Governance, Risk Management, Compliance & Ethics PDF

STUDY MATERIAL PROFESSIONAL PROGRAMME GOVERNANCE, RISK ­MANAGEMENT, ­ OMPLIANCES AND ETHICS C MODULE 1 PAPER 1  © THE INSTITUTE OF COMPANY SECRETARIES OF INDIA TIMING OF HEADQUARTERS Mon...

STUDY MATERIAL PROFESSIONAL PROGRAMME GOVERNANCE, RISK ­MANAGEMENT, ­ OMPLIANCES AND ETHICS C MODULE 1 PAPER 1  © THE INSTITUTE OF COMPANY SECRETARIES OF INDIA TIMING OF HEADQUARTERS Monday to Friday Office Timings – 9.00 A.M. to 5.30 P.M. Public Dealing Timings Without financial transactions – 9.30 A.M. to 5.00 P.M. With financial transactions – 9.30 A.M. to 4.00 P.M. Phones 011-45341000 Fax 011-24626727 Website www.icsi.edu E-mail [email protected] Laser Typesetting by Satyabrata Mohapatra, Noida and Printed at HT Media Ltd, Greater Noida ii  PROFESSIONAL PROGRAMME GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS Corporate governance offers a comprehensive, interdisciplinary approach to the management and control of companies. Corporate professionals of today and tomorrow must imbibe in themselves the evolving principles of good corporate governance across the globe on a continual basis. Therefore Corporate Governance has emerged as an important academic discipline in its own right, bringing together contributions from accounting, finance, law and management. Excellence can be bettered only through continuous study, research and academic and professional interaction of the highest quality in the theory and practice of good corporate governance. The corporate world especially looks upon Company Secretaries to provide the impetus, guidance and direction for achieving world-class corporate governance. Company Secretaries are the primary source of advice on the conduct of business. This can take into its fold everything from legal advice on conflicts of interest, through accounting advice, to the development of strategy/corporate compliance and advice on sustainability aspects. The paper on Governance, Risk Management, Compliances and Ethics has been introduced to provide knowledge on global development on governance, risk management, compliances, ethics and sustainability aspects and best governance practices followed worldwide. This Paper is divided into four parts: Part I deals with Governance, Part II deals with Risk Management, Part III deals with Compliances and Part IV deals with Ethics & Sustainability. Part I elaborates on the conceptual and legal framework of Corporate Governance and the role of Board of Directors, promoters and stakeholders. Part II explains about the Risk identification, its management, mitigation and audit. Part III explains the significance of Compliance and essentials of a compliance management program. This part also details about the Internal Control and Reporting. Part IV details about the relation of Ethics and business. This part also explains about Sustainability and approaches to measure Business Sustainability. The legislative changes made up to July, 2021 have been incorporated in the study material. The students to be conversant with the amendments to the laws made upto six months preceding the date of examination. It may happen that some developments might have taken place during the printing of the study material and its supply to the students. The students are therefore advised to refer to the updations at the Regulator’s website, Supplement relevant for the subject issued by ICSI and ICSI Journal Chartered Secretary and other publications for updation of study material. In the event of any doubt, students may write to the Directorate of Academics of the Institute for clarification at [email protected]. Although due care has been taken in publishing this study material, the possibility of errors, omissions and/or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf. Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if the same is brought to its notice for issue of corrigendum in the e-journal ‘Student Company Secretary’. iii  PROFESSIONAL PROGRAMME GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS Objective This study material is divided into four parts with following weightage of marks: Part I – Governance (50 marks) Part II - Risk Management (20 marks) Part III - Compliances (20 marks) Part IV - Ethics & Sustainability (10 marks) PART I – GOVERNANCE Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical environment. In other words, the heart of corporate governance is transparency, disclosure, accountability and integrity. In the last decade, many emerging markets, international bodies, governments, financial institutions, public and private sector bodies have reformed their corporate governance systems and are encouraging debate and spearheading initiatives towards good corporate governance. Better regulatory and self-regulatory corporate governance frameworks and enforcement mechanisms are being implemented through tougher legislations and Corporate Governance Codes. This part of the study apprise about the developments across jurisdictions and brief about the historic origin, need and importance of corporate governance, legislative framework of Corporate Governance explaining the need, scope and evolution of Corporate Governance, Contemporary Developments in Corporate Governance Corporate Governance codes in major jurisdictions, Corporate Governance in Indian Ethos and family enterprises. This part further explains the Board effectiveness, its committees, performance evaluation of Board and role of Promoters. PART II - RISK MANAGEMENT Risk is inherent in every business, whether it is of financial nature or non-financial nature. Thus, management of the risk is very important. Risk management begins with the risk identification, analyzing the risk factors, making assessment of the risk and mitigation of the risk. Better risk management techniques provide early warning signals so that the same may addressed in time. In traditional concept the natural calamities like fire, earthquake, flood, etc were only treated as risk and keeping the safe guard equipments etc were assumed to have mitigated the risk. But now in the era of fast changing global economy, the management of various types of risks has gained utmost importance. This part of the study explains the concepts, process, its advantages and steps for implementation of risk management. It also deals with the fraud and reputation risk management and how the negative reputation of an entity may have adverse impact on the operations and profitability. iv  PART III - COMPLIANCES Compliance means the complete alliance of various parts of the business – whether commercial, financial, or regulatory. It necessitates following the rules, both external and internal. Compliance with law and regulation must be managed as an integral part of any corporate strategy. The board of directors and management must recognize the scope and implications of laws and regulations that apply to the company. They must establish a compliance management system as a supporting system of risk management system as it reduces compliance risk to a great extent. Compliance with the requirements of law through a compliance management programme can produce positive results at several levels. This part of study explains the adequacy and effectiveness of the compliance system, internal compliance reporting mechanism and ensuring the best practices available for the good governance principles for compliance issues. It further details about the concept of internal control, elements of internal control and its efficacy, concept of Reporting which includes the financial as well as non-financial reporting. PART IV - ETHICS & SUSTAINABILITY Business Ethics is the application of ethical principles and methods of analysis to business. In past few decades business ethics has been given due importance in business, commerce and industry. Promotion of culture of ethics is an imperative, and it is increasingly being realized that it is the bedrock of good governance which ultimately re- instills the confidence of the stakeholder in the company. Sustainable development is a broad concept that balances the need for economic growth with environmental protection and social equity. Sustainability is based on a simple principle: Everything that we need for our survival and well-being depends, either directly or indirectly, on our natural environment. Sustainability creates and maintains the conditions under which humans and nature can exist in productive harmony that permits fulfilling the social, economic and other requirements of the present and future generations. This part of the study elaborates the concept and advantages of business ethics and also explains about corporate sustainability and sustainable development. v  PROFESSIONAL PROGRAMME Module1 Paper1 GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS (100 Marks) SYLLABUS Objective Part-I: To develop skills of high order so as to provide thorough knowledge and insight into the corporate governance framework, best governance practices. Part–II: To develop skills of high order so as to provide thorough knowledge and insight into the spectrum of risks faced by businesses. Part-III: To develop the ability to devise and implement adequate and effective systems to ensure compliance of all applicable laws. Part-IV: To acquire knowledge of ethics in business and framework for corporate sustainability reporting. Detailed Contents Part I: Governance (50 Marks) 1. Conceptual Framework of Corporate Governance: Introduction, Need and Scope, Evolution of Corporate Governance, Management vs. Ownership, Majority vs Minority, Corporate Governance codes in major jurisdictions, Sarbanes Oxley Act, US Securities and Exchange Commission; OECD Principles of Corporate Governance; Developments in India, Corporate Governance in Indian Ethos, Corporate Governance – Contemporary Developments. 