Components of a good corporate governance - A full report

1. 1
A REPORT ON
COMPONENTS OF GOOD CORPORATE GOVERNANCE
Submitted By:-
RAM KRISHNA TIWARI
MFC 2ND
SEMESTER
Roll no. 23
A Literatures Review Report
Submitted to:-
Rishi Chapagai
Lecturer
SOMTU
In the partial fulfillment of Requirements for the
INTERNAL EVALUATION
Corporate Governance
January, 2015

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Acknowledgement
I would like to express my deepest appreciation to all those who provided me the possibility to
complete this report. A special gratitude I give to our Second Semester Corporate Governance
facilitator, Mr. Rishi Chapagai, whose contribution in stimulating suggestions and
encouragement, helped me to coordinate my project especially in writing this report.
Furthermore I would also like to acknowledge with much appreciation the crucial role of the
friends of SOMTU, who gave the valuable knowledge and the necessary materials to complete
the task. A special thanks goes to my friend, OM Prakash Bhandari, who help me to assemble the
parts and gave suggestion about the task. I have to appreciate the guidance given by other
supervisor as well as the panels especially in my project presentation that has improved my
writing skills thanks to their comment and advices.
Ram Krishna Tiwari
SOMTU
Kirtipur, Kathmandu

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ABBREVIATION
& and
A/C Account
BAFIA Banking and Financial Institution Act
CG Corporate Governance
FY Fiscal Year
ICAAP Internal Capital Adequacy Assessment Process
I.e. That is
NEPSE Nepal Stock Exchange
NG Nepal Government
No. Number
NRB Nepal Rastra Bank
OECD Organization for Economic Co-operation and Development
S.N. Serial Number
SEBON Security Board of Nepal

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Table of Contents
CHAPTER:-I.....................................................................................................................................1
INTRODUCTION.............................................................................................................................1
The History of Corporate Governance............................................................................................1
Introduction...................................................................................................................................1
Objectives of study ........................................................................................................................2
Limitation of Study........................................................................................................................2
Research Methodology ..................................................................................................................2
Basic Principles and Objectives of Corporate Governance .............................................................3
The basic principles: ..................................................................................................................3
Main Objectives:........................................................................................................................3
CHAPTER-II ....................................................................................................................................4
PRESENTATION AND ANALYSIS OF INFORMATION ..............................................................4
Causes Behind Development of the Concept ..................................................................................4
Models of Corporate Governance ..................................................................................................4
Actors of Corporate Governance....................................................................................................5
The Key to Good Corporate Governance .......................................................................................5
OECD Principles on Corporate Governance...................................................................................5
Purpose of OECD Principles..........................................................................................................6
Six Principles of OECD on the Corporate Governance ...............................................................6
Key corporate actors ......................................................................................................................6
The Board of Directors...............................................................................................................7
The CEO and Management ........................................................................................................7
Audit Committee........................................................................................................................8
Corporate Governance Committee..............................................................................................8
Corporate Compliance................................................................................................................9
Nepalese Context.........................................................................................................................10
NRB circular to promote good corporate governance in BFIs ...................................................11
Chapter-III ......................................................................................................................................13
Conclusion ......................................................................................................................................13
References.......................................................................................................................................14

