Assignment Code: MMPB-006 / TMA / JULY / 2022

Course Code: MMPB-006

Assignment Name: Corporate Governance in Banking and Financial Sector

Year: 2022

Verification Status: Verified by Professor

Q 1. Discuss the following theories of Corporate Governance:

(i) Agency Theory

Ans) Agency theory is a critical component of corporate governance that addresses the relationship between the owners (principals) and the management (agents) of a company. The theory posits that, as management acts on behalf of the owners, there is a risk of "agency problems" arising where the interests of management may not align with those of the owners. This misalignment of interests can lead to a range of negative outcomes, such as excessive risk-taking, poor financial performance, and even fraud. To mitigate these agency problems, corporate governance mechanisms such as board of director oversight, performance-based compensation, and accountability measures are put in place. For instance, by linking management's compensation to the company's financial performance, the interests of management and owners become more aligned. Additionally, regular financial reporting and auditing help ensure transparency and accountability, reducing the risk of fraudulent behavior.

Moreover, the composition and independence of the board of directors play a crucial role in corporate governance. An independent board, free from conflicts of interest, helps ensure that management is accountable to the owners and acts in the best interests of the company. Additionally, the board of directors is responsible for overseeing the management's actions, evaluating the company's strategies, and making recommendations to improve corporate governance. In the end, the agency theory of corporate governance shows how important it is to make sure that management and owners have the same goals. This is done through a number of governance tools, such as pay based on performance, board oversight, and measures of accountability. Effective corporate governance makes sure that management acts in the best interests of the company and its owners, which is good for the company's long-term success and stability.

(ii) Stewardship Theory

Ans) The Stewardship theory of corporate governance is an alternative to the Agency theory, which focuses on the relationship between the owners (principals) and the management (agents) of a company. Unlike the Agency theory, which assumes that the interests of management and owners are misaligned, Stewardship theory posits that management acts as responsible stewards of the company, working in the best interests of the owners.

In this view, the management is seen as having a long-term commitment to the company and its owners and is motivated by a sense of duty and responsibility. The theory suggests that management is committed to making sound business decisions, acting ethically, and maximizing the value of the company over the long term.

Stewardship theory also emphasizes the importance of trust in the management-owner relationship. The owners are assumed to trust the management to act in their best interests, and the management is trusted to act as responsible stewards of the company. This trust enables the management to make strategic decisions without the need for excessive oversight, leading to a more efficient and effective governance structure.

Additionally, Stewardship theory recognizes the importance of the board of directors in ensuring responsible management behavior. The board of directors is responsible for overseeing the management, evaluating the company's strategies, and making recommendations to improve corporate governance. The board is also responsible for ensuring that the management acts as responsible stewards of the company, working in the best interests of the owners.

In conclusion, the Stewardship theory of corporate governance is a unique way to look at the relationship between management and owners. It is based on the idea that management is a good steward of the company and works for the best of the owners. This point of view stresses how important trust is in the relationship and the role of the board of directors in making sure that management is acting in a responsible way. The goal of the Stewardship theory is to make sure that the company and its owners have long-term success and stability.

Q 2. List down the important recommendations of various committees to improve the standards of governance.

Ans) A few committees have been formed to assess the corporate governance status in India and recommended set of governance code and standards.

Some of the important recommendations of these committees are discussed here.

1. Kumar Mangalam Birla Committee, 1999

The committee advised boards to have at least 50% independent directors for objectivity. The committee suggested annual evaluations for board, committee, and director performance. The committee recommended companies regularly and effectively communicate with investors, employees, and other stakeholders. The committee advised a strong whistle-blower policy to encourage employees to report unethical or illegal behaviour. The committee recommended CEO succession plans for emergencies. The committee advised businesses to incorporate CSR.

The committee advised companies to regularly update shareholders on their performance.

2. Naresh Chandra Committee Report, 2002

The Naresh Chandra Committee will examine the statutory auditor-company relationship and propose changes to improve its professionalism. the need, if any, for rotation of statutory audit firms or partners; the procedure for appointing auditors and determining audit fees; restrictions, if necessary, on non-audit fees; independence of auditing functions; measures needed to ensure that management and companies present "true and fair" statements of their financial affairs; and the need to consider measures like management certification of accounts and financial statements.

