Conceptual Framework of Corporate Governance: formula sheet

Key formulas

Core definition

Corporate governance = system by which a company is directed and controlled, with accountability to shareholders and other stakeholders

Use the Cadbury wording for the definition and add the OECD relationship view if the question carries more marks.

Root cause

Separation of ownership from control → agency problem → need for governance

Always link the need for governance to the agency problem.

Global timeline

Cadbury (1992) → OECD Principles (1999) → Sarbanes-Oxley (2002)

Write in date order. Sarbanes-Oxley followed the Enron and WorldCom failures.

Indian timeline

CII Code (1998) → Kumar Mangalam Birla (1999) → Naresh Chandra (2002) → Narayana Murthy (2003) → Companies Act, 2013 → SEBI LODR, 2015 → Uday Kotak (2017)

Clause 49 came into the listing agreement in 2000 on the Birla Committee's recommendation.

Five core principles

Accountability + Transparency + Fairness + Responsibility + Independence

Use these as headings when a question asks for principles. Some texts add integrity or discipline; state which you follow.

Agency theory

Principal (shareholders) ↔ Agent (managers): conflict of interest + information asymmetry → agency costs

Agency costs are monitoring cost, bonding cost and residual loss.

Stewardship theory

Manager = steward → interests aligned with the company → empower, do not over-monitor

Often linked with a combined chairman and CEO role.

Stakeholder theory

Company answers to all stakeholders, not only shareholders

Contrast with the shareholder primacy view.

Resource dependency theory

Board = link to external resources (expertise, contacts, capital, legitimacy)

Supports diverse boards and outside directors.

Anglo-American model

Unitary board + dispersed shareholders + shareholder primacy + market-based control

Used in the USA and UK. Focus is on the agency problem between managers and shareholders.

German model

Two-tier board (supervisory board over management board) + co-determination + stakeholder focus

Supervisory board appoints and monitors the management board. Same person cannot serve on both.

Japanese model

Relationship-based + cross-shareholding + main bank + insider-dominated board

Control comes through group ties and the main bank, not mainly through the market.

Indian model

Unitary board + promoter-controlled ownership + statutory rules (Companies Act, 2013 and SEBI LODR) + stakeholder elements

A hybrid. Describe it as such rather than copying any single foreign model.

Unitary vs two-tier board

Unitary: one board for management and oversight. Two-tier: separate boards for management and supervision.

The core structural difference to state in answers.

Chronology of key reports

Cadbury (UK, 1992) → OECD Principles (1999, revised later) and Birla Committee (constituted 1999, report 2000; Clause 49 in 2000) → Narayana Murthy (set up 2002, report 2003; revised Clause 49 issued 2004, in force around 2005-06) → Kotak (2017)

Birla and OECD both date to 1999, so do not present them as one following the other. Kotak (2017) is a major later review, not the last word. Use this order to structure any comparison answer.

Cadbury approach

Comply or explain

Companies follow the code or disclose and justify any departure. It is a voluntary, disclosure-based approach. Do not apply it to Clause 49, which was a mandatory rule-based listing requirement.

Birla Committee outcome

Birla Committee (constituted 1999, report 2000) → Clause 49 of the listing agreement (introduced 2000, phased in for listed companies)

First mandatory Indian code for listed companies. The recommendations were split into mandatory and non-mandatory; the mandatory ones went into Clause 49. Its board and audit committee ideas were influenced by Cadbury, but its approach was mandatory, not comply or explain.

Narayana Murthy outcome

Narayana Murthy (set up 2002, report 2003) → revised Clause 49 (issued 2004, in force around 2005-06)

Dealt with audit committee, related party disclosures, risk management and CEO/CFO certification. The whistle-blower policy was a non-mandatory recommendation. Check the study material for the exact effective date.

Kotak outcome

Kotak Committee (2017) → LODR amendments

Focus on board composition, independent directors and related party transactions.

