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Corporate Governance
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Why Strategy fails?
Formulation failure Inability to forecast environmental trends
Not able to foresee competitive moves
Wrong business definition
Implementation failure Structure & systems Culture & Ethics
Leadership (Most important??)
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Strategy Control
Types of Control:
Behavior Controls Policies, rules, SOPs, directives
Output Controls
Objectives, targets, milestones
Input Controls
Resources, knowledge, skills, values
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Ownership
Indicates ownership control
Shareholders (Owners and Directors:Same??)
Persons responsible for direction areaccountable to owners
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Agency Theory explains key reason of failure?
Problems arise in corporations
because the agents (BOD and topmanagement) are not willing towork in the interest of owners
(especially small).
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Influence of Stakeholders
SHAREHOLDERS
BOARD
MANAGEMENT
PRODUCT/ MARKETS
FINANCIAL
MARKETSOTHER
STAKEHOLDERS
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Management of Board
FRAUD
CONFLICT OF INTEREST
FREEDOM TO MANAGE
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Governance
Derived from latin word gubernare whichmeans to ruleor to steer
Indicates ability, capability & stabilityofCorporates
Corporate Governance Practices impartbalance between exercise of powerandacceptance of accountability
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Corporate Governance
Defined:
Refers to the relationship among
the board of directors, topmanagement, and shareholders
in determining the direction and
performance of the corporation.
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Corporate Governance
RELATIONSHIPS AMONG:
SHAREHOLDERS
MANAGERSDIRECTORS
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Corporate Governance
No consistent link between boardmembership, leadership, structure, andfinancial performance of firm
Investors pay more for a firms stock whenpositive toward good corporate governance
Belief that Good governance leads to better performance over
time
Reduces risk of company finding itself in trouble
Governance is a major strategic issue
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Governance vis--visManagement
Governance Management
Strategy Oriented Task OrientedFraming of Policy Execution of Tasks
External Focus Internal Focus
Better Governance leads to BetterManagement
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Corporate Governance
Synonym for sound management,transparency and disclosure
In the words of J. Wolfensohn, formerPresident of the World Bank,
Corporate Governance is about promotingcorporate fairness, transparency andaccountability
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Direction
Laying down Policy Decisions
Guidelines what is to be done asopposed to how to be done
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Corporate Governance
Setting corporate strategy, overalldirection, mission or vision
Hiring and firing the CEO and topmanagement
Controlling, monitoring, or supervising
top management
Reviewing and approving the use ofresources
Caring for shareholder interests
Board ofDirectors
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Corporate Governance
Role of the Board in strategic management
Monitor Developments inside and outside the corporation
Evaluate & Influence Review proposals, advise, provide suggestions
and alternatives
Initiate & Determine Delineate corporations mission and specify
strategic options
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Board Structure
SIZE
COMPOSITION
COMPETENCES
COMPENSATION
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Board Processes
COMMITTEESAUDIT
REMUNERATION
FINANCE
STYLE
TASKS
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Board of Directors
Board of
Director
Membership
Wiling to challengemanagementSpecial expertiseAvailability for advice and
meetingsExpertise on global issuesUnderstands key technologiesExternal contacts valuable tothe firm
Detailed knowledge of industryHigh visibility in fieldAccomplished in representingfirm to stakeholders
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Board of Directors
Boards more involved in reviewing,evaluating, and shaping strategy
Institutional investors active onboards
pressure on CEO for firmperformance
Shareholders demand directors ownmore than token amounts of thefirms stock
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Board of Directors
Boards becoming smaller
Boards taking more control of board
functionsCorporations becoming more global;international experience needed
Societal expectations that boards balance
profitability and social responsibilityDiversity of board members
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Why Corporate Governancenow?
Failure of a corporation affects shareholders
employees (they tend to lose their jobs)
customers (they are deprived of quality productsand concerns are raised about after sales service)
government (they lose revenue and have to dealwith problem of unemployment)
lenders (sticky loans now called as non-performingassetsNPAs)
creditors (fear of non-recovery of amounts due)
suppliers (lose valuable customers which is turn
affects their operations)
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Why Corporate Governancenow?
