Corporate governance is essentially a state of mind

BUSINESS ethics, value creation, transparency, credibility, integrity, trust, honesty, responsibility, accountability, and `all good thoughts' are part of what Sanjiv Agarwal is passionate about in Corporate Governance: Concept and Dimensions, published by Snow white Publications Pvt Ltd (www.swpindia.com) .

Former Chief Justice of India, Mr M.N. Venkatachaliah writes in his foreword to the book that compiles dozens of contributions: "Merely formalising corporate governance practices is not sufficient. Corporate governance is essentially a state of mind and a set of principles based on relationships."

The opening chapter is by Swami Dayananda who writes on `value of values in life': "Ethical standards are based on a human consensus regarding what is the acceptable conduct; this consensus is not negated by the fact that the norms may be subject to interpretation in some situations."

Then comes a piece by Dr P.L. Sanjeev Reddy where he draws four principles of governance from Kautilya: "It is the duty of the king to protect the wealth of the State and its subjects, to enhance the wealth, to maintain it and safeguard it and the interest of the subjects."

Mr K.B. Dadiseth's article defines corporate governance as not simply a matter of creating checks and balances; "it is about creating an outperforming organisation, which leads to increasing customer satisfaction and shareholder's value."

Following it is Mr N.R. Narayana Murthy's limited definition of ethical behaviour as doing what is best in enhancing the trust and confidence between two entities so that both the entities feel energised and enthused to work towards the betterment of common good.

Dr Madhav Mehra's piece postulates ambitiously that good governance is not simply about corporate excellence.

"Corporations of today are no longer sheer economic entities. These are the engines of economic and social transformation."

Mr Vipin Malik is critical of the fact that in a large number of companies, relevant business information is not passed on to directors.

"Even where the Board is briefed about major developments or strategic changes, there is hardly sufficient time or data made available in advance."

According to Mr N. Vittal, public governance can bring a greater discipline to corporate governance, "by nurturing the appropriate external environment in which an enterprise operates."

Ms Sucheta Dalal's article points out that good governance by itself can do little to change the fortunes of bad business.

"There is no shortage of good people, the problem is that there aren't enough to meet the specific requirements of our companies."

Dr Bimal Jalan explains the core of corporate governance for the banking sector to be risk containment, early warning systems, and prompt corrective action to avoid failure.

Dr Y.V. Reddy perceives the central bank's role in helping to develop "systems, institutions, and procedures to enable a paradigm shift in public policy, and in the process enhance corporate governance also in PSBs."

Useful read on `good thoughts' that may not be seen much in action, for corporate governance is primarily a state of mind.

Specially on special leave petitions

A compilation of utility from Company Law Institute of India Pvt Ltd (www.cliofindia.com) is ITR's Special Leave Petitions on Direct Taxes.

The book draws inputs from cases spanning the last two decades, and presents condensed information in a dictionary order, starting from `abkari' and ending with `writ', indicating whether the High Court decision was upheld or reversed. It may seem that some entries don't explain much, but if you are patient enough, the full story emerges in the cross-reference.

Thus, under `auditor's fees' there is the Shivantappa case cited, and the information that the apex court granted special leave to the assessee; more details are under `business expenditure: auditor's fees'.

There, one learns that the Kerala High Court held in 1980 that under the Kerala fees paid to an auditor for preparing the return of agricultural income of the assessee were not admissible as a business expense. However, the Supreme Court reversed the decision in 1993.

Another interesting case is that of Pure Ice Cream Co, listed under `embezzlement'. The company had periodically borrowed moneys for its business through a broker and written off as a loss "some borrowed moneys misused by the broker after the broker confessed to the misuse".

Is this business loss? Yes, said the Delhi High Court. The Supreme Court dismissed the SLP filed by the Department.

There are many cases that are hanging fire on the issue whether audit report constitutes `information' for reassessment, though in quite a few the apex court has dismissed the SLP filed by the Department, as in the Atlas Cycle case.

On `information' under `search and seizure' there is the Nand Lal Tahiliani case where the Allahabad High Court had said that mere rumour that the assessee, a doctor, was charging high fees and was living in a posh house would not constitute `information' justifying search warrant. No rumour that the book will serve the tax practitioners well!

Corporate Governance is defined as a systemic process by which companies are directed and controlled to enhance their wealth generating capacity. Since large corporations employ vast quantum of societal resources, we believe that the governance process should ensure that these companies are managed in a manner that meets stakeholders aspirations and societal expectations.

Impact of Corporate Governance
The positive effect of good corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socio-economic development.[4] After East Asian economies collapsed in the late 20th century, the World Bank's president warned those countries, that for sustainable development, corporate governance has to be good. Economic health of a nation depends substantially on how sound and ethical businesses are.

