CORPORATE

GOVERNANCE
 Introduction to
• CG
Corporate governance is how a corporation is
administered or controlled.
• Corporate Governance is a set of processes
,customs ,policies ,laws & instructions affecting
the way a corporations is directed
,administrated or controlled.
• The participants in the process include
employees and suppliers ,partners, customers ,
government and professional organization
regulators ,and the communities in which the
organization has a presence.
 Definition of Corporate
Governance
Sir Adrian Cadbury ; “Corporate Governance is
concerned with holding the balance between
economic & social goals and between individual
and communal goals. The C G framework is there to
encourage the efficient use of resources and
equally to require stewardship of those resources.
The aim is to align as nearly as possible the interest
of individuals,
corporations and society.”
Gabriele O’Donovan; C G is an internal system
encompassing policies ,processes & people
which serves the needs of shareholders &
management activities, by directing &
controlling management activities with good
business savvy objectivity, accountability &
 Definition of Corporate
In other words ;
Governance
C G may be defined as a set of systems, processes and
principles which ensures that a company is governed in
the best interest of all the stakeholders.
It is the system by which the companies are directed
and controlled. It is about promoting corporate
fairness, transparency and accountability.
In other words, ‘good corporate governance’ is
simply ‘good business’. It ensures:
• Adequate disclosures and effective decision
making to
achieve corporate objectives.
• Transparency in business transaction.
• Statutory and Legal Compliances
• Protection of shareholder interests
• Commitment of values and ethical conduct of
business
Why is it important?

• 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.
• Proliferation of financial scandals and crisis
• Loss of trust of investors
• Globalization lead to increasing cross-border investment
opportunities but investors may not have knowledge about
the regulatory framework of overseas investees
The Need for Corporate Governance
Pillars of Corporate Governance
1. Accountability.
2. Fairness.
3. Transparency.
4. Independence.
1. Accountability
• Ensure that management is accountable to the Board of
Directors.

• Ensure that the Board of Directors is accountable to

shareholders.
2. Fairness
• Protect Shareholders rights.

• Treat all shareholders including minorities,

equitably.

• Provide effective redress for violations.

3. Transparency

Ensure timely, accurate disclosure on all material

matters, including the financial situation,
performance, ownership and corporate governance.
4. Independence

• Independent Directors and Advisers i.e. free from

the influence of others.

Elements of Corporate Governance
1. Good Board practices.

2. Control Environment.

3. Transparent Disclosure.

4. Well-defined shareholder rights.

5. Board Commitment.
1. Good Board Practices
• Clearly defined roles and authorities.
• Duties and responsibilities of Directors understood.
• Board is well structured.
• Appropriate work and mix of skills.
• Appropriate Board procedures.
• Director compensation in line with best practice.
• Board self-evaluation and training conducted.
2. Control Environment
• Internal control procedures.
• Risk management framework present.
• Disaster recovery systems in place.
• Media management techniques in use.
• Business stability procedures in place.
• Independent external auditor conducts audits.
• Independent audit committee established.
• Internal Audit Function.
• Management Information systems established.
• Compliance Function established.
3. 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.
4. Well-Defined Shareholder Rights

• Minority shareholder rights formalized.

• Well-organized shareholder meetings conducted.

• Policy on related party transactions.

• Policy on extraordinary transactions.

• Clearly defined and explicit dividend policy.

5. Board Commitment
• The Board discusses corporate governance issues and
has created a corporate governance committee.
• The company has a corporate governance champion.
• 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.
• The company is recognized as a corporate
governance leader.
Organization for Economic
Cooperation and Development (OCED) Principles of Corporate governance

• Principle Number 1:
Ensuring the basis for an effective corporate governance
framework
• The corporate governance framework should be
developed with a view to its impact on overall economic
performance, market integrity and the incentives it
creates for market participants and the promotion of
transparent and well functioning markets.
• The legal and regulatory requirements that affect
corporate governance practices should be consistent
with the rule of law, transparent and enforceable.
• The division of responsibilities among different
authorities should be clearly articulated and designed
to serve the public interest.
• Stock market regulation should support effective
corporate governance.
• Cross-border co-operation should be enhanced,
including through bilateral and multilateral
arrangements for exchange of information.
• Principle Number 2

The rights and equitable treatment of shareholders and

key ownership functions.

