Chapter 13

Corporate Governance

Chapter 13 – Corporate Governance 1

Learning Objective
To understand the importance of corporate
governance
To understand the definition of corporate
governance
To understand the purpose of corporation
To evaluate organisation and corporate
governance
To understand Corporate Ethics and corporate
Social responsibility

Chapter 13 – Corporate Governance 2

Introduction to Corporate Governance

• Corporate governance is the lifeline of any business

that needs to sustain its existence.

• It is in general over and beyond law and regulation in

the domain of corporate affairs.

• Corporate governance is tightly tied with the purpose

of the organisation and how the firm define its
business.

• Numbers of cases organisations have collapsed

because of bad governance
Chapter 13 – Corporate Governance 3
Defining Corporate Governance

• Involves a set of relationships between a company

management, board, shareholders and other
important stakeholders like employees, partners,
society etc.

• The governance framework provides the structure

through which an organisation is able to set its
objectives and monitor its performance on a regular
basis

Chapter 13 – Corporate Governance 4

Fundamentals of Corporate Governance

• Shareholders of an organisation have relationship will

all other stakeholders because it is their money at
stake

• Way in which companies are directed and controlled

Chapter 13 – Corporate Governance 5

Stakeholders in a modern corporation

• External stakeholder –
• Shareholders,
• debt holders,
• trade creditors,
• suppliers,
• customers and
• communities

• Internal Stakeholders –
• Board of Directors,
• executives and
• other employees
Chapter 13 – Corporate Governance 6
Principles of Corporate Governance

• Rights and equitable treatment of shareholders –

Organisations to respect rights of shareholders and
help shareholders to exercise those rights

• Interest of other stakeholders – Organisation have

obligations to non-shareholder stakeholders like
creditors, suppliers, communities etc.

Chapter 13 – Corporate Governance 7

Principles of Corporate Governance

• Risk and Responsibilities of the Board- Board needs

to meet requirements as to skills, understanding of
business, numbers, independence and commitment

• Disclosure and transparency-Clarify and make

publicly known the roles and responsibilities of board
and management to provide stakeholders with a level
of accountability

Chapter 13 – Corporate Governance 8

Regulations, Codes and Guidelines with
respect to corporate governance
• Sarbanes-Oxley Act of 2002

• OECD Principles

• Stock exchange listing standards

• Other guidelines line International Corporate

Governance Network

Chapter 13 – Corporate Governance 9

Corporate Governance in India

SEBI guidelines and norms

• Market regulator has listed requirements for

compliance in the listing agreement

• SEBI has also issued guidelines under the Clause 49

of listing agreement

• Key standards of SEBI are as follows

• Compulsory whistle blower policy
• No stock options for independent directors

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Corporate Governance in India

• Key standards of SEBI are as follows

• Separate meetings of independent directors
• Setting up stakeholders relationship committee
• Enhanced disclosure of remuneration policies
• System to evaluate performance of all directors
• Prior approval of audit committee for all party
transactions
• Stakeholders special resolution from material
related transactions
• At-least one woman director on the board of every
listed company

Chapter 13 – Corporate Governance 11

Purpose of Corporation

• The purpose of corporation is not just to meet the

financial interest and profitability motive of the
shareholders, but also to serve the society and other
stakeholders in all fairness.

• Corporate ethical behaviour can be looked at a

number of ways how the organisation behaves during
various challenges

Chapter 13 – Corporate Governance 12

Corporate Social Responsibility
• CSR is generally the expectation that the corporate
organisation should serve both the societal needs
and financial interests of shareholders

• Corporate adopt CSR policy with the aim to embrace

responsibility for the company’s actions and
encourage a positive impact through its activities on
the society, environment, consumers, employees,
communities, stakeholders and all other members of
the public sphere.

• CSR is titles to aid an organisation’s mission as well

as a guide to what the company stands for and will
uphold to its consumers 13
Chapter 13 – Corporate Governance
Summary
• Corporate governance is the way an organisation is
directed and controlled

• It is a system of law and sound approaches by which

corporations are directed and controlled focusing on
the internal and external corporate structures

• In India, corporate governance is guided by SEBI

• Corporate Social Responsibility (CSR) defines

company’s purpose and vision over a longer term
beyond the financial measures like profitability
Chapter 13 – Corporate Governance 14