[edit] Role of Institutional Investors
Many years ago, worldwide, buyers and sellers of corporation stocks were individual investors, such as wealthy businessmen or families, who often had a vested, personal and emotional interest in the corporations whose shares they owned. Over time, markets have become largely institutionalized: buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups, and banks).
The rise of the institutional investor has brought with it some increase of professional diligence which has tended to improve regulation of the stock market (but not necessarily in the interest of the small investor or even of the naïve institutions, of which there are many). Note that this process occurred simultaneously with the direct growth of individuals investing indirectly in the market (for example individuals have twice as much money in mutual funds as they do in bank accounts). However this growth occurred primarily by way of individuals turning over their funds to 'professionals' to manage, such as in mutual funds. In this way, the majority of investment now is described as "institutional investment" even though the vast majority of the funds are for the benefit of individual investors.
Program trading, the hallmark of institutional trading, is averaging over 60% a day in 2007.[citation needed]
Unfortunately, there has been a concurrent lapse in the oversight of large corporations, which are now almost all owned by large institutions. The Board of Directors of large corporations used to be chosen by the principal shareholders, who usually had an emotional as well as monetary investment in the company (think Ford), and the Board diligently kept an eye on the company and its principal executives (they usually hired and fired the President, or Chief executive officer— CEO).
Nowadays, if the owning institutions don't like what the President/CEO is doing and they feel that firing them will likely be costly (think "golden handshake") and/or time consuming, they will simply sell out their interest. The Board is now mostly chosen by the President/CEO, and may be made up primarily of their friends and associates, such as officers of the corporation or business colleagues. Since the (institutional) shareholders rarely object, the President/CEO generally takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire" him/her). Occasionally, but rarely, institutional investors support shareholder resolutions on such matters as executive pay and anti-takeover measures.
Finally, the largest pools of invested money (such as the mutual fund 'Vanguard 500', or the largest investment management firm for corporations, State Street Corp.) are designed simply to invest in a very large number of different companies with sufficient liquidity, based on the idea that this strategy will largely eliminate individual company financial or other risk and, therefore, these investors have even less interest in a particular company's governance.
Since the marked rise in the use of Internet transactions from the 1990s, both individual and professional stock investors around the world have emerged as a potential new kind of major (short term) force in the direct or indirect ownership of corporations and in the markets: the casual participant. Even as the purchase of individual shares in any one corporation by individual investors diminishes, the sale of derivatives (e.g., exchange-traded funds (ETFs), Stock market index options [4], etc.) has soared. So, the interests of most investors are now increasingly rarely tied to the fortunes of individual corporations.
But, the ownership of stocks in markets around the world varies; for example, the majority of the shares in the Japanese market are held by financial companies and industrial corporations (there is a large and deliberate amount of cross-holding among Japanese keiretsu corporations and within S. Korean chaebol 'groups'), whereas stock in the USA or the UK and Europe are much more broadly owned, often still by large individual investors.

Parties to corporate governance
Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management and shareholders). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.
In corporations, the shareholder delegates decision rights to the manager to act in the principal's best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. With the significant increase in equity holdings of investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse.
A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organisation's strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organisation to its owners and authorities.
The Company Secretary, known as a Corporate Secretary in the US and often referred to as a Chartered Secretary if qualified by the Institute of Chartered Secretaries and Administrators (ICSA), is a high ranking professional who is trained to uphold the highest standards of corporate governance, effective operations, compliance and administration.
All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organisation. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital.
A key factor in an individual's decision to participate in an organisation e.g. through providing financial capital and trust that they will receive a fair share of the organisational returns. If some parties are receiving more than their fair return then participants may choose to not continue participating leading to organizational collapse.

Principles
Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.
Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.
Commonly accepted principles of corporate governance include:
Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.
Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person.
Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.
Issues involving corporate governance principles include:
oversight of the preparation of the entity's financial statements
internal controls and the independence of the entity's auditors
review of the compensation arrangements for the chief executive officer and other senior executives
the way in which individuals are nominated for positions on the board
the resources made available to directors in carrying out their duties
oversight and management of risk
dividend policy
" Corporate Governance" despite some feeble attempts from various quarters has remained ambiguous and often misunderstood pharse. For Quite some time it was confined to only corporate management. It is not so. it is something much broader for it must include a fair, efficient and transparent administration to meet certain well defined objectives. Corporate governance also must go beyong law. The quantity, quality and frequency of financial and managerial disclosure, the degree and extent to which the board of Director (BOD) exercise their trustee responsibilities and the commitment to run transparent organization- these should evolve due to interplay of many factors and the role played by more progressive elements within the corporate sector. In India, a strident demand for evolving a code of good practices by the corporate themselves is emerging