Basic shareholder rights should include

• secure methods of ownership registration
• convey or transfer shares
• obtain relevant and material information on
• the corporation on a timely and regular basis
• participate and vote in general shareholder meetings
• elect and remove members of the board
• share in the profits of the corporation.
Shareholders should be sufficiently informed about:
• Amendments to the statutes, or articles of
incorporation or similar governing documents of
the company.
• The authorization of additional shares.
• extraordinary transactions, including the transfer
of all or substantially all assets, that in effect result
in the sale of the company.
Rights of shareholders:

• Shareholders should have the opportunity to participate

effectively and vote in general shareholder meetings
• Shareholders should have the opportunity to ask questions
to the board, including questions relating to the annual
external audit, to place items on the agenda of general
meetings, and to propose resolutions, subject to reasonable
limitations.
• Effective shareholder participation in key corporate
governance decisions, such as the nomination and election
of board members
• Principle Number 3:
Institutional investors, stock markets, and other
intermediaries.
• Institutional investors acting in a fiduciary capacity should
disclose their corporate governance with respect to their
investments, including the procedures.
• The corporate governance framework should require that
advisors, analysts, brokers, rating agencies and others that
provide analysis or advice relevant to decisions by investors,
disclose and minimize conflicts of interest.
• Stock markets should provide fair and efficient price
discovery as a means to help promote effective corporate
governance.
• Principle Number 4:
The role of stakeholders in corporate governance

• The rights of stakeholders that are established by law or

through mutual agreements are to be respected.
• Where stakeholder interests are protected by law,
stakeholders should have the opportunity to obtain effective
redress for violation of their rights.
• Where stakeholders participate in the corporate governance
process, they should have access to relevant, sufficient and
reliable information on a timely and regular basis.
• Stakeholders, including individual employees and their
representative bodies, should be able to freely communicate
their concerns about illegal or unethical practices to the
board and to the competent public authorities and their
rights should not be compromised for doing this.
• Principle Number 5
Disclosure and transparency
• Disclosure and transparency includes
1. The financial and operating results of the company.
2. Company objectives and non financial information.
3. Major share ownership, including beneficial owners, and
voting rights.
4. Remuneration of members of the board and key executives.
5. Related party transactions.
Principle Number 6:
The responsibilities of the board

• Board members should act on a fully informed basis, in good

faith, with due diligence and care, and in the best interest of
the company and the shareholders.

• Where board decisions may affect different shareholder

groups differently, the board should treat all shareholders
fairly.

• The board should apply high ethical standards. It should

take into account the interests of stakeholders.
• Monitoring the effectiveness of the company’s governance
practices and making changes as needed.

• Selecting, compensating, monitoring and, when necessary,

replacing key executives and overseeing succession
planning.

• Ensuring a formal and transparent board nomination and

election process.
Difference between Corporate Governance and
Corporate Management
 FRAMEWORK for CG
INTERNAL Private EXTERNAL
Regulatory
STAKE
SHAREHOLDERS Standards (for example
HOLDERS accounting and auditing)

