Corporate Governance

The 4 Ps

2

An OECD Definition

• “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”

– Preamble to the OECD Principles of Corporate Governance, 2004

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An Indian Definition

• “…fundamental objective of corporate governance is the ‘enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.”

– SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000

Globalization has not only significantly increasing and intensifying businessrisks, but also it has compelled Indian companies to adopt international normsof transparency and good governance. Corporate Governance policyrecognizes the challenge of this new business reality.

A meaningful policy onCorporate Governance must provide empowerment to the executivemanagement of the Company, and simultaneously create a mechanism ofchecks and balances which ensures that the decision making powers vested inthe executive management is not misused, but is used with care andresponsibility to meet stakeholder aspirations and societal expectations.

Corporate Governance initiative is based on two core principles. These are:1.Management must have the executive freedom to drive the enterprise forward without undue restraints; and

2. This freedom of management should be exercised within a framework of effective accountability

Corporate Governance features

• CG is the set of processes, customs, policies, laws and institutions affecting the way a company is directed, administered or controlled

• CG also includes the relationships among the many stakeholders.

• The principal stakeholders are the shareholders, management and the board of directors

• Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large

• CG has a strong impact on economic efficiency and at the same time emphasizes shareholder welfare

CG cont..• Quality is determined by the financial markets, legislation and other external

market forces plus the international organizational environment; how policies and

processes are implemented and how people are led

• External forces are, to a large extent, outside the circle of control of any board

• The internal environment is quite a different matter, and offers companies the

opportunity to differentiate from competitors through their board culture

• CG a system of structuring, operating and controlling a company with a view to

achieve 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

Parties Involved in CG

• Parties involved in corporate governance include the regulatory body e.g. the CEO, the Board of Directors, Management and Shareholders

• Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large

How Does it Work?

• In corporations, the shareholder delegates decision rights to the manager to act in

the principal's best interests

• This separation of ownership from control implies a loss of effective control by

shareholders over managerial decisions

• Partly as a result of this separation between the two parties, a system of

corporate governance controls is implemented to assist in aligning the incentives

of managers with those of shareholders

• A board of directors: plays a key role in corporate governance. It is their

responsibility to endorse the organization’s strategy, develop directional policy,

appoint, supervise and remunerate senior executives and to ensure accountability

of the organization to its owners & authorities

Pros & Cons of Governance

• Profit maximization in the short term: a few beneficiaries only

• Profit optimization in economical, social andenvironmental terms: benefits to many

(stakeholders)

CG Objectives

• Integrate economic, social & environmental objectives in the Corporate

Strategic Plan• Translate objectives into a pragmatic Action Plan applicable at all levels of

the organization

• MBO for teams and for indiv. Including Marketers, Buyers especially in

relation to suppliers etc.

• External audits, audit reports, corrective actions if needed

• Education: managers, staff, etc.

• Issue Management: pro-activity allows to ensure a competitive advantage

Corporate GovernanceVision, Mission,Strategy

Mgmt.CompliancesInnovation

EfficiencyGrowth

EquityEthicsRelationship

To study 4m another slide.

Principles of corporate governance include:

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 effectively communicating information that is understandable and accessible2.Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.

3. Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance.

*Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. 4. Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders 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.5. Appropriate mix of executive and non-executive directors: The key roles of Chairperson & CEO should not be held by the same person

Issues involving CG Principles• internal controls and the independence of the firm’s

auditors • oversight and management of risk • oversight of the preparation of the firm’s financial

statements • review of the compensation arrangements for the CEO

officer and other senior executives • the resources made available to directors in carrying out

their duties • the way in which individuals are nominated for positions on

the board • Dividend policy