https://www.managementstudyguide.com/corporate-governance.

htm

Slide 1
What is ‘corporate governance’?
Corporate governance is the system by which companies are directed and controlled.
Boards of directors are responsible for the governance of their companies. The
shareholders’ role in governance is to appoint the directors and the auditors and to
satisfy themselves that an appropriate governance structure is in place. The
responsibilities of the board include setting the company’s strategic aims, providing
the leadership to put them into effect, supervising the management of the business
and reporting to shareholders on their stewardship. The board’s actions are subject to
laws, regulations and the shareholders in general meeting
If you see in CG, the law makes all directors are responsible for the stewardship of the
company’s assets. All directors, therefore, whether or not they have executive
responsibilities, have a monitoring role and are responsible for ensuring that the
necessary controls over the activities of their companies are in place - and working.

It is the technique by which companies are directed and managed. It means carrying
the business as per the stakeholders’ desires. It is actually conducted by the board of
Directors and the concerned committees for the company’s stakeholder’s benefit. It is
all about balancing individual and societal goals, as well as, economic and social
goals.

Corporate Governance is the interaction between various participants (shareholders,

board of directors, and company’s management) in shaping corporation’s
performance and the way it is proceeding towards. The relationship between the
owners and the managers in an organization must be healthy and there should be no
conflict between the two. The owners must see that individual’s actual performance is
according to the standard performance. These dimensions of corporate governance
should not be overlooked.

…….so considering few scandals in the past, there were concerns about functioning
of the corporate system. Not just corporate system were heightened by some
unexpected failures of major companies’ but also by criticisms of the lack of effective
board accountability for such matters as directors’ pay, incentives given to them ..
The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report
issued by "The Committee on the Financial Aspects of Corporate Governance" chaired
by Adrian Cadbury that sets out recommendations on the arrangement of company
boards and accounting systems to mitigate corporate governance risks and failures
Adrian Cadbury Chairman
The Committee’s recommendations are focused on the control and reporting functions
of boards, and on the role of auditors. This reflects the Committee’s purpose, which
was to review those aspects of corporate governance specifically related to financial
reporting and accountability
At the heart of the Committee’s recommendations is a Code of Best Practice designed
to achieve the necessary high standards of corporate behaviour.

According to Gabrielle O’Donovan, corporate governance is defined as,

“An internal system encompassing policies, processes and people, which
serves the needs of shareholders and other stakeholders, by directing and
controlling management activities, with good business savvy, objectivity,
accountability and integrity. where, sound corporate governance is reliant
on the external market place commitment and legislati on, plus a healthy
board culture which safeguards policies and processes.”
The Cadbury Committee, set up in 1991 by the Financial Reporting Council
of London stock exchange, gave a more comprehensive definition of
corporate governance. Accordingly, it de fined as a “system by which
companies are directed and controlled “,

An expansion might include:

• 'in the interests of shareholders' highlighting the agency issue involved
• and in relation to those beyond the company boundaries' or
• And stakeholders' suggesting a much broader definition that brings in concerns
over social responsibility.
To include these final elements is to recognise the need for organisations to be
accountable to someone or something.
Governance could therefore be described as:
“The system by which companies are directed and controlled in the interests of
shareholders and other stakeholder”.
Coverage of governance
Companies are directed and controlled from inside and outside the company. Good
governance requires the following to be considered:
Direction from within:
• The nature and structure of those who set direction, the board of directors
• The need to monitor major forces through risk analysis
 • The need to control operations: internal control.
Control from outside:
• the need to be knowledgeable about the regulatory framework that defines
codes of best practice, compliance and legal statute
• The wider view of corporate position in the world through social responsibility
and ethical decisions.
https://thecompany.ninja/scope-and-importance-of-corporate-governance/

Slide 2

Organization of Economic Cooperation And Development (OECD)

In the international scale, the first organisation for corporate governance

practices was formed by OEDC; it framed the first internationally accepted
corporate governance standards in 1999. it is based in Paris with 29
member countries from all over the w orld. The standards formulated reflect
certain principles of the Cadbury Committee Code; it lays importance to
equitable treatment of shareholders, responsibilities of the board of
directors, transparency and disclosure in accounts and audit importance of
non-executive directors and corporate social responsibility listed
companies.

So if you see, According to OECD “ Corporate governance involves a set of relationships

between a company’s management, its board, its shareholders and other stakeholders.
Corporate governance also provides the structure through which the company’s objectives
are set, and the means of attaining those objectives and monitoring performance are
determined.”

When we speak about - Principles of Corporate

Governance OECD’s- principles of corporate governance initially adopted by
the 30 member countries of the OECD in 1999, have become a reference tool for
countries all over the world. These principles are the base for formulating corporate
governance regulations in all the me mber countries. A few abstract are ….