Laws and regulations

BOARD OF
DIRECTORS
Reputational
Agents
- Financial Sector
Accountants - Debt
- Lawyers
Appoints - Equity
- Credit
Reports to and
Ratings
Monitors - Markets
Investment
Bankers - Competitive factors
MANAGEMENT - Financial and foreign
media markets
- Investment - Foreign Direct Investment
Operates advisors - Corporate Control
- Research
Core functions Corporate
Governance
- Analysis
 Introduction to Framework
(1) The shareholders are given necessary reports ,
information to guide them in appointing and re-
appointing an effective Board of Directors who
manage the day to day operations of the company.
There is a clear cut distinction between the owners
and the stakeholders, the employees, the financers
who empower the Board of Directors to run the
company effectively. Thus ,the first principle in the
frame work is that there is clear cut distinction
between the Ownership and the Professional
Management of the Company. And all the
stakeholders are informed about the day to day
operations through various reports and data.
 Introduction to Framework
(2) There are many stakeholder in the company:
(a) The shareholders which again can be further sub-divided as the
general shareholders, the employee shareholder who have got
ESOP (Employee Stock Option Plan),the Institutional Investors (All
the qualified Institutional Buyers) and finally the promoter group
who have considerable stake in the company. Their main
objective is to maximize the wealth of the shareholders.
(b) The Distributors or the channel partners are also the stakeholders,
their main objective is to be part of a value chain and make
timely deliveries across the country.
(c) The Customers are also the stakeholders whose main objective is
to
get best quality product or service at the most competitive rate.
(d) The employees whose main objective is to get the most
lucrative salary and perks to motivate them to put in their
very best.
 Introduction to Framework
(3) The reputational agents which would be part of
the Corporate Framework would be.
(a) Accountants.
(b) Legal Experts.
(c) Credit Rating Agencies
(d) Financial and Investment Advisors
(e) Financial Media

(4) The regulatory framework includes all the regulatory

authorities like SEBI and the Stock Exchange which
would ensure that all the principles laid down are
followed.
Last para text book page 169
Framework of Corporate
Governance
Regulatory framework on corporate
governance
The Indian framework on Corporate Governance has been vastly in sync with the
international standards. Broadly, it can be described in the following:
The Companies Acts 2013 has provisions concerning Independent Directors, Board
Constitution, General meetings, Board meetings, Board processes, Related Party
Transactions, Audit Committees, etc.
SEBI (Securities and Exchange Board of India) Guidelines ensure the protection of investors
and have mandated the companies to adhere to the best practices mentioned in the
guidelines.
Accounting Standards issued by the ICAI (Institute of Chartered Accountants of India)
wherein the ICAI is an autonomous body and issues accounting standards. The disclosure of
financial statements is also made mandatory by the ICAI backed by the Companies Act
2013, Sec. 129.
Standard Listing Agreement of Stock Exchanges applies to the companies whose shares are
listed on various stock exchanges.
Secretarial Standards Issued by the ICSI (Institute of Company Secretaries of India) issues
standards on ‘Meetings of the board of Directors’, General Meetings’, etc.. The companies
Act 2013 empowers this autonomous body to provide standards which each and every
company is required to adhere to so that they are not punished under the Companies Act
itself.
Theoretical Basis of Corporate
Governance

o Agency Theory
o Problems with the Agency Theory
o Stewardship Theory
o Shareholder Vs Stakeholder
Approaches
o Stakeholder Theory
o Criticisms of the Stakeholder Theory
o Sociological Theory
 Agency
Theory
 Management as agents of stockholders
 Agency Cost raise issues (Trade-off)
 Mechanisms reducing agency cost
 Fair and Accurate Financial Disclosures
 Financial and Non-Financial Disclosures
 Efficient and Independent BoDs
 Stewardship
Theory
 Managers are trustworthy
 Managers attach significant value to their own
personal reputations
 Manager is steward of principal
 Steward will do good for organization
 Controls will demotivate stewards
 The theory defines
 Managers are not motivaed by individual goals but
with the objectives of principles
 A steward will choose the interessts of his/her
organization, and will not entertain self-serving
behavior
 Control can be potentially
counterproductive
 Behavioural
Differences
THEORY AGENCY STEWARDSHIP
Managers act as Agents Stewards

Governance Approach Materialistic Sociological and

Psychological
Behaviour Pattern o Individualistic o Collectivistic
o Opportunistic Pro-
o Self- serving o organisational
Trustworthy
Managers motivated by Their own o
Principal’s objectives
objectives
Manager’s and Principal’ s Differ Converge
Interests
Management Structures Monitor and Facilitate and empower
control
Owners’ Attitude Risk Risk taken
Avoidance
Principal – Manager Trust
Relationship based on Control
 Psychological Mechanisms

