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.
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Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.
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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.
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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.
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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.
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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.
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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 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 nonexecutive 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.
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Reducing risk.
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Facilitate decision making process / fasten exploitation of opportunities
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Highlight possible risks and threats
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Add value & premium for shareholders / investors.
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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.
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Also, unlike most OECD countries, the initiative in India was driven by an industry association, the Confederation of Indian Industry
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In December 1995, CII set up a task force to design a voluntary code of corporate governance
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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
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Agency theory
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Stewardship theory
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Stakeholder theory
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Sociological theory
Agency theory .
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Relationship between share holders and managers
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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
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Align Business Goals: appropriate goals, arrived at through the creation of a suitable stakeholder decision making model
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Strategic management: an effective strategy process which incorporates stakeholder
value •
Organisation : an organisation suitably structured to effect good corporate governance
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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.
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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.
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There are very many websites and publications advising on how to do this, and of course, this is what is described as good management.
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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.
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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:
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• A strong board of directors, independent of management and with sufficient expertise to oversee corporate management on behalf of the company’s shareholders;
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• 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;
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• Strong corporation laws and regulations designed to protect the rights of shareholders;
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• 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
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• 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
