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Corporate Governance: An Overview Business Ethics and Corporate Governance, 2e A. C. Fernando
Corporate Governance: An Overview Business Ethics and Corporate Governance, 2e A. C. Fernando
Corporate Governance: An Overview Business Ethics and Corporate Governance, 2e A. C. Fernando
An Overview
A. C. Fernando
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Chapter 13
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A. C. Fernando
Corporate Board:- Attributes, Duties,
Responsibilities, Liabilities. Shaping Directorial
Competence and Board Effectiveness. Financial
Institutions and Nominee Directors. Corporate
Board Committees-15 ch. Role of independent
directors, legal & regulatory setting of an
company. (Policies and procedures for ‘best
practice’ companies. Rules and principles
based approaches to governance. The
regulatory governance framework.- ch 20)
A. C. Fernando
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Corporate governance is the new buzzword in corporate
and academic circles today. It means several things to
several people, depending on the sensitivity of the analyst
and his vested interest in it. This chapter gives an overview
of the concept, defines it, discusses its evolution and
explains its relevance and impact on the economy.
A. C. Fernando
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Objectives
Capitalism at crossroads
Increasing awareness
Global concerns
What is corporate governance?
Governance is more than just board processes and
procedures
• A historical perspective of corporate governance
• Issues in corporate governance
•
•
•
•
•
A. C. Fernando
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Chapter Outline
Many of their top executives were
committing fraud and irregularities.
penalized
A. C. Fernando
for
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• Capitalism at crossroads
• America’s hall of shame – 2002
Giant corporations such as Enron Worldcom, Dynegy,
Waste Management, Adelphia Communications, Tyco,
Imclone Systems and Rite Aid failed and were being
investigated for fraud and malpractices.
Corporate misgovernance in India
•
•
•
A. C. Fernando
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•
From the Academic Point of View
“Corporate governance addresses problems that result
from the separation of ownership and control.”
From the Angle of Developed Versus Developing Countries
John D. Sullivan: “In developing economies, one must
look to supporting institutions – for example, shoring up
weak judicial and legal systems in order to better enforce
contracts and protect property rights.”
Narrow Versus Broad Perceptions of Corporate Governance
Corporate Governance… is defined narrowly as the
relationship of a company to its shareholders or, more
broadly, as a relationship to society.
(An article in Financial Times)
Business Ethics and Corporate Governance, 2e
A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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Different Perceptions
in Definitions
A Historical Perspective of Corporate Governance
From a Narrow to a Broader Vision
(Shareholder to Stakeholder perspective)
The Growth of Modern Ideas of Corporate Governance from
the USA
England Catches Up With US
The Cadbury Committee
The Aftermath of Cadbury Report
Corporate Governance in the Banking Sector
Revival of Corporate Governance Issues in the New Millennium
A. C. Fernando
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•
Issues in Corporate Governance
A. C. Fernando
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•
A. C. Fernando
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Relevance/objectives of CG
Relevance of Corporate Governance
Managements usually have an information advantage over others.
Good corporate governance will ensure all stakeholders interests are
protected, while their requirements are fulfilled.
A. C. Fernando
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governance
Corporate values, codes, internal control systems etc. are
useful to ensure flow of capital for combating corruption,
stakeholder protection, ensuring industrialization and
economic development.
Benefits of good corporate governance to a corporation culture
within the organization and industry improves shareholder
confidence improves
Companies that are seen as well governed get a premium for
their stocks
Benefits to the society- transparency in dealing with investors
& creditors, combats corruption by fair disclosure of
accounting & auditing practices & improved management of
firm by professionals instead of being just family owned
A. C. Fernando
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fraud
A. C. Fernando
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A. C. Fernando
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Contd…
Management of corporate
governance,
A. C. Fernando
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A. C. Fernando
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Board of
Directors
Executive
Committee
appoints
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A. C. Fernando
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A. C. Fernando
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Who is a Director?
We can recognize another category of directors as per
certain provisions of the (Indian) Companies Act “Shadow
Directors’’. These so-called “deemed- directors’’ acquire
their status by virtue of their giving instructions (other than
professional advices) according to which “appointed”
directors are accustomed to act.
A. C. Fernando
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A. C. Fernando
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Nominee Directors
• The Articles of Association of a company usually name the first set of
directors by their respective names or prescribe the method of
appointing them.
• Certain provisions of the Companies Act in India govern the appointment
or reappointment of directors by a company in general meeting.
