Internal Corporate Governnance Mechanism

8/2/2019 Internal Corporate Governnance Mechanism

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Internal Corporate

Governance Mechanism

Presented By:

Moizur Rahman

Nausheen KhatoonNeha Thakur

Pratibha Singh

Sabiha Ahmed

Safina Zakir

Shabeena Afroz


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Corporate Governance is:A relationship among stakeholders that is used to

determine and control the strategic direction and

performance of organizations.

Concerned with identifying ways to ensure that

strategic decisions are made more effectively.

Used in corporations to establish order between

the firms owners and its top-level managers whoseinterests may be in conflict.


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Parties to Corporate Governance:

Parties involved in corporate governance include theregulatory body (e.g. Chief Executive Officer, the board of

directors, management, shareholders and Auditors). Other

stakeholders who take part include suppliers, employees,

creditors, customers, government regulations, managerial

labor market, media and the community at large.

But the main corporate governance parties:

(a) Shareholdersthose that own the company;

(b) Board of DirectorsGuardians of the Companys assetsfor the Shareholders;

(c) Managers (the agents) who are delegated to use the

Companys assets.


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Internal Corporate Governance Mechanism:

Ownership Concentration:

Relative amounts of stock owned by individual shareholders

and institutional investors

Board of Directors:Individuals responsible for representing the firms owners

by monitoring top-level managers strategic decisions

Executive Compensation:

Use of salary, bonuses, and long-term incentives to alignmanagers interests with shareholders interests


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Ownership Concentration:

Large block shareholders have a strong incentive to

monitor management closely.

Their large stakes make it worth their while to spend time,

effort & expense to monitor closely.

Institutional owners are financial institutions such as stock

mutual funds and pension funds that control large-block

shareholder positions


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Boards of Directors:

Formally monitor & control the firms top- level executives.

Set compensation of CEO & decidewhen to replace the CEO.

May lack contact with day to day operations.

A firms CEO & other top-level managers

Individuals not involved with a firms day-to-day

operations, but who have a relationship with the company

Individuals independent of a firms day-to-day

operations and other relationships

Related

Outsiders

Insiders

Outsiders


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Accountability of Board Members

Increased diversity amongst board members.

The strengthening of internal management & accounting controlsystems.

The establishment & consistent use of formal processes toevaluate boards performance.

Directors are being required to own significant equity stakes asa prerequisite to holding a board seat.


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Executive Compensation:

Executive compensation:

A governance mechanism aligning the interests of managers

& owners through salaries, bonuses and long term incentives

such as stock options

Stock options:

A mechanism which links the executives performance to the

performance of the company.


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An Agency Relationship exists when


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Agency Relationship Problems:

Principal and agent have divergent interests and

goals

Shareholders lack direct control of large, publicly

traded corporations

Agent makes decisions that result in the pursuit of

goals that conflict with those of the principal

It is difficult or expensive for the principal to verify

that the agent has behaved appropriately

Agent falls prey to managerial opportunism


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Important Corporate Committees:

1. Board of Directors:The Board is a top level managerial body of a company,

elected or appointed members who jointly oversee the activities

of a company or organization. It is headed by the Chairman

and the Managing Director. The Board may comprise 10 to15 members depending upon the size of the company.

2. Audit Committee:

It is another empowered body of the company and some of its

members may be drawn from the Board of Directors, with

a Chairperson selected from among the committee members .

an audit committee is charged with oversight of financial

reporting and disclosure.


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3. Nomination Committee:

Nomination Committee of the Board consists of3 to 5

outstanding personalities in the field of law, businessmanagement, economics, accountancy etc. the job of this

committee is to search, locate and appoint independent

Directors on the Board of public companies lying within their

jurisdiction.

4. Remuneration Committee:

The basic purpose of forming the remuneration committee is

to establish a pay performance relationship. In other words,

the best formula for executive compensation plan must comprisea fixed component and a variable element linked to

performance parameters like turnover or EVA, profit sharing,

stock option scheme.


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Whistle Blowers:

Whistle blowing is a procedural way to reinforce thetransparency necessary to free trapped capital, encourage

foreign investment, and move economies especially transitional

ones away from reliance on personal relationships and bribes.

Whistleblowers have drawn nearly universal praise for helping

to ensure that their employers obey the law. They performvaluable civic services by revealing information that their

employers chose to suppress.