3. Narayana Murthy Committee, 2003

The committee recommended professional, independent boards with a majority of non-executive directors. To ensure objectivity and impartiality, the committee recommended a minimum of 50% independent directors on boards. The committee advised companies to have audit, remuneration, and nomination committees for board oversight and support. The committee advised businesses to integrate CSR into their operations. The committee stressed transparency and disclosure in corporate governance and advised companies to regularly communicate with shareholders and provide accurate and timely information about their performance and activities.

The committee advised companies to follow international corporate governance standards.

4. J. J. Irani Committee (2005)

The committee advised professional, independent boards with most non-executive directors. The committee advised boards to have at least 50% independent directors for objectivity. Audit, remuneration, and nomination committees were recommended for board oversight and support. For long-term shareholder value, the committee recommended performance-based management. The committee advised companies to regularly update shareholders on their performance and activities. International corporate governance standards were recommended by the committee. The committee advised Indian companies to separate ownership and control to protect shareholders.

5. Kotak Committee (2018)

The committee recommended professional, independent boards with a majority of non-executive directors. To ensure objectivity and impartiality, the committee recommended a minimum of 50% independent directors on boards. The committee advised companies to have audit, remuneration, and nomination committees for board oversight and support. The committee suggested performance-based management for long-term shareholder value. The committee stressed disclosure and transparency in corporate governance and advised companies to regularly communicate with shareholders and provide accurate and timely information about their performance and activities. The committee advised companies to follow international corporate governance standards. The committee advised shareholders to vote and communicate with companies more.

Q 3. Analyse the government initiatives of ensuring fairness and transparency in the mutual funds industry.

Ans) The government of India has implemented a number of reforms in recent years in order to make the mutual fund industry more equitable and transparent.

Some of the key initiatives include:

Regulation by SEBI: The Securities and Exchange Board of India (SEBI) is the primary regulatory body for the mutual funds industry in India. SEBI has implemented several regulations aimed at ensuring fairness and transparency in the mutual funds industry, such as the requirement for mutual funds to appoint a custodian, regular disclosures of fund performance, and regulations on the appointment of fund managers.

Investor education: The government has launched several initiatives to educate investors about mutual funds and to raise awareness about the importance of investing in mutual funds. This includes the creation of the Mutual Fund Awareness Campaign and the Mutual Fund Sahi Hai campaign, which aim to educate and inform investors about the benefits of investing in mutual funds and how to make informed investment decisions.

Fair treatment of investors: The government has introduced regulations to ensure fair treatment of investors in mutual funds. For example, SEBI has implemented regulations requiring mutual funds to disclose their investment policies and strategies, and to provide regular updates on their performance. Additionally, mutual funds are required to disclose any charges or fees that investors may incur as a result of investing in the fund.

Transparency in fund operations: The government has introduced regulations aimed at ensuring transparency in the operations of mutual funds. For example, mutual funds are required to provide regular reports on their holdings, portfolio performance, and investment strategies, which help investors make informed investment decisions. Additionally, mutual funds are required to appoint independent auditors to conduct regular audits of their operations, which helps to ensure that they are operating in a transparent and fair manner.

Protecting investor interests: The government has introduced regulations aimed at protecting the interests of investors in mutual funds. For example, mutual funds are required to maintain a high level of corporate governance and to appoint independent directors to their boards, who are responsible for ensuring that the interests of investors are protected. Additionally, mutual funds are required to have in place robust risk management systems to help manage the risks associated with their investments.

Investors in mutual funds in India now operate in a climate that is both more open and more level-playing thanks to the initiatives taken by the Indian government. Investors are able to make educated decisions about their investments and have confidence that their holdings will be safeguarded when it is ensured that mutual funds operate in a transparent and equitable manner. In turn, this helps to promote long-term growth and stability in the mutual funds industry, which in turn attracts more investment into the sector.

Q 4. Explain how financial inclusion can facilitate the sustainable development goals.

