Business Ethics and Corporate GovernanceMeaning & Definition of Ethics and Business Ethics: Many philosophers have expressed different views about ethics. But they all agree that, in essence ethics deals with what is right or wrong. Business ethics is nothing but an application of ethical judgments to business activities. There was an argument whether ethics should form a part of business or not. This resulted in three different views: Unitarian view, Separatist view and Integration view. Unitarian view argues that morality and ethics are related to business. The Separatist view expressed that, business should concentrate on profits, and ethics and morality do not form a part of business. The Integration view defined a new area called business ethics, where ethical behavior and business are integrated. The external forces like government, market system, law and services will guide the ethical behavior of the business. Finally, the chapter discusses about the need or necessity for business ethics - business in order to survive in the long run should concentrate on the welfare of the society. Nature of Ethics: The followings are characterized as the nature of ethics. 1. Ethics deals with human beings 2. Ethics belongs to the field of social science. It deals with moral behavior and conduct of human being. 3. The science of ethics is a normative science. It deals with value judgment. It decides what ought to be rather than factual judgments. 4. It deals with human conduct which is voluntary and not forced by other person or circumstances. Sources of Ethics: Five primary sources of ethics have been identified in the American business area by ethics scholars George and John Stever as under: 1. Genetic Inheritance: A lots of evidence and arguments suggests that the evolutionary forces of natural selection influence the development of traits such as cooperation and alteration that lie at the core of our ethical system. 2. Religion: Many business people believe that their religion provides them with ethical principles and standards which are applied in business. Hinduism, Christianity, Islam, Judaism are the great world religions that guides people to behave ethically. The Christians believe the ten commandments as the will of god and so preached in their day to day life. The ethical commands are: You shall not kill You shall not commit adultery You shall not steal You shall not bear false witness against your neighbors You shall not covert your neighbors house. 3. Philosophical system: There are two basic philosophical systems who teach differently to pleasure and pain. The Epicureanism believe that pleasure is the chief good. Whereas the stoics are indifferent to pleasure and pain. Similarly different philosophies guide people differently towards good and bad.

4. Legal System: The law educates us about the ethical course in life. The legal system of a nation guides the businessmen how to deal with employees, shareholders, customers, suppliers and with the society at large. 5. Code of Conduct: The followings are the three primary codes of conduct to shape our ethical judgement. These are as follows: Company Codes Company operating policies Code of Ethics. Definition of Business Ethics: Business ethics is a form of applied ethics that scrutinizes ethical principles and moral or ethical problems that occur in a business environment. In the more conscientious marketplaces of the 21st century, the demand for more ethical business processes and actions (referred to as ethicism) is mounting. Also, pressures for the application of business ethics are being exerted through enactment of new public initiatives and laws

What is Business Ethics?Business ethics demand that a company examines its behavior towards the outside world. It takes into consideration morality, ethical reasoning and ethics application. For instance, the business manager's moral philosophy of situations do affect the manager's ethical beliefs. Moral philosophy pertains to the overall guiding belief system behind the individual's perception of right or wrong. It is important to be acquainted with moral philosophy, ethical reasoning, and especially the application of ethics to business and management. Ethical theories and concepts are important to resolving moral problems confronting business. Employees and managers must integrate moral concerns into their decision-making process. What is ethical business performance? Ethical business performance always adheres to societys basic rules that define right and wrong behavior. One of the major challenges faced by business is to balance ethics and economics. Society wants business to be ethical and economically profitable at the same time. Therefore the ethical decision should be right, proper and just. Ethical Objectives: The followings are the basic objectives of ethics. 1. It studies human behavior. It makes evaluative assessment of what is moram and what is immoral. 2. It establishes moral standard/norms of behavior. 3. Makes judgment of human behavior based on these standards and norms. 4. It prescribes moral behavior. It makes recommendation how to or how not to behave. 5. Expresses opinion about human attitude or conduct in general.

Importance of Ethics in Business Ethics is important not only in business but in all aspects of life because it is the vital part and the foundation on which the society is build. A business/society that lacks ethical principles is bound to fail sooner or later. According to International Ethical Business Registry, "there has been a dramatic increase in the ethical expectation of businesses and professionals over the past 10 years. Increasingly, customers, clients and employees are deliberately seeking out those who define the basic ground, rules of their operations on a day today...." Ethics refers to a code of conduct that guides an individual in dealing with others. Business Ethics is a form of the art of applied ethics that examines ethical principles and moral or ethical problems that can arise in business environment. It deals with issues regarding the moral and ethical rights, duties and corporate governance between a company and its shareholders, employees, customers, media, government, suppliers and dealers. Henry Ford said, "Business that makes noting but money is a poor kind of business". Ethics is related to all disciplines of management like accounting information, human resource management, sales and marketing, production, intellectual property knowledge and skill, international business and economic system. As said by Joe Paterno once that success without honor is an unseasoned dish. It will satisfy your hunger, but won't taste good. In business world the organization's culture sets standards for determining the difference between good or bad, right or wrong, fair or unfair. "It is perfectly possible to make a decent living without compromising the integrity of the company or the individual, wrote business executive R. Holland, "Quite apart from the issues of rightness and wrongness, the fact is that ethical behavior in business serves the individual and the enterprise much better in long run.", he added. Some management guru stressed that ethical companies have an advantage over their competitors. Said Cohen and Greenfield, "Consumers are used to buying products despite how they feel about the company that sells them. But a valued company earned a kind of customer loyalty most corporations only dream of because it appeals to its customers more than a product". The ethical issues in business have become more complicated because of the global and diversified nature of many large corporation and because of the complexity of economic, social, global, natural, political, legal and government regulations and environment, hence the company must decide whether to adhere to constant ethical principles or to adjust to domestic standards and culture. Managers have to remember that leading by example is the first step in fostering a culture of ethical behavior in the companies as rightly said by Robert Noyce, "If ethics are poor at the top, that behavior is copied down through the organization", however the other methods can be creating a common interest by favorable corporate culture, setting high standards, norms, framing attitudes for acceptable behavior, making written code of ethics implicable

