CG Chapters Copy

8/8/2019 CG Chapters Copy

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Ethics is a body of principles or standards of human conduct that govern the

behavior of individuals and groups. Ethics arise not simply from man's

creation but from human nature itself making it a natural body of laws from

which man's laws follow.

The word ethics is derived from the Greek word ethikos meaning

custom or character. It is the science of morals describing a set of rules of

behavior. Business ethics itself is an offshoot of applied ethics. The study of

business ethics essentially deals with understanding what is right and

morally good in business. Ethics can be defined as a set of moral

principles or values,

Ethics is a branch of philosophy and is concerned a normative science

because it is concerned with the norms of human conduct, as distinguished

from formal sciences such as mathematics and logic, physical sciences such

as chemistry and physics, and empirical sciences such as economics and

psychology. The principal of ethical reasoning are useful tools for sorting

out the good and bad components within complex human interactions.

1.1 Business Ethics

Ethics is a conception of right and wrong behavior, defining for us when

our actions are moral and when immoral. Business ethics is the applications

of general ethical ideas to business behavior.

Business ethics is the art and discipline of applying ethical principles to

examine and solve complex moral dilemmas.


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Business ethics is that set of principles of reasons which should govern

the conduct of business whether at individual or collective level.

Business ethics proves that business can be and have been ethical and still

make profits. Till the last decade, business ethics was thought of as being a

contradiction in terms. But things have changed; today more and more

interest is being shown to the applications of ethical practices in business

dealings and the ethical implications of the business.

Companies, led by top management, are increasingly adopting ethical codes

of conduct. Modern ethics codes aren't just some simple platitudes set in a

break-room plaque. Companies now commit considerable time and money

to illustrate their reliance on ethical behavior.

Ethical behavior starts at the top. Before a company can expect to be

viewed as ethical in the business community, ethical behavior within its

own walls-to and by employees-is a must, and top management dictates the

mood. Ethical behavior by the leaders of an organization will inevitably set

the tone for the rest of the company-values will remain consistent. Further,

a well communicated commitment to ethics sends a powerful message that

ethical behavior is considered to be a business imperative.

A Code of Ethics goes beyond separate values to become a set of

principles that makes a clear statement of what the business corporation is


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willing to do, or not do, like forbidding staff to take bribes. Many different

Codes of Ethics, or Conduct, now exist, ranging from those issued by

international bodies, such as the Organization for economic Co-operation

and Development (OECD) Guidelines for Multinational Enterprises, to

individual Codes adopted by different business corporations around the

world.

To define Business Ethics, then, it is made up of three main components:-

Ethical values; a Code of Ethics, and Good Corporate Governance

Need for Business Ethics

Ethics is closely related to trust. Most of the people would agree on the fact

that to develop trust, behavior must be ethical. Ethical Behavior is necessity

to gain trust.

Trust leads to predictability and efficiency of business. Ethics is all about

developing trust and maintain it fruitfully so that the firm flourishes

profitably and maintains good reputation. Lack of ethics would lead to

unethical practices in organization and personal life. There are number of


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examples of companies whose top management are involved in unethical

practices, to name a few, Enron, WorldCom, etc.

Earlier it was said that-business of business is business- now there is a

sudden change in the slogan. In the contemporary scenario where has got

due importance, the slogan has taken the form-business of business is

ethical business.

There are number of companies which have succeeded in profit making and

public esteem by following ethical practices in their realm of business.

Some of such companies are: Infosys, Larsen and Turbo, Wipro, Ford and

Tata steel. They have gained trusts of public through ethical practices.

Ethics make Corporate Governance more Meaningful

Though the concept of corporate governance may sound a novelty in the

Indian business context and may be linked to the era of liberalization, it

should not be ignored that the ancient Indian texts are true originators of

good business governance.

Corporate governance is meant to run companies ethically in a mannersuch that all stakeholders-creditors, depositors, distributors, customers,


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employees, the society at large and government-are dealt in a fair

manner.

Good governance should look at all stakeholders and not justshareholders alone.

Corporate Governance is not something which regulators have toimpose on a management, it should come from within. There is no point

in making statutory provisions for enforcing ethical conduct.

There are number of grey areas where regulatory frame work is weak,which are manipulated by unscrupulous persons.

The Securities and Exchange Board of India (SEBI) has jurisdictiononly in cases of limited companies and are concerned only with their

protection.

1.2 Introduction to Corporate Governance

Corporate Governance is generally understood as the framework of rules,

relationships, systems and processes within and by which authority is

exercised and controlled in corporations. Before going into more details let

us understand some terms.

Corporate is the adjective meaning of or relating to a corporation

derived from the noun corporation. A corporation is an organization created


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(Incorporated) by a group of shareholders who have ownership of the

corporation.

Governance has Latin origins that suggest the notion of 'steering'. It deals

with the processes and systems by which an organization or society

operates.

In a narrow sense, corporate governance involves a set of relationship

amongst the companys management, its board of directors, shareholders

and other stakeholders. These relationships, which involve various rules and

incentives, provide the structure through which the objectives of the

company are set, and the means of attaining those objectives and

monitoring performance are determined.

In a broader sense, however, good corporate governance is the extent to

which companies are run in an open and honest manner- is important for

overall market confidence, the efficiency of international capital allocation,

the renewal of countries industrial bases, and ultimately the nations

overall wealth and welfare.

Definitions

Corporate Governance is a broad concept and has been defined and

understood differently by different groups and at different points of time.

