Corporate Governance

Presented By:

Dhaivat Raval(10)

Chintan Patel(4)

Sumit Patel(8)

Hardik Patel(6)

Abhinav sisaudiya(13)

Introduction• Corporate governance is the set of processes, customs, policies,

laws, and institutions affecting the way a corporation is directed, administered or controlled.

• Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

• The principal stakeholders are the shareholders/members, management, and the board of directors. Other stakeholders include labour (employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large.

• An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem.

• It is 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.

Why Corporate Governance???

• In the beginning of the new millennium, several companies in the USA and elsewhere faced collapse because of corporate mis-governance and unethical practices they indulged in. the then existing regulatory framework seemed to be inadequate to deal with the gigantic business corporations that committed deliberate frauds.

• In the year 2000, several American mega corporations collapsed like a pack of cards. The federal administration of President Bush was quick to slap corrective measures on blundering corporations and initiated preventive steps to avoid corporate frauds in future.

• In India, the governance of most of the country’s industrial and business organizations thrived on unethical practices at the market place and showed little regard for the timeless human and organizational values while dealing with their shareholders, employees and other stakeholders.

An overwhelmingly large number of Indian corporations used several illegal tactics such as restricting of industrial licenses with a view to keeping away competitors, using import licenses to make a quick profit, illegally holding money aboard, and indulging into corruption and other unethical practices with impunity.

The reasons for the corporate mis-governance in India were many: A closed economy, a sheltered market, limited need and access to global business, lack of competitive spirit and an inefficient regulatory framework. These were responsible for poor governance of companies in India for well over 40 years, between 1951 and 1991.

What is ”Good” Corporate Governance???• Bad governance is being recognized now as one of the root causes of

corrupt practices in our societies. Major donors, institutional investors and

international financial institutions provide their aid and loans in condition

that reforms that ensure “good governance” are put in place by the

recipient nations.

• As with nations, corporations too are expected to provide good governance

to benefit all their stakeholders. At the same time, good corporate are not

born, but are made by the combined efforts of all stakeholders, which

include shareholders, board of directors, employees, customers, dealers,

government and the society at large.

• Law and regulation alone cannot bring about changes in corporate to

behave better to benefit all concerned. Directors and management, as

goaded by stakeholders and inspired by societal values, have a very

important role to play.

• The company and its officers, who, inter alia, include the board of directors

and the officials, especially the senior management, should strictly follow a

code of conduct.

Corporate Governance System1. The Anglo-American model : This is also known as unitary board

model, in which all directors participate in a single board

comprising both executive and non-executive directors in varying

proportions.

2. The German model : Corporate governance in the German model

is exercised through two boards, in which the upper board

supervises the executive board on behalf of stakeholders and is

typically societal oriented.

3. The Japanese model : This is the business network model, which

reflects the cultural relationships seen in the Japanese keiretsu

network. In this model the financial institution has accrual role in

governance. The shareholders and the main bank together appoint

board of directors and the president.

Importance of Corporate Governance

• With good governance we will perform better over time.

• Reducing risk.

• Facilitate decision making process / fasten exploitation of

opportunities

• Highlight possible risks and threats

• Add value & premium for shareholders / investors.

• The importance of corporate governance - that is, responsibility in

the handling of money and the conduct of commercial activities.

Corporate Governance in India- a background

• Unlike South-East and East Asia, the corporate governance

initiative in India was not triggered by any serious nationwide

financial, banking and economic.

• Also, unlike most OECD countries, the initiative in India was driven

by an industry association, the Confederation of Indian Industry

• In December 1995, CII set up a task force to design a voluntary

code of corporate governance

• Between 1998 and 2000, over 25 leading companies voluntarily

followed the code: Bajaj Auto, Infosys, Dr. Reddy’s Laboratories,

Nicholas Piramal, BSES, HDFC, ICICI and many others

The Theory & Practices of Corporate Governance

1. Agency theory

2. Stewardship theory

3. Stakeholder theory

4. Sociological theory

Agency theory

• Relationship between share holders and managers.• In this theory, shareholders who are the owners or principals of

the company, hires the agents to perform work. Principals

delegate the running of business to the directors or managers,

who are the shareholder’s agents.

• The agency theory shareholders expect the agents to act and

make decisions in the principal’s interest. the agent may not

necessarily make decisions in the best interests of the principals .

Such a problem was first highlighted by Adam Smith in the 18th

century

Stewardship Theory

• Stewardship theory has its roots from psychology and

sociology and is defined by Davis & Donaldson (1997) as

“a steward protects and maximizes shareholders wealth

through firm performance, because by so doing, the

steward’s utility functions are maximized”.

• stewardship theory suggests unifying the role of the CEO

and the chairman so as to reduce agency costs and to have

greater role as stewards in the organization.

Stakeholder Theory

• This theory developed by freeman (1984).

• Stakeholder theory can be defined as “any group or

individual who can affect or is affected by the achievement

of the organization’s objectives”. Unlike agency theory in

which the managers are

Corporate Governance System

1. The Anglo-American model : This is also known as unitary board model, in which

all directors participate in a single board comprising both executive and non-

executive directors in varying proportions.

