corporate governance - corporategov1.pptx

corporate governance

1. Corporate Governance Corporate Governance has attracted significant public interest Corporation as a capitalistic institution formed to maximize shareholders value The above definition of corporation is modified by defining corporation as a social institution The corporate charter is a social invention created to aggregate private financial resources in the service of a public purpose With the above in view the first royal charter was given to East India Company

2. Theories of the Corporation Corporation theories fall into three broad categories Contractualism Communitarianism Concessionarism

3. Contractualism Contractualism has two parts a)Legal Contractualism b) Economic contractualism   Legal Contractualism : Two or more parties come together to carry on commercial activity and it is from this agreement that a company is born Regulatory role of the state - general requirements of the law of the land - fair competition , so on Economic Contractualism is based on the premises that a company is a voluntary association between shareholders rather than a creation of the state The Contractual theory excludes the social responsibility of corporation

4. Communitarianism This approach is based on the assumption that grant of company status by the sate is an instrument for the state to utilize for public good particularly because of the added incentives of limited liability to the shareholder. It is opposed individualists approach of contractment theory The level of utility of a corporation is not be judged on the basis of individual wealth created its shareholder but on the criteria whether it contributes to honoring individual dignity and promoting overall welfare.

5. Concessionarism Incorporation of a company with limited liability condition is a concession granted by state. Perspectives and Models of corporate governance Two Broad perspectives: a)Corporation's Perspectives b) Public Policy Perspectives Corporation's Perspectives - Two type I) shareholder perspective - shareholder perspective- shareholder perspective - shareholders provide risk capital and have therefore final control over resource allocation decision. ( II) organizational control perspective- Manager who co ordinate the efforts of different factors of production are basically responsible for generating surplus for the shareholders Public Purpose perspective cum also be called stakeholder perspective. It believes that corporation is a social institution it is a coalition of interest of various stakeholder. Thus not shareholder value maximization but wellbeing of all group having a stake in the corporation is the purpose of the corporation.

6. Models Model 1) Anglo- American Model or principal - agent model - outsider model separation between ownership and control   Model 2) Continental model - insider model - corporation composed of small relatively compact group of shareholders - institutional finance main source of fund   Model 3) Insider model east Asian type close knit families are generally the controlling authorities .   In India Predominant form is model 3 however corporate governance principles in India are dictated according to model 1  

7. Model 1 When there is congruence between principal and agenda the model works well In case of Conflict of interest between managers and shareholders governance problem becomes critical Excessive Concern for short term returns - fear of hostile takeover affect long term development of the corporation (My opic market model )   However a Quick take over cannot act as substitutes for sustained effort for long term growth   In India strangely Anglo - American model of corporate governance though most corporation belong to model 3 reasons for this may be:   1) Historically Relative failure of ISI model encouraged attention to Anglo - American model as part of reform process 2) SAP of IMF advocated Model 1 3) Advocates of Economics Reform favored model 4) Colonial Tradition encouraged following Anglo - American Model 5) Current International Trends towards model

8. Shareholders are passive owners - they are also widely dispersed   The Control groups (Managers )Cleared the copy for the claims of a group far wider than the owners or the control .They Have placed the community in a position to demand that the modern corporation serves not alone the owners but all society

9. Theories of Corporate Governance Agency Theory - Theory Suggest that Shareholders are principals in whose interest the corporation should be run even though they rely on others for the actual running of the. Agency Theory Examined the working of a firm as a constantly re negotiated contract by many individuals each with the aim of maximizing their own utility. The essence of the agency problem is the separation of management and finance. It has to be noted that the agency theory offers shareholders the preeminent position in the firm not as the firm’s owners but as the residual risk takers. In this theory relationship between shareholders and mangers will inevitably be problematic as the principals attempt to make to prevent their agents from maximizing their own utility

10. Stewardship Theory It presents a very different model of management to agency theory There is no inherent conflict of interest between managers and owners Optimal Governance structures allow co ordination of the enterprise to be achieved most effectively Managers are not opportunist agents but good stewards who will act in the best interest of owners Mangers Balance completing shareholders and stake holders objectives making decision with the best interest of all

11. Stake holder theory Business has to acknowledge the existence of a cross section of parties be they individuals or groups who benefits from or are harmed by - whose rights are violated or respected by corporate actions Stakeholder theory recognizes that many constituent affect corporate decision making It is an all inclusive theory and takes into consideration all those parties who are affected by corporate actions

12. Gandhian Trustee Ship Theory Mahatma Gandhi’s Over Arching principle concerning wealth and wealth creation is one of 'Trustee ship’ Wealth should be made by legitimate and ethical means Surplus after meeting basic needs should be held in trust for the society. Gandhian concept of 'trusteeship fits well with the governance concepts of fiduciary obligations of director as well as of corporation trusteeship responsibility in re of the physical environment and earth resources IT corresponds to the notions of accountability to the beneficiaries both for the wealth created for the wealth created for them and the protection of wealth creating assets held in trust further.

