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CorporateGovernance

PGDM


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What is CorporateGovernance???

The process and responsibility of the Boardof Directors in ensuring the management ofa corporation conducts business in such away as to meet the expectations of itsvarious stakeholders

Besides financial returns for shareholdersthis also includes impact on employeesenvironment and community at large.


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Definition-OECD

Corporate governance is the system by whichbusiness corporations are directed andcontrolled.

The corporate governance structure specifiesthe distribution of rights and responsibilitiesamong different participants in the corporation

such as the board, managers, shareholdersand other stakeholders.

Spells out the rules and procedures for making

decisions on corporate affairs.


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Definition

The Kumar Mangalam Birla Committeeconstituted by SEBI has observed that:

Strong corporate governance is indispensableto resilient and vibrant capital markets and isan important instrument of investor protection.It is the blood that fills the veins of transparent

corporate disclosure and high qualityaccounting practices. It is the muscle thatmoves a viable and accessible financialreporting structure.


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Indian Scenario

The standard of corporate governance waspoor during the earlier decades dominatedby family business houses.

They operated in a virtually closed economyand could manipulate the rules governing the

licence-permit rajby generous donations topolitical parties, and other corrupt practices.


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Why is CorporateGovernance important???

As we are increasingly moving towards open andmarket driven economic systems, a number ofcompanies catering to international markets

These companies are required to comply withenhanced disclosure and stringent listingrequirements.

Institutional investors, both foreign and domesticare becoming important players in the stock market.

They are increasingly demanding more informationand transparency in operations

No. of International events (like joint ventures,

mergers, takeovers) are taking place so it isrequired that proper corporate governance practices


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Issues in CorporateGovernance

Ethical Issues

Efficiency Issues

Accountability Issues


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Issues in CorporateGovernance (contd)

Opening of Economy

Rising importance of institutional investors

Growth of private companies

Insider Trading

Growth and magnitude of corporate groups

Rise in hostile takeovers


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Objectives of CorporateGovernance

A properly structured Board capable of takingindependent and objective decisions is in place atthe helm of affairs;

The board is balanced as regards therepresentation of adequate number of Non-executive and independent directors who will takecare of the interests and well being of all thestakeholders;

The Board adopts transparent procedures andpractices and arrives at decisions on the strengthof adequate information;


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Objectives of CorporateGovernance

The Board has an effective machinery to sub serve theconcerns of stakeholders;

The Board keeps the shareholders informed of relevantdevelopments impacting the company;

The Board effectively and regularly monitors the functioningof the management team; and

The Board remains in effective control of the affairs of the

company at all times.

The overall endeavor of the Board should be to take theorganization forward, to maximize long term value andshare holders wealth.


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Board Structures and Processes forGood Governance

STRUCTURES PROCESSES

Limit the size of Board Develop guidelines for committees

Separate the role of CEO andChairman

Rotate directors through variouscommittees

Avoid inside directors on thecommittees

Ensure that outside directors meetalone

Ensure a majority of outsidedirectors

Ensure efficient information flow

Limit the number of other boardson which the directors can serve

Insist on regular attendance atboard meetings by all directors

Impose a retirement age Establish an orientation programfor new directors


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Key Principles of Good CorporateGovernance

ExternalAudit

InternalAudit

DirectorsRemuneration

FinancialReporting

InternalControl

AppointmentTo

board

Supply ofInformation

Division ofresponsibility

KeyPrinciples

Openness

Accountability

Integrity


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Functions of the BOARD

Strategic Role Systematic level strategy

Structural and Portfolio strategy Implementation strategy

Policy Making

Monitoring and Supervisory Role


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Committees of the BOARD

Audit committee

Remuneration committee

Nomination committee


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Benefits of Good CorporateGovernance System

Increased Employee motivation

Better information System

Effective ethical policies

Stronger organizational Structure

Conducive environment for achievingcompany objectives


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International Developments

Organization for Economic Cooperation andDevelopment (OECD) has set certain principles inareas of corporate governance

The Right of shareholders

Equitable treatment of shareholders

Role of stakeholders

Disclosure and transparency

The responsibilities of Board


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Developments in UK

Cadbury Committee Report- 1992 focused onaccountability aspects

Audit Committee to comprise of minimum threemembers

Listed companies to publish full financial statementsannually and half-yearly reports interim.

Code of Best Practices to incorporate

Board to present assessment of companysposition

Directors to report on effectiveness of internalcontrol s stems


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Development in USA

CG came into forefront through shareholder activism

California Public Employees Retirement Systems(CalPERS) is in the forefront of shareholder activismand internationally credited as a torch bearer of CG

CalPERS have brought out the good governanceprinciples: Accountability

Transparency

Equity

Voting Method improvements

Long term vision


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Principles for Corporate Governance inthe Common wealth (1999)

Ensure that the corporation complies with all relevantlaws, regulations and codes of best business practice

Ensure that the corporation communicates withshareholders and other stakeholders effectively

Serves the legitimate interests of the shareholdersand account to them fully

Regularly review the procedures and processes toensure the effectiveness of its internal systems andcontrol

Ensure annually that the corporation will continue asa going concern in its next fiscal year


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Developments in India

Voluntary code of Corporate Governance for listed companies- CII - 1998

Kumar Mangalam Birla committee by SEBI - 2000

Companies (Amendment Act), 2000 & Clause 49 of listingagreement -2000

Naresh Chandra Committee by SEBI - 2002

Companies (Amendment) Bill of 2003

N.R.Narayana Murthy Committee -2003


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Kumar Mangalam BirlaReport

In 1999 SEBI constituted- under thechirmanship of Shri

Kumarmangalam Birla Committee submitted its report in

year 2000

Based on these recommendationsClause 49 was incorporated in theListing Agreement


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Kumarmangalam BirlaCommittee Report

Board should have an optimum combination ofExecutive and Non- Executive directors and atleast 50 % should be non-executive

An independent Audit committee should be setup by Board

Remuneration Committee should be set up by

Board

There should be a separate section on CG inAnnual Report with details on level ofcompliance by the company

Th N h Ch d C itt


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The Naresh Chandra Committee(appointed by Department ofCompany Affairs)

It has suggested that the partners and at least 50% of theengagement team responsible for either the audit of a listedcompany should be rotated every five years

The committee also recommends that no partner or memberof the engagement team should be employed by or becomea director of a client company with whom he workedpreceding two years.

The committee has considered the need for reviewing themanner in which the three professional bodies- the Instituteof Chartered Accountants. Cost and Works Accountants, the

Company Secretaries regulate their membership. It hasrecommended the setting up of independent quality reviewboards (QRBs), one for each of the three organizations.

It has also recommended the setting up of Corporate SeriousFraud Office for punishing erring professionals.


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Professionalization ofCorporate Governance

Distinguish Management from Control

Active Role of Institutional Investors

Expand Role of Non- Executive Directors

Proper and Timely Information to Board

Size of Board

Improve Accounting and Reporting Practices


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Corporate Governance andCorporate Excellence

The essence of good corporate governanceis transparency, accountability, investorprotection, compliance with statutory laws

and regulations and value-creation forshareholders and other stakeholders.

A companys most valuable asset is goodwill

it enjoys with its stakeholders andinstitutional investors are willing to pay 20%more on average for companies with a goodgovernance record.


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Corporate Excellence

Profitability

Satisfied stakeholders such as shareholders,customers, employees

Revenue and profit growth

Growth in market share

Growth in market value (Market

capitalization)


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Thank You

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