30_Corporate governance- an idea whose time has come_Nisha Prabhu

8/7/2019 30_Corporate governance- an idea whose time has come_Nisha Prabhu

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CERTIFICATE

I, Nadirshaw. A. Dhondy , Advocate Supreme Court have examined the Thesis of

Miss. Nisha D. Prabhu who has been enrolled at Alkesh Dinesh Mody Institute of

Financial and Management Studies for the Academic Year 2009-11.

Her Unique Identification Number is 30

Her thesis entitled ³Corporate Governance- an idea whose time has

come´ has been completed for the part assessment of the final exam.

Her is evaluated to receive _____ marks out of 40.

(Signature of the Candidate) Signature

Miss.Nisha D. PrabhuNadirshaw K. Dhondy

Advocate Supreme Court



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ACKNOWLEDGEMENT

One of the pleasant aspects of preparing a Thesis is the opportunity to thank to those who have

contributed to make the project completion possible.

I am extremely thankful to Professor Mr. NADIRSHAW K. DHONDY, Advocate Supreme Court,

whose active interest in the project and insights helped me formulate, redefine and implement my

approach to the project.

Last but not certainly the least, I would like to extend my gratitude to the faculty of ALKESH

DINESH INSTITUTE OF MANAGEMENT FOR FINANCIAL AND MANAGEMENT STUDIES,

UNIVERSITY OF MUMBAI, and the Library staff for equipping me with the basics that helped

me throughout the making of this project.

-Miss. Nisha D. Prabhu.



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I NDEX:

Particulars Page Number

Introduction to Corporate Governance 4

Recent Upgradation In Corporate governance

in India

12

Advantages of Corporate Governance 16

Issues of Corporate Governance 18

Indian Model of corporate Governance 24

CASE STUDY: TATA STEEL 27

Bibilography 33

Epilogue 34



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PROLOGUE:

" No one pretends that democracy is perfect or all-wise, indeed it has been said that democracy is

the worst form of government except all those other forms that have been tried from time to

time."

-WINSTON CHURCHILL to the house of `commons'

This is an interesting & thoroughly worthwhile project. Its basic messages are relevant to any

organization & any manager. This project is not encyclopedic (as Corporate Governance itself is

a very large issue), although it is hoped that answers to meet question will be found, or that at

least a pointer may be given as to where the answers are

Corporate Governance brings power; and power corrupts. The antidotes to that power are

transparency, objectivity and accountability. All three requires a stead fort and clear

app\reciation of oneself as seen by others.

Corporate Governance is the term given to the management practices followed by the business

organizations. We believe that good business practices, transparency in corporate financial

reporting and the highest levels of corporate governance must be maintained. These channels in

turn are activated through several structural and institutional factors pertaining to the

corporation. They are as follows:

[1] The ownership structure of the organization.

[2] The financial structure of the corporation.

[3] The structure and functioning of the company boards and the associated internal control

systems.

[4] The legal, political and regulatory environment within which the Corporate functions



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Thus Corporate Governance (CG) is the way the firm ought to be run, managed and controlled.

It is related with supervision and holding the responsibility of those who direct and control the

management.

Prime time Matter:

Introduction:

The concept of corporate governance is poorly defined because it covers various economics

aspects. As a result of this different people have come up with different definitions on corporate

governance. It is hard to point on any one definition as the ultimate definition on corporate

governance. So the best way to define the concept is to provide a list of the definitions given by

some noteworthy people.

Though it may sound, financial scandals the world over highlight the ever-growing importance

of corporate governance. Future scandals will continue to assure a focus on governance issues -

especially transparency and disclosure, control and accountability - and on the most appropriate

form of board structure that may be capable of preventing such scandals occurring in future.

The relationship between corporate governance reforms and recession is cyclical, with waves of

reform and increased regulation occurring during periods of recession, corporate collapse and

reexamination of the viability of regulatory systems (Clarke, 2004). During long periods of

expansion, both companies and shareholders are concerned with the generation of wealth rather

than in ensuring governance mechanisms are working purposefully for the retention of wealth.

This leads to diminishment of active interest in governance.

The recent global financial crisis proves beyond a doubt that we are living in a global age and

has brought to the fore the relevance of a sound corporate governance system as an essential

element of effective risk-management. Though not the only cause, governance failings are

significant where boards fail to understand and manage risk, and tolerate perverse incentives.

The recent crisis highlights the need to develop more effective approaches to corporate

governance and risk management, as well as the importance of social responsibility in the



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financial sector; the role that corporate governance can and should play is in restoring trust

(International Corporate Governance Network, 2008).

