CENTRAL UNIVERSITY OF SOUTH BIHAR

PANCHANPUR CAMPUS, GAYA

PROJECT TOPIC:

Corporate governance and role of director

Submitted by: - Submitted to:-

Shruti Dr P.K Das
B.sc.LLb (Hons.) Assistant professor
9th semester School of law and governance
CUB1413115027 CUSB

1
 Acknowledgement

I hereby take the opportunity thank Dr P.K Das sir, for his consent and the inspiration that he
radiates. His jovial behaviour and ease making attitude eased my tension and the initial doubts
that I had about my potentialities. I also want to thank my friends who helped me a lot in
preparing this project. I have also taken help from several books and websites for doing this.
Ultimately, I once again thank Das sir, who made indelible impact on me which shall go beyond
the pages of this project and reflect in all my endeavours of life.

Hoping Acceptance and Appreciation from you, I hereby submit this project.

- Shruti

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 TENTATIVE CHAPTERISATION
Chapter Contents Page No.
01 Introduction 07
02 Definition of corporate governance 08
03 Importance of corporate governance 09
3.1 Needs of corporate governance 09
3.2 Fundamental elements of corporate governance 09-10
04 Corporate governance guidelines 11
4.1 Cadbury Committee Report 11
4.2 Naresh Chandra Committee Report (2002) 11
4.3 Birla Committee (SEBI) Recommendations (2000) 11-12
05 Models of corporate governance 13
5.1 Anglo-US model of corporate governance 13-16
5.2 The Japanese Model of corporate governance 16-19
5.3 German Model of corporate governance 20-22
5.4 Indian Corporate Governance 22-23
06 Role of director in corporate governance 24
6.1 Establish vision, mission and values 24
6.2 Set strategy and structure 24
6.3 Delegate to management 24-25
6.4 Exercise accountability to shareholders and be responsible to 25
relevant stakeholders
6.5 Duties of director’s 25-26
6.6 Fiduciary duty of director 26
Aveling Barford Ltd v Perion Ltd 26
British Midland Tool Ltd v. Midland International Tooling Ltd 27
Marshall (Thomas) (Exporters) Ltd v Guinle 27-28
6.7 Liabilities of Directors 28

3
Title of the proposed study

Corporate governance and role of director. A study of the provision under company Act 2013

Literature Review
The following Primary and Secondary sources have been referred to

Primary Sources

1. Asok K. Nadhani, Business and Corporate Laws, (BPB Publications, 2nd Edition, New
Delhi,2009)
2. Ghosh, P.K. & V. Balachandran, Company Law and Practice, Sultan Chand & Sons,
New Delhi, 4th Edition 1989)
3. A.C. Fernando, Corporate Governance, Principles, Policies and Practices, Pearson
4. Stephen M. Bainbridge, the New Corporate Governance in Theory and Practice, Oxford
University Press
5. Adrian Cadbury, Corporate Governance and Chairmanship- A personal View, Oxford
University Press

 Statutes Referred
(i) The Companies Act,1956
(ii) The Companies Act, 2013
(iii) The securities Act 1933
(iv) The securities Exchange Act 1934
(v) The Sarvanes Oxley Act 2002
(vi) Dodd-frank wall street reforms & consumer protection Act 2010
(vii) Jump start our business startup Act 2010
(viii) The Companies Act, 1956 & The Companies Act, 2013
(ix) The Securities Contracts (Regulation) Act, 1956
(x) The Securities and Exchange Board of India (SEBI) Act, 1992
(xi) The Depositories Act, 1996
(xii) Listing Agreement with stock exchanges, 2000

4
 Secondary Sources

 Indian journal referred

1. Panchali, J. N. (2001). "Corporate Governance: Indian Experiences", in
"Corporate Excellence through Corporate Governance Contemporary Practices
and Prognosis". (Edited by ICSI Centre for Corporate Research and Training,
2001.)
2. Classens, 5. S. Djankov, and L. Larry (2000). "The Separation of Ownership
and Control in East Asian Corporations". Journal of Financial Economics, vol.
58, pp. 81-112

Reports on corporate governance

 Cadbury, Sir Adrian (1992). Report of the Committee on the Financial Aspects of
Corporate Governance.
 Task Force Report (1999). "Principles of Corporate Governance". OECD
 Naresh Chandra Committee Report (2002)
 Birla Committee (SEBI) Recommendations (2000)

Website refereed

 www.geometricsoftware.com/investors/corporate.htm
 www.business.gov.in/corporate_governance
 www.gIobalchange.com/corporategovernance.htm
 www.cipe.org/publications/fs/ert/e18/corp_gov.htm
 www.academyofcg.org/archives/jun-2003.htm#article2

Hypotheses

The following hypotheses would be taken account of in this study and they have been examined
in the course of discussion. A conclusion has been drawn to assess whether the hypotheses
proposed were true to their extent of statement

1. To analyse the basic principles of Corporate governance and its historical development
in England, USA, Australia, Canada, Japan and in India
2. What are the roles of director in corporate governance?