1. An effective Board should head governanc e structure in the company

management
2. The board must identify the roles, responsibilities and duties of which they have
to execute
3. The board’s structure and other committees’ sho uld be maintained in the
appropriate combination of executives, executive directors, independent
directors, and non-independent non-executive directors to prevent a group of
individuals from dominating the board’s decision taking.
4. Appropriate board committees should be formed to assist the board in the
adequate performance of its duties.
5. A formal and transparent procedure must be followed for appointment of
directors and their successors; the criteria include traits such as ski lls,
 knowledge, experience, and independence, diversity on the board, including
gender.
6. The board should be accountable in all corporate affairs.
7. The corporation must f ormulate and execute comprehensive risk management
strategies to protect investors’ interest and maintain internal and external
control.
8. The audit committee must submit a timely audit report containing all the
financial transactions to the management.
9. The internal audit committee should be practical, transparent and independent.
10. The board should ensure the ma intenance of a cordial relationship with
shareholders and respect the interests

Slide 3

Key-Players of Corporate Governance

1. The company or entity: An artificial person created by law with perpetual
succession and a common seal but operating through the medium of directors.
2. Directors: Custodians of the company assets, which are monitored and
segregate to the shareholders at the time of winding up
3. Managers/Executives: Those who handle the company assets and administrate
the everyday business of the corpora tions
4. Shareholders: Those that own the company shares, either from the private or
public entities.
5. Stakeholders: Different market participants

Scope Of Corporate Governance

It refers to how it influences the business inside out; generally, its scope is bro ader; it
encompasses various development factors. It is solely about maintaining equilibrium
between the individual or corporation and societal goals and economic and social
developmental goals

Economic growth
Proper implementation of corporate governance norms enhances the country’s
economic growth;

1. the regulations facilitating transparency, accountability, fairness, and equity in

managing the company affairs internally and externally
2. Boosting the confidence of investors expedite buying and selling of securities
which directly influences the maintenance of financial market liquidity
3. regulatory authorities of the corporation being professional, competent and fast
in dealings promote market performance

Social responsibility
The primary objecti ve of implementing corporate governance is to facilitate sustainable
growth; the development of a business must encircle body economic and social
development that corporate governance codes enable.
 1. It acts as a tool for social construction where the compa nies practice both profit
maximisation and social welfare, and these pra ctical applications benefit the
growth of social responsibility among corporates.
2. By providing reasonable corporate governance increase investor confidence
leading to boost investments and income generation for the society.

Business expansion and development

An effective corporate governance strategy such as maintaining proper audit of
accounts, efficiency in directors role, the cordial relationship among shareholders etc.,
ultimately impact business expansion and diversification. It is facilitated by;

1. raising capital at a faster rate because of increased public confidence level

2. it causes a hike in demand and supply of stocks which reflects in the stock price
increase
3. minimise mismanagement inside corporation helping expansion of business

Increased efficiency, Lowered illegalities and

mismanagement
1. Well-regulated internal management with an appropriate number of executive,
non-executive and independent director s avoid i mpartial decision making
2. All piece of information, genuine and relevant are facilitated adequately to the
market participants to mitigate defrauding
3. Transparency in the appointment of executives and directors lower illegal and
unfair governance
4. Accountability of the board of directors and other executive promote a fair legal
remedy to the aggrieved party
5. Surveillance over the corporation affair by outsi de market players lower market
illegalities
6.

Slide 4
Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic

growth.
2. Strong corporate governance maintains investors’ confidence, as a result of
which, company can raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve
objectives that are in interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of
all.
Good corporate governance helps fill the loopholes, promote company growth and
enhance investor confidence in the securi ties market. It helps lower the cost of capital
and facilitates the development of company management. It also ensures the
companies legal commitments and forms friendly relations among the market
participants. Thus, it is evident that an improved corporat e governance code helps
evaluate and evaluate corporations’ competence in participating in the economic
building.

Corporate governance is claimed to bring the following benefits:

• It is suggested that strengthening the control structure of a business
increases accountability of management and maximises sustainable
• Institutional investors believe that better financial performance is achieved
through better management, and better managers pay attention to
governance, hence the company is more attractive to such investors.
• The above points may cause the share price to rise – which can be referred
to as the “governance dividend” (i.e. the benefit that shareholders receive
from good corporate governance).
• Additionally, a socially responsible company may be more attractive to
customers and investors hence revenues and share price may rise (a "social
responsibility dividend").