The earliest definition of Corporate Governance is from the Economist

and Noble laureate Milton Friedman. According to him Corporate


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Governance is to conduct the business in accordance with owner or

shareholders desires, which generally will be to make as much money as

possible, while conforming to the basic rules of the society embodied in law

and local customs.

This definition is based on the economic concept of market value

maximization that underpins shareholder capitalism. Apparently, in the

present day context, Friedmans governance has been widened. It now

encompasses the interest of not only the shareholders but also many

stakeholders.

Some other Definitions

The Cadbury Committee report defines it as the system by which

companies are directed and controlled. It is generally understood as the

framework of rules, relationships, systems and processes within and by

which authority is exercised and controlled in corporations.

The Kumar Mangalam Birla Committee report defines it as

fundamental objective of corporate governance is the enhancement of

the long-term shareholder value while at the same time protecting the

interests of other stakeholders.

The OECD, 1999 defines Corporate Governance is the system by

business corporations are directed and controlled. The Corporate

Governance structure specifies the distribution of rights and


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responsibilities among different participants in the corporation, such as, the

board, managed shareholders and other stakeholders, and spells out the

rules and procedures for making decisions on corporate affairs. By doing

this, provides the structure through which the company objectives are set

and also provides the means of attaining those objectives and monitoring

performance.

Hence, Corporate Governance can be understood to be a systematic process

by which Companies are directed & controlled to ensure that they are

managed in the manner that meets stakeholders aspirations & societal

expectation. This leads to the corporate governance philosophies of:

Trusteeship; Transparency; Empowerment & Accountability; Control and

Ethical Corporate Behavior

Significance of Corporate Governance

It lays down the frame work for creating long term trust betweencompanies and the external providers of capital.

It improves strategic thinking at the top by inducting independentdirectors who bring in a wealth of experience and host of new ideas.

It limits the liability at the top management and directors by carefullyarticulating the decision making reports

It helps to provide a degree of confidence that is necessary for theproper funding of a market economy.


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It ensures integrity of financial reports.

Objectives of Corporate Governance

To build an environment of trust and confidence amongst these havingcompetition and conflicting interest.

To enhance shareholders value and protect the interest of stakeholdersby enhancing the corporate performance and accountability.

To have system and procedures which are transparent and which informthe stakeholders about the working of corporations.

1.3 Historical Perspective of Corporate Governance

Internationally

The seeds of modern corporate governance were probably sown by the

Water gate scandal in the United States. As a result of subsequent

investigations, US regulatory and legislative bodies were able to highlight

control failures that had allowed several major corporations to make illegal

political contribution and to bribe the government officials. This led to the

development of Foreign and Corrupt Practices Act of 1997 in USA that


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Thus, the report of the Cadbury Committee is a pioneer in the field of

corporate governance and it serves as the foundation for the reports

prepared by many other countries on corporate governance.

Indian Context

It is strange but true that early initiatives for better corporate governance in

India came from the more enlightened listed companies and an industry

association. When India embarked on its corporate governance movement,

the country faced no financial or balance of payment crisis.

The corporate governance movement began on 1997-98, with

Confederation of Indian Industries (CII) coming out with the Code of

Desirable Corporate Governance which was voluntary in nature. In the

next three years about 30 listed companies voluntarily accepted the code

issued by CII.

The Securities Exchange Board of India (SEBI), as the custodian of

investors interests, did not lag behind. On May 7, 1999, it constituted an 18

member committee, chaired by the young and forward looking industrialist,

Mr. Kumar Mangalam Birla on the Corporate Governance, mainly with the

view to protecting the interest of investors.

The Reserve Bank of India (RBI) also constituted its own committee to

view corporate governance from the perspective of the banking sector.


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The desirable Code of corporate governance, which was drafted by CII and

were voluntary in nature, did not produce the expected improvement on

corporate governance.

It is in this context that the Kumar Mangalam Committee felt that under the

Indian condition statutory rather than a voluntary code would be far more

purposive and meaningful. The committee report has been well received

and SEBI has given effect to recommendations by a direction to all the

stock exchanges to amend the listing agreement.

Fundamental Principles of Corporate governance

Governance styles may be as different as the nature of companies. It was

for this reason that Adrian Cadbury had cautioned against there being any

simple style suiting all types of companies. Every company may have a

unique governance style of its own. Despite uniqueness of styles, there are

some fundamental principles noted below that permeate all kinds of

governance styles:


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Transparency: It involves the explaining of companys policies andaction to those whom it owes responsibilities. It should lead to the

making of appropriate disclosures without which endanger companys

strategic interest. Internally transparency means openness in a

companys relationship with its employees as well as the conduct of its

business in a manner of its business in a manner that will bear scrutiny.

Unfortunately, total transparency is not the dominant culture in

corporations.

Accountability: It signifies that the boards of Directors are accountableto the shareholders and the management is accountable to the Board of

Directors. Both the board and management must be accountable to the

shareholders for the performance of tasks assigned to them. It is thrust

is to ensure effective management of resources and achievement of

results with efficiency coupled with empowerment. Accountability

provides impetus to performance.

Trusteeship: Large Corporations have both a social and economicpurpose. They represent a coalition of interests of shareholders, lenders

of capital as well as business associates and employees. It casts a

responsibility of trusteeship on the Board of Directors who must act to

protect and enhance shareholder value. The Board must ensure that the

company fulfills its obligation and responsibility to its other

stakeholders. Inherent in the concept of trusteeship is the responsibility

to ensure equity, namely, that the rights of all shareholders, large or

small, are protected.