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Research design/methodology
In accordance with the objectives of the present study, doctrinal research design has been
adopted. The doctrinal design has been used to study the provisions related to corporate
governance and role of director’s under company Act 2013. Doctrinal Research is a research,
as we all know, based on the principles or the propositions made earlier. It is more based on
the sources like books of the library, and through resources collected through access to various
websites. For the purpose of the Research Project, the Researcher has collected relevant
materials from books on company law and also from various websites. The Research has been
done primarily with the help of various reports on corporate governance as well as legislative
provisions. Various articles from the internet sources have also been referred.

6
 CHAPTER 1
Introduction
The corporate governance structure of joint stock corporations in a given country is determined
by several factors: the legal and regulatory framework outlining the rights and responsibilities
of all parties involved in corporate governance; the de facto realities of the corporate
environment in the country; and each corporation’s articles of association. While corporate
governance provisions may differ from corporation to corporation, many de facto and de jure
factors affect corporations in a similar way. Therefore, it is possible to outline a "model" of
corporate governance for a given country.

In each country, the corporate governance structure has certain characteristics or constituent
elements, which distinguish it from structures in other countries. To date, researchers have
identified three models of corporate governance in developed capital markets. These are the
Anglo-US model, the Japanese model, and the German model.

Each model identifies the following constituent elements: key players in the corporate
environment; the share ownership pattern in the given country; the composition of the board
of directors (or boards, in the German model); the regulatory framework; disclosure
requirements for publicly-listed stock corporations; corporate actions requiring shareholder
approval; and interaction among key players.

Across the world, there are several different models of corporate governance in practice. It is
the reflection of the ways organizations are funded and secondly reveals the control imposed
by legislation or an external regulator. Taking a worldwide view, governments have created
many different approaches to regulate companies and corporation in order to protest assets,
earning capacity and reputation of the organization.

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 CHAPTER 2
Definition of corporate governance

According to Cadbury Committee 19921

Corporate Governance is the system by which companies are directed and controlled (Cadbury
Committee 1992) it involves the set of processes, customs, policies, laws and institutions
affecting the way a corporation is directed, administered or controlled.

According to SEBI Committee2

SEBI Committee defines Corporate Governance as the “Acceptance by management of the

inalienable rights of shareholders as the true owners of the corporation and of their own role as
trustees on behalf of the shareholders. It is all about commitment to values, ethics, business
conduct and destination between personal and corporate funds in the management of a
company.

According to Gabrielle O'Donovan

Corporate governance is 'an internal system encompassing policies, processes and people,
which serves the needs of shareholders and other stakeholders, by directing and controlling
management activities with good business savvy, objectivity and integrity.3

According to International Chamber of Commerce

Corporate governance is the relationship between corporate managers, directors and the
providers of equity, people and institutions who save and invest their capital to earn a return.
It ensures that the board of directors is accountable for the pursuit of corporate objectives and
that the corporation itself conforms to the law and regulations. 4

According to Sternberg (1998)

Corporate governance describes ways of ensuring that corporate actions, assets and agents are
directed at achieving the corporate objectives established by the corporation’s shareholders.

1
http://wwwdata.unibg.it/dati/corsi/900002/79548-Beyond%20Cadbury%20Report%20Napier%20paper.pdf
Last accessed on 09/11/2018
2
https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate
governance_36177.html Last accessed on 09/11/2018
3
http://first.emeraldinsight.com/interviews/pdf/odonovan.pdf Last accessed on 09/11/2018
4
https://iccwbo.org/media-wall/news-speeches/icc-releases-corporate-governance-report/ Last accessed on
09/11/2018

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 CHAPTER 3
Importance of corporate governance
There are following importance of corporate governance which are as follows;

1. It creates a corporate culture of transparency, accountability and discloser

2. It enhances customer satisfaction, shareholder value and wealth
3. It prevents corporate frauds, scams and irregularities.
4. It helps to attract motivate and retain talent.
5. It create secure and prosperous operating environment and improve operating
performance.
6. It manage and mitigate the risk of the company.
7. It enhances the reputation of the company.
8. It enhances the investors trust.
9. It also help to collect easy finance from the financial institution.
10. It also helps to entering into global market.

Needs of corporate governance5

1. Corporate governance helps the board to take independent and objective decision.
2. It helps the board to adopt transparent procedure and practice.
3. Corporate governance inculcate strong culture of core value, ethic integrity, reliability
and fair dealing among corporations.
4. It ensure adequate discloser and effective decision making.
5. Corporate governance promotes sustainable and inclusive growth.
6. Corporate governance helps to achieve a balance between providing protection to
investors and fostering fair and efficient capital market.

5
http://www.economicsdiscussion.net/business-environment/corporate-governance/corporate-governance-
in-india-need-importance-and-conclusion/10145 last accessed on 09/11/2018

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Fundamental elements of corporate governance6

There are following fundamental elements of corporate governance which are as follows;

1. Role and power of the board.

2. Legislation
3. Management and environment.
4. Board skill.
5. Board composition.
6. Criteria for board membership.
7. Diversity in board.
8. Board committees.
9. Board appointment.
10. Board induction and training.
11. Independent board meeting.
12. Board meeting.
13. Code of conduct.
14. Strategy setting.
15. Business and community obligation.
16. Financial and operational reporting.
17. Monitoring the board performance.
18. Transparency and discloser.
19. Audit committee.
20. Risk management.

