CORPORATE GOVERNANCE
A REPORT ON
CODE OF CONDUCT AND ITS IMPACT ON CORPORATE GOVERNANCE
SUBMITTED TO:
Mr. Resham Raj RegmiInstructor
Corporate Governance
SUBMITED BY:
Sandarva PalMBA FALL 2010
TERM VI
July 27, 2012
ACE INSTITUTE OF MANAGEMENT
Table of Contents
1. INTRODUCTION.......................................................................................................1
1.1 Background.............................................................................................................1
1.1.1 The philosophy of the Code..............................................................................1
1.1.2 The evolution of codes of conduct....................................................................2
2. INTERNATIONAL STANDARDS..............................................................................3
2.1 UK CG Code...........................................................................................................3
2.2 Federal Sentencing Guidelines for Organizations (FS GO)....................................3
2.3 Sarbanes-Oxley Act................................................................................................4
2.4 New York Stock Exchange and the NASDAQ........................................................4
2.5 Clause 49 of SEBI Listing Agreement.....................................................................4
3. NEPALESE PRACTICE............................................................................................5
3.1 Banking Sector........................................................................................................5
3.1.1 Nepal Investment Bank Limited (NIBL).............................................................6
3.2 Security Exchange Board of Nepal (SEBON).........................................................7
3.3 Nepal Medical Council............................................................................................7
4. INTERNATIONAL PRACTICES................................................................................8
4.1 The code of conduct on corporate governance (Bangladesh)................................8
4.2 Committee on Corporate Governance Code (Korea)..............................................8
5. STRENGTH/WEAKNESS.......................................................................................10
5.1 Strengths..............................................................................................................10
5.2 Weakness.............................................................................................................10
6. CONCLUSION........................................................................................................12
6.1 Nepalese Context.................................................................................................12
i | P a g e
6.1.1 Impact on Banking Sector...............................................................................12
6.1.2 Impact on Security Market..............................................................................12
6.2 International Context.............................................................................................13
6.2.1 Impact of UK CG Code...................................................................................13
6.2.2 Impact on Countries.......................................................................................13
BIBLIOGRAPHY............................................................................................................15
ii | P a g e
1. INTRODUCTION
1.1 Background
Companies have been writing codes of business conduct for decades, but the role they
play in shaping corporate culture and governance is changing dramatically. The focus is
shifting from writing a comprehensive code of rules to regulate conduct to leveraging a
values-based code that inspires principled performance among employees,
management and executives. This shift is propelled by both internal and external
sources. Investors, customers and other stakeholders increasingly want to do business
with organizations that have high ethical standards and, as a result, top management
and boards of directors are becoming more attuned to the ethical climate. Additionally,
there is increased pressure from regulators that now require organizations to focus on
promoting ethical codes of conduct.
The Code is a guide to a number of key components of effective board practice. It is
based on the underlying principles of all good governance: accountability, transparency,
probity and focus on the sustainable success of an entity over the longer term. The
code of conduct influences core management and executives to discharge their duties
at the highest level honesty and integrity having regard to their position in the
organization. The codes provides authoritative guidance to officers in carrying out their
duties and responsibilities in accordance with legal and regulatory requirements and
observes the rule and spirit of law and comply with ethical and technical requirements of
regulatory body. Financial officers should maintain the principle of transparency in the
preparation and delivery of financial information to both internal and external users
1.1.1 The philosophy of the Code
The code of conduct in general envisages and expects –
Adherence to the highest standards of honest and ethical conduct, including proper and
ethical procedures in dealing with actual or apparent conflicts of interest between
personal and professional relationships. Full, fair, accurate, sensible, timely and
meaningful disclosures in the periodic reports required to be filed by the public and
listed companies with Government and regulatory agencies. Compliance with applicable
1 | P a g e
laws, rules and regulations. To redress misuse or misapplication of the company’s
assets and resources. The highest level of confidentiality and fair dealings within and
outside the organization
1.1.2 The evolution of codes of conduct
Codes of conduct extend back to before World War II. One of the earliest company
codes was Johnson & Johnson’s Credo, published in 1943 after General Robert Wood
Johnson urged his fellow industrialists to embrace corporate responsibility to customers,
employees, the community and stockholders. Worldwide interest in business ethics and
codes of conduct took off in the 1980s. Among the first large corporations to adopt
codes of conduct were General Electric, General Dynamics, Martin Marietta (now
Lockheed Martin) and several other defense contractors who saw business ethics
programs as a way to self-regulate rather than submitting themselves to government
regulation. Many of the early corporate codes of conduct addressed a fairly limited list
of topics: conflicts of interest, use of company property, non-discrimination. Since that
time, the corporate world has evolved in its understanding of the topics that impact a
company’s integrity: customer and supplier relations, relations with consultants, fair
competition practices, substance misuse (including alcohol), community relations, to
name a few.
