Index Sr no: Topic

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Introduction to corporate governance Purpose and benefit of corporate governance

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The Role of Corporate Governance in Strategic Decision Making Corporate Governance Objectives
Case study

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6.

Conclusion

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Introduction to corporate governance

Corporate governance is an important part of strategic management that can improve firm performance. Despite its importance, many people are unclear about what corporate governance is precisely. Both managers and investors should understand what corporate governance is and the role that it plays in firms. Being aware of what corporate governance is will allow them to see how it affects their respective businesses. Definition: Corporate governance, in strategic management, refers to the set of internal rules and policies that determine how a company is directed. Corporate governance decides, for example, which strategic decisions can be decided by managers and which decisions must be decided by the board of directors or shareholders. History: Corporate governance is a concept that emerged following the growth of corporations in the 20th century. In particular, following the stock market crash in 1929, scholars began to argue for corporate governance mechanisms that would allow shareholders to keep companies in check. In the latter half of the 20th century this continued, with corporate governance
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structures being introduced to control managers and to ensure that their actions are in line with shareholder interests.

Purpose and benefit of corporate governance

Purpose of corporate governance: The central purpose of corporate governance is to make managers accountable to shareholders. Without a corporate governance structure, managers would be free to make decisions that are in their own interest, but not necessarily in the interest of the firm. Corporate governance keeps managers in check by limiting their power and, often, by tying their pay to firm performance. Benefits of corporate governance: Firms with good corporate governance models perform better because their managers are more inclined to make decisions that favor the business. They also will tend to have higher stock prices because investors are more confident that they can control the firm. Firms with good corporate governance models also will find it
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easier to attract financing because they are perceived as being more accountable.

The Role of Corporate Governance in Strategic Decision Making

One of the most important roles of corporate governance is to ensure that strategic decisions are made in the interest of those with a stake in successful outcomes. Boards have increasingly become more focused on corporate shareholders, but a shift may be beginning to occur. The interests of stakeholders, such as customers, potential customers and non-customers impacted by the decisions of a company, may begin to get attention as corporate governance plays an increasingly strategic role. Policy Setting Corporate governance is the system used to direct and control organizations. One of the many important roles played by corporate boards and executive committees is to establish and enforce policies deemed necessary for the effective operation of the company. These may
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include codes of ethical conduct towards customers, vendors, employees and shareholders, input into the organization's structure, as well as approval of functional positions and responsibilities. This may include input into the corporate culture, or a host of subtle governance cues that affect the transparency or opaqueness of strategic decision making. Establishing Corporate Strategy An organization's corporate board must be intimately involved with establishing a clear definition for the organization's purpose and desired outcomes. If a company sets the goal to become the global leader in telecom technology for the military market, for instance, then corporate objectives, strategic plans, financial allocations and measurable outcomes should all be measured against their ability to move the company toward that goal. If resources are being allocated to places that do not support this strategic goal, then the board's due diligence must identify the reason why and give input into which is off-strategy: the strategic goal itself or the resource actions that appear initially to be out-of-sync. Assurance That Actions Support Strategic Positions A company's executive team is directly accountable to the board of directors. This requires that major corporate decisions and results tracked against the corporate goals should be vetted, if not by the full board, then by the board's executive committee. Key strategic actions, such as mergers and acquisitions, major new market entries, exiting markets, closing plants, or changing the diversification mix or pricing
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position, are examples of decisions that require the oversight of corporate governance. Monitoring Investments Investment Decisions and Capital

It is the responsibility of the corporate board to review and understand the financial statements of the company and to guide the prudent investment of funds to maximize net income and returns. Especially since the Sarbanes-Oxley Act of 2002 which introduced new responsibilities for financial reporting, corporate boards must be vigilant regarding the strategic impact of new requirements for internal controls. Corporate boards must also review and understand product portfolio and support the executive management team, offering strategic oversight regarding adjustments to the product mix, approving or shifting capital investment to product categories with the most potential to maintain and grow revenue streams and manage expenses. At the same time, corporate board members have a difficult task: helping the executive team balance the short-term goals so desired by shareholders with the long-term investment necessary to ensure the company's future. Accountability to Stakeholders From a governance perspective, accountability, while often focused on stock shareholders, can sometimes become something heretofore unconsidered. Historically, business school curriculum has emphasized responsibility primarily for stock shareholder returns, leaving the responsibilities of a corporation to be a good corporate citizen often overlooked. As stock prices
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and quarterly dividends have taken center stage, longterm investments are often set aside. Critical aspects of corporate governance responsibilities, such as infrastructure investment, plant retooling, workplace safety or disaster planning, have often been ignored or delayed past safe time parameters. The Gulf oil disaster in 2010 demonstrated questionable judgment by the corporate governance of British Petroleum (BP). While the lapse was perhaps shared by many oil producers, it followed years of unprecedented revenue growth and shareholder returns. As unprecedented profits rolled in, it appeared that little to no corporate investment was designated to technology, safety inspections or deep water disaster response plans, even as oil reserves were tapped in deeper and deeper water. Surely the stakeholders in this disaster go far beyond BP shareholders and include the fishermen and small business people whose livelihoods were destroyed, the wildlife being killed by it and the people of the Gulf, whose lives would be impacted for decades to come. A corporate board that does not prepare for crisis, or consider the broad impact of their operational decisions, is not fulfilling its board mandate.

