Corporate Governance

Definitions of Corporate
Governance:
From the Academic Point of View
“Corporate governance addresses problems that result
from the separation of ownership and control.”
From the Angle of Developed Versus Developing Countries
John D. Sullivan: “In developing economies, one must
look to supporting institutions – for example, shoring
up weak judicial and legal systems in order to better
enforce contracts and protect property rights.”
Narrow Versus Broad Perceptions of Corporate Governance
Corporate Governance… is defined narrowly as the
relationship of a company to its shareholders or, more
broadly, as a relationship to society.
• Corporate governance is not just corporate
management; it is a much broader concept and
includes a fair, efficient and transparent
administration to meet certain well-defined
objectives.
• It is a system of structuring, operating and controlling
a company with a view to achieving long-term
strategic goals to satisfy shareholders, creditors,
employees, customers and suppliers and complying
with the legal and regulatory requirements, apart
from meeting environmental and local community
needs.
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 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
 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
 Why Corporate Governance?
• Better access to external finance
• Improved company performance –
sustainability
• Reduced risk of corporate crisis and scandals
THEORIES OF CORPORATE
GOVERNANCE

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 THEORIES

AGENCY THEORY

STEWARDSHIP THEORY

STAKEHOLDERS THEORY
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 1. AGENCY THEORY
• ‘agency’ – relationship between two elements
or entities.
• Principals(promoters) – agents(managers)
• Agency theory is defined as “the relationship
between the principals, such as shareholders
and agents such as the company executives
and managers”.

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 Agency Theory
An agency relationship exists when:
Agency Relationship
Shareholders
Risk Bearing Specialist
(Principals) (Principal)

Hire Managerial Decision-Making

Firm Owners Specialist
(Agent)

Managers
(Agents)
which creates
Decision
Makers 13
• separation of ownership and control
• the agents are controlled by principal-made
rules, with the aim of maximizing shareholders
value.
• Family owned firm – minimal agency cost
• Managers maynot function as per principal’s
plan, therefore, more agency cost

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 Problems of agency theory
• The desires or goals of the principal and
agent conflict
• Principals may engage in monitoring
behavior to assess the activities and decisions
of managers. However, dispersed
shareholding makes it difficult and inefficient
to monitor management’s behavior
Measures
Financial disclosures

Independent BOD
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 2. STEWARDSHIP THEORY
• “a steward protects and maximises shareholders
wealth through firm performance, because by so
doing, the steward’s utility functions are
maximised”
• Assumption- managers are trustworthy and
good
• An ideal theory
• Adopted by religious organizations and family
enterprises
• Advocated by mahatma gandhi
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• The stewardship perspective suggests that
stewards are satisfied and motivated when
organizational success is attained
• Autonomy to stewards
• Objective – more profitable and satisfied
shareholders

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 Stakeholder Theory
• The purpose of the firm is to create wealth or
value for its stakeholders by covering their
stakes into goods and services.

• The conception of the company is a set of

relationship rather than a serious of
transactions, in which managers adopt an
inclusive concern for all stakeholders

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Corporate Governance & Corporate
Management
CORPORATE CORPORATE
GOVERNANCE MANAGEMENT
Governance External Focus Internal Focus

Governance Management
assumes an open assumes a closed
system system

Strategy- oriented Task-oriented

Management

Concerned with Concerned with

where the getting the
company is going company there
 Internal Corporate Governance
Mechanism – Board Style and
structure
Types of Board structure
• All- Executive board
• Majority executive board
• Majority outside board
• Two tier Supervisory board
 Governance

Board

Management

1.All- Executive Board

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 Governance

Board
Management

2.Majority-Executive Board
 Governance

Board

Management

3. Majority outside board

4. Two-tier Supervisory Board

5. Advisory Boards
 Issues in designing a board

• The board size

• The role of chairman and the chief
executive
• Duality in subsidiary company board
 Board Styles

• Rubber stamps boards

• Representative boards
• Country club boards
• Professional board
 HIGH

Country Club Professional board

board

Concern for
relations
among
Directors

Rubber stamp Representative

board board

LOW Commitment to HIGH

effective communication
Corporate governance – Roles
and responsibilities of
directors, CEO, Chairman,
Board (Code of conduct)
Who is a Director?

