Corporate Governance

The term Corporate Governance refers to the relationship among the three groups in determining the direction and performance of the corporation.
Top Managers

Shareholders

BOD

3 Constituents of Corporate Governance

Corporate Governance Defined

CORPORATE GOVERNANCE is the system by which companies are directed and controlled by the management in the best interest of the shareholders and others ensuring greater transparency and better and timely financial reporting. The Board of Directors are responsible for governance of their companies. CORPORATE GOVERNANCE is needed to create a corporate culture of consciousness, transparency and openness. It refers to combination of laws, rules, regulations, procedures and voluntary practices to enable the companies to maximize the shareholders long-term value. It should lead to increasing customer satisfaction, shareholder value and wealth.

Corporate Governance Defined

C.G is the application of the best management practices, compliance of law in true spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. (The institute of company Secretaries in India).

Purpose of Corporate Governance is to have a demonstrable impact on a corporations financial performance.

Responsibilities of the Board

Laws and standards defining the BOD vary from country to country. There is nevertheless, a developing worldwide consensus concerning the major responsibilities of the board. Interviews with 200 directors from 8 countries revealed strong agreement on the following 5 BOD responsibilities. Setting Corporate strategy, overall direction, mission and vision. Hiring and firing the CEO and top management. Controlling, monitoring or supervising the top management. Reviewing and approving the use of resources. Caring for shareholder interests.

Responsibilities of the Board Contd..

In a legal sense, the Board is required to direct the affairs of the Corporation but not to manage them. In India, section 291 of the Indian Companies Act, 1956 enlists the
general powers of the board.

Role of the board in Strategic Management

Monitor- By acting through its committees, a board can keep abreast of developments inside and outside the Corporations, bringing to managements attention developments it might have over looked. Evaluate and Influence: A board can examine managements proposals, decisions and actions; agree or disagree with them; give advice and offer suggestions; and outline alternatives. Initiate and determine: A Board can delineate a corporations mission and specific strategic options to its management.

LOW (Passive)

Board of Directors Continuum

Active Participation Approves questions, and makes final decisions on mission, strategy, policies and objectives. Has active board committees. Performs fiscal and management audits

High (Active)

Catalyst
Takes the leading role in establishing and modifying mission, objectives, policies and strategies. It has a very active strategy committee.

Minimal review
Phantom Rubber stamp Formally reviews selected issues that officers bring to its attention

Nominal partici pation

Involved to limited degree in the performanc e or review of selected key decisions

No degree Permits of officers to involvemen make all t decisions

Trends in Corporate governance

Boards are getting more involved not only in reviewing and evaluating company strategy but also in shaping it.

Boards are getting smaller, partially because of the reduction of the number of insiders but also because boards desire new directors to have specialized knowledge and expertise instead of general experience.
As Corporations become more global, they are increasingly looking for international experience in their board members.

History of Corporate Governance in India

In India the real history of Corporate Governance dates back to 1997.

In 1997 voluntary code framed by the CII.

This was followed by the recommendations of the Kumar Mangalam Birla Committee set up by SEBI in 1999. It includes issues as the composition of board, appointment and structure of audit committees, remuneration of directors, board procedures, additional information regarding management, disclosure of directors interest, shareholders rights, and the compliance level of Corporate Governance in annual report.

Corporate Governance Committees in India Naresh Chandra Committee,2002

Drastic amendments to the law involving the auditor- Client relationships and the role of independent directors by the Deptt. Of Company affairs in the Ministry of Finance and Company affairs.

Narayana Murthy Committee, 2003 Dr. J.J Irani Committee Report on Company Law, 2005
Suggestions to reform & update the basic corporate legal framework essential for sustainable economic reform.

Type of Directors
Board

Executive Directors

Non- executive directors

Independent Directors

Nominee Directors

Independent Director" means a director who is a person who: has not been employed by the Company or its Related Parties in the past five years;
is not, and is not affiliated with a company that is an advisor or consultant to the Company or its Related Parties; is not affiliated with a significant customer or supplier of the Company or its Related Parties; is not affiliated with a non-profit organization that receives significant funding from the Company or its Related Parties; is not a member of the immediate family of an individual who is, or has been during the past five years, employed by the Company or its Related Parties as an executive officer;

Independent directors

Nominee Directors
who acts as a non-executive director on the BOD of a firm, on behalf of another person or firm such as an bank, investor or lender.

What is good Corporate Governance

Obligation to Society
National Interest Political Non alignment Legal Compliances Honest and Ethical Conduct Corporate Social responsibility Fair Competition Environment Friendliness

Obligation to Investors
Towards Shareholders: co. should put in all possible efforts to enhance shareholders value& comply with the laws that govern shareholders rights. Info. Should be disclosed to shareholders about all aspects of the business.

Informed shareholder Participation: Greater levels of informed attendance & meaningful participation by shareholders in matters relating to their companies. Transparency: All decisions must be taken in open manner , information should be disclosed to those who are affected by the decisions. Financial reporting and Records: Company should maintain accounts of its business affairs fairly & accurately in accordance with the accounting and financial reporting standards.

Obligation to Employees
Fair Employment Practices Equal Opportunities Employer Encouraging Whistle Blowing Humane Treatment Participation Empowerment Inclusiveness