Corporate governance

Assignment 1

Submitted to:

Submitted by: Salman mahmood chaudhry Zeeshan zafar

Q1: What do you understand by the term corporate governance? What are the different definition of corporate governance ? From my understanding, Corporate Governance is a practice whereby companies should be more transparent in their business operations. This could mean that there is a need for more information to be published or procedures to be followed. Corporate Governence is important to establish an honest and efficient organization. Without it organizations are characterised by corruption or nepotism. The definition of corporate governance most widely used is "the system by which companies are directed and controlled" (Cadbury Committee, 1992). I listed here three definitions coming from three different worlds: audit, OECD corporate governance scope and finance. The International Standards for the Professional Practice of Internal Auditing (Standards) define governance as: the combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives. (Chartered Institute of Internal Auditors 2010) The OECD Principles were originally released in 1999 and revised in 2003-2004, they also are one of the 12 key standards of the Financial Stability Forum. These principles are addressing key areas of corporate governance e.g. shareholders, stakeholders, board accountability, transparency, disclosure, etc (OECD 2004). The OECD Principles of Corporate Governance states: "Corporate governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."

From a financial perspective: Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations. (SearchFinancialSecurity.com 2010) At the end of the day what is important to take away from these is that it is about accountability and to close the gap of the principal agent problem.

Q2: What were the illegal tactics used by Indian corporate? What do you think were the reason for the misgoverance? Is the problem resolved now? Illegal tactics: Various illegal tactics used by india are as follows: 1. Cornering of industrial license mainly with a view to pre-empting competitors to enter into their well-entreched industry. 2. Using import license to make a quick profit in the market. 3. Illegally holding money abroad to meet business expenses and investments for which government would not allow enough funds. 4. Trying to gain special advantages for the business through bribery of concerned officials, generating unaccounted money in the business so as to compensate for penal levels of taxation other business expenses and political donations.

Reason of corporate mis-governance: Indian corporate have insulated themselves from wholesome developments evolving elsewhere. A closed economy, a sheltered market, limited need and access to global

business/trade, lack of competitive spirit and a regulatory framework that enjoined mere observance of rules and regulations rather than realization of broader corporate

objectives marked the contours of corporate management for well over 40 years.

Q3: Discuss the two version of governance chain model illustrate by Mckinsey and company. Ans.: McKinsey & Company published a report in 2001, entitled Giving new life to the Corporate Governance Reform Agenda for Emerging Markets suggests that by using twoversion governance chain model we can easily illustrate the governance practices through out the world.

1: Market Model:

According to first version of McKinseys model The Market Model represents the developed countries like US, UK, Canada. To apply the market model there should be efficient and well developed equity markets and dispersed ownership.

CHAIN MODEL:

Control model represents the underdeveloped countries like Pakistan and India. Where there is family owned businesses, less share holders transparency and inadequate protection of minority and foreign shareholders.

Q4: Discuss the concerns of the government and society that are commonly addressed in most corporate governance definition. Ans. Corporate governance address about the role and rights of stakeholders. Stakeholders are those who are directly or indirectly affected by the company. So the corporate governance definition address to recognition of their right as establish by law. Means the law made by government should be to protect the rights of the society should be followed. The definition of corporate governance state four major points Fairness: the concept of fairness in corporate governance is to protect share holder and stake holder rights and they should treat everyone equally. According to corporate governance they cant take biased decisions; while taking decision and making policies they should treat majorty and minority equally. Responsibility: the corporate governance frame work should recognize the right of stake holders as establish by law and encourage active co-operation between corporation and stakeholder in creating wealth and jobs. So by obeying law and protecting their rights, giving jobs for people and creating wealth for the government corporate will fulfill the societal needs and responsibilities. Transparency: the corporate governance states that there should be a proper framework in the company. Every information and processes should b transparent and properly convened to its share holder and stake holders. It shouldnt have any hidden information that is in the interest of the company but harmful for the rights of share and stake holders. Disclosure should me made on all material matters. Accountability: the corporate frame work should the strategic guidance of the company. The board of directors should do effective monitoring of management. and they should b liable and answerable to their deeds.

Q5: why is it more difficult for developing and transition economies to ensure good governance? It is difficult for the developing countries because most of the information is hidden and not shown. Corporate governance is generally perceived as a set of codes and guidelines to be followed by companies. But governance is more than just board process and procedures. It involves a relationship between a companys management, its board of director, shareholders and stakeholders. The underlying concern is to accomplish the core values of corporate governance that include the transparency, accountability and building values. Q6:Briefly discuss the perceptional difference in the corporate governance definition. A proper definition of corporate governance should not just describe directors obligations towards shareholders. And different countries have different ideas as to what constitutes good corporate governance. Therefore any satisfactory definition, to be applicable to a modern, global company, must synthesis best practice from the biggest economic powers into something which can be applied across all major countries. In essence we believe that good corporate governance consists of a system of structuring, operating and controlling a company such as to achieve the following:

a culture based on a foundation of sound business ethics fulfilling the long-term strategic goal of the owners while taking into account the expectations of all the key stakeholders, and in particular:
o o o

consider and care for the interests of employees, past, present and future work to maintain excellent relations with both customers and suppliers take account of the needs of the environment and the local community

Maintaining proper compliance with all the applicable legal and regulatory requirements under which the company is carrying out its activities.

Q7: What are the requirement of OECD for good corporate governance?

