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Role of Ethics in Corporate Governance


Corporate Governance is concerned with holding the balance between economic and ... Sir Adrian Cadbury. What is corporate governance? Contd... – PowerPoint PPT presentation

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Title: Role of Ethics in Corporate Governance

Role of Ethics in Corporate Governance
What is corporate governance?
  • Corporate Governance is concerned with holding
    the balance between economic and social goals and
    between individual and communal goals.
  • The corporate 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, corporations and
  • - Sir Adrian Cadbury

What is corporate governance? Contd
  • The primary purpose of corporate leadership is to
    create wealth legally and ethically.
  • This translates to bringing a high level of
    satisfaction to five constituencies -- customers,
    employees, investors, vendors and the
  • The raison d'être of every corporate body is to
    ensure predictability, sustainability and
    profitability of revenues year after year.
  • - N R Narayana Murthy

History of Corp Gov in India
  • Unlike South-East and East Asia, the corporate
    governance initiative in India was not triggered
    by any serious nationwide financial, banking and
    economic collapse
  • Also, unlike most OECD countries, the initiative
    in India was initially driven by an industry
    association, the Confederation of Indian Industry
  • In December 1995, CII set up a task force to
    design a voluntary code of corporate governance
  • The final draft of this code was widely
    circulated in 1997
  • In April 1998, the code was released. It was
    called Desirable Corporate Governance A Code
  • Between 1998 and 2000, over 25 leading companies
    voluntarily followed the code Bajaj Auto,
    Hindalco, Infosys, Dr. Reddys Laboratories,
    Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI
    and many others

History of Corp Gov in India
  • Following CIIs initiative, the Securities and
    Exchange Board of India (SEBI) set up a committee
    under Kumar Mangalam Birla to design a
    mandatory-cum-recommendatory code for listed
  • The Birla Committee Report was approved by SEBI
    in December 2000
  • Became mandatory for listed companies through the
    listing agreement, and implemented according to a
    rollout plan

History of Corp Gov in India
  • Following CII and SEBI, the Department of Company
    Affairs (DCA) modified the Companies Act, 1956 to
    incorporate specific corporate governance
    provisions regarding independent directors and
    audit committees
  • In 2001-02, certain accounting standards were
    modified to further improve financial
    disclosures. These were
  • Disclosure of related party transactions
  • Disclosure of segment income revenues, profits
    and capital employed
  • Deferred tax liabilities or assets
  • Consolidation of accounts
  • Initiatives are being taken to (i) account for
    ESOPs, (ii) further increase disclosures, and
    (iii) put in place systems that can further
    strengthen auditors independence

Fundamental Objective of Corporate Governance
  • Enhancement of Shareholder Value, keeping in view
    the Interests of other Stakeholders
  • CG a Way of Life rather than a Code

Constituents of Corp Gov
  • The Board of Directors
  • Pivotal role
  • Accountable to stakeholders
  • Directs management
  • The Shareholders Stakeholders
  • To participate in appointment of directors
  • To hold the BoD accountable for governance
    through proper disclosures
  • The Management
  • To act on the direction of the BoD
  • To provide requisite information to the BoD for
    decision making
  • To implement and monitor control systems

Rationale for Disclosures
  • An effective disclosure based regulation (DBR)
    implies greater responsibilities on the company
    directors, its management and advisers
  • An effective DBR promotes investor activism
  • Markets believe that perceived benefits outweigh
    perceived costs

Disclosure based Regulation Components types
of disclosure
  • Disclosures Disclosures
  • by whom for whom
  • Public Listed Cos. Shareholders
  • Intermediaries Investors
  • Stock Exchanges MARKET Intermediaries
  • Mutual Funds Regulator
  • Analysts advisors Government
  • Other stake - holders

Disclosure Based Regulation
  • Components types of disclosures
  • Initial Disclosures Disclosures for raising
    capital by companies, mutual funds in offer
  • - Public Offers
  • - Private Placement
  • Continuous disclosures financial /
  • Frequency of disclosure
  • Dissemination process electronic, physical,
    centralised, dispersed
  • Accessibility of information