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Empowerment: It signifies that management must have the freedom todrive the enterprise forward. It is a process of actualizing the potential

of its employees. Empowerment unleashes creativity and innovation

throughout the organization by truly vesting decision-making powers at

the most appropriate levels in the organizational hierarchy.

Ethics: A corporation must set exemplary standards of ethical behaviorboth within the organization and in its external relationships. Deviation

from ethical principles corrupts organizational culture and undermines

stakeholder value.

Oversight: It means the existence of a system of checks and balances.It should prevent misuse of power and facilitate timely management

response to change and risks.

Fairness to all stakeholders: It involves a fair and equitable treatmentof all participants in the corporate governance structure.

Good Governance

A good governance system generates ideas through participation of all

stakeholders and harmonizes different viewpoints while protecting interests

of the interest of the minority stakeholders. Good corporate governance

relates to transparency and fairness that maximizes long term shareholder

value of a company and also addresses the interest of all other stakeholders

in the enterprise.


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Recently the terms governance and good governance are being

increasingly used in development literature. Bad governance is being

recognized now as one of the root causes of corrupt practices in our

societies. Major donors, institutional investors and international financial

institutions provide their aid and loans on the conditions that reforms that

ensure good governance are put in place by the recipient nations. As with

nations, corporations too are expected to provide good governance to

benefit all their stakeholders. At the same time, good corporate are not born,

but are made by combined efforts of all stakeholders, board of directors,

employees, customers, dealers, government and the society at large.

Good Corporate Governance also deals with building trust with customer,

suppliers creditors and diverse investors-trust that the company will be

managed properly, will increase corporate value for its share.

Need of Corporate governance in India

If corporate governance has to take root in a country it will, to a large extent

depend on the economic and business environment that has been created by

public governance in the country, there cannot be good governance if public

governance is weak.


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The legal and administrative environment in India provides greater scope

for corrupt practices in business. For more than five decades since

independence, lack of transparency and financial disclosures, corruptions

and mismanagement have been accepted as a way of life in a stride in a

license ridden and non-competitive economic environment. We should

approach the issue of corporate governance in India not merely from the

point of view of the Companies Act or the SEBI guidelines or the codes

evolved out of recommendations of Kumar Mangalam Birla Committee, but

also look at the entire network of various rules and regulations impinging

on business so that there is an integrated holistic system, created for

ensuring that transparency and good corporate governance prevails.

1.4 Corporate Misgovernance in India

Industrial growth in India along with the development of corporate culture

started only after the country became free in 1947. However, with the

characteristics of the countrys governance continuing to be feudalistic, and

its political system degenerating to be pseudo-democratic, the governance

of the most of the countrys industrial and business organizations thrived on

unethical practices at the market place while the showing scant regard for

the timeless human and organizational values in dealing with their

employees, shareholders and customers. The increasing corruption in the

government and its various services had kept the managements of countrys

industrial and business organizations above accountability for their

misdeeds, encouraging them to indulge in more unethical practices. The


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state owned organizations occupying a dominant position in the countrys

economy and being monopolistic, passed on the costs of the misgovernance

to the helpless consumers of their products and services. Organizations in

the private sector barring a few, indulged in all possible unethical practices

to fleece their customers on the one hand and demand the state its due on

the other. In India one could see a large number of privately owned

business organizations too indulging in rampant corporate misgovernance.

The difference is that while in state owned organizations employees at all

levels are seen to indulge in, or contribute to corporate misgovernance, in

privately owned business organizations employees at the lower levels of the

corporation are better controlled. The scams committed in a number of

large privately owned corporations during the last one decade clearly

indicate the nature and extent of corporate misgovernance that exists in

privately owned business organizations.

Series of Scams That Shook Investor Confidence

The need of corporate governance was first realized in the country with

Big Bull, Harshad Mehtas securities scam that was uncovered in April

1992 involving a large number of banks and resulting in the stock market

nose diving for the first time since the advent of reforms in 1991. This was

followed by a sudden growth of cases in 1993 when the transnational

companies started consolidating their ownership by issuing equity

allotments to their respective controlling groups at steep discounts to their

market price. In this preferential allotment scam alone investors lost

roughly Rs. 5000 crore. The third scandal of the decade was the

disappearance of the companies during 1993-94. Due to this vanishing


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companies scam, gullible investors lost a lot of money because during the

artificial boom hundreds of obscure companies were allowed to make

public issues at large share premium through high sales pitch of

questionable investment banks and misleading prospectus.

The non-banking finance companies scam took place in 1995-97 also saw

more than Rs. 50000 crore mopped up from the pubic promising them high

returns but vanished. The mutual fund scam saw public sector banks raising

between 1995-98 nearly Rs. 15000 crore by promising huge fixed returns

but all of them flopped.

1.5 Sound Corporate Governance Practices

1. Established strategic objectives and a set of corporate values that are

communicated throughout the banking organizations:

It is difficult to conduct the activities of an organization when there are no

strategic objectives or guiding corporate values. Therefore the board should

establish strategies that will direct the ongoing activities of the bank. It

should also take the lead in establishing the tone at the top and approving

corporate values for itself, senior management employees.

The board of Directors should ensure that the senior management

implements policies that prohibit activities and relationships that diminish

the quality of corporate governance, such as

Conflicts of interest Lending to officers and employees and other forms of self dealing


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Providing preferential treatment to related parties and other favoredentities

2. Setting and enforcing clear lines of responsibility and accountability

throughout the organization:

Effective boards of directors clearly define the authorities and key

responsibilities for themselves, as well as senior management. They also

recognize that unspecified lines of accountability or confusing multiple

lines of responsibility may exacerbate a problem through slow or diluted

responses. Senior management is responsible for creating an accountability

hierarchy the staff and must be aware of the fact that they are ultimately

responsible to the board for the performance of the bank.