6
https://www.pearse-trust.ie/blog/bid/108866/the-core-principles-of-good-corporate-governance last
accessed on 09/11/2018

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 CHAPTER 4
Corporate governance guidelines

Cadbury Committee Report7

A committee under the chairmanship of Adrian Cadbury (UK) in May 1991 has first ever
organized attempt to establish the set of guidelines for governance. It was concerned about the
minority investors’ confidence in fiscal reporting and the ability of the auditor to carry out their
jobs. Committee had also contemplate on how governance can be improved by involving
independent directors in the board, separating the roles of chairman and CEO and establishing
audit committee of a boards for all companies listed on the stock Exchange.

It was the pioneer initiatives and was/is being used as the reference point for the many other
corporate governance guidelines initiated by many other countries. The report includes the
structure and responsibilities of boards of directors, role of auditors, and right and
responsibilities of the shareholders. The code of Cadbury was the general guideline for the
company which provides the lot of room for companies to develop their own governance
practices. The code was voluntary in nature, companies has to provide the information in which
area they are compliance with guidelines and give the explanation on gaps from the code, if
any.

Naresh Chandra Committee Report (2002)8

After the failure of large corporate companies in US and also enactment of Sarbanes-Oxley
Act 2002, in India the Department of Company Affairs (DCA) appointed a committee under
the chairmanship of Shri Naresh Chandra to review the governance issues related to
appointment of auditors, fees of auditors, rotation of audit firms or partners and make the
crucial role of independent directors on the board.

7
Swamin (Dr.) Parthasarathy. (2007), “Corporate Governance –Principles, Mechanism & Practices”, First
Edition, Bizmantra Publication.
8
https://www.oreilly.com/library/view/business-ethics-and/9789332511255/xhtml/c15s21.xhtml last
accessed on 10/11/2018

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Birla Committee (SEBI) Recommendations (2000)9

In 2000 the committee chaired by Kumar Managlam Birla have further contemplate on
contemporary governance practices and evaluate the same and given some important
reformation for effective governance practices. It gives more emphasis on non-executive
members in board. As the CII codes were the voluntary in nature from the industry side
therefore SEBI has taken the initiatives to create and regulate the realm for corporate
governance for the Indian Companies. While a number of guidelines for corporate governance
were available in US, UK and other developed countries, but it doesn’t make any sense for the
heterogeneous industry structure and environment in India. It appointed a committee under the
chairmanship of Shri Kumar Managlam Birla to prepare guidelines that can be executed for the
corporate governance practices of the Indian companies. The major recommendations of the
committee are incorporated in the Clause 49 agreements of the listing between companies and
the stock exchange which forms the basis of corporate governance in India. Report is classified
under the mandatory and no mandatory guidelines.

Few important mandatory guidelines are as follow;

 Not less than 50 per cent of the board should be non-executive directors (at least one
third of the board should be independent directors in case of non-executive chair and
half for the executive chair)
 Nominee directors can be appointed by the financial institution only on selective bases
and where it is essential.
 Under the chairmanship of an independent director, the Audit committee should be
form with majority independent directors with financial qualified or literate.
 The directorship of the directors on the board is maximum limited to 10 committees
and can act as the chairman of the maximum five committees.
 Management has to disclose all the financial and commercial transaction to the board.
 The board of directors should decide the remuneration of non-executive directors.

9
Satheesh Kumar, (2010). “Corporate Governance”, Oxford Higher Education Publication, 2nd Edition, Page
172, 448

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 CHAPTER 5
Models of corporate governance
There are various models of corporate governance which are applicable across the globe.

1. Anglo-US model
2. The Japanese model
3. The German model

Anglo-US model of corporate governance10

The Anglo-US model is characterized by share ownership of individual, and increasingly

institutional, investors not affiliated with the corporation (known as outside shareholders or
“outsiders”); a well-developed legal framework defining the rights and responsibilities of three
key players, namely management, directors and shareholders; and a comparatively
uncomplicated procedure for interaction between shareholder and corporation as well as among
shareholders during or outside the AGM.

Equity financing is a common method of raising capital for corporations in the United Kingdom
(UK) and the US. It is not surprising, therefore, that the US is the largest capital market in the
world, and that the London Stock Exchange is the third largest stock exchange in the world (in
terms of market capitalization) after the New York Stock Exchange (NYSE) and Tokyo.

There is a causal relationship between the importance of equity financing, the size of the capital
market and the development of a corporate governance system. The US is both the world’s
largest capital market and the home of the world’s most-developed system of proxy voting and
shareholder activism by institutional investors. Institutional investors also play an important
role in both the capital market and corporate governance in the UK.

Key Players in the Anglo-US Model

Players in the Anglo-US model include management, directors, shareholders (especially

institutional investors), government agencies, stock exchanges, self-regulatory organizations
and consulting firms which advise corporations and/or shareholders on corporate governance
and proxy voting.