Overwhelming Public Interest
Erosion in faith of stakeholders
No corporation can work in isolation; whathappens in one affects others and the
economy as well
All stakeholders feel impact
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Core of Corporate Governance
Independence
Disclosure
TransparencyEthics
Risk Assessment
Risk Containment/ManagementEntire model of Corporate Governance is based
on JUDGMENT, PRUDENCE & WISDOM
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Action
HabitsCharacter
ThoughtsWords
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Watch your actions, they become your habits
Watch your habits, they become your character
Watch your character, they become your thoughts
Watch your thoughts, they become your words
Watch your words, they become your actions
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Independent Directors
Meaning of Independence
Are they policemen in civil clothes?
Degree of IndependenceShould independent directors possessbusiness intellect?
Freedoms
Are freedoms unfettered?Remuneration
Skill Enhancement
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Ethics
Ethics is knowing thedifference between what
you have a right to do andwhat is right to do.
..Potter Stewart
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Social Responsibility
Key question for strategic decision makers:
Should strategic decision makers be
responsible only to shareholders or dothey have broader responsibilities?
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Social Responsibility
Friedmans Traditional View
There is one and only one socialresponsibility of business to use itsresources and engage in activitiesdesigned to increase its profits
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Social Responsibility
Carrolls Four Responsibilities
Economic
Legal
Ethical
Discretionary
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Social Responsibility
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Social Responsibility
Moral Relativism
Morality is relative to somepersonal, social or culturalstandard and that there is no
method for deciding whether onedecision is better than another.
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Social Responsibility
Kohlbergs Levels of
Moral Development
Preconventional Level
Concern for self
Conventional Level Consideration of laws and norms
Principled LevelAdherence to internal moral code
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Social Responsibility
Code of Ethics:
Specifies how an organizationexpects its employees to behavewhile on the job.
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Social Responsibility
EthicsThe consensually accepted standards of behaviorfor an occupation, trade, or profession
MoralityThe precepts of personal behavior based onreligious or philosophical grounds
Law
Formal codes that permit or forbid certainbehaviors
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Social Responsibility
Approaches to Ethical Behavior
Utilitarian
Actions and plans judged by consequences
Individual Rights
People have fundamental rights to berespected in all decisions
Justice
Distribution of costs and benefits to beequitable, fair, and impartial
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Why Ethical Code?
To command respect and confidence
To maintain Independence
To maintain IntegrityTo maintain Excellence
To ensure Objectivity
To ensure Ethical Behaviour
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Ethics
Integrity without knowledge is
weak and useless, andknowledge without integrityis dangerous and dreadful.
..Samuel Johnson
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SEBI Framework
Controls through Clause 49 of theListing Agreement
Board of Directors Composition
Executive:Non-executive Directors 50:50
Non-executive Chairman 1/3rd Independent
Directors Executive Chairman 50% Independent
Directors
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SEBI Framework
Board of Directors
Compensation
Prior approval of shareholders Frequency of Meetings
4 meetings, Gap not to exceed 4 months
Code of Conduct Board + Senior Management
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SEBI Framework
Audit Committees
Composition
3 Directors, 2/3rd
independent, financiallyliterate
Meetings 4 per year
Gap between 2meetings Max. 4 months
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SEBI Framework
Audit Committees Powers
To investigate any activity within its terms of reference.
To seek information from any employee.
To obtain outside legal or other professional advice.
To secure attendance of outsiders with relevantexpertise, if it considers necessary.
Role Review of Information
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SEBI Framework
Subsidiary Companies
Disclosures
Related Party Transactions Disclosure of Accounting Treatment
Board Disclosures Risk Management
Proceeds from Public Issues, Rights Issues etc
Remuneration of Directors Management
Shareholders
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SEBI Framework
CEO/CFO Certification
Report on Corporate Governance
Compliance Certificates
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Powers of Directors
General Powers
Power vests in BOD can do all such acts
and things as the company is authorised toexercise and do
Restrictions on powers of Board Some powers to be exercised through resolutions
in Board Meetings Making calls, Issuing Debentures, Borrowing
Money, Investing Funds, Making Loans
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Control by Directors
Annual operating plans and budgets
Capital Budgets
Results of Company and its divisions andsegments
Minutes of committees of Board
Information on Senior Level Appointments
Show cause, demand, prosecution andpenalty notices
Accidents, Dangerous Occurrences, Pollutionproblems
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Control by Directors
Default in financial obligation
Details of Joint Venture or CollaborationAgreements
Significant investment in Assets, Trademarks,Goodwill etc.