PSYCHOLOGICAL STEWARDSHP
AGENCY THEORY
RESPONSES THEORY

Motivation oLower order o Higher order needs

needs o Intrinsic needs

oExtrinsic needs
Social comparison Compatriots Principal

Attachmen Little attachment to Great attachment to

t company company

Powe Institutional Personal

r
 Situational Mechanisms
SITUATIONAL STEWAREDSHIP
AGENCY THEORY
RESPONSES THEORY

Management Control oriented Involvement oriented

Philosophy
While dealing with Greater controls Training and
increasing More supervisions empowering people
Uncertainty and risk Making jobs to be
more challenging and
motivating
Risk orientation Through a system of Through trust
control
Time frame Short term based Long term based

Objective Cost control Improving

performance
Cultural differences Individualism
Large power Collectivism
Shareholder Vs.
Stakeholder
Theory
• Shareholders are investors of the
• firm Stakeholders are all-
interest
• Employees,groups
customers, dealers, government
and the society at large
• Ethics of care, theory of property rights

and so on
• Not applicable in practice
• Criticism
• Difficulty in defining the
• concept Who is genuine
• stakeholder?

Practical?
 Sociological Theory
• Focuses
on:
• Board Composition
• Power and Wealth Distribution in
• Society Power in few hands
• Challenge
( privilege
to equity
class)
and social progress
• To promote equity and fairness
• Board composition, financial reporting,

disclosure and auditing

Corporate Governance Mechanisms

o The Importance of Corporate

Governance
o Contemporary Corporate Governance
Situation
o Growing Awareness and Societal
Responses

Corporate Governance Systems

o Anglo-American Model
o The German Model
o The Japanese Model
Fig.1 : The Anglo- American Model
Elect
Shareholders Board of Directors
(Supervisors)

Appoints & Supervises

Own
Creditors
Officers (
Lien on
Managers)

Stakeholders
Stake in Manage

Legal/Regulatory Monitors & Regulates

Company
System
Fig.2 : The German Model

Appoint – 50%
Shareholders
Supervisory Board
Appoints and Supervises

Management
Appoint – 50%
Board (Including
Labour Relations
Officer)
Manage

Employees
and
Labour Company
Unions
 Japanese
Shareholders Model
elect Supervisory Board
(Including
Provides Loans
President)
Ratifies the President’s
Decisions

President
Provides Managers
Monitors & Acts in Consults
Emergencies

Executive Management
(Primarily Board of Directors)

Manages

Own
Main Own Company
s
Provides Loans
Ban
k
What Is Good Corporate
Governance?
Obligation to society at large
o National Interest

o Political Non- alignment

o Legal Compliances

o Rule of Law

o Honest and Ethical Conduct

o Corporate Citizenship

o Ethical Behaviour

o Social Concerns

o Corporate Social Responsibility

Environment-
o
friendliness
o Health, Safety and Working Environment
Competition

o Trusteeship
Accountabilit

o y
Effectiveness and Efficiency
o Timely Responsiveness
Corporations Should Uphold
Obligation
the Fairto investors
Name of the Country
o
o Towards Shareholders
o Measures Promoting Transparency and Informed
o
Shareholder Participation
o Transparency
o
o Financial Reporting and Records
Obligation to customers
o Quality of Products and Services

o Products at Affordable Prices

o Unwavering Commitment to Customer

Satisfaction

Obligation to employees
o Fair Employment Practices

o Equal- opportunities Employer

o Encouraging Whistle Blowing

o Humane Treatment
Participation Empowerment
• Equity and Inclusiveness

• Participative and Collaborative Environment

•Managerial obligation
o Protecting Company’s Assets

o Behaviour Towards Government Agencies

Control
o Consensus Oriented

Gifts and Donations

o Role and Responsibilities of Corporate Board and
Directors
o Direction and Management must be Distinguished
o
o Managing and Whole- Time Directors