Corporate Governance a conceptual framework

Corporate Governance a conceptual framework

1. Corporate Governance – A Conceptual Analysis

2. Introduction to CG Corporate governance is how a corporation is administered or controlled. Corporate Governance is a set of processes ,customs ,policies ,laws & instructions affecting the way a corporations is directed ,administrated or controlled. The participants in the process include employees and suppliers ,partners, customers , government and professional organization regulators ,and the communities in which the organization has a presence.

3. Definition of Corporate Governance Sir Adrian Cadbury ; “Corporate Governance is concerned with holding the balance between economic & social goals and between individual and communal goals. The CG framework is there to encourage the efficient use of resources and equally to require stewardship of those resources. The aim is to align as nearly as possible the interest of individuals, corporations and society.” Gabriele O’Donovan; CG is an internal system encompassing policies ,processes & people which serves the needs of shareholders & management activities, by directing & controlling management activities with good business savvy objectivity, accountability & integrity.

4. Definition of Corporate Governance In other words ; CG may be defined as a set of systems, processes and principles which ensures that a company is governed in the best interest of all the stakeholders. It is the system by which the companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. In other words, ‘good corporate governance’ is simply ‘good business’. It ensures: Adequate disclosures and effective decision making to achieve corporate objectives. Transparency in business transaction. Statutory and Legal Compliances Protection of shareholder interests Commitment of values and ethical conduct of business

5. Diagram

6. Objectives of Corporate Governance To build an environment of trust and confidence among those having competing and conflicting interest. To enhance shareholders value and protect interest of other stake holders. To have system and procedure. Text Book page 159. Advantages

7. Right and Equitable Treatment to shareholders. Interest of other Stakeholders. Role and Responsibility of the Board. Integrity and Ethical Behavior. Disclosure and Transparency. Text book page 162 Principles of Corporate Governance

8. FRAMEWORK for CG STAKE HOLDERS Private EXTERNAL INTERNAL Regulatory SHAREHOLDERS BOARD OF DIRECTORS Appoints and Monitors Reports to MANAGEMENT Operates Core functions Financial Sector Debt - Equity Markets Competitive factors and foreign markets Foreign Direct Investment Corporate Control Reputational Agents Accountants Lawyers Credit Ratings Investment Bankers Financial media Investment advisors Research Corporate Governance Analysis Standards (for example accounting and auditing) Laws and regulations

9. Introduction to Framework The shareholders are given necessary reports , information to guide them in appointing and re-appointing an effective Board of Directors who manage the day to day operations of the company. There is a clear cut distinction between the owners and the stakeholders, the employees, the financers who empower the Board of Directors to run the company effectively. Thus ,the first principle in the frame work is that there is clear cut distinction between the Ownership and the Professional Management of the Company. And all the stakeholders are informed about the day to day operations through various reports and data.

10. Introduction to Framework (2) There are many stakeholder in the company: The shareholders which again can be further sub-divided as the general shareholders, the employee share holder who have got ESOP (Employee Stock Option Plan),the Institutional Investors (All the qualified Institutional Buyers) and finally the promoter group who have considerable stake in the company. Their main objective is to maximize the wealth of the shareholders. The Distributors or the channel partners are also the stakeholders, their main objective is to be part of a value chain and make timely deliveries across the country. The Customers are also the stakeholders whose main objective is to get best quality product or service at the most competitive rate. The employees whose main objective is to get the most lucrative salary and perks to motivate them to put in their very best.

11. Introduction to Framework (3) The reputational agents which would be part of the Corporate Framework would be. Accountants. Legal Experts. Credit Rating Agencies Financial and Investment Advisors Financial Media (4) The regulatory framework includes all the regulatory authorities like SEBI and the Stock Exchange which would ensure that all the principles laid down are followed. Last para text book page 169

12. Framework of Corporate Governance

13. FIVE GOVERNANCE PRINCIPLES FOR CG (A).Effective Leadership: The CEO’s leadership role in governance is fundamental(important);an indication of leadership is the effective way in which the organization as a whole works together under the CEO’s leadership. The Executives also has a collective responsibility to provide leadership ,communicating coherent governance principles throughout the agency and ensuring the operation of the checks and balances with effective governance demands. 1.Executive Leadership Group……. 2.Embracing better/more comprehensive management performance….. 3.Monitoring policies directed…………….. 4.Management Information System is in place………. 5.Reviewing its own process and effectiveness……….