Statute versus code

Companies Act, 2013 (binding on companies) + SEBI LODR (binding on listed entities) + OECD (voluntary guidance)

State whether a provision is mandatory or recommendatory.

Typical causes of governance failure

Dominant promoter/CEO + weak or captive board + poor audit/controls + related party abuse + weak ethical culture

Use as a checklist to analyse facts in a case question. Do not assume every cause exists in every case.

Vigil mechanism requirement

Listed companies and prescribed classes must have a vigil mechanism with safeguards against victimisation

Source is Section 177 of the Companies Act, 2013 read with the rules. Check the prescribed classes in the rules before naming them.

Whistle-blower policy essentials

Who can report + what can be reported + how to report + protection + investigation + access to audit committee chair

Use this as the structure when asked to draft or evaluate a policy.

Ethics hierarchy

Law = minimum standard; ethics = higher standard of conduct

A lawful act can still be unethical.

Accountability chain

Board → shareholders and other stakeholders, through disclosure, reporting and redress

Link every failure to a break in this chain.

Quick revision

• Corporate governance is the system by which companies are directed and controlled.
• Good governance rests on fairness, transparency, accountability and responsibility.
• Agency theory deals with the conflict between owners and managers.
• Stewardship theory assumes managers act in the best interest of owners.
• Stakeholder theory extends the company's duty beyond shareholders.
• Compare the models by ownership pattern, board system and who is protected.
• Know the board's composition, the role of independent directors and the main committees.
• Check the exact legal source for each requirement: Companies Act, 2013 or SEBI listing regulations.
• Ethics and codes of conduct support governance where law is silent.
• Governance failures usually involve weak boards, poor disclosure or promoter dominance.
• In case answers, always link facts to a rule before concluding.

Common mistakes

• Defining governance only as 'rules for directors' or 'compliance'. Fix: State that it is a system of direction, control and accountability to shareholders and other stakeholders, not only compliance.
• Mixing up the order of Indian committees. Fix: Remember the sequence CII 1998, Birla 1999, Naresh Chandra 2002, Narayana Murthy 2003, Kotak 2017, and attach one theme to each.
• Treating agency and stewardship theory as the same Fix: Remember the assumption. Agency assumes managers act in self-interest and need monitoring. Stewardship assumes they act for the company and need empowerment.
• Saying stakeholder theory ignores shareholders Fix: Say shareholders are one important stakeholder group, but not the only one.
• Calling the German board unitary or saying one person sits on both boards. Fix: Link 'German' with 'two tiers': a supervisory board above a management board, with separate members.
• Saying the Anglo-American model is stakeholder-focused. Fix: State that its traditional core is shareholder primacy. Say stakeholder concern is a later addition.
• Mixing up the Birla and Narayana Murthy committees. Fix: Remember Birla (committee 1999, Clause 49 in 2000) created Clause 49; Narayana Murthy (set up 2002, report 2003, revised Clause 49 issued 2004 and in force around 2005-06) strengthened it.
• Treating the OECD Principles as binding law. Fix: Say they are non-binding international guidance that countries adapt.
• Writing the story of a scandal without analysis. Fix: For each fact, state the weakness it shows and the reform that would prevent it.
• Quoting exact figures or details of cases from memory. Fix: Use only facts you are sure of. Examiners reward analysis, and a wrong figure loses credibility.

Exam tips

• Always give the year and body for each milestone. Marks are awarded for the right sequence.
• Open every answer with a definition and its source. It is the easiest mark.
• In case-based questions, spot the agency problem or the missing control in the facts and name it.
• Use bullet points and a short timeline. Examiners prefer structured answers over long paragraphs.
• Do not quote a date you are unsure of. Name the committee and its theme instead.
• Expect distinction questions: agency vs stewardship and shareholder vs stakeholder are the most likely pairs.
• Present comparisons point by point in a short list, since the paper is written and rewards structure.
• In case questions, name the theory only after quoting the facts that point to it.