CSR and conceptual framework

1. Unit IV: Conceptual Framework
of Corporate Governance

2. Corporate Governance
• Corporate Governance is the application of best
management practices, compliance of law in true
letter and spirit and adherence to ethical
standards for effective management and
distribution of wealth and discharge of social
responsibility for sustainable development of all
stakeholders.
• Conduct of business in accordance with
shareholders desires (maximising wealth) while
confirming to the basic rules of the society
embodied in the Law and Local Customs

3. Corporate Governance
• Relationships among various participants in determining
the direction and performance of a corporation.
• Effective management of relationships among
• – Shareholders
• – Managers
• – Board of directors
• – employees
• – Customers
• – Creditors
• – Suppliers
• – community

4. Why Corporate Governance?
• Better access to external finance
• Lower costs of capital – interest rates on loans
• Improved company performance –
sustainability
• Higher firm valuation and share performance
• Reduced risk of corporate crisis and scandals

5. Principles of Corporate Governance
• Sustainable development of all stake holders- to
ensure growth of all individuals associated with
or effected by the enterprise on sustainable basis
• Effective management and distribution of
wealth – to ensure that enterprise creates
maximum wealth and judiciously uses the wealth
so created for providing maximum benefits to all
stake holders and enhancing its wealth creation
capabilities to maintain sustainability
• Contd….

6. • Discharge of social responsibility- to ensure that
enterprise is acceptable to the society in which it
is functioning
• Application of best management practices- to
ensure excellence in functioning of enterprise
and optimum creation of wealth on sustainable
basis
• Compliance of law in letter & spirit- to ensure
value enhancement for all stakeholders
guaranteed by the law for maintaining socio-
economic balance
• Adherence to ethical standards- to ensure
integrity, transparency, independence and
accountability in dealings with all stakeholders

7. Four Pillars of Corporate Governance
• Accountability
• Fairness
• Transparency
• Independence
• Accountability
• Ensure that management is accountable to the
Board
• Ensure that the Board is accountable to
shareholders

8. Four Pillars of Corporate Governance
• Fairness
• Protect Shareholders rights
• Treat all shareholders including minorities, equitably
• Provide effective redress for violations
• Transparency
• Ensure timely, accurate disclosure on all material matters,
including the financial situation, performance, ownership
and corporate governance
• Independence
• Procedures and structures are in place so as to minimise,
or avoid completely conflicts of interest
• Independent Directors and Advisers i.e. free from the
influence of others

9. Elements of Corporate Governance
• Good Board practices
• Control Environment
• Transparent disclosure
• Well-defined shareholder rights
• Board commitment

10. Good Board Practices
• Clearly defined roles and authorities
• Duties and responsibilities of Directors
Understood
• Board is well structured
• Appropriate composition and mix of skills

11. Good Board procedures
• Appropriate Board procedures
• Director Remuneration in line with best
practice
• Board self-evaluation and training conducted

12. Control Environment
• Internal control procedures
• Risk management framework present
• Disaster recovery systems in place
• Media management techniques in use

13. Control Environment
• Business continuity procedures in place
• Independent external auditor conducts audits
• Independent audit committee established
• Internal Audit Function
• Management Information systems established
• Compliance Function established

14. Transparent Disclosure
• Financial Information disclosed
• Non-Financial Information disclosed
• Financials prepared according to International
Financial Reporting Standards (IFRS)
• Companies Registry filings up to date
• High-Quality annual report published
• Web-based disclosure

15. Transparent Disclosure
• Well-Defined Shareholder Rights
• Minority shareholder rights formalized
• Well-organised shareholder meetings
conducted
• Policy on related party transactions
• Policy on extraordinary transactions
• Clearly defined and explicit dividend policy

16. Board Commitment
• The Board discusses corporate governance issues and has created a
corporate governance committee
• The company has a corporate governance champion
• A corporate governance improvement plan has been created
• Appropriate resources are committed to corporate governance
initiatives
• Policies and procedures have been formalized and distributed to
relevant staff
• A corporate governance code has been developed
• A code of ethics has been developed
• The company is recognized as a corporate governance leader