at all levels from top to bottom, deciding the policies for recruiting, selecting, training, induction, promotion, monetary / non-monetary motivation, remuneration and retention of employees. "Price is what you pay. Value is what you get" - Warren Buffet Thus, a manager should treat his employees, customers, shareholders, government, media and society in an honest and fair way by knowing the difference between right or wrong and choosing what is right, this is the foundation of ethical decision making. REMEMBER: GOOD ETHICS IS GOOD BUSINESS. "Non-corporation with the evil is as much a duty as is co-operation with good" - Mahatma Gandhi. Objectives of Business Ethics Statement To establish a framework for professional behavior and uphold values such as trust, transparency, honesty and integrity in all dealings; To increase the awareness to management and employees of the companys ethical stand in carrying out the daily activities and the discharge of responsibilities; To comply and maintain high ethical standards, obeying all applicable laws and regulations locally and internationally. 1.3 Scope and Application The scope and application should extend throughout the company and to all levels of employees and shall apply to all types of activities in the organization. The Code of Ethics statement is applied to all levels of management and employees, including our dealings with customers, suppliers, contractors, government authorities, and associated bodies or organizations. Factors influencing Business Ethics Business may be defined as a set of standards or principles governing the moral conduct of businessman. There are many factors influencing business ethics. Some of them are social values, legislation, industry norms, personal values and professionalisation. The main determinants of business ethics are as follows: Social forces and pressure exercise considerable influence on business ethics. Often, different groups in society compel businessman to discontinue unethical issues. Laws are generally passed to keep a check on unethical practices. They are the result of social pressures. When society considers a practice unethical, it may exercise its influence to get that practice declared illegal. In some industries and trades, specific codes of conduct have been laid down. In addition, many organizations have laid down guidelines for regulating their behavior of their employees. Most industries have ethical climate which governs the code of conduct of the employees. The personal beliefs of the individuals working in an organization also influence business ethics. However sometimes there is conflict between personal moral values and company goals. Generally employees look at their superiors and tend to adopt their values and actions. The behavior of competitors and associates also influences business ethics Professional managers normally tend to have higher ethical standards than family managers. Therefore growing professionalisation of management has exercised a healthy influence on ethics in business.

Ethical Aspects in Marketing

Frameworks of analysis for marketing ethicsPossible frameworks:

Value-oriented framework, analyzing ethical problems on the basis of the values which they infringe (e.g. honesty, autonomy, privacy, transparency). An example of such an approach is the AMA Statement of Ethics. Stakeholder-oriented framework, analysing ethical problems on the basis of whom they affect (e.g. consumers, competitors, society as a whole). Process-oriented framework, analysing ethical problems in terms of the categories used by marketing specialists (e.g. research, price, promotion, placement).

Specific issues in marketing ethicsMarket researchEthical danger points in market research include:

Invasion of privacy. Stereotyping.

Stereotyping occurs because any analysis of real populations needs to make approximations and place individuals into groups. However if conducted irresponsibly, stereotyping can lead to a variety of ethical undesirable results. In the AMA Statement of Ethics, stereotyping is countered by the obligation to show respect ("acknowledge the basic human dignity of all stakeholders").

Market audienceEthical danger points include:

Targeting the vulnerable (e.g. children, the elderly). Excluding potential customers from the market: selective marketing is used to discourage demand from undesirable market sectors or disenfranchise them altogether.

Examples of unethical market exclusion or selective marketing are past industry attitudes to the gay, ethnic minority and obese ("plus-size") markets. Contrary to the popular myth that ethics and profits do not mix, the tapping of these markets has proved highly profitable. For example, 20% of US clothing sales are now plus-size.Another example is the selective marketing of health care, so that unprofitable sectors (i.e. the elderly) will not attempt to take benefits to which they are entitled.A further example of market exclusion is the pharmaceutical industry's exclusion of developing countries from AIDS drugs.

Examples of marketing which unethically targets the elderly include: living trusts, time share fraud, mass marketing fraud and other.The elderly hold a disproportionate amount of the world's wealth and are therefore the target of financial exploitation.[12] In the case of children, the main products are unhealthy food, fashionware and entertainment goods. Children are a lucrative market: "...children 12 and under spend more than $11 billion of their own money and influence family spending decisions worth another $165 billion", but are not capable of resisting or understanding marketing tactics at younger ages ("children don't understand persuasive intent until they are eight or nine years old"). At older ages competitive feelings towards other children are stronger than financial sense. The practice of extending children's marketing from television to the schoolground is also controversial (see marketing in schools). The following is a select list of online articles:

Sharon Beder, Marketing to Children (University of Wollongong, 1998). Miriam H. Zoll, Psychologists Challenge Ethics Of Marketing To Children (American News Service, 2000) Donnell Alexander and Aliza Dichter, Ads And Kids: How Young Is Too Young? Rebecca Clay, Advertising to children: Is it ethical? (Monitor on Psychology, Volume 31, No. 8 Sept. 2000) Media Awareness Network, How marketers target kids

Other vulnerable audiences include emerging markets in developing countries, where the public may not be sufficiently aware of skilled marketing ploys transferred from developed countries, and where, conversely, marketers may not be aware how excessively powerful their tactics may be. See Nestle infant milk formula scandal. Another vulnerable group are mentally unstable consumers. The definition of vulnerability is also problematic: for example, when should endebtedness be seen as a vulnerability and when should "cheap" loan providers be seen as loan sharks, unethically exploiting the economically disadvantaged? Pricing ethics: List of unethical pricing practices.

price fixing price skimming price discrimination variable pricing predatory pricing supra competitive pricing price war bid rigging dumping (pricing policy)

Ethics in advertising and promotion

ContentEthical pitfalls in advertising and promotional content include:

Issues over truth and honesty. In the 1940s and 1950's, tobacco used to be advertised as promoting health. Today an advertiser who fails to tell the truth not only offends against morality but also against the law. However the law permits "puffery" (a legal term).The difference between mere puffery and fraud is a slippery slope: "The problem... is the slippery slope by which variations on puffery can descend fairly quickly to lies." See main article: false advertising. Issues with violence, sex and profanity. Sexual innuendo is a mainstay of advertising content (see sex in advertising), and yet is also regarded as a form of sexual harassment. Violence is an issue especially for children's advertising and advertising likely to be seen by children. Taste and controversy. The advertising of certain products may strongly offend some people while being in the interests of others. Examples include: feminine hygiene products, hemorrhoid and constipation medication. The advertising of condoms has become acceptable in the interests of AIDS-prevention, but are nevertheless seen by some as promoting promiscuity. Some companies have actually marketed themselves on the basis of controversial advertising - see Benetton. Sony has also frequently attracted criticism for unethical content (portrayals of Jesus which enfuriated religious groups; racial innuendo in marketing black and white versions of its PSP product; graffiti adverts in major US cities). Negative advertising techniques, such as attack ads. In negative advertising, the advertiser highlights the disadvantages of competitor products rather than the advantages of their own. The methods are most familiar from the political sphere: see negative campaigning.

Delivery channels

Direct marketing is the most controversial of advertising channels, particularly when approaches are unsolicited. TV commercials and direct mail are common examples. Electronic spam and telemarketing push the borders of ethics and legality more strongly. Shills and astroturfers are examples of ways for delivering a marketing message under the guise of independent product reviews and endorsements, or creating supposedly independent watchdog or review organisations. For example, fake reviews can be published on Amazon.[21] Shills are primarily for message-delivery, but they can also be used to drive up prices in auctions, such as Ebay auctions.