10
http://www.papertyari.com/general-awareness/management/corporate-governance-models/ last accessed
on 11/11/2018

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The Anglo-US model, developed within the context of the free market economy, assumes the
separation of ownership and control in most publicly-held corporations. This important legal
distinction serves a valuable business and social purpose: investors contribute capital and
maintain ownership in the enterprise, while generally avoiding legal liability for the acts of the
corporation. Investors avoid legal liability by ceding to management control of the corporation,
and paying management for acting as their agent by undertaking the affairs of the corporation.
The cost of this separation of ownership and control is defined as “agency costs”.

The interests of shareholders and management may not always coincide. Laws governing
corporations in countries using the Anglo-US model attempt to reconcile this conflict in several
ways. Most importantly, they prescribe the election of a board of directors by shareholders and
require that boards act as fiduciaries for shareholders’ interests by overseeing management on
behalf of shareholders.

Structural Diagram of Anglo-US model

Share Ownership Pattern in the Anglo-US Model

1. Individual shareholder
2. Institutional shareholder

In 1990, institutional investors held approximately 61 percent of the shares of UK corporations,

and individuals held approximately 21 percent. (In 1981, individuals held 38 percent.) In 1990,
institutions held 53.3 percent of the shares of US corporations.

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Composition of the Board of Directors in the Anglo-US Model

The board of directors of most corporations that follow the Anglo-US model includes both
“insiders” and “outsiders”. An “insider” is as a person who is either employed by the
corporation (an executive, manager or employee) or who has significant personal or business
relationships with corporate management. An “outsider” is a person or institution which has
no direct relationship with the corporation or corporate management.

Regulatory Framework in the Anglo-US Model

In the UK and US, a wide range of laws and regulatory codes define relationships among
management, directors and shareholders.

In USA for example following are the legislation and other regulatory mechanism, to regulate
corporate governance system.

1. The securities Act 1933

2. The securities Exchange Act 1934
3. The Sarvanes Oxley Act 2002
4. Dodd-frank wall street reforms & consumer protection Act 2010
5. Jump start our business startup Act 2010
6. New York stock exchange listing rule

Disclosure Requirements in the Anglo-US Model

US corporations are required to disclose a wide range of information. The following

information is included either in the annual report or in the agenda of the annual general
meeting (formally known as the “proxy statement”): corporate financial data ( this is reported
on a quarterly basis in the US); a breakdown of the corporation’s capital structure; substantial
background information on each nominee to the board of directors (including name,
occupation, relationship with the company, and ownership of stock in the corporation); the
aggregate compensation paid to all executive officers (upper management) as well as individual
compensation data for each of the five highest paid executive officers, who are to be named;
all shareholders holding more than five percent of the corporation’s total share capital;
information on proposed mergers and restructurings; proposed amendments to the articles of
association; and names of individuals and/or companies proposed as auditors.

15
Interaction among Players in the Anglo-US Model

Shareholders may exercise their voting rights without attending the annual general meeting in
person. All registered shareholders receive the following by mail: the agenda for the meeting
including background information an all proposals ("proxy statement"), the corporation’s
annual report and a voting card.

Shareholders may vote by proxy, that is, they complete the voting card and return it by mail to
the corporation. By mailing the voting card back to the corporation, the shareholder authorizes
the chairman of the board of directors to act as his proxy and cast his votes as indicated on the
voting card.

The Japanese Model of corporate governance

Japanese industrial structure is based on a network of supplier and buyer companies

(“Keiretsu”). Keiretsu are known for their extensive cross shareholding among members and
their main banks. Organizations have long term and stable relationship among firms and the
banks that finance them. It may suffer from collusion and favor entrenchment by managers.

From the perspective of Japanese definition the corporate governance is concerned with the
code and conduct of the board of directors who are selected on behalf of the investors. The
directors are authorized to govern the organization and also monitor and control the
management in order to enable the effective management to protect the rights of investors.
They are the major administrator in the organization to ensure that it is always endeavoring to
maximize corporate value in the long-term for the shareholders and always prepared to be
accountable for its actions to all the stakeholders.11

11
http://www.yourarticlelibrary.com/corporate-governance/7-important-models-of-corporate-
governance/99350 Last accessed on 10/11/2018

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 Structural diagram of Japanese Model of corporate governance

Key Players in the Japanese Model12

The Japanese system of corporate governance is many-sided, centering around a main bank
and a financial/industrial network or keiretsu.

The main bank system and the keiretsu are two different, yet overlapping and complementary,
elements of the Japanese model.13 Almost all Japanese corporations have a close relationship
with a main bank. The bank provides its corporate client with loans as well as services related
to bond issues, equity issues, settlement accounts, and related consulting services. The main
bank is generally a major shareholder in the corporation

Many Japanese corporations also have strong financial relationships with a network of
affiliated companies. These networks, characterized by crossholdings of debt and equity,
trading of goods and services, and informal business contacts, are known as keiretsu.

Government-directed industrial policy also plays a key role in Japanese governance. Since the
1930s, the Japanese government has pursued an active industrial policy designed to assist

12
https://www.coursehero.com/file/p7p19kn/Four-Key-Players-of-Japanese-Model-1-Main-bank-2-Affiliated-
Company-or-Keiretsu/ Last accessed on 10/11/2018
13
“Corporate Governance in Transition Economies: The Theory and its Policy Implications.” in Masahiko Aoki
and Hyung-Ki Kim, editors, Corporate Governance in Transitional Economies: Insider Control and the Role of
Banks. Washington, D.C.: The World Bank.