2. Legislative Framework of Corporate Governance in India: Listed Companies, Unlisted Companies, PSUs, Banks and Insurance Companies. 3. Board Effectiveness: Composition and Structure, Duties and Liabilities, Evolution of Jurisprudence, Diversity in Board Room, Women Director, Nominee Directors; Selection and Appointment Process, Independent Directors: expectations, liabilities and their role, code of conduct, responsibilities and effectiveness. 4. Board Processes through Secretarial Standards. 5. Board Committees: Composition & Terms of Reference, Roles and Responsibilities. 6. Corporate Policies & Disclosures: Various policies and disclosures to be made as per regulatory requirements / voluntarily made as part of good governance. vi 7. Directors’ Training, Development and familiarisation. 8. Performance Evaluation of Board and Management: Evaluation of the performance of the Board as a whole, individual director (including independent directors and Chairperson), various Committees of the Board and of the management. 9. Role of promoter/controlling shareholder, redressal against Oppression and Mismanagement. 10. Monitoring of group entities and subsidiaries. 11. Accounting and Audit related issues. 12. Related Party Transactions. 13. Vigil Mechanism/Whistle blower. 14. Corporate Governance and Shareholders’ Rights. 15. Corporate Governance and other Stakeholders: Employees, Customers, Lenders, Vendors, Government and Regulators, Society, etc. 16. Governance and Compliance Risk: Governance/Compliance failure and their impact on business, reputation and fund raising. 17. Corporate Governance Forums. 18. Parameters of Better Governed Companies: ICSI National Award for Excellence in Corporate Governance. 19. Dealing with Investor Associations, Proxy Services Firms and Institutional Investors. 20. Family Enterprise and Corporate Governance. Case Laws, Case Studies & Practical Aspects. Part II: Risk Management (20 Marks) 21. Risk Identification, Mitigation and Audit: Risk Identification, Risk Analysis, Risk Measurement, Risk Mitigation, Risk Elimination, Risk Management Committee, Clarification and Investigation, Role of Internal Audit, Risk Audit, Risk Related Disclosures. Case Studies & Practical Aspects. Part III: Compliances (20 Marks) 22. Compliance Management: Essentials of successful compliance program, Significance of Compliance, devising proper systems to ensure compliance, ensuring adequacy and effectiveness of compliance system, internal compliance reporting mechanisms, use of technology for compliance management. 23. Internal Control: Nature, Scope and Elements, Techniques of Internal Control System, Steps for Internal Control, Efficacy of internal controls and its review. 24. Reporting: Integrated Reporting, Non-financial Reporting, Corporate Sustainability Reporting, Board Reporting, Annual Report, Other Reports under LODR, PIT, SAST Regulations. 25. Website Management: Meeting through Video Conferencing. Case Studies & Practical Aspects vii  Part IV: Ethics & Sustainability (10 Marks) 26. Ethics & Business: Ethics, Business Ethics, Organization Structure and Ethics, Addressing Ethical Dilemmas, Code of Ethics, Indian Ethos, Designing Code of Conduct, Policies, Fair practices and frameworks. 27. Sustainability: Corporate Social Responsibility, Corporate Sustainability Reporting Framework, Legal Framework, Conventions, Treaties on Environmental and Social Aspects, Triple Bottom Line, Principle of Absolute Liability - Case Studies, Contemporary Developments, Indian Ethos. 28. Models / Approaches to measure Business Sustainability: Altman Z-Score Model, Risk Adjusted Return on Capital, Economic Value Added (EVA), Market Value Added (MVA), Sustainable Value Added Approach. 29. Indian and contemporary Laws relating to Anti-bribery: Prevention of corruption Act,1988, Central Vigilance Commission Act, 2003, Lokpal & Lokayukta Act, 2013, Foreign Corrupt Practices Act, 1977, Unlawful Activities (Prevention) Act, 1967 & Delhi Special Police Establishment Act, 1946; ICSI Anti Bribery Code. Case Studies & Practical Aspects viii  ARRANGEMENT OF STUDY LESSONS Module 1 Paper 1 GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS PART I: GOVERNANCE Lesson No. Lesson Title 1 Conceptual Framework of Corporate Governance 2 Legislative Framework of Corporate Governance in India 3 Board Effectiveness 4 Board Processes through Secretarial Standards 5 Board Committees 6 Corporate Policies and Disclosures 7 Accounting and Audit related issues, RPTs and Vigil Mechanism 8 Corporate Governance and Shareholders Rights 9 Corporate Governance and Other Stakeholders 10 Governance and Compliance Risk 11 Corporate Governance Forums PART II: RISK MANAGEMENT 12 Risk Management PART III: COMPLIANCE 13 Internal Control 14 Reporting PART IV: ETHICS & SUSTAINABILITY 15 Ethics and Business 16 CSR and Sustainability 17 Anti-Corruption and Anti-Bribery Laws in India ix  LESSON WISE SUMMARY GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS Lesson 1: Conceptual Framework of Corporate Governance Corporate Governance is how a corporation is administered or controlled. It is a set of processes, customs, policies, laws and instructions affecting the way a corporation is directed, administered or controlled. The participants in the process include employees, suppliers, partners, customers, government, and professional organization regulators, and the communities in which the organization has presence. Corporate Governance is integral to the existence of the company. Corporate Governance is needed to create a corporate culture of transparency, accountability and disclosure. Good corporate governance systems attract investment from global investors, which subsequently leads to greater efficiencies in the financial sector. The relation between corporate governance practices and the increasing international character of investment is very important. International flows of capital enable companies to access financing from a much larger pool of investors. In order to reap the full benefits of the global capital market and attract long-term capital, corporate governance arrangements must be credible, well understood across borders and should adhere to internationally accepted principles. Corporate governance is a critical factor in economic stability and organisational success. In the last decade, many emerging markets, international bodies, governments, financial institutions, public and private sector bodies have reformed their corporate governance systems and are encouraging debate and spearheading initiatives towards good corporate governance. Better regulatory and self-regulatory corporate governance frameworks and enforcement mechanisms are being implemented through tougher legislations and Corporate Governance Codes. This Lesson gives an overview of the evolution of Corporate Governance worldwide and the existence and development of corporate governance in India since centuries. Lesson 2: Legislative Framework of Corporate Governance in India The Companies Act, 2013 which envisages radical changes in the sphere of Corporate Governance in India along with SEBI LODR Regulations, 2015 provide for various provisions for good governance of companies. The Companies Act, 2013 is applicable to all companies registered under the Act and listed companies have to follow SEBI Regulations also. However the same is not the case with nationalized banks as these are governed by separate Acts. The sector specific companies i.e. banking/insurance/ public sector are required to follow the regulatory norms prescribed by their sectoral regulator. For example Insurance companies are subject to compliance with IRDA guidelines in addition to other applicable legislations. The guidelines issued by the IRDA on the Corporate Governance norms