13. Indian Company's Act – 1956 RIGHTS TO SHAREHOLDERS Right to vole - for every resolution in the Annual General body meeting - and for deciding composition of the board of directors Proxy voting and postal ballot permitted All Shares carry proportional voting rights Annual general Body Meeting Board of Directors can convene extra ordinary general meeting Minimums 5 directors - Board one tier body - chairman executive and non executive directors special category of whole time directors Audited financial statement must be received by shareholders Rights of minority shareholders as in the contract Amendment of the act in 2008, small shareholders interest protected SEBI has provided guidelines for takeover (Takeover code)

14. SIZE – According to need – not too large – not too small BALANCE – Between Executive, Non Executives, Balance between different stake holders interest DIVERSITY – Diverse skills & views LEAD DIRECTOR where combined board chair and Chief Executive is the generally accepted norm efforts have been made to create a mechanism that still maintains the separation between execution and direction / evaluation. Proposal is to appoint a lead Director from among the independent members.   BOARD PROCESS Chairman has a vital role in managing board deliberations and getting the best out of the team Taking an objective and balance view in respect of each issue and all stake holders. Make all relevant matters and information available to members in appropriate time. Maintaining dignity and decorum. Ensuring that decisions are faithfully recorded

15. BOARD AND CORPORATE GOVERNANCE Most Banks and Financial Institutions has a highly centralized corporate Governance system Very little check on the CEO who is generally closely linked with the largest owner group. Board and auditing systems not effective Good Corporate Governance should be in place in respect of all our Banks and Financial institutions Better accounting, auditing, new disclosure norms and also better systems of checks and balances must be introduced in our banks and financial Institutions urgently.    

16. CORPORATE SOCIAL RESPONSIBILITY Corporations are meant to maximize profit for the owners that is the shareholders that is the prevailing view In spite of criticism of the above view by various sections of the society, it is still the dominant view However corporate failures and scams have turned the tide of popular opinion in favor of the opposite view which considers Business Corporation as social institutions and therefore must serve social purpose while generating surplus (called profit)   All decisions by an organization must be based on ethics (means must be official irrespective of ends pursued). All such decisions and policies must be economically feasible, ethical, acceptable and socially legitimate. Following legitimacies must be satisfied. Economic legitimacy Ethical legitimacy Social legitimacy  

17. Corporate social responsibility aspects must satisfy all three criteria of legitimacy. We are really concerned with two basic issues One issue is related to organizations responsibility regarding the activities that affect society. The second issue is concerned with the degree of responsibility that business organization must undertake to alleviate or solve problems affecting society (poverty, inequality, unemployment, crime, ill health, mal nutrition, illiteracy, school dropout, ill treatment of certain groups- ladies, ensuring liberty, freedom and democracy) Corporate social responsibility is concerned with treating the stake holders of the firm ‘ethically or in a responsible manner’. Ethically or responsible means treating stakeholders in a manner deemed acceptable in civilized societies. Social includes economic and environmental responsibility. Stakeholders exist both within a firm and outside. The wider aim of the social responsibility is to create higher and higher standards of living, while preserving the profitability of the corporation for people both outside and within the corporation.

18. All business organizations are social institutions- Organizations therefore have an obligation to society A book by the committee for Economic Development urges organizations to get involved in social causes such as spread of education, urban renewal, giving scope and job opportunities to minority community and providing special favor and aid to those who are under privileged and disadvantaged. Social responsibility of Business can be measured at four levels Economic Legal Ethical Discretionary The figure below shows their relative weight ages

19. Approaches to Social Responsibilities by Managers: Obstructionist approach – Managers don’t believe in CSR so they put all possible obstruction to CSR ideas and activities Defensive Approach – Here social obligation is created as an obligation to be fulfilled. Thus the approach is routine and trend is following minimum rules and standards. Managers realize the need for fulfilling social responsibility and therefore they try to complete obligations duly, sincerely and efficiently but don’t take any initiative or pro active action. The last approach is not obligation but comes out of own volunteering and discretion, this is pro active and enthusiastic approach. These approaches are shown in the scale of degree of acceptance of social responsibility