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Japanese corporations. This policy includes official and unofficial representation on corporate
boards, when a corporation faces financial difficulty.

In the Japanese model, the four key players are: main bank (a major inside shareholder),
affiliated company or keiretsu (a major inside shareholder), management and the government.
Note that the interaction among these players serves to link relationships rather than balance
powers, as in the case in the Anglo-US model.

The Japanese model may be diagrammed as an open-ended hexagon

The base of the figure, with four connecting lines, represents the linked interests of the four
key players: government, management, bank and keiretsu. The open lines at the top represent
the nonlinked interests of non-affiliated shareholders and outside directors, because these play
an insignificant role.

Share Ownership Pattern in the Japanese Model14

In Japan, financial institutions and corporations firmly hold ownership of the equity market.
Similar to the trend in the UK and US, the shift during the postwar period has been away from
individual ownership to institutional and corporate ownership. In 1990, financial institutions
(insurance companies and banks) held approximately 43 percent of the Japanese equity market,
and corporations (excluding financial institutions) held 25 percent. Foreigners currently own
approximately three percent.

14
https://www.coursehero.com/file/p4hd4a8/2-Share-ownership-pattern-in-the-given-country-3-
Composition-of-the-board-of/ last accessed on 11/11/2018

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Composition of the Board of Directors in the Japanese Model15
The board of directors of Japanese corporations is composed almost completely of insiders,
that is, executive managers, usually the heads of major divisions of the company and its central
administrative body. If a company’s profits fall over an extended period, the main bank and
members of the keiretsu may remove directors and appoint their own candidates to the
company’s board. Another practice common in Japan is the appointment of retiring
government bureaucrats to corporate boards; for example, the Ministry of Finance may appoint
a retiring official to a bank’s board.

Regulatory Framework in the Japanese Model

In japan government frames the industrial policy the primary regulatory body in japan are as
follows;

1. Securities bureau of the ministry of finance

2. The Securities Exchange Surveillance Committee

These two bodies are responsible for monitoring corporate compliances and they also
investigate the violation of legislation.

Disclosure Requirements in the Japanese Model16

Corporation are required to disclose a wide range of information in the annual report and
agenda for the AGM this includes;

1. Financial data of the corporation.

2. Data of the corporation capital structure.
3. Background information on each nominee to the board of director.
4. Purposed merger and acquisition.

German Model of corporate governance17

It views a firm as a collective entity that has responsibilities and duties towards key
stakeholders, with shareholders perceived to be only one group of such stake holders. It applies

15
https://www.bain.com/insights/corporate-governance-in-japan-board-membership-and-beyond/ last
accessed on 11/11/2018
16
https://www.coursehero.com/file/p75ns9/Disclosure-Requirements-in-the-Japanese-Model-Disclosure-
requirements-in-Japan/ last accessed on 11/11/.2018
17
http://www.emergingmarketsesg.net/esg/wp-content/uploads/2011/01/Three-Models-of-Corporate-
Governance-January-2009.pdf last accessed on 11/11/2018

19
to Germany and other Continental countries. It represents a well-developed stock market,
strong investors’ protection, disclosure requirements, shareholders activism and takeovers but
may suffer from short-termism by both managers and investors. The Rhineland model is
characterized by a significant holding by a parent company and outside shareholders represent
a smaller portion of the equity. This model is based more on a “socially correct” market
economy. In fact, individual companies within a particular company group can be viewed as
an “internal market”, both in terms of financial and other resources such as labor and
intellectual properties.

Structural diagram of German Model of corporate governance

Key player in German model

German banks and corporate shareholder are the key player in the German corporate
governance. Banks usually play different role as shareholder, lender issue of both equity and
debt, depository and voting agent as at AGM. The name of three German banks which
participate in the process;

1. Decitshe bank AG
2. Dresdner bank AG
3. Commerz bank AG

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Share Ownership Pattern in the German Model

German banks and corporations are the dominant shareholders in Germany. In 1990,
corporations held 41 percent of the German equity market, and institutional owners (primarily
banks) held 27 percent. Neither institutional agents, such as pension funds (three percent) or
individual owners (four percent) are significant in Germany. Foreign investors held 19 percent
in 1990, and their impact on the German corporate governance system is increasing.

Composition of the Management Board and Supervisory Board in the

German Model

1. Vorstand (Management Board)

2. Aufsichtsrat (Supervisory Board)

German corporations are governed by a supervisory board and a management board. The
supervisory board appoints and dismisses the management board, approves major management
decisions; and advises the management board. The supervisory board usually meets once a
month. A corporation’s articles of association sets the financial threshold of corporate acts
requiring supervisory board approval. The management board is responsible for daily
management of the company.

Regulatory Framework in the German Model

Germany has a strong federal tradition; both federal and state (Laender) law influence corporate
governance. Federal laws include: the Stock Corporation Law, Stock Exchange Law and
Commercial Law, as well as the above-mentioned laws governing the composition of the
supervisory board are all federal laws. Regulation of Germany’s stock exchanges is, however,
the mandate of the states.

