corporategovernance-aconceptualframework-141203105638-conversion-gate02.pptx

Corporate governance introduction

1. Corporate Governance – A Conceptual Analysis

2. Introduction to CG Cor p orate g o v ernan c e i s how a c or p orat i on i s ad m i n ist e red or controlled. Corporate Go v ernance i s a se t of p rocesses , cust oms , pol i c i es , law s & i ns t ruct i ons af f ect i ng the wa y a c o r p orat i ons i s d i re c ted , adm i n i st r ate d or controlled. T he part i c i pant s i n the p r ocess i nclude employees an d s u p p l i ers , partners , cust omers , go v ernment and professional organization regulators ,and the commu n i t ie s i n wh i ch the organ i z a t i on has a presence.

3. Definition of Corporate Governance Si r Adrian Cadbury ; “Co r p o rate Go v ernan c e i s con c erned w i th hold i ng the balanc e b etween econom i c & soc ial goa l s an d betwee n i ndividu a l and com m un a l goa ls . T he CG framework i s there to encourage the eff i c i ent use of reso u rc e s an d equally to require stewardship of those resources. The aim is to align as nearly as possible the interest of individuals, cor p orat i ons an d soc i ety . ” Gabriele O’Donovan; CG i s a n i nternal sys t em en c ompas s i ng p o l i cies , p r o c esses & p e o p l e wh i ch serves the needs of shareholders & management act i vities , b y d i re c t i ng & controll i ng ma n a gement activities with good business savvy objectivity, ac c ountab i l it y & i nte g r i ty.

4. Definition of Corporate Governance In othe r words ; CG may be defined as a set of systems, processes and principles which ensures that a company is governed in the bes t i n t erest of al l t he s t ake h olders. It is the system by which the companies are directed and controlled. It is about promoting corporate fairness, t ransparen cy a n d ac c oun t ab i l i t y . In other words, ‘good corporate governance’ is simply ‘good bu s ines s’. It ensu r es: 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 buil d a n environmen t o f trust an d confidenc e among those having competing and conflicting interest. To enh a nc e s h areh old e rs val u e an d prote c t interest o f other stake holders. To hav e system an d procedure.

7. R i ght an d Equ i table Tr e atme n t to shareholders. Inter e s t of o ther Stake h o l ders. Role and Responsibility of the Board. Integr i ty an d E t h i cal Behav i or. D i sclosur e an d Transpar e nc y . T e xt bo o k pa g e 162 Principles of Corporate Governance

8. FRAMEWORK for CG STAKE HOL D ERS Pri v ate IN T E R N AL EXTERNAL Regulatory SHAREHOLDERS BOARD OF DIRECTORS Reports to Ap p oints and Monitors MANAGEMENT Operates Core functions Financial Sector Debt Equity Markets - Competitive factors and foreign markets - Foreign Direct Investment - Corporate Control Re pu t a t i o na l Agents Accountants Lawyers Credit Ratings I n vestm e n t Bankers Financial media Investment advisors Research Corporate G ov er n a n ce Analysis Standards (for example accounting and auditing) Laws and regulations

9. Introduction to Framework (1) The share hold er s are giv e n n e cessar y rep o rts , i nfo rm a t io n to g u i de the m i n a ppo i nt i ng a nd r e - appointing an effective Board of Directors who manage the day to day operations of the company. There is a clea r c u t d i s t i n c t i on betwe e n the owners a nd the stakeholders, the employees, the financers who e m power the Bo a rd of D i rectors to run the comp a ny eff e ct i v e ly . T h u s , the f i rst pr i nc i pl e i n the fra m e wor k i s th a t the re i s clea r c u t d i st i nc t io n betwe e n the Ownership and the Professional Management of the C o m pa n y . A nd a l l the st a keholde rs a re i nfo rmed a bo u t the day to day operations through various reports and data.

10. Introduction to Framework There are many stakeholder in the company: The shareholders which again can be further sub-divided as the general shareholders, the employee shareholder 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 m aximize t he w e a l th of t he shar e hol ders. The Distributors or the channel partners are also the stakeholders, their main objective is to be part of a value chain and make timely de l i v e r i e s acros s t he coun t r y . 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 The reputational agents which would be part of the Corporate Framework would be. Accountants. Legal Ex p e r t s . Cr e di t Ra t in g A g e ncie s Financial a n d I n v e s tm e n t A d v iso r s F i nancial M e d i a (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.

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. Executive Leadership Group……. Embracing better/more comprehensive management performance….. M o ni t o r in g polic i es d i rec t ed…………… . . M a nageme nt I nf o rma t i o n S y s t em i s i n p l ace………. 5 . Re v iewin g i t s own pr o ce s s an d effec t i v e nes s …… … .