Purpose and objectives of corporate governance

Corporate governance has both purposes and objectives.
For the private sector:
• The basic purpose of corporate governance is to monitor those parties within
a company which control the resources owned by investors.
• The primary objective of sound corporate governance is to contribute to
improved corporate performance and accountability in creating long term
shareholder value.
For the public and not for profit sectors:
Often objectives within these organisations are more complex and conflicting.
• Economy – a measure of inputs to achieve a certain service or level of
service.
• Effectiveness – a measure of outputs, i.e. services/facilities.
• Efficiency – the optimum of economy and effectiveness, i.e. the measure of
outputs over inputs. These concepts will be discussed in greater detail.
https://www.google.com/search?q=cadbury+report+on+corporate+governance+pdf&
rlz=1C1CHBF_enIN912IN912&oq=cadbury+report&aqs=chrome.1.69i57j0l5j0i395l2.
4557j1j7&sourceid=chrome&ie=UTF-8
https://ecgi.global/sites/default/files//codes/documents/cadbury.pdf
https://www.google.com/search?q=key+concepts+of+corporate+governance&rlz=1C
1CHBF_enIN912IN912&oq=keyc+concepts+of+corpo&aqs=chrome.2.69i57j0i13i457
j0i13l2j46i13j0i5i13i30j0i8i13i30.6857j1j9&sourceid=chrome&ie=UTF-8
https://www.charterededucation.com/general/7-key-corporate-governance-concepts-
for-acca-p1/
----------------------------------------------------------------------------------------------------------------
https://www.youtube.com/watch?v=_d2M6aL-iI8
https://www.youtube.com/watch?v=40MRkN-tipI

Key Concepts in Corporate Governance

An appropriate level of morality or ethical behaviour is important for a number of
reasons:
• Codes provide the principle to behaviour; it is the individual’s ethical
stance that translates this into action in a given business situation.
• The existence of given levels of ethical behaviour improves vital public
perception and support for the accountancy profession and actions of
individuals within that profession.
• Such moral virtue operates as a guide to individual, personal
behaviour as well as in a business context.
• The existence of such moral virtue provides trust in the agency
relationship between the accountant and others such as auditors. This
trust is an essential ingredient for successful relationships

• There are a few key concepts underpinning good corporate

governance in an organisation. a few of them you should know are…..

• Fairness
• Openness/transparency
• Innovation
• Scepticism
• Independence
• Probity/honesty
• Responsibility
• Accountability
• Reputation

1. Fairness
The board of directors should treat all stakeholders fairly and
equitably.
 2. Independence Each director should independent. There should
be no conflict of interest. For example, it would not be good for a
director to get involved in the sale of an asset to another company, if
he/she was a director of that other company too.

3. Honesty The directors must protect the shareholders interests in

the organisation, and should give confidence to the shareholders
that thier interests are being protected.

4. Transparency The directors should disclose material information in a

timely and accurate manner.

5. Accountability
Those who control the business (i.e. directors) should be accountable
to those who own the business (i.e. shareholders)

6. Integrity
Moral and ethical issues should be considered when making
decisions relevant to the organisation.

7. Responsibility
The board of directors should ensure the organisation complies with
the relevant laws where it operates.

Show web page and explain

The International Finance Corporation (IFC) is an international financial institution that
offers investment, advisory, and asset-management services to encourage private-sector
development in less developed countries. The IFC is a member of the World Bank Group and is
headquartered in Washington, D.C. in the United States.
https://www.charterededucation.com/general/7-key-corporate-governance-concepts-
for-acca-p1/

https://en.wikipedia.org/wiki/International_Finance_Corporation
https://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_
Site/IFC+CG
https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/
ifc+cg/overview
https://nmc.ae/investorrelations/corporategovernance
https://core.ac.uk/download/pdf/234630549.pdf
https://www.mondaq.com/shareholders/954688/nmc-scandal-and-its-corporate-
governance
https://www.bloomberg.com/news/articles/2020-05-12/how-a-gulf-hospital-chain-
unleashed-scandal-in-london-quicktake
https://www.youtube.com/watch?v=mKiT4uIAToQ
go through the above news, very informative. In the last she has also spoken a bit
about FCA

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Class 3
Slide 7
STAKEHOLDERS

What is the stakeholder theory of corporate governance?

The stakeholder theory of corporate governance focuses on the effect of
corporate activity on all identifiable stakeholders of the corporation. This
theory posits that corporate managers (officers and directors) should take
into consideration the interests of each stakeholder in its governance
process. This includes taking efforts to reduce or mitigate the conflicts
between stakeholder interests. It looks further than the traditional members
of the corporation (officers, directors, and shareholders) and also focuses on
the interests of any third party that has some level of dependence upon the
corporation. Stakeholders are generally divided into internal and external
stakeholders.

