Corporate Governance

Submitted by: Vincent and Megha Nagpal

(MBA-A)

Question
Check on the Web to do some research on the nature of
corporate governance in your home country. You might find details in a corporate governance or corporate finance textbook, or on a website dealing with national governance codes or governance reform. By taking an example, explain

the system of corporate governance that operates in any

company or sector and explain that the particular governance system provides a fair basis for corporate activity?

Introduction
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders/members, management, and the board of directors. Other stakeholders include labour (employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem.

It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.

Why Corporate Governance???

In the beginning of the new millennium, several companies in the USA and elsewhere faced collapse because of corporate mis-governance and unethical practices they indulged in. the then existing regulatory framework seemed to be inadequate to deal with the gigantic business corporations that committed deliberate frauds. In the year 2000, several American mega corporations collapsed like a pack of cards. The federal administration of President Bush was quick to slap corrective measures on blundering corporations and initiated preventive steps to avoid corporate frauds in future. In India, the governance of most of the countrys industrial and business organizations thrived on unethical practices at the market place and showed little regard for the timeless human and organizational values while dealing with their shareholders, employees and other stakeholders.

An overwhelmingly large number of Indian corporations used several illegal tactics such as restricting of industrial licenses with a view to keeping away competitors, using import licenses to make a quick profit, illegally holding money aboard, and indulging into corruption and other unethical practices with impunity.

The reasons for the corporate mis-governance in India were many: A closed economy, a sheltered market, limited need and access to global business, lack of competitive spirit and an inefficient regulatory framework. These were responsible for poor governance of companies in India for well over 40 years, between 1951 and 1991.

What is Good Corporate Governance???

Bad governance is being recognized now as one of the root causes of corrupt practices in our societies. Major donors, institutional investors and international financial institutions provide their aid and loans in condition that reforms that ensure good governance are put in place by the recipient nations. As with nations, corporations too are expected to provide good governance to benefit all their stakeholders. At the same time, good corporate are not born, but are made by the combined efforts of all stakeholders, which include shareholders, board of directors, employees, customers, dealers, government and the society at large. Law and regulation alone cannot bring about changes in corporate to behave better to benefit all concerned. Directors and management, as goaded by stakeholders and inspired

by societal values, have a very important role to play.

The company and its officers, who, inter alia, include the board of directors and the officials, especially the senior management, should strictly follow a code of conduct.

Corporate Governance System

1. The Anglo-American model : This is also known as unitary board model, in which all directors participate in a single board comprising both executive and nonexecutive directors in varying proportions. 2. The German model : Corporate governance in the German model is exercised

through two boards, in which the upper board supervises the executive board on
behalf of stakeholders and is typically societal oriented. 3. The Japanese model : This is the business network model, which reflects the cultural relationships seen in the Japanese keiretsu network. In this model the financial institution has accrual role in governance. The shareholders and the main bank together appoint board of directors and the president.

Importance of Corporate Governance

With good governance we will perform better over time. Reducing risk.

Facilitate decision making process / fasten exploitation of opportunities

Highlight possible risks and threats Add value & premium for shareholders / investors. The importance of corporate governance - that is, responsibility in the handling of money and the conduct of commercial activities.

Corporate Governance in India- a background

Unlike South-East and East Asia, the corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic. Also, unlike most OECD countries, the initiative in India was driven by an industry association, the Confederation of Indian Industry In December 1995, CII set up a task force to design a voluntary code of corporate governance

Between 1998 and 2000, over 25 leading companies voluntarily followed the
code: Bajaj Auto, Infosys, Dr. Reddys Laboratories, Nicholas Piramal, BSES, HDFC, ICICI and many others

&

THE INFOSYS MODEL

A formal code of business conduct and ethics.

To be signed and adhered to by employees.

Action against any employee for violation is taken seriously

THE INFOSYS MODEL -Contents

General standards of conduct

Management of conflicts of interest

Prohibition of exploitation of corporate opportunities

Protection of companys confidential information Use of assets An entire section on responsibilities to customers and stakeholders.

Infosys Technologies: The Best among Indian Corporate

As per the Credit Lyonnais Securities Analysis (CLSA), the corporate governance ratings of the Software firms are higher than those of other Indian firms.
Infosys, based in Bangalore, is a publicly held, ISO 9001 certified company offering information technology consulting & software services. The software offered include application development, E-Commerce & Internet Consulting, Software Maintenance. Respected across the country, with very strong systems, high ethical values & a nurturing working atmosphere. Net income of US 1,155 million and revenue of US 4,176 million. At present having US 20.4 billion market capitalization

Achievements
Voted as the Best Managed Company in Asia.
Biggest exporters of Software. First to follow the US Generally Accepted Accounting Principles before going for Nasdaq listing in 1991. Championed Corporate Governance in India

Narayana Murthys Global Strategy

1) Global Delivery Model Producing where it is most cost effective to produce & selling where it is most profitable to sell. Moving up the Value Chain Getting involved in a software development project at the earliest stage of its life cycle. PSPD Model Predictability of Revenues, Sustainability of Revenues, Profitability, Decisionmaking and risk taking

2)

3)

ICSI National Award for Excellence in Corporate Governance Best Governed Companies

Benefits of Good Corporate Governance

Having better access to external finance. Lower costs of capital.

Improved company performance.

Higher firm valuation and share performance.

Reduced risk of corporate crises and scandals

Thank you