A. C. Fernando
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Directors’ Appointment
•
•
A. C. Fernando
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A. C. Fernando
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duties, responsibilities,
attributes and liabilities of
corporate board
•
•
•
•
•
•
•
A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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(a) on their failure to repay application money if minimum subscription has not
been subscribed;
(b) on an irregular allotment of shares to an allottee (and likewise to the
company) if loss or damage is
sustained;
(c) on their failure to repay application money if the application for the
securities to be dealt in on a
recognized Stock Exchange is not made or refused; and
A. C. Fernando
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Liabilities of Directors
(d)
(e)
A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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Disablities of Directors
(4)
A company shall not without obtaining the previous approval of the Central
Government in that
behalf, directly or indirectly make any loan to-
(i) any director of the lending company or of a company which is its holding
company or any partner
or relative of any such director;
(ii) any firm in which any such director or relative is a partner;
(iii) any private company of which any such director is a director or member;
(iv) any body corporate at a general meeting of which not less than 25 per cent of
the total voting
power may be exercised or controlled by any such director; or
(v) any body corporate, the board of directors, managing director, or manager
whereof is accustomed
to act in accordance with the directions or instructions of the Board, or of any
director or directors
of the lending company.
A. C. Fernando
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(6)
A. C. Fernando
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A. C. Fernando
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Prevention of Management by
Undesirable Persons
(1) a person who is convicted of any offence in connection
with the promotion or management of a company; or
(2) a person who in the course of winding up of a company
(2)
A. C. Fernando
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Fraudulent Persons
Though the board is recognized legally as the top
layer of management with the responsibility of
governing the enterprise, yet, in actual practice,
the board of directors delegates most of its
managerial power to chief executives- say, the
managing director or manager. In many cases,
the board appoints many committees and confers
them with its power.
A. C. Fernando
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A. C. Fernando
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in
Ensuring
A. C. Fernando
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1.
2.
3.
4.
5.
A. C. Fernando
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A. C. Fernando
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(1)
(2)
(3)
(4)
(5)
Market Forces &
Shareholders
Competition
Accountability
Depositors, Borrowers
and Other Customers
Customer Service and
Satisfaction
Empowerment and
Pressure to perform
Regulatory Compliance
Organization’s welfare
Supplies
Continuing Relationship
Board of Directors
Policy,
Directors
and
Compliance
and
Accountability
Top Management
Career Advancement
and Job satisfaction
Transparency and
fairness in dealings
Employees
A. C. Fernando
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A. C. Fernando
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I.
The Role of Directors (contd.)
A. C. Fernando
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I.
The board of directors, including chairmen and managing
directors, consisted of family members with a couple of
directors from funding financial institutions and perhaps a
couple of outside passive directors.
A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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(e) Boards
delegating
specific
tasks
such
as
audit,
remuneration and appointments to committees with
members having professional expertise will be a normal
phenomenon.
(i)
(j)
A. C. Fernando
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(h) The highest priority of the boards would be to ensure longterm maximisation of
shareholder value and wealth. Better
corporate performance through legitimate and transparent
policies will enrich shareholders. Accountability to
shareholders does not mean, that other stakeholders such
as customers and employees would have to be excluded,
as the respective objectives are not naturally exclusive.
(l)
A. C. Fernando
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2.
A. C. Fernando
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5.
The
board
of
the
fast-growing
Chennai-based
pharmaceutical
company,
Orchid
Chemicals
and
Pharmaceuticals Ltd, directed its Managing Director to
seek the advice of the international consultant, Mckinsey
and Co. on his growth strategy for the company.
The board of Chennai-based Polaris Software Lab. forced
its Chairman and Managing Director not to acquire any
new business at the peak of dotcom boom, but instead to
consolidate the company’s business.
Godrej Consumer Products consulted the Confederation of
Indian Industry (CII) for forming its board. The CII
advised the company to choose independent professionals
and not industrialists.
A. C. Fernando
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3.
Business Ethics and Corporate Governance, 2e
A. C. Fernando
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Governance committees
The stated objective of the Cadbury Committee was "to
help raise the standards of corporate governance and the
level of confidence in financial reporting and auditing by
setting out clearly what it sees as the respective
responsibilities of those involved and what it believes is
expected of them".
A. C. Fernando
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Cadbury Committee on
Corporate Governance, 1992
The Cadbury Code of Best Practices had 19 recommendations.
Relating to the board of directors, the recommendations are:
•The Board should meet regularly, retain full and effective
control over the company and monitor the executive
management.
• There should be a clearly accepted division of responsibilities
at the head of a company, which
will
ensure balance of
power and authority, such that no individual has unfettered
powers of decision.
