Professional Documents
Culture Documents
The primary goal of a corporation is to maximise the shareholders wealth in a legal and ethical manner.
Players
The shareholders : invest the capital The directors : answerable to shareholders The management : runs the company and is answerable to the directors.
Corporate Governance = system of making directors accountable to shareholders for effective management of the company in the best interest of the company and shareholders along with concern for ethics and values.
I would like to speak to you briefly about corporate governance at Alcan. In the current environment, shareholders of public corporations must inform themselves about their company's governance practices. Alcan has always been committed to be and remain a leader in this area. The Board believes that this commitment is essential to Alcan's success and to its ability to enhance Shareholder value. Allow me to give you three examples of our leadership in this area: (1) the roles of Chairman and CEO were separated in 1995 well before this practice became a fundamental precept of corporate governance; (2) also, since 1995, Alcan's Board has been composed entirely of unrelated Directors with the exception of the CEO, and (3) the involvement of the fully-independent Audit Committee of the Board in the audit of the Company and in its financial reporting, became a practice long before it became best practice in the corporate world. From an address by L. Yves Fortier, Chairman of the Board, Alcan Inc. to the 101st Annual General Meeting of Shareholders, Montreal, Canada
What is never a problem, difference lies in how part that makes the board effective.
Oriental value system Social hierarchy acting as a deterrent to professionalism in Board Encourages passive or indifferent or reluctant participation in guiding commercial destiny of company.
4. Instead of optimal size of 12, it was 7. 5. Instead of average 12 meetings a year, it was 7. 6. 40% boards did not have any sub committees. and so on
A study conducted at select 30 large Indian public corporations inferred that : Profits have no relation with the kind of Corporate governance model followed in the sample companies. Directors in most of the companies are found ineffective in monitoring the managements performance. Better corporate governance is driven by collective conscious and not by stakeholders demands or market forces.
In India, more often than not, if the Board is active, it is occupied with operating and not strategic decision making.
Legal requirements:
Indian Companys Act, 1956 provides for : Legal rights to shareholders : a. Vote on every resolution placed before AGM b. Elect Directors c. Determine remuneration of Directors and CEO d. Removal of Directors e. Appoint auditors to provide an external check on financial statements. f. Take active part in AGM SEBI (1992) had made certain recommendations which has impacted directly corporate governance.
Category of Directors:
Promoter Executive Non executive Independent non executive : directors with no business relationship with the company. Nominee
Ideal board:
Optimum combination of executive and non executive directors Not less than 50% of the Board consisting of non executive directors If non-executive Chairman, atleast one third of the Board be Independent directors If executive Chairman, atleast 50% of the Board be Independent directors
from Kumarmangalam Birla (SEBI) Report
Ideal board:
Directors should have:
Integrity Sense of accountability Track record of acheivements Ability to ask tough questions Financial literacy Ability to think strategically Commitment to the company Can represent maximum 10 Boards instead of 20
from Kumarmangalam Birla (SEBI) Report
Ideal board:
Nominees of Financial Institutions
Appointment on selective basis where such appointment is considered necessary to protect the interests of the institution or where it is a right under loan agreement.
from Kumarmangalam Birla (SEBI) Report
Role of Chairman
Ideal board:
To ensure Board works both as governance and as a contributor to policy and growth. Maintain relation with institutional shareholders, government, media and business Collaborates the overall design of policy, encourages growth and development. vs
Role of CEO
Developing the bottomline Maintain operational control Proposing and implementing policy Leading the operational team Can same person hold both the position ? from Kumarmangalam Birla (SEBI) Report
Creating the right structure by inducting professionally acclaimed people who can:
Evaluate and comment. (eg Orchid Chemicals) Contribute in critical areas. (eg Marico) Independent from the management (eg Hughes) Give good counsel (eg HLL) Build the brand equity (eg Goenka) Build up overall expertise (eg Mahindra and Mahindra) Complement the expertise of Board (eg Godrej) Market the company (eg Infosys) Provide right kind of diversity Provide adequate time
Examples
L&T : 3 insiders vs 7 outsiders ITC : 4 insiders vs 9 outsiders Hughes : 1 insider vs 10 outsiders
A survey of 200 CEOs in 2001 serving as outside directors of public firms found :
1.
