Corporate Governance & Ethics Apr 2014_1.pptx

Corporate Governance & Ethics

SIIB: 2014-16Facilitator: Bijoy S GuhaLecture ppt: Edition1

Syllabus Summary Introduction to Governance Theoretical Approaches Practice and Elements of Corporate Governance Overarching Institutions EthicsLearning Objective(s):To understand, analyze and review the larger theoretical and

empirical aspects of corporate governance and ethics.To equip ‘to be’ managers with an insight into emerging

challenges/opportunities in governance within the corporate domain by linking the micro context (Corp Gov.) to that of macro context in a State and the World.

Group Assignment(s) Template

Grp. Roll Nos. Assignment Submission

1

2 Barings Bank Failure 1/07 3/07

3

4 BCCI Collapse 1/07 3/07

5

6 GM Bankruptcy 1/07 3/07

7

8 Stayam “Scam” 1/07 3/07

9

10 Enron Case 1/07 3/07

11

12

Division: A

Mailer to all30 min PPT

Group Assignment(s) Template

Grp. Roll Nos. Assignment Submission

1

2 Barings Bank Failure 1/07 3/07

3

4 BCCI Collapse 1/07 3/07

5

6 GM Bankruptcy 1/07 3/07

7

8 Stayam “Scam” 1/07 3/07

9

10 Enron Case 1/07 3/07

11

12

Division: B

Mailer to all30 min PPT

“The 19th Century belonged to Entrepreneurship , 20th to Management – the 21st will to Governance”: R.I. Tricker / 1992

Introduction to Governance

Introduction to GovernanceGovernance: “All processes of governing, whether undertaken by

a government, market or network, whether over a family or tribe, formal or informal organization/territory and whether through laws, norms, power or language.

It relates to processes and decisions that seek to define actions, grant power and verify performance.”

The word governance is rooted in the Latin ‘gubernare’ , derived from Greek verb κυβερνάω [kubernáo] which means to steer

Source: Wikipedia

Introduction to Governance ...ctd.

Public Governance•Administrative, ‘Politics’ – use of power & position

Private Governance•NGOs, 3rd Parties – Rules/recommendations for society

Global Governance•Complex – Formal/Informal, Govt./Non-govt. Etc.

Corporate Governance•Direction & control of ‘Corporations’

“Meta-governance”•Ethics & Principles shaping all types of governance

Source: Wikipedia

Evolution: An overview Craft based ‘business’• Often in barter between individuals; Trust & belief• Small volumes and exchanges to satisfy simple ‘needs’• “Agricultural Age” Society

Extension to Trade Bodies/Guilds• Collective offering & emergence of ‘supply chain’; larger scale• Some codes/understanding in dealings & hierarchy• “Renaissance Age” Science, Exploration & Economics gain

Expansion of scale & territory: “Company”• Interdependence & multiplicity of ‘custom’ ; Entrepreneurship• Involvement of state in policy; public funds• “Industrial Age” Society

The Modern Corporation• “Information age” Society; global scale & scope• Complex transactions and funding• Separation of Ownership & Management

Evolution: Economic underpinning An economy is the exchange of goods, rights,

services & money between people It is a ‘social interaction’ and it is governed by social

rules Formal i.e. Laws Informal i.e. Norms, ethics

If people break the rules, the economy breaks down: no ‘trust’ to establish exchange

Paper currencies make exchange easier Paper money is intrinsically value-less; because of the

rules governing its production, people trust that it has value;

When those rules break down (e.g. ‘Printing’ too much) the paper money becomes worthless

The salt & spice were the first ‘long distance’ trades Essential nutrients that are hard to come by naturally.

People liked to add them to food! Early voyages of exploration were made to find new

ways to get to the source of spices. Metal money was introduced in agrarian

societies of Middle East (2000~1800 b.c.e) First complex economies formed in Italy during

the Renaissance Different methods of carrying payments were

developed (promissory notes and bills of exchange). Shakespeare's “The Merchant of Venice” !