• Internal Stakeholders - Are the corporate directors and employees, who are actually
involved in corporate governance process.
• External Stakeholders - May include creditors, auditors, customers, suppliers,
government agencies, and the community at large.

Difference between stake holder and share holder

Shareholders are always stakeholders in a corporation, but stakeholders
are not always shareholders. A shareholder owns part of a public company
through shares of stock, while a stakeholder has an interest in the
performance of a company for reasons other than stock performance or
appreciation.

Internal stakeholders
Within an organisation there are several internal parties involved in corporate
governance. These parties can be referred to as internal stakeholders. A useful
definition of a stakeholder, for use at this point, is 'any person or group that can
affect or be affected by the policies or activities of an organisation'.
Each internal stakeholder has:
• An operational role within the company
• A role in the corporate governance of the company
• A number of interests in the company
Slide 8

The board of directors

• Has the responsibility for giving direction to the company.
• Delegates most executive powers to the executive management, but reserves
some decision-making powers to itself, such as decisions about raising
finance, paying dividends and making major investments.
• Executive directors are individuals who combine their role as director with
their position within the executive management of the company.
 • Non-executive directors (NEDs) perform the functions of director only, without
any executive responsibilities.
• Executive directors combine their stake in the company as a director with their
stake as fully paid employees, and their interests are, therefore, likely to differ
from those of the NEDs.
• NEDs Often responsible is to advising the board on corporate governance
matters and ensuring board procedures are followed.
- .
Company secretary
May act as the general administrator and head office manager. This role may
include a responsibility for maintaining accounting records, corresponding with
legal advisers, tax authorities and trade associations.
• Does not have the same legal responsibilities as directors.
• Should always act in the interests of the company in any event of conflict or
dispute with directors.
• Is responsible to the board and accountable through the chairman and Chief
Executive Officer (CEO) for duties carried out.
• Has the same interests and claims in the company as other employees.
• Remuneration package should be settled by the board or remuneration
committee. Advising on good governance practices and compliance of
Corporate Governance norms as prescribed under various Corporate,
Securities and Other Business Laws and regulations and guidelines made
thereunder.

Duties vary with the size of the company, but are likely to include:
- arranging meetings of the board
- drafting and circulating minutes of board meetings
- ensuring that board decisions are communicated to staff and outsiders
- completing and signing of various returns
- filing accounts with statutory authorities
- Maintaining statutory documents and registers required by the authorities
Management
• Responsible for running business operations.
• Accountable to the board of directors (and more particularly to the CEO).
• Will take an interest in corporate governance decisions which may impact
their current position and potential future positions (as main board directors,
possibly)
• Individual managers, like executive directors, may want power, status and a
high remuneration.
• As employees, they may see their stake in the company in terms of the need
for a career and an income.
Employees
• Have a stake in their company because it provides them with a job and an
income.
• Have expectations about what their company should do for them, e.g. security
of employment, good pay and suitable working conditions.
• Some employee rights are protected by employment law, but the powers of
employees are generally limited

Slide 9

External stakeholders
A company has many external stakeholders involved in corporate governance.
Each stakeholder has:
• A role to play in influencing the operation of the company
• Its own interests and claims in the company
• A stakeholder claim is where a stakeholder wants something from an
organisation. These claims can be concerned with the way a stakeholder may
want to influence the activities of an organisation or by the way they are
affected by the organisation.
https://www.diligent.com/en-gb/blog/the-role-of-the-company-secretary-and-board-meetings/

https://www.investopedia.com/ask/answers/08/difference-between-a-shareholder-
and-a-
stakeholder.asp#:~:text=Shareholders%20are%20always%20stakeholders%20in,tha
n%20stock%20performance%20or%20appreciation.

https://asq.org/quality-resources/stakeholders
https://corporatefinanceinstitute.com/resources/knowledge/finance/stakeholder/
https://www.iod.org.nz/resources-and-insights/starting-a-board/types-of-
directors/#

https://www.infosys.com/about/management-profiles.html

https://www.ril.com/OurCompany/Leadership/BoardofDirectors_OLD.aspx

https://www.itcportal.com/about-itc/leadership/board-of-directors.aspx

https://www.biocon.com/investor-relations/corporate-governance/board-of-
directors/

https://www.youtube.com/watch?v=JGZJjqhA9wY
https://www.youtube.com/watch?v=ZzqvF9uJ1hA

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Class 4

https://www.investopedia.com/ask/answers/031815/what-role-agency-
theory-corporate-
governance.asp#:~:text=What%20Is%20the%20Role%20of%20Agency%
20Theory%20in%20Corporate%20Governance%3F&text=Agency%20the
ory%20is%20used%20to,without%20regard%20for%20self%2Dinterest.

https://www.investopedia.com/terms/a/agencytheory.asp

https://efinancemanagement.com/financial-management/agency-theory

https://analystprep.com/cfa-level-1-exam/corporate-
finance/relationships-corporate-governance/

https://analystnotes.com/cfa-study-notes-principal-agent-and-other-
relationships-in-corporate-governance.html

https://bizfluent.com/about-6729036-agency-theory-corporate-
governance.html

https://www.youtube.com/watch?v=hi93--8jnpk

Slide 10
Agency Theory

Agency theory is a group of concepts describing the nature of the agency

relationship deriving from the separation between ownership and control.