• Section 2 (13) of the Companies Act defines a director as

follows: “A director includes any person occupying the
position of director by whatever name called.
• The important factor to determine whether a person is or is
not a director is to refer to the nature of the office and its
duties.
• It does not matter by what name he is called, if he performs
the functions of a director.
• Section 2(6) of the Companies Act states that directors are
collectively referred to ‘Board of Directors’ or simply the
‘board’.
Legal Position of a Director

• They have been described variously as agents,

trustees, or managing partners of the company.

• The legal position of the directors as agents and

trustees originate from the fact that a company being
an artificial person cannot act in its own person.

• It has become a well-settled fact now that directors are

not only agents but also act as trustees as a result of
several court decisions in India and England.
INDEPENDENT DIRECTORS

• An independent director is defined as a “non executive

director who is free from any business or other relationship
which could materially interfere with the exercise of their
independent judgment”
• Companies Act renders ineligible 11 categories of persons
to be appointed as independent directors in a company,
like:
 A person who has held any post in a company at any
point of time is disqualified
 Any vendor, supplier would stand disqualified
Qualifications of Directors

• A director must:
(a) be an individual;
(b) be competent to enter into a contract; and
(c) hold a share qualification if so required by the Articles of
Association.
 Duties of directors
• Exercise care in the discharge of functions
as directors
• Attend board meetings and devote
sufficient time and attention to the affairs
of the company
• Act in the best interest of the company
and its stockholders and customers
• Not to misuse power
 Duties of Directors
• Protect interests of creditors
• Maintain confidentiality
• Not to make secret profits and make good
loss, if accrued due to breach of duty, of
negligence
• Not to exercise powers for collateral
purpose
• Not to waste company assets
Liabilities of Directors in General

Directors of a company may be held liable under the

following situations:

1. Directors of a company may be liable to third parties in

connection with the issue of a prospectus, which does
not contain the particulars required under the
Companies Act or which contains material
misrepresentations;

2. Directors may also incur personal liability under the Act

a. on their failure to repay application money if minimum
subscription has not been subscribed;
Liabilities of Directors (contd.)

b. on an irregular allotment of shares to an allottee (and

likewise to the company) if loss or damage is sustained;
c. on failure by the company to pay a bill of exchange,
promissory note, cheque or order for money or goods
wherein the name of the company is not mentioned in
legible characters.
The Directors’ Liability to the Company
1. Ultra vires Acts: Directors are personally liable to the company in
matters of illegal acts.

2. Negligence: A director may be held liable for negligence in the

exercise of his duties.

3. Breach of Trust: They are liable to the company for any material
loss on account of the breach of trust.
Liability for Breach of Statutory Duties

The Companies Act imposes penalty upon the directors for not
complying with the provisions of the Act, which include
•sections on criminal liability for misstatements in prospectus,
•penalty for fraudulently inducing persons to invest money,
•concealment of names of creditors,
•penalty for default in filing with the registrar for registration of
the particulars of any charge created by the company.
RESPONSIBILITIES OF DIRECTORS

1. An efficient and independent board should be conscious of

protecting the interests of all stakeholders and not be
concerned too much with the current price of the stock.
2. Another important function of the director is to set priorities
and to ensure that these are acted upon.
3. A director is also expected to have the courage of
conviction to disagree.
4. Directors have great responsibility in the matter of
employment and dismissal of the CEO.
RESPONSIBILITIES OF DIRECTORS (Contd.)