Evolution: Economic underpinning ...ctd

In Netherlands, other institutions developed that facilitated the emergence of complex economies Courts of law to enforce contracts Institutions provided certainty to producers and

traders - that they would own the results of their labors and get a fair price for their product - promoted complex trading economies.

In today’s world, governments are responsible for creating and enforcing the institutions that promote the working of the (global) economy E.g. Sound currency, enforceable laws etc.


Sometimes governments make massive mistakes! The Soviet Experiment

The Bolshevik Revolution in Russia (1917), led by Vladimir Lenin, to turn Russia into the ‘ideal’ socialist society that Karl Marx had envisioned, involved getting rid of private property & private ownership: many people & ‘capital’ fled!

Stalin turned USSR into a ‘command economy’ in which rules for what and how much was to be produced was not determined by the market, but by government committee.

Lasted (economically & politically) < 100 years!

Economies in the ‘rich’ world countries are run mostly on market principles, irrespective of Political ideology


Economies today are truly ‘global’: ‘Products’ are sold throughout the world e.g.

Honda, Coke, Hollywood movies, Barbie dolls & …. In addition, many of these products are now made

throughout the world National economies work because of

institutions, so does the global economy. • There are also the rules laid out by the World Bank,

IMF & UN Bodies.• Also, international organizations to detect crime and

administer justice, including Interpol, the UN Security Council and the International Criminal Court.


The workings of any company also rely on institutions - both formal and informal. Industries are ‘typed’ into : the core/primary sector

and the periphery/ secondary sector. The core is made up of industries dominated by a few

large firms. Wages tend to be high and job security is high.

The periphery is made up of industries dominated by many very small firms. Wages tend to be low and job security is low.

‘way of working’ can be very different from company to company There are often similarities between organizations in

the same industry or economic sector.


The size of a firm helps shape the institutions and culture of the organization “Mom and Pop” shops run differently Retailers! Regional differences in the way firms operate,

depending on local situations & local markets Some organizations in some regions become home to

particular ethnic groups, and this influences the way each organization operates e.g. Udippi fast-food restaurants.

“Organization Ecology” examines the process by which organizations emerge, compete, grow, change and die. “Theory of a firm”


Contemporary ‘corporate governance’ started in 1992 with the Cadbury Report in the UK ‘Cadbury’ was the result of several high

profile company collapses Concerned with protecting weak & widely

dispersed shareholders against self-interested Directors and managers Primarily concerned with public listed companies

i.e. those listed on a Stock Exchange with large public funding

Focused on preventing corporate collapses such as Enron, Satyam, Barings Bank …

Evolution: Corporate Governance

“Corporate Governance is the system by which companies are directed and controlled…” (Cadbury Report, UK, 1992)

“Involves a set or relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” (OECD, Principles of Corporate Governance, 1999; 2004)

Evolution: Corporate Governance ...ctd

Corporate Governance today applies to all types of organizations:

companies in the private sector the ‘not for profit’ public sectors & state-owned enterprises

Corporate Governance is effected by way of legislation and/or best practice Code:

US adopted legislation in 2002 - Sarbanes Oxley Act (commonly termed ‘SOX’)

Most other developed and emerging market countries have adopted best practice Codes e.g. Combined Code in the UK, Cromme Code in Germany etc. which require Firms/ Organizations to ‘comply or explain’.


Corporate Governance Life CycleMaturity Governance challenges

Growth Governance challenges:

Launch Governance Challenges:

Maintain alertnessBoard assessmentAdvance value

Risk management Develop board directors. Engage stakeholders.