2. The German model : Corporate governance in the German model is exercised

through two boards, in which the upper board supervises the executive board on

behalf of stakeholders and is typically societal oriented.

3. The Japanese model : This is the business network model, which reflects the

cultural relationships seen in the Japanese keiretsu network, in which boards

tend to be large, predominantly executive and often ritualistic. The reality of

power in the enterprise lies in the relationships between top management in the

companies in the keiretsu network. In this model the financial institution has

accrual role in governance. The shareholders and the main bank together

appoint board of directors and the president.

Obligation

1. Obligation to society at large:

National interest : A company should be committed in all its actions to

benefit the economic development of the countries in which it operates and

should not engage in any activity that would militate against such an

objective.

Political non-alignment : A company should be committed to and support a

functioning democratic constitution and system with a transparent and fair

electoral system and should not support directly or indirectly any specific

political party or candidate for political office.

Legal Compliances : The management of a company should comply with all

applicable government laws, rules and regulations.

Rules of Law : Good governance requires fair, legal frameworks that are

enforced impartially. It also requires full protection of rights, particularly

those of minority shareholders.

Honest and ethical conduct : Every officer of the company should deal on behalf of the company with professionalism, honesty, commitment and sincerity as well as high moral and ethical standards.

Corporate Citizenship : A corporate should be committed to be a good corporate citizen not only in compliance with all relevant laws and regulations but also by actively assisting in the improvement of the quality of life of the people in the communities in which it operates with the objective of making them self reliant and enjoy a better quality of life.

Ethical behavior : Corporations have a responsibility to set exemplary standards of ethical behaviour, both internally within the organizations, as well as in their external relationships.

Social concern : The Company should have concerns towards the society. It can help the needy people & show its concern by not polluting the water, air & land.

Healthy and safe working environment : A company should be able to provide a safe and healthy working environment

Competition : A company should market its products & services on its own merits & should not resort to unethical advertisements or include unfair & misleading pronouncements on competitors’ products & services.

Timely Responsiveness : Good governance requires that institutions & processes try to serve all stakeholders within a reasonable time frame.

Obligation

2. Obligation to investor:

Towards shareholder

Measures promoting transparency and informed shareholder

participation

Financial reporting and records

3. Obligation to employees

Fair employment practices

Equal opportunities

Humane treatment

Obligation

4. Obligation to customers

Quality of products and services

Products at affordable prices

Unwavering commitment to customer satisfaction

5. Managerial obligations

Protecting company’s assets

Behavior toward government agencies

Control

Five Golden Rules

Our Five Golden Rules of best Corporate governance practices are:

• Ethics: a clearly ethical basis to the business 

• Align Business Goals: appropriate goals, arrived at through the creation

of a suitable stakeholder decision making model 

• Strategic management: an effective strategy process which incorporates

stakeholder value 

• Organisation : an organisation suitably structured to effect good

corporate governance 

• Reporting: reporting systems structured to provide transparency and

accountability

Best corporate governance practice = best management practice

• The regulatory approach to the subject would regard governance as something on its

own, to do with ensuring a balance between the various interested parties in a

company’s affairs, or more particularly a way of making sure that the chairman or

chief executive is under control, producing transparency in reporting or curbing over-

generous remuneration packages. This indeed is what the Cadbury recommendations

and the subsequent reports and code are all about. However, as we express in the

rest of this website, we regard this as much too limited a view of governance, and

hence of best corporate governance practice.

• The essence of success in business is: having a clear and achievable goal ,having a

feasible strategy to achieve it ,Creating an organization appropriate to

deliver ,Having in place a reporting system to guide progress.

• There are very many websites and publications advising on how to do this, and of

course, this is what is described as good management.

• Best corporate governance practice is about achieving the stakeholders’ goal, and

delivering success in an ethical way. Hence it follows that it must entail a holistic

application of good management.

• To demonstrate the totality, and the need for a holistic approach, we present below

an illustration showing the pressures on a large organization.

Conclusion• Corporate governance philosophies differ around the world. However, with a few relatively minor exceptions, there exists a broad consensus on the elements of good corporate governance. It is widely understood that the most effective aspects of good corporate governance include:

• • A strong board of directors, independent of management and with sufficient expertise to oversee corporate management on behalf of the company’s shareholders;

• • Management compensation oversight, such as a compensation committee comprised of independent directors, to prevent opportunistic behavior by management and help link management compensation to corporate performance;

• • Strong corporation laws and regulations designed to protect the rights of shareholders;

• • Extensive public disclosure requirements, including both financial and non-financial reporting designed to give shareholders and potential investors an accurate, timely and thorough picture of the company’s performance and liabilities; and

• • A robust independent audit function, with sufficiently thorough procedures to confirm the accuracy of a public company’s financial disclosure statements and overseen by a board committee comprised of independent directors, or by some other mechanism independent of management.

Thank you