Professional Documents
Culture Documents
OBJECTIVES
Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically, from one that was related to agency cost, it is now perceived to encompass everyones interests. This chapter discusses the theoretical basis, mechanisms and the divergent models of corporate governance and culminates in the identification of an ideal corporation.
CHAPTER OUTLINE
The Concept of Corporation Theoretical Basis of Corporate Governance Agency Theory Stewardship Theory Stakeholder Theory Corporate Governance Mechanisms Corporate Governance Systems Indian Model of Governance What Is Good Corporate Governance Obligation to Society at Large Obligation to Investors Obligation to Employees Obligation to Customers Managerial Obligation
What is a Corporate?
The term corporate refers to an association of many persons, who contribute money or moneys worth to a common stock and employ it in some trade or business, and who share the profit and loss arising therefrom. The common stocks so contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are its members. The proportion of the capital to which each member is entitled is his share. Shares are always transferable, although the right to transfer them is often more or less restricted.
What is Governance?
Governance is the process of decision making and
the process by which decisions are implemented or not implemented.
Characteristics of a Corporation
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Incorporated Association Artificial Legal Existence Perpetual Existence Common Seal Extensive Membership Separation of Management and Ownership
Limited Liability
Transferability of shares
o Sociological Theory
Behavioural Differences
THEORY Managers act as Governance Approach AGENCY Agents Materialistic
o Individualistic o Opportunistic o Self-serving
Behaviour Pattern
Owners Attitude
Principal Manager Relationship based on
Risk Avoidance
Control
Risk taken
Trust
Psychological Mechanisms
PSYCHOLOGICAL RESPONSES
Motivation AGENCY THEORY
o Lower order needs o Extrinsic needs
STEWARDSHP THEORY
o Higher order needs o Intrinsic needs
Compatriots
Principal
Power
Situational Mechanisms
SITUATIONAL RESPONSES Management Philosophy While dealing with increasing Uncertainty and risk AGENCY THEORY Control oriented Greater controls More supervisions STEWAREDSHIP THEORY Involvement oriented Training and empowering people Making jobs to be more challenging and motivating Through trust Long term based
Objective
Cultural differences
Cost control
Individualism Large power distance
Improving performance
Collectivism Small power distance
Shareholders
Creditors
Own
Officers (Managers)
Stakeholders
Manage Company
Legal/Regulatory System
Shareholders
Appoint 50%
Supervisory Board Appoints and Supervises Management Board (Including Labour Relations Officer) Manage
Company
Consults
Executive Management (Primarily Board of Directors)
Company
Provides Loans
Depositors, Borrowers,
Proper governance value Corporate Governance Outcomes / Benefits to Society Transparency Investor protection customer
Shareholder
o Ethical Behaviour
o Social Concerns o Corporate Social Responsibility
Environment-friendliness
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Obligation to investors
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Towards Shareholders Measures Promoting Transparency and Informed Shareholder Participation Transparency Financial Reporting and Records
Obligation to customers
o Quality of Products and Services o Products at Affordable Prices o Unwavering Commitment to o Customer Satisfaction
Obligation to employees
o Fair Employment Practices
o Equal-opportunities Employer
o Encouraging Whistle Blowing o Humane Treatment
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Managerial obligation
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Protecting Companys Assets Behaviour Towards Government Agencies Control Consensus Oriented Gifts and Donations Role and Responsibilities of Corporate Board and Directors Direction and Management must be Distinguished Managing and Whole-Time Directors
Johnson & Johnsons excellent Credo exemplarily epitomises what an ideal corporate should aspire to be.
Our Credo We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers' orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.
We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit.
They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical.
We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.
Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched.
Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return. Johnson & Johnson
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No clear demarcation of control mechanisms between SEBI, DCA and Stock Exchanges.
Lack of Professionalism of Directors Institutional Investors show poor commitment Indian boards are not professional Unindependent Independent directors Whistle Blower Policy not in place
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Soft State, lethargic judiciary, inefficient market regulator, poor enforcement machinery, and a value system which is indifferent to moral turpitudes.
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