2.
63% of the boards they serve have never been subjected to performance evaluation. 42% of their own companies, where they are CEOs, have never done a board evaluation.
Examples
Once every three years, every Director on the British Airways Board is expected to submit a peer group review to the Chairman. Independent Director signs KRAs to be achieved. Pepsico Board spends one full day of each Board meeting to look in depth at the strategic challenges of each business unit. Home Depot Board members are expected to visit 8 stores outside their home states between each board meeting.
Murugappa group Each Director mentors few managers out of the list of 100 fast track managers. Annual reviews Infosys and Dr Reddys Lab
Some examples:
Groupthink ????? In Enron, Rebecca Mark and Clifford Baxter resigned as they were not comfortable with the paths the Company had taken. Walter Hewlett was the lone dissenter in the merger of HP with Compaq. At Tyco no body questioned the millions od dollar lent to the CEO. Medtronic pharma company lone dissenter convinced the Co not to get out of angioplasty business.
Some of the most exciting times that I have had as an independent director have been on the Board S Ganguly, one of the former ICICI Bank Directors.
Independent Directors
Clarion call for independent Directors Expected to participate actively in audit committees Part of non statutory advisory or superevisory Board Proposed amendments seek to expand the scope of their responsibilities.
Eg, they have to periodically review legal compliance reports prepared by the Company and the steps taken to cure any taint. For NASDAQ/NYSE listed companies, every director of a audit committee is expected to be independent.
Examples:
Supervisory Boards :
no restriction on payment (BoD members are paid sitting fee of Rs 5000.00 per Board meeting and the Board shares upto 1% of the profit). Utilise their expertise better.
Please go through the handout detailing Maricos BoD. Harsh Mariwala reconstituted his Board in mid 2002. He put the structure ahead of Directors. Marico identified four critical areas where Directors could contribute and spent close to 7 months in finalising the Board. FMCG strategy Entrepreneurial wisdom Technology finance
Can you identify who fits in which slot ?
Is there a lack of understanding of the role that Board could play in public enterprises ?
Question : How Board has helped in guiding ONGC in market driven economy.
Answer : Can you tell us ?
Whistleblower
What should you (a Director) do if a whistle-blower comes to you with allegations that the company, or one or more of its officers, is cooking the books or misbehaving in some other way?
Whistleblower
- Worldcom inflated its income figures since 1999 by as much as $9bn Dy Vice President of Internal Audit dept acted as the whistleblower - At Enron, Sharron Watkins of Internal Audit had raised major questions about financial irregularities.
(check out whistleblower.org. The Government Accountability Projects mission is to protect the public interest by promoting government and corporate accountability through advancing occupational free speech and ethical conduct, defending whistleblowers, and empowering citizen activists.)
We will now discuss 10 recommendations categorized into three broad areas of responsibility for improving the effectiveness of corporate governance practices in Public Enterprises: 1. stewardship of the corporation; 2. working with management; 3. and the functioning of the board.
Stewardship of Corporation
1. Board Responsibility
(i) approve the strategic direction and the corporate plan for the corporation; (ii) ensure that the principal risks of the corporations business have been identified and that appropriate systems to manage these risks have been implemented; (generally all PSUs have commercial and
public policy objectives)
(iii) approve managements succession plan including appointing, training and monitoring senior management; and (iv) ensure that the corporations information systems and management practices meet its needs and give the board confidence in the integrity of information produced.
3. Communications
The board of directors of every corporation should ensure that the corporation communicates effectively, with the Government, other stakeholders and the public. Communication responsibilities Reporting responsibilities
5 Board Independence
The Rolesof the Chair and the CEO Meeting as a Board Public servants as Directors The use of committees Independent Advice Conflict of interest
8. Education of Directors
New Directors Ongoing education
9. Compensation
Business Ethics
Imagine that you are the ruler of the world. You have total power over everything on the planet. You are faced with the following dilemma:
1. You can almost completely remove hunger from the face of the planet. Unfortunately, to do so will involve you killing one million people. The reason for this is not clear you just have to andthere is no way out.