5. One of the toughest challenges confronted by boards arises

while approving acquisitions.
6. An efficient board should be able to anticipate business
events that would spell success or lead to disaster if proper
measures are not adopted in time.
7. The directors have a duty to act bona fide for the benefit of
the company as a whole.
 Roles and responsibilities of
directors
Role of directors
• The Performance role
• The conformance role
Responsibilities of directors
• Responsibilities to shareholders(framing
appropriate policies
• Obligation to maintain honesty and
integrity
Disabilities of Directors

In order to protect the interest of a company and its

shareholders, the Companies Act has placed the following
disabilities on the directors:
1. An insolvent shall not be appointed to act as director of any
company, or in any way to take part in the management of
any company.
2. No person shall hold office at the same time as director in
more than 15 companies.
Disabilities of Directors (Contd.)

3. A company shall not without obtaining the previous approval

of the Central Government in that behalf, directly or
indirectly make any loan to
a. any firm in which any such director or relative is a
partner;
b. any private company of which any such director is a
director or member;
c. any body corporate, the board of directors, managing
director, or manager whereof is accustomed to act in
accordance with the directions or instructions of the
Board, or of any director or directors of the lending
company.
Disabilities of Directors (contd.)
5. Except with the consent of the board of directors of a
company,
• a director of the company or his relative, a firm in which such
a director or relative is a partner, any other partner, in such a
firm, or a private company of which the director is a member
or director, shall not enter into any contract with the company.
a. for the sale, purchase or supply of any goods, materials or
services; or
b. for underwriting the subscription of any shares in, or
debentures of, the company.
 Roles & Functions of chairman
• Roles of chairman
-Relationship with the CEO
-Relationships with executive directors
-Relationships with non-executive directors
• Functions of chairman
- To set standards and ensure that policies and practices are in
place
-To ensure that the directors make good decisions.
-To make sure that directors are continuously upgraded to the
levels required by investors to meet future needs of the co.
-To act decisively in times of crisis
-To act as a representative of the company
 Roles & functions of CEO
• Role of CEO
Relation with the chairman
Relation with directors
 Roles & functions of CEO
• Functions of CEO
• To assist executive directors in formulating strategic proposals that have
to be endorsed by the board
• To provide leadership and direction to all his executive directors.
• To develop a plan for implementing the strategy formulated by the
board and to convince non-executive directors that strategy can work.
• To act as representative of the executive directors when interacting with
the non-executive directors.
• To present the company to major investors, the media and government.
• To be a source of inspiration, leadership and direction to the employees
, customers and suppliers
• To be able to identify the situations that requires intervention.
 Functions of the board
1.Strategic role of the board
• Systematic level strategy
• Structural and portfolio strategy
• Implementation strategy
2. Policy making role of the board
3.Monitoring and supervisory roles
Characteristics of good Board

1. The board should be of small size

2. If a board has to be both effective & objective, it should
have a good number of independent directors
3. The directors should have varied expertise & experience
4. A strategic board is a well informed board. They should get
intelligent, timely & accurate information on various issues
5. They should have a longer vision & broader responsibility
Powers of the Board
•The Board of Directors of a company includes all the directors
elected by shareholders to represent their interests
•The board has extensive powers to manage the company,
delegate its power & authority to executives to carry on all
activities to promote the interests of company & shareholders
•The board of directors of a company is authorized to exercise
such powers, subject to two conditions:
1. The board shall not do any act which is to be done by the
company in the general meetings of the shareholder
2. The board shall exercise its power subject to the provisions
contained in the articles or memorandum.
 Power of the board

a) make calls on shareholders in respect of money unpaid on their

shares;

(b) issue debentures;

(c)Borrow money;

(d) invest the funds of the company; and

(e) make loans.

Effectiveness of the Board

The realistic functions of the board are:

a. Confirming management decisions on company matters
like major changes in objectives, policies & those
transactions which will have a substantial effect on the
success of the company;
b. Providing constructive advice to the executives on business
outlook, new governmental legislation, wage policy etc.;
c. Selecting the chief executives and confirming the selection
of the other executives in the company made by chief
executives; and
d. Reviewing the results of current operations.
 COMMITTEES OF THE BOARD

Audit Remuneration Nomination

committee committee committee
Ms. Pooja Vasant ,aits, mba 55