In Nepal the codes of conduct was first framed by public (government) organizations in
part to bring transparency, accountability and prompt delivery of service to general
public recently even private sectors and its associations has been slowly but steadily
drafting codes of conduct for its top level executives in terms of Performance-related
pay that should be aligned to the long-term interests of the company and its risk policy
and systems. And outline responsibility of the non-executive directors to provide
constructive challenge, and the time commitment is expected of all directors
2 | P a g e
2. INTERNATIONAL STANDARDS
2.1 UK CG CodeThe UK Corporate Governance Code (formerly known as the Combined Code) sets out
standards of good practice for listed companies on board composition and
development, remuneration, shareholder relations, accountability and audit
The code is published by the Financial Reporting Council (FRC) which is regulator for
financial reporting and CG. All companies with a Premium Listing of equity shares in the
UK are required under the Listing Rules to report on how they have applied the
Combined Code in their annual report and accounts. The first version of the UK Code
on Corporate Governance (the Code) was produced in 1992 by the Cadbury
Committee.
The FRC traces the roots of the UK Corporate Governance Code to the Cadbury
Committee Report and its successor reports. The UK Corporate Governance Code
continues to have ‘comply or explain’ approach which was introduced in the Cadbury
Committee Report. This approach is a great strength and has been adopted in many
countries.
The Code has five sections: (1) Section A: Leadership, (2) Section B: Effectiveness, (3)
Section C: Accountability, (4) Section D: Remuneration, and (5) Section E: Relations
with Shareholders.
2.2 Federal Sentencing Guidelines for Organizations (FS GO)
In 1991, the U.S. Sentencing Commission issued the Federal Sentencing Guidelines for
Organizations (FS GO), outlining the elements of an effective ethics and compliance
program. As one component of this, the FS GO recognized that simply having a code
was not enough. In this view, the “3P” approach – in which you “Print a code of conduct,
Post it on the wall and Pray people actually read it” – simply did not form the basis for
an effective program. As a result, the FS GO required code education for employees
and other mechanisms for communicating and reinforcing organizational values
3 | P a g e
2.3 Sarbanes-Oxley Act
In U.S. in 2002, Sarbanes-Oxley Act the further bolstered the importance of codes of
conduct by requiring public companies to have a code of conduct for top executives
(and, if they didn’t have one, to explain why). This Code of Conduct attempts to set forth
the guiding principles on which the public companies such as banks shall operate and
conduct its daily business with its multitudinous stakeholders, government and
regulatory agencies, media, and anyone else with whom it is connected. It recognizes
that the companies should fulfill its fiduciary obligations and responsibilities, it has to
maintain and continue to enjoy the trust and confidence of public at large
2.4 New York Stock Exchange and the NASDAQ
In 2003, both the New York Stock Exchange and the NASDAQ required listed
companies to adopt and disclose a “code of business conduct and ethics” that applies to
all employees and directors. Together with these regulatory developments, having a
code became practically a mandate for public companies.
2.5 Clause 49 of SEBI Listing Agreement
Based on SEBI circular dated Oct, 2004, clause 49 of the listing agreements revised by
stock exchanges, to be implemented on or before 31st march 2004, came to effect from
31st December, 2005, formulated for the improvement of corporate governance in all
listed companies.
Need and objective of Clause 49 Code
Clause 49 of the Listing Agreement entered into with the Stock Exchanges, requires, as
part of Corporate Governance, the listed entities to lay down a Code of Conduct for
Directors on the Board of an entity and its Senior Management, Senior Management
has been defined to include personnel who are members of its Core Management and
functional heads excluding the Board of Directors. Board members/ senior management
to affirm compliance of the code and the annual report should contain such a
declaration signed by chairman.