A. C. Fernando
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Cadbury Committee on
Corporate Governance, 1992 (contd)
•
A. C. Fernando
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Cadbury Committee on
Corporate Governance, 1992 (contd.)
Relating to the non-executive directors the recommendations
are:
•Non-executive directors should bring an independent
judgment to bear on issues of strategy, performance,
resources, including key appointments, and standards of
conduct.
• Non-executive Directors should be appointed for specified
terms and reappointment should not be automatic.
• Non-executive Directors should be selected through a
formal process and both, this process and their
appointment, should be a matter for the Board as a
whole.
A. C. Fernando
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Cadbury Committee on
Corporate Governance, 1992 (contd)
•
•
•
A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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World Bank on
Corporate Governance
•
A. C. Fernando
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World Bank on
Corporate Governance (contd.)
o
A. C. Fernando
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OECD Principles
•
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A. C. Fernando
The OECD recognizes that there are other stakeholders in
companies in addition to shareholders. Banks, bondholders
and workers, for example, are important stakeholders in
the way in which companies perform and make decisions.
A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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McKinsey Survey on
Corporate Governance
In short, good corporate governance increases market
valuation by:
• Increasing financial performance;
• Transparency of dealing, thereby reducing the risk that
boards will serve their own self-interest;
• Increasing investor confidence.
A. C. Fernando
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McKinsey Survey on
Corporate Governance (contd.)
McKinsey rated the performance on corporate governance of
each company based on the following parameters:
• Accountability: Transparent ownership, board size, board
accountability, ownership neutrality
• Disclosure and transparency of the board, timely and
accurate disclosure, independent directors
• Shareholder equality: One share, one vote
A. C. Fernando
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McKinsey Survey on
Corporate Governance (contd.)
Through the survey, McKinesy found that companies with
good corporate governance practices have high price-to-book
values indicating that investors are willing to pay a premium
for the shares of a well-managed and governed company.
Additionally, the survey revealed that investors are willing to
pay a premium of as much as 28 per cent for shares of such a
corporate governance based company.
A. C. Fernando
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McKinsey Survey on
Corporate Governance (contd.)
Companies in emerging markets often claim that Western
corporate governance standards do not apply to them.
However, the survey revealed that studies of the six
emerging markets show that investors the world over look
for high standards of good governance. Additionally, they are
willing to pay a high premium for shares in companies that
meet their requirements of good corporate governance.
A. C. Fernando
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McKinsey Survey on
Corporate Governance (contd.)
The Sarbanes–Oxley Act (SOX Act), 2002 is a serious
attempt to address all the issues associated with corporate
failures to achieve quality governance and to restore
investor confidence. The Act contains a number of
provisions that dramatically change the reporting and
corporate directors governance obligations of public
companies, the directors and officers.
A. C. Fernando
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A. C. Fernando
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External Environment
Government Regulations,
Policies, Guidelines etc.
Company Acts
SEBI
Stock Exchanges
Depositors, Borrowers,
Internal Environment
Auditors
Board of
CORPORATE
GOVERNANCE
SYSTEM
Proper governance
value
Shareholder
Concern for
Healthy corporate sector development
Business Ethics and Corporate Governance, 2e
A. C. Fernando
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National interest
Political non-alignment
Legal compliances
Rule of law
Honest and ethical conduct
Corporate citizenship
Ethical behavior
Social concerns
Corporate social responsibility
A. C. Fernando
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Competition
Trusteeship
Accountability
Timely responsiveness
Obligation to Investors
•
Towards shareholders
Transparency
A. C. Fernando
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•
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Obligation to Customers
o Quality of products and services
o Products at affordable prices
o Unwavering commitment to
o Customer satisfaction
Obligation to Employees
• Fair employment practices
• Equal-opportunities employer
• Encouraging whistle blowing
• Humane treatment
Business Ethics and Corporate Governance, 2e
A. C. Fernando
o Empowerment
o Equity and inclusiveness
o Participative and collaborative environment
Managerial Obligation
•
Control
Consensus-oriented
A. C. Fernando
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o Participation
Our Credo
We believe our first responsibility is to the doctors, nurses and
patients, to mothers and fathers and all others who use our
products and services.
In meeting their needs everything we do must be of high quality.
We must constantly strive to reduce our costs in order to
maintain reasonable prices.
Customers' orders must be serviced promptly and accurately.
Our suppliers and distributors must have an opportunity to make
a fair profit.