Raise capital Recruit board of directors Establish accountability

Time

Corp

orat

e D

evel

opm

ent

FoundingEntrepreneurs

PrivateCompany

IPO(Initial Public Offering)

Public Corporation(Majority Shareholders)

Public Corporation(Diffuse Shareholders)

Source: Clarke T. (2006)


Approach(s) to Corporate Governance

“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals” Sir Adrian Cadbury/ 2004

Historically, ‘firms’ were owned and managed by family and friends (model ‘kingdoms’): Evidence from the names – e.g. ‘Philips’ , ‘Ford’,

‘Siemens’, ‘Lehman Bros.’, ‘XYZ & Sons’ etc. Evidence from structures – e.g. ‘The East India Company’

, Business (trade) moved from “Local” “Regional”

“National” Renaissance , particularly the global exploration, and

Industrial Revolution, culminating with move to mass production pushed the boundaries further: “National” “International”

Multiplying the requirement for Human & Financial resources. Entry of unrelated “outsiders” into Business

The Modern ‘Corporation’

To get the (larger) funding, the close-circle had to invite others to put in money for the enterprise: These ‘financiers’ were keen to increase their wealth

without involvement! At the same time, they wanted to limit the consequent risk!!

Corollary: the concept of “Limited Liability” for a ‘share’ of the returns from business. “Outside” owners i.e. Investors ‘ interest in the firm i

almost solely increase of wealth Investment ‘risky’ - being owner, exposed to the

consequences of this gamble Therefore the need to limit the ‘liability’ only to the

sum invested

The Modern ‘Corporation’... ctd

Concurrently, these owners (‘shareholders’) did not want /know nor were skilled in the business – they disassociated (‘divorced’) from ‘management’. Leading to the firm/enterprise becoming a ‘commodity’;

Shares (‘stock’) could be sold to bidders or traded in a “Share/Stock-market” Firms could be ‘valued’ by the current ‘share-price’ – which

could be higher or lower than the face value of a share; The market (share)price multiplied by the number of shares

gave “Market Capitalization”, the notional worth of the firm. Led to the creation of firms dealing purely in investments

and “short-termism”: Portfolio management. “Managers “ were engaged to ‘run the business’ for best

returns – without risking their ‘wealth’ .



Initially, buyers and sellers of corporation stocks were individual investors, e.g. wealthy business families, who often had a vested, personal interest in the corporations whose shares they owned. The Board of Directors of corporations were nominated

by the “principal shareholders”, comprised people who had an emotional as well as monetary investment in the company (e.g. Ford), Thus, the Board diligently kept an eye on the company

and its principal executives. The Board, mostly chosen by the President/ CEO, may

have been made up primarily of their friends and colleagues. (Disadvantage: “The Old-boys network”, “crony capitalism” etc.)


Systems in UK/USA allow ‘owners’ (principally shareholders) to delegate running of corporations to company managements under supervision of a “Board of Directors”.

With the ‘widely-held (public)’ shareholding, multiple owners had little influence over company management since they were rendered relatively powerless by the dispersion of ownership;

Now, Markets have become largely institutionalized: buyers and sellers are largely institutions e.g. pension/ mutual /hedge funds, insurance Cos., banks, brokers etc.: company shares have ‘power’ vested in consolidated interest-groups.

SEPARATION OF OWNERSHIP AND MANAGEMENT

Basis of the modern corporation:• Shareholders purchase

stock, becoming residual claimants

• Shareholders reduce risk by holding diversified portfolios

• Shareholder value reflected in price of stock

• Professional managers are contracted to provide decision making for operations

Modern ‘public corporation’ format leads to efficient specialization of tasks:• Risk bearing by

shareholders• Strategy development

and decision making by managers

• A body termed the ‘Board of Directors’ form the ‘bridge’ in between



IT & globalization of operations, has increased the awareness and ‘social consciousness’ leading to: ‘Shareholder Activism’ i.e. mainly manifest in the “voice

of the minority shareholders” – which are diverse. Legal, ethical & societal demands for increasing

affirmative actions on “Social Responsibility” ‘Environmental’ and other linked ( e.g. Human Rights) highly

diverse demands, Consequent liabilities arising from non-business legislation

‘Sustainability’ issues Shifting of focus from a narrow ‘Shareholder’ to a

more comprehensive ‘Stakeholder’ demands.



