Governance Structure

Category: Governance
Last Updated: 28 May 2020
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Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment.

Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders. PRINCIPLES OF CORPORATE GOVERNANCE Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002).

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RIGHTS AND EQUITABLE TREATMENT OF SHAREHOLDERS: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. INTERESTS OF OTHER STAKEHOLDERS: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.

ROLE AND RESPONSIBILITIES OF THE BOARD: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment. INTEGRITY AND ETHICAL BEHAVIOUR: Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.

DISCLOSURE AND TRANSPARENCY: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. CORPORATE GOVERNANCE IN INDIA Although India has been rather slow in establishing corporate governance principles over the last two decades, 2012 was a positive year for progression in the Indian corporate governance arena.

The Companies Bill 2012, passed by Lok Sabha on 18 December 2012, includes a number of new provisions aimed at improving the governance of public companies. Interestingly, despite the structure of Indian businesses differing significantly from those in the UK, the foundations of the new Indian corporate governance model are drawn from the Anglo-Saxon governance model. The investor base in the Indian corporate market, for instance, largely consists of the company founders, their respective family members and the government.

In contrast, shareholders in UK companies are less concentrated towards a certain group of people, are geographically dispersed and largely held by professional investors. However, despite significant differences in the corporate structure in the two markets, the corporate governance proposals recently published in India are similar to those adopted in the UK. The Indian market regulator, the Securities and Exchange Board of India (SEBI), recently issued a consultative paper on the "Review of Corporate Governance" encouraging a wider debate on governance.

The paper calls for, inter alia, the splitting of the roles of chairman and chief executive, disclosure of the reasons for an independent director's resignation from office, a limit on the term of appointment of independent directors and greater involvement of institutional investors. SEBI goes on to propose making radical changes which seek to ensure that these corporate governance proposals are implemented in a market which is generally viewed as weak in the implementation of rules and regulations.

These changes include: The appointment of independent directors by minority shareholders, independent directors to receive compulsory training and pass examinations; and The adoption of a principle-based approach for certain principles. There has been a clear move in India to develop the corporate market to attract foreign investment. Foreign investment is slowly increasing shareholder diversity in some companies. This in turn pushes the agenda for the introduction of a regulated and universal corporate governance model.

It appears from the recent SEBI proposals that the adoption of a corporate governance model based on the Anglo-Saxon model will be a useful starting point but the adoption of certain UK-based concepts such as 'comply or explain' should be adopted cautiously given the radical nature of certain proposals and significant effects they will have on the structure of Indian businesses. New regulatory institutions may need to be created, existing institutions strengthened and hybrid approaches adopted but, on the whole, the Anglo-Saxon model may well be a useful foundation. MOST RECENT CONFERENCE ON CORPORATE GOVERNANCE

The eighth national conference on 'Corporate governance' (IIC-2013) 22ND December 2013, the flagship event of Jaipuria Institute of Management (JIM), Lucknow, was inaugurated by M Damodaran, former chairman of Securities and Exchange Board of India in Lucknow on Saturday. Ashish Kumar Chauhan, managing director and CEO, Bombay Stock Exchange Ltd, started the keynote address emphasising the pros and cons of the corporate sector. The key highlights of his message were conceptual technologies like invention of zero, double entry book keeping system, creation of corporate, etc.

He concluded saying the definition of corporate governance has evolved over a period of time and corporate sector is now largely answerable to the youth. M Damodaran in his address averred that corporate governance is acting in a manner consistent with the interests of all stakeholders. He emphasised that content in corporate governance is more important than its structure and that mere compliance with regulatory framework is not governance. "In the words of Mahatma Gandhi, business stands for trust, and stakeholders are its trustees'.

Besides, corporate governance should also aim at mitigating the asymmetry of information and conflicts of interests between managers and owners," he pointed out. In the first session on the theme 'finance and corporate management', RK Dubey, chairman and managing director of Canara Bank, stressed virtues of transparency while AC Mahajan, chairman Banking Codes and Standards Board of India said global financial crisis has brought all business to ponder over the issue of corporate governance.

In the second session, the theme of 'legal perspectives on corporate governance' was taken forward by Justice Sudhir K Saxena, judge, Allahabad high court. He said the best governance is one which needs to be governed the least. He also discussed the vital role an effective investigation plays in the handling of corporate scandals. CASE STUDY ON ITC’S CORPORATE GOVERNANCE Over the years, ITC has evolved from a single product company to a multi-business corporation. Its businesses are spread over a wide spectrum, ranging from cigarettes and tobacco to hotels, packaging, paper and paperboards and international commodities trading.

Each of these businesses is vastly different from the others in its type, the state of its evolution and the basic nature of its activity, all of which influence the choice of the form of governance. The challenge of governance for ITC therefore lies in fashioning a model that addresses the uniqueness of each of its businesses and yet strengthens the unity of purpose of the Company as a whole. ITC defines Corporate Governance as a systemic process by which companies are directed and controlled to enhance their wealth generating capacity.

Since large corporations employ vast quantum of societal resources, we believe that the governance process should ensure that these companies are managed in a manner that meets stakeholder's aspirations and societal expectations. CORE PRINCIPLES ITC's Corporate Governance initiative is based on two core principles. These are : Management must have the executive freedom to drive the enterprise forward without undue restraints; and this freedom of management should be exercised within a framework of effective accountability.