To some extent, shareholders may be criticized for not holding companies accountable, and it is

true that shareholders have encouraged companies to ramp up short-term returns through

leverage. However, regulators have often not responded decisively on realizing that markets

were mispric- ing risk, allowing bank boards to operate with too little capital, excessive

leverage, too much liquidity risk and poor mortgage lending practices.

There is an increasing perception that contagion and spill-over effects from the global financial

turmoil could undermine the economic achievements of any country. As a result, there has to be

an increased interaction between corporate governance and the stability and soundness of the

financial system.

Hence, corporate governance practice needs strengthening, in particular by increasing board

competence and responsibility. Board members need to have up-to-date knowledge on financial

issues and risk-management to fulfill their functions and training should it be required when

necessary. Boards should conduct annual evaluations of their performance and report to

shareholders. Risk management frameworks, processes, and implementation practices require

reform in order to redress the shortcomings revealed by the turmoil. It is vital that regulatory

reform augments corporate governance solutions without aggravating existing weaknesses.



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Structure of corporate gover nance:

Various definitions of corporate governance:

1. According to Sir Adrian Cadbury.

The system by which companies are directed and controlled

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´

2. According to Mathiesen (2002)

³Corporate Governance is a field in economics that investigates how to secure/motivate efficient

management of corporations by the use of incentive mechanisms, such as contracts,

organizational designs and legislation. This is often limited to the question of improving



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financial performance, for example, how the corporate owners can secure/motivate that the

corporate managers will deliver a competitive rate of return.´

The definition given by Mathiesen means that corporate governance is a method which tries to

find out the different incentives which would motivate the managers of a corporate to give a

good return to the owners of the corporation.

3. According to the Journal of Finance written by Shleifer and Vishnv (1997),

³Corporate governance deals with the way in which suppliers of finance to corporate assure

themselves of getting a return on their investment´

The definition here means that corporate governance is basically a technique where people who

give money (lenders of the money) promise themselves or comfort themselves about getting a

return on their investment.

4. According to J. Wolfensohn, president of the World Bank, (in 1999)

³Corporate governance is about promoting corporate fairness, transparency and

accountability´

Corporate governance thus refers to the manner in which a company is managed and states the

rules, laws and regulation that affect the management of the firm. It also includes laws relating

to the formation of the firm, establishment of the firm and the structure of the firm. The most

important concern of corporate governance is to ensure that the managers and directors act in

the interest of the firm and for the shareholders.



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Why corporate gover nance?

a) The liberalization and de-regulation world over gave greater freedom in management. This

would imply greater responsibilities.

b) The players in the field are many. Competition brings in its wake weakness in standards of

reporting and accountability.

c) Market conditions are increasingly becoming complex in the light of global developments like

WTO, removal of barriers/reduction in duties.

d) The failure of corporates due to lack of transparency and disclosures and instances of

falsification of accounts/embezzlement and the effect of such undesirable practices in other

companies.

It is the increasing role of foreign institutional investors in emerging economies that has made

the concept of corporate governance a relevant issue today. In fact, the expression was hardly in

the public domain. In the increasingly close interaction of the economies of different countries

lies the process of globalisation. This involves the rapid migration of four elements across

national borders. These are

Physical capital in terms of plant and machinery;

Financial capital;

Technology; and

Labour

The increasing concern of the foreign investors is that the enterprise in which they invest should

not only be effectively managed but should also observe the principles of corporate governance.

In other words, the enterprises will not do anything illegal or unethical. This need for re-

assurance is felt by the FIIs due to the fact that there have been cases of dramatic collapse of

enterprises which were apparently doing well but which were not observing the principles of

corporate governance.



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In India corruption is an all-embracing phenomenon. In this, if the respective players in the field

were to adopt healthy principles of good corporate governance and avoid corruption in their

transactions, India could really take a step forward to becoming a less corrupt country and

improving its rank in the Corruption Perception Index listed by the Transparency International.



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Essential Governance Principles:

A company should:

1. Lay solid foundations for management and oversight, recognise and publish the respective

roles and responsibilities of board and management.

2. Structure the board to add value - Have a board of an effective composition, size and

commitment to adequately discharge its responsibilities and duties.

3. Promote ethical and responsible decision-making

- Actively promote ethical and responsible decision-making.

4. Safeguard integrity in financial reporting

- Have a structure to independently verify and safeguard the integrity of the company¶s financial

reporting.

5. Make timely and balanced disclosure

- Promote timely and balanced disclosure of all material matters concerning the company.

6. Respect the rights of shareholders

- Respect the rights of shareholders and facilitate the effective exercise of those rights.