3. Ensuring that board members are qualified for their position, havea clear understanding of their role in corporate governance and are not

subject to undue influence from management or outside concerns:

The board of directors is ultimately responsible for the operations and

financial soundness of the bank. The Board of Directors must receive on

timely basis sufficient information to judge the performance of

management.

An effective number of board members should be capable of exercising

judgment, independent of the views of management, large shareholders or

government.

4. Ensuring that there is appropriate oversight by senior management

Senior management is a key component of corporate governance. While the

board of directors provides checks and balances to senior managers,


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similarly senior managers should assume that oversight role with respect to

line mangers, in specific business areas and activities.

5. Effectively utilizing the work conducted by internal and external

auditors in recognition of the important control function they provide

The role of auditors is vital for corporate governance process. The board

should also recognize and acknowledge that the internal and external

auditors are their critically important agents. In particular, the board should

utilize the work of the auditors as an independent check on the information

received from management on the operations and performance of the bank.

6. Ensuring that compensation approaches are consistent with the

banks ethical values, objectives, strategies and control environment.

Failure to link incentive compensations to the business strategy can cause or

encourage managers to book business based upon volume and/or short term

profitability to the bank with little regard to short or long term profitability

to the banks with traders and loan officers, but can also adversely affect the

performance of other support staff.

7. Conducting corporate governance in a transparent manner:

It is difficult to hold the board of directors and senior management properly

accountable for their actions and performance when there is lack of

transparency. This happens in situations where stakeholders, market

participants and general public do not receive sufficient information on the

structure and objectives of bank with which to judge the effectiveness of the

board and senior management in governing bank.

Transparency can reinforce sound corporate governance. Therefore, public

disclosure is desirable into the following areas:


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mutual funds and oversee the working of stock exchanges in the country. In

consultation with the government, SEBI has initiated a number of steps to

introduce improved practices and greater transparency in the capital

markets in the interest of the investing public.

The Institute of Charted Accountants of India (ICAI) has emerged as a

responsible body regulating the profession of public auditors and counts

among its achievements the issue of number of accounting and auditing

standards.

The Institute of Company Secretaries of India (ICSI) have helped in

promoting and regulating a well trained and disciplined body of

professional who could add value to corporations in improving their

management practices. It has taken major initiatives to formulate secretarial

standards and best secretarial practices and develop guidance notes in order

to integrate, consolidate, harmonize and standardize the prevalent diverse

practices with the ultimate objectives of promoting better corporate

practices and improved corporate governance.

2.1 Role of RBI in Corporate Governance

The RBI has been making continuous endeavor to bring clarity to the role

of board and senior management in the risk management architecture of

banks. Bank boards are required to lay down policies on credit, investment,

forex, and recovery and asset liability management. They have to exercise

prudence in management of affairs of banks and ensure that proper and


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functioning control systems exist. Capital requirement for market risks has

been specified. Further, RBI has brought out several guidelines on best

practices in asset liability management, management of credit and market

risk etc.

Banks, too, are gradually improving their risk management capabilities.

Data and reports on maturity of assets and liabilities are now part of regular

ALCO meetings. Banks are now better equipped to anticipate changes in

their net interest income for any given change in market variables and

respond proactively to also getting reduced- thanks to extensive use of

technology.

Taking cognizance of crucial role of Board of Directors, the RBI has

directed banks to set up Audit Committee of the board chaired by non-

executive chairman and consist of non executive directors. The Audit

Committee should be responsible for ensuring the efficiency of the entire

internal control system and audit functions of the banks besides

compliances with the inspection report of the RBI and internal and

concurrent auditors

RBI approach to regulations of operations of commercial banks in the

recent past has some features that would enhance the need for and

usefulness of good corporate governance in financial information,

timeliness of such information and analytical content.

2.2 OECD Principles

The Organisation for Economic Cooperation and Development

(OECD) was one of the earliest non-governmental organizations to


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5. The responsibility of the board: The OECD Guidelines provide a greatdeal of details about the functions of the board in protecting the company

and its shareholder. These include concerns about corporate strategy,

risk, executive compensation and performance as well as accounting and

reporting systems.

2.3 The Kumar Mangalam Birla Committee on

Corporate Governance, SEBI

The Securities and Exchange Board of India monitors and regulates

corporate governance of listed companies through Clause 49. This Clause isincorporated in the Listing Agreement (LA) of stock exchanges with

companies and it is compulsory for them to comply with its provisions.

Stock Exchanges endeavor to bring in corporate governance standards

among companies by the introduction of Clause 49 in the listing agreement

they enter into with them before they are being listed. SEBI issued the

Clause 49 in February 2000.

Recommendations

The recommendations were made by the Committee keeping in view the

fact that; any code of corporate governance should be dynamic and should


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change with changing context and times. This code was the first formal and

comprehensive attempt, in the context of prevailing conditions of

governance in Indian Companies, as well as the state of capital markets.

Applicability of Recommendations

The code is to be followed by listed companies, their directors,

management, employees and professional with the companies. They should

be responsible for complying with the code in letter and spirit and

interpreting it always in a manner that always gives precedence to substance

over form. The ultimate responsibility for putting the practice however liesdirectly with board of Directors.

Mandatory Recommendations

The Committee recognized, that it would be difficult to immediately

implement and this code to the last letter by relatively smaller companies.