Disclosure Requirements in the German Model

Disclosure requirements in Germany are relatively stringent, but not as stringent as in the US.
Corporations are required to disclose a wide range of information in the annual report and/or
agenda for the AGM, including: corporate financial data (required on a semi-annual basis);
data on the capital structure; limited information on each supervisory board nominee.

21
Corporate Actions Requiring Shareholder Approval in the German Model

The routine corporate actions requiring shareholder approval under the German model are:

1. Allocation of net income (payment of dividends and allocation to reserves)

2. Ratification of the acts of the management board for the previous fiscal year
3. Ratification of the acts of the supervisory board for the previous fiscal year
4. Election of the supervisory board
5. Appointment of auditors

Indian Corporate Governance18

The frame work of Indian corporate governance is consist of various legislation and regulations
like the Companies Act, 1956, the Securities Contracts Act, 1956, the SEBI Act, 1992, the
Depositories Act, 1996, Listing Agreement with Stock Exchange, 2000 etc.. All listed and
unlisted companies in India are governed by the Companies Act 1956 and it is administrated
by Department of Companies Act (now it is ministry of corporate affairs). This act was
amended in 2000. It was more focused on modern principles of corporate governance
principles. The power of Securities Contracts Act covers all types of tradable government
shares, debentures, stocks and other forms of marketable securities issued by companies. The
basic objectives of SEBI act are to protect the interests of investors in securities and promote
and regulate the securities market. To empower the SEBI and to develop a well secured stock
market. The act was amended twice in 1995 and in 1999. The listing agreement defines the
rules, disclosure and processes that companies must follow to remain as listed entities on stock
exchange.

18
http://www.yourarticlelibrary.com/corporate-governance/7-important-models-of-corporate-
governance/99350 last accessed on 12/11/2018

22
 Indian Model of corporate governance

Regulatory Framework in the Indian Model

The corporate governance framework in India primarily consist of the following legislations
and regulations:

1. The Companies Act, 1956 & The Companies Act, 2013

2. The Securities Contracts (Regulation) Act, 1956
3. The Securities and Exchange Board of India (SEBI) Act, 1992
4. The Depositories Act, 1996
5. Listing Agreement with stock exchanges, 2000

23
 CHAPTER 6
Role of director in corporate governance

Establish vision, mission and values19

 Determine the company's vision and mission to guide and set the pace for its current
operations and future development.
 Determine the values to be promoted throughout the company.
 Determine and review company goals.
 Determine company policies.

Set strategy and structure20

 Review and evaluate present and future opportunities, threats and risks in the external
environment and current and future strengths, weaknesses and risks relating to the
company.
 Determine strategic options, select those to be pursued, and decide the means to
implement and support them.
 Determine the business strategies and plans that underpin the corporate strategy.
 Ensure that the company's organisational structure and capability are appropriate for
implementing the chosen strategies.

Delegate to management21

 Delegate authority to management, and monitor and evaluate the implementation of

policies, strategies and business plans.
 Determine monitoring criteria to be used by the board.
 Ensure that internal controls are effective.
 Communicate with senior management.

19
https://www.brefigroup.co.uk/directors/directors_roles_and_responsibilities.html Last accessed on
08/11/2018
20
https://www.brefigroup.co.uk/directors/directors_roles_and_responsibilities.html Last accessed on
08/11/2018
21
https://www.brefigroup.co.uk/directors/directors_roles_and_responsibilities.html Last accessed on
08/11/2018

24
Exercise accountability to shareholders and be responsible to relevant stakeholders

 Ensure that communications both to and from shareholders and relevant stakeholders
are effective.
 Understand and take into account the interests of shareholders and relevant
stakeholders.
 Monitor relations with shareholders and relevant stakeholders by gathering and
evaluation of appropriate information.
 Promote the goodwill and support of shareholders and relevant stakeholders.

Duties of director’s22

The duties and responsibilities of directors stipulated by the Indian Companies Act of 2013 can
broadly be classified into the following two categories:

1. The duties and liabilities which encourage and promote the sincerest investment of the
best efforts of directors in the efficient and prudent corporate management, in providing
elegant and swift resolutions of various business-related issues including those which
are raised through "red flags", and in taking fully mature and wise decisions to avert
unnecessary risks to the company.
2. Fiduciary duties which ensure and secure that the directors of companies always keep
the interests of the company and its stakeholders, ahead and above their own personal
interests.

The Companies Act, 2013 has in section 166 made a statutory formulation of director’s duties.
They are mentioned as follows:

1. Director to act in accordance with articles of the company.

2. A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, and the community and for the protection of
environment.

22
http://shodhganga.inflibnet.ac.in/bitstream/10603/125485/10/10_chapter%204.pdf last accessed on
12/11/2018

25
 3. A director of a company shall exercise his duties with due and reasonable care, skill
and diligence and shall exercise independent judgment.
4. A director of a company shall not involve in a situation in which he may have a direct
or indirect interest that conflicts, or possibly may conflict, with the interest of the
company.
5. A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates and if such director
is found guilty of making any undue gain, he shall be liable to pay an amount equal to
that gain to the company.
6. A director of a company shall not assign his office and any assignment so made shall
be void.