7. Recognise and manage risk

- Establish a sound system of risk oversight and management and internal control.

8. Encourage enhanced performance

9. Remunerate fairly and responsibly

10. Recognise the legitimate interests of stakeholders

11. Corporate Governance Rating be made mandatory for listed companies.



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R ecent upgradation of Corporate governance in India:

The concept of corporate governance has attracted public attention for quite some time in India.

In 1996, the Confederation of Indian Industry (CII) initiated the first institutional evaluation of

corporate governance in Indian industry. The objective was to develop a code for corporate

governance to be adopted and followed by Indian firms, financial institutions and public

organizations. The 1999 Kumar Mangalam Birla Committee on Corporate Governance made

recommendations that define the responsibilities and obligations of boards and management in

instituting systems for good governance and emphasizes the rights of shareholders. The 2000

Task Force on Corporate Excellence through Governance recommended the phased

implementation of essential measures, depending upon the size and the capabilities of the

companies and market requirements. The Advisory Group on Corporate Governance: Standing

Committee on International Financial Standards and Codes 2001, laid emphasis on audit

committees and the appointment of truly independent directors to raise the quality of board

deliberations and performance.

In 2002, the Reserve Bank set up the Consultative Group of Directors of banks and financial

institutions to review the supervisory role of boards of banks and financial institutions, and to

obtain feedback on the functioning of boards with respect to compliance, transparency,

disclosures, and audit committees. They also made recommendations for making the role of the

Board of Directors more effective with a view to minimizing risks and overexposure. The Naresh

Chandra Committee on Corporate Audit and Governance Committee in 2002 recommended

changes in areas such as the statutory auditor-company relationship, the procedure for

appointment of auditors and determination of audit fees, independence of auditing functions and

measures required to ensure that the management and companies actually present a 'true and

fair' statement of the financial affairs of the company. The SEBI Committee on Corporate

Governance in 2003 discussed issues related to audit committees, audit reports, independent

directors, related parties, risk management, directorships and director compensation, codes of

conduct and financial disclosures. Finally, the Naresh Chandra Committee II on Regulation of

Private Companies and Partnerships was constituted to suggest a scientific and rational

regulatory environment, the hallmark of which is quality rather than quantity, of regulation with

particular reference to the Companies Act 1956 and the Indian Partnership Act 1932.



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The Department of Company Affairs, in May 2000, invited a group of leading industrialists,

professionals and academics to study and recommend measures to enhance corporate excellence

in India. The Study Group in turn set up a Task Force, which examined the subject of Corporate

Excellence through sound corporate governance and submitted its report in Nov. 2000. The task

force in its recommendations identified two classifications namely essential and desirable with

the former to be introduced immediately by legislation and the latter to be left to the discretion of

companies and their shareholders. Some of the recommendations of the task force include:

* Greater role and influence for nonexecutive independent directors

* Stringent punishment for executive directors for failing to comply with listing and other

requirements

* Limitation on the nature and number of directorship of managing and whole-time directors

* Proper disclosure to the shareholders and investing community

* Interested shareholders to abstain from voting on specified matters

* More meaningful and transparent accounting and reporting

* Tougher listing and compliance regimen through a centralized national listing authority

* Highest and toughest standards of Corporate Governance for listed companies

* A code of public behaviour for public sector units

* Setting up of a centre for Corporate Excellence

Recently, the Government has announced the proposal for setting up the Centre for Corporate

Excellence under the aegis of the Department of Company Affairs as an independent and

autonomous body as recommended by the study group. The centre would undertake research on

Corporate Governance; provide a scheme by which companies could rate themselves in terms of

their corporate governance performance; promote corporate governance through certifying

companies who practice acceptable standards of corporate governance and by instituting annual

award for outstanding performance in this area. Government¶s initiative in promoting

corporate excellence in the country by setting up such a center is indeed a very important step in



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the right direction. It is likely to spread greater awareness among the corporate sector

regarding matters relating to good corporate governance motivating them to seek accreditation

from this body. Cumulative effect of the companies achieving levels of corporate excellence

would undoubtedly be visible in the form of much enhanced competitive strength of our country

in the global market for goods and services.

