Corporate Governance

BY: BHAVDEEP S KOCHAR

 Corporate Governance

A system of checks and balances between the board,

management and investors to produce an efficiently
functioning corporation, ideally geared to produce long-
term value
 Board- key to corporate governance

Board- constitutes representatives of shareholders

Expected to provide corporate leadership and
strategic guidance independent to the management
of company
Indian Board – generally comprises:
 Promoters
 Directors

 Professional

 Directors

 Nominated directors
 Board constitution

Qualified individuals of integrity with diversity of

experience
Should be able to devote sufficient time towards his
duties
Should have substantial no. of independent directors
For family-owned business, outside directors are
essential
 Board responsibility

Approves core philosophy and mission

Monitor and evaluate corporate performance
Determine executive compensation
Communicate with shareholders
Evaluate board performance
 Disclosure and transparency

Essential for good governance

Entrusts confidence among shareholders
Investors and lenders can take better decision
Serve as deterrent to fraud and corruption.
 What shall be disclosed

Company objectives
Major share ownership and voting rights
Governance structure- division of authority among
shareholders, management and board members
Managerial compensation
Board members
 Executive & non-executive directors

Executive: full time

Non-executive: part time
 Retained for their professional advise
 Cannot be a director in more than 20 companies
 Governance and performance

 Good governance leads to good performance

 It creates an open and transparent system
 It improves communication and breaks down
systematic barriers to flow of information
 Good governance allows decision making based on
data. It reduces risk
 Good governance helps in creating a brand and creates
comfort for all stakeholders and society
 Case of enron, Satyam
 Does performance depend on governance

 Medium to long term performance requires governance

 Most companies which have grown in the last 25 years
have outstanding performance and have good
governance structure
 A good governance structure treats all stakeholders
fairly
 Governance alone cannot ensure performance
 Investing in Corporate Governance

 Companies need to invest in good governance

 Corporate governance has a direct bearing on business
performance and thereby ROI
 Leverage the power of IT
 On average, businesses with superior governance
practices generate 20 percent greater profits than
other companies
 A study based on 256 companies conducted at the MIT
Sloan School of Management
 Issues in Corporate Governance

 Asymmetry of power
 Asymmetry of information
 Interests of shareholders as residual owners
 Role of owner management
 Theory of separation of powers
 Division of corporate pie among stakeholders
Current status on corporate governance
Comparison of Board structure – Indian top 50 Vs U.S. top 50 – Key Findings
Parameter
Ownership pattern
Board size
Board independence
Executive directors in board
Chairman and CEO
Lead independent director
Board committees
India (Nifty Fifty companies)
48% of Indian companies have largest shareholder
holding over 50%
Largest board size – 17. smallest – 5
44% of the top 50 companies have more than 12
directors
58% of companies have a board majority of
independent directors
12% have less than 1/3rd of their directors
independent
In 35 companies 50% of the directors – or more – are
executive directors
60% have separate Chairman and CEO
3 companies have lead independent directors
All companies have audit committees – 54% have
fully independent Audit Committees
33 companies have remuneration committees – of
these 14 fully independent and 16 have majority
independent committees
9 companies have nomination committees – 6 are
fully independent and 3 have majority independent
committees
Source: Crisil Report on Corporate Governance
US (top 50 out of NYSE 100 index)
Largest shareholder holds less than 10%
in all cases
Largest board size 18. smallest – 10
66% of the top 50 companies have more
than 12 directors
Allcompanies have a board majority of
independent directors
Boards of 49 companies out of 50 have
less than 25% executive directors
Only 20% have separate Chairman and
CEO
20 companies have lead independent
directors
Allcompanies have fully independent
audit remuneration and nomination
committees
Thank You