Fiduciary duty of director

The corporate model separate ownership from delegation of control to non-owner giving the
significant discriminatory power over the corporation that cannot be constrained by other legal
device without determining the objective of the corporation so the fiduciary duty as the power
of the corporation and its assets but the exercise of power each condition by the duty of use it
in the best interest of corporation and thereby its owner there are certain fiduciary duty of
director.

 A Director must only act within the powers as granted by the Company’s constitution.
 A Director has a prime duty to promote the Company’s success (unless insolvent).
 A Director must exercise independent judgment.
 A Director must exercise reasonable care, skill and diligence in his/her role.
 A Director must avoid conflicts between his/her role and his/her personal interests.
 A Director cannot accept benefits from third parties which arise from his/her role.
 A Director must always declare to other director his/her personal interest in any
transaction or arrangement which the Company proposes to enter into.

26
 Aveling Barford Ltd v Perion Ltd23

Where the director was aware of the fact that the companies property for being sold for 350$
where its real value is good at 650$. The Hon’ble cort held that this was the breach of fiduciary
duty of the part of director.

British Midland Tool Ltd v. Midland International Tooling Ltd24

The High Court has held a number of full time working directors of a private company liable
to pay substantial damages running into hundreds of thousands of pounds when they went into
competition with their old company after resigning. The facts were that a number of directors
hatched the plan to go into competition while they were still working for the company. One of
them then retired, but the others continued as directors for a while longer before resigning
themselves and immediately activating the new business. The judge held that implementation
of the directors' plan necessarily involved a breach of fiduciary duty by those individuals who
remained, for the time being, directors of the claimant. The judge held that it was established
law that a director's duty to act so as to promote the best interests of the company prima facie
included a duty on his part to inform the company of any activity, actual or threatened, which
might damage those interests, even where that involved telling tales on his co-directors. The
directors were therefore liable for the tort of conspiracy.

Marshall (Thomas) (Exporters) Ltd v Guinle25

Mr Guinle was appointed managing director of a company for a fixed term of 10 years. The
company’s business was to purchase clothing from foreign manufacturers mainly in Eastern
Europe and the Far East, which it then imported and resold to retailers in the UK. One of its
customers was C & A. A major part of Mr Guinle’s work involved travel abroad arranging
contracts. The success of the business depended very heavily on the business contacts Mr
Guinle made abroad and, in turn, on the customers to whom he sold the merchandise.
Consequently Mr Guinle’s contract contained restrictions, the key ones being:

1. The managing director shall “Not at any time during the period of his appointment or
after the termination thereof disclose any confidential information relating to the affairs,

23
[1989] BCLC 626
24
2003 ALL ER (D) 174
25
[1978] IRLR 174, HC

27
 customers or trade secrets of the Group of which he shall become possessed whilst in
the service of the company.”
2. “During the period of his appointment the Managing Director shall not, save with the
consent in writing of the company, be directly or indirectly engaged, concerned or
interested in any other business save that of the company.”
3. “If the Managing Director shall cease for any reason to be Managing Director of the
company or any of its subsidiaries he shall be under no restriction in relation to any
person, firm or company who was or were customers of or suppliers to the company or
any of its subsidiaries, any rule of law to the contrary notwithstanding, provided that he
does not use or disclose any confidential information belonging to any companies in
the Thomas Marshall Investments Group, nor within five years employ any person
employed by the company during the last two years of his appointment.”

It was discovered that, with four and a half years of his contract to run, Mr Guinle had set up
his own company in the same line of business, had purchased goods for it whilst abroad
ostensibly on T Marshall Business, had solicited customers of T Marshall and had employed
four ex-T Marshall Employees. When invited to a meeting to discuss matters he purported to
resign there and then. The company sought an interlocutory injunction to stop further breaches
of Mr Guinle’s contract. Mr Guinle’s defence principally was that his own breaches of contract
had effectively brought the contract to an end. This being so he was free from the restrictions
in it

The Decision: High Court

Megarry VC in the High Court (Chancery Division) gave the injunction asked for. Mr Guinle’s
contract did not end automatically through his repudiation of it by breach of contract. It was up
to his employers to elect what their course of action would be, whether to accept his resignation
or refuse it and hold him to the terms of the agreement. They were completely within their
rights to decline the resignation and to enforce the restriction in the contract, by injunction if
necessary.