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 g r oup e t c. ( Text bo o k…pg17 0). (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 Ris k Management: Responsible risk management establishes process for identifying, analyzing and mitigating risks that could prevent the agency from achie v in g i t s b us i ness object i v es ( Text book… p g170).

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

16. Advantages/Benefits of Corporate Governance Enhanc i ng o v erall company performa nce. Preparing a small enterprise for growth, and so helping to secure new bus i ness op p ortun i t i es whe n they ar i se. Increasing attractiveness to investors and lenders , which enables fa s t er growth. Increasing the company’s ability to identify and mitigate risks, manage crises and respond to changing market trends. Increasing market confidence as a whole. All compan i es s u ffer from c or p orate scand a ls , wh i ch 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 f i rm i s not the sa m e a s the person who m a na g es or controls i t. For example ,investors or financiers (principals) hire mana gers(a g ents) to run the f i rm on the i r b e half. Investors need managers specialized human capital to gener a te returns on the i r i n v es t ment s , an d man a gers m a y need investors’ fund since they may not have enough ca p i tal of the i r own t o i n v est. In this case there is a separation between the financing and he management of the firm, i.e there is a separation betwee n ownersh i p an d m a na g ement.

19. 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

20. Agency Theory A s i mple a g ency model sug ge s ts th a t , a s a res u l t of information asymmetries (all the stakeholders not having all the information about the company. There may be few who kno w more abou t the compan y than others , this is called information asymmetry). 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 scop e for i nforma t i on a s ym m etr i es an d op p ortun i s t i c behavior. This is done through periodic reporting of the financial aspects of the company.

21. 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 l i t er a tu r e un t i l 1 9 8 . A da m Smi t h recog nized t he impo r t anc e of c o rp o ra t e governance long back though he did not use the phrase. A cco r d i ng t o 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 o v e r their o w n . ”

22. Corporate Governance Codes Mean ing & 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” T hus i t i s a se t of s t anda r d s ag r eed b y a gro u p of people who d o a par t i c u la r job . A r eg u l a ti o n i s a n o f f i c i a l rules t hat 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 be h a v i or or t he c onduct of i nd i v i d u al s work i ng i n 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)

23. Benefits of self-regulatory Codes International Capital Markets Group (1992) listed the following benefits of self regulation. I n “ s e l f reg u l a ti o n ” i t i s p o ss i b l e t o impose ethica l standards , w h i ch go e s beyond those, which can be imposed by statutory legislation. ”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. Self-regulation operates in an environment where there is a willingness to accept regulations formulated from with in the common good of the group. 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. Self-regulators has a build-in system of checks and balances as the regulated see it as their duty to expose non-compliance. Self-regulators can identify complex regulatory problems at an early stage and develop suitable solution before these problems reach a stage that can disrupt group operations Self-regulations are more comprehensive than official regulations and are e a s i e r t o o pe r a t e a n d i mp l e m e n t .

24. Role and Responsibilities of Top Authority in Corporate Governance CEO CHAIRMAN BOARD MANAGING DIRECTOR RIGHT S o f INVESTOR an d SHAREHOLDERS

25. 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)

26. Chairman BOARD MEMBERS a) The Officer b) The President c) The Vice President d) Secretary e) Treasurer f) Executive Director g) Board Committee and Committee members

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

28. Managing Director T he f i rst bu i ld i ng b l ock of C orpora t e G o v erna n ce t o be pu t up in place in a company is the Managing Director (also known as the Chief Executive).In startups this position is generally f i l l ed b y t he f ounder. 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 leadersh i p an d d i rect i on t o s t af f . 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 i s de v elo pe d , t he Manag i ng Director/Chief Executive may delegate some responsibilities t o mem ber s o f t he Managemen t T eam.

29. Rights of Investors and Shareholders Voting Powers on Major Issues. Ownership in a Portion of company Earnings The Righ t to Transfer Righ t t o receiv e dividend Opportunity to Inspect Books of accounts and records. The right to sue for wro ngfu l act.

30. Distinguishing the Roles of Board and Management Const i tuti o ns of more an d more c o mpan i es stres s a nd underline that the businesses is to be managed “by or under the d i re c t i on of the b oard . ” In such a practice, the responsibility for managing the business is delegated by the board to the CEO, who in t u rn delegates the respons ib i l it y to other s en i or executive. T h u s , the b o a rd occup i es a k ey pos i t i on betwe e n the shareholder s (own e rs) an d the c o mpany’s m a na g e m ent (d a y - to - day m a na g ers of the company’s resources)

31. Shareholder Japan Thrust areas of Corporate Governance Composition of Board Shareholder UK/US Shareholder France/Germany Sha r eholder 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 compr i se of independent directors Share h older African

32. Separation of the roles of the CEO and Chairperson Should the board have Committees?? Appointments:- The Board and the Directors’ Re-elections Remuneration of Directors and Executives’ Remuneration. Disclosure and Audit

33. 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.