17. Other Entities
• Corporate Governance applies to all types of
organisations not just companies in the
private sector but also in the not for profit and
public sectors
• Examples are - NGOs, schools, hospitals,
pension funds, state-owned enterprises

18. Corporate governance in India
• The Indian corporate scenario was more or less
stagnant till the early 90s.
• The position and goals of the Indian corporate
sector has changed a lot after the liberalisation of
90s.
• India’s economic reform programme made a
steady progress in 1994.
• India with its 20 million shareholders, is one of
the largest emerging markets in terms of the
market capitalization.

19. Corporate governance of India has
undergone a paradigm shift
• In 1996, Confederation of Indian Industry (CII), took a
special initiative on Corporate Governance.
• The objective was to develop and promote a code for
corporate governance to be adopted and followed by
Indian companies, be these in the Private Sector, the
Public Sector, Banks or Financial Institutions, all of
which are corporate entities.
• This initiative by CII flowed from public concerns
regarding the protection of investor interest, especially
the small investor, the promotion of transparency
within business and industry

20. Securities and Exchange Board of
India
• The Government of India's securities watchdog,
the Securities Board of India, announced strict
corporate governance norms for publicly listed
companies in India.
• The Indian Economy was liberalised in 1991. In
order to achieve the full potential of liberalisation
and enable the Indian Stock Market to attract
huge investments from foreign institutional
investors (FIIs), it was necessary to introduce a
series of stock market reforms.
• SEBI, established in 1988 and became a fully
autonomous body by the year 1992 with defined
responsibilities to cover both development and
growth

21. SEBI
• On April 12, 1988, the Securities and Exchange
Board of India (SEBI)was established with a dual
objective of protecting the rights of small
investors and regulating & developing the stock
markets in India.
• In 1992, the ‘BSE’, the leading stock exchange in
India, witnessed the first major scam
masterminded by Harshad Mehta.
• Analysts felt that if more powers had been given
to SEBI, the scam would not have happened.
• As a result the ‘GoI’ brought in a separate
legislation by the name of ‘SEBI Act 1992’ and
conferred statutory powers to it.
• Since then, SEBI had introduced several stock

22. SEBI and Clause 49
• SEBI asked Indian firms above a certain size to
implement Clause 49, a regulation that
strengthens the role of independent directors
serving on corporate boards.
• On August 26, 2003, SEBI announced an
amended Clause 49 of the listing agreement
which every public company listed on an
Indian stock exchange is required to sign. The
amended clauses come into immediate effect
for companies seeking a new listing.

23. The major changes to Clause 49…
• Independent Directors:- 1/3 to ½depending
whether the chairman of the board is a
nonexecutive or executive position.
• Non-Executive Directors:- The total term of
office of non-executive directors is now
limited to three terms of three years each.
• Board of Directors:- The board is required to
frame a code of conduct for all board
members and senior management and each of
them have to annually affirm compliance with
the code.

24. • Audit Committee:- Financial statements and the draft
audit report of management discussion & analysis of…
• Financial condition
• Result of operations of compliance with laws
• Risk management letters
• Letters of weaknesses in internal controls issued by
statutory
• Internal auditors
• Removal and terms of remuneration of the chief
internal auditor
• Whistleblower Policy :- This policy has to be
communicated to all employees and whistleblowers
should be protected from unfair treatment and
termination.
• Subsidiary Companies:- 50% non-executive directors &
1/3 & ½independent directors depending on whether
the chairman is non-executive or executive.