4 | P a g e
3. NEPALESE PRACTICE
3.1 Banking Sector
Nepal Bankers’ Association has formulated a voluntary Code of conduct, which sets standards of fair banking practices for member banks of Nepal Bankers' Association to follow when they are dealing with individual customers. It provides valuable guidance to banks for its day-to-day operations. The Code applies to:
Current, savings and all other deposit accounts
Collection and remittance services offered by the banks
Loans and overdrafts
Foreign-exchange services
Card products
Third party products offered through our network.
As a voluntary Code, it promotes competition and encourages market forces to achieve
higher operating standards for the benefit of customers. In the Code, 'you' denotes the
customer and 'we' the bank, the customer deals with.
The standards of the Code are covered by the four key commitments:
a.) Act fairly and reasonably in all our dealings with you by:
Meeting the commitments and standards in this Code, for the products and
services we offer, and in the procedures and practices our staff follow
Making sure our products and services meet relevant laws and regulations, and
compliance driven
Our dealings with you will rest on ethical principles of transparency, unless it is
restricted by law or competent authority and integrity.
b.) Help you to understand how our financial products and services work by:
Giving you information about them in Nepali and/or English.
5 | P a g e
Explaining their financial implications and
Helping you choose the one that meets your needs.
c.) Deal quickly and empathetically with things that require:
Correcting mistakes quickly
Handling your complaints quickly
Telling you how to take your complaint forward if you are still not satisfied and
Reversing any bank charges that is debited erroneously
d.) Publicize this Code, put it on our website and have copies available for you on
request.
Unless it says otherwise, all parts of this Code apply to all the products and services
listed above, whether they are provided by branches across the counter, over the
phone, by post, through interactive electronic devices, on the internet or by any other
method. Commitments outlined in this Code are applicable under normal operating
environment. This code came into effect from 27th Bhadra 2063 (September 12, 2006)
unless otherwise indicated.
3.1.1 Nepal Investment Bank Limited (NIBL)
Nepal Investment Bank Limited (NIBL) is firmly committed to the highest standards of
governance. The Board of Directors ensures that the activities of the Bank are always
conducted with the highest standards and in the best interests of its stakeholders. The
Board of Directors continues to ensure that the Bank conducts itself as a model
corporate citizen by specifying corporate values for the Bank and stipulating a code of
Conduct and Ethics for the employees to ensure that the employees maintain their
dignity and integrity and build customer confidence
The bank has adopted good corporate governance practices prescribed by the Nepal
Rastra Bank as well as other relevant statues such as Companies Act 2006 and Bank
6 | P a g e
and Financial Institution Act 2006. We believe that the trust, confidence and goodwill
reposed on the Bank by the stakeholders and clients is, inter alia, an acknowledgment
of good corporate governance practices adopted by the Bank.
3.2 Security Exchange Board of Nepal (SEBON)
A detail legislative code has been adopted by the Government to protect the investors'
interests The Securities Exchange Regulation, 1993, provides for reforms in stock
exchange trading methods and practices. The Regulation has added further functions,
powers and duties of the Securities Board, Nepal (SEBO).
In order to manage sales and promotion of securities and make the sales and issue
manager accountable for their services, SEBO has issued the Securities Issue
Management Guidelines, 1998. This guideline has been made as per the provision of
Section 35 of the Securities Exchange Act, 1983 (Second Amendment). The guideline
further specified various provisions regarding disclosure, application for registration of
securities, agreement between issue managers and issuing companies, execution
procedures of the sales management and code of conduct to be specified etc.
3.3 Nepal Medical Council
The Medical Council has passed a Code of conduct which all doctors who register are
required to sign and then subsequently keep as guidance for behavior in their future
practices. Proposal for further amendments to the Act in view of the increased number
of medical schools and also because of the starting of postgraduate education is in
process. Guidelines regarding the establishment of medical and dental colleges, forms if
internship, have been laid down.
It encompasses the roles, duties and responsibilities of the directors and executives in
the Board of Hospitals and its affiliated colleges. It underlines the quality of service to be
delivered, behavior of doctors and nurses and other medical staffs. The codes guide
medical practitioners and institutions on strengthening the practice of good corporate
governance.