Equally, implementation of the recommendations will require in existinglaw.

The committee has the following mandatory recommendations:

Composition of Board of Directors

A)The board of directors of the company shall have an optimumcombination of executive directors with not less than 50% of the board

directors comprising of non-executive directors.

B)All the pecuniary relationship or transaction of non executive directors the company should disclose on the Annual Report.


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Audit Committee

A.A qualified and independent audit committee shall be set upB.The audit committee shall meet at least thrice a yearC.The Committee shall all the powers relate to investigate, seek

information from employee, obtain outside legal or other

professional advice.

D.Role of audit committee shall include reviewing the financialreporting process appointment and removal of auditors etc

E.If the Company has set up an audit committee pursuant to provisionof the Companies Act, the said audit committee shall have such

additional features as is contained in the listing agreement.

Remuneration of Directors

The remuneration of non-executive directors shall be decided by the Boardof Directors. The following disclosures on the remuneration of directors

shall be made in the section on the corporate governance of the annual

report.

aa)) Remuneration package of all directors i.e. salary, benefits, bonuses,stock options, pensions

bb)) Service contracts, notice period, severance feescc)) Stock option, if any

Board Procedure


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The board meeting shall be held at least 4 times a year with a maximum

time of four months between any two meetings. A director shall not be a

member in more than 10 committees or act as Chairman of more than five

committees across companies in which he is director.\

Management

A.Management discussion and analysis report should form part of theannual report to the shareholders.

B.Disclosures must be made by the management to the board relating toall material financial and commercial transactions, where they have

personal interest, that have potential conflict with the interest of the

company at large.

Shareholders

AA..In case of the appointment of new director or re-appointment of adirector the shareholder must be provided with the information

BB..Information like quarterly results, presentation made by companies toanalyst shall be put on companys web site or shall be sent in such a

form so as to enable the stock exchanges on which the company is

listed to put on its own web site.

CC..A board committee shall be formed to specifically look into theredressing the shareholder and investor complaint.

Report on Corporate Governance


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There shall be a separate section on corporate governance in the annual

report company, with a detailed compliance on corporate governance. The

compliance of any mandatory requirement i.e. which is part of the listing

agreement with reasons thereof and the extent to which non-mandatory

requirement have been adopted should be specifically highlighted.

Subsequently, on 29th

October 2004, SEBI amended the original clause 49

and issued a new Clause 49. All existing listed companies will have to

comply worth provisions of new clause by 1st

April 2005. However, it has

already come into force for companies that have been listed on the stock

exchanges after 29 October 2004.

Provisions and Requirements of Clause 49

1) Composition of Board: The board should be composed of in thefollowing manner: In case of full time chairman, 50% non-executive

directors and 50% executive directors.

2) Constitution ofAudit Committee: The Audit Committee should have 3independent Directors with the chairman having sound financial

background. The finance Director and the head of the internal audit

should be special invitees and minimum of three meetings should be

convened every year.

3)The Audit Committee: The audit committee is responsible for review offinancial performance on half yearly / annually basis, appointment/

removal/ remuneration of auditors, review of internal control system and

its adequacy.


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4) Remuneration of Directors: Remuneration of non-executive directors isto be decided by the board. Details of remuneration package, stock

options, and performance incentives of Directors should be disclosed to

the shareholders.

5) Board Procedures: The Board should have at least four meetings a year.A director should not be a member of more than 10 committees and

chairman of more than 5 committees across all companies.

Management discussions and analysis report should include the following

points:

Company structure and development Opportunities and threats Segment wise or product wise performance Outlook on the business Risk and concerns Internal control systems and its adequacy Discussions on financial performance Disclosure by Directors on Material, Financial Commercials

transactions with the company

6) Shareholders Information: The Company should provide a brief resumeof new and reappointed directors. Quarterly results should be submitted to

stock exchanges, placed on the company web site and presented to analysis.


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The shareholders/ investors grievances should have minimum of 2 meetings

a year, under the chairmanship of independent director.

A report on corporate governance and a certificate from auditors on

compliance of provisions of corporate governance, as per Clause 49 in the

Listing Agreement, should be provided.

2.4 Basel Committee of Corporate Governance

In 1988, the bank for International Settlement (BIS)-based Basel

Committee on Banking Supervision came out with regulations regarding thecapital requirements for banks. Although these were essentially intended for

internationally operating banks, in due course, almost all countries adopted

these regulations for their banks.

The crux of the Basel I requirements is the assignments of risk weights for

different assets in a banks book and aggregating the risk-weighted assets of

which 8per cent was recommended as the capital of the bank. The

committees recommendations were not mandatory, but the worlds central

banks speeded up the process of compliance, particularly following the East

Asian Crisis and the collapse of certain hedge funds in New York which

threatened to bring down in 1992 closely following the inception of

economic reforms.

Basel Committee published a paper on corporate governance for banking

organizations in September1999. The committee felt that it was the

responsibility of the banking supervisors to ensure that there was effective


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corporate governance in the banking industry. Supervisory experience

underscores the need for having appropriate accountability and checks and

balances within each bank to ensure sound corporate governance, which in

turn leads to effective and more meaningful supervision. Sound corporate

governance could also contribute to a collaborative working relationship

between bank managements and a bank supervisor.