The use of ethics as a marketing tacticBusiness ethics has been an increasing concern among larger companies, at least since the 1990s. Major corporations increasingly fear the damage to their image associated with press revelations of unethical practices. Marketers have been among the fastest to perceive the market's preference for ethical companies, often moving faster to take advantage of this

shift in consumer taste. This results in the expropriation of ethics itself as a selling point or a component of a corporate image.

The Body Shop is an example of a company which marketed itself and its entire product range solely on an ethical message, although its products were deceptively characterized and its history was marked by misrepresentations. "The Body Shop's only real product is honesty..." (Jon Entine in an ethics audit of the company). However the story of the Body Shop ended with increasing criticism of a gap between its morals and its practices. Greenwash is an example of a strategy used to make a company appear ethical when its unethical practices continue. Liberation marketing is another strategy whereby a product can masquerade behind an image that appeals to a range of values, including ethical values related to lifestyle and anti-consumerism.

"Liberation marketing takes the old mass culture critique consumerism as conformity fully into account, acknowledges it, addresses it, and solves it. Liberation marketing imagines consumers breaking free from the old enforcers of order, tearing loose from the shackles with which capitalism has bound us, escaping the routine of bureaucracy and hierarchy, getting in touch with our true selves, and finally, finding authenticity, that holiest of consumer grails." (Thomas Frank)

APPROACHES TO ETHICAL DECISION MAKING: Business owners often face difficult ethical dilemmas, such as whether to cut corners on quality to meet a deadline or whether to lay off workers to enhance profits. A current ethical debate concerns the use of extremely low-wage foreign workers, especially in the garment industry. The intense pressures of business may not always allow you the luxury of much time for reflection, and the high stakes may tempt you to compromise your ideals. How will you respond? No doubt, you already have a well-developed ethical outlook. Nevertheless, by considering various approaches to ethical decision making, you may be better able to make the right choice when the need arises. The subject of business ethics is complex. Fair-minded people sometimes have significant differences of opinion regarding what constitutes ethical behavior and how ethical decisions should be made. This article discusses four approaches that business owners can use to consider ethical questions. The method you prefer may not suit everyone. Hopefully, by considering the alternatives, you will be able to make decisions that are right for you. Utilitarian The utilitarian approach to ethical decision making focuses on taking the action that will result in the greatest good for the greatest number of people. Considering our example of employing low-wage workers, under the utilitarian approach you would try to determine whether using low-wage foreign workers would result in the greatest good.

For example, if you use low-wage foreign workers in response to price competition, you might retain your market share, enabling you to avoid laying off your U.S. employees, and perhaps even allowing you to pay your U.S. employees higher wages. If you refuse to use low-wage foreign workers regardless of the competition, you may be unable to compete. This could result in layoffs of your U.S. workers and even your foreign workers, for whom the relatively low wages may be essential income. On the other hand, using low-wage workers may tend to depress the wages of most workers, thus reducing almost everyones standard of living and depressing their ability to purchase the very goods you and others are trying to sell. Moral Rights The moral rights approach concerns itself with moral principles, regardless of the consequences. Under this view, some actions are simply considered to be right or wrong. From this standpoint, if paying extremely low wages is immoral, your desire to meet the competition and keep your business afloat is not a sufficient justification. Under this view, you should close down your business if you cannot operate it by paying your workers a "living wage," regardless of the actions of your competitors. Universalism The universalist approach to ethical decision making is similar to the Golden Rule. This approach has two steps. First, you determine whether a particular action should apply to all people under all circumstances. Next, you determine whether you would be willing to have someone else apply the rule to you. Under this approach, for example, you would ask yourself whether paying extremely low wages in response to competition would be right for you and everyone else. If so, you then would ask yourself whether someone would be justified in paying you those low wages if you, as a worker, had no alternative except starvation. Cost-Benefit Under the cost-benefit approach, you balance the costs and benefits of taking versus not taking a particular action. For example, one of the costs of paying extremely low wages might include negative publicity. You would weigh that cost against the competitive advantage that you might gain by paying those wages. Conclusion In our complex global business climate, ethical decision making is rarely easy. However, as a business owner, you have several models available for analyzing your ethical dilemmas. Sometimes one approach will be more appropriate than another. If you take time to consider the various possibilities, you are more likely to make a decision you believe is ethically correct.

Module-2:

Corporate Governance: Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large. Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. 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. 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:

internal controls and internal auditors the independence of the entity's external auditors and the quality of their audits oversight and management of risk oversight of the preparation of the entity's financial statements review of the compensation arrangements for the chief executive officer and other senior executives the resources made available to directors in carrying out their duties the way in which individuals are nominated for positions on the board dividend policy

Nevertheless "corporate governance," despite some feeble attempts from various quarters, remains an ambiguous and often misunderstood phrase. For quite some time it was confined only to corporate management. That is not so. It is something much broader, for it must include a fair, efficient and transparent administration and strive to meet certain well defined, written objectives. Corporate governance must go well beyond 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 (largely an ethical commitment), and the commitment to run a transparent organization- these should be constantly evolving due to interplay of many factors and the roles played by the more progressive/responsible elements within the corporate sector. John G. Smale, a former member of the General Motors board of directors, wrote: "The Board is responsible for the successful perpetuation of the corporation. That responsibility cannot be relegated to management."However it should be noted that a corporation should cease to exist if that is in the best interests of its stakeholders. Perpetuation for its own sake may be counterproductive. In India, a strident demand for evolving a code of good practices by the corporation, written by each corporation management, is emerging.

Mechanisms and controls Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers' behaviour, an independent third party (the external auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability. Internal corporate governance controls Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Examples include:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.[6] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decisionmaking process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria. Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity's internal control procedures and the reliability of its financial reporting Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met. Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organisation. Examples include:

competition debt covenants demand for and assessment of performance information (especially financial statements) government regulations managerial labour market media pressure takeovers

What is good corporate governance? Good corporate governance is characterized by a firm commitment and adoption of ethical practices by an organization across its entire value chain and in all of its dealings with a wide group of stakeholders encompassing employees, customers, vendors, regulators and shareholders (including the minority shareholders), in both good and bad times. To achieve this, certain checks and practices need to be whole-heartedly embraced. Some considerations in this respect are outlined below: Codes of conduct and whistle blower policies are important, but more important is how they are communicated and practiced. It is vital for board members and senior management to lead by example The concept of having independent directors is a good one in theory but more important is the process underlying selection of independent directors is this process rigorous, transparent and objective and is it aligned to the companys needs? It is important to focus on not just earnings but on the sustainability of business models. Focus on not just How much? but on How?, At what cost? and At whose expense? Rating agencies need to develop criteria that focus on substance rather than the form of governance Compensation of executive directors should flow from an objective performance evaluation process conducted by the board Greater transparency and disclosure of executive performance criteria are required which should include financial and non-financial measures Regulators should send clear signals that they shall be proactive in imposing substantial penalties for non-compliance, so that compliance is strictly adhered to. Market Model of Governance Chain: The market model of governance chain is adopted in an efficient well developed equity market and where there is dispersed ownership. It is very common in the developed nations such as USA, Canada, Australia and UK. In these countries , the corporate governance policies basically deals with how companies deal fairly with problems that arise from separation of ownership and effective control.

