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CORPORATE GOVERNANCE
Corporate governance broadly refers to the mechanisms,
processes and relations by which corporations are controlled
and directed.
Governance structures identify the distribution of rights and
responsibilities among different participants in the
corporation (such as the board of directors, managers,
shareholders, creditors, auditors, regulators, and other
stakeholders)
Includes the rules and procedures for making decisions in
corporate affairs.
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CORPORATE GOVERNANCE
Corporate governance has also been defined as
"a system of law and sound approaches by which corporations
are directed and controlled focusing on the internal and
external corporate structures with the intention of monitoring
the actions of management and directors and thereby,
mitigating agency risks which may stem from the misdeeds of
corporate officers.”
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PRINCIPLES
Contemporary discussions of corporate governance tend to
refer to principles raised in three documents released since
1990:
The Cadbury report (UK, 1992)
The principles of corporate governance (OECD, 1998 and
2004)
The Sarbanes-Oxley act of 2002 (US, 2002).
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PRINCIPLES
1. 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 openly and
effectively communicating information and by
encouraging shareholders to participate in general
meetings.
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PRINCIPLES
2. Interests of other stakeholders
Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder
stakeholders, including employees, investors,
creditors, suppliers, local communities, customers, and
policy makers.
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PRINCIPLES
3. Role and responsibilities of the board:
The board needs sufficient relevant skills and
understanding to review and challenge management
performance. It also needs adequate size and appropriate
levels of independence and commitment.
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PRINCIPLES
4. Integrity and ethical behavior:
Integrity should be a fundamental requirement in
choosing corporate officers and board members.
Organizations should develop a code of conduct for their
directors and executives that promotes ethical and
responsible decision making.
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PRINCIPLES
5. Disclosure and transparency:
Organizations should clarify and make publicly known the
roles and responsibilities of board and management to
provide stakeholders with a level of accountability.
Disclosure of material matters concerning the organization
should be timely and balanced to ensure that all investors
have access to clear, factual information
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CG MODELS ACROSS THE WORLD
There are many different models of corporate governance
around the world. These differ according to the variety of
capitalism in which they are embedded.
The Anglo-American "model" tends to emphasize the
interests of shareholders.
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CG MODELS ACROSS THE
WORLD
The coordinated or Multi-Stakeholder Model associated with
Continental Europe and Japan also recognizes the interests of
workers, managers, suppliers, customers, and the
community.
A related distinction is between market-orientated and
network-orientated models of corporate governance.
12. +CORPORATE GOVERNANCE MODEL
IN CONTINENTAL EUROPE
Some continental European countries, including Germany
and the Netherlands, require a two-tiered Board of Directors
as a means of improving corporate governance.
In the two-tiered board,
The Executive Board, made up of company executives, generally
runs day-to-day operations
The supervisory board, made up entirely of non-executive
directors who represent shareholders and employees, hires and
fires the members of the executive board, determines their
compensation, and reviews major business decisions.
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CORPORATE GOVERNANCE IN
INDIA
India's SEBI Committee on Corporate Governance defines
corporate governance as the …
"acceptance by management of the inalienable rights of
shareholders as the true owners of the corporation and of their
own role as trustees on behalf of the shareholders.
It is about commitment to values, about ethical business
conduct and about making a distinction between personal &
corporate funds in the management of a company.”
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CORPORATE GOVERNENCE IN
U.S.A And U.K
The so-called "Anglo-American model" of corporate
governance emphasizes the interests of shareholders.
It relies on a single-tiered Board of Directors that is normally
dominated by non-executive directors elected by
shareholders. Because of this, it is also known as "the unitary
system"
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CORPORATE GOVERNENCE IN
U.S.A And U.K
Within this system, many boards include some executives
from the company (who are ex officio members of the
board).
Non-executive directors are expected to outnumber
executive directors and hold key posts, including audit and
compensation committees.
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CORPORATE GOVERNENCE IN
U.S.A And U.K
The United States and the United Kingdom differ in
one critical respect with regard to corporate
governance:
In the United Kingdom, the CEO generally does not also
serve as Chairman of the Board.
In the US having the dual role is the norm, despite major
misgivings regarding the impact on corporate
governance.
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PARTIES TO CORPORATE
GOVERNANCE
Key parties involved in corporate governance include
stakeholders such as the board of directors, management
and shareholders.
External stakeholders such as creditors, auditors, customers,
suppliers, government agencies, and the community at large
also exert influence.
Now let us study about various parties to corporate
governance in detail.
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THE BOARD OF DIRECTORS
The OECD Principles of Corporate Governance (2004)
describe the responsibilities of the board some of these are
summarized below:
1. Board members should be informed and act ethically and in
good faith, with due diligence and care, in the best interest of
the company and the shareholders.
2. Review and guide corporate strategy, objective setting,
major plans of action, risk policy, capital plans, and annual
budgets.
3. Oversee major acquisitions and divestitures.
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THE BOARD OF DIRECTORS
4. Select, compensate, monitor and replace key executives
and oversee succession planning.
5. Align key executive and board remuneration (pay) with the
longer-term interests of the company and its shareholders.
6. Ensure a formal and transparent board member
nomination and election process.
7. Ensure the integrity of the corporations accounting and
financial reporting systems, including their independent
audit.
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THE BOARD OF DIRECTORS
8. Ensure appropriate systems of internal control are
established.
9. Oversee the process of disclosure and communications.
10. Where committees of the board are established, their
mandate, composition and working procedures should be
well-defined and disclosed.
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STAKE HOLDERS
All parties to corporate governance have an interest,
whether direct or indirect, in the financial performance of the
corporation.
Directors, workers and management receive salaries,
benefits and reputation, while investors expect to receive
financial returns.
For lenders, it is specified interest payments, while returns to
equity investors arise from dividend distributions or capital
gains on their stock.
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STAKE HOLDERS
Customers are concerned with the certainty of the provision
of goods and services of an appropriate quality; suppliers
are concerned with compensation for their goods or
services, and possible continued trading relationships.
These parties provide value to the corporation in the form of
financial, physical, human and other forms of capital. Many
parties may also be concerned with corporate social
performance.
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CONTROL AND OWNERSHIP
Control and ownership structure refers to the types and
composition of shareholders in a corporation.
In some countries such as most of Continental Europe,
ownership is not necessarily equivalent to control due to the
existence of
1. Dual-class shares
2. Ownership pyramids
3. Voting coalitions
4. Proxy votes and clauses in the articles of association that confer
additional voting rights to long-term shareholders
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MECHANISM AND CONTROL
Corporate governance mechanisms and controls are
designed to reduce the inefficiencies that arise from moral
hazard and adverse selection.
There are both internal monitoring systems and external
monitoring systems.
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INTERNAL CORPORATE
GOVERENCE CONTROL
Monitoring by the board of directors.
Internal control procedures and internal auditors.
Balance of power.
Remuneration.
Monitoring by large shareholders.
Monitoring by banks and other large creditors.
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EXTERNAL CORPORATE
GOVERNANCE
External corporate governance controls encompass the
controls external stakeholders exercise over the organization
they include:
1. Competition
2. Debt covenants
3. Demand for and assessment of performance information
(especially financial statements)
4. Government regulations
5. Managerial labour market
6. Media pressure
7. Takeovers
27. THANK YOU
+
A PRESENTATION BY ,
Maurya SirReddy
Shweta Jain
Sudeepta