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CHAPTER:-I
INTRODUCTION
The History of Corporate Governance
“Corporate governance” first came into vogue in the 1970s in the United States. Within 45 years
corporate governance had become the subject of debate worldwide by academics, regulators,
executives and investors. This paper traces developments occurring since 1970, by which point
“corporate governance” was well-entrenched as academic and regulatory shorthand. The paper
concludes by reviewing articles and; literatures briefly recent developments and by maintaining
that analysis of the inter-relationship between directors, executives and shareholders of publicly
traded companies is likely to be conducted through the conceptual prism of corporate governance
for the foreseeable future.
In Nepal, in the support of World Bank, the Financial Sector Reformation Project is started in
2002. Then, Nepal Rastra Bank Act-2058, Bank and Financial Institutions Act-2063 and
Company Act-2063 are enforced. That has fully empowered Nepal Rastra Bank with the power
relating to licensing, supervising and regulating Nepal’s all Bank and Financial Institutions,
except cooperative organizations, Employee Provident Fund and Citizens Investment Fund.
The Nepal Rastra Bank Act-2058 has, in this regard, laid down the basic legal and operational
propositions by which it can be run as an independent and autonomous central banking
organization. The Bank and Financial Institutions Act -2063 has made the Nepal Rastra Bank
more powerful. It has repealed five statutory laws and the powers are lain down in the single
Umbrella Act for the purpose of improving the Nepal Rastra Bank as a central bank of Nepal.
The Company Act-2063 has emphasized on Good Corporate Governance among its major
Characteristics. (Brian R. Cheffins)
Introduction
The phrase “corporate governance” describes “the framework of rules, relationships, systems and
processes within and by which authority is exercised and controlled within corporations. It
encompasses the mechanisms by which companies, and those in control, are held to
account.”Good corporate governance promotes investor confidence. (Australian Stock Exchange)
A good system of corporate governance represents the key element for the improvement of
economic efficiency. Corporate governance represents the system by which a corporation is
managed and controlled.
International standards pay high attention to the corporate governance. In accordance with
OECD principles for corporations’ management, corporate governance implies a set of relations

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between the Council, executive body, shareholders and other associated parties (employees,
partners, creditors, local authorities etc.) of the company.
The strategic investors will evaluate the observance of the corporate governance norms as part of
their measures for protection of stockholders rights and against risks according to the accepted
general norms in a particular country.
That is why, the Corporate Governance in a corporate organization is principally rule based,
simple, moral, accountable, responsible and transparent, and has to be focused on the protection
of interest of investors, company itself and the public at large. It is the duty of the board of
directors of a company. Thus, the Corporate Governance---
- Checks direct extraction from the company of excessive benefits by management, e.g.
drawing large salaries, pension, share options, use of company assets (vehicles, apartments), etc.
- Checks the manipulation of the share price by misrepresenting the company's
profitability, usually so that shares in the company can be sold or options 'cashed in'.
- Minimizes the contingent risk of the company, controls unfair conduct of the officials
and maintains sustainability of the business. (Kalika, Satya Narayan)
Objectives of study
To find out components of Good Corporate Governance, the specified objectives of this study
are as follow.
a. To find out meaning of Corporate Governance.
b. To know the components of CG.
c. To find out current position of CG in Nepal.
d. To find out principles of CG.
e. To find out the other areas and scope of CG.
f. To find out the benefits of CG.
Limitation of Study
This report is about components of Good Corporate Governance. The information available on
the other published articles was limited because it depends upon the secondary or relevant data,
so that the all information cannot be expressed in the desired form.
Whereas in Nepal about CG, there are few sources to collect information and data. So that, lot of
study about CG can’t be done by this paper.
ResearchMethodology
The sources of information used in this study are basically secondary in nature and to some
extent primary information are also used. All the necessary information for the project is
collected from booklets, bulletins, reports, financial statements and journal of SEBON. This
report, I have used qualitative analysis for the interpretation of such information.

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Basic Principles and Objectives of Corporate Governance
The basic principles:
• People are more important than the process
• There must be an appropriate regulatory regime to back these obligations
• Shareholder accountability
• External audit must be independent and penetrating
• Disclosure and transparency are crucial to market integrity
• The BOD is responsible as the agent of the corporation
Main Objectives:
• To promote a healthy environment of investment
• To create a trust in a corporate and in its abilities
• To promote business sustainability and risk minimization
• To improve the efficiency of the capital market
• To enhance effectiveness in the service of real economy (Kalika, Satya N.)