From a banking industry perspective, corporate governance involves the

manner in which the business and affairs of individual institutions are

governed by their boards of directors and senior management affecting how

banks

Set corporate objectives (including generating economic returns toowners)

Run the day to day operations of business Consider the interest of recognized stakeholders Align corporate activities and behavior with the expectations that banks

will operate in a safe and sound manner and in compliance with

applicable laws and regulations

Protect the interests of depositors

The Indian corporate are governed by the Companys Act 1956 that

followed more or less the UK model. The pattern of private companies is

mostly that closely held or dominated by a founder, his family and

associates.


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In terms of legislative mechanisms, Indian government and industry

constituted three committees to study corporate governance practiced in the

country and suggest measures for measures for improvement based on what

has globally recognized as best practices. Significantly, most of the

recommendations of the three committees-SEBI, appointed Kumar

Mangalam Birla Committee (2000), the government appointed Naresh

Chandra (2003) and the SEBIs Narayana Murthy Committee are

remarkably similar to those of Cadbury Committee and American Sarbanes-

Oxleys Act, in terms of their approaches and recommendations.

Further India has adopted the key tenets of the Anglo-American external

and internal mechanisms, in the wake of economic liberalization and its

integration into the global economy. Thus corporate governance

developments in India in recent years show a paradigm shift from German/

Japanese model to Anglo American models.

There is not a single preferred model or set of corporate governance

mechanisms. Moreover, ideas and practices are evolving fast in many

countries. Moreover, the overall corporate governance package has to be

consistent with the way business is done and the reality of relationship in

that culture.

3.1 Corporate Governance in Financial Institutions


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The question of efficiency and accountability of management of financial

institutions has gained prominence due to two major developments. The

first is the report on S.H. Khan Committee on Corporate Governance and

second is the UTIs representation on this Board will be precursor to good

corporate governance. The Khan Committee has recommended that the FIs

should themselves become role models. The FIs need to make several

structural reforms in their governance organs such as the constitution of

board committees, separation of the role of CEO and chairman, putting off

majority of independent directors on credit and investment committees, etc.

Moreover, RBI should be the sole financial regulatory authority over the

Financial Institutions (FIs).

Banks

Banks are a critical component of any economy. They provide financing for

commercial enterprises, basic financial services to a broad segment of the

population and access to payment systems. In addition some banks are

expected to make credit and liquidity available in difficult market

conditions. The importance of banks to national economies is underscored

by the fact that banking is virtually universally a regulated industry and that

banks have access to government safety nets. It is of crucial importance,

therefore, that banks have strong corporate governance. There has been a

great deal of attention given recently to the issue of corporate governance in

various national and international forums.

In particular, the OECD has issued a set of corporate governance standards

and guidelines to help governments in their efforts to evaluate and


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improve the legal, institutional and regulatory framework for corporate

governance in their countries and to provide guidance and suggestions for

stock exchanges, investors, corporations and other parties that role in the

process of developing good corporate governance.

3.2 Corporate Governance in Banks

protecting the interests of depositors becomes a matter of paramount

importance to banks. In other corporate, this is not and need not be so for

two reasons:

The depositors collectively entrust a very large sum of their hard earnedmoney to the care of banks. It is found that in India, the depositors

contribution was well over 15.5 times the shareholders stake in banks as

early as in March 2001. This is bound to be much more now.


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The depositors are very large in number and are scattered and have littlesay in the administration of banks. In other corporate, big lenders do

exercise the right to direct the management. In any case, the lenders

stake in them might not exceed 2 or 3 times the owners stake.

Banks deal in peoples fund and should, therefore, act as trustees of the

depositors. Regulations the world over has recognized the vulnerability of

depositors to the whims of managerial misadventures in banks and therefore

has been regulating banks more tightly than other corporate.

To sum up, the objective of governance in banks should first be protection

of depositors interest and then to be optimize the shareholders interests.

All other considerations would fall in place once these two are achieved.

As part of its ongoing efforts to address supervisory issues, the Basel

Committee on Banking Supervision (BCBS) has been active in drawing

from the collective supervisory experience of its members and other

supervisors in issuing supervisory guidance to foster safe and sound

banking practices. The committee was set up to reinforce the importance of

for banks of the OECD principles, to draw attention to corporate

governance issues addressed by previous committees and to present some

new topics related to corporate governance for banks and their supervisors

to consider.

Banking supervision cannot function effectively if sound corporate

governance is not in place and consequently, banking supervisors have a

strong interest in ensuring that there is effective corporate governance at


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every banking organization. Supervisory experience underscores the

necessity of having the appropriate levels of accountability and checks and

balances within each bank. Put plainly sound corporate governance makes

work of supervisors infinitely easier. Sound corporate governance can

contribute to collaborative working relationship between bank management

and bank supervisors.

Recent sound practices papers issued by Basel Committee underscore the

need for banks to set strategies for their operations and establish

accountability for executing these strategies. In addition, transparency of

information related to existing conditions, decisions and actions is

integrally related to accountability in that it gives market participants

sufficient information with which to judge the management of a bank.

According to OECD, corporate governance involves a set of relationships

between a companys management, its board, its shareholders and other

stakeholders. Corporate Governance also provides the structure through

which the objectives of the company are set, and the means of attaining

those objectives of and monitoring performance are determined. Good

Corporate Governance should provide proper incentives for the board and

the management to pursue objectives that are in the interest of the company

and shareholders should facilitate effective monitoring thereby encouraging

firms to use resources more efficiently.


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Banks as custodian of money: Banks are the custodians of money oftheir depositors and have a moral obligation to make a prudent

application of depositors funds. Whenever the banking sector gets

struck into crisis, the government has to act faster to salvage them

before the entire banking system gets engulfed. For this reason banking

is highly regulated industry.