Liabilities of Directors

The ubiquitous issue of corruption and the high risk of internal fraud raise serious concerns
about the liability of corporate directors. Director liability in India can be divided into two
principal areas: (1) liability under the Companies Act of 1956 (the 1956 Act), which has now

28
transitioned to the Companies Act of 2013 (the 2013 Act); and (2) liability under other Indian
statutes. There has been a seminal shift in the Indian corporate legal regime with the enactment
of the 2013 Act and more recent amendments. For instance, penalties under the 1956 Act that
were seen as ineffective have been significantly amplified under the 2013 Act. The 2013 Act
also provides statutory recognition to the duties of a director, such as exercise of due and
reasonable care, skill, diligence, and independent judgment. One of the key concepts of the
Companies Act is the meaning of the term “officer who is in default.” Under the act, liability
for default by a company has been imposed on an officer who is in default. By virtue of their
positions in the company, the managing director, the whole-time director, and the company
secretary directly fall within the scope of this term. Under the 1956 Act, certain key employees
such as the chief executive officer and chief financial officer did not directly come within the
ambit of the term, which raised serious concerns because these personnel were viewed as key
officials in any company. The 2013 Act corrects this anomaly and significantly expands the
scope of the expression “officer in default.” The term also includes the following:

1. Any individual who, under the superintendence, control, and direction of the board of
directors, exercises the management of the whole, or substantially the whole, of the
affairs of a company;
2. Any person on whose advice, directions, or instructions the board of directors is
accustomed to act, other than persons giving advice in a professional capacity; and
3. Every director aware of wrongdoing by virtue of knowledge of or participation in
proceedings of the board without objection.

A critical failure of Indian corporate law was further highlighted during various
corporate and financial scams, such as the Harshad Mehta episode or the Satyam fiasco. To
address this issue, the 2013 Act now specifically defines “fraud” and states that a person who
is guilty of it may be punished by imprisonment for up to 10 years, and where fraud involves
the public interest, the minimum sentence prescribed is three years. Fraud, as defined under
Companies Act, 2013, includes any act or abuse of position committed with intent to deceive,
to gain undue advantage from, or to injure the interests of a person, company, shareholders, or
creditors, whether or not there is wrongful gain or loss.26

26
Section 447 of the Companies Act, 2013

29
 Conclusion
Corporate governance is the application of best management practices, compliance of law in
true letter and spirit and adherence to ethical standards for effective management and
distribution of wealth and discharge of social responsibility for sustainable development of all
stakeholders.

Banking sector plays a significant role in India to transform economy towards self-sufficiency
hence the corporate governance of the banking sector is significantly important. There is a need
for the development of new policy framework on corporate governance as well as the proper
implementation of existing laws, regulations and guidelines with the equal participation of all
relevant stakeholders. Corporate governance has become a topic of increasing interest among
the policy makers since it looks at the relationship between the board of directors, shareholders
and management.

The project has introduced each model, describe the constituent elements of each and
demonstrate how each developed in response to country-specific factors and conditions. It
should reflect the fact that it is not possible to simply select a model and apply it to a given
country. Instead, the process is dynamic: the corporate governance structure in each country
develops in response to country-specific factors and conditions.

With the globalization of capital markets, each of these three models is opening (albeit slowly)
to influences from other models, while largely retaining its unique characteristics. Legal,
economic and financial specialists around the world can profit from a familiarity with each
model.

30
 Bibliography
The following Primary and Secondary sources have been referred to

Primary Sources

1. Asok K. Nadhani, Business and Corporate Laws, (BPB Publications, 2nd Edition, New
Delhi,2009)
2. Ghosh, P.K. & V. Balachandran, Company Law and Practice, Sultan Chand & Sons,
New Delhi, 4th Edition 1989)
3. A.C. Fernando, Corporate Governance, Principles, Policies and Practices, Pearson
4. Stephen M. Bainbridge, the New Corporate Governance in Theory and Practice, Oxford
University Press
5. Adrian Cadbury, Corporate Governance and Chairmanship- A personal View, Oxford
University Press

 Statutes Referred
(i) The Companies Act,1956
(ii) The Companies Act, 2013
(iii) The securities Act 1933
(iv) The securities Exchange Act 1934
(v) The Sarvanes Oxley Act 2002
(vi) Dodd-frank wall street reforms & consumer protection Act 2010
(vii) Jump start our business startup Act 2010
(viii) The Companies Act, 1956 & The Companies Act, 2013
(ix) The Securities Contracts (Regulation) Act, 1956
(x) The Securities and Exchange Board of India (SEBI) Act, 1992
(xi) The Depositories Act, 1996
(xii) Listing Agreement with stock exchanges, 2000

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Secondary Sources

 Indian journal referred

1. Panchali, J. N. (2001). "Corporate Governance: Indian Experiences", in "Corporate
Excellence through Corporate Governance Contemporary Practices and Prognosis".
(Edited by ICSI Centre for Corporate Research and Training, 2001.)
2. Classens, 5. S. Djankov, and L. Larry (2000). "The Separation of Ownership and
Control in East Asian Corporations". Journal of Financial Economics, vol. 58, pp.
81-112

Reports on corporate governance

 Cadbury, Sir Adrian (1992). Report of the Committee on the Financial Aspects of
Corporate Governance.
 Task Force Report (1999). "Principles of Corporate Governance". OECD
 Naresh Chandra Committee Report (2002)
 Birla Committee (SEBI) Recommendations (2000)

Website refereed

 www.geometricsoftware.com/investors/corporate.htm
 www.business.gov.in/corporate_governance
 www.gIobalchange.com/corporategovernance.htm
 www.cipe.org/publications/fs/ert/e18/corp_gov.htm
 www.academyofcg.org/archives/jun-2003.htm#article2

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