applicable to the Insurance Company have been dealt with in the chapter. The lesson details the corporate governance developments in Companies, Banks and NBFCs. Also details the guidelines for the insurance companies. Stewardship Code for insurers in India has also been explained. It also provides overview of the governance of Public Sector Enterprises under DPE Guidelines. Lesson 3: Board Effectiveness Company being an artificial person it requires certain natural persons to represent the company at various fronts. The position of directors in their relationship to the company is not only as the agents, but also trustees of the company. x The Board of Directors plays a pivotal role in ensuring good governance. The contribution of directors on the Board is critical to the way a corporate conducts itself. A board’s responsibilities derive from law, custom, tradition and prevailing practices. In the present times transparency, disclosure, accountability, issues of sustainability, corporate citizenship, globalization are some of the concerns that the Boards have to deal with. In addition, the Boards have to respond to the explosive demands of the marketplace. This two dimensional role of the Board of Directors is the cornerstone in evolving a sound, efficient, vibrant and dynamic corporate sector for attaining of high standards in integrity, transparency, conduct, accountability as well as social responsibility. Therefore in this Lesson Board’s role, powers and duties, types of directors required to be appointed under the laws, board composition and role of independent director in ensuring board effectiveness have been discussed. The lesson also gives an insight on training of directors and performance evaluation of directors. Lesson 4: Board Processes through Secretarial Standards In general, board process refers mainly to the decision-making activities of the board which need to be performed so that the objectives of the board can be achieved. Decisions relating to the policy and operations of the company are arrived at meetings of the Board held periodically. Meetings of the Board enable discussions on matters placed before them and facilitate decision making based on collective judgment of the Board. The fundamental principles with respect to Board Meetings are laid down in the Companies Act, 2013 and the Secretarial Standard -1 facilitates compliance with these principles by endeavouring to provide further clarity where there is ambiguity and establishing benchmark standards to harmonise prevalent diverse practices. For the benefit of companies, SS-1 provides necessary flexibility in many cases viz. with respect to calling Meeting at shorter notice, transacting any other business not contained in the agenda and passing of Resolutions by circulation. In this lesson, effective working of Boards through Secretarial Standard- 1 has been discussed. Lesson 5: Board Committees A board committee is a small working group identified by the board, consisting of board members, for the purpose of supporting the board’s work. Committees are generally formed to perform some expertise work and improve board effectiveness and efficiency. Companies Act, 2013 requires certain class of companies to form some committees mandatorily. Similarly SEBI (LODR) Regulations, 2015 makes it mandatory for the listed companies to formulate certain committees of the board. In this lesson role and functioning various committees like audit committee, stakeholder relationship committee, corporate social responsibility committee is explained. For the prospective company secretaries this lesson shall be useful in performing the advisory role and in compliance management in practical areas of work. Lesson 6: Corporate Policies and Disclosures A Company has to formulate specific policies in different areas of operations that help to bring uniformity in processes by clearly defining the business approach. Some of the policies are legally required, some are organisational needs and some are voluntarily made as part of good governance. This lesson discusses about various disclosure and transparency requirements under Companies Act 2013 and SEBI Regulations. Various disclosures mandatorily required by the companies and listed entities are also elaborated in detail in this chapter. xi Lesson 7: Accounting and Audit related issues, RPTs and Vigil Mechanism 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 society. Good accounting and auditing practices are highly effective as an instrument of corporate governance. Companies Act 2013 has provided for various mandatory and voluntary practices to improve financial reporting, internal audit and statutory audit of companies in India. Keeping this in view, this study lesson covers various good governance initiatives taken by the government of our country for accounting and audit related issues. It also covers in brief various legal provisions as well as background to related party transactions, meaning of related parties, transactions covered under RPT and the procedure for approval etc. At the end, lesson provides brief about vigil mechanism, background of whistle blower concept and various laws pertaining to it. Lesson 8 : Corporate Governance and Shareholders Rights The central element in corporate governance is the challenges arising out of separation of ownership and control. The shareholders are the true owners of a corporate and the governance function controls the operations of the corporate. There is a strong likelihood that there is a mismatch between the expectations of the shareholders and the actions of the management. Therefore there is a need to lay down clearly the rights of the shareholders and that of the management. SEBI Act, 1992, the various SEBI Regulations and Guidelines and the Companies Act, 2013 enables the empowerment of shareholder rights. Companies Act, 2013 provides for some measures to protect the interest of minority shareholders. One of the objectives of the SEBI is to provide a degree of protection to the investors and to safeguard their rights, steady flow of savings into market and to promote the development of and regulate the securities market. Investors should be safeguarded not only against frauds and cheating but also against the losses arising out of unfair practices. This lesson will enable the students to understand what the rights of the shareholders are and how it is important from corporate governance perspective. Lesson 9: Corporate Governance and Other Stakeholders In a business context, customers, investors, shareholders, employees, suppliers, government agencies, communities and many others who have a ‘stake’ or claim in some aspect of a company’s products, operations, markets, industry and outcomes are known as stakeholders. Stakeholders are characterized by their relationship to the company and their needs, interests and concerns, which will be foremost in their minds at the start of an engagement process. However, as the process unfolds they will soon take a particular role with related tasks and responsibilities. A major reason for increasing adoption of a Stakeholder Concept in setting business objectives is the recognition that businesses are affected by the “environment” in which they operate. Businesses come into regular contact with customers, suppliers, government agencies, families of employees, special interest groups. Decisions made by a business are likely to affect one or more of these “stakeholder groups”. Stakeholders can only be well informed and knowledgeable if companies are transparent and report on issues that impact stakeholders. Both parties have an obligation to communicate sincerely and attempt to understand, not just be understood. xii In this lesson relationship between company and various stakeholders has been discussed and explained how better stakeholder engagement ensures good governance. Lesson 10: Governance and Compliance Risk Historically, boards have been perceived to focus primarily on value creation for shareholders. But with renewed attention to statutory compliance, regulators now also want boards to focus on value management and value protection by doing a formal review of compliance obligations. As a result, corporations are looking to replace informal compliance frameworks with well structured, documented and demonstrable compliance structures that help management monitor and report compliance risk and exposure as well as compliance status to the Board. Regulatory compliance is an organization’s adherence to laws, regulations, guidelines and specifications relevant to its business. Violations of regulatory compliance regulations often result in legal punishment, including penalties/ fines. As the number of rules has increased since the turn of the century, regulatory compliance has become more prominent in a variety