Employees are in a unique position to uncover wrongdoing in

the workplace. They can tell more readily than governmentalinspectors whether their employers are violating safety

standards.


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The whistleblower thus becomes the public's, and thegovernment's, only way of discovering employer misconduct.

Whistle blowing as a governance tool becomes even more

important in this context because it encourages responsive, and

thereby responsible, governance practices.

It gives individuals a say in their organization, and contributes to

a feeling of procedural justice. Giving individuals a standardized

way to speak and be heard also helps reinforce democratic ideas.

This check on power is crucial for an effective democratic

institution. Whistle blowing leads to accountability, and accountability helps

defuse the resentment and opportunities for corruption.


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Corporate Governance Model: India

India's SEBI Committee on Corporate Governance definescorporate governance as the acceptance by management of the

inalienable rights of shareholders as the true owners of the

corporation and of their own role as trustees on behalf of the

shareholders. It is about commitment to values, about ethical

business conduct and about making a distinction betweenpersonal & corporate funds in the management of a

company.

It has been suggested that the Indian approach is drawn from theGandhian principle of trusteeship and the Directive

Principles of the Indian Constitution, but this

conceptualization of corporate objectives is also prevalent

in Anglo-American and most other jurisdictions.


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Governance Mechanism & Ethical Behavior:

Shareholders are recognized as a companys most significantstakeholders.

The minimum interests or needs of all stakeholders must be

recognized through the firms actions.

A firms strategic competitiveness is enhanced when itsgovernance mechanisms take into consideration the interests of all

stakeholders.

Only when the proper corporate governance is exercised can

strategies be formulated & implemented that will help the firmachieve strategic competitiveness & earn above average returns.


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Case Study: The Satyam Scanda


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Chairman of

Satyam resigns:

On January 7th 2009, B.

Ramalinga Raju, Founder

and Chairman ofSatyam

Computer Services,

resigns amid a scandal over

a billion dollar fraud that

sends shock-waves

throughout the globe

The incident throws a

spotlight on Corporate

Governance in India-based

companies


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The Satyam Growth Story:

Founded in 1987, Satyam hadepitomized Corporate India and its

emergence as an powerhouse in the

global IT industry. Satyam built its

business around 3 areas, namely ITservices, Business Process

Outsourcing (BPO) and Software

Products

With over 50,000 employees across the

global, Satyam became Indias 4th

largest IT services company. Almost

one in every two of the Fortune 500

was said to be a client of Satyam


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Corporate Earnings:

In the financial year ending

March 2008, Satyam reported an

impressive 46.3% rise in

revenue to $2.1 billion

In October 2008, Satyam said

revenue would rise a further

20% in the 2009 financial year

Such statements were, of course,

later found out to be fictitious


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Letter to the Satyam Board:

In a letter to the Satyam Board,

Raju publicly admits to having

overstated Satyams profits over

a period of several years to the

tune ofapproximately US$1

billion

In his letter, Raju states he acted

alone, but questions are

immediately raised about theinvolvement of others, including

Satyams auditors,

PriceWaterhouse


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Relentless Pursuit to be No.1

With the ever-increasing pressureto perform, Satyam was keen to

catch-up to its key competitors,

Tata Consultancy Services,

Infosys Technologies and Wipro

The relentless pursuit to be No.1

led Satyam to over-inflate its

profits over the years until the gap

became so wide it was, in Rajusown words like riding a tiger, not

knowing how to get off without

being eaten


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The Maytas Incident:

In an attempt to cover-up Satyams

US$1 billion worth offictitious

assets with real assets, Satyam

attempted to acquire Maytas

Infrastructure and Maytas

Properties, companies controlled bythe Raju family that owned land

reportedly worth around US$1

billion

However, the acquisition was

dropped when Satyam shareholders

protested, questioning why such an

acquisition was needed


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The Investigation:

Indias Central Bureau ofInvestigation inquiry into the

Satyam scandal suggest falsified

accounting on a massive scale

Their report highlights the

involvement ofdual accounting

books, thousands of forged

invoices, fake bank statements, and

thousands of unnecessary employeesand auditors who received fees

several times the market rate


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Indias Enron:

Charges of cheating, forgery

and falsification of accounts

have been filed against Raju,

two of his brothers and four

other Satyam Executives

Satyam has since been acquired

by Tech Mahindra

The incident has been dubbed

Indias Enron and has put a

blot on Indias Corporate

Landscape


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Thank You !!!

Internal Corporate Governnance Mechanism

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