A large number of public sector companies both in the banking industry and financial sector

have on their Boards representative of the Government / Reserve Bank of India. It is for debate

whether functionaries of the Government should sit on their boards. While there is no easy or

straightforward answer to this question, at some distant future it is hoped, all the Directors

would be truly independent. The subject is no doubt complex and can be looked upon from

various angles. Frauds in the banking system are also increasing but computer Management

Information Systems should be able to detect them early and the Board must have the will to deal

with such mischief-makers in an exemplary manner. Zero tolerance should be the goal for

frauds in the banking system. It is the leader at the helm of affairs who makes a difference. A

close coordination exists through High Level Co-ordination Committee (HLCC) between RBI,

SEBI, IRDA and the Secretary Finance, Government of India who has a formal structure for

reviewing the affairs which impact the whole financial system. Although the US and UK models

are different, this model has served us well and we seem to be comfortable to continue with the

same for some more time to come.

There is an entire subject called ³whistle blowing´ and there is enormous literature on this

subject ± when to blow the whistle, who should blow the whistle and where the whistle should be

heard. These are the questions for which one needs to find the answers between spate of

anonymous letters to which any one working in public sector is used to and honest officials are

harassed sometimes on one side and the damaging investigative audit reports and doctored

balance sheets on the other side. Somewhere in between lies the governance and ethics; and

standards expected to be set up by the virtuous men appointed for heading these institutions. In

such organizations the shareholders and the other stakeholders derive full value. It is myopic,

bordering on foolishness, to look for astronomical return by the shareholders, who would allow

the boards to indulge in unethical practices like market rigging, insider trading, speculation and

host of other irregular practices for the sole purpose of making huge profits. One cannot argue



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that the shareholder¶s value is enhanced by higher profits and dividends are distributed by the

board acting merely as an agent of the shareholder who becomes the principal. Here lies the

test of governance of the board of directors walking the well-defined, honest and straight path in

conducting the affairs in the required atmosphere of transparency seen and perceived by all the

stakeholders, the markets and the regulators. Then only one can confidently state that corporate

governance has taken firm roots in this country.



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Advantages of Corporate Governance

Corporate Governance µis only a small part of Governanceµ. In 2001, Indian listed companies on

our stock exchanges embraced the culture, practice and accountability of ÄCorporate

Governance, which covers about, 7% of India¶s GDP and 100% of our market capitalization.

Good Governance of India should be an A1 priority, as it affects all the 1090 million people and

100% of Indiaµs GDP! It covers all activities of the Nation, that is, the public sector, private

sector, unorganized sector and even NGOs. And its members have mailed and distributed about

6,00,000 booklets, about the advantages of good governance, and loss to the citizens and the

nation, in the absence of good governance and effective administration. We have received

positive responses from Indian citizens in politics, government, business, management, teaching

and the youth of India. We are therefore very positive about INDIA.

Corporate Governance ± Benefits:

With corporate responsibility and the need for governance high in the public and medias eye

there has been much discussion regarding how the management of the corporate resource and

skills pool needs to reflect, accurately, contemporary business needs and to deliver the services

required supporting line of business activities including key projects. With this in mind business

need to credibly provide evidence that their management of resources, business capability,

programs and projects is inline with regulatory and corporate governance requirements.

A good corporate governance framework has the potential for these benefits:

y Enhancing overall company performance.

y Preparing a small enterprise for growth, and so helping to secure new business

opportunities when they arise.

y Increasing attractiveness to investors and lenders, which enables faster growth.

y Increasing the company's ability to identify and mitigate risks, manage crises and

respond to changing market trends.



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y Increasing market confidence as a whole. All companies suffer from corporate scandals,

which scare potential investors away from the market.



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Issues i n Corporate Gover nance

Corporate Governance has been defined in different ways by different writers and

organizations. Some define it in a narrow perspective to include on it only the shareholders,

while others want it to address the concerns of all stake holders. Some talk about corporate

governance being an important instrument for a country to achieve sustainable economic

development, while some others consider it as corporate strategy to achieve ling tenure and a

healthy image. Thus, corporate governance has different meaning to different people. But to all

corporate governance is a means to an end, the end being long term shareholder, and more

importantly stakeholder value. They identify some governance issues being crucial and critical

to achieve these objectives. These are:

1. Distinguishing the roles of board and management:

Constitutions of more and more companies stress and underline that the business is to be

managed ³by or under the direction of the board´. In such a practice, the responsibility for

managing the business is delegated by the board to the CEO, who in turn delegates the

responsibility to other senior executives. Thus, the board occupies a key position between the

shareholders (owners) and the company¶s management (day-to-day managers of the companyµs

resources).

2. Composition of the board and related issues:

A board of directors isa ³committee elected by the shareholders of a limited company to be

responsible for the company´. Sometimes, full-time functional directors are appointed, each

being responsible for some particular branch of the firmµs work. The composition of board of

directors refers to the number of directors of different kinds that participate in the work of the

board. Over a period of time there has been a change as to the number and proportion of

different types of directors in the board in recent times in most of the countries.