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CHAPTER-II
PRESENTATION AND ANALYSIS OF INFORMATION
Causes Behind Development of the Concept
The Corporate Governance is about ensuring that companies are run well in the best interest of
the Corporation itself, the shareholders, their stakeholders and the wider community. The causal
incidents behind the rise of principles of the Corporate Governance can be summarized below
(Athavale, 2006).
The need to insure Corporate Governance in the UK felt in 1980s following the collapse of high
profile companies like Maxwell, Polly Peck, BCCI, etc.
The Poor standard of Corporate Governance led to insufficient control in the companies
preventing from wrongdoing. The lesson taken by the collapses of Enron, and WorldCom
incidents.
The Collapse of economy in India in the 1992 brought new experiences that, financial
indiscipline and negligence of a single person may ruin a company having hundred years of
reputation in a contingent small jolt.
International efforts have been made for a number of years for strengthening in standards of
Corporate Governance by OECD, ICGN and Basel-II.
The published scandals of well established companies are the example of abuse of the trust
makes aware the democratic governments and their regulatory agency. (Kalika, Satya N.)
Models of Corporate Governance
The Corporate Governance may be of two models from the point of view of beneficiary-
(i) liberal and
(ii) Coordinated.
The liberal model of the Corporate Governance gives emphasis to the interest of the
shareholders. It is found in the Anglo-American countries that prefer capitalism model of
economy. The coordinated model of Corporate Governance recognizes the larger interest of the
workers, managers, suppliers, customers and the general community (Prasad, 2006).
However, the both have distinct competitive advantage performed in the different ways.
Nepalese legislations such as, Company Act, Bank and Financial Institution Act of 2063 and,
Nepal Rastra Bank Act are influenced by the liberal model of corporate governance. (Kalika,
Satya N.)

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Actors of Corporate Governance
The Corporate Governance refers to the balanced relationship that exists between the different
participants, defining the direction and the performance of a corporate organization. The main
tripod actors are the Chief Executive Officer, the Board of Directors (BOD) and the Shareholders
of the corporation who play a vital role in farming and applying the policies formally. The
auxiliary actors who are influencing the governance in the organization are the staffs, suppliers,
consumers, creditors, regulatory bodies and the community (Davies, 2000).
The need of which is fulfilled by the natural person as the agent of the company to perform the
corporate activities. The natural persons are appointed as the directors and the senior managers
therefore; their moral, ethical and value framing works are expected to take the decisions on
behalf of the company/corporation. (Kalika, Satya N.)
The Key to Good Corporate Governance
The key to good and effective Corporate Governance is to ensure the individuals are rewarded at
appropriate levels for their effort and skills whilst ensuring that they act in the best interest of the
company and its stakeholders. (Kalika, Satya N.)
1. Responsibility
2. Accountability
3. Transparency
4. Rule based system
5. Protection of rights of minority shareholders
6. Protection of rights of depositors in bank and financial institutions.
OECD Principles on Corporate Governance
The principles developed by the OECD is internationally recognizes. On May 1999, twenty nine
member countries meeting constituted the Organization for Economic Cooperation and
Development (OECD) and uniformly voted in favors of OECD principles developed on
Corporate Governance. The principle has been backed by the G7 leaders at the Cologne summit
in June1999 as well as ICGN key players known as, key pillars and architects of global
economy.
The OECD principles are declared as the basic minimum standard to be observed by the
international business organization for the common good of wider interest, culture and practices.
The ICGN views on the OECD principles in the form of working kit criteria for Corporate
Governance as: Corporate purpose, communication and reporting, strategic focus, corporate
citizenship, corporate boards, voting rights, optimize performance, return to shareholders and the
remuneration policy and the corporate governance by the government and the regulatory bodies
(Prasad, 2006).