of organizations. The trend has even led to the creation of corporate, chief and regulatory compliance officer positions to hire employees whose sole focus is to make sure the organization conforms to stringent, complex legal mandates. This lesson describes the importance compliance and consequences of non compliance. Besides, it also highlights the importance of corporate compliance management and compliance risks. Lesson 11: Corporate Governance Forums The world has become a borderless global village. The spirit to implement internationally accepted norms of corporate governance standards found expression in private sector, public sector and the government thinking. The framework for corporate governance is not only an important component affecting the long-term prosperity of companies, but it is critical in terms of National Governance, Human Governance, Societal Governance, Economic Governance and Political Governance since the activities of the corporate have an impact on every aspect of the society as such. The need to find an institutional framework for corporate governance and to advocate its cause has resulted in the setting up and constitution of various corporate governance forums and institutions the world over. In this study lesson we will be discussing with some of the prominent Forums and Institutions of Corporate Governance. Lesson 12: Risk Management Risk and reward go hand by hand. We have often heard the statement that without risk there is no gain. Risk is inherent in the business. Different types of risk exist in the business according to the nature of the business and they are to be controlled and managed. Risk Management is a continuous process of identifying, evaluating and assessing the inherent and potential risk, adopting the methods for its systematic reduction in order to sustainable business development. Companies Act, 2013 provides that a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company. SEBI (LODR) Regulations, 2015 also provides that company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. The Board shall be responsible for framing, implementing and monitoring the risk management plan for the company. The company secretaries are governance professionals whose role is to enforce a compliance framework to safeguard the integrity of the organization and to promote high standards of ethical behavior. He has a significant role in assisting the board of the organization to achieve its vision and strategy. The activities of the governance xiii professional encompass legal and regulatory duties and obligations and additional responsibilities assigned by the employer. This lesson shall enable the students to understand risk management framework, the definition and types of risks; risk management process; advantages of risk management; steps in risk management; legal provisions on risk management; who is responsible for risk management etc. Lesson 13: Internal Control Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. It is a means by which an organization’s resources are directed, monitored, and measured. It plays an important role in detecting and preventing fraud and protecting the organization’s resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks). This lesson details various elements of internal control, techniques of internal control system and gives an insight on efficacy and limitations of internal audit. Lesson 14: Reporting Reporting may mean to provide the information to the stake holders as per the requirement of the law. Reporting is not the new concept. The companies are reporting through their annual report which is a comprehensive report on a company’s activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people information about the company’s activities and financial performance. They may be considered as grey literature. The annual reports contain the financial reporting as well as non-financial reporting too. Corporate reporting is an essential means by which companies communicate with investors as part of their accountability and stewardship obligations. The current financial reporting model was developed in the 1930’s for an industrial world which is like “looking in the rear-view mirror.” This has led to the development of contemporary means of reporting like CSR reporting, reporting of business sustainability and the most recent development is integrated reporting. In this study lesson reporting requirements for a company under the laws and some best practices have been discussed. The lesson highlights requirements for Board’s report, CSR Report, BRR and the framework for integrated reporting. Lesson 15: Ethics and Business Ethics is a “Science of morals.” The new and emerging concepts in management like corporate governance, business ethics and corporate sustainability are some of the expressions through which this emerging ethical instinct in the corporate world is trying to express and embody itself in the corporate life. In this study we examine the concept of ethics and its importance for the business, corporate governance and governance through inner conscience and sustainability. The objective of the study lesson is to enable the students understand the following: Inner Conscience and its Linkage to Governance The concept of business ethics Advantages of Ethics xiv Lesson 16: CSR and Sustainability Corporate Social Responsibility (CSR) is a concept whereby companies not only consider their profitability and growth, but also the interests of society and the environment by taking responsibility for the impact of their activities on stakeholders, environment, consumers, employees, communities, and all other members of the public sphere. The basic premise is that when the corporations get bigger in size, apart from the economic responsibility of earning profits, there are many other responsibilities attached to them which are more of non- financial/social in nature. These are the expectations of the society from these corporate to give something in return to the society with whose explicit or implicit help these entities stand where they are. Sustainability is an emerging mega trend that focuses on business capacity to create value for the customers, shareholders, and other stakeholders. Globalized workforces and supply chains have created environmental pressures and attendant business liabilities. The rise of new world powers has intensified competition for natural resources (especially oil) and added a geopolitical dimension to sustainability. The objective of this study lesson is to enable the students to understand the concept, applicability and reporting in respect to Corporate Social Responsibility and Sustainability. The lesson also highlights the importance of sustainable development and important global treaties on environmental and social aspects. The various models and approaches used for measuring the business sustainability which will guide the students to understand the models and approaches used for measuring the business sustainability are also discussed. Lesson 17: Anti-Corruption and Anti-Bribery Laws in India Indian laws and regulations often provide for considerable discretion in the hands of government agencies and personnel, and this can make interacting with government a subjective and time-consuming exercise. While Indian anti-corruption laws are fairly stringent, corruption is not uncommon in India, and until recently the enforcement of anti-corruption laws left much to be desired. This has led to unfortunate notion (particularly outside India) that corruption is an accepted practice in India – however, this notion is misplaced, and recent years have been marked with growing public dissatisfaction over corruption and its cost to the Indian economy. Over the past five to six years, there has been a strong public sentiment against corruption, and high-profile instances of corruption have become key political and election issues. The objective of this study lesson is to enable the students to understand the legal framework in India which regard to the prevailing Anti-Corruption and Anti-Bribery Laws. Most importantly, the past few years have seen a change in attitude of enforcement agencies, which have started enforcing anti-corruption laws aggressively in India, and have been supported in their efforts by the judiciary (which has taken up an active role in monitoring corruption cases) are discussed in this lesson. xv  LIST OF RECOMMENDED BOOKS PAPER 1 – GOVERNANCE, RISK MANAGEMENT, COMPLIANCE AND ETHICS Readings 1. Corporate Governance, Principles, policies and Practices – A.C. Fernando, Pearson Education 2. Business, Ethics and Corporate Governance - A.C. Fernando, Pearson Education 3. Corporate Governance – IICA, Taxmann 4. Business Ethics- Concepts and Cases – Manuel G. Velasquez 5. The Art of Corporate Governance – Dr. Joffy George 6. Journals – (a) ICSI – Chartered Secretary (b) ICSI – Student Company Secretary – E-Journal 7. Companies Act, 2013 and Rules 8. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 xvi  CONTENTS PAPER 1 – GOVERNANCE, RISK MANAGEMENT, COMPLIANCE AND ETHICS Lesson 1 Conceptual Framework of Corporate Governance Meaning and Definitions of Corporate Governance 2 Need for Corporate Governance 3 Elements / Scope of Good Corporate Governance 5 Evolution of Corporate Governance 7 Concept of Management Vs. Ownership 9 Concept of Majority Rule Vs. Minority Interest 9 Roots of Corporate Governance in Indian Ethos 9 Corporate Governance – Contemporary Developments in India 10 International Regulatory Framework 14 Stages of Corporate Governance Across Globe 14 Stages of Development of Corporate Governance in USA 14 Corporate Governance Codes in Major Jurisdictions Across the World 20 Corporate Governance Framework in USA 20 UK Corporate Governance Code, 2018 22 Corporate Governance Principles and Recommendations, Australia - 2019 24 Code of Corporate Governance, Singapore - 2018 25 King IV Report on Corporate Governance, South Africa – 2016 26 King IV Principles 26 OECD Principles of Corporate Governance 27 The Finnish Corporate Governance Code, 2020 32 The Italian Corporate Governance Code 33 Japan’s Stewardship Code - Principles for Responsible Institutional Investors 34 LESSON ROUND UP 34 GLOSSARY 35 TEST YOURSELF 36 xvii  Lesson 2 Legislative Framework of Corporate Governance in India Introduction 38 Regulatory Framework 39 Regulation 4 of SEBI (LODR) Regulations, 2015 39 Principles Governing Disclosures and Obligations – Regulation 4 39 Corporate Governance in Banks/ Financial Institutions 43 Basel Committee on Corporate Governance 44 Guidelines on Corporate Governance for Nbfcs 48 Corporate Governance Guidelines for Insurance Companies 50 1. General 51 2. Objectives 51 3. Significant Owners, Controlling Shareholders – Role of Board 52 3A. Conflict of Interest – Role of Board 52 4. Governance Structure 53 5. Board of Directors 53 6. Control Functions 56 7. Delegation of Functions- Committees of the Board 56 8. Key Managerial Persons 63 8A. External Audit – Appointment of Statutory Auditors 64 9. Disclosure Requirements 65 10. Outsourcing Arrangements 65 11. Interaction with the Regulator 66 12. Whistle Blower Policy 66 13. Evaluation of Board of Directors Including Independent Directors 67 14. Applicability 67 Stewardship Code for Insurers in India 67 Revised Guidelines on Stewardship Code for Insurers in India 67 Corporate Governance in Central Public Sector Enterprises (CPSEs) 71 Guidelines on Corporate Social Responsibility and Sustainability for CPSEs 77 DPE Guidelines on CSR and Sustainability for CPSEs 78 Guidelines for CSR Expenditure of CPSEs 80 LESSON ROUND UP 81 GLOSSARY 81 TEST YOURSELF 82 xviii  Lesson 3 Board Effectiveness Introduction 84 Role of the Board of Directors 84 Meaning of Board of Directors 85 Types of Directors under Companies Act, 2013 85 1. Executive Director 85 2. Non-Executive Director 86 3. Shadow Director 86 4. Woman Director 86 5. Resident Director 87 6. Independent Director 87 7. Nominee Director 88 8. Small Shareholder Director 88 Composition and Structure of Baord 88 Selection and Appointment of Directors 90 Duties of Directors 92 Powers of the Board 93 Independent Directors for Better Board Effectiveness 94 Meaning of Independent Director under Regulation 16(1)(B) of SEBI (Lodr) Regulations, 2015 100 Liability of Independent Directors 101 Clarification Provided by MCA Vide General Circular No. 1/ 2020 Dated 2nd March, 2020 101 Other Good Practices to Enhance Board Effectiveness 103 Appointment of Lead Independent Director 103 Separation of Role of Chairman and Chief Executive Officer 103 Succession Planning 105 Directors Training, Development and Familarisation 106 Performance Evaluation of the Board and Management 108 Main Provisions under the Companies Act, 2013 with respect to Board Evaluation 109 Broad Evaluation Framework and Parameters 110 Board Effectiveness and the Role of the Company Secretary 113 LESSON ROUND UP 115 GLOSSARY 116 TEST YOURSELF 116 xix  Lesson 4 Board Processes Through Secretarial Standards Introduction 118 SS-1: Meetings of the Board of Directors 118 Board Processes Through Secretarial Standards (SS-1) 119 Meeting Through Video Conferencing 133 LESSON ROUND UP 135 GLOSSARY 136 TEST YOURSELF 136 Lesson 5 Board Committees Introduction 138 Need for Committees 138 Rational Behind Board Committees 139 Committee Management 139 Selection of Committee Members 140 Appointment of Committee Chairman 140 Mandatory Committees of the Board 142 Audit Committee 142 Constitution under Companies Act, 2013 143 Under SEBI (LODR) Regulation, 2015 143 Functions / Role of the Audit Committee 144 Powers of the Audit Committee 147 Number of Meetings and Quorum of the Audit Committee 147 Disclosure in Board’s Report 147 Nomination and Remuneration Committee 148 Constitution of Nomination and Remuneration Committee 148 Composition 148 Functions of the Nomination and Remuneration Committee 149 Stakeholders Relationship Committee 151 Constitution / Composition of the Stakeholders Committee 151 Role of Stakeholders Relationship Committee 151 Corporate Social Responsibility Committee under Companies Act, 2013 152 xx Composition of the CSR Committee 152 Functions of the CSR Committee 153 CSR Expenditure 153 Risk Management Committee (RMC) 156 Vigil Mechanism 156 Other Committees / Non-Mandatory Committees of The Board 158 LESSON ROUND UP 159 GLOSSARY 160 TEST YOURSELF 161 Lesson 6 Corporate Policies and Disclosures Corporate Policies - Meaning and Importance 164 Policies under the Companies Act, 2013 164 Policies/Codes under the SEBI (LODR), Regulations, 2015 166 Policies under other Laws and Voluntary Policies 168 Disclosure and Transparency Requirements 169 1. In terms of Companies Act, 2013 169 2. In terms of Various Rules Made under Companies Act, 2013 172 3. Under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 177 4. Under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 179 5. Under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 180 6. Under SEBI (Prohibition of Insider Trading) Regulations, 2015 194 LESSON ROUND UP 198 GLOSSARY 198 TEST YOURSELF 198 Lesson 7 Accounting and Audit Related Issues, Related Party Transactions (RPTs) and Vigil Mechanism Introduction 200 Strengthening Financial Reporting Standards 200 Improving Auditors’ Effectiveness 205 Auditor’s Independence 205 Mandatory Rotation of Auditors 207 Auditing Standards 208 xxi Internal Audit 208 Secretarial Audit 209 Constitution of National Financial Reporting Authority (NFRA) 210 Related Party Transactions 215 Identification of Related Parties 216 Identification of Related Party Transaction 217 Approval Process 218 Provisions under SEBI (LODR) Regulations, 2015 220 Vigil Mechanism / Whistle Blower-Meaning and Definition 221 Types of Whistle-Blowers 222 Whistle Blowing under Sarbanes-Oxley Act, 2002 (SOX) 222 Vigil Mechanism under Companies Act, 2013 223 Vigil Mechanism under SEBI Listing Obligations and Disclosure Requirements, 2015 223 Annexure A 224 LESSON ROUND UP 226 GLOSSARY 226 TEST YOURSELF 226 Lesson 8 Corporate Governance and Shareholder’s Rights Introduciton 228 Rights of Shareholders under the Companies Act, 2013 229 Rights of Shareholder under SEBI (LODR) Regulations, 2015 234 Promoter / Controlling Shareholder 234 Role and Liabilities of Promoters 236 Majority and Minitory Sharehoders 238 Protection of Rights of Shareholder / Investors in India 238 Investor Education & Protection Fund 239 Investor Associations 240 Protection of Rights of Majority Sharehoders 241 Institutional Investors and their Role in Promoting Good Corporate Governance 245 UK Stewardship Code 247 Principles for Responsible Investment (PRI) 249 Code for Responsible Investing in South Africa (CRISA) 251 California Public Employees’ Retirement System (CalPERS) 254 xxii Dealing with Institutional Investors 256 Role of Proxy Advisory Firms 257 Governance of Group Entities / Subsidiaries 257 Corporate Governance in Family Owned Enterprises 259 Conclusion 261 LESSON ROUND UP 261 GLOSSARY 261 TEST YOURSELF 262 Lesson 9 Corporate Governance and Other Stakeholders Introduction 264 Definition and Evolution of Stakeholder Theory 264 Recognition of Stakeholder Concept in Law: Under the UK Companies Act, 2006 266 Under the UK Corporate Governance Code, 2018 268 Under the UAE Corporate Governance Rules, 2016 270 Under the South Africa, King IV Report on Corporate Governance, 2016 274 Under the Code of Corporate Governance for Listed Companies in China 276 Under the German Corporate Governance Code, 2019 277 Under the Japan’s Corporate Governance Code, 2018 279 Under the Indian Companies Act, 2013 285 Under