14. FIVE GOVERNANCE PRINCIPLES FOR CG (B).Capable Management: Capable management includes setting in place the broad principles under which the agency operates , including setting clear objectives and an appropriate ethical framework operating in the public interest; establishing due process; defining duty of care to the agencies client group etc. (Text book…pg170). ( C ).Diligent Monitoring: Diligent Monitoring of risks, and the effectiveness of mitigating strategies, should include processes to access the delivery of outputs and quality of control systems overtime enabling the identification of corrective actions for continuous improvement. Systems operating in a changing environment require close monitoring. (Text book…pg170). (D ).Responsible Risk Management: Responsible risk management establishes process for identifying, analyzing and mitigating risks that could prevent the agency from achieving its business objectives (Text book…pg170).

15. FIVE GOVERNANCE PRINCIPLES FOR CG (E).Clear Accountability and Responsibility: Clear accountability and responsibility is primarily through the CEO to the responsible Managers and the Executive Directors….. ( Textbook…pg171)

16. Advantages/Benefits of Corporate Governance (1). Enhancing overall company performance. (2). Preparing a small enterprise for growth, and so helping to secure new business opportunities when they arise. (3). Increasing attractiveness to investors and lenders , which enables faster growth. (4). Increasing the company’s ability to identify and mitigate risks, manage crises and respond to changing market trends. (5). Increasing market confidence as a whole. (6). All companies suffer from corporate scandals, which scare potential investors away from the market.

17. Corporate Governance : Principal Agency Relationship Principal Agency Agent Third Party Principal’s obligation to perform contract Contract with third party on behalf of principal

18. What is Principal Agent Relationship A “principal-agent” relationship arises when the person who owns a firm i s not the same as the person who manages or controls it. For example ,investors or financiers (principals) hire managers(agents) to run the firm on their behalf. Investors need managers specialized human capital to generate returns on their investments, and managers may need investors’ fund since they may not have enough capital of their own to invest. In this case there is a separation between the financing and he management of the firm, i.e there is a separation between ownership and management.

19. Principal-Agency Relationship Further reading….page 175.

20. Models of the Corporation SHAREHOLDER MODEL STAKEHOLDER MODEL 1.In its narrowest sense (Shareholder Model), corporate governance often describes the formal system of accountability of senior management to the shareholders. 1.In its widest sense (Stakeholder Model) ,corporate governance can be used to describe the network of formal and informal relations involving the corporation. 2.More recently ,the stakeholder approach emphasizes on contributions by stakeholders that can contribute to the long-term performance of the firm and shareholder value ,and the shareholder approach also recognizes that business ethics and stakeholder relation can have an impact on the reputation and long-term success of the corporation. 3.Therefore, the difference between these two models is not as stark as it seems, and instead a question of emphasis Conti….page 174 Conti….page 175

21. Agency Theory 1 .A simple agency model suggests that , as a result of information asymmetries (all the stakeholders not having all the information about the company. There may be few who know more about the company than others, this is called information asymmetry). 2.They would be led by self interest. The principals would also lack trust as regards their agents and will seek to resolve these concerns by putting in place mechanisms to align the interests of the agents with the principals and to reduce the scope for information asymmetries and opportunistic behavior. 3.This is done through periodic reporting of the financial aspects of the company. This VIDEO clip will make it clear as to what are the challenges.

22. Corporate Governance Codes Introduction: Governance occurs just as a corporate entity acquires life and particularly when ownership of the enterprise is separated from its management. The governance phase was not in vogue in the management literature until 1980. Adam Smith recognized the importance of corporate governance long back though he did not use the phrase. According to him, “The directors of the companies being the managers of the peoples’(shareholders) money than their own ,it can not well be expected that they should watch over it with the same anxious vigilance with the partners in a private corporation frequently watch over their own. ”

23. Corporate Governance Codes Meaning & Definition “A code is a set of rules ,which are accepted as general principles, or a set of written rules ,which states how the people of a particular organization or country should behave” Thus it is a set of standards agreed by a group of people who do a particular job. A regulation is an official rules that lays down how things should be done. Both codes and regulation are “set of rules” or “principles” or “standards” that and are intended to control, guide or manage behavior or the conduct of individuals working in an organizations, the basic difference being that codes are “self imposed” or “self-regulated” sets of rules, while regulations and “official” i.e imposed by the State (government )