Agency theory and corporate governance

Agency theory can help to explain the actions of the various interest groups in
the corporate governance debate.

Historically, companies were owned and managed by the same people. For
economies to grow it was necessary to find a larger number of investors to
provide finance to assist in corporate expansion.
This led to the concept of limited liability and the development of stock
markets to buy and sell shares.
 Limited liability – the concept that shareholders are legally responsible for
the debts of the company only to the sum of the nominal value of their shares.
Stock market – the “market” in which publicly held shares are issued and
traded.
Delegation of running the firm to the agent or managers.
Separation of goals between wealth maximisation of shareholders and the
personal objectives of managers. This separation is a key assumption of
agency theory.
Possible short-term perspective of managers rather than protecting long-
term shareholder wealth.
Divorce between ownership and control linked with differing objectives
creates agency problems.

Key concepts of agency theory

A number of key terms and concepts are essential to understanding agency

theory.
An agent is employed by a principal to carry out a task on their behalf.
Agency refers to the relationship between a principal and their agent.
Agency costs are incurred by principals in monitoring agency behaviour
because of a lack of trust in the good faith of agents.
By accepting to undertake a task on their behalf, an agent becomes
accountable to the principal by whom they are employed. The agent is
accountable to that principal.
Directors (agents) have a fiduciary responsibility to the shareholders
(principal) of their organisation (usually described through company law as
'operating in the best interests of the shareholders').
Agent objectives (such as a desire for high salary, large bonus and status
for a director) will differ from the principal's objectives (wealth
maximisation for shareholders)
The most important agency costs are the external audit fee, attending

https://bizfluent.com/about-6729036-agency-theory-corporate-governance.html
 Slide 10 contd….
Corporate management should act in the best interest of a company's
stakeholders, especially the shareholders who own equity but have no
direct voice
The agency theory of corporate governance is quite simple, at least on
the surface. It states that corporate executives have a moral and
financial duty to act in the best interests of the parties they serve,
specifically the shareholders.
In practice, agency theory can sometimes be quite challenging,
especially when there are billions of dollars at stake.

Importance of Agency Theory

Agency theory provides clear parameters for corporate officers

and board members making strategic decisions. It comes in
handy if decision makers have a tendency to be greedy and
profit at the expense of the company. It is also an invaluable
guideline when a company's long-term interests conflict with
actions that may provide lesser but more immediate benefits to
stakeholders.

• Decision-making protocols. In theory, buying a share of

company stock gives you a vote in major company
decisions. This right is diluted by the fact that some
stockholders may own a single share, giving them a
single vote, while others own thousands of shares, giving
them thousands of votes. Executives and board members
should represent all shareholders, but they might
overrepresent those who own the most equity. Agency
theory is a step toward navigating these complex and
sometimes conflicting obligations.

• Greedy executives. The people with the power to make

high-level corporate decisions are often directly in line to
 benefit from some of these decisions, especially with
regard to issues of corporate pay. In a perfect world, high
pay and large bonuses for executives would motivate and
reward them for quality work that brings in extra income
for all shareholders. In the real world, high corporate pay
can come at the expense of the bottom line that is divided
among the broader pool of shareholders.

• Long-term vs. short-term interests. It may be in the

best interests of a company to invest in the future, but
these outlays often come at the expense of short-term
rewards such as shareholder dividends. Executives
conscientiously practicing corporate agency theory will
use the knowledge and skills that landed them in
management positions to make the best calls possible for
the organization as a whole.

SLIDE 11
Are conflicts common in a organisation?
The agent is expected to act in the best interest of the principal.
It is however not unusual for principal-agent relationships to
lead to conflicts. The most common example of this occurs
when managers, acting as agents, do not act in the best
interest of the shareholders of the company (the principals).