Business Ethics and Corporate Governance, 2e
A. C. Fernando
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A. C. Fernando
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Conclusion
Business Ethics and Corporate Governance, 2e
A. C. Fernando
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CHAPTER 20
Policies and procedures for ‘best
practice’ companies. Rules and
principles based approaches to
governance. The regulatory
governance framework. models of
corporate governance
•
A. C. Fernando
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A. C. Fernando
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Insider System
Insider System- Adv & Disadv
Insiders have the power and the incentive to monitor management closely thereby
minimizing the potential for mismanagement and fraud.
•2. Insiders tend to keep their investment in a firm for long periods of time. As a
result, insiders
tend to support decisions that will enhance a firm's long-term performance as
opposed to
decisions designed to maximise short-term gains.
•Disadv- However, insider systems predispose a company to certain corporate
governance
failures. One is that dominant owners and/or vote holders can bully or collude with
management to expropriate the firm’s assets at the expense of minority
shareholders. This is a
significant risk when minority shareholders do not enjoy legal rights.
•Insiders who wield their power irresponsibly waste resources and drain company
productivity
levels; they also foster investor reluctance and illiquid capital markets. Shallow
capital markets,
in turn, deprive companies of capital and prevent investors from diversifying their
risks.
A. C. Fernando
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•1.
•
A. C. Fernando
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Outsider System
•
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A. C. Fernando
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EXTERNAL
Private
Regulatory
Shareholders
Stakeholders
(for example,
accounting and
auditing)
Standards
Board of Directors
Reputed agents Laws and regulations
* Accountants Financial sector
Reports Appoints
* Lawyers
to
* Credit rating
* Debt
and
* Investment bankers
Financial media * Equity
monitors
* Investment advisors
* Research
* Corporate governance Financial sector
Management
analysts
* Competitive factor
and product markets
Operates
* Corporate control
Core functions
A. C. Fernando
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A. C. Fernando
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•
•
•
•
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•
•
•
•
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•
•
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•
•
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Successful Strategies:
One Size Does Not Fit All
•
A. C. Fernando
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Successful Strategies:
One Size Does Not Fit All (contd.)
•
A. C. Fernando
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A. C. Fernando
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•
The role of the state in the transition economies is ambiguous.
On the one hand, the role of the state in post-socialism should
be limited. On the other hand, strong state power is needed to
carry through the political programmes required by economic
transformation. Weak governments have proved to be
incapable of economic transformation.
A. C. Fernando
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•
In transition economies, the most important firms, such as
public sector companies that contribute more to the nation's
gross national product, employment, income, and capital use
than private sector firms, are controlled by the state as it was
in India, prior to 1991.
A. C. Fernando
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•
The question is whether it is possible to reproduce all at once
the institutions from developed market economies in transition
economies. The standard institutional portfolio has evolved
gradually in different circumstances. Merely transplanting these
institutions is not possible because there are new conditions
and many cultural differences.
A. C. Fernando
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•
The transition economies cannot afford the luxury of searching
for new third way between socialism and capitalism. Instead,
they have to find a way to accept the existing institutional
portfolio and to make it work in the specific cultural, historical
and economic environment. Each region is in a different stage
of establishing a democratic, market-based economy and a
corporate governance system.
A. C. Fernando
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•
Corporate
Governance
in
Developing
and
Transition
Economies
Objectives –
The developing, transitional or emerging economies of the world are at a
crossroads. Their development efforts cannot overlook the wide distribution of
wealth and incomes their corporates generate, nor can they close their eyes to
the problem of the ‘insiders’ stealing the legitimate share of the ‘outsiders’.
This
chapter elaborates on corporate governance challenges in emerging economies,
and also discusses successful strategies to ensure corporate governance.
A. C. Fernando
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Chapter 20
•
•
•
•
•
Introduction
Problems Faced by Developing and Transitional Economies
Defining Corporate Governance
Corporate Governance Models
The Institutional Framework for Effective Corporate
Governance
Corporate Governance Challenges in Developing, Emerging
and Transition Economies
Current Corporate Governance Settings in Transition
Economies
A. C. Fernando
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Chapter Outline
•
Steps were mooted to root out the misdemeanours of the illbehaved corporations.
However, there was a problem. While it
was easy to incorporate the required transformational changes in
the corporate sphere of advanced countries where the systems
and procedures and regulatory bodies to combat and arrest the
declining standards were in place, albeit in an immature degree,
it was difficult in the case of developing and transition economies
where everything had to be built from the scratch.
A. C. Fernando
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Introduction
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A. C. Fernando
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Introduction (contd.)
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A. C. Fernando
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A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
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A. C. Fernando
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A. C. Fernando
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A. C. Fernando
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Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Appendix
A. C. Fernando
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A. C. Fernando
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A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
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A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
A. C. Fernando
Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.