Corporate Governance PPT

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Corporate Governance

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CORPORATE GOVERNANCE

Meaning:- Corporate governance involves a set

of 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.

CORPORATE GOVERNANCE

Definition The definition of corporate governance most

widely used is "the system by which companies are directed and controlled" (Cadbury Committee, 1992).

OR

Milton Friedman has defined Corporate Governance as “The conduct of business in accordance with shareholders desire which generally is to make as much money as possible while conforming to the basic rules of society embodied in law and local customs.

Concept of Corporate Governance

Laws and RegulationsInterests of

StakeholdersOwnershipBoard of DirectorsOther Stakeholders

IMPORTANCE

Changing Ownership Structure.Social Responsibility.Globalization.Ethical Conduct in Business.Improving Economic Efficiency of a Corporate.Co-operation of all stakeholders for the Growth.SCAMS

IMPORTANCE

OBJECTIVES

To promote a healthy environment for long-…term investment.

To create a trust in the corporate and in its …abilities.

To promote business development. To improve the efficiency of the

capital ….markets. To enhance the effectiveness in the

service of …the real economy.

Principles People are more imp0orant than

processes. Shareholder accountability. External audit must be independent

and ```penetrating. Disclosure and transparency are crucial

to market ….integrity. There must be an appropriate regularity

regime ….to back these obligations.

Corporate governance and

Agency theory Meaning:-Agency theory is a theory

concerning the relationship between a Principal (Share holder) and an Agent of the Principal (Company’s Manager).

Corporate governance and

Agency theory Investopedia Explains:Agency theory is a very academic term

essentially it involves Principals and Agents and aligning interests of the two groups.

Agency theory is the branch of Financial Economics that looks at conflicts of interest between people with different interests in the some assets. This most importantly means the conflicts between

Shareholders and Manager of Companies. Shareholders and Bond Holders.

Corporate governance and

Agency theory Agency Theory Explains abouto Why co’s so often make acquisitions that are bad for share holders.o Why convertible bonds are used and bonds are sometimes sold with warrants.o Why capital structure matters. One particularly important agency issue is the conflict between the interests of shareholders and debt holders.

In particular, following a more riskier but higher return strategy benefits the shareholder to the detriment (damage) of the debt holders.

To be contd…..

Corporate governance and

Agency theory o Debt holders lose out a more risky strategy increases the risk of difficult on debt, but Debt holders, being entitled to a fixed return, will not benefit form higher returns.

oShareholders will benefit form the higher return, however if the risk goes bad, shareholders will thanks to limited liability, share a sufficiently bad loss with Debt holders.

Benefits of corporate Governance

There are three Benefits of Corporate Governance:-

To Companies. To Shareholders. To National Economy.

Benefits of corporate GovernanceoTo Companies

Compliance with the Corporate Governance Principles can benefit the owners and managers of companies and increase transparency and disclosure by,

Improving access to capital and financial markets.

Help to survive in an increasingly competitive environment through mergers, acquisitions, partnerships and risk reduction through asset diversification.

provide an exit policy and ensure a smooth inter-generational transfer of wealth and divestment of family assets, as well as reducing the chance for conflicts of interest to arise.

To be contd….

Benefits of corporate GovernanceoTo Companies

It leads to better system of internal control, thus leading to greater accountability and better profit margins.

It has a ability to attract equity investors-nationally and from abroad.

It also reduce the cost of loans/ credit for corporations.

Investors and potential partners will have more confidence in investing in or expanding the company’s operations.

Benefits of corporate GovernanceoTo Shareholders.

Provide the proper incentives for the board and management to pursue objectives that are in the interest of the company and shareholders as well as facilitate effective monitoring.

Greater Security on their investments. It ensures that shareholders are sufficiently

informed on decisions concerning amendments of statutes or articles in incorporation , sale of assets etc.,

Benefits of corporate GovernanceoTo National Economy

Empirical evidence and research conducted in recent years supports the proposition that it pays to have good corporate Governance.

