Module II
Corporate Governance Theories
The following theories elucidate the basis of corporate governance:
(a) Agency Theory
(b)
Shareholder Theory
(c) Stake Holder Theory
(d)
Stewardship Theory
Agency Theory
According to this theory,
managers act as 'Age nts' of the corporation. The owners or directors set the central
objectives of the corporation. Managers are responsible
for carrying out these objectives
in day-to-day work of the company. Corporate Governance is control of management through designing
the structures and processes.
In agency theory, the owners are the principals. But principals may
not have knowledge or skill for getting the objectives executed. The principal
authorises the mangers to act as 'Agents' and a contract between principal and
agent is made. Under the contract of agency, the agent should act in good
faith. He should
protect the interest of the principal and should remain faithful to
the goals.
In modern corporations, the shareholdings are widely spread. The management (the agent) directly or indirectly
selected by the shareholders (the Principals),
pursue the objectives set out by the shareholders.
The main thrust of the Agency Theory is that the actions of the management
differ from those required by the shareholders
to maximize
their return. The principals who are widely
scattered may not be able to counter this in the absence of proper systems in place as regards timely disclosures, monitoring and oversight.
Corporate Governance puts in place such systems of oversight.
Stockholder/shareholder Theory
According to this theory,
it is the corporation which is considered
as the property of shareholders/ stockholders.
They can dispose of this property, as they like. They
want to get maximum return from this property.
The owners seek a return on their investment and that is
why they invest in a corporation. But this
narrow role has been expanded into overseeing the operations
of the
corporations and its mangers to
ensure that the corporation is in compliance
with ethical and legal standards set by the government. So the directors are responsible
for any damage or harm done to their property i.e., the corporation.
The role of managers is to maximize the wealth of the shareholders.
They, therefore should exercise due diligence, care and avoid conflict of interest and should not violate the confidence reposed in them. The
agents must be faithful to shareholders.
Stakeholder Theory
According to this theory, the company is seen as an
input-output model and all the interest groups which include creditors,
employees, customers, suppliers, local-community and the government are to be
considered. From their point of view, a corporation exists for them and not the
shareholders alone.
The different
stakeholders also have a self interest. The interest of these different stakeholders is at times conflicting. The managers
and the corporation are responsible to mediate between these different stakeholders interest. The stake holders have solidarity with each other. This theory assumes that
stakeholders are capable and willing to negotiate and bargain with one another. This results in long term self interest.
The role of shareholders is reduced in the corporation. But they should also work to make
their interest compatible with
the other stake holders. This requires integrity and managers play
an important role here.
They are faithful agents but of all stakeholders, not just
stockholders.
Stewardship Theory
The word
'steward' means a person who
manages another's property or estate. Here, the word is used in the sense of guardian in relation
to a corporation, this theory is value
based. The managers and employees are to safeguard the resources
of corporation and its property and interest when the owner is absent. They are like a caretaker. They have to take
utmost care of the corporation. They should not
use the property for their
selfish ends. This theory thus makes use of the social
approach to human nature.
The managers
should manage the corporation as if
it is their own corporation. They are not agents as such but occupy a position of stewards.
The managers are motivated by the principal's objective and the behavior pattern is collective,
pro-organizational and trustworthy. Thus,
under this theory, first of all values
as standards are identified and
formulated. Second step is to develop training programmes that help to achieve excellence. Thirdly,
moral support is important to fill any
gaps in values.
REGULATORY FRAMEWORK OF CORPORATE
GOVERNANCE IN INDIA
Corporate
Governance means set of rules and regulations by which an organization is
governed, controlled and directed. It is conducted by the Board of Directors or
the concerned committee for the benefit of the company’s stakeholders. The Indian statutory framework
has, by and large, been in consonance with the international best practices of
corporate governance. Broadly speaking, the corporate governance mechanism for
companies in India is enumerated in the following enactments/ regulations/
guidelines/ listing agreement:
1. The Companies Act, 2013.
The new Companies Law contains many provisions related to good corporate
governance like Composition of Board of Directors, Admitting Woman Director,
Admitting Independent Director, Directors Training and Evaluation, Constitution
of Audit Committee, Internal Audit, Risk Management Committee, SFIO Purview,
Subsidiaries Companies Management, Compliance center,etc. All such provisions
of new Company Law are instrumental in providing a good Corporate Governance
structure.