E.g.: The SEBI appointed Kumar Mangalam Birlaµs Committee Report defined the composition

of Board thus: the BODµs of the company shall have an optimum combination of the

executives and non-executives directors with not less than 50% of the BODµs to be non-executive

directors. In case of executiveµs chairman, at least half of the board should be independent



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directors and in case of non-executive chairman, at least one-third of the board should

compromise independent directors.

3. Separation of the roles of the CEO and chairperson:

The composition of the board is a major issue in corporate governance as the board acts as a

link between the shareholders and the management and it decisions affect the performance of the

company. It is now increasingly being realized that the practice of combining the role of the

chairperson and with that of the CEO as is done in countries like US and India leads to conflicts

in decision-making and too much concentration of power in one person resulting in unsavory

consequences. The role of CEO is to lead the senior management team in managing the

enterprise, while the role of the chairperson is to lead the board.

4. Should the board have committees?

Many committees on corporate governance have recommended in one voice the appointment of

special committees for nomination; remuneration and for auditing. These committees would

lessen the burden of the board and enhance its effectiveness. When these committees are peopled

with independent directors selected for their competence, professional expertise in their chosen

fields and long years of work experience would help the respective committees decide issues

objectively and in a manner that would promote the long term interests of the organization.

5. Appointments the board and directors re-election:

As per the Indian company law, shareholders elect directors to the board. However,

shareholders are a legion in large companies and also scattered and to have them together to

elect the directors will be expensive and time-consuming. Therefore, in actual practice, in most

cases, the board or its specially constituted committees selects and appoints the prospective

director and get the person formally ³elected´ by the shareholders at the ensuring An

General body Meeting. Shareholders in fact only endorse the boardµs nominees and it is only in

rarest of rare cases that shareholders refuse to ratify the boardµs nominees for directorship.



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Ethics and Corporate Governance

Corporate Governance Ethics:

Though the concept of Corporate Governance may sound a novelty in the Indian business

context and may be linked to the era of liberalisation, it should not be ignored that the ancient

Indian texts are the true originators of good business governance as one important sloka from

the Rugveda says: " A businessman should benefit from business like a honey-bee which suckles

honey from the flower without affecting its charm and beauty."

As a public company, it is of critical importance that companies' information reporting with the

regulators be accurate and timely. The chief executive officer and the senior leadership of the

finance department bear a special responsibility for prompting integrity throughout the

organization, with responsibilities to stakeholders both inside and outside of companies.

1. Act with honesty and integrity, avoiding actual or apparent conflict of interest in personal and

professional relationships.

2. Provide information thatis accurate, complete, objective, relevant, timely and understandable

to ensure full, fair, accurate, timely, understandable disclosure in reports and documents that

companies file with, or submit to, the regulators.

3. Comply with applicable laws, rules and regulations of federal, state, and local governments,

and other appropriate public and private regulatory agencies in all material respects.

4. Act in good faith, responsibility, with due care, competence and diligence, without

misrepresenting material facts or allowing one's independent judgment to be subordinated.

5. Respect the confidentiality of information acquired in the place of one's work except when

authorized or otherwise legally obligated to disclose. Confidential information required in the

course of oneµs work will not be used for personal advantage.

6. Share knowledge and maintain skills importantand relevant to stakeholders' needs.

Proactively promote and be an example of ethical behaviour as a responsible partner among

peers, in the work environment and the community.



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Benefits from Managing Ethics in Workplace:

(a) Attention to business ethics has substantially improved society:

Establishment of anti-trust laws, unions, and other regulatory bodies has contributed to the

development of the society. There was a time when discriminations and exploitation of employees

were high, the fight for equality and fairness at workplace ended up in establishing certain laws

which benefited the society.

(b) Ethical practice has contributed towards high productivity and strong team works:

Organizations being a collection of individuals, the values reflected will be different from that of

the organization. Constant check and dialogue will ensure that the employee matches to the

values of the organization which will in turn result in better co-operation and increased

productivity.

(c) Changing situations require ethical education:

During turbulent times, where chaos becomes the order of the day, one must have clear ethical

guidelines to take right decisions. Ethical training will be of great help in those situations.

(d) Ethical practices create strong public image:

Organizations with strong ethical practices will possess a strong image among the public. This

image would lead to strong and continued loyalty. Conscious implementation of ethics in

organizations becomes the cornerstone for the success and image of the organization. It is

because of this ethical perception that the employees of TISCO and the general public protested

in 1977 when the then Minister for Industries in the Janata Government, attempted to nationalise

the company.