It was found out that more than 84% of the global institutional investors are willing to pay a premium for the shares of well governed company over one considered poorly governed but with a comparable financial record.

The adoption of Corporate Governance Principles as good Corporate Governance practice has already shown in other markets can also play a role in increasing the corporate value of companies.

Present Scenario in India

Corporate Governance is part of an economy’s system which has today become the most important mechanism for resource allocation. It is affected by Capital market, block holders, institutional investors, proxy wars, company law and capital market regulation s and many other macro-economic as well as political factors.

Much of the concerned literature revolves around the agency problem, while developing countries expropriation of small shareholders is the governance problem, However, shareholders activism is not likely to resolve the issue. Many more measures form audit committee of the board, rigorous disclosure, exercise of voting rights will ensure the issue.

Reforming Board of DirectorsThe board of a company provides the

leadership and strategic guidance, exercises control over the company while at all times remaining accountable to he shareholders. The overall role of the Board as envisaged under the statute is to direct and control the management of the company.

COMPOSITION OF THE BOARD:-The composition of the BOD’s is critical to the

independent functioning of the Board. The executive directors (like Director-finance, Director-Human Resource) are involved in the day-to-day management of companies; non-executive directors bring external and wider perspective and independence to decision making. Among the non-executive directors are independent directors who have a key role in the entire mosaic of corporate Governance.

To be contd…

Reforming Board of Directors

Good Corporate Governance dictates that the Board be Comprised of individuals with certain personal traits and care competencies such as..

Recognition of Boards tasks. Integrity. Sense of Accountability. track record of achievements.

Each of the members of the Board should have a driving motivation and aggressiveness, natural leadership and organizational abilities with a high degree of technical competence and team spirit.

Reforming Board of DirectorsSection 291 of the companies Act of

1956 specifies that the Board of Directors of the company shall be entitled to exercise all such powers and duties.

POWERS EXERCISABLE BY THE BOARD Powers exercisable only at meetings of the

Board. Powers exercisable only with the prior consent

of the company in general meeting. Powers exercisable by the Board through

resolution passed by circulation. Boards is free to act and decide based on its

wisdom.

Reforming Board of DirectorsDUTIES OF THE DIRECTORS

Directors must act bona fide in the interests of the company.

Every director must act with care and skill reasonably expected of his office.

Personal interests must not be placed before company’s interests.

The information and knowledge gained during his tenure as director should not be used to gain personal profits.

Duty to disclose his concern or interest in transactions.

Reforming Board of DirectorsLIABILITIES OF THE DIRECTORS

Liability to maintain Books and Registers. Directors responsibility for proper books of

accounts. Personal liability of Directors to repay in

certain cases. Duty of filing of returns. Duty to seek approval form registrar.

Birla Committee. Naresh Chandra

Committee. Narayan Murthy

Committee.

Birla committ

ee

Birla committ

eeSummary of the Report of the Kumar Mangalam Birla Committee on Corporate Governance

Birla committ

eeProcedures, reporting requirements and

rules also goes beyond corporate to other entities in the financial markets such as stock exchanges, Intermediaries, Financial institutions, Mutual funds and concerned professionals who may have access to inside information. This is being dealt with in a comprehensive manner by a separate group appointed by SEBI under the chairmanship of Shri.Kumar Mangalam Birla

Birla committ

eeThe SEBI appointed the committee on

corporate Governance on May 7th,1999 under the chairmanship of Shri.Kumar Mangalam Birla, member SEBI Board to promote and raise the standards of corporate Governance.

Birla committ

eeTerms of the reference:-

To suggest suitable amendments to the listing …agreement executed by the stock exchanges with the …companies and any other measures to improve the …standards of corporate governance in the listed …companies.

To draft a code of corporate best practices; and

To suggest safeguards to be instituted within the …companies to deal with insider information and …insider trading.