Control Model of Governance Chain: The controlled model of corporate governance chain is represented by underdeveloped equity markets, concentrated ownership and less share holders transparency and inadequate protection to minority and foreign shareholders. This model is more familiar in Asia, Latin America and some East European nations. In such economies there is a need to build, nurture and grow supporting institutions through a strong and efficient capital market regulator and judiciary to enforce contracts or protects property rights. Narrow versus Broad Perception of Corporate Governance. Corporate governance can be viewed from a narrow to broad perspectives. In narrow sense it aims at establishing relationship of a company to its share holders. In broad sense it establishes relationship with the society. The narrow definition is propagated by Milton Friedman. According to him corporate governance is to conduct business according to the owners or share holders desires which basically aims at maximizing profit by confirming the basic rules of the society. This is purely viewed as internal to the corporations. The broader perspectives of corporate governance as defined by the world bank emphasis the relationship between owners, management, board and other stake holders. Here the role of governance to minimize the difference between private and social interests. Why Corporate Governance?Investors primarily consider two variables before making investment decisions--the rate of return on invested capital and the risk associated with the investment. (13) In recent years, the "attractiveness of developing nations" as a destination for foreign capital has increased, partly because of the high likelihood of obtaining robust returns and partly because of the decreasing "attractiveness of developed nations." (14) The lure of achieving a high rate of return, however, does not, by itself, guarantee foreign investment; the attendant risk (15) weighs equally in an investor's decision-making calculus. (16) Good corporate-governance practices reduce this risk by ensuring transparency, accountability, and enforceability in the marketplace. (17) While strong corporate-governance systems help ensure a country's long-term success, weak systems often lead to serious problems. For example, weak institutions caused, at least in part, the debilitating 1997 East Asian economic crisis. (18) The crisis was characterized by plummeting stock and real-estate prices, as well as a severe erosion of investor confidence. (19) The total indebtedness of the countries (20) affected by the crisis exceeded one-hundred billion dollars. (21) While the presence of a good corporate-governance framework ensures neither stability nor success, (22) it is widely believed that corporate governance can "raise efficiency and growth," especially for countries that rely heavily on stock markets to raise capital. (23) In fact, some contend that the "Asian financial crisis gave developing countries ... a lesson on the importance of a sound corporate governance system." (24) In an open market, investors choose from a variety of investment vehicles. (25) The existence of a corporate-governance system is likely a part of this decision-making process. In such a scenario, firms that are "more open and transparent," (26) and thus well governed, are more likely to raise capital successfully because investors will have "the information and confidence necessary for them to lend funds directly" to such firms. (27) Moreover, well-governed firms likely will obtain capital more cheaply than firms that have poor corporate-governance practices because investors will require a smaller "risk premium" for investing in well-governed firms. (28)

Also, sound corporate-governance practices enable management to allocate resources more efficiently, which increases the likelihood that investors will obtain a higher rate of return on their investment. (29) Finally, leading indices show that developing countries that have good governance structures consistently outperform developing countries with poor corporate-governance structures. (30) Thus, in an efficient capital market, (31) investors will invest in firms with better corporate-governance frameworks (32) because of the lower risks and the likelihood of higher returns. (33) At a macro level, if firms in developing countries attract investment, they will stimulate growth in the local economy. (34) If they "cannot attract equity capital, they are doomed to remain on a small, inefficient scale," and they will be unable to stimulate growth in their host country. (35) Good corporate governance benefits developing countries in a number of ways. According to at least one scholar, good corporate-governance practices can decrease the "likelihood of a domestic financial crisis" (36) and the severity if such a crisis does occur. (37) Additionally, scholars have found strong "evidence linking corporate governance to corporate efficiency" (38) and have shown that "corporate governance creates more efficient corporate management." (39) Finally, research shows that wellgoverned firms are valued significantly higher than firms with imperfect corporategovernance practices. (40) It has been estimated that, by the end of this century, "funds seeking trustworthy, productive companies in today's developing countries are likely to top $500,000 billion." (41) The policy challenge that exists for governments in developing countries is to provide a hospitable environment for such funds; a sound corporate-governance framework can play a decisive role in creating this hospitable environment. (42)

Strong corporate governance has beneficial consequences even for countries that choose to follow a development strategy that does not focus on attracting foreign investment. (43) Many developing countries are home to strong distribution cartels that waste scarce resources. (44) Good corporate governance can reduce this wasteful behavior and, thus, "overcome the obstacles to productivity growth." (45) Moreover, corporate governance can play a role in reducing corruption, (46) and decreased corruption significantly enhances a country's developmental prospects. (47) Ultimately, corporate governance "is not just one of those imported western luxuries; it is a vital imperative." (48) Importance of Corporate Governance:Corporate governance is a set of rules that define the relationship between stakeholders, management, and board of directors of a company and influence how that company is operating. At its most basic level, corporate governance deals with issues that result from the separation of ownership and control. But corporate governance goes beyond simply establishing a clear relationship between shareholders and managers. The presence of strong governance standards provides better access to capital and aids economic growth. Corporate governance also has broader social and institutional dimensions. Properly designed rules of governance should focus on implementing the values of fairness, transparency, accountability, and responsibility to both shareholders and stakeholders. In order to be effectively and ethically governed, businesses need not only good internal governance, but also must operate in a sound institutional environment. Therefore, elements such as secure private property rights, functioning judiciary, and free press are necessary to translate corporate governance laws and regulations into on-the-ground practice. Good corporate governance ensures that the business environment is fair and transparent and that companies can be held accountable for their actions. Conversely, weak corporate governance leads to waste, mismanagement, and corruption. It is also important to remember that although corporate governance has emerged as a way to manage modern joint stock corporations it is equally significant in

state-owned enterprises, cooperatives, and family businesses. Regardless of the type of venture, only good governance can deliver sustainable good business performance.