33%

20%

31%

1%5%

10%

Share Holding – ITC/2013

Institutions FII Foreign Coys NRIs

Corporates Public

Board of (Executive) Directors1. Yogesh Chander Deveshwar (C’man)2. Nakul Anand3. Pradeep Vasant Dhobale4. Kurush Noshir GrantNon-Executive Directors5. Shilabhadra Banerjee (UTI)6. Angara Venkata Girija Kumar (GIC Asscn)7. Dinesh Kumar Mehrotra (LIC)8. Hugo Geoffrey Powell (BAT)9. Anthony Ruys (BAT)10. Serajul Haq Khan11. Sunil Behari Mathur 12. Anil Baijal13. Pillappakkam B Ramanujam14. Sahibzada Syed Habib-ur-Rehman15. Basudeb Sen16. Meera Shankar17. Krishnamoorthy Vaidyanath18. Balakrishnan VijayaraghavanMkt. Cap.: Rs. 290,000 crores

S’holder’s Funds: Rs. 22,300 crores

The “theory of the firm” aims to answer: Existence – why do firms emerge, why are not all

transactions in the economy mediated over the market? Boundaries – why is the boundary between firms and the

market located exactly there as to size and output variety? Which transactions are performed internally and which are

negotiated on the market? Organization – why are firms structured in such a specific

way, e.g. as to hierarchy or decentralization? What is the interplay of formal and informal relationships?

Heterogeneity of firm actions/performances – what drives different actions and performances of firms?

The Theory of the Firm

The Theory of the Firm ...ctdEconomic Transactions Approach

The Theory of the Firm ...ctd Transaction costs:

the costs of negotiating, monitoring, and governing exchanges between people

Transaction cost theory: states that the goal of an organization is to

minimize the costs of exchanging resources in the environment and the costs of managing exchanges inside the organization Organizations try to design the (ex)change in their

products/services in the most economic way. This change, on one side, is influenced by the

‘bounded rationality’ of the decision-makers and on the other side influenced by the self-benefit behaviors of the people involved in (ex)change.

The Theory of the Firm ...ctd Firms will form when they can arrange to produce

what they need internally and somehow avoid transactions costs. Firms exist as an alternative system to the market-price

mechanism when it is more efficient to produce in a non-market environment.

The size of a firm, measured by how many contractual relations are "internal" to the firm and how many "external“, is a result of finding an optimal balance between the competing tendencies of the costs outlined above. Coase (The Nature of the Firm -1937)

In general, making the firm larger will initially be advantageous, but the decreasing returns will eventually kick in, preventing the firm from growing indefinitely.

Organizations will adopt increasingly formal linkage mechanisms with their exchange partners as transaction costs increase. But these mechanism also carry ‘bureaucratic

costs’ within the organization. Creation of ‘hierarchy’ Managers can weigh the savings in transaction costs of

particular linkage mechanisms against the bureaucratic costs.

If the external transaction costs are lower than the internal transaction costs the company will be downsized e.g. by outsourcing.

The Theory of the Firm ...ctd

Transaction Costs are low when:

1. Organizations are exchanging nonspecific goods and services.

2. Uncertainty is low.3. There are many

possible exchange partners.

Transaction costs rise when:

1. Organizations begin to exchange more specific goods and services.

2. Uncertainty increases.3. The number of

possible exchange partners falls.


As defined by Coase (‘37), “hierarchy” usually implies a superior-subordinate relationship; The “employment relationship” is commonly associated

with voluntary subordination. Leading to the “Agency theory” in governance -

explaining the relationship between principals (e.g. shareholders) and agents, (e.g. a company’s) executives. In this contractual relationship the principal delegates or hires an agent to perform work One of the earliest applications of this Principal-Agent

model was to sharecropping, where the landowner was the Principal and the tenant farmer the Agent



42

Agency TheoryGiven the ‘divorce’ of management and ownership, this theory define shareholder as ‘principals’ who delegate day to day decision-making to the directors – who are ‘agents’. This is the most common structure today.