7 | P a g e
4. INTERNATIONAL PRACTICES
4.1 The code of conduct on corporate governance (Bangladesh)
In August 2003, Bangladesh Enterprise Institute (BEI) invited a number of prominent
individuals from the private sector, the government, NGOs and other relevant bodies to
begin the process of formulating a Code of conduct on Corporate Governance for
Bangladesh
Code of Conduct
Principle:
A. Boards should create a Code of Conduct for Directors detailing directors’ roles,
responsibilities, and duties.
Guidelines:
B. Every year, directors should review and agree to abide by this Code of Conduct.
Code of Corporate Governance for Bangladesh
C. The Code of Conduct should be included in the orientation for all new directors.
D. The board should also create Codes of Conduct for Management and Employees,
which should be signed and agreed as a condition of the contract of employment.
E. Codes appropriate to the industry (e.g. consumer rights, passing quality
control/safety standards) should be created.
4.2 Committee on Corporate Governance Code (Korea)
The Committee on Corporate Governance was founded as a non-government body in
March 1999 to develop a code of best practices, a source to guide corporations in
establishing proper corporate governance structure. This Code applies to listed
companies and other public companies. But it is strongly advisable for non-public
enterprises to also follow the Code to the extent applicable.
8 | P a g e
Purpose
The purpose of the Code is to maximize corporate value by enhancing the transparency
and efficiency of corporations for the future
Contents and Structure of the Code
The Committee has tried, at the same time, to take into consideration of the special
managerial circumstances that Korean corporations face, while also trying to include in
the Code the principles and standards that are internationally accepted. Also, the
Committee respects the demands of the present laws and decrees while simultaneously
providing a direction for exemplary corporate governance systems from a forward
looking perspective.
The contents of the Code consist of five sections and recommendations: Preamble,
Shareholders, Board of Directors, Audit Systems, Stakeholders, and Management
Monitoring by the Market. For each section, the code is presented, along with appended
notes to aid understanding.
Application of the Code
This Code applies to listed companies and other public companies. But it is strongly
advisable for non-public enterprises to also follow the Code to the extent applicable.
The circumstances surrounding each corporation are different from others and are also
continuously changing; therefore, corporate governance system should be flexible and
elastic. Corporations should, with the Code as its basis, voluntarily plan and operate
their own corporate governance system and continuously upgrade it with ongoing
evaluations. This Code should also be reviewed regularly according to changing
circumstances of the time.
9 | P a g e
5. STRENGTH/WEAKNESS
5.1 Strengths
Current researches show that codes of conduct are having a positive impact on
employee behavior and perceptions and on organization at large worldwide. A research
conducted by LRN entitled “The impact of codes of conduct on corporate governance”
has following findings benefits:
Management genuinely wants to promote ethics and integrity in the organization.
Managements try to comply with the law.
Organization frame code of conduct or ethics so management can protect itself.
Employees whose organizations have a written code of conduct or ethics say it
makes the organization a better place to work.
Code has helped alter behavior or direct decisions.
Management team and BOD apply their understanding of the code on the job and at
meetings.
Codes have helped organizations to strengthen the practice and implementation of
good corporate governance.
5.2 Weakness
A survey conducted by University of Toronto showed that many of the Board of
Directors and Audit Committee suggest that there were weaknesses in many of the
organizations’ formulation and implementation of code of conduct on corporate
governance practices that contributed to senior executives benefiting personally from
various related party transactions and negatively impacting shareholders and the
company. In many instances members of board were involved in transactions that were
associated with benefits to board members at the expense of shareholders. Code of
conduct was manipulated according to their need.
10 | P a g e
Although written codes of conduct and code education are core elements of an effective
ethics and compliance program, simply adopting and distributing a code and offering
education is not enough. Whether a program will have a positive impact on an
organization’s practice of corporate governance depends on how an organization uses
these tools. “[A] world-class code is no guarantee of world-class conduct,” cautions a
Harvard Business School study. “A code is only a tool, and like any tool, it can be used
well or poorly – or left on the shelf to be admired or to rust.” Each organization is
different, with unique goals, strategies and risk profiles. In addition, organizations are at
different stages in the evolution of their codes of conduct and their ethics and
compliance programs. Codes of conduct often fail to meet its particular objectives due
to lack of alignment with organization’s overall business strategy as well as the goals.