OECD Principle:ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENTPursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; to contribute to sound economic expansion in Member as well as nonmember countries in the process of economic development; and to contribute to the expansion of world trade on a multilateral, nondiscriminatory basis in accordance with international obligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary(7th May 1996), Poland (22nd November 1996) and Korea (12th December 1996). The Commission of the European Communities takes part in the work of the OECD

THE RIGHTS OF SHAREHOLDERSThe corporate governance framework should protect shareholders rights.A. Basic shareholder rights include the right to: 1) secure methods of ownership registration; 2) convey or transfer shares; 3) obtain relevant information on the corporation on a timely and regular basis; 4) participate and vote in general shareholder meetings; 5) elect members of the board; and 6) share in the profits of the corporation. B. Shareholders have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as: 1) amendments to the statutes, or articles of incorporation or similar governing documents of the company; 2) the authorisation of additional shares; and 3) extraordinary transactions that in effect result in the sale of the company. C. Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures, that govern general shareholder meetings: 1. Shareholders should be furnished with sufficient and timely information concerning the date, location and agenda of general meetings, as well as full and timely information regarding the issues to be decided at the meeting. 2. Opportunity should be provided for shareholders to ask questions of the board and to place items on the agenda at general meetings, subject to reasonable limitations. 3. Shareholders should be able to vote in person or in absentia, and equal effect should be given to votes whether cast in person or in absentia. D. Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed. E. Markets for corporate control should be allowed to function in an efficient and transparent manner. F. Shareholders, including institutional investors, should consider the costs and benefits of exercising their voting rights.OECD Principles of Corporate Governance

1. The rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class. 2. Anti-take-over devices should not be used to shield management from accountability.

II. THE EQUITABLE TREATMENT OF SHAREHOLDERSThe corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.A. All shareholders of the same class should be treated equally. 1. Within any class, all shareholders should have the same voting rights. All investors should be able to obtain information about the voting rights attached to all classes of shares before they purchase. Any changes in voting rights should be subject to shareholder vote. 2. Votes should be cast by custodians or nominees in a manner agreed upon with the beneficial owner of the shares. 3. Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes. B. Insider trading and abusive self-dealing should be prohibited. C. Members of the board and managers should be required to disclose any material interests in transactions or matters affecting the corporation.

III. THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCEThe corporate governance framework should recognise the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.A. The corporate governance framework should assure that the rights of stakeholders that are protected by law are respected. B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights. C. The corporate governance framework should permit performance-enhancing mechanisms for stakeholder participation. D. Where stakeholders participate in the corporate governance process, they should have access to relevant information.

IV. DISCLOSURE AND TRANSPARENCYThe corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.A. Disclosure should include, but not be limited to, material information on: 1. The financial and operating results of the company. 2. Company objectives. 3. Major share ownership and voting rights. 4. Members of the board and key executives, and their remuneration. 5. Material foreseeable risk factors. 6. Material issues regarding employees and other stakeholders. 7. Governance structures and policies. B. Information should be prepared, audited, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit.

C. An annual audit should be conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented. D. Channels for disseminating information should provide for fair, timely and cost-efficient access to relevant information by users.

V. THE RESPONSIBILITIES OF THE BOARDThe corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the boards accountability to the company and the shareholders.A. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders. B. Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly. C. The board should ensure compliance with applicable law and take into account the interests of stakeholders. D. The board should fulfil certain key functions, including: 1. Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures. 2. Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning. 3. Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process. 4. Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions. 5. Ensuring the integrity of the corporations accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law. 6. Monitoring the effectiveness of the governance practices under which it operates and making changes as needed. 7. Overseeing the process of disclosure and communications.OECD Principles of Corporate Governance

E. The board should be able to exercise objective judgement on corporate affairs independent, in particular, from management. 1. Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgement to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are financial reporting, nomination and executive and board remuneration. 2. Board members should devote sufficient time to their responsibilities. F. In order to fulfil their responsibilities, board members should have access to accurate, relevant and timely information.

Part Two

ANNOTATIONS TO THE OECD PRINCIPLES OF CORPORATE GOVERNANCE27

I. THE RIGHTS OF SHAREHOLDERSThe corporate governance framework should protect shareholders rights.Equity investors have certain property rights. For example, an equity share can be bought, sold, or transferred. An equity share also entitles the investor to participate in the profits of the corporation, with liability limited to the amount of the investment. In addition, ownership of an equity share provides a right to information about the corporation and a right to influence the corporation, primarily by participation in general shareholder meetings and by voting. As a practical matter, however, the corporation cannot be managed by shareholder

referendum. The shareholding body is made up of individuals and institutions whose interests, goals, investment horizons and capabilities vary. Moreover, the corporation's management must be able to take business decisions rapidly. In light of these realities and the complexity of managing the corporation's affairs in fast moving and ever changing markets, shareholders are not expected to assume responsibility for managing corporate activities. The responsibility for corporate strategy and operations is typically placed in the hands of the board and a management team that is selected, motivated and, when necessary, replaced by the board. Shareholders rights to influence the corporation centre on certain fundamental issues, such as the election of board members, or other means of influencing the composition of the board, amendments to the company's organic documents, approval of extraordinary transactions, and other basic issues as specified in company law and internal company statutes. This Section can be seen as a statement of the most basic rights of shareholders, which are recognised by law in virtually all OECD countries. Additional rights such as the approval or election of auditors, direct nomination of board members, the ability to pledge shares, the approval of distributions of profits, etc., can be found in various jurisdictions. A. Basic shareholder rights include the right to: 1) secure methods of ownership registration; 2) convey or transfer shares; 3) obtain relevant information on the corporation on a timely and regular basis; 4) participate and vote in general shareholder meetings; 5) elect members of the board; and 6) share in the profits of the corporation.OECD Principles of Corporate Governance 28

B. Shareholders have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes such as: 1) amendments to the statutes, or articles of incorporation or similar governing documents of the company; 2) the authorisation of additional shares; and 3) extraordinary transactions that in effect result in the sale of the company. C. Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures, that govern general shareholder meetings: 1. Shareholders should be furnished with sufficient and timely information concerning the date, location and agenda of general meetings, as well as full and timely information regarding the issues to be decided at the meeting. 2. Opportunity should be provided for shareholders to ask questions of the board and to place items on the agenda at general meetings, subject to reasonable limitations. In order to enlarge the ability of investors to participate in general meetings, some companies have increased the ability of shareholders to place items on the agenda by simplifying the process of filing amendments and resolutions. The ability of shareholders to submit questions in advance and to obtain replies from management and board members has also been increased. Companies are justified in assuring that frivolous or disruptive attempts to place items on the agenda do not occur. It is reasonable, for example, to require that in order for shareholderproposed resolutions to be placed on the agenda, they need to be supported by those holding a specified number of shares. 3. Shareholders should be able to vote in person or in absentia, and equal effect should be given to votes whether cast in person or in absentia. The Principles recommend that voting by proxy be generally accepted. Moreover, the objective of broadening shareholder participation suggests