Disclosure Based Regulation
  • Initial Disclosures
  • Continuous disclosures
  • Corporate Governance
  • Financial disclosures
  • Risk based disclosures for intermediaries
  • Disclosures for stock exchanges

  • Board of Directors information that must be
  • Annual, quarter, half year operating plans,
    budgets and updates
  • Quarterly results of company and its business
  • Minutes of the audit committee and other board
  • Recruitment and remuneration of senior officers
  • Materially important legal notices and claims, as
    well as any accidents, hazards, pollution issues
    and labor problems
  • Any actual or expected default in financial
  • Details of joint ventures and collaborations
  • Transactions involving payment towards goodwill,
    brand equity and intellectual property
  • Any materially significant sale of business and
  • Foreign currency and other risks and risk
  • Any regulatory non-compliance

  • Disclosures to shareholders in addition to
    balance sheet, PL and cash flow statement
  • Board composition (executive, non-exec,
  • Qualifications and experience of directors
  • Number of outside directorships held by each
    director (capped at director not being a member
    of more than 10 board-level committees, and
    Chairman of not more than 5)
  • Attendance record of directors
  • Remuneration of directors
  • Relationship (familial or pecuniary) with other
  • Warning against insider trading, with procedures
    to prevent such acts
  • Details of grievances of shareholders, and how
    quickly these were addressed
  • Date, time and venue of annual general meeting of

  • Disclosures to shareholders in addition to
    balance sheet, PL and cash flow statement
  • Dates of book closure and dividend payment
  • Details of shareholding pattern
  • Name, address and contact details of registrars
    and/or share transfer agents
  • Details about the share transfer system
  • Stock price data over the reporting year, and how
    the companys stock measured up to the index
  • Financial effects of stock options
  • Financial effects of any share buyback
  • Financial effects of any warrants that are to be
  • Chapter reporting corporate governance practices

  • Disclosures to shareholders in addition to
    balance sheet, PL and cash flow statement
  • Detailed chapter on Management Discussion and
    Analysis focusing on markets, operations,
    finances, accounts, risks, opportunities and
    threats, internal control systems
  • Consolidated financial statement, incorporating
    accounts of all subsidiaries (over 50 shares
    held by reporting company)
  • Details of all significant related party
  • Detailed segment reporting (revenues, costs,
    operating profits and capital employed)
  • Deferred tax liabilities and assets and
    debit/credit in the PL for the reporting year

  • (A) Basis of related party transactions
  • A statement in summary form of transactions with
    related parties in the ordinary course of
    business shall be placed periodically before the
    audit committee.
  • Details of material individual transactions with
    related parties which are not in the normal
    course of business shall be placed before the
    audit committee.
  • Details of material individual transactions with
    related parties or others, which are not on an
    arms length basis should be placed before the
    audit committee, together with Managements
    justification for the same

  • (B) Disclosure of Accounting Treatment
  • To disclose in the financial statements, if an
    accounting treatment other than prescribed in
    Accounting Standard has been followed alongwith
  • (C) Board Disclosures Risk management
  • Internal and external business risks
  • Procedures to inform Board members about the risk
    assessment and minimization.
  • Periodically reviewed

  • (D) Proceeds from public issues, rights issues,
    preferential issues etc.
  • To disclose to the Audit Committee, on
    use/application of funds as and when any issue
    is made
  • (E) Additional disclosures
  • In the Annual Report the criteria of making
    payments to NEDs to be disclosed or a reference
    to be made that the same is available on the
    companys website
  • number of shares and convertible instruments held
    by NEDs.
  • NEDs shall disclose their shareholding (both own
    or held by / for other persons on a beneficial
    basis) in the company in which they are proposed
    to be appointed as directors, prior to their