43

Top managers are in effect ‘hired hands’ who may be more interested in their own rather than the shareholders’ welfare/interests!

Problems highlighted by the theory:o Due to uncertainty (asymmetric information) and

bounded rationality, contracts governing transactions (internal and external) are necessarily incomplete ;

o Incomplete contracts are a problem when people act with opportunistic behavior

o Objectives/interests are in conflict and may be too difficult/ expensive for owners ascertain what the ‘agent’ is actually doing e.g. diversification.


44

o Risk-taking/sharing problem which arises with different attitude towards risk.

o In general, shareholders prefer riskier strategies than managers

o Tendency for maximising ‘short-term’ gains rather than creation of ‘long-term’ wealth for shareholders.o More widespread the holding, the more the

probability of the problems

• Principals establish governance and control mechanisms to prevent agents from acting opportunistically.


Shareholders, as owners, are “principal”

who hire

Managers, who make decisions as “agents”

“Agency Relationship” between risk bearing principals & decision-

making specialists

“Agency Theory” driven Governance


47

Stewardship Theory In contrast, this theory suggests that managers are

motivated to act in for the welfare of the corporation than in their self-interest.

Managers are viewed as ‘loyal to the company’ and interested in achieving better performance. Specifically, they motivated by a higher order need - to gain ‘intrinsic satisfaction’ :

The Top Manager thus is a ’steward’ more than a hired hand for the Board

Top management care more for the company than that shown by short-term investors and shareholders.

Promote involvement and empowerment of employees.For Top executive, mobility is not so easy – so interest in long

term performance is high

Agency Theory Stewardship Theory

Focus: Materialistic, (Cost) Control & short-term

Focus: Sociological, Achievement & long-term

Differing Interests of Managers & Principals

Convergence of interest of Managers & Principals

Relationship Basis: risk avoidance & control

Relationship Basis: risk taking & trust

Behaviour: individualistic, opportunistic & self-serving

Behaviour: collectivistic, societal, mutuality


The Theory of the Firm ...ctdStakeholder Theory

Traditional view of the firm is a shareholders’ view: they are the owners of the company, and the firm has a

binding fiduciary duty to put their needs first, to increase value for them.

Stakeholder theory (R. Edward Freeman, 1984) argues that there are other parties, inside and outside the firm, involved. Even competitors are sometimes counted as stakeholders -

their status being derived from their capacity to affect the firm and its stakeholders.

The stakeholder view of strategy integrates both a resource-based view and a market-based view, and adding a socio-political level.

The Theory of the Firm ...ctdStakeholder Theory


Firms can be conceptualized as bundles of resources –

Resources are those specific physical, human, and organizational assets that can be used to implement value-creating strategies.

They include the local abilities or ‘competencies’ that are fundamental to the competitive advantage of a firm

those resources are heterogeneously distributed across firms

resource differences persist over time When these resources and their related activity systems

have complementarities, their potential to create sustainable competitive advantage is enhanced

Resource Based View of the Firm

Fernando Alberti, PhD

The resource-based view of the firm

Resources

Tangible:• financial• physical

Intangible:• technology• reputation• culture

Human:• competences and

specialized knowledge• interaction and

communication abilities• motivation

Capabilities &Competencies

StrategyIndustry’s critical

success factors

Competitive advantage

Organizational routinesNorms and directives

FIT


Firms compete on the basis of product design & quality,

process efficiency, and other attributes.

However, firms are constantly attempting to improve their competencies or to imitate the competence of their most qualified competitors. Rivalry/quest to develop new competences or to

improve existing ones is critical.

The “dynamic capabilities” approach places emphasis on and balances the firm’s internal processes, assets and market positions, the path along which it has traveled and the paths that lie ahead.