Let us look into various corporate relationships

➢ Shareholder and Manager or Director Relationships
Directors and managers (agents) are expected to act in the
best interests of the shareholders (principal) by maximizing the
company’s equity value. These two groups, however, tend to
have conflicting interests on issues related to the risks that a
company should undertake. Managers and directors tend to act
in a more risk-averse manner to better protect their
employment status. On their part, shareholders would want
directors and managers to accept more risk to maximize equity
value.
In addition, managers usually have greater access to
information and are more knowledgeable about the company’s
affairs than the shareholders. This information asymmetry
makes it easier for managers to make strategic decisions that
are not necessarily in the best interests of shareholders.
➢ Controlling and Minority Shareholder Relationships
Minority shareholders usually have limited or no control over
the management. Similarly, they have limited or no voice in
director appointments or in major transactions that could
directly impact shareholder value. As a result, conflicts between
minority and controlling shareholders usually occur. Such
conflicts arise when the opinions or desires of the minority
shareholders are eclipsed by the influence of the controlling
shareholders.
➢ Manager and Board Relationships
Whereas managers are involved in the day-to-day operations of
a company, the board of directors, especially the non-executive
board members, are not. This leads to information asymmetry
and makes it difficult for the board to effectively carry out its
functions.
➢ Creditor Versus Shareholder Interests
Creditors’ interest is to have a company undertake activities
that promote stable financial performance and maintain default
risk at an acceptable level. This essentially guarantees a safe
return of their principal and payment of interest by the
company. Shareholders, on the other hand, prefer to have the
company venture into riskier activities that have high return
potential and are as such more likely to enhance equity value.
There is, therefore, a divergence of interest in risk tolerance
between these two groups.

➢ Shareholders and Auditors:

Look for the explanation in next page

➢ Other Stakeholder Conflicts

Examples of other conflicts between stakeholders include
conflicts between, shareholders and Auditors, customers and
shareholders, customers and suppliers, and shareholders and
governments or regulators.

https://analystprep.com/cfa-level-1-exam/corporate-
finance/relationships-corporate-governance/
SLIDE 12

What are Agency Costs?

Agency costs are internal costs incurred due to the

competing interests of shareholders (principals) and the
management team (agents). Expenses that are associated
with resolving this disagreement and managing the
relationship are referred to as agency costs.

The key takeaway point is that these costs arise from the
separation of ownership and control. Shareholders want to
maximize shareholder value, while management may
sometimes make decisions that are not in the best interests
of the shareholders (i.e., those that benefit themselves).

For example, agency costs are incurred when the senior

management team, when traveling, unnecessarily books
the most expensive hotel or orders unnecessary hotel
upgrades. The cost of such actions increases the operating
cost of the company while providing no added benefit or
value to shareholders.
video….
https://corporatefinanceinstitute.com/resources/knowledge/finance/agency-
costs/

https://www.youtube.com/watch?v=I--GOjK8KNk

https://www.youtube.com/watch?v=cD28QzpbcjY
Class 5

https://www.youtube.com/watch?v=fsSIoGaF-8A

https://corporatefinanceinstitute.com/resources/careers/jobs/board-of-
directors/
 SLIDE 13

In a corporation, a board of directors is a group of elected

individuals representing the shareholders.
The board is a governing body that meets at regular
intervals to set policies and oversee corporate
management.
A board of directors is a requirement for every public
company. Non-profit and private organisations may also
have boards of directors.
The Companies Act, 2013 does not contain an
exhaustive definition of the term “director”.

Section 2 (34) of the Act prescribed that “director”

means a director appointed to the Board of a
company.

A director is a person appointed to perform the

duties and functions of director of a company in
accordance with the provisions of the Companies
Act, 2013.

Section 2 (10) "Board of Directors" or "Board", in

relation to a company, means the collective body of
the directors of the company;
 However, the authority of the board is subject to the
limitations imposed by the Memorandum of
Association, Articles of Association of the company
and there relevant provisions of the Companies Act,
1956.

What does a board of directors do?

For the most part, the board is a trusted advisor (fiduciary)
on behalf of shareholders.
The hiring and firing of senior executives, dividend
policies, options policies, and executive compensation
are the main issues under a board’s remit.
The board of directors also ensures the company has
sufficient, well-managed resources at its disposal while
also helping it set broad goals and supporting the
executive team’s responsibilities

SLIDE 14
The Role of the Board of Directors

The board of directors, including the general

manager or CEO (chief executive officer), has very
defined roles and responsibilities within the business
organization.

Essentially, it is the role of the board of directors to

hire the CEO or general manager of the business
and assess the overall direction and strategy of the
business.
 The CEO or general manager is responsible for
hiring all of the other employees and overseeing the
day-to-day operation of the business.

Problems usually arise when these guidelines are

not followed.

Conflict occurs when the directors begin to meddle

in the day-to-day operation of the business.

Conversely, management is not responsible for the

overall policy decisions of the business.

The Board of Directors key function is to ensure the

company's prosperity whilst meeting the appropriate
interests of the shareholders.

However, the authority of the board is subject to the

limitations imposed by the Memorandum of
Association, Articles of Association of the company
and the relevant provisions of the Companies Act,
2013.