You can reduce hunger in the world by 20% from its current level. This is still clearly a desirable outcome. Again though, there is a downside. In this case you have to kill one hundred people You can leave things as they are. There is no trade off whatsoever in this case.
2.
3.
What do you do ? There are some more rules to be noted : 1. 2. Whichever decision you make, you will not kill yourself. The people you kill will all be complete strangers to you.
Ethics : Concerned with how individual should behave. What is right and what is wrong? Values : These are the core beliefs or desires that guide or motivate attitudes and actions. These are form early in life. They come from parents, friends, school, culture, society. Morals : Of or concerned with the judgment of the goodness or badness of human action and character
Ethical Relativitism
Ethical Relativitism
Circumstances alter cases. Everyday standards are good, but exceptions are also right and good. The judgment of good or bad is based upon the result or consequence of the act rather than the act itself. An action is right if it tends to produce the greatest good for the greatest number. Ethical relativism claim s that when two individuals or two cultures disagree on their moral views of an act, both can be right.
There neither is a separate ethics of business, nor is one need. For men and women do not acquire exemption from ordinary rules of personal behavior because of their work or job. Nor, however, they cease to be human beings when appointed vice-president, city manager or college dean. Peter Drucker
Corporate management would like to have a clear cut conceptualisation of business ethics so that corporate policies and programs are formulated and implemented in a way that endears business to the society at large.
Business ethics : the set/system of principles and rules of conduct applied to business.
Its legal so it is OK
Morality is broader than legality. The view that laws and not morals should restrict business practice fails to recognize:
It is illegal as it is immoral !!! If morals are not policed by industry, then when laws do come along they are much mor tougher.
Business ethics has come to represent a set of fundamental beliefs about business such as : a. Employees do their best in a good work place. b. Companies do their best in healthy communities with a good quality of life. c. Companies achieve more if they respect the environment and conserve resources.
Business ethics has come to represent a set of fundamental beliefs about business such as :
d. Companies must take a long term view of their operations. e. A companys reputation will become as important as profits in the years to come. f. There is no reason why, as between various stakeholders, the interests of shareholders should prevail unconditionally over others interests.
Remember :
1. The car did not break any law. 2. By producing the car, Ford kept many people in work. The death of a few people was a small price to pay. Many other Americans lost their lives in car accidents during this time. It is best to benefit the majority.
Analysis:
Why ? Groupthink !!!! (This concept argues that a group of people will tend to focus on one objective and go along with the rest of the group in search of this goal, even though the gol or the means should have been questioned. Go with the flow)
Financial ethics:
Creative accounting = cook the book. Insider dealing Leveraged buyout
(such allegation ultimately led to sacking of Sunil Alagh from the top position at Britannia)
Inaccurate stating of stock levels to increase or reduce profits Booking orders at quarter end/year end to boost revenue Smooth out performance of the company by holding back sales in certain periods. Manipulation of fixed assets
Changing the depreciation method from year to year. Qualification for bad debts. Cash. Stocks. Treatment of extraordinary items Off balance sheet accounting
Insider dealing : This occurs when an individual with inside information about a company uses their particular knowledge to gain on the stock market. Refer to Tata Finance case.
Leveraged buyout :
Analysis:
Star trader was given too much freedom. Lack of segregation og Leesons duties, so he could cover his tracks well. Lack of supervsision. No body questioned the extraordinary profit that he was making.
Boeing sacked the CFO on Nov 24, 2003. His alleged misdeed : Negotiating to hire Air Force procurement officer Darleen A Druyun while she was in a position to influence the outcome of a defense dept contract to buy Boeing 767 tankers.Druyun, hired in Jan 2003, after leaving the Air Force job in Nov 2002, also lost her job.
CEO Philip M Condit said Boeing must and will live by the highest standards of ethical conduct.
Enron
Please go through the writeup on Enron.
Enron :
The deadly combination of : - bad business strategy, - bad investments and - desperate attempts to use accounting tricks to hide bad decisions
led Enron to free fall into the largest bankruptcy in American history.