that companies consider favourably the enlarged use of technology in voting, including telephone and electronic voting. The increased importance of foreign shareholders suggests that on balance companies ought to make every effort to enable shareholders to participate through means which make use of modern technology. Effective participation of shareholders in general meetings can be enhanced by developing secure electronic means of communication and allowing shareholders to communicate with each other without having to comply with the formaliOECDPrinciples of Corporate Governance 29

ties of proxy solicitation. As a matter of transparency, meeting procedures should ensure that votes are properly counted and recorded, and that a timely announcement of the outcome be made. D. Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed. Some capital structures allow a shareholder to exercise a degree of control over the corporation disproportionate to the shareholders equity ownership in the company. Pyramid structures and cross shareholdings can be used to diminish the capability of non-controlling shareholders to influence corporate policy. In addition to ownership relations, other devices can affect control over the corporation. Shareholder agreements are a common means for groups of shareholders, who individually may hold relatively small shares of total equity, to act in concert so as to constitute an effective majority, or at least the largest single block of shareholders. Shareholder agreements usually give those participating in the agreements preferential rights to purchase shares if other parties to the agreement wish to sell. These agreements can also contain provisions that require those accepting the agreement not to sell their shares for a specified time. Shareholder agreements can cover issues such as how the board or the Chairman will be selected. The agreements can also oblige those in the agreement to vote as a block. Voting caps limit the number of votes that a shareholder may cast, regardless of the number of shares the shareholder may actually possess. Voting caps therefore redistribute control and may affect the incentives for shareholder participation in shareholder meetings. Given the capacity of these mechanisms to redistribute the influence of shareholders on company policy, shareholders can reasonably expect that all such capital structures and arrangements be disclosed. E. Markets for corporate control should be allowed to function in an efficient and transparent manner. 1. The rules and procedures governing the acquisition of corporate control in the capital markets, and extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class.OECD Principles of Corporate Governance 30

2. Anti-take-over devices should not be used to shield management from accountability. In some countries, companies employ anti-take-over devices. However, both investors and stock exchanges have expressed concern over the possibility that widespread use of anti-take-over devices may be a serious impediment to the functioning of the market for corporate control. In

some instances, take-over defences can simply be devices to shield the management from shareholder monitoring. F. Shareholders, including institutional investors, should consider the costs and benefits of exercising their voting rights. The Principles do not advocate any particular investment strategy for investors and do not seek to prescribe the optimal degree of investor activism. Nevertheless, many investors have concluded that positive financial returns can be obtained by undertaking a reasonable amount of analysis and by exercising their voting rights. Some institutional investors also disclose their own policies with respect to the companies in which they invest.31

II. THE EQUITABLE TREATMENT OF SHAREHOLDERSThe corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.Investors confidence that the capital they provide will be protected from misuse or misappropriation by corporate managers, board members or controlling shareholders is an important factor in the capital markets. Corporate boards, managers and controlling shareholders may have the opportunity to engage in activities that may advance their own interests at the expense of non-controlling shareholders. The Principles support equal treatment for foreign and domestic shareholders in corporate governance. They do not address government policies to regulate foreign direct investment. One of the ways in which shareholders can enforce their rights is to be able to initiate legal and administrative proceedings against management and board members. Experience has shown that an important determinant of the degree to which shareholder rights are protected is whether effective methods exist to obtain redress for grievances at a reasonable cost and without excessive delay. The confidence of minority investors is enhanced when the legal system provides mechanisms for minority shareholders to bring lawsuits when they have reasonable grounds to believe that their rights have been violated. There is some risk that a legal system, which enables any investor to challenge corporate activity in the courts, can become prone to excessive litigation. Thus, many legal systems have introduced provisions to protect management and board members against litigation abuse in the form of tests for the sufficiency of shareholder complaints, so-called safe harbours for management and board member actions (such as the business judgement rule) as well as safe harbours for the disclosure of information. In the end, a balance must be struck between allowing investors to seek remedies for infringement of ownership rights and avoiding excessive litigation. Many countries have found that alternative adjudication procedures, such as administrative hearings or arbitration procedures organised by the securiOECDPrinciples of Corporate Governance 32

ties regulators or other regulatory bodies, are an efficient method for dispute settlement, at least at the first instance level. A. All shareholders of the same class should be treated equally. 1. Within any class, all shareholders should have the same voting rights. All investors should be able to obtain information about the voting rights attached to all classes of shares before they purchase. Any changes in voting rights should be subject to shareholder vote. The optimal capital structure of the firm is best decided by the management and the board, subject to the approval of the shareholders. Some companies issue preferred (or preference) shares which have a preference in respect of receipt of the profits of the firm but which normally

have no voting rights. Companies may also issue participation certificates or shares without voting rights, which would presumably trade at different prices than shares with voting rights. All of these structures may be effective in distributing risk and reward in ways that are thought to be in the best interest of the company and to cost-efficient financing. The Principles do not take a position on the concept of one share one vote. However, many institutional investors and shareholder associations support this concept. Investors can expect to be informed regarding their voting rights before they invest. Once they have invested, their rights should not be changed unless those holding voting shares have had the opportunity to participate in the decision. Proposals to change the voting rights of different classes of shares are normally submitted for approval at general shareholders meetings by a specified majority of voting shares in the affected categories. 2. Votes should be cast by custodians or nominees in a manner agreed upon with the beneficial owner of the shares. In some OECD countries it was customary for financial institutions which held shares in custody for investors to cast the votes of those shares. Custodians such as banks and brokerage firms holding securities as nominees for customers were sometimes required to vote in support of management unless specifically instructed by the shareholder to do otherwise. The trend in OECD countries is to remove provisions that automatically enable custodian institutions to cast the votes of shareholders. Rules in some countries have recently been revised to require custodian institutions to provide shareholders with information concerning their options in the use of their voting rights. Shareholders may elect to delegate allOECD Principles of Corporate Governance 33

voting rights to custodians. Alternatively, shareholders may choose to be informed of all upcoming shareholder votes and may decide to cast some votes while delegating some voting rights to the custodian. It is necessary to draw a reasonable balance between assuring that shareholder votes are not cast by custodians without regard for the wishes of shareholders and not imposing excessive burdens on custodians to secure shareholder approval before casting votes. It is sufficient to disclose to the shareholders that, if no instruction to the contrary is received, the custodian will vote the shares in the way he deems consistent with shareholder interest. It should be noted that this item does not apply to the exercise of voting rights by trustees or other persons acting under a special legal mandate (such as, for example, bankruptcy receivers and estate executors). 3. Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes. In Section I of the Principles, the right to participate in general shareholder meetings was identified as a shareholder right. Management and controlling investors have at times sought to discourage non-controlling or foreign investors from trying to influence the direction of the company. Some companies charged fees for voting. Other impediments included prohibitions on proxy voting and the requirement of personal attendance at general shareholder meetings to vote. Still other procedures may make it practically impossible to exercise ownership rights. Proxy materials may be sent too close to the time of general shareholder meetings to allow investors adequate time for reflection and consultation. Many companies in OECD countries are seeking to develop better channels

