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Corporate GovernanceAn IntroductionIntroductionCorporations as Organizations- They are legal person but are /should they be moral person Are corporations social organizations? Whose interests they cater to? Todays Context: Debate between Immoral Monism versus Moral Pluralism- Shareholders vs. Stakeholders

Recent Studys Findings on Fortune 500 Cos: Out of the 100 companies surveyed 10 were governed by pure stockholders approach 22 were legally and ethically binded 64 were governed by principle of 'maximising stakeholder value while only 2 considered social problems while making profits

The Problem: Capitalism not a self-justificatory system and need for external morality and hence rise of BE CG : Growing Concern in Recent Times: Why?Need to take greater business risks with associated ethical ambiguities and implications in an unpredictable world

Ever-widening group of more diverse stakeholders with multiple needs/interests accompanied by increasing stakeholder activism

Heightened expectation of organizations to be more visibly ethical and demonstrate citizenship conduct

Growing legislative enforcement of directors fiduciary accountability and personal liability for organizations they oversee

Size of organizations: Too big to fail?

Relevance of CGAccountability and transparency encouraged by CG are essential for capital market developmentEnhanced corporate productivity and efficiency through good CG ensures economic growth with social justice and developmentDisciplined and Controlled CG can reduce financial turmoilEthically inspired CG ensures employees welfare and consumers welfareGood corporate citizenship is a sort of national pride and assetNecessary for Successful International Business

Corporate Governance versus Corporate ManagementCorporate ManagementImplements the orderMore esotericPower is delegatedWorks in a close-ended systemDecides how to go?More a stereotyped function

Corporate GovernanceGives orderMore exotericBoard is empowered in Corporate GovernanceWorks in an open-ended systemDecides where to go?Defining CGInformally defined, CG pertains to ensuring that the right people in the organization consistently do the right things, for the right reasons, in the right way, and at the right time, with the right autonomy Formally defined, CG refers to ensuring that an organization conducts its business in an ethical, legitimate, fair, and credible manner with respect to its current performance and future sustainability, whilst balancing the multiple interests of its diverse stakeholdersUltimate aim of CG: Ensure business of the organization within a certain context is conducted in such a way a to make and keep the organization a going concern for all its stakeholders through on-going wealth creation-now and in the future 3Distinctions and Definitions of CGInternal CG: System by which a company is directed and controlled (Cadbury Committee)External CG: Refers to legal and regulatory environment within which corporations function as well as to the market for corporate control- Control over companies exercised through marketShareholder Theory: Schleifer and Vishnys Def of CG: The ways in which suppliers of finance to corporations assure themselves of getting a return on their investment

3Distinctions and Definitions of CG...contStakeholder Approach: Corporation as a Social Institution-In the words of Collier and Roberts CG is aligning and balancing a wide variety of potentially competitive interests within the corporation

Descriptive Approach: Account of practices and ideas that are widely associated with CG without making any value judgement about it- For instance, in terms of internal governance, Adrian Cadbury spoke about CG as the system by which a company is directed and controlled- In terms of external governance, Wiefield defined CG as leadership, management and control of a firm by formal and informal, public and private rules

Normative Approach: Concerned with notion of good governance and with holding the balance between economic and social goals and between individual and communal goals Historical Background of Corporate GovernanceForeign and Corrupt Practices Act,(US,1977)Treadway Commission Report(US,1987): Recos for better internal management of business companies through proper auditing and controlCommittee of Sponsoring Organization( US,1992): Framework for ideal functioning of corporations and their managementCadburys Committee(UK, 1992):Internal Financial ControlOECD(1999): Certain ideal principles for Corporate Governance(Shareholders rights, equal treatment of all shareholders, Disclosure and Transparency, Responsibilities of Board)CII (India,1997): Code for CG in IndiaKumar Mangalam Birla Committee(1999): Under auspices of SEBI introduced standard listing agreement to be followed by all listed companies in India under Clause 49SOX Act (US,2002): Principles for strict compliance of the corporate sector in the USModels of Corporate Governance: Anglo-American Model

Topmost priority to shareholders: Implies professional management with utmost integrity ,transparency and accountabilitySeparation of ownership and controlSingle-tier governance systemGoverned by the BoDCEO is extremely powerfulBoD selected by shareholders and a mixture of internal and external directorsDisclosure of all information and dataStress on role of capital market in disciplining the company

Sarbanes-Oxley Act, 2002Broad act even making provisions for ideal ethical practices of a corporate houseAccounting firms prohibited from providing consultancy services to client firmsAccounting profession under strict scrutiny by independent 5 members of private sector. Conferred power which will have both disciplinary and legal aspectsCorporate penalty increased to 20 years of imprisonment for corporate fraudCEOs who certify false accounts are liable to be punished for a maximum period of 20 years along with fines that go up to 5millionUSDNew rules framed for financial analysts by Security Exchange Commission Protection for whistle-blowersModels of Corporate Governance: German ModelTwo-tier system: Supervisory board (Aufsichtstrat) and an Executive Board (Vorstand)Possibilities of clash of interest b/w SB and EB (though generally avoided by veto power of each board member)Important decisions taken jointly by SB and EBDirectors of Boards can access information from internal and external sourcesDoes not support high turnover of DirectorsCommercial banks holding a large proportion of shares on behalf of the private shareholders along with their own shares become source of domination and controlling powerStrong relationship between corporate sector and banking sectorSystemic protection extended to lenders, shareholders and employees in area of CGInstitutional shareholding is only 30% of total sharesGovernment takes active interest in CG and ensures consensus on long-run objectives