Corporate Governance Objectives

Alan Calder, in his book, "Corporate Governance: A Practical Guide to the Legal Frameworks," states, "Effective corporate governance is transparent, protects the rights of shareholders, includes both
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strategic and operational risk management, is as interested in long-term earning potential as it is in actual short-term earnings and holds directors accountable for their stewardship of the business." These guidelines include most objectives of a corporate governance policy in any organization. Transparency and Full Disclosure Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts. Full disclosure includes compliance with regulations and disclosing any information important to the shareholders. For example, if a manager has close ties with suppliers or has a vested interest in a contract, it must be disclosed. Also, directors should be independent so that the oversight of the company management is unbiased. Transparency involves disclosure of all forms of conflict of interest. Accountability Jean Du Plessis, James McConvill and Mirko Bagaric, in their book, "Principles of Contemporary Corporate Governance," point out that a corporate governance structure encourages accountability of the management to the company directors and the accountability of the directors to the shareholders. Through hiring independent directors, a company aims to create good corporate governance. The compensation of the chief executive officer has to be approved by the company directors to ensure that the compensation structure is fair and in the best interests
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of the shareholders. Any discrepancies in the company accounts or malfunctioning of the company is closely watched by the board of directors. The board has a right to question strategic decisions. Equitable Treatment of Shareholders A corporate governance structure ensures equitable treatment of all the shareholders of the company. In some organizations, a particular group of shareholders remains active due to their concentrated position and may be better able to guard their interests; such groups include high-net-worth individuals and institutions that have a substantial proportion of their portfolios invested in the company. However, all shareholders deserve equitable treatment, and this equity is ensured by a good corporate governance structure in any organization.

Self Evaluation Corporate governance allows firms to evaluate their behavior before they are scrutinized by regulatory bodies. Firms with a strong corporate governance system are better able to limit their exposure to regulatory risks and fines. An active and independent board can successfully point out the loopholes in the company operations and help solve issues internally. Increasing Shareholders' Wealth The main objective of corporate governance is to protect the long-term interests of the shareholders. Ira Millstein, in his book, "Corporate Governance:
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Improving Competitiveness and Access to Capital in Global Markets," mentions that firms with strong corporate governance structures are seen to have higher valuation premiums attached to their shares. This shows that good corporate governance is perceived by the market as an incentive for shareholders to invest in the company.

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Case study
Infosys
Infosys technologies: The best among Indian Corporate: As per the Credit Lyonnais Securities Analysis (CLSA), the corporate governance ratings of the Software firms are higher than those of other Indian firms. Infosys, based in Bangalore, is a publicly held, ISO 9001 certified company offering information technology consulting & software services. The software offered include application development, E-Commerce & Internet Consulting, Software Maintenance. Respected across the country, with very strong systems, high ethical values & a nurturing working atmosphere. Net income of US 1,155 million and revenue of US 4,176 million. At present having US 20.4 billion market capitalization Achievements: Voted as the Best Managed Company in Asia. Biggest exporters of Software.
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 First to follow the US Generally Accepted Accounting Principles before going for Nasdaq listing in 1991. Championed Corporate Governance in India

Narayana Murthys Global strategy:

Global Delivery Model Producing where it is most cost effective to produce & selling where it is most profitable to sell. Moving up the Value Chain Getting involved in a software development project at the earliest stage of its life cycle. PSPD Model Predictability of Revenues, Sustainability of Revenues, Profitability, Decisionmaking and risk taking

The model of Infosys: A formal code of business conduct and ethics. To be signed and adhered to by employees. Action against any employee for violation is taken seriously

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Conclusion

Good corporate governance promotes accountability of board members and management to shareholders and improves transparency and disclosure. According to the OECD, the integrity of organisations and markets is central to the health and stability of both local and global economies. In addition, corporate governance practices are now being looked at by rating agencies, and they have an impact on the cost of capital. Research shows that investors from all over the world indicate will pay large premiums for companies with effective corporate governance. A study conducted by The McKinsey Quarterly found that institutional investors in emerging market companies would be willing to pay as much as 30% more for shares in companies with good governance. In addition, it showed that companies with better corporate governance had higher price-to-book

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ratios, demonstrating that investors do indeed reward good governance.

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