of communication and decision-making with shareholders. Efforts by companies to remove artificial barriers to participation in general meetings are encouraged. B. Insider trading and abusive self-dealing should be prohibited. Abusive self-dealing occurs when persons having close relationships to the company exploit those relationships to the detriment of the company and investors. Since insider trading entails manipulation of the capital markets, it is prohibited by securities regulations, company law and/or criminal law in most OECD countries. However, not all jurisdictions prohibit such practices, and in some cases enforcement is not vigorous. These practices can be seen as constituting a breach of good corporate governance inasmuch as they violate the principle of equitable treatment of shareholders.OECD Principles of Corporate Governance 34

The Principles reaffirm that it is reasonable for investors to expect that the abuse of insider power be prohibited. In cases where such abuses are not specifically forbidden by legislation or where enforcement is not effective, it will be important for governments to take measures to remove any such gaps. C. Members of the board and managers should be required to disclose any material interests in transactions or matters affecting the corporation. This item refers to situations where members of the board and managers have a business, family or other special relationship to the company that could affect their judgement with respect to a transaction.35

III. THE ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCEThe corporate governance framework should recognise the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.A key aspect of corporate governance is concerned with ensuring the flow of external capital to firms. Corporate governance is also concerned with finding ways to encourage the various stakeholders in the firm to undertake socially efficient levels of investment in firm-specific human and physical capital. The competitiveness and ultimate success of a corporation is the result of teamwork that embodies contributions from a range of different resource providers including investors, employees, creditors, and suppliers. Corporations should recognise that the contributions of stakeholders constitute a valuable resource for building competitive and profitable companies. It is, therefore, in the long-term interest of corporations to foster wealth-creating co-operation among stakeholders. The governance framework should recognise that the interests of the corporation are served by recognising the interests of stakeholders and their contribution to the long-term success of the corporation. A. The corporate governance framework should assure that the rights of stakeholders that are protected by law are respected. In all OECD countries stakeholder rights are established by law, such as labour law, business law, contract law, and insolvency law. Even in areas where stakeholder interests are not legislated, many firms make additional commitments to stakeholders, and concern over corporate reputation and corporate performance often require the recognition of broader interests. B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights. The legal framework and process should be transparent and not impede the ability of stakeholders to communicate and to obtain redress for the violation of rights.

OECD Principles of Corporate Governance 36

C. The corporate governance framework should permit performance-enhancing mechanisms for stakeholder participation. Corporate governance frameworks will provide for different roles for stakeholders. The degree to which stakeholders participate in corporate governance depends on national laws and practices, and may vary from company to company as well. Examples of mechanisms for stakeholder participation include: employee representation on boards; employee stock ownership plans or other profit sharing mechanisms or governance processes that consider stakeholder viewpoints in certain key decisions. They may, in addition, include creditor involvement in governance in the context of insolvency proceedings. D. Where stakeholders participate in the corporate governance process, they should have access to relevant information. Where laws and practice of corporate governance systems provide for participation by stakeholders, it is important that stakeholders have access to information necessary to fulfil their responsibilities.37

IV. DISCLOSURE AND TRANSPARENCYThe corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.In most OECD countries a large amount of information, both mandatory and voluntary, is compiled on publicly traded and large unlisted enterprises, and subsequently disseminated to a broad range of users. Public disclosure is typically required, at a minimum, on an annual basis though some countries require periodic disclosure on a semi-annual or quarterly basis, or even more frequently in the case of material developments affecting the company. Companies often make voluntary disclosure that goes beyond minimum disclosure requirements in response to market demand. A strong disclosure regime is a pivotal feature of market-based monitoring of companies and is central to shareholders ability to exercise their voting rights. Experience in countries with large and active equity markets shows that disclosure can also be a powerful tool for influencing the behaviour of companies and for protecting investors. A strong disclosure regime can help to attract capital and maintain confidence in the capital markets. Shareholders and potential investors require access to regular, reliable and comparable information in sufficient detail for them to assess the stewardship of management, and make informed decisions about the valuation, ownership and voting of shares. Insufficient or unclear information may hamper the ability of the markets to function, may increase the cost of capital and result in a poor allocation of resources. Disclosure also helps improve public understanding of the structure and activities of enterprises, corporate policies and performance with respect to environmental and ethical standards, and companies relationships with the communities in which they operate. The OECD Guidelines for Multinational Enterprises are relevant in this context. Disclosure requirements are not expected to place unreasonable administrative or cost burdens on enterprises. Nor are companies expected to discloseOECD Principles of Corporate Governance 38

information that may endanger their competitive position unless disclosure is necessary to fully inform the investment decision and to avoid misleading the investor. In order to determine what information should be disclosed at a minimum, many

countries apply the concept of materiality. Material information can be defined as information whose omission or misstatement could influence the economic decisions taken by users of information. The Principles support timely disclosure of all material developments that arise between regular reports. They also support simultaneous reporting of information to all shareholders in order to ensure their equitable treatment. A. Disclosure should include, but not be limited to, material information on: 1. The financial and operating results of the company. Audited financial statements showing the financial performance and the financial situation of the company (most typically including the balance sheet, the profit and loss statement, the cash flow statement and notes to the financial statements) are the most widely used source of information on companies. In their current form, the two principal goals of financial statements are to enable appropriate monitoring to take place and to provide the basis to value securities. Managements discussion and analysis of operations is typically included in annual reports. This discussion is most useful when read in conjunction with the accompanying financial statements. Investors are particularly interested in information that may shed light on the future performance of the enterprise. It is important that transactions relating to an entire group be disclosed. Arguably, failures of governance can often be linked to the failure to disclose the whole picture, particularly where off-balance sheet items are used to provide guarantees or similar commitments between related companies. 2. Company objectives. In addition to their commercial objectives, companies are encouraged to disclose policies relating to business ethics, the environment and other public policy commitments. Such information may be important for investors and other users of information to better evaluate the relationship between companies and the communities in which they operate and the steps that companies have taken to implement their objectives. 3. Major share ownership and voting rights. One of the basic rights of investors is to be informed about the ownership structure of the enterprise and their rights vis--vis the rights of other owners. Countries often require disclosure of ownership data once certainOECD Principles of Corporate Governance 39