25. Conclusion
• As Indian companies compete globally for access to
capital markets, many are finding that the ability to
benchmark against world-class organizations is
essential.
• For a long time, India was a managed, protected
economy with the corporate sector operating in an
insular fashion.
• But as restrictions have eased, Indian corporations are
emerging on the world stage and discovering that the
old ways of doing business are no longer sufficient in
such a fast-paced global environment.
Thank you

26. Corporate Governance

27. 1.Introduction
What is corporate governance?
• Corporate governance is the system of principles,
policies, procedures, and clearly defined
responsibilities and accountabilities used by
stakeholders to overcome the conflicts of interest
inherent in the corporate form.
– Hence, the importance of understanding the different
forms of business.
• Corporate governance affects the operational risk and,
hence, sustainability of a corporation.
– The quality of a corporation’s corporate of governance
affects the risks and value of the corporation.
– Effective, strong corporate governance is essential for the
efficient functioning of markets.

28. 2.Corporate governance: Objectives
and guiding principles
• There are inherent conflicts of interest in
corporations in which the ownership and
management are separate.
• Objectives of corporate governance:
– To eliminate or mitigate conflicts of interest.
• Particularly those between corporate managers and
shareholders; and
– To ensure that the assets of the company are used
efficiently and productively and in the best
interests of its investors and other stakeholders.

29. Core Attributes of an effective
corporate governance system
Clearly defined manager and
director governance
responsibilities
Identifiable and measureable
accountabilities
Fairness and equitable
treatment in dealings
Transparency and accuracy in
disclosures
Delineation of rights of
shareholders and other
stakeholders

30. 3.Forms of business
and conflicts of interest
The form of business will dictate, in part, the
relationship between the owners of the business
and management.
– The degree of separation may be minimal (e.g., sole
proprietorship), or significant (e.g., large corporation).
– When there is a separation between owners and
managers, there is a potential for agency problems,
which may affect the value of the business.
– We will examine three business forms: the sole
proprietorship, the partnership, and the corporation.

31. Sole proprietorship
• A sole proprietorship is owned and operated by a
single person
• Sole proprietorships are the most numerous in
terms of number of businesses.
• Who bears governance risk in a sole
proprietorship?
– There are few risks with respect to governance from
the perspective of the owner.
– Creditors, including trade creditors, have the highest
risk with respect to governance.

32. Partnership
• A partnership has two or more
owner/managers.
• Who bears governance risk in a partnership?
– There are few risks with respect to governance
from the perspective of the owners, with
ownership rights and responsibilities detailed in
the partnership agreement.
– Creditors, including trade creditors, have the
higher risk with respect to governance.

33. Corporation
• A corporation is a legal entity that has rights
similar to an individual.
– For example, a corporation can enter into
contracts.
• Corporations account for most business
revenue around the world.
– Corporations around the world: Limited Company
(U.K.), Gesellschaft (German); Societé Anonyme
(France), 公司 (China); şirket (Turkey); บริษัท
(Thailand)

34. Advantages of the corporate form
1.A corporation can raise capital.
– Grant ownership stakes (that is, issue stock) or
borrow (that is, issue bonds).
2.Owners need not know how to run the
business.
– The corporation hires experts to manage the
business.
3.Ownership interests are transferrable.

35. Disadvantages of the corporate form
1. Corporations are more highly regulated than are
partnerships or sole proprietorships.
– For example, in the U.S. there are State laws pertaining to
corporations and the Securities and Exchange Commission
requires specific disclosures.
2. Separation of owners and managers.
– This is the agency relationship, in which someone (the agent)
acts on behalf of another person (the principal).
– The potential conflict between owners and managers is the
agency problem or principal-agent problem,
• Principals: shareholders
• Agents: Management and members of the board of directors
– There are costs to this agency relationship arising from conflicts
of interest.