  • F) Management
  • A Management Discussion and Analysis report to
    form part of the Annual Report.
  • G) Shareholders
  • Disclosures to shareholders in case of
    appointment /reappointment of directors,
    quarterly results and presentations made,
    shareholders grievance committee and share
    transfer committee, shareholding pattern-change

CEO/CFO certification
  • The CEO, i.e. Managing Director and the CFO i.e.
    whole-time Finance Director or head of the
    finance function to certify to the Board that
  • (a) They have reviewed financial statements and
    the cash flow statement for the year and these
  • (i) do not contain any materially untrue
    statement or omit any material fact or contain
    statements that might be misleading
  • (ii) together present a true and fair view of the
    companys affairs and are in compliance with
    existing accounting standards, applicable laws
    and regulations.
  • (b) no transactions entered into by the company
    during the year which are fraudulent, illegal or
    violative of the companys code of conduct.

CEO/CFO certification (contd)
  • (c)They accept responsibility for establishing
    and maintaining internal controls and that they
    have evaluated the effectiveness of the internal
    control systems of the company and they have
    disclosed to the auditors and the Audit
    Committee, deficiencies in the design or
    operation of internal controls, if any, of which
    they are aware and the steps they have taken or
    propose to take to rectify these deficiencies.
  • (d)They have indicated to the auditors and the
    Audit committee
  • (i) Significant changes in internal control
    during the year
  • (ii) Significant changes in accounting policies
    during the year and that the same have been
    disclosed in the notes to the financial
    statements and
  • (iii)Instances of significant fraud of which they
    have become aware and the involvement therein, if
    any, of the management or an employee having a
    significant role in the companys internal
    control system

  • The word ethics is derived from the Greek word
    ethos meaning character and latin word mores
    meaning customs
  • To better understand ethics let us understand and
    contrast the definition of ethics and law
  • Law is a consistent set of universal rules that
    are widely published, generally accepted and
    usually enforced. These rules describe the ways
    in which people are required to act in society.
  • Ethics defines what is good for the individual
    and for society and establishes the nature of
    duties that people owe to oneself and others in

What are ethics
  • The principle of conduct professional ethics
  • A system or philosophy of conduct
  • A discipline dealing with what is good and bad-
    moral duty and obligation
  • A set of moral principles or values.

Relation between ethics and law
  • Reflection in a companys operations of the
    values and moral principles used in the
    communities in which they operate
  • Successful markets and corporate performance are
    founded on a commitment to basic ethical
    principles aligned as much as possible to the
    interests of individuals, corporations and
  • Ethical standards may be expressed in a companys
    formal conduct requirements, or contained in
    generally stated principles that guide a
    companys preferred conduct or behavior.
  • Most companies have put in place a code of ethics
    for its employees to conduct themselves in a
    particular manner while doing business.

Purpose of Ethics
  • Ethics are the guiding principles.
  • Where the proposed business activity/ operation
    of the company borders on the unknown, the
    company needs to apply the ethics principle to
    decide on the project.
  • Ethics help make relationships mutually pleasant
    and productive- imbibes a sense of community
    among members- a sense of belongingness to

Why have a code of ethics?
  • To define acceptable behavior
  • To promote high standards of practice
  • To provide a benchmark for self-evaluation
  • To establish a framework for professional
    behavior and responsibilities
  • As a vehicle for occupational identity
  • As a mark of occupational maturity.

Code of ethics -transition

Creating the Ethical Imperative
  • Written code of ethics
  • Employee commitment
  • Employee training
  • Discipline process
  • Full disclosure
  • Building expectations
  • Resolution process conflict management

  • A formal code of business conduct and ethics.
  • To be signed and adhered to by employees.
  • Action against any employee for violation thereof.

  • General standards of conduct
  • Management of conflicts of interest
  • Prohibition of exploitation of corporate
  • Protection of companys confidential information
  • Obligations under securities laws
  • Use of assets
  • An entire section on responsibilities to
    customers and stakeholders.