Primarily concerned with public listed companies i.e.

those listed on a Stock Exchange Focused on preventing corporate collapses such as Enron, and the Maxwell companies

Contemporary corporate governance started in 1992 with the Cadbury report in the UK Cadbury was the result of several high profile company collapses is concerned primarily with protecting weak and widely dispersed shareholders against selfinterested managers

the fundamental objective of corporate governance is the enhancement of shareholder value, keeping in view the interests of other stakeholder. Corporate Governance is used to determine and control the strategic direction and performance of organizations

Agency Theory An agency relationship exists when: Shareholds (Principals) Firm Owners Agency Relationship
Risk Bearing Specialist (Principal) Managerial DecisionMaking Specialist (Agent)

Hire

Managers (Agents) Decision Makers

which creates

Agency Theory The Agency problem occurs when: - The desires or goals of the principal and agent and it is difficult or expensive for the principal to conflict verify that the agent has behaved appropriately Example: Overdiversification because increased product diversification leads to lower employment risk for managers and greater compensation

Solution: Principals engage in incentive-based performance contracts, monitoring mechanisms such as the board of directors and enforcement mechanisms such as the managerial labor market laws to mitigate the agency problem

Shareholders those that own the company Directors Guardians of the Companys assets for the Shareholders Managers who use the Companys assets

Governance Mechanisms

Boards of Directors
- Insiders - Related Outsiders - Outsiders - Review and ratify important decisions - Set compensation of CEO and decide when to replace the CEO - Lack contact with day to day operations

Governance Mechanisms

Ownership Concentration
- Large block shareholders have a strong incentive monitor to management closely - Their large stakes make it worth their while to spend time, effort and expense to monitor closely - They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)

Accountability Fairness Transparency Independence

Ensure that management is accountable to the Board Ensure that the Board is accountable to shareholders

Protect Shareholders rights Treat all shareholders including minorities, equitably Provide effective redress for violations

Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance

Procedures and structures are in place so as to minimise, or avoid completely conflicts of interest

Independent Directors and Advisers i.e. free from the influence of others

15

1992 Securities scam: Harshad Mehta manipulated banks and the stock market, pushing shares like ACC from Rs.500 to Rs 10,000.

2009 Satyam Computer Services scandal: It was a corporate scandal that occurred in 2009 where Chairman Ramalinga Raju confessed that the company's accounts had been falsified. the Chairman of Satyam, Raju confessed that he had manipulated the accounts by $1.47 Billion

For example, actual number of employees was only 40,000 and not 53,000 as reported earlier. Mr. Raju had been allegedly withdrawing 200 million (US$3 million) every month for paying these 13,000 non-existent employees