(e) Strong ethical practices act as insurance & strong ethical practices of the organization are

an added advantage for the future function of the business. In the long run, it would benefit if the

organization is equipped to withstand the competition.



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H ow Ethics Can Make Corporate Governance more Meaningful?

(a) Corporate governance is meant to run companies ethically in a manner such that all

stakeholders, creditors, distributors, customers, employees, the society at large and governments

are dealt in a fair manner.

(b) Good corporate governance should look at all stakeholders and not just shareholders alone.

Otherwise, a chemical company, for example, can maximize the profit of shareholders, but

completely violate all environment laws and make it impossible for the people around the area to

lead a normal life. Ship-breaking in Valinokkam, near Arantangi in Tamil Nadu, leather

tanneries in South, Arco and hosiery units in Tirupur, have brought about too much of

environmental degradation that has unleashed untold miseries to people in and around their

locations.

(c) Corporate governance is not something which regulators have impose on a management, it

should come from within. There is no point in making statutory provisions for enforcing ethical

conduct.

(d) There is a lot of provisions in the Companies Act, for example, (i) disclosing the interest of

directors in contracts in which they are interested; (ii) abstaining from exercising voting rights

in matters they are interested; and (iii) statutory protection to auditors who are supposed to go

into the details of the financial management of the company and report the same to the

shareholders of the company. But most of these may be observed in letter, but not in spirit.

Members of the board and top management should ensure that these are followed both in letter

and spirit.

(e) There are a number of grey areas where the law is silent or where regulatory framework is

weak, which are manipulated by unscrupulous persons like Ketan Parikh and Harshad Mehta. In

the US, for instance, the courts recognise that new forms of fraud may arise, which may not becovered technically under any existing law and cannot be interpreted as violating any of the

existing laws. For example, a clever conman can try to sell a piece of the blue sky. In order to

check such crooks, there is the concept of the " blue sky" law. However, such wide-ranging

processes are not available to courts in developing countries.



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(f) The Securities and Exchange Board of India (SEBI) has jurisdiction only in cases of limited

and listed companies and are concerned only with their protection.

(g) The Serious Fraud Investigation Office (SIFO) in the Department of Company Affairs (DCA)

has been investigating several " Vanishing Companies

" . By 2003, SEBI has identified 229 as

" vanishing companies"² which tapped the capital market, collected more than Rs. 800 crores

from the public and subsequently became untraceable.

However, thousands of investors have lost their hard-earned money and no agency has come to

their rescue so far.



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Indian Model of Corporate Governance

The Indian corporates are governed by the Company¶s Act of 1956 that follows more or less the

UK model. The pattern of private companies is mostly that of closely held or dominated by a

founder, his family and associates. The figure drawn below indicates how the corporate

governance system works in India.

Indian Corporate governance Model:



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Model for corporate governance:

The model measures 6 parameters of corporate governance. Accounting Quality, Value

Creation, Fair Policies and Actions, Communication, Effective Governing Board and

Reliability.For Accounting Quality the fundmanagers look at all or any of the following

variables: company accounting policies, disclosure standards, proactive adoption of accounting

policy improvements, internal audit and control mechanisms for addressing auditorµs queries.

The top companies were ranked accordingly. Similarly, for ³Value Creation Focus´ business

strategy (driven by value creation focus), effective use of cash surplus, capital structure, usage of

IPO funds, shareholder friendliness are among the key variables. For ³Fair policies among

actions´, the fund managers take the cue from fair treatment of minority shareholders,

transparency of trades by top management and ethical behavior with customers, suppliers, tax



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authorities and government. Similar variables were used for ranking companies based on other

parameters.

Board of Directors and Corporate Governance

There is an increasing awareness that corporates owe their existence to shareholders and the

long-term sustainability of companies depends upon winning their confidence through

disclosures and transparency in accountability for their actions to them. This is achieved

through voluntary actions on the part of board of directors and through regulatory framework

such as stock exchanges, securities and exchange board and other regulatory bodies. These

principles are codifies as principles of corporate governance. The following diagram clearly

illustrates how board of directors and top management are placed in the structure of corporates

to interface, interact and intervene, when necessary, to carry on the running of the company

efficiently.

Role of the board in the dynamics of Corporate Governance:



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Case study: TATA Steel

1. Introduction

The Tata Group is a giant family of businesses that dominates Indian markets. There is a long

history of corporate responsibility within the group, and it is no surprise that all Tata companies

have adopted a Tata Code of Conduct as well as many international standards. This case study

concerns initiatives undertaken by Tata Steel, as examples of those implemented by the wider

organization.