Models of Corporate Governance: Japan ModelCompanies are based on family types relationship and tiesDecisions based on consensusConcept of obligatory relation and performance play crucial role in CGCulture of tolerance and respect for traditional valuesCommunitarian calculus given more importanceConcept of profit is less important than that of market shareGovernment plays an important role in corporate regulationNo hostile take-overs because of corporate cross-shareholding (Keiretsu) Cross shareholding by banks and affiliated companiesAgreement on mergers for mutual benefitsIndustrial activities and capital flows are controlled by the governmentInstitutional shareholding constitutes 60%-80% but their influence on CG is minimalBoard of Directors elected by shareholders and the directors are mostly insiders having a stakeholders approachSingle-tier system CG in INDIASingle-tier majority inside board systemFamily based insider system of ownershipReliance on internal capital marketCapital market and stock exchanges in India are not as well-developed as in other developed capitalist countriesMinority investors rights and creditors rights are not as well protected as in advanced countriesSEBI has laid down provisions for listing of companies under clause 49Appointment of independent directors is mandatory(50% or 1/3rd of total board members of listed companies)Audit committee must have majority of independent directors and function in sync with rules of SEBI and Companies Act

Broad Structure of Corporate GovernanceKey Elements of CGUnique Character of the BoardBoard membership is either on the basis of election or nominationMembers expected to represent and serve parochial interests of the stakeholders they representBoard members have high personal profiles and strong personalitiesAt least 50% of board members are not employed on a permanent basis by the organizations on whose boards they serveLow frequency of regular, face to face interaction amongst board members this may occur twice a quarter/year for a few hours in board and board committee meetingsDuty of solving of complex challenges/issues under severe time constraints with imperfect information Hardware(things the board has to put in place regarding its task. Board Hardware sets the outer context (playing field, rules of the game) for the Board Software( players and the game)Elements of the BoD18Software(Process of working together to create favourable board dynamics and performance conditions) of the Board19Map of the Performance Space of the Board (Source: Theo Veldsman: The soft underbelly of CG: The HW of Board Dynamics)High Board Performance OutcomesBoard HWBoard SWHighTask Performance Dimension: Board Task Execution WhatProcess Performance Dimension: Board Process HowFormingStorming NormingPerformingReinventingHardware of the BoardPositioning of a Board Purpose (Why does the board Exist?)Vision (What dream does it have for which its performing oversight role?) Mandate (Who can act and with what degree of autonomy?) Vantage Point ( What perspective the board vies the world and the way world works)What are right set of glasses to use when looking at the world in which the board has to lead? (Newtonian world view vs. Complexity/chaos view)Temporal Dimensions (Past/Present/Future View)Identity: Who and what are we as a Board? Whats our brand as a Board?

Tasking: Self-Imposed TasksSelf-imposed tasksAgreed goalsAgendaExpected OutcomesDemarcation and definition of board rolesStakeholder engagement and Accountability

Strategic Direction and Philosophy

Organizational and Management Performance

Organizational and Leadership Continuity

Hardware of the Board.ContDesignDemarcation and Design of Board RulesDivision of work through work PortfoliosStructure and Composition of BoardStructuring of Boards Agenda

Profile/Board DemographySize of the BoardInsider and Outsider RatioStakeholder Diversity and Representavity

Software of the BoardMacro-elements: Context in which micro software elements are embedded-: Organizational Image and ReputationDominant Coalition on the boardCulture and Climate of boardMicro-elements: Affect ongoing daily board processes and include leadership displayedLeadership(focus; style; mode)Personal EngagementPower and Politics

Trust: As resultant outcome of interaction between all of the above software element

Software of the Board....Cont Organizational Image and Quality of LeadershipDominant Coalition: Serving parochial interests of shareholders or super-ordinate interests? Conflict ridden boards become dysfunctional -Biased preferences and over representation of some profiles? Culture: Consensus on hardware elements leads to strong common culture- Shared attitudes of engaging with work- Consensus doesnt imply possibilities of Constructive ConflictClimate: Mood/Views: Conflicting /Oppressive/Compliant/ vs. Conducive/Teaming Atmosphere/ Partnering

Software of the Board....ContLeadershipFocusTransactional (enhancing the existing)Transformational (turning the existing into something new and/or bringing new into being) Transcendental (building a lasting legacy)

Style: Self-governed/Self managed/Co-determined/ Consult

Mode: Caretaking mode (status quoist)-Crisis Mode (influencing members to respond to crisis-Instrumental Mode( establishing clear links b/w goals and rewards-Visionary /purpose driven

Software of the Board....ContPersonal EngagementTransforming a group of strangers to evolve a collective conscienceOngoing processes to facilitate understandingUtilization of competenciesPower and Politics: Board dynamics Means-End question( leveraging of power for opportunistic self-serving basis)Inter-action Pattern: Way in which members interact in doing boards workTrust: Positive expectation of others motives-Ultimate result of constructive and healthy

Control Mechanisms of CGControlling authority (Board of Directors) has to have access to all necessary information stockMonitoring by Board can be made effective through regular meetings of the BoardControl mechanisms to encompass both internal and external controlsEfficiency based remuneration for executives and employeesSystem of checks and balances at all levelsGovernment Regulations ( in Indias case, Indian Companies Act, 1956 and SEBI ,1992) Code of ConductTheories of CGCG Failure in SatyamObjectivesUnderstand fundamental concepts and theories of CGReasons behind failure of CG at SatyamImplications of failure of CG at SatyamExamine role of independent and non-executive directorsFuture prospects of CG in Companies Important Points to ponderWhat is the case all about?Reasons behind inadequate CG at SatyamImplications for Satyam of CG failureRole of independent and non-executive membersTheories of CG