“Dynamic Capability”

The Alessi example

Traditional stainless steel tableware and household objects

Since 1921

Since 1993

Since 1985

1991

2002 2002 2003

Cordless telephone w/Siemens

Electric kitchen appliances w/Philips

Historical reproductions

Plastic objects

Watches w/SII Marketing Int. Inc. Alessi bathroom w/Inda, Laufen, Oras

Since 1989

Traditional wooden household objects

Since 1985

Porcelain tableware objects

http://www.yellow-goods.de/kg447.htm

An extension of these themes is the ‘trusteeship’ model, wherein the Directors hold the investors money in trust for creation of assets and are legally liable to the shareholders. Concurrently, they hold fiduciary (ethical, moral, in-trust)

responsibility to the public and the Society at large. There has been much debate in recent years about how

best to ensure good corporate governance, especially about the role played by institutional investors, and pension funds in particular.

Governments are looking to shareholders to play a more active part; they should take more than just a simple financial interest in their shares!

The Theory of the Firm ...ctd“Trusteeship”

Managers balance the various interest for and in the interest of the Corporation. Indian governance mode draws from Gandhi-ji’s similar

thinking, particularly in respect of employee relations. Oriental cultures also imply that an entrepreneur is ordained

by God to act as his chosen one for society. The Western World is expected to legislate along the lines of

the prudent man principle followed in the US. This would require trustees to have a higher standard of care when dealing with investments than on other matters.

“Good corporate governance is not so much a set of firm rules but rather general principles that reflect the responsibilities of directors and shareholders”. (Hempel Committee Report/UK )

The Theory of the Firm ...ctd“Trusteeship”

Corporate Governance: Practice

“There are profound, economic and ethical, difficulties with the Free Market price system – it cannot be made the complete arbiter of social life (e.g. the price system does not, in any way, prescribe a just distribution of income). There is a tension we all feel between the claims of individual self-fulfillment and those of social conscience and action.” Arrow/1974

Corporate Governance: the contextThe traditional view of Corporate Governance are

based on the three ‘fundamental assumptions’ for the corporation’s existence: Primacy of the Shareholder Diversity of the shareholder groups Maximization of shareholders’ wealth

These are supported in ‘mature’ capitalistic economies by: Well functioning market system Highly developed legal institutions

Ensuring ‘checks & balances’ for good corporate behaviour

Corporate Governance: the context ...ctd

Investor

Society

EmployeeCustomer

Supplier Do they prioritize the same

way?

EPS/ROI

Quality of Life

Security/ Esteem

Value for Money

Profits/ Growth

Growing ‘weight’ of the Stakeholders


Corporate governance is most commonly viewed as both the structure and the relationships, which determine corporate direction & performance.

The Board of Directors is typically central to corporate governance. Its relationship to the other primary participants, typically

shareholders and management, is critical. The authority structure of a firm lies at the heart of the

issue: “who has claim to the cash flow of the firm, who has a

say in its strategy and its allocation of resources ?” “It creates both the temptations for cheating and the

rewards for honesty, inside the firm” ‘Direction’ shapes Corporate Efficiency, Effectiveness &

Compliance, Employee Wellbeing and Social Responsibility


“Corporate governance is defined as holding the balance between economic and social goals and also between individual and common goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society. The incentive for corporations is to achieve their corporate aims and to attract investment. The incentive for states is to strengthen their economies and discourage fraud and mismanagement.” Sir Adrian Cadbury/ 2004


“ The system of checks and balances, both internal and external, which ensures that the companies discharge their accountability to all stakeholders and act in a socially responsible way in all areas of their business activity” (Solomon

& Solomon). Much of the contemporary interest in corporate

governance is concerned with mitigation of the conflicts of interests between stakeholders.

Ways of mitigating/preventing these conflicts of interests include the processes, customs, policies, laws & institutions which impact the way a company is controlled

Corporate Governance: the context ...ctd Corporate Governance needs to stimulate both

business prosperity and accountability to multiple ‘stakeholders’ what is the balance? How dynamic is it?