36. 3.Forms of business and
conflicts of interest
Characteristic Sole Proprietorship Partnership Corporation
Ownership Sole owner Multiple owners Unlimited ownership
Legal requirements and regulation Few; entity easily
formed
Few; entity easily
formed
Numerous legal
requirements
Legal distinction between owner
and business
None None Legal separation
between owners and
business
Liability Unlimited Unlimited but shared
among partners
Limited
Ability to raise capital Very limited Limited Nearly unlimited
Transferability of ownership Non-transferable
(except by sale of
entire business)
Non-transferable Easily transferable
Owner expertise in business Essential Essential Unnecessary

37. 4.Specific sources of conflict:
Agency relationships
Managers
Board of
directors
Shareholders
Management–Shareholder conflicts
Director–Shareholder conflicts

38. Management–Shareholder Conflicts
• Shareholders entrust management with funds from reinvested
earnings or newly issued stock, which management invests.
• The overarching objective is to maximize shareholders’ wealth.
• Issue: Managers are human
– Managers may be more interested in expanding the size of the
business, bonuses based on earnings, taking on excessive risks, or job
security.
– Managers may consume excessive perquisites, or in effect, take
advantage of their position to spend excessively on things for
themselves.
– Bottom line: there may be agency costs in terms of the explicit and
implicit costs when managers do not act in the best interest of
shareholders.
• Effective corporate governance guards against agency costs.

39. Director–shareholder conflicts
• The board of directors are an intermediary between
the shareholders and management, and represent
shareholders’ interests by:
– Monitoring managers;
– Approving strategies and policies;
– Approving mergers and acquisitions;
– Approving audit contracts;
– Reviewing audit contracts and financial contracts;
– Establishing management compensation;
– Disciplining poorly performing managers.
• A conflict may arise if the board members align with
management.

40. Responsibilities of the
Board of Directors
• Establish corporate values and governance structures for the company;
• Ensure that all legal and regulatory requirements are met and complied
with fully and in a timely fashion;
• Establish long-term strategic objectives for the company;
• Establish clear lines of responsibility and a strong system of accountability
and performance measurement;
• Hire the chief executive officer, determine the compensation package, and
periodically evaluate the officer’s performance;
• Ensure that management has supplied the board with sufficient
information for it to be fully informed and prepared to make the decisions
that are its responsibility, and to be able to adequately monitor and
oversee the company’s management;
• Meet regularly to perform its duties;
• Acquire adequate training.

41. 5. Corporate Governance Evaluation:
Board of director Attributes
• The board should be comprised primarily of independent
directors (that is, not insiders)
• The Chairman of the Board should be independent;
• Directors should be qualified;
• There should be a regular election of members of the
Board;
• There should be a regular self-assessment of the Board;
• The board should hold separate meetings of the
independent directors;
• The board should require audit oversight by independent
directors who have sufficient expertise in finance,
accounting, and the law.

42. • The nominating committee should be comprised of independent directors;
• The compensation committee should be comprised of independent
directors;
• The board should be able to hire outside counsel;
• The board should disclose governance policies;
• The board should ensure adequate disclosure and transparency;
• The board should require disclosure of any related-party transactions;
• The board should respond to shareholders’ non-binding proxy votes.
5. CORPORATE GOVERNANCE EVALUATION:
BOARD OF DIRECTOR ATTRIBUTES (CONTINUED)

43. Monetary Authority of Singapore
Guidelines and Regulations on Corporate Governance
Principle 1: Every Institution should be headed by an effective Board.
Principle 2: There should be a strong and independent element on the
Board which is able to exercise objective judgment on
corporate affairs independently from management and
substantial shareholders.
Principle 3: The Board should set and enforce clear lines of
responsibility and accountability throughout the Institution.
Principle 4: There should be a formal and transparent process for the
appointment of new directors to the Board.
Principle 5: There should be a formal assessment of the effectiveness of
the Board as a whole and the contribution by each director
to the effectiveness of the Board.
Principle 6: In order to fulfill their responsibilities, Board members
should be provided with complete, adequate and timely
information prior to board meetings and on an on-going
basis by the management.

