1

Corporate Governance
Corporate Governance
Corporategovernanceisthesetofprocesses,customs,policies,laws,andinstitutionsaffectingthewaya
corporation(orcompany)isdirected,administeredorcontrolled.Corporategovernancealsoincludesthe
relationshipsamongthemanystakeholdersinvolvedandthegoalsforwhichthecorporationisgoverned.

Corporategovernanceisconcernedwithholdingthebalancebetweeneconomicandsocialgoalsand
betweenindividualandcommunalgoals.

MajoradvantagesofCorporateGovernanceare
Goodgovernanceleadstogoodperformance.
Itcreatesanopenandtransparentsystem.
Itimprovescommunicationandbreaksdownsystematicbarrierstoflowofinformation.
Goodgovernanceallowsdecisionmakingbasedondata.Itreducesrisk.
Goodgovernancehelpsincreatingabrandandcreatescomfortforallstakeholdersandsociety.

Insummary,objectivesofCGare
Eliminateormitigateconflictsofinterest,particularlythosebetweencorporatemanagers&
shareholders.
Ensurethattheassetsofthecompanyareusedefficientlyandproductivelyandinthebest
interestsofitsinvestorsandotherstakeholders.

AneffectiveCGsystemconsistsof(components)
BoardofDirectors&Committees.
Legal&RegulatoryFrameworks.

MajorfactorsinfluencingtheCGare

MaincharacteristicsofaneffectiveCGare

Infosysasanexample
Factors Deciding CG Structure
Thestructureofagovernancesystemalsodependsonthefundamentalorientationofthefirmandtherole
thatthefirmplaysinthesociety.

Fromashareholderperspectiveeffectivecorporategovernanceshouldincreasethevalueofequity
holdersbybetteraligningincentivesbetweenmanagementandshareholders.

2
Fromastakeholderperspectiveeffectivegovernanceshouldsupportpoliciesthatproducestableandsafe
employment,provideanacceptablestandardoflivingtoworkers,mitigateriskfordebtholders,and
improvethecommunityandenvironment.

Abroadsetofexternalforcesthatvaryacrossnationsalsoinfluencethestructureofthegovernance
system.Theseincludetheefficiencyoflocalcapitalmarkets,legaltradition,reliabilityofaccounting
standards,regulatoryenforcement,andsocietalandculturalvalues.Theseforcesserveasanexternal
discipliningmechanismonmanagerialbehavior.Theirrelativeeffectivenessdeterminestheextentto
whichadditionalmonitoringmechanismsarerequired.

Finally,anysystemofcorporategovernanceinvolvesthirdpartiesthatarelinkedwiththecompanybutdo
nothaveadirectownershipstake.Theseincluderegulators(suchastheSEC),politicians,theexternal
auditor,securityanalysts,externallegalcounsel,employeesandunions,proxyadvisoryfirms,customers,
suppliers,andothersimilarparticipants.

Effective CG System

Accountability Ensurethatmanagementisaccountabletotheboard.
Ensurethatboardisaccountabletoshareholders.
Fairness Protectshareholdersrights.
Treatallshareholdersincludingminorityequally.
Provideeffectiveredressforviolations.
Transparency Ensuretimely&accuratedisclosureonallmattersincludingfinancialsituation,
performance,ownership&CG.
Responsibility Recognizestakeholdersrights.
Encouragecooperationbetweencompany&stakeholders.

CorporateManagementvs.CorporateGovernance
http://smallbusiness.chron.com/differencebetweencorporategovernancecorporatemanagement61799.h
tml

3
BOD - Structure & Types

BOD - Responsibilities
Establishcorporatevaluesandgovernancestructuresforthecompany
Ensurethatalllegalandregulatoryrequirementsaremetandcompliedwithfullyandinatimely
fashion
Establishlongtermstrategicobjectivesforthecompany
Establishclearlinesofresponsibilityandastrongsystemofaccountabilityandperformance
measurement
Hirethechiefexecutiveofficer,determinethecompensationpackage,andperiodicallyevaluate
theofficersperformance
Ensurethatmanagementhassuppliedtheboardwithsufficientinformationforittobefully
informedandpreparedtomakethedecisionsthatareitsresponsibility,andtobeableto
adequatelymonitorandoverseethecompanysmanagement
Meetregularlytoperformitsduties
Acquireadequatetraining.