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Purpose of OECD Principles
The Codes of best practice of Good Corporate Governance is the outcome of the companies who
are well run but faced the scandals. Actually, this is the development of pressure extended by
stock exchanges on the companies whose shares are openly traded. Therefore, the principles
constituted in 1999 were revised in 2004by the OECD. The Purpose of OEDC Principle is
(Kalika, Satya N.)
• to assist the governments and regulatory authority in their efforts to evaluate and improve the
legal, institutional and regulatory frameworks.
• to provide guidance and suggestions for stock exchange, investors, corporations, regulatory
authority and other parties that have a role in the process of developing good corporate
governance.
• to apply six principles that are backed by a number of sub-principles of business laws.
E.g.BOD, corporate social responsibility, shareholders, auditors and stakeholders.
• to promote sustainability of the corporations in their fair, transparent and accountable manner.
Six Principles of OECD on the Corporate Governance
Six Principles of Good Corporate Governance developed by the OECD focuses on- (Kalika,
Satya N.)
1) Ensuring the basis for effective Corporate Governance
2) The rights of shareholders and key ownership functions
3) The equitable treatment of shareholders/ owners
4) The Role of Stakeholders in Corporate Governance
5) Disclosure and Transparency of transaction
6) The Responsibilities of the Board of Directors
Key corporate actors
The Corporate Governance refers to the balanced relationship that exists between the different
participants, defining the direction and the performance of a corporate organization. The main
tripod actors are the Chief Executive Officer, the Board of Directors (BOD) and the Shareholders
of the corporation who play a vital role in farming and applying the policies formally. The
auxiliary actors who are influencing the governance in the organization are the staffs, suppliers,
consumers, creditors, regulatory bodies and the community (Davies, 2000). The need of which is
fulfilled by the natural person as the agent of the company to perform the corporate activities.
The natural persons are appointed as the directors and the senior managers therefore; their moral,
ethical and value framing works are expected to take the decisions on behalf of the
company/corporation.

11. 7
The Board of Directors
The selection, compensation and evaluation of a well qualified and ethical CEO is the single
most important function of the board. The board's oversight function carries with it a number of
specific responsibilities in addition to that of selecting the CEO. These include responsibility
for:
i) Planning for management succession.
ii) Understanding, reviewing and monitoring implementation of the corporation's strategic plans.
iii) Understanding and reviewing annual operating plans and budgets.
iv) Focusing on the integrity and clarity of the corporation's financial statements and financial
reporting.
v) Engaging outside auditors and considering independence issues.
vi) Advising management on significant issues facing the corporation.
vii) Reviewing and approving significant corporate actions.
viii) Reviewing management's plans for business resiliency.
ix) Nominating directors and committee members and overseeing effective corporate
governance. (The Business Roundtable)
Board Composition and Leadership
Boards of directors of large publicly owned corporations vary in size from industry to industry
and from corporation to corporation.
The board of a publicly owned corporation should have a substantial degree of independence
from management. Providing objective independent judgment is at the core of the Principles of
Corporate Governance board's oversight function.
The CEO and Management
The CEO and senior management run the corporation's day-to-day business operations. It is the
responsibility of the CEO, and of senior management under the CEO's direction, to operate the
corporation in an effective and ethical manner. (The Business Roundtable)
As part of its operational responsibility, senior management is charged with:
i) Operating the corporation.
ii) Strategic planning.
iii) Annual operating plans and budgets.
iv) Selecting qualified management and establishing an effective organizational
structure.
v) Identifying and managing risks.
vi) Good financial reporting.
In carrying out this function, The Business Roundtable believes that corporations should have:
i. A CEO of integrity.
ii. A strong, ethical "tone at the top."

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iii. Internal controls.
iv. Codes of conduct.
Audit Committee
Every publicly owned corporation should have an audit committee comprised solely of
independent directors. Audit committees typically consist of 3 to 5 members.
Audit committee members should meet minimum financial literacy standards, and at least one of
the committee members should have accounting or financial management expertise, as required
by the listing standards of the major securities markets.
The audit committee is responsible for oversight of the corporation's financial reporting process.
The primary functions of the audit committee are the following (The Business Roundtable):
i. Risk profile: The audit committee should understand the corporation's risk profile and
oversee Principles of Corporate Governance the corporation's risk assessment and
management practices.
ii. Outside auditors. : The selection of an outside auditor should involve an annual due
diligence process in which the audit committee reviews the qualifications, work product,
independence and reputation of the proposed outside auditor.
iii. Independence.
iv. Critical accounting judgments and estimates.
v. Compliance: The audit committee should review the corporation's procedures addressing
compliance with the law and important corporate policies.
vi. Financial statements: The audit committee should review and discuss the corporation's
annual financial statements with management.
Corporate Governance Committee
Every publicly owned corporation should have a committee that addresses corporate governance
issues. (The Business Roundtable)
i. A corporate governance committee should be comprised solely of independent directors.
ii. A corporate governance committee performs the core function of recommending
nominees to the board. The committee also recommends directors for appointment to
committees of the board.
iii. A corporate governance committee should monitor and safeguard the independence of
the board.
iv. A corporate governance committee should oversee and review the corporation's processes
for providing information to the board.
v. A corporate governance committee should develop and recommend to the board a set of
corporate governance principles applicable to the corporation.
vi. A committee comprised of independent directors should oversee the evaluation of the
board and management.