Ans) The term "financial inclusion" refers to making financial services available to a wide variety of people and businesses, including those who do not have bank accounts or who are not currently being served by financial institutions. This encompasses services such as credit and loan applications, insurance policies, and money transfers, among others. Inclusion in the financial system is a crucial factor in achieving sustainable development because it has the potential to aid in the accomplishment of a number of the Sustainable Development Goals established by the United Nations (SDGs).

1. Poverty Reduction: Access to financial services can help low-income households manage their finances more effectively, reducing the risk of falling into poverty. For example, savings accounts and remittances can help households build a safety net and provide a source of income in times of need.

2. Economic Growth: Financial inclusion can promote economic growth by increasing the availability of credit and other financial services to businesses, particularly those in the micro and small enterprise sector. This can help businesses grow and create jobs, boosting economic activity and reducing poverty.

3. Gender Equality: Financial inclusion can play a significant role in promoting gender equality by empowering women and enabling them to access financial services. This can increase their economic independence and decision-making power and help to close the gender pay gap.

4. Quality Education: Financial inclusion can help to increase access to quality education by providing families with the means to pay for school fees, uniforms, and other related expenses. This can help to increase school enrolment and attendance and improve educational outcomes.

5. Climate Action: Financial inclusion can contribute to climate action by providing access to finance for sustainable development projects, such as renewable energy and low-carbon infrastructure. This can help to reduce greenhouse gas emissions and promote more sustainable economic growth.

6. Partnership for the Goals: Financial inclusion requires a coordinated effort between government, private sector, civil society, and development partners. By working together, these stakeholders can create an enabling environment for financial inclusion, increasing access to finance and promoting sustainable development.

Because it has the potential to drive economic growth, reduce poverty, promote gender equality, and contribute to climate action, financial inclusion is a key tool for achieving the Sustainable Development Goals (SDGs). In conclusion, financial inclusion is a key tool for achieving the SDGs. Financial inclusion can contribute to the creation of a more sustainable and equitable future for all people by broadening their access to various forms of finance and financial services.

Q 5. Explain the concept of Business Ethics and its relevance in Corporate Governance.

Ans) The moral principles and values that direct the behaviour of businesses and the decisions they make are referred to as "business ethics." It entails taking into consideration the impact that business practises have on various stakeholders, including employees, customers, and suppliers, as well as the larger community, and making an effort to behave in a socially responsible and environmentally sustainable manner.

The idea of business ethics is inextricably linked to the principles of corporate governance. These principles are designed to ensure that a company is managed in an honest and open manner, with an eye toward the long-term interests of its stakeholders. The implementation of strong ethical policies and practises, such as codes of conduct, whistle-blower mechanisms, and efficient compliance programmes, is necessary for effective corporate governance.

Business ethics is relevant in corporate governance in several ways:

1. Building Trust: Business ethics helps to build trust between a company and its stakeholders by demonstrating a commitment to ethical behavior and social responsibility. This can enhance a company's reputation and increase customer loyalty.

2. Reducing Risk: Adherence to business ethics can reduce the risk of unethical behavior and misconduct, such as bribery, corruption, and exploitation. This can help to maintain the company's integrity and reputation and avoid potential legal and financial consequences.

3. Enhancing Reputation: Companies that demonstrate a commitment to business ethics and corporate social responsibility are often viewed more favourably by investors, customers, and other stakeholders. This can enhance the company's reputation and contribute to long-term success.

4. Encouraging Innovation: Business ethics can encourage innovation and creativity by providing a framework for decision-making that takes into account the impact on stakeholders and the wider community. This can help to create new business opportunities and foster a positive corporate culture.

5. Driving Sustainable Development: Business ethics is closely linked to sustainable development, as it promotes responsible and sustainable business practices. This can help to address environmental and social challenges, such as climate change and poverty, and contribute to a more equitable and sustainable future.

In conclusion, business ethics and corporate governance are tightly intertwined, and both play an important part in ensuring that businesses conduct their operations in a responsible and environmentally conscious manner. Businesses have the opportunity to increase customer confidence, lower their risk exposure, improve their reputation, and contribute to the advancement of sustainable practises when they implement ethical policies and procedures.