11 | P a g e
6. CONCLUSION
6.1 Nepalese Context
6.1.1 Impact on Banking Sector
The banking sector is probably the most prominent sector when it comes to formulating
and implementing the codes of conduct that promote healthy competition, build public
image and serve the customers in align with the organizations achievement of goals
and objectives. Nepal Bankers’ Association (NBA) has been successful in ensuring
every bank follows detailed code of conduct framed by NBA that have positive impact
on the corporate governance practices. The code of conduct has promoted
accountability, transparency, probity and focus on the sustainable success of an entity
over the longer term. Many of the organizations have even articulated its own codes to
have affirmative impact on the practice of good corporate governance as shown by
example of Nepal Investment Bank Limited. However, there are instances of banks
involved in using the code of conduct in the favour of its directors and executives and
seriously hampering the future growth of the banks. Examples of financial institutions
like Nepal Development Bank, Royal Merchant fiancé company and Nepal Bangladesh
Bank shows the need to monitor the use of codes of conduct by financial institutions by
concerned regulators and bodies.
6.1.2 Impact on Security MarketSEBON has been, to much extent, unable to govern the security market and ensure the
proper devising of codes of conduct for the Board members, affiliates i.e. NEPSE and
other market participants like brokers. It has the reputation of ineffective governance
practices that has directly or indirectly affected the share traders trading on NEPSE
platform. Unclear codes, poor implementation and regulation of policy and guidelines
and unprofessional conduct by management at SEBON and NEPSE are not uncommon
Code of Corporate Governance for Public Companies in Nepal and developing a
mechanism for its enforceability is a major problem in Nepal. Identification of
weaknesses in, and constraints to, good corporate governance, and the role of code of
conduct and ethical standards is lacking at both Public and non-public enterprises. A
12 | P a g e
greater compliance is relevant to promoting good corporate governance practices by
public companies. In Nepal it is at its initial phase in most of the sectors, and for aligning
Nepalese practices with international best practices seems to take quite a long times.
6.2 International Context
6.2.1 Impact of UK CG Code
The UK Corporate Governance Code has been a key standard of good practice for
listed companies on board composition and development, remuneration, shareholder
relations, accountability and audit.
It has been a milestone for all companies with a Premium Listing of equity shares in the
UK which has helped listed companies to practice codes of conduct which is a
benchmark for other countries. It required under the Listing Rules to report on how they
have applied the Combined Code in their annual report and accounts. This approach is
a great strength and has been adopted in many countries where many regulators and
bodies have made it a base to initiate writing codes of conduct for sector and
enterprises.
6.2.2 Impact on Countries
Many of the developing countries like Bangladesh, India and China have now detailed
codes of conduct for its corporations. Private sector participation is high while drafting
conduct and many committees have been formed to study the need and importance of
codes of conduct and its impact on corporate governance. As seen above Korea is in a
good position in identifying and implementing Code of Best Practice for Corporate
Governance. Similarly corporate governance in emerging economy and their impact on
enterprise performance is becoming more vigilant than ever before with synchronization
of international laws and practices related to the conduct of MNCs operating in
developing countries.
To conclude, we can say that organizations have started to realize the importance of
good codes of conduct for it to better position itself in the eyes of shareholders and
customers and control over the reckless Board Of Directors at large corporations. The
trend is towards better integration of international codes of conduct for each sector and
13 | P a g e
develop mechanism to monitor and inspect on how adoption and implementation of
codes of conduct is going on to create favorable conditions for practice of good
corporate governance. Increasing evidence, both quantitative and qualitative, now show
that corporate codes of conduct along with education improve employee morale and job
satisfaction, aid the company’s recruiting efforts and help strengthen relationships with
business partners. There is a direct relationship between good corporate governance,
codes of conduct and compliance practices and the strength of numerous business
success indicators. Codes of conduct and code education are slowly permeating many
corporate cultures and improving corporate governance.
14 | P a g e
BIBLIOGRAPHY
Websites:
www.frc.org.uk/Our-Work/Codes.../Corporate-governance.aspx
en.wikipedia.org/wiki/Code_of_conduct
www.newforestnpa.gov.uk/__.../code_of_practice_for_corporate
www.syndicatebank.in/.../MODEL-CODE-CONDUCT-WEB.doc
15 | P a g e