BOD - Attributes
Theboardshouldbecomprisedprimarilyofindependentdirectors(thatis,notinsiders)
TheChairmanoftheBoardshouldbeindependent
Directorsshouldbequalified
ThereshouldbearegularelectionofmembersoftheBoard
ThereshouldbearegularselfassessmentoftheBoard
Theboardshouldholdseparatemeetingsoftheindependentdirectors
Theboardshouldrequireauditoversightbyindependentdirectorswhohavesufficientexpertisein
finance,accounting,andthelaw.

Board Committees

Audit Oneofthemostimportantcommittee.
MandatoryasperASXregulations.
4
Responsibletooversee&coordinateinternalauditfunctionwiththe
requirementsoftheindependentorexternalauditors.
Nomination Looksforsuitablyqualifiedandexperiencedreplacements.
Involveinsupervisingthereplacementofkeyexecutivemanagers.
Remuneration Appraisesremunerationlevelsforkeyexecutives,particularlytheCEO.
Remunerationpackagesincludeshareoptions&profitschemesaswellasthe
traditionalcomponentsofsalarypackage.
Env&Safety EnsuresthattheBoardmonitorscompliancewithallenv&occupationalhealth
&safety(OH&S)issues.
Privacy Ensuresinfofromandaboutcustomers,clients&employeesiscollected,
maintainedandstoredwithallnecessarylevelsofprotectionfromunauthorized
accessoruse.

CG - Emerging Trends

CG & Globalization
Employees
Shareholders
BOD
TopManagementTeam(TMT)
Governments

CorporateDisclosures

Forms of Business & Degree of Conflict

Theformofabusinesswilldictate,inpart,therelationshipbetweentheownersofthebusinessand
management.
ASoleProprietorshipisownedandoperatedbyasingleperson.Undersoleproprietorship,therearefew
riskswithrespecttogovernancefromtheperspectiveoftheowner.Creditorshavethehighestriskwith
respecttogovernance.

APartnershiphave2ormoreowners.Therearefewriskswithrespecttogovernancefromthe
perspectiveoftheowners,withownershiprightsandresponsibilitiesdetailedinthepartnershipagreement.
Creditors,includingtradecreditors,havethehigherriskwithrespecttogovernance.

Acorporationisalegalentitythathasrightssimilartoanindividual.
Acorporationcanraisecapital.
5
Ownersneednotknowhowtorunthebusiness.
Ownershipinterestsaretransferrable.
Corporationsaremorehighlyregulatedthanarepartnershipsorsoleproprietorships.
Separationofownersandmanagers.

Globalization

TheneedforCGrestsontheideathatwhenseparationexistsbetweentheownershipofacompanyand
itsmanagement,selfinterestedexecutiveshavetheopportunitytotakeactionsthatbenefitthemselves.
Thisscenarioistypicallyreferredtoasagencyproblemwiththecostsresultingfromthisproblem
describedasagencycosts.Tolessenagencycosts,sometypeofcontrolormonitoringsystemisputin
placeintheorg.Thatsystemsofcheck&balanceiscalledCorporateGovernance.

ThatmeansCGisacontrolmechanismtopreventselfinterestedmanagersfromtakingactions
detrimentaltoshareholders&stakeholders.

Ataminimum,themonitoringsystemconsistsofaBoDtooverseemanagementandanexternalauditor
toexpressanopiniononthereliabilityoffinancialstatements.Inmostcases,however,governance
systemsareinfluencedbyamuchbroadergroupofconstituentsincludingownersofthefirm,creditors,
laborunions,customers,suppliers,investmentanalysts,media,regulatorsetc.

Shorttermperformancedoesnotnecessarilydependongovernance.Marketasymmetriesareresponsible
forthis.However,thisincreasesrisk.Thisalsocreatesbarriertolongtermgrowth.[Enron]

Mediumtolongtermperformancerequiresgovernance.Mostcompanieswhichhavegrowninthelast25
yearshaveoutstandingperformanceandhavegoodgovernancestructure.Agoodgovernancestructure
treatsallstakeholdersfairly.Governancealonecannotensureperformance.