Government dominance: Government had for long been dominantowner in the financial sector-whether it be banks or financial

institutions. Gradually, it is disinvesting its equity holdings. As public

participation in the holdings of financial sector entities goes up, good

governance thereof becomes an issue of paramount significance. For

example, in the specific context of banks, good governance signifies

that they must be operated in a safe and sound manner in accordance

with applicable laws so that the interests of depositors are not

jeopardized.

3.3 Corporate Governance in Indian Banks

Although the subject of corporate governance has received a lot of attention

on recent times in India, corporate governance issues and practices by

Indian Banks have received only a scanty notice. The question of corporate

governance in banks is important for several reasons. First, banks have an

overwhelming dominant position in developing the economys financial

markets and are extremely important engines of growth. Second, as the


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countrys financial system and are underdeveloped banks in India are the

most significant source of finance for majority of firms in Indian industry.

Third, banks are also the channels through which the countrys savings are

collected and are used for investments. Fourth, India has recently

liberalized its banking system through privatization, disinvestments and has

reduced the role of economic regulation and consequently managers of

banks have obtained greater autonomy and freedom with regard to running

of banks. This would necessitate their observing best corporate practices to

regain the investors confidence now that the government authority does not

protect them anymore. Corporate governance in banks has assumed

importance in India post 1991 reforms because competition compelled

banks to improve their performance. Even the majority of banks and

financial institutions, owned, managed and influenced by the government

with neither high quality management nor any exemplary record by

practicing corporate governance have realized the importance of adopting

better practices to protect their depositors and banking public.

Corporate Governance in Public Sector Banks

A substantial chunk of Indian banking sector still remains under the control

of public sector banks despite the entry of some private banks in the arena.

Major shareholding of public banks is with the Government. The public

banks are new to concept of corporate governance. Basel Committee has

underscored the need for the banks to establish strategies and to become


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accountable for executing them. Transparency is vital to accountability so

as to enable market participants to judge the management of a bank. The

existing legal institutional framework of public sector banks is not aligned

with principles of good corporate governance. So far banks have been

burdened more with social responsibility and compelled to tow the line of

thinking dictated by the political party in power. Healthy banking policies

had been the last priority. Monopoly of public sector banks in banking

business has protected them from competition and the bank management

has thereby become complacent.

Lack of accountability and transparency has led to colossal amounts of non-

performing assets (NPAs). The scheduled commercial banks in India have

NPAs of over Rs. 70,900 crores which are seriously impacting their

profitability. Steps are being taken to hasten recoveries under the new Act

viz. Securitization and Reconstruction of Financial Assets and Enforcement

of Security. RBI nominees on the boards of banks have been concerned

merely with preventing banks from committing any breach of quantitative

guide-lines than with the framing of strategic policies.

Governance in Private Sector Banks

Entry of private sector banks in the arena has introduced an element of

competition in the banking sector too. Private sector banks have entered

niche areas, listed their scrips and being market driven they have been more

transparent in their functioning. They have also been more tech-savy,

growth oriented and have less of NPAs. But these signals are not a


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permanent indication of the future scenario. The involvement of leading

private banks in the stock market scam has dispelled the wrong notion that

private banks are a haven or model of good governance.

The business of banking is unique in its nature since it deals with the money

of others. It is necessary for the banks to adhere to strict ethical standards. It

is the trust of the depositors that drives the industry. The situation as of now

is that the banks have to still inculcate corporate governance principles in

their functioning. The increasing competition is however making the banks

aware of such need. Most of the banks are attempting to fulfill the bare

legal requirements about disclosure, transparency and accountability. None

of the banks has shown any initiative to set new standards. The extent to

which the banks actually practice the professed corporate governance norms

is still a debatable question. Standards of good banking Practices which are

of significance to all types of banks are as follows:

To ensure a fair and transparent relationship between the customer andthe bank

To institute comprehensive risk management system To proactively eliminate customer complaints and evolve a scheme for

redressal of grievances

Corporate Governance in Co-Operative Banks

For the co-operative banks in India these are challenging times. Never

before has the need for restoring customer confidence in the cooperative

sector been felt so much. Never before has the issue of good governance in

the co-operative banks assumed such criticality. The literature on corporate

governance in its wider connotation covers a range of issues such as

protection of shareholders rights, enhancing shareholders value, Board


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issues including its composition and role, disclosure requirements, integrity

of accounting practices, the control systems, in particular internal control

systems. Corporate governance especially in the co-operative sector has

come into sharp focus because more and more co-operative banks in India,

both in urban and rural areas, have experienced grave problems in recent

times which have in a way threatened the profile and identity of the entire

co-operative system. These problems include mismanagement, financial

impropriety, poor investment decisions and the growing distance between

members and their co-operative society.

The purpose and objectives of co-operatives provide the framework for co-

operative corporate governance. Co- operatives are organized groups of

people and jointly managed and democratically controlled enterprises. They

exist to serve their members and depositors and produce benefits for them.

Co-operative corporate governance is therefore about ensuring co-operative

relevance and performance by connecting members, management and the

employees to the policy, strategy and decision-making processes.

3.4 Obstacles on the Path of Good Governance in

Banking Sector

There are several reasons for the absence of a sufficient corporate

governance mechanism in the Indian banking sector

Multiplicity of regulations: Banks are governed by governed bymultiple enactments. For instance, private banks are governed both by

the Companies Act, 1956 and the Banking Companies Regulation Act.