Is regulation really the answer? Rules and regulations in essence are reactionary – they ‘lag’

the need, but do they ‘deter’ for the future? Is a more ‘voluntary approach’, substituting regulations by

guidelines in Board room practices more pragmatic? Is it not more worrisome for shareholders to feel that

the directors (of the companies they own) are so untrustworthy that they have to be tied down? “Calculative Trust” ?


Therefore, Corporate Governance ‘crisis’ and reform is essentially cyclical:

Waves of corporate governance reform and increased regulation occur during periods of recession, corporate collapse and re-examination of the viability of regulatory systems.

During long periods of expansion, active interest in governance diminishes, as companies and shareholders become again more concerned with the generation of wealth, than in its retention.

Clarke, T. (2004). Theories of Corporate Governance,

Corporate Governance: Elements

The environment for governance: International deregulation of financial markets Increasing scale and activity of corporations Growth of investment institutions Effective monitoring necessary for security of

investments Recognition that governance matters for

accountability, performance and attracting capital. A general trend in society towards openness,

transparency and disclosure.

The “Four Pillars”:Accountability

Management to The Board & Board to Shareholders

Fairness Protect shareholders’ rights and treat them equitably Provide effective redress in event of violation(s)

Transparency & Disclosures Ensure timely, accurate disclosure on all material

matters: the financial situation, performance, ownership & governance

Independence Procedures and structures to minimize or avoid

completely conflicts of interest

Corporate Governance: Elements ...ctd

The Board

Top Manage’nt

Policy, Directions

Compliance,Accountability

Shareh’dersTransparency,Disclosures

Empowerment,Performance Norms

Depositors, borrowers & customers

ServiceSatisfaction

Relationship

Other Stakeholders

FairnessTransparency

Services, Supplies

EmployeesCareerJob Satisfaction

Expertise, Performance

Market & Competition

BusinessEthics

Social Responsibility

Legal,Regulatory



Good Board practices & processes Clearly defined & understood roles/responsibilities/

duties and authorities of the Board the Directors The Board is well structured with appropriate skill-mix Self evaluation, retained learning & training instituted Board remuneration in line with best practices

Control Environment Robust internal control procedures Risk management framework present Disaster recovery systems instituted Media relationship practiced Independent auditors & internal audit committee

Corporate Governance: Elements ...ctd Transparent disclosure

Financial & non-Financial information disclosed (web based) in high quality annual reports

Financial prepared as per International Financial Reporting Systems (IFRS)

Company Registry filings updated Well-defined shareholder rights

Well organized shareholder meetings Minority shareholder rights formalized Explicit policies on ‘related party’ transactions , extra-

ordinary transactions and dividends Board commitment

Codes for governance & ethics widely circulated Recognition for good governance & sustainability

Inpu

tsIn

puts

Corporate Governance: MechanismThree internal governance mechanisms and a single

external one are used in the modern corporation The internal mechanisms are:

Ownership Concentration, represented by types of shareholders and their different incentives to monitor managers

Board of Directors Executive Compensation

The single external one is: Market for Corporate Control

This market is a set of potential owners seeking to acquire undervalued firms and earn above-average returns on their investments by replacing (ineffective) top-level management teams.

Inpu

tsIn

puts

Corporate Governance: Mechanism ...ctd

OwnershipConcentration

Governance mechanism is defined by the no. of large-block shareholders & the percentage of shares owned

• Large block shareholders: shareholders owning a concentration of at least 5 percent of a corporation’s issued shares

• Large block shareholders have a strong incentive to monitor management closely

• They may also obtain Board seats, which enhances their ability to monitor effectively

Inpu

tsIn

puts



• Institutional owners: financial institutions such as stock- mutual funds and pension funds that qualify to large block shareholder positions

• The growing influence of institutional owners shapes strategy and the incentive to discipline ineffective managers

• Increased shareholder activism supported by various rulings in support of shareholder involvement and control of managerial decisions