It is divided into two broad sections; the first of which discusses corporate responsibility during

the business process (entitled µCorporate Governance¶); the second of which discusses social

investment and philanthropy undertaken with the use of company profits and donations. Because

Tata Steel appears to choose and implement projects of its own design, the last section contains

discussion of the dangers (and benefits) of ³targeting´.

2 . Company Profile

Tata Steel is one of twenty-eight major corporations within the Tata Group. Founded in 1907, it

is the largest private sector steel company in India, with a capacity of 3.5 million tonnes per

annum crude steel production. Operations are spread across the country, with the steel

manufacturing unit at Jamshedpur, and other manufacturing and mining activities situated in the

states of Jharkhand and Orissa at eight locations. Headquarters are based in Mumbai,

Maharashtra.

Tata¶s stock is listed and traded on the Bombay Stock Exchange and the National Stock

Exchange in New Delhi. Exports are primarily to Japan, the USA, and the Middle East and

South East Asian countries. It manufactures products including rods, pipes, tubes and rings.

However it also provides services such as personnel and technical training, IT and Design and

Engineering.







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Tata Steel was the first integrated iron and steel plant in India to have been certified with the

ISO-14001 Environmental Standard, and one of only a few in the world to have this

accreditation in 2000. It operates its own Environmental Management System (EMS), aimed at

increasing efficiency and limiting environmental impact at all stages of steel production.

This system focuses on improved staff education (including contractors), instituting a system of

waste segregation and its eco-friendly disposal, the safe disposal of industrial waste and where

possible, a 100 per cent recycling of hazardous wastes such as tar sludge, oil soaked jute, and

waste acid from batteries.

3.1.2 . Departments

Tata Steel has also established several social departments and societies that work within the

structure of the company. Table 1 lists them and details when they were established.

Programmes implemented under these departments and societies are described in the next

section, Social Investment.

3.2 . Social Investment

This section reviews ³after-profit´ practice, work in and for the community that is not

directlyrelated to the ³business of business.´ Again, Tata Steel has internal procedures that

guide policy, meaning that community initiatives are seldom ad hoc. Below are six of these

initiatives or procedures, three of which are organised by some of the departments listed in

Table 1 above.



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3.2 .1. Tata Council for Community Initiatives (TCCI)

TCCI is a product of the Tata Group¶s commitment to the community. It serves to help the Tata

companies in their business-community relations, by drawing up µTata Guidelines for

Community Development,¶ designing programmes then implementing them. Programmes include

training courses in which Tata companies conduct technical (IT, vocational) training to

members of the community. This is done with the help of company volunteers, often

management staff. A forthcoming project involves forming a Tata Corps of Volunteers, under

which employee volunteering will play an increasingly important role in developing business-

community relations.

3.2 .2 . Tata Social Evaluation, R esponsibility and Accountability (E RA)

ERA is a procedure by which Tata¶s community projects are evaluated for their impact on the

target communities and their level of accountability. Although ERA is not independent of Tata,

such procedures are influential in improving programme delivery and ensuring continuing self-

evaluation and learning.

3.2 .3. Global Business Coalition (GBC)

The Global Business Coalition on HIV/AIDS aims to check the growth of the disease with the

help of over a hundred major international companies. Believing that business holds the

necessary marketing skills, management and infrastructure to be able to raise awareness in rural

communities, the GBC encourages companies to campaign with imagination and consistency.

Tata Steel has done just that, and won an award in June 2003 for ³Best Initiative.´ Initially Tata

focused on educating employees, but now targets over 600 villages in the State of Jharkhand.

This is done through the dissemination of mass media, as well as more inventive schemes, such

as student workshops which employees are trained to deliver, or travelling street plays in local

languages that reach the rural illiterate. Tata paid for six condom-vending machines in the city

of Jamshedpur in public places, which are also proving to be a success. At one of these

locations, a busy coach station, there is also a clinic where passers-by can have free check-ups

and learn more about HIV/AIDS.

3.2 .4. Volunteer Database



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A µDirectory of Employee Volunteers¶ was established by the Tata Group as an efficient way of

matching jobs in the community with employee skills and interests. A corporate committee,

comprised of a senior executive, union and government officials, interacts with the communities

to ascertain their needs. This is done on a quarterly basis with senior citizens of each village,

and biannually with target women¶s groups.