thresholds of ownership are passed. Such disclosure might include data on major shareholders and others that control or may control the company, including information on special voting rights, shareholder agreements, the ownership of controlling or large blocks of shares, significant cross shareholding relationships and cross guarantees. (See Section I.D.) Companies are also expected to provide information on related party transactions. 4. Members of the board and key executives, and their remuneration. Investors require information on individual board members and key executives in order to evaluate their experience and qualifications and assess any potential conflicts of interest that might affect their judgement. Board and executive remuneration are also of concern to shareholders. Companies are generally expected to disclose sufficient information on the remuneration of board members and key executives (either individually or in the aggregate) for investors to properly assess the costs and benefits of remuneration plans and the contribution of incentive schemes, such as stock option schemes, to performance. 5. Material foreseeable risk factors. Users of financial information and market participants need information

on reasonably foreseeable material risks that may include: risks that are specific to the industry or geographical areas; dependence on commodities; financial market risk including interest rate or currency risk; risk related to derivatives and off-balance sheet transactions; and risks related to environmental liabilities. The Principles do not envision the disclosure of information in greater detail than is necessary to fully inform investors of the material and foreseeable risks of the enterprise. Disclosure of risk is most effective when it is tailored to the particular industry in question. Disclosure of whether or not companies have put systems for monitoring risk in place is also useful. 6. Material issues regarding employees and other stakeholders. Companies are encouraged to provide information on key issues relevant to employees and other stakeholders that may materially affect the performance of the company. Disclosure may include management/ employee relations, and relations with other stakeholders such as creditors, suppliers, and local communities. Some countries require extensive disclosure of information on human resources. Human resource policies, such as programmes for humanOECD Principles of Corporate Governance 40

resource development or employee share ownership plans, can communicate important information on the competitive strengths of companies to market participants. 7. Governance structures and policies. Companies are encouraged to report on how they apply relevant corporate governance principles in practice. Disclosure of the governance structures and policies of the company, in particular the division of authority between shareholders, management and board members is important for the assessment of a companys governance B. Information should be prepared, audited, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit. The application of high quality standards is expected to significantly improve the ability of investors to monitor the company by providing increased reliability and comparability of reporting, and improved insight into company performance. The quality of information depends on the standards under which it is compiled and disclosed. The Principles support the development of high quality internationally recognised standards, which can serve to improve the comparability of information between countries. C. An annual audit should be conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented. Many countries have considered measures to improve the independence of auditors and their accountability to shareholders. It is widely felt that the application of high quality audit standards and codes of ethics is one of the best methods for increasing independence and strengthening the standing of the profession. Further measures include strengthening of board audit committees and increasing the boards responsibility in the auditor selection process. Other proposals have been considered by OECD countries. Some countries apply limitations on the percentage of non-audit income that the auditor can receive from a particular client. Other countries require companies to disclose the level of fees paid to auditors for non-audit services. In addition there may be limitations on the total percentage of auditor income that can come from one client. Examples of other proposals include quality reviews

of auditors by another auditor, prohibitions on the provision of non-audit services, mandatory rotation of auditors and the direct appointment of auditors by shareholders.OECD Principles of Corporate Governance 41

D. Channels for disseminating information should provide for fair, timely and cost-efficient access to relevant information by users. Channels for the dissemination of information can be as important as the content of the information itself. While the disclosure of information is often provided for by legislation, filing and access to information can be cumbersome and costly. Filing of statutory reports has been greatly enhanced in some countries by electronic filing and data retrieval systems. The Internet and other information technologies also provide the opportunity for improving information dissemination.42

V. THE RESPONSIBILITIES OF THE BOARDThe corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the boards accountability to the company and the shareholders.Board structures and procedures vary both within and among OECD countries. Some countries have two-tier boards that separate the supervisory function and the management function into different bodies. Such systems typically have a supervisory board composed of non-executive board members and a management board composed entirely of executives. Other countries have unitary boards, which bring together executive and non-executive board members. The Principles are intended to be sufficiently general to apply to whatever board structure is charged with the functions of governing the enterprise and monitoring management. Together with guiding corporate strategy, the board is chiefly responsible for monitoring managerial performance and achieving an adequate return for shareholders, while preventing conflicts of interest and balancing competing demands on the corporation. In order for boards to effectively fulfil their responsibilities they must have some degree of independence from management. Another important board responsibility is to implement systems designed to ensure that the corporation obeys applicable laws, including tax, competition, labour, environmental, equal opportunity, health and safety laws. In addition, boards are expected to take due regard of, and deal fairly with, other stakeholder interests including those of employees, creditors, customers, suppliers and local communities. Observance of environmental and social standards is relevant in this context. A. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders. In some countries, the board is legally required to act in the interest of the company, taking into account the interests of shareholders, employees, and the public good. Acting in the best interest of the company should not permit management to become entrenched.OECD Principles of Corporate Governance 43

B. Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly. C. The board should ensure compliance with applicable law and take into account the interests of stakeholders. D. The board should fulfil certain key functions, including: 1. Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.

2. Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning. 3. Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process. 4. Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions. 5. Ensuring the integrity of the corporations accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law. 6. Monitoring the effectiveness of the governance practices under which it operates and making changes as needed. 7. Overseeing the process of disclosure and communications. The specific functions of board members may differ according to the articles of company law in each jurisdiction and according to the statutes of each company. The above-noted elements are, however, considered essential for purposes of corporate governance. E. The board should be able to exercise objective judgement on corporate affairs independent, in particular, from management. The variety of board structures and practices in different countries will require different approaches to the issue of independent board members. Board independence usually requires that a sufficient number of board members not be employed by the company and not be closely related to the company or its management through significant economic, family or other ties. This does not prevent shareholders from being board members. Independent board members can contribute significantly to the decisionmaking of the board. They can bring an objective view to the evaluation of the performance of the board and management. In addition, they can playOECD Principles of Corporate Governance 44

an important role in areas where the interests of management, the company and shareholders may diverge such as executive remuneration, succession planning, changes of corporate control, take-over defences, large acquisitions and the audit function. The Chairman as the head of the board can play a central role in ensuring the effective governance of the enterprise and is responsible for the boards effective function. The Chairman may in some countries, be supported by the company secretary. In unitary board systems, the separation of the roles of the Chief Executive and Chairman is often proposed as a method of ensuring an appropriate balance of power, increasing accountability and increasing the capacity of the board for independent decision making. 1. Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgement to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are financial reporting, nomination and executive and board remuneration. While the responsibility for financial reporting, remuneration and nomination are those of the board as a whole, independent non-executive board members can provide additional assurance to market participants that their interests are defended. Boards may also consider establishing specific committees to consider questions where there is a potential for conflict of interest. These committees may require a minimum number or be composed entirely of non-executive members. 2. Board members should de