Inpu

tsIn

puts



• Shareholder Activism• Other Shareholders can convene

to discuss corporation’s direction• If a consensus exists,

shareholders can vote as a block to elect their candidates to the board

• “Proxy fights”• There are limits on shareholder

activism available to institutional owners in responding to activists’ tactics

Inpu

tsIn

puts



Board of Directors

Group of shareholder-elected individuals (usually called ‘directors’) whose primary responsibility is to act in the owners’ interests by formally monitoring and controlling the corporation’s top-level executives

Inpu

tsIn

puts



Board of Directors

• Three director classifications - Insider, related outsider, and outsider:• Insiders: the firm’s CEO and other

top-level managers• Related outsiders: individuals

uninvolved with day-to-day operations, but who have a relationship with the firm

• Outsiders: individuals who are independent of the firm’s day-to-day operations and other relationships

Inpu

tsIn

puts



Board of Directors

• As stewards of an organization's resources, an effective and well-structured board of directors can influence the performance of a firm:• Oversee managers to ensure the

company is operated in ways to maximize shareholder wealth

• Direct the affairs of the organization• Punish and reward managers• Protect shareholders’ rights and

interests• Protect owners from managerial

opportunism

The BoardBOARD DUTIES AND FUNCTIONS: OECD “Principles of Corporate Governance – 2004” Reviewing and guiding corporate strategy, major plans of

action, risk policy, annual budgets and business plans; setting performance objectives, monitoring and implementation and corporate performance; and overseeing major capital expenditure, acquisitions and other divestitures.

Monitoring the effectiveness of the company’s governance practices and making changes as needed.

Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

Aligning key executives and board remuneration with the longer term interests of the company and its shareholders.

The Board ....ctd

Ensuring a formal and transparent board nomination and election process

Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse of related party transactions.

Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit and appropriate systems of control are in place, in particular systems for risk management, financial and operational control, and compliance with the law and relevant standards.

Overseeing the process of disclosure & communication

Inpu

tsIn

puts

The Board ....ctd

Inpu

tsIn

puts



Board of Directors

ExecutiveCompensation

Governance mechanism that seeks to align the interests of top managers and owners through salaries, bonuses, and long-term ‘incentive’ compensation: stock awards and stock options • Generally, thought to be

excessive and out of line with performance

Inpu

tsIn

puts



Board of Directors


Factors complicating the executive compensation mechanism:• Strategic, top-level decisions are

complex, non-routine and affect the firm over an extended period, making it difficult to assess the decisions’ current effectiveness

• Other intervening variables affect the firm’s performance over time

• Incentive schemes provide no mechanism for preventing mistakes or opportunistic, myopic behavior.

• Institutional investors have little/no direct interest in running of a firm.

Inpu

tsIn

puts



Board of Directors


Market forCorporate Control

External governance: • a mechanism consisting of a

set of potential owners seeking to acquire undervalued firms and earn above-average returns on their investments

• Becomes active only when internal controls have failed

• Ineffective managers are usually replaced in/by takeovers

Inpu

tsIn

puts



Board of Directors



• Need for external mechanisms exists to:• Address weak internal

corporate governance and correct suboptimal performance relative to competitors

• Discipline ineffective or opportunistic managers

• Threat of takeover may lead firm to operate more efficiently

• Changes in regulations have made hostile takeovers difficult

Inpu

tsIn

puts



Board of Directors



Internal governance: • hinges on the ability of the

board to monitor the firm's executives - is a function of its access to information

• Directors expectedly possess superior knowledge of the domain process and evaluate top management on the ‘quality’ of its decisions

The Board often look beyond the confines of financial criteria

Inpu

tsIn

puts



Board of Directors



• Internal control procedures are implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance

• Balance of power: The simplest balance of power require that the President be a different person from the Treasurer:• Divergent views – UK ‘mandates’

separation for control, US practice is single-headed for speed & cohesion, since all have the same interest in view.

Inpu

tsIn

puts

Corporate Governance & Ethics Apr 2014_1.pptx

Documents

governance processes

public governance

wikipediaglobal governance

private governance

processes of governing

corporate domain

set of processes

century risks