the Principles Articulated under SEBI (LODR) Regulations, 2015 287 Stakeholder Engagement 287 Stakeholder Analysis 288 Better Stakeholder Engagement Ensures Good Governance 289 Types of Stakeholders 289 The Caux Round Table 289 CRT Stakeholder Management Guidelines 291 The Clarkson Principles of Stakeholder Management 293 Governance Paradigm and Various Stakeholders 293 Conclusion 296 LESSON ROUND UP 296 GLOSSARY 296 TEST YOURSELF 297 xxiii  Lesson 10 Governance and Compliance Risk Introduction 300 Regulatory Framework 301 Compliance 301 Compliance Obligations 301 Need for Compliance 302 Types of Compliances 302 Compliance Risk 303 Elements of Effective Compliance Program 304 Regulatory Technology (Regtech) 304 Consequences/ Risks of Non-Compliance 306 Compliance Risk Management 312 Steps in Compliance Risk Management 313 Compliance Risk Mitigation 314 Essentials of A Successful Compliance-Risk Management Program 316 New Developments- Governance, Risk Management and Compliance (GRC) 317 Conclusion 319 LESSON ROUND UP 320 GLOSSARY 320 TEST YOURSELF 320 Lesson 11 Corporate Governance Forums Introduction 322 Regulatory Framework: A. Institute of Company Secretaries of India (ICSI) 322 ICSI’s Philosophy on Corporate Governance 322 ICSI Initiatives 322 B. National Foundation for Corporate Governance (NFCG) 324 C. Organization for Economic Co-Operation and Development (OECD) 325 D. the Institute of Directors (IOD), UK 327 E. International Corporate Governance Network (ICGN) 327 xxiv F. European Corporate Governance Institute (ECGI) 329 G. Conference Board 330 H. Asian Corporate Governance Association (ACGA) 330 I. Corporate Secretaries International Association Limited (CSIA) 331 J. International Integrated Reporting Council (IIRC) 331 CG Forums at a Glance 332 Conclusion 333 LESSON ROUND UP 333 GLOSSARY 333 TEST YOURSELF 333 Lesson 12 Risk Management Risk 336 Classification of Risks 336 Types of Risks on the basis of Impact on Finance 336 Risk Management 340 Advantages of Risk Management 341 Steps in Risk Management Process 341 I. Risk Identification 341 II. Risk Analysis 342 II. Risk Assessment 344 IV. Handling of Risk 346 Risk Mitigation Strategy 346 Maintaining the Risk Strategy 348 Fraud Risk Management 348 Reporting of Fraud under Companies Act, 2013 349 Reputation Risk Management 349 Responsibility of Risk Management 350 Risk Governance 351 Risk Management Frameworks and Standards 352 1. Enterprise Risk Management – Integrated Framework (2004) 352 Case Study 354 xxv 2. ISO 31000: International Standard for Risk Management 356 Strategic Risk Management 358 Risk Management and Internal Controls 359 Risk Matrix 360 LESSON ROUND UP 361 GLOSSARY 362 TEST YOURSELF 362 Lesson 13 Internal Control Introduction 364 Objectives of Internal Control 364 Nature of Internal Control 365 Classification of Internal Control 365 Elements of Internal Control 366 Components of Internal Control 367 Limitations of Internal Control 370 Considerations Specific to Smaller Entities 371 Division of Internal Control Into Components 371 Techniques of Internal Control System 373 Internal Check 373 Internal Audit 375 Steps for Internal Control 377 COSO’s Internal Control Framework 377 Difference Between Internal Control, Internal Check and Internal Audit 379 Components of Internal Control As Defined by COSO 380 Control Testing and Evaluation 381 Efficiency of Internal Controls and Its Review 381 Limitation of Internal Control 381 Role and Responsibilities with Regard to Internal Control 382 Conclusion 385 LESSON ROUND UP 385 GLOSSARY 386 TEST YOURSELF 386 xxvi  Lesson 14 Reporting Introduction 388 Financial Reporting 388 Objectives of Financial Reporting 388 Importance of Financial Reporting 389 Limitations of Financial Reporting 389 Non-Financial Reporting 390 Board’s Report 390 Corporate Social Responsibility Report 391 Corporate Sustainability Reporting 395 Global Reporting Initiative - Sustainability Reporting Framework 397 Sustainability Reporting Framework in India 399 Challenges in Mainstreaming Sustainability Reporting 400 Towards Integrated Reporting 400 Key Stakeholders of Integrated Reporting 401 Integrated Reporting and Governance 402 International Integrated Reporting Council (IIRC) 402 Benefits of Integrated Reporting 405 Integrated Reporting by Listed Entities in India 405 Relation Between Integrated Reporting and Sustainability Reporting 407 LESSON ROUND UP 409 GLOSSARY 409 TEST YOURSELF 409 Lesson 15 Ethics and Business Introduction 412 What Is Ethics 412 Business Ethics 412 Context and Relevance of Business Ethics in Today’s Business 412 Five Bottom Lines of the Future 414 Importance of Business Ethics 415 Organisation Structure and Ethics 415 Four Fundamental Ethical Principles 416 Ethical Dilemma 417 xxvii Addressing Ethical Dilemmas 417 Case Studies on Ethical Dilemma 418 Steps to Resolving An Ethical Dilemma 421 Code of Ethics 423 Indian Ethos 424 Code of Conduct 425 Advantages of Business Ethics 426 Conclusion 427 LESSON ROUND UP 428 GLOSSARY 428 TEST YOURSELF 428 Lesson 16 CSR and Sustainability Introduction 430 Corporate Social Responsibility (CSR) 431 Why CSR At All? 432 Factors Influencing CSR 433 Triple Bottom Line Approach of CSR 434 Corporate Citizenship – Beyond the Mandate of Law 436 Case Study: Tata Steel – A Company That Also Makes Steel 437 Global Principles and Guidelines 439 Corporate Sustainability 440 United Nations Global Compact’s Ten Principles, 2000 441 CSR and Sustainability in India 445 Corporate Social Responsibility Voluntary Guidelines, 2009 447 National Guidelines on Responsible Business Conduct (NGRBC) 2019 447 CSR under the Companies Act, 2013 451 The Companies (Corporate Social Responsibility Policy) Rules, 2014 452 SEBI (LODR) Regulations, 2015 457 Sustainable Development 458 1. United Nations Conference on Human Environment 460 2. United Nations Environment Programme 460 3. Brundtland Commission 461 4. United Nations Conference on Environment and Development (UNCED) 461 5. Kyoto Protocol 462 xxviii 6. Bali Roadmap 463 7. United Nations Conference on Sustainable Development, Rio+20 464 8. Paris Agreement on Climate Change, 2015 465 The 2030 Agenda for Sustainable Development 465 Sustainability Indices 467 Measuring Business Sustainability 468 Altman Z-Score 469 Risk-Adjusted Return on Capital - RAROC 469 Economic Value Added (EVA) 470 Market Value Added (MVA) 471 Sustainable Value Added (SVA) 472 Environmental, Social and Governance (ESG) 473 Focus on ESG Issues- the Global Trend 474 LESSON ROUND UP 476 GLOSSARY 476 TEST YOURSELF 477 Lesson 17 Anti-Corruption and Anti-Bribery Laws in India Introduction 480 Forceful and Regulatory Ethics 480 Bribery and Corruption - Global Scenarios 480 Brief Information on the Laws and Enforcement Regime in India 481 (A) Delhi Special Police Establishment Act, 1946 481 (B) Unlawful Activities (Prevention) Act, 1967 483 (C) Foreign Corrupt Practices Act, 1977 (The FCPA) 494 (D) Prevention of Corruption Act, 1988 (The PCA) 495 Offence Relating to Public Servant being Bribed [Section 7] 496 Offence Relating to Bribing of A Public Servant [Section 8] 497 Offence Relating to Bribing A Public Servant by A Commercial Organisation [Section 9] 498 Person in Charge of Commercial Organization to Be Guilty of Offence [Section 10] 498 Punishment for Abetment of Offences [ Section 12] 499 Criminal Misconduct by A Public Servant [Section 13] 499 Punishment for Habitual Offender [Section 14] 499 Punishment for Attempt [Section 15] 499 xxix Matters to Be Taken Into Consideration for Fixing Fine [Section 16] 499 Chapter IV Investigation into cases under the Act 500 Persons Authorised to Investigate [Section 17] 500 Power to Inspect Bankers’ Books [Section 18] 500 Chapter IVA Attachment and Forfeiture of Property 501 Chapter V Sanction for Prosecution and Other Miscellaneous Provisions 501 Previous Sanction Necessary for Prosecution [Section 19] 501 Presumption Where Public Servant Accepts Any Undue Advantage [Section 20] 502 Accused Person to be a Competent Witness [Section 21] 502 The Code of Criminal Procedure, 1973 to Apply Subject to Certain Modifications [Section 22] 503 Particulars in a Charge in Relation to an Offence under Section 13(1)(A) – [Section 23] 503 Military, Naval and Air Force or other law not to be Affected [Section 25] 503 Appeal and Revision [Section 27] 504 Act to be in Addition to Any Other Law [Section 28] 504 Amendment of the Ordinance 38 of 1944 [Section 29] 504 (E) Central Vigilance Commission Act, 2003 504 The Central Vigilance Commission - Chapter II 505 Functions and Powers of the Central Vigilance Commission (Chapter III) 507 Expenses and Annual Report (Chapter IV) 510 Miscellaneous (Chapter V) 510 (F) Lokpal and Lokayukta Act, 2013 (LLA) 514 Powers of Lokpal (Chapter VIII) 521 Complaints Against Chairperson, Members and Officials of Lokpal (Chapter X) 524 Assessment of Loss and Recovery Thereof by Special Court ( Chapter XI) 525 Offences and Penalties (Chapter XIV) 525 Chapter xv Miscellaneous 526 Establishment of the Lokayukta (Part III) 528 (G) Fugitive Economic Offender Act, 2018 529 (H) ICSI Anti Bribery Code 531 LESSON ROUND UP 533 GLOSSARY 533 TEST YOURSELF 534 TEST PAPER 535 xxx  Conceptual Framework of Lesson 1 Corporate Governance Key Concepts One Learning Objectives Should Know To understand the: Corporate Concept of Corporate Governance, Performance Developments across jurisdictions Theories of Corporate Historic origin of Corporate Governance Governance Need and importance of corporate governance Triple Bottom line Evolution of Corporate Governance across countries including India Board Independence Corporate governance framework and its evolution in the Indian Ethos Management vs Ownership Corporate Governance Code Accountability Investor trust Lesson Outline Meaning and Definitions of Corporate Governance Advantages of Corporate Governance Need for Corporate Governance Elements/Scope of Corporate Governance Evolution of Corporate Governance – Theories of Corporate Governance – Concept of Management vs. Ownership – Concept of Majority vs. Minority Roots of Corporate Governance in Indian Ethos Corporate Governance in India- Contemporary Developments History of development of Corporate Governance – Stages of Development of corporate governance in USA – Development of corporate governance in UK Corporate Governance Codes in Major Jurisdictions of the world OECD Principles of Corporate Governance LESSON ROUND UP GLOSSARY TEST YOURSELF 2 Lesson 1 PP-GRMCE MEANING AND DEFINITIONS OF CORPORATE GOVERNANCE The phrase “corporate governance” describes “the framework of rules, relationships, systems and processes within and by which “Corporate Governance is the application of authority is exercised and controlled within corporations. It best management practices, compliance of encompasses the mechanisms by which companies, and those in law in true letter and spirit and adherence to control, are held to account.” ethical standards for effective management and distribution of wealth and discharge Corporate governance is the broad term used to describe the of social responsibility for sustainable processes, customs, policies, laws and institutions that direct the development of all stakeholders.” organizations and corporations in the way they act or administer and control their operations. It works to achieve the goal of the The Institute of Company Secretaries of organization and manages the relationship with the stakeholders India including the board of directors and the shareholders. Corporate governance means to steer an organization in the desired direction by determining ways to take effective strategic decisions. It also deals with the accountability of the individuals through a mechanism which reduces the principal-agent problem in the organization. Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages “Corporate Governance is concerned with a trustworthy, moral, as well as ethical environment. In other the way corporate entities are governed, words, the heart of corporate governance is transparency, as distinct from the way business within disclosure, accountability and integrity. It is to be borne in mind those companies are managed. Corporate that mere legislation does not ensure good governance. Good governance addresses the issues facing governance flows from ethical business practices even when Board of Directors, such as the interaction there is no legislation. with top management and relationships with the owners and others interested in Good corporate governance promotes investor confidence, which the affairs of the company” RobertIan is crucial to the ability of entities listed on stock exchanges to (Bob) Tricker (who introduced the words compete for capital. Good corporate governance is essential corporate governance for the first time in his to develop additional values to the stakeholders as it ensures book in 1984) transparency which ensures strong and balanced economic development. This also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights. Corporate Governance is managing, monitoring and overseeing various corporate systems in such a manner that corporate reliability, reputation are not put at stake. Corporate Governance pillars on transparency and fairness in action satisfying accountability and responsibility towards the stakeholders.  Lesson 1 Conceptual Framework of Corporate Governance 3 The long term performance of a corporate is judged by a wide constituency of stakeholders. Various stakeholders affected by the governance practices of the company include: Advantages of Corporate Governance 1. Good corporate governance ensures corporate success and economic growth. 2. Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively. 3. There is a positive impact on the share price. 4. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. 5. Good corporate governance also minimizes wastages, corruption, risks and mismanagement. 6. It helps in brand formation and development. 7. It ensures organization is managed in a manner that fits the best interests of all. 8. It reduces cost and aids in long term sustenance and growth of the Company. NEED FOR CORPORATE GOVERNANCE Corporate Governance is integral to the existence of the company. Corporate Governance is needed to create a corporate culture of transparency, accountability and disclosure. 4 Lesson 1 PP-GRMCE (a) Corporate Performance Improved governance structures and processes ensure quality decision-making, encourage effective succession planning for senior management and enhance the long-term prosperity of companies, independent of the type of company and its sources of finance. This can be linked with improved corporate performance- either in terms of share price or profitability. (b) Enhanced Investor Trust As individuals and institutions invest capital directly or through intermediary funds, they look to see if well- governed corporate boards are there to protect their interests. Investors who are provided with high levels of disclosure and transparency such as relating to data on matters such as pay governance, pay components, performance goals, and the rationale for pay decisions etc. are likely to invest openly in those companies. On Apple’s investor relations site, for example, the firm outlines its leadership and governance, including its executive team, its board of directors and also the firm’s committee charters and governance documents, such as bylaws, stock ownership guidelines etc. (c) Better Access to Global Market Good corporate governance systems attract investment from global investors, which subsequently leads to greater efficiencies in the financial sector. The relation between corporate governance practices and the increasing international character of investment is very important. International flows of capital enable companies to access financing from a much larger pool of investors. In order to reap the full benefits of the global capital market and attract long-term capital, corporate governance arrangements must be credible, well understood across borders and should adhere to internationally accepted principles. On the other hand, even if corporations do not rely primarily on foreign sources of capital, adherence to good corporate governance practices helps improve the confidence of domestic investors, reduces the cost of capital, enables good functioning of financial markets and ultimately leads to more stable sources of finance. (d) Combating Corruption Companies that are transparent, and have sound system that provide full disclosure of accounting and auditing procedures, allow transparency in all business transactions, provide environment where corruption would certainly fade out. Corporate Governance enables a corporation to compete more efficiently and prevent fraud and malpractices within the organization. (e) Easy Finance from Institutions Several structural changes like increased role of financial intermediaries and institutional investors, size of the enterprises, investment choices available to investors, increased competition, and increased risk exposure have made monitoring the use of capital more complex thereby increasing the need of Good Corporate Governance. Evidences indicate that well-governed companies receive higher market valuations. The credit worthiness of a company can be trusted on the basis of corporate governance practiced in the company. (f) Enhancing Enterprise Valuation Improved management accountability and operational transparency fulfill investors’ expectations and confidence on management and corporations, and in return, increase the value of corporations. (g) Reduced Risk of Corporate Crisis and Scandals