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Corporate Compliance
The Board should ensure that the corporation complies with all relevant laws, regulations,
governance practices, accounting and auditing standards.( Private Sector Corporate Governance
Trust)

14. 10
Nepalese Context
In the support of World Bank, the Financial Sector Reformation Project is started in 2002. Then,
Nepal Rastra Bank Act-2058, Bank and Financial Institutions Act-2063 and Company Act-2063
are enforced. That has fully empowered Nepal Rastra Bank with the power relating to licensing,
supervising and regulating Nepal’s all Bank and Financial Institutions, except cooperative
organizations, Employee Provident Fund and Citizens Investment Fund.
The Nepal Rastra Bank Act-2058 has, in this regard, laid down the basic legal and operational
propositions by which it can be run as an independent and autonomous central banking
organization. This aspect can be visualized in the legal provisions relating to the formation of the
board and areas of responsibilities. The Nepal Rastra Bank Act -2058 has made stringent
provisions regarding the appointment of professional and experienced members of BOD. The
specific educational qualification, experience, renownedness, area division for appointment and
conflict of interest have guaranteed that, the bank and financial institutions can be run with good
corporate manner with trust.
The Bank and Financial Institutions Act -2063 has made the Nepal Rastra Bank more powerful.
It has repealed five statutory laws and the powers are lain down in the single Umbrella Act for
the purpose of improving the Nepal Rastra Bank as a central bank of Nepal. The Company Act-
2063 has emphasized on Good Corporate Governance among its major Characteristics. It has
focused on protection of interest of shareholders, company itself, the influencing stakeholders
and the larger society. It has separated administrative and judicial functions respectively to the
company registrars' office and the court. Besides, the Company Act- 2063, Competition Act,
Security Exchange Act also has focused on the concepts, such as accountability, responsibility
and financial transparency in the Companies. In this context, the Security Exchange Board,
Management Association of Nepal, Federation of Nepalese Chambers of Commerce and other
NGO’s, INGO’s have conducted study project for the purpose of promoting good corporate
governance in Nepal. (Kalika, Satya N.)
Transparency, accountability, information disclosures and stringent ethics practiced by
companies are fundamental in winning investors' confidence. Capital market and so the corporate
sector cannot develop with weak minority shareholders, inadequate or non-disclosures, violation
of laws, non-compliance to the rules and regulations and lack of independent oversight of the
directors. Nepalese corporate sector has yet to establish good governance practices and become
more competitive sector of the economy. (Kafle, Deepak R.)
As a regulator, Securities Board (SEBO) wants to see improved image of Nepalese corporate
sector. It is presently involved in implementing government's capital market reform program that
affects many aspects of corporate governance.
The government has signed a contract with the Asian Development Bank to implement a
Financial and Corporate Governance Project. Modernization of NEPSE would allow it to
facilitate low cost and efficient transactions. Accounting and Auditing Standards are converging
towards international best practices with the progress in the activities of Accounting Standards