24. Benefits of self-regulatory Codes International Capital Markets Group (1992) listed the following benefits of self regulation. 1.In “self regulation” it is possible to impose ethical standards , which goes beyond those, which can be imposed by statutory legislation. 2.”Self-regulators are directly accountable to the members of their group". Self-regulatory systems have built-in motivation to regulate for effectiveness and least interference. 3. Self-regulation operates in an environment where there is a willingness to accept regulations formulated from with in the common good of the group. 4.The regulated have an opportunity to participate at all levels of the self-regulatory process. This make it easier for them to appreciate and accept new regulation. 5.Self-regulators has a build-in system of checks and balances as the regulated see it as their duty to expose non-compliance. 6.Self-regulators can identify complex regula tory problems at an early stage and develop suitable solution before these problems reach a stage that can disrupt group operations 7 .Self-regulations are more comprehensive than official regulations and are easier to operate and implement.

25. Role and Responsibilities of Top Authority in Corporate Governance CEO CHAIRMAN BOARD MANAGING DIRECTOR RIGHTS of INVESTOR and SHAREHOLDERS

26. Roles of a Chief Executive Officer Leader Visionary/Information Bearer Decision Maker Manager Board Developer Responsibilities of CEO 1.Board Administration and Support 2.Programe ,Product and Service Delivery 3.Financial ,Tax, Risk and Facilities Management 4.Human Resource Management 5.Communication and Public Relations 6.Fundraising (nonprofit organisation )

27. Chairman To be read from pg 102 Seth Publication Board-Role & responsibility To be read from pg 102 Seth Publication BOARD MEMBERS a) The Officer b) The President d) Secretary c) The Vice President e) Treasurer f) Executive Director g ) Board Committee and Committee

28. Different Committee Executive Committee Budget and Administration Committee Nominating Committee Governance Committee Revenue Generation Committee Policy Committee Medical Advisory Board Program Committee

29. Managing Director The first building block of C orporate G overnance to be put up in place in a company is the Managing Director (also known as the Chief Executive).In startups this position is generally filled by the founder. Whatever the size or nature of the company, the role of the Managing Director/Chief Executive is to ensure that the company achieves its strategic objectives and to provide leadership and direction to staff. His her role depends on the stage of growth of the company. Typically, the scope of the role becomes more clearly defined as the company develops and the supporting Corporate Governance framework required is clearer. For example, once such a framework is developed ,the Managing Director/Chief Executive may delegate some responsibilities to members of the Management Team.

30. Role of Managing Director/Chief Executive Page 106 Seth Publication

31. Rights of Investors and Shareholders Voting Powers on Major Issues. Ownership in a Portion of company Earnings The Right to Transfer Right to receive dividend Opportunity to Inspect Books of accounts and records. The right to sue for wrongful act.

32. Distinguishing the Roles of Board and Management Constitutions of more and more companies stress and underline that the businesses is to be managed “by or under the direction of the board.” In such a practice, the responsibility for managing the business is delegated by the board to the CEO, who in turn delegates the responsibility to other senior executive. Thus, the board occupies a key position between the shareholders (owners) and the company’s management (day-to-day managers of the company’s resources)

33. Thrust areas of Corporate Governance Shareholder Japan Composition of Board Shareholder UK/US Shareholder France/Germany Shareholder India/China BOARD OF DIRECTORS Executive Directors Non-executive Directors 51% or more In case of executive chairman, at least ½ of the board should be independent directors In case of non- executive chairman, at least 1/3rd of the board should compromise independent directors Shareholder African

34. Separation of the roles of the CEO and Chairperson To be read from pg.177&178 Should the board have Committees?? Appointments:- The Board and the Directors’ Re-elections Remuneration of Directors and Executives’ Remuneration. Disclosure and Audit

35. Role and Responsibility of a Non-executive Director BOARD OF DIRECTORS Executive Non-executive Though the law treats them simply as directors and both carry equal responsibility ,they have different roles to play. The non-executive independent directors are generally given the chairmanship of important committee like Audit Committee, Nomination Committee and Remuneration committee They are closer to action. They can question the executives directly. They observe from a distance how well executives are performing their duties.