ITC believes that any meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations. CORNERSTONES From the above definition and core principles of Corporate Governance emerge the cornerstones of ITC's governance philosophy, namely trusteeship, transparency, empowerment and accountability, control and ethical corporate citizenship.

ITC believes that the practice of each of these leads to the creation of the right corporate culture in which the company is managed in a manner that fulfils the purpose of Corporate Governance. Trusteeship: ITC believes that large corporations like itself have both a social and economic purpose. They represent a coalition of interests, namely those of the shareholders, other providers of capital, business associates and employees. This belief therefore casts a responsibility of trusteeship on the Company's Board of Directors.

They are to act as trustees to protect and enhance shareholder value, as well as to ensure that the Company fulfils its obligations and responsibilities 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. Transparency: ITC believes that transparency means explaining Company's policies and actions to those to whom it has responsibilities. Therefore transparency must lead to maximum appropriate disclosures without jeopardising the Company's strategic interests.

Internally, transparency means openness in Company's relationship with its employees, as well as the conduct of its business in a manner that will bear scrutiny. We believe transparency enhances accountability. Empowerment and Accountability: Empowerment is an essential concomitant of ITC's first core principle of governance that management must have the freedom to drive the enterprise forward. ITC believes that empowerment is a process of actualising the potential of its employees.

Empowerment unleashes creativity and innovation throughout the organisation by truly vesting decision-making powers at the most appropriate levels in the organisational hierarchy. ITC believes that the Board of Directors are accountable to the shareholders, and the management is accountable to the Board of Directors. Control: ITC believes that control is a necessary concomitant of its second core principle of governance that the freedom of management should be exercised within a framework of appropriate checks and balances.

Control should prevent misuse of power, facilitate timely management response to change, and ensure that business risks are pre-emptively and effectively managed. Ethical Corporate Citizenship: ITC believes that corporations like itself have a responsibility to set exemplary standards of ethical behaviour, both internally within the organisation, as well as in their external relationships. We believe that unethical behaviour corrupts organisational culture and undermines stakeholder value. OVERHAUL OF CORPORATE GOVERNANCE RULES IN INDIA

To give a greater say to minority shareholders and put more onus on independent directors and institutional shareholders, the Securities and Exchange Board of India (Sebi) is planning an overhaul of corporate governance rules. The capital markets regulator also proposes to come out with the final guidelines for real estate investment trusts (Reits), which could open a new liquidity stream for the cash-starved realty sector. Both the proposals would be taken up at Sebi’s board meeting here on December 24, said three people privy to the development. In October, Sebi had floated a discussion paper on Reits.

In January, it had brought out a consultative paper on corporate governance norms. Sebi’s new corporate governance norms will re-align the existing framework with that in the new Companies Bill, which has already been approved by Parliament. SEBI’S YEAR END AGENDA The regulator could introduce whistle-blower policy, class action suits, lead independent director Curbs on related-party transactions; mandatory rotation of auditors New rules aimed at increasing transparency, giving greater say to public shareholders Reits could open new revenue stream for the real estate sector Experts say Sebi regulations will have to be backed by tax breaks

A source said though several clauses pertaining to corporate governance in the Companies Act had to be notified by the government, Sebi had decided to go ahead with finalising the new corporate governance norms. Sebi’s governance norms, to be applicable only for listed companies, are stricter than the norms in the new Companies Act. The new norms could see the introduction of a whistle-blowing policy, class action suits, a lead independent director and compulsory rotation of auditors.

“The new Companies Act has come out with a number of new stipulations and clarity on what the country wants to achieve in corporate governance in India. But Sebi’s role and the role of stock exchanges also includes ensuring disclosures are made on time, the disclosures are complete and relevant and nothing significant is suppressed,” Sebi Chairman U K Sinha had said in a speech on Saturday. It is unclear whether all the recommendations made in the consultative paper were accepted by the Sebi board.

The paper had also recommended giving more powers to independent directors, putting curbs on related-party transactions by companies and enhancing the role of institutional investors by asking them to define a clear voting policy. Sources said the draft regulations on Reits, after incorporating some public suggestions, were likely be accepted by the Sebi board. “Reits may only succeed if these are given tax incentives; but we are readying the regulations that will enable setting up Reits in the country. We need not wait for the tax breaks to come first,” said a senior Sebi official.

Experts believe Reits will have to be treated as pass-through instruments; for these to succeed, these will be taxed only at a single point. In the discussion paper, Sebi had suggested a model on the lines of an initial public offering (IPO), with a lot of emphasis on transparency and disclosures for Reits. It had proposed an initial offer size of at least Rs 250 crore and a public float of at least 25 per cent. To attract only high net worth individuals, the draft regulations had also proposed a subscription ticket size of at least Rs 2 lakh. “It is important for Reits to come in India.

Real estate developers will benefit, as these will give them institutional funding. It will also help retail investors with relatively lower investment sizes to be part of real estate…and benefit from the upswing. Taxation, however, will be the key for investments in Reits,” said Anuj Puri, chairman and country head, Jones Lang LaSalle India. This is Sebi’s third attempt to introduce a real investment vehicle. The market regulator had issued draft regulations on Reits in 2008 as well, only to withdraw these later. Also, Sebi’s real estate investment management company framework didn’t find any takers.

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Governance Structure. (2018, Jun 29). Retrieved from

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