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The nationalized banks are governed both by the Banking Companies

Regulation Act and the Bank Nationalization Act, 1969 (amended in

1982). The State Bank of India and its associates are governed by the

State Bank of India Act, 1955 (amended in 1997), The regional Rural

Bank are regulated by RRB Act, 1975, the co-operative Banks by

Cooperative Banking Regulation Act, 1949 and Banking Laws (Co-

operative Societies) Act, 1965. The RBI advisory group has opined that

all the banks should be brought within the purview of a single Act which

prescribes the various practices to be followed by all and one.

Lack of synchronization among various corporate governancenorms: Three different committees in India have dealt with the subject

of corporate governance. These are: the Kumar Mangalam Birla

Committee Report, 2000 that had been constituted by SEBI; CII Report,

1998 and the R BI advisory Committee Report, 2001. There is no

synchronization of the regulations. Each report has dwelt on specific

issues. It would be better if a common code is prescribed after

harmonizing the recommendations of various committees.

Qualitative vs. Quantitative: Banking norms are more quantitative thatqualitative. Governance depends more on quality of adherence to the

norms in addition to quantitative benchmark.

Mix up between ownership role and regulatory role: In most of thefinancial institutions, the RBI has been a majority shareholder as well as

the regulator. Narsimhan Committee on Banking Reforms raised the

question as to whether regulators should be owners in the context of


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State Bank of India. Recently, RBI vacated its majority ownerships from

Financial Institutions like Securities Trading Corporation of India Ltd.

and Discount and Finance House of India and is in the process of total

disinvestment. There is also no justification for a regulator like RBI to

be represented on the Board of those regulated.

Mismatch between ownership pattern and board levelrepresentation: Previously, when Government used to be the majority

shareholder in many of the financial representation on its board. With

diversified ownership, private shareholders have begun to be given

board level representation. But private shareholder representation is not

commensurate with the extent of their shareholding.

Lack of transparency in selection of board members: It is anybodysguess as to what are the considerations that weigh in making board level

appointments. To have truly professional directors, there should be a

process of transparent search.

Board Accountability: Accountability of Directors in Public SectorBanks is another aspect on which processes have to be put in place.

Directors must be made aware as to what they are expected to do on the

boards. Their actual performance should be monitored and kept in view

while reappointing them.

Lack of timely appointment of Directors: Sometimes it takes anumber of years to reconstitute the board of some of the public sector

banks.


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Political Boards: Very often, board level appointments in the financialinstitutions are based on the political consideration. Board appointments

must remain stable and unaffected by political developments.

IICCIICCII BBaannkk

ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00

billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25billion (US$ 896 million) for the year ended March 31, 2010. The Bank has

a network of 2,035 branches and about 5,518 ATMs in India and presence

in 18 countries. ICICI Bank offers a wide range of banking products and

financial services to corporate and retail customers through a variety of

delivery channels and through its specialized subsidiaries in the areas of

investment banking, life and non-life insurance, venture capital and asset

management.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange

and the National Stock Exchange of India Limited and its American


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Depositary Receipts (ADRs) are listed on the New York Stock Exchange

(NYSE).

The corporate governance framework in ICICI Bank is based on an

effective independent Board, the separation of the Boards supervisory role

from the executive management and the constitution of Board Committees,

generally comprising a majority of independent Directors and chaired by an

independent Director, to oversee critical areas.

4.1 Philosophy of Corporate Governance

ICICI Banks corporate governance philosophy encompasses not only

regulatory and legal requirements, such as the terms of listing agreements

with stock exchanges, but also several voluntary practices aimed at a high

level of business ethics, effective supervision and enhancement of value for

all stakeholders. The corporate governance framework adopted by the Bank

already encompasses a significant portion of the recommendations

contained in the Corporate Governance Voluntary Guidelines 2009 issued

by the Ministry of Corporate Affairs.

Definition of Corporate Governance by ICICI

ICICI bank has emphasized on the definition of corporate governance given

by OECD which is as follows:


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Corporate Governance is the system by which business corporation are

directed and controlled. The corporate governance structure specifies the

distribution of rights and responsibilities among different participants in

the corporation and spells out the rules and procedures for making decision

on corporate affairs.

In the years to come, the Indian financial system will grow not only in size

but also in complexity as the forces of competition gain further momentum

and financial markets acquire greater depth. The policy environment willremain supportive of healthy growth and development with accent on more

operational flexibility as well as greater prudential regulation and

supervision.

The real success of our financial sector reforms will however depend

primarily on the organizational effectiveness of the banks, including

cooperative banks, for which initiatives will have to come from the banks

themselves. It is for the co-operative banks themselves to build on the

synergy inherent in the cooperative structure and stand up for their unique

qualities. With elements of good corporate governance, sound investment

policy, appropriate internal control systems, better credit risk management,

focus on newly-emerging business areas like micro finance, commitment to

better customer service, adequate automation and proactive policies on

house-keeping issues, co-operative banks will definitely be able to struggle

with these challenges and convert them into opportunities.


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Lets conclude that the Reserve Bank and Securities Exchange Board of

India (SEBI) is continuously striving to ensure compliance with international

standards and best practices of corporate governance in banks as relevant to

India. RBI is also interacting closely with the Government and the SEBI in

this regard. The various committees that have been set up have helped the

banks with a better view of corporate governance. Increasing regulatory

comfort in regard to standards of governance in banks gives greater

confidence to shift from external regulation to internal systems of controls

and risk-management. Each of the directors of the banks has a role in

continually enhancing the standards of governance in banks through a

combination of appropriate knowledge and values.

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