Effective Corporate Governance ensures efficient risk mitigation system in place. A transparent and accountable system makes the Board of a company aware of the majority of the mask risks involved in a particular strategy, thereby, placing various control systems in place to facilitate the monitoring of the related issues. (h) Accountability Investor relations are essential part of good corporate governance. Investors directly/ indirectly entrust management of the company to create enhanced value for their investment. The company is hence obliged to make timely disclosures on regular basis to all its shareholders in order to maintain good investor relation. Good Corporate Governance practices create the environment whereby Boards cannot ignore their accountability to these stakeholders. Lesson 1 Conceptual Framework of Corporate Governance 5 ELEMENTS / SCOPE OF GOOD CORPORATE GOVERNANCE Some of the important elements of good corporate governance are discussed as under: 1. Role and powers of Board Board of Directors is the primary interface between the Company and its various stake holders. Directors are elected by shareholders to represent them and are tasked with making important decisions, such as corporate officer appointments, executive compensation and dividend policy. In some instances, board obligations stretch beyond financial optimization, when shareholder resolutions call for certain social or environmental concerns to be prioritized. The Board as a main functionary is primary responsible to ensure value creation for its stakeholders. The absence of clearly designated role and powers of Board weakens accountability mechanism and threatens the achievement of organizational goals. Therefore, the foremost requirement of good governance is the clear identification of powers, roles, responsibilities and accountability of the Board, CEO, and the Chairman of the Board. The role of the Board should be clearly documented in a Board Charter. 2. Legislation Clear and unambiguous legislation and regulations are fundamental to effective corporate governance. Legislation that requires continuing legal interpretation or is difficult to interpret on a day-to-day basis can be subject to deliberate manipulation or inadvertent misinterpretation. 3. Management environment Management environment includes setting-up of clear objectives and appropriate ethical framework, establishing due processes, providing for transparency and clear enunciation of responsibility and accountability, implementing sound business planning, encouraging business risk assessment, having right people and right skill for the jobs, establishing clear boundaries for acceptable behavior, establishing performance evaluation measures and evaluating performance and sufficiently recognizing individual and group contribution within the organisation. 4. Board skills To be able to undertake its functions efficiently and effectively, the Board must possess the necessary blend of qualities, skills, knowledge and experience. Each of the directors should make quality contribution to the organizations policies, operations and management. Illustratively, a Board should have a mix of the following skills, knowledge and experience: – Operational or technical expertise, commitment to establish leadership; – Financial skills; – Legal skills; and – Knowledge of Government and regulatory requirement. 5. Board appointments To ensure that the most competent people are appointed on the Board, the Board positions should be filled only after making an extensive search. A well-defined and open procedure must be in place for re-appointments as well as for appointment of new directors. Appointment mechanism should satisfy all statutory and administrative requirements. High on the priority should be an understanding of skill requirements of the Board particularly at the time of making a choice for appointing a new director. All new directors should be provided with a letter of appointment setting out in detail their duties and responsibilities. Orientation program for new directors should also be provided to apprise them about the company, its internal and external management and the expectations from the directors and the Board. 6 Lesson 1 PP-GRMCE The role of the board of directors was summarized by the King Report (a South African report on corporate governance) as: 6. Board induction and training Directors must have a broad understanding of the area of operation of the company’s business, corporate strategy and challenges being faced by the Board. Attendance at continuing education and professional development programmes is essential to ensure that directors remain abreast of all developments, which are or may impact their corporate governance and other related duties. 7. Board independence Independent Board is essential for sound corporate governance. This goal may be achieved by associating sufficient number of independent directors with the Board. Independence of directors would ensure that there are no actual or perceived conflicts of interest. It also ensures that the Board is effective in supervising and, where necessary, challenging the activities of management. The Board needs to be capable of assessing the performance of managers with an objective perspective. Accordingly, a portion of the Board members should be independent of both the management team and any commercial dealings with the company. At the same time a proper balance between independent and non-independent directors is also very important. 8. Board meetings Directors must devote sufficient time and give due attention to meet their obligations. Attending Board meetings regularly and preparing thoroughly before entering the Boardroom increases the quality of interaction at Board meetings. Board meetings are the forums for Board decision-making. These meetings enable directors to discharge their responsibilities. The effectiveness of Board meetings is dependent on carefully planned agendas and providing relevant papers and material to directors sufficiently prior to Board meetings. 9. Code of conduct It is essential that the organization’s explicitly prescribed norms of ethical practices and code of conduct are communicated to all concerned and are clearly understood and followed by each member of the organization. Systems should be in place to periodically measure, evaluate and if possible recognize the adherence to code of conduct. 10. Strategy setting The objectives of the company must be clearly documented in a long-term corporate strategy including an annual business plan together with achievable and measurable performance targets and milestones. 11. Business and community obligations Though basic activity of a business entity is inherently commercial yet it must also take care of community’s obligations. Commercial objectives and community service obligations should be clearly documented after approval by the Board. The stakeholders must be informed about the proposed and ongoing initiatives taken to meet the community obligations. Corporate Social Responsibility is rapidly becoming an integral part of the management’s role and responsibility. Lesson 1 Conceptual Framework of Corporate Governance 7 12. Financial and operational reporting The Board requires comprehensive, regular, reliable, timely, correct and relevant information in a form and of a quality that is appropriate to discharge its function of monitoring corporate performance. For this purpose, clearly defined performance measures - financial and non-financial should be prescribed which would add to the efficiency and effectiveness of the organization. The reports and information provided by the management must be comprehensive but not so extensive and detailed as to hamper comprehension of the key issues. The reports should be available to Board members well in advance to allow informed decision-making. Reporting should include status report about the state of implementation to facilitate the monitoring of the progress of all significant Board approved initiatives. 13. Monitoring the Board performance The Board must monitor and evaluate its combined performance and also that of individual directors at periodic intervals, using key performance indicators besides peer review. The Board should establish an appropriate mechanism for reporting the results of Board’s performance evaluation. Companies Act, 2013 mandates Board evaluation of specified classes of Companies. 14. Audit Committee The Audit Committee is inter alia responsible for liaison with the management; internal and statutory auditors, reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting to the Board on the key issues. The quality of Audit Committee significantly contributes to the governance of the company. 15. Risk management “Corporate governance deals with laws,