3.2 .5. H ealth Initiatives

Working with government to prioritize projects, Tata Steel¶s involvement in health initiatives

remains largely philanthropic, with the exception of the Global Business Coalition for HIV/AIDS

awareness scheme (see subsection 3 above). Tata Steel has invested in a local hospital which

treats an average of 2,300 people per day. It has also bought specialist cancer-treating

equipment, and part-finances the running of one blood bank, two rehabilitation Centre¶s and five

homeopathic clinics. Donations to the clinics and Centre¶s are regular and on a long-term basis,

which does indicate a move from ad hoc sponsorship to a more strategic social investment. This

is organized by the Family Welfare department.

3.2 .6. Culture and Education Education and Youth Development Programmes have built and maintained infrastructure for

sports across Jharkhand. Over 1,500 young people are currently training at Tata Steel¶s two

sporting academies, six training centers or their Adventure Foundation. Awards are given to

employees who excel in sports. A Tribal Cultural Centre was built in 1993 and a Jubilee

Amusement Park in 2001 to enrich the cultural heritage of the city of Jamshedpur. Tata Steel has

also invested in education, part-financing eleven schools and colleges that teach nearly 10,000

students per year.

3.3. Looking to the future

Along with the TCCI¶s forthcoming project to formalise employee volunteering, Tata Steel also

hopes to align more with global standards and initiatives. In 2001 Tata Steel produced a

Corporate Sustainability Report following guidelines established by the Global Reporting



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Initiative. This is another step forward for the company looking to make its mark on the new

corporate responsibility agenda.

BIBILOG RAP HY

1. Wikipedia: www.wikipedia.com

2. www.mbaknol.com

3. Corporate governance by Vasuda.



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EP I LOGUE:

Tata Steel has provided many examples of how business-community relations are approached by

the private sector in India at the present time. Summaries of Tata initiatives reveal that the

company is working to improve both ³before´ and ³after-profit´ practice.

Corporate governance is being tackled through increased transparency in business operations,

illustrated in the establishment of an Audit Committee. The Tata Code of Conduct also means

that the company holds certain principles, based on value judgments that influence its policies

and procedures. One result of this has been the adoption of various organizational structures

that are responsible for targeting particular issues, such as the Family Welfare and

Environmental Management Department.

Moreover, Tata Steel has seemingly pushed back the boundaries of what is expected from

³corporate social responsibility´ (CSR) in India at this time. Not only has it given donations to

local education, health and sports projects, but it has also demonstrated longer-term

commitment in the establishment of the Tata Council for Community Initiatives (TCCI). Its

participation in the Global Business Coalition to raise awareness of HIV/AIDS has earned

international recognition over a sustained period. This is indicative of a move towards ³social

investment,´ which heralds a more serious commitment to CSR than donations or sponsorship.

Tata Steel¶s dalliance with employee volunteering is, however, of the most interest for this

research project. It seems that the volunteer database enables the company to match volunteers

with community positions easily and quickly. The experience then is more beneficial to everyone.

It would be interesting to learn if employees are given incentives for volunteering, or if they are

rewarded afterwards. This would have implications on the ³real´ motivation behind employees



giving up their time for a local cause. Would this make a difference of the quality of work? Do

volunteers need extra motivation anyway, or is altruism and personal satisfaction enough?

Another issue that arises from Tata¶s employee volunteering scheme is the manner in which

³jobs´ and communities are chosen. On the Tata website, it is claimed that:

Companies are encouraged to design and implement programmes that help improve the health

and hygiene of the various communities that are ³adopted.´ Prioritizing health and hygiene

programmes seems like a good idea, because it targets the community¶s ³basic needs.´ The

doubts appear because the companies are expected to design their own projects. Moreover, the

term ³adopted´ implies that the communities themselves had little choice in the matter.

All of a sudden it seems the company is dictating development programmes. While this might be

a misinterpretation, there are dangers in ³top-down´ approaches, especially when initiated by

the private sector. In the first instance, the private sector might not have the technical knowledge

to identify cause and solution. It is also possible that community projects are implemented in a

manner similar to a business project. This might be by following a blueprint plan, rather than

opting for a more flexible approach. It might lack community participation. Alternatively it might

try to engage in community participation but have an inadequate understanding of power

dimensions within the community that affects the outcome of the project. In short, a business

might not have the technical or sociological knowledge to implement a successful community

project. Moreover, the community does need to have some opportunity to voice their complaints,

for these to be heard and then challenged by way of a community project ± although it is worth

bearing in mind that often those who are able to ³speak out´ are not powerless.

Tata¶s paternal ³adoption´ of communities is therefore worrying, the implication being that the

³targeted´ communities have minimal input into their future relations with the company.

Although Tata Steel¶s initiatives have served communities on many levels, a means of enhancing

business-community relations in the future would require communication between both sectors,when both parties are able to contribute to project selection and planning procedures.

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