The OECD identifies the following key requirements of good corporate governance: The rights and obligations of shareholders Equitable treatment of shareholders The role of stakeholders and corporate governance Transparency, disclosure of information and audit The board of directors Non-executive members of the board Executive management, compensation and performance

Each of these is discussed in more detail below. The rights and obligations of shareholders A corporate governance framework should protect shareholder rights. It should ensure that

there is one vote for one share. It should ensure that management provides sufficient and relevant information. It should encourage shareholders to participate in annual general meetings and vote. Shareholders should be able to share in residual profit (dividends). Minority shareholders should be protected. It should ensure fairness and transparency in the operations of the company. Obligations: use voting rights.

Equitable treatment of shareholders A corporate governance framework should ensure equitable treatment of all shareholders, including minority and foreign shareholders; Same voting rights (within same class of shares etc); All shareholders of same class should be treated equally.

The role of stakeholders in corporate governance A corporate governance framework should ensure that the rights of stakeholders are protected by law and that these rights are respected. It should provide effective redress for violation of rights. It should encourage stakeholders to assume a role in the corporation that enhances the performance of the corporation and the market; It should provide for disclosure of information relevant to the interests of stakeholders.

Transparency, disclosure of information and audit A corporate governance framework should ensure the full, timely and detailed disclosure of information on all material matters, including the company's financial situation, performance, and ownership structure and governance. It should include the establishment of an (internal) audit committee. Transparency/disclosure includes disclosure of information on: - financial/operating results - ownership structure - members of the board of directors and management - quantitative and qualitative matters concerning employees and other stakeholders in the corporation - governance structures and policies - corporate targets and prospects

- execution of unusual and complex transactions, transactions including derivative products and their level of risk The board of directors A corporate governance framework should ensure the strategic leadership of the corporation, the efficient monitoring of management by the board of directors. Accountability of board to its corporation and shareholders. Meetings, for example one a month; process; Chair/CEO (separation of duties and responsibilities) etc. Non-executive members of the board These members should form independent judgements, especially with respect to the corporations strategy, performance, asset management and management appointments; Non-executive members should be independent from executive members of board (e.g. family members should not be admitted) and should not have a business relationship with the corporation or any other commercial involvement that may affect their independent judgment Interlocking directorships should be avoided. Executive management, compensation and performance Management compensation should be tied to the corporations general level of profitability and overall performance. Total compensation should be disclosed in financial statements. Procedures for determining compensation should be disclosed. A remuneration committee (or review committee) should be established.

Q8: Are the issue of corporate governance practices similar globally? If not, what are the differences? Corporate governance practices cannot be similar globally because there are different systems in different countries, depending on which constituent or interested party in the companys operations has been given the most importance. In the Anglo-Saxon world, for example, there has always been a single board of directors consisting of executive and non-executive, or independent directors. Elsewhere, a two tier structure exists to balance the executive board with representatives from other stakeholder groups like employees and bankers (like the Aufsichtsrat or Supervisory Board in Germany). Q9: what are the issue of corporate governance? Issues of corporate governance: Asymmetry of power Asymmetry of information Interests of shareholders as residual owners Role of owner management Theory of separation of powers Division of corporate pie among stakeholders how to align the interests of top managers and shareholders, the proper level and function of executive compensation, who monitors the top management team and how that monitoring occurs, and inclusion of shareholders and non-shareholder stakeholders.

Some of the questions which came into the mind are Is governance a luxury that can be afforded only by the performing companies? Do strategies and tactics need to change to accommodate governance with performance? Is there a time-lag between governance and performance? Are stakeholders concerned about performance or promised performance ?

Is governance behavior motivated by legislation? o Do standards vary with jurisdictions or do you adopt the best option? o Do you choose the right thing to do irrespective of whether its mandatory or not?

Is performance evaluation limited to valuation metrics? o Is it only ROE, Net margin, growth, shareholder wealth creation? Do performance measures need to be holistic? o We need to encompass all stakeholders o Governance is an enabler for holistic performance

How do managers better understand governance requirements? o Do we need market research for governance requirements?

Q10: what is the importancesof good corporate governance to the following: a) Investor b) B) society c) C) corporation Investors: opportunities and trends For shareholders, effective corporate governance structures have become an important criterion for selecting the companies in which they wish to invest. Basically there are two approaches. The first focuses on the analysis of corporate governance structures. As investors interested in the long term, pension funds examine the extent to which a company has implemented the recommendations contained in the most important codes. This analysis is the starting point for a comparison of various companies with respect to good corporate governance. The results influence investment decisions. Companies with poor structures are avoided. The second, far more effective approach consists of acting as shareholders who exercise their proprietary and other rights. Shareholders have the right to demand information from the company at any time about important questions in connection with management. However, they also have the right to participate in the shareholders general meeting, to propose resolutions for

the agenda, and to speak, last but not least, they have the obligation to take positions and vote accordingly.

Society: For the maximum benefit of society as a whole, corporate governance must mean more than trying to reduce the frequency of corporate scandals. The immense cost of the Sarbanes-Oxley Act reflects a typical reaction--or overreaction--to the aftermath of a financial bubble. Although the monetary costs frequently get the most attention because they are immediately apparent, other factors need to be considered. These include what opportunity costs are imposed, whether the burden of increased controls and regulation induces mediocre performance, and broadly, whether societys corporate governance portfolio should resemble a portfolio of Treasury bills or of equities. What is the trade-off between independence of directors and knowledge and how should these be balanced? These issues need to be considered in any discussion of optimal corporate governance. Corporation: It is important because it ensure better mangamenet structure and system. In many developing countries, promoters are directly involved in the management of the firsm they help to promote. There are some benefit that help to make good governance, and they are as follows: 1) Creation and enhancement of a corporations competitive advantage 2) Enabling corporation perform efficiently by preventing fraud and malpractices 3) Providing protection to shareholder interest 4) Enhancing the valuation of an enterprise 5) Ensuring compliance of laws and regulations