15. 11
Board and Auditing Standards Board under the umbrella of the Institute of Chartered
Accountant, Nepal, Act.
NRB circular to promote good corporate governance in BFIs
In a bid to promote good corporate governance practices in banks and financial institutions
(BFIs), the Nepal Rastra Bank (NRB) has introduce a new circular, under which BFIs’
subcommittees should be headed by non-executive board members.
The latest central bank move comes in the wake of a number of incidents in which FIs landed in
trouble due to board members involvement in irregularities.
The central bank has already barred BFIs from forming more than three subcommittees— risk
management, audit and staff management. The new circular says each of these committees
should be led by non-executive board members; the chairman of the board cannot get involved in
them; and the coordinator of a panel cannot head another.
As per the NRB directive, a risk management subcommittee should consist of the operation
department head of the BFI concerned as member and credit department chief or risk
management unit chief as member secretary.
This panel will be responsible for identifying risk, analyzing strategies for its mitigation,
developing new methodologies if the existing ones fail to manage risk properly, and providing
necessary suggestions to the board.
The team is also entrusted with the responsibility to hold discussions on risk assessment,
evaluation and monitoring, capital adequacy ratio, Internal Capital Adequacy Assessment
Process (ICAAP) and the maximum risk the institution can handle. The committee should
suggest the board on developing policies in line with the central bank policies on risk
management.
In case of commercial banks and national-level development banks, such a committee should
regularly conduct ‘stress tests’, analyse results, and make suggestions to the board.
As far as the audit committee is concerned, it should have the internal audit department head as
its member secretary. The committee should analyse remarks of external auditor regarding
financial status of the BFI concerned and direct the management to carry out reforms.
It is also required to review whether the remarks and suggestions made by NRB’s supervision
report have been executed and inform the board about the matter. It should prepare a detailed
action plan about the internal audit process and should ensure its implementation.

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In case of the staff management subcommittee, it should include the audit department chief as
member and human resource department chief as member secretary.
The panel’s tasks include assessing whether the chief executive officer or other staff members
are paid remuneration in violation of the existing law and policies, and make necessary
recommendations to the board. The panel is also responsible for drafting staff policy, review the
structure of employees, prepare succession plans and recommend them to the board for approval.
(ekantipur.com)

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Chapter-III
Conclusion
Company/corporation is a legal person who has no minds and hands, therefore; are run by natural
persons, as agents on behalf of the company. Generally, the salaried professional
managers/directors acquire substantial powers in respect of the affairs of the company. However,
directors have not always had the best interest of shareholders in mind when performing their
managerial functions. The Corporate Governance is an attempt to make directors more
accountable for their policies and actions towards the shareholders.
The concept of Corporate Governance refers to an economic, legal and institutional environment
that allows companies to diversify, grow, restructure, and do everything necessary to maximize
corporation's value and sustainability. Though, corporate governance is not a new notion for
economically developed countries of the west but it is the buzz word in the Nepalese corporate
jargon in these days. The pressure of globalization, open market policy and Nepal’s WTO
membership made it indispensable for the development of Nepalese economy.

18. 14
References
Athavale, Mahesh, A. (ed.by) Corporate Governance: Modules of Best Practices (4th ed.)
ICSI, New Delhi (2006)
Brian R. Cheffins, (December 1, 2011), OXFORD HANDBOOK OF CORPORATE
GOVERNANCE, Mike Wright, Donald Siegel, Kevin Keasey and Igor Filatotchev, eds.,
Oxford University Press, 2013, University of Cambridge Faculty of Law Research Paper No.
54/2011, ECGI - Law Working Paper No. 184/2012
Davies, Paul L, (ed. by) Gower's Principle of Modern Company Law, (6th ed.) (2nd
impression in 2000)
Hicks, Andrew and Goo, S.H., Cases and Materials On Company Law (3rd ed.) Blackstone
Press Ltd. London (1999)
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Unified%20_Directives%20_2067%20_English.pdf access on December 28, 2014
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December 28, 2014
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December 28, 2014
Kalika, Satya Narayan (____),
https://www.epfnepal.com.np/downloads/articles/Satya_Narayan_Kalika.pdf access on
December 28, 2014
Prasad, Kesho, Corporate Governance, Prentice Hall of India (P) LTD, New Delhi (2006).
Private Sector Corporate Governance Trust, (____), Principles for Corporate Governance in
Kenya and a sample Code of Best Practice for Corporate Governance
The Business Roundtable, an association of chief executive officers committed to improving
public policy May 2002, Principles of Corporate Governance
Australian Stock Exchange, March 2003, Principles of Corporate Governance and Best
Practice Recommendations
Kafle, Deepak R., SEBO Journal, Vol. I June 2004 Special Publication, Towards Good
Corporate Governance
ekantipur.com, Monday - 26th December, 2011,New NRB circular to promote good
corporate governance in BFIs
https://www.commercial.hsbc.com.hk/1/2/commercial/livingbusiness/work/gov/element
access on December 28, 2014