44. Guidelines and Regulations on
Corporate Governance (continued)
Principle 7: There should be a formal and transparent
procedure for fixing the remuneration packages of
individual directors. No director should be involved
in deciding his own remuneration.
Principle 8: The level and composition of remuneration
should be appropriate to attract, retain and motivate
the directors to perform their roles and carry out
their responsibilities.
Principle 9: The Board should establish an Audit Committee
with a set of written terms of reference that clearly
sets out its authority and duties.
Principle 10: The Board should ensure that there is an
adequate risk management system and sound
internal controls.

45. Principle 11: The Board should ensure that an internal
audit function that is independent of the
activities audited is established.
Principle 12: The Board should ensure that management
formulates policies to ensure dealings with the
public, the Institution’s policyholders and
claimants, depositors and other customers are
conducted fairly, responsibly and professionally.
Principle 13: The Board should ensure that related party
transactions with the Institution are made on
an arm’s length basis.
GUIDELINES AND REGULATIONS ON CORPORATE
GOVERNANCE (CONTINUED)

46. Organisation for Economic Co-Operation and Development
(OECD)
Principles of Corporate Governance
I
• The rights of shareholders
II
• The equitable treatment of shareholders
III
• The role of stakeholders in corporate governance
IV
• Disclosure and transparency
V
• The responsibilities of the board

47. 6.Environmental, social, and
governance factors ESG risk exposure
• Environmental, social, and governance (ESG) risk is
the risk associated with the management of
environment, social, and governance issues.
– Involves mitigating risks and managing these risks when
they arise.
• ESG risk affects the company’s sustainability and
valuation.
Environment
• Pollution
• Disclosures
Social
• Workplace issues
• Product quality
and safety
• Community
interaction
Governance
• Effective
governance

48. Examples of ESG risks
• Legislative and regulatory risk (that is, the role
of governments)
• Legal risk (for example, lawsuits)
• Reputational risk
• Operating risk
• Financial risk

49. 7.Valuation implications of corporate
governance
Benefits from a strong
corporate governance
Risks of weak corporate
governance

50. Risks of weak corporate governance
Accounting risk
• The risk that a
company’s financial
statement
recognition and
related disclosures
are incomplete,
misleading, or
materially
misstated. Enron
• Sunbeam
Asset risk
• The risk that the
firm’s assets may be
misappropriated by
managers or
directors in the form
of excessive
compensation or
other perquisites.
• Adelphia
• TycoInternational
Liability risk
• The risk that
management will
enter into excessive
obligations that
destroy the value of
shareholders’
equity.
Strategic policy
risk
• The risk that
managers may enter
into transactions or
incur other business
risks that are self-
serving and may not
be in the best long-
term interest of
shareholders.

51. Benefits from strong governance
Evidence suggests that:
– companies with strong governance had greater
investment performance.
– companies with strong shareholders’ rights
outperformed those with weak protections.

52. 8. Summary
– Corporate governance is the system of principles,
policies, procedures, and clearly defined
responsibilities and accountabilities.
– The objectives of a corporate governance system are
(1) to eliminate or mitigate conflicts of interest among
stakeholders, particularly between managers and
shareholders, and (2) to ensure that the assets of the
company are used efficiently and productively and in
the best interests of the investors and other
stakeholders.
– The failure of a company to establish an effective
system of corporate governance represents a major
operational risk to the company and its investors.

53. • The specific sources of conflict in corporate
agency relationships are manager-
shareholder.
• The responsibilities of board members, both
individually and as a group, are to establish
corporate values and effective governance
structures for the company.
Summary (continued)

54. • Companies committed to corporate governance often
provide a statement of corporate governance policies.
Analysts should assess:
– the code of ethics; statements of the oversight, monitoring,
and review responsibilities of directors;
– statements of management’s responsibilities with respect to
information and access of directors to internal company
functions;
– reports of directors’ examinations, evaluations, and findings;
– board and committee self-assessments; management self-
assessments; and
– training policies for directors.
• Weak corporate governance systems give rise to risks
including accounting risk, asset risk, liability risk, and
strategic policy risk.
SUMMARY (CONTINUED)