Functions of Board of Directors (In general)

• Creating dividend policies

• Hiring and firing of senior executives (especially
the CEO)
• Establishing compensation for executives
• Supporting executives and their teams
 • Maintaining company resources
• Setting general company goals
• Making sure that the company is equipped with the
tools it needs to be managed well

UK

https://www.icaew.com/technical/corporate-
governance/codes-and-reports/uk-corporate-
governance-code#code

The UK Corporate Governance Code (formerly

known as the Combined Code) sets out standards of
good practice for listed companies on board
composition and development, remuneration,
shareholder relations, accountability and audit.

For your information.

On 16 July 2018 the FRC published the updated UK

Corporate Governance Code. The new Code applies to
accounting periods beginning on or after 1 January 2019

The new code is accompanied by updated guidance on

board effectiveness and UK Corporate Governance
Code 2018 highlights.
Let us examine the role and responsibilities of Board of Directors in
terms of Companies Act, 2013 and other legal provisions. Company is a
legal personality and BOD's are its body and mind.

https://www.legalserviceindia.com/legal/article-4617-role-of-directors-in-
corporate-governance.html

PPT covered by students

 SLIDE 15
The role of the boards has been under severe criticism
for failing to ensure quality of corporate governance in
general, and to prevent corporate frauds in particular.

The boards of corporates which failed in recent times —

like Satyam, ILFS, DHFL, PMC, Yes Bank — were star-
studded and yet failed to detect brewing frauds by their
promoters.

The boards of these companies could not identify and

check diversion of funds through circuitous routes,
dubious related-party transactions and lending, financial
indiscipline through webs of group companies, the use of
financial reporting to hide frauds and business failures,
continuing deterioration in financial and operational
viability,etc.

Corporate boards today are expected to be more

engaged, more knowledgeable and more effective than in
the past.

One tool that a growing number of boards are using to

examine and improve their effectiveness is the board
evaluation.

Annual assessments have become the norm for boards

in many countries, with nearly all listed companies in
Canada, France, the U.K. and the U.S. conducting some
sort of assessment each year.

The practice is also gaining attention in many Asia Pacific

markets, where the issue of board effectiveness is
moving up on the corporate governance agenda.

How to deliver good corporate governance by first making the boards effective

Read more at:

https://economictimes.indiatimes.com/news/company/corporate-trends/how-to-deliver-good-corporate-
governance-by-first-making-the-boards-
effective/articleshow/85237104.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
Class 6
Slide 16
Different approaches to Corporate Governance

In general what is the difference between a rules-based

and principle-based approach to regulation?

A rules-based approach to regulation prescribe in detail

or gives a set of rules, how to behave whereas a principle-
based approach to regulation outcomes and principles
are set and the controls, measures, procedures on how
to achieve that outcome is left for each organisation to
determine.

An example to understand rule based and principle

based in general

A rules-based approach: “In South Africa, the legal limit

for blood alcohol level is 0.05g per 100ml whilst
driving” There is a clear rule on how to behave when
drinking and driving.
Principle-based approach: “Please consume alcohol
responsibly before driving on public roads.” The outcome
is clear, namely responsible driving on the roads, but the
manner in which to achieve this is left open for
interpretation.

https://portal.abuad.edu.ng/lecturer/documents/150818733
1APPROACHES_TO_CORPORATE_GOVERNANCE.pdf
https://learnbusinessconcepts.com/rules-based-approach-
vs-principles-based-approach/
Board Committees

1) Audit Committee
2) Nomination and remuneration committee
3) Risk Management Committee
4) CSR Committee
5) Stakeholders and ESG committee

https://www.biocon.com/investor-relations/corporate-
governance/board-committees/#1589165934116-f009732e-
da74ef4a-83a8

https://www.infosys.com/investors/corporate-
governance/Documents/committee-composition.pdf

Class 7
Class 7

Before playing below videos finish explaining BOD from below page
completely along with class 6 videos above.

Audit committee, Nomination committee, remuneration committee

https://www.youtube.com/watch?v=Ubd6QsH2gMc

https://www.youtube.com/watch?v=dwufjlI9_eo
https://www.youtube.com/watch?v=WUh7AJslY_U

https://www.youtube.com/watch?v=I3cRLk-wIOQ

https://taxguru.in/company-law/nomination-remuneration-
committee.html

https://www.cr-
power.com/en/InvestorRelations/CorporateGovernance/BoardCommittee
s/201312/P020141216643862411311.pdf

https://www.infosys.com/investors/corporate-
governance/documents/nomination-remuneration-policy.pdf

https://www.infosys.com/investors/corporate-
governance/documents/archives/nomination-remuneration-committee-
charter.pdf