2. Securities and Exchange
Board of India (SEBI) Guidelines: SEBI is a regulatory authority
having jurisdiction over listed companies and which issues regulations, rules
and guidelines to companies to ensure protection of investors.
3. Standard Listing
Agreement of Stock Exchanges: For companies whose shares are listed on
the stock exchanges.
4. Accounting Standards
issued by the Institute of Chartered Accountants of India (ICAI): ICAI
is an autonomous body, which issues accounting standards providing guidelines
for disclosures of financial information. Section 129 of the New Companies
Act inter alia provides
that the financial statements shall give a true and fair view of the state of
affairs of the company or companies, comply with the accounting standards
notified under s 133 of the New Companies Act. It is further provided that
items contained in such financial statements shall be in accordance with the
accounting standards.
5. Secretarial Standards
issued by the Institute of Company Secretaries of India (ICSI): ICSI
is an autonomous body, which issues secretarial standards in terms of the
provisions of the New Companies Act. So far, the ICSI has issued Secretarial
Standard on "Meetings of the Board of Directors" (SS-1) and
Secretarial Standards on "General Meetings" (SS-2). These Secretarial
Standards have come into force July 1, 2015. Section 118(10) of the New
Companies Act provide that every
company (other than one person company) shall observe Secretarial
Standards specified as such by the ICSI with respect to general and board meetings.
Securities and Exchange Board of India (SEBI) guidelines
SEBI is a
regulatory authority established on April 12, 1992. SEBI was established with
the main purpose of curbing the malpractices and protecting the interest of its
investors. Its main objective is to regulate the activities of Stock Exchange
and at the same time ensuring the healthy development in the financial market.
In order to ensure good corporate governance SEBI came up with detailed
Corporate Governance Norms.
1. As per the new rules the companies are required to get shareholders
approval for RPT (Related Party Transactions), it established whistle blower mechanism, clear
mandate to have at least one woman director in the Board and moreover it
elaborated disclosures on pay packages.
2. Clause 35B of the Listing Agreement is being amended by the regulatory
authority. Now as per the amended clause, Listed companies are required to
provide the option of e-voting to its shareholders on all proposed or passed at
general meetings. Those
who do not have access to e-voting facility, they should be provided to cast
their votes in writing on Postal Ballot. There was the need to amend the
provision so that the provisions of the listing agreement can be aligned with
the provisions of Companies Act, 2013. By doing so an additional requirement
can be provided to strengthen the Corporate Governance norms in India with
respect to Listed companies.
3. Clause 49 of the Listing Agreement was also amended by SEBI in order to
strengthen the Corporate Governance framework for Listed companies in India.
The revised clause forbids the independent directors from being eligible for
any kind of stock option. Whistle blower policy is also added in the revised clause whereby the
directors and employees can report any unethical behavior, any fraud or if
there is violation of Code of Conduct of the company. By the amendment Audit
Committee is also enhanced, now it will include evaluation of risk management
system and internal financial control, will keep a check on inter-corporate
loans and investments. The amendment now requires all the companies to form a
policy for the purpose of determination of ‘material subsidiaries’ and that
will be published online.
SEBI ALSO IMPLEMENTED VARIOUS REGULATIONS FOR EFFECTIVE WORKING OF THE
COMPANIES, FEW OF THESE REGULATIONS ARE AS FOLLOWS-
1. SEBI (Issue of Capital and Disclosure Requirements) regulation, 2009. This Regulation contains provisions
for public issue wherein the issuer shall satisfy the conditions mentioned
under the regulation, it also contains provisions regarding restriction on
right issue. It also contains provisions regarding listing of Securities on
stock exchange wherein in-principle is to be obtained by the issuer from
recognised stock exchange.
2. SEBI (Listing obligations and Disclosure Requirements), 2015. The LODR Regulations were notified
with the aim of simplifying the existing provisions of listing agreements for
different segment of capital markets like convertible and non-convertible debt
securities, equity shares etc. it requires all listed entities to make
disclosure and abide by the provisions of these regulations. The intent here is
to ensure that once the shares of a company is listed on a Stock Exchange they
are easily accessible to the normal public.
3. SEBI (Prohibition of Insider Trading) Regulations,2015. Insider trading per se is not a
violation of Law but what is prohibited is trading by an insider on the basis
of Non-public information. To prevent such trading SEBI came up with this
regulation. Under this, the restriction is corporate insiders who arrive at
trading decisions by using the price sensitive information directly or
indirectly.