Related Party Transactions
Significant Labour ProblemsForeign Exchange Exposures
Non-compliance of regulatory and statutoryrequirements
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Evaluation and Control
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Strategic Audit:
Type of management audit that isextremely useful as a diagnostic toolto pinpoint corporate-wide problemareas and to highlight organizational
strengths and weaknesses.
A dit St
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Audit Steps:
Evaluate current performance results
Review corporate governance
Scan and assess the external environment Scan and assess the internal environment
Analyze strategic factors using SWOT
Generate and evaluate strategic alternatives
Implement strategies Evaluate and control
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Styles of Corporate Governance
Entrepreneurship
management
Partnership
management
Chaos
management
Remote
managementD
egreeofInvolvement
ByTopManag
ement
Degree of InvolvementBy Board of Directors
High
Low
Low High
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Board of Directors Continuum
Phantom
Rubber
Stamp
Minimal
Review
Nominal
Participation
Active
Participation Catalyst
Never knowswhat to do, ifanything; nodegree ofinvolvement.
Permits officersto make alldecisions. Itvotes as theofficers recom-mend on actionissues.
Formallyreviewsselected issuesthat officersbring to its
Involved to alimited degreein the perform-ance or reviewof selected keydecisions,indicators, orprograms ofmanagement.
Takes theleading role inestablishingand modifyingthe mission,objectives,strategy, andpolicies. It hasa very activestrategycommittee.
Low(Passive)
High(Active)
Approves,questions, andmakes final de-cisions on mis-sion, strategy,policies, andobjectives. Hasactive boardcommittees.Performs fiscaland manage-ment audits.
DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT
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Top Management
Responsibilities of Top Management:
Provide executive leadership and astrategic vision
Manage the strategic planning process
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Top Management
CEO and Clear Strategic Vision
Common Characteristics:
CEO articulates a strategic vision
CEO presents a role for others
CEO communicates high performance
standards and shows confidence infollowers
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Defining CEO
In an organization that has a board of directors,
the "chief executive officer" is (usually) the singular
organizational position that is primarily responsible
to carry out the strategic plans and policies as
established by the board of directors.Chief executive reports to the board of directors
Without a board of directors (sole proprietorship,
partnership, etc.),
the "chief executive officer" is (usually) the singularorganizational position (other than partnerships, etc.)
that sets the direction and oversees the operations
of an organization.
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Role of CEO
LEADER
Advises the Board
Advocates / promotes organization and stakeholder change related to
organization mission
Supports motivation of employees in organization products/programs and
operations
VISIONARY / INFORMATION BEARER Ensures staff and Board have sufficient and up-to-date information
Looks to the future for change opportunities
Interfaces between Board and employees
Interfaces between organization and community
DECISION MAKER
Formulates policies and planning recommendations to the Board
Decides or guides courses of action in operations by staff
l f
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Role of CEO
MANAGER Oversees operations of organization
Implements plans Manages human resources of organization
Manages financial and physical resources
BOARD DEVELOPER Assists in the selection and evaluation of board members Makes recommendations, supports Board during orientation and self-
evaluation
Supports Board's evaluation of Chief Executive
l d & Skill l f C O
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Knowledge & Skill Role of CEO
Basics in Management and Leadership
Planning
Organizing
Leading
Coordinating Activities and Resources (including
performance management)
Role: Chairman
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The chairman's role includes managing the
board's business and acting as its facilitator and
guide.
This can include:
Determining board composition and
organization;Clarifying board and management
responsibilities;
Planning and managing board and boardcommittee meetings;
Developing the effectiveness of the
board.
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Strategic Management Process
Strategic Planning Staff --
Supports top management andbusiness units in the strategicplanning process.
Strategic Management Process
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Strategic Management ProcessStrategic Planning Staff
Responsibilities:
Identify and analyze company-wide
strategic issues, suggest corporatestrategic alternatives
Work as facilitators with business
units to guide them through thestrategic planning process
Risk Assessment &
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Risk Assessment &Management
Risk Assessment &
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Risk Assessment &Management