There is no single model of good CG that fits for all (Narayana Murthy Committee Report 2003)
Rajni Deverajan 2004 observed that shareholders are not the primary factors that drive good governance. The new drivers are the stakeholders and their intangible contributions. Firms in the IT sector adopt good governance standards to attract these stakeholders namely, good employees (the knowledge workers) who create value for the new age companies and attract prospective clients and retain the existing clients. It also leverages the establishment of strategic alliances that act as a platform for sustainable development. Benchmark for good governance should also include benchmarks for monitoring and managing the value creators i.e. intangibles. Good governance should also encompass evolving standards to protect, preserve and enhance the value of the value drivers in this sector.
Basic Principles of Fairness, Accountability, Responsibility, Transparency and Disclosure must be internalized in the firm Companies Act 2013 is in right direction. It is in consistence with changes in the world Transparency in Accounting gets improved with immediate convergence of Accounting standards in India with IFRS CG is related to Investment Decisions, Intangibles Contribution, Information technology changes and there is a need for sensitization among all stakeholders Hence there is strong need for International Corporate Governance Day to be adopted and ICSI efforts are in right direction
CG Concept and principles CG in India Companies Act changes Transparency in Accounting Convergence to IFRS CG and role of Intangibles CG and ICSI Role Need for ICGD a good initiative by ICSI
