Corporate Governance

Unit II

Corporate Governance
It is a system by which business corporations are directed and controlled Specifies the distribution of rights and responsibilities among different participants in the corporation Also specifies the rules and procedures for making decisions on corporate affairs Provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance

Corporate Governance
It can be defined narrowly as the relationship of a company with its stakeholders or more broadly, its relationship with society It is about promoting corporate fairness, transparency and accountability It is a system and a process, consistent with principles and practices which are used by corporate firms of a free and open society It assigns final authority and full responsibility of managing the firm to the Board of Directors of the firm

Corporate Governance Concepts

Milton Friedman, Corporate Governance is to conduct the business in accordance with owner or shareholders desires, which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs.

Corporate Governance Concepts

J.Wolfensohn, President, World Bank, Corporate Governance is about promoting corporate fairness, transparency and accountability

Corporate Governance Concepts

Is a set of process or set of systems and process to ensure that the company is managed to suit the best interests of all stakeholders Internal Stakeholders : Promoters, Employees, Workmen and Executives External Stakeholders : Shareholders, Customers, Suppliers, Financial Institutions, Dealers, Vendors, Bankers, Community, Trade Bodies, Government, Regulators and Fauna and Flora of the area

Corporate Governance Concepts

Voluntary Ethical Code of Business Transparency, Integrity and Accountability of the Management Deals with laws, procedures, practices and implicit rules that determine a companys ability to take correct managerial decisions for its stakeholders

Need for Corporate Governance

Market driven economy Globalization and Liberalization Severe and chaotic competition (Efficiency and Effectiveness are now the critical success factor) High and consistent standards for reporting Changing ownership structure

Parties to Corporate Governance

Primary social stakeholders
Customers Suppliers Investors Managers and Employees Local Communities Business Partners Global citizens

Secondary social stakeholders

Government Society Unions Media and Communicators Trade bodies Competitors

Parties to Corporate Governance

Primary non-social stakeholders
Natural Environment Non-human species Future Generations

Secondary non-social stakeholders

Environmental pressure groups Animal welfare pressure groups

Principles of Corporate Governance

Rights and Equitable treatment of shareholders Accountability Disclosure and transparency Integrity and ethical behavior Interest of other stakeholders Role and responsibilities of the Board Transparency

Issues involving Corporate Governance Principles

Mechanisms and Controls (designed to reduce the inefficiencies that arise) Internal Corporate Governance controls Monitoring by the Board of Directors (safeguard invested capital) Remuneration (Performance based remuneration)

Appointment of Directors
Four Types of Directors in a limited company
Working Directors Non-Working Directors but from the entrepreneurs family Outside directors inducted for their expertise in some area connected with the firms business eg. advocates, chartered accountants and technical consultants Directors nominated by lending financial institutions and banks

Steps to be taken in Governing Corporations

Forward looking reporting (Reports to be strategic) Score-card approach (should give the salient features of the report at a glance) Measurements and controls (develop forms with digital approach to make measurement possible) Responsibility and Accountability (to stakeholders is the foremost interest)

Steps to be taken in Governing Corporations

Transparency of Operations (especially with the stakeholders) Trust with teams Fairness (sense of justice in all its dealings)

Ethical Business
Ideas behind Corporate Governance Adequate information to stake holders Focused approach Stream-lined delegation Professional management

This would result in maximizing the shareholder value and in protecting the interest of other stakeholders

Corporate Governance in India

Main issues in the area of Corporate Governance in India Role of Board of Directors (independent and effective board) Composition of the Board Audit Committee (>5 crore paid-up capital must establish audit committee; may include nonexecutive directors, auditors, the company secretary or any senior manager)

Corporate Governance in India

Shareholders Committee (SEBIs code provides for constitution of shareholders committee under the chairmanship of non-executive director - to ensure that grievances of shareholders)

SEBI Code of Corporate Governance

Issued by SEBI dated 21.2.2000 SEBI constituted a committee on Corporate Governance under chairmanship of Kumar Mangalam Birla To promote and raise the standard of Corporate Governance in respect of Listed companies

SEBI Code of Corporate Governance

Board of Directors Optimum combination of executive and nonexecutive directors (not less than 50%) All pecuniary relationship or transactions of non-executive directors to be disclosed in Annual Report

SEBI Code of Corporate Governance

Audit Committee To meet 3 times a year Shall have powers
To investigate any activity within the terms of reference To seek info from any employee To obtain outside legal and other professional advice

SEBI Code of Corporate Governance

Role of audit committee
Oversight of companys financial reporting process Recommending appointment and removal of external auditor Reviewing with management the annual financial statements before submission Reviewing findings of any internal investigation Discussing with external auditor Reviewing companys financial and risk management policies To look into reasons for substantial defaults in payment to depositors, debenture holders, shareholders, etc

SEBI Code of Corporate Governance

Remuneration of Directors Remuneration of non-executive directors to be fixed by Board of Directors Remuneration to be disclosed in the Corporate Governance section of the annual report

SEBI Code of Corporate Governance

Board Procedure Board meeting to be held at least 4 times a year Maximum time gap between any 2 meetings is 4 months A director shall not be a member in more than 10 committees in which companies he is director

SEBI Code of Corporate Governance

Management Directors Report or Management Discussion and Analysis Report should form part of the annual report All transactions where the Boards personal interest, that has potential conflict with interest of the company must be disclosed

SEBI Code of Corporate Governance

Shareholders Company has to inform about the appointment of director to its share holder Quarterly results, presentation made to analysts shall be made available on company website Form a Board Committee to redress shareholder and investors

SEBI Code of Corporate Governance

Report on Corporate Governance Separate section on Corporate Governance in the Annual Report with detailed Compliance Report on Corporate Governance

SEBI Code of Corporate Governance

Compliance Obtain a Certificate from Auditors of the Company regarding compliance of conditions of corporate Governance Annex such certificate with the Directors Report which is sent annually to all shareholders of the Company Sent to Stock Exchanges along with annual returns filed by the Company