4. SEBI came up with many other regulations like Regulation on Fraudulent
and Unfair Trade Practices, Regulations on Substantial Acquisition of Shares
and Takeovers, Issue of Sweat Equity etc. The main aim behind coming up with such
Regulation, rules etc is to ensure good corporate governance in a company.
Listing agreement – Applicable to the listed companies
SEBI has amended
the Listing Agreement with effect from October 1, 2014 to align it with New
Companies Act. Clause 49 of the Listing Agreement can be said to be a bold
initiative towards strengthening corporate governance amongst the listed
companies. This Clause intends to put a check over the activities of companies
in order to save the interest of the shareholders. Broadly, clause 49 provides for the following:
1.
Composition of Board
·
Optimum
Combination of Executive & Non Executive Directors,
·
Not less
than 50% of the board should comprise Non-Executive Directors,
·
At Least
one Women Director,
·
A
relative of a promoter or an executive director shall not be regarded as an
independent director.
·
Where
chairman is non executive Director as least 1/3rd of the board should
comprise Independent Director, and if
·
Chairman
is executive director then ½ of the board should comprise Independent Director.
|
Chairman
|
Executive Director
|
1/2 of Board shall be Independent Director
|
|
Chairman
|
Non-Executive Director
|
1/3rd of Board shall be Independent Director
|
2.
Audit Committee
The audit
committee is a committee of the board of directors responsible for oversight of
the financial reporting process, selection of independent auditor, receipt of
audit results from both internal & external auditors. The committee assists
the board to fulfil its corporate governance and overseeing responsibilities in
relation to an entity’s financial reporting, internal control system.
·
Minimum 3
directors shall be the members of Audit Committee,
·
2/3rd shall
be the Independent Director
·
All the
members shall be financially literate & at least one member must have
expertise in accounts & finance field.
·
Chairman
shall be Independent Director and must be present at annual general meeting.
At least
four meeting in a year shall be held by audit committee with maximum time gap
between two meetings shall not be more than 120 days. Quorum shall either two
members or 1/3rd members of the committee which shall be higher
but at least two independent directors must be present.
Powers of
Audit Committee
·
To
investigate any activity within its terms of reference,
·
To seek
information from any employee,
·
To obtain
outside or legal advice,
·
To secure
attendance of outsider with relevant expertise, if any
Role of
Audit Committee
·
Overseeing
the Financial reporting and disclosure process,
·
Monitoring
choice of accounting policies and principles,
·
Overseeing
hiring, performance and independence of the external auditor
·
Oversight
of regulatory compliance , ethics & whistle blower’s hotline
·
Monitoring
the internal control process,
·
Overseeing
the performance of internal audit function,
·
Discuss
risk management policies etc.
3.Subsidiary
Companies
o At least one independent director on the Board of
Directors of the holding company shall be a director on the Board of Directors of a
material non listed Indian subsidiary company.
o The Audit Committee of the listed holding company
shall also review the financial statements, in particular, the investments made by the
unlisted subsidiary company.
o The minutes of the Board meetings of the unlisted
subsidiary company shall be placed at the Board meeting of the listed holding
company. The management should periodically bring to the attention of the Board
of Directors of the listed holding company, a statement of all significant
transactions and arrangements entered into by the unlisted subsidiary company
4.
Disclosure Requirements
Periodical
disclosures relating to the financial and commercial transactions, remuneration
of directors, etc, to ensure transparency. For good corporate governance
company should make all necessary disclosures. It is also a responsibility on
management to make disclosures of all material matters which all stakeholders
are suppose to know. Stakeholders like creditors and customers can not attend
meetings so the disclosure is only way through which they can get information
5.
CEO/ CFO Certification
Any
managing director, CFO or whole time finance director, who is in discharging of
finance function, must certify to the board that the financial statements have
been reviewed by him and present the true & fair view and do not contain
any material untrue statement or misstatement.
He also
indicate to auditor or audit committee if
·
There is
any material change in internal control system,
·
Change in
accounting policies,
·
Knowledge
of any fraudulent activity being noticed by them
6.
Report and Compliance
A company
must give a separate section on Corporate Governance in annual report, where
all the disclosures regarding compliance & non compliance with mandatory
requirement and the extent to which non mandatory requirements have been adopted.
Quarterly compliance report shall be given to stock exchange within 15 days
from the date of closure
A
separate section in the annual report on compliance with Corporate Governance,
quarterly compliance report to stock exchange signed by the compliance officer
or CEO, company to disclose compliance with non-mandatory requirements in
annual reports
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