https://www.mca.gov.in/SearchableActs/Section177.htm

https://www.infosys.com/investors/corporate-
governance/documents/audit-committee-charter.pdf

http://www.mca.gov.in/SearchableActs/Section178.htm

https://corporatefinanceinstitute.com/resources/knowledge/accounting/
audit-committee/

https://taxguru.in/company-law/audit-committee-section-177-companies-
act2013.html

https://www.indiafilings.com/learn/audit-
committee/#:~:text=In%20India%2C%20the%20constitution%20of,2009%
20and%20the%20SEBI%20Act.&text=Every%20member%20of%20an%20
audit,or%20related%20financial%20management%20expertise.

https://taxguru.in/company-law/key-managerial-personnel-kmp-
companies-act-
2013.html#:~:text=According%20to%20Section%202(51,Chief%20Financi
al%20Officer%20(CFO).
https://business.gov.nl/running-your-business/business-
management/governance/one-tier-or-two-tier-board-as-a-governance-model/
https://www.termscompared.com/difference-between-unitary-and-two-tier-board-of-
directors/#:~:text=One%2Dtier%20board%20of%20directors,strategic%20decisions
%20of%20a%20company.&text=Two%2Dtier%20board%20of%20directors%20is%2
0a%20system%20in%20which,board%20and%20a%20supervisory%20board.

https://askanydifference.com/difference-between-one-tier-and-two-tier-board-of-
directors/

What is a two-tier board?

In the two-tier system (dualistic governance model), there
is a separation between management and supervisors.
The board is responsible for the day-to-day management
of the company. A separate supervisory board supervises
the management. Most private limited and public limited
companies in the Netherlands (bv and nv) have a two-tier
board.

What is a one-tier board?

If you have a one-tier board (monistic governance model),
there is only one board that consists of both the
management and the supervisors. The supervisors are
part of the board. Within the one-tier board a distinction is
made between executive directors and non-executive
directors. Only a non-executive director may fulfil the task
of chairperson of the board. You can include a one-tier
board in the articles of association
 The main difference between a One-Tier Structure of
Board of Directors and a Two-Tier Structure of Board
of Directors is that there is a single committee that
makes all the important managerial decisions for the
organisation in a One-Tier system, whereas there are
two separate committees for the organization’s
policymaking in the Two-tier system.

In a One-Tier Structure of the Board of Directors, the

single committee makes all management decisions. It
comprises the executive as well as non-executive
directors from the organization. One-tier Board of
Directors is also called the Unitary Board of Directors.

A Two-Tier System, on the other hand, is responsible for

the supervision of the policy executions. The two
separate boards, Management and Supervisory Boards
have separate departments to look after and are headed
by two different people. Management Board is headed by
the Chief Executive Officer of the Company whilst the
Supervisory Board is headed by the Chairman of the
Organization.

Comparison Table Between One-Tier Board of

Directors and Two-Tier Board of Directors

Parameters of
One-Tier Board of Directors Two-Tier Board of Directors
Comparison

One-Tier Board includes both the
executive directors from the
Composition
company and the non-executive
directors of the company. Both stand
Two-Tier Board has a separate management board
and supervisory board. The supervisory board is
superior in authority and can hire and fire members
of the management board
 at the same level and have similar
authority

Since in a Two-Tier board, there are two separate

One-Tier board has no segregation
boards. Namely, management and supervisory.
of authority. Therefore, there is no
Distribution of They have different departments to look after.
distribution of authority. Everybody
Roles Management looks after the management of the
stands at the same level and have the
organization whereas the Supervisory board takes
authority to make decisions in unity.
care of the policy-making of the company

In a One-Tier Board of Directors,

there is not much involvement of the Since Two-Tier Board has two boards, and there
Involvement of
shareholders, since in a board there are different departments there is provision to
Stakeholder
cannot be many external people include members from amongst the shareholders.
involved

In the Two-Tier Board system, where there are two

In One-Tier Board, is lead by the
Chairman and
chairman of the board. He
CEO
supervises the entire board.
boards, the Management Board is lead by the Chief
Executive Officer of the Company, and the
Supervisory Board is presided by the Chairman of
the organization.

The decisions made by the One-tier
board is quicker than Two-tier
Making of
boards. The reason being that, it is a
Decisions
single and small board, and if all
agree, it is final.
In a two-tier board, since there are two segregated
boards, they both have to agree for a decision to be
made. It takes time. and since the making of
decisions and executing are governed by two
different boards, it takes much longer
Board Committees Importance
The boards of larger organisations often delegate work to committees of directors to
more effectively deal with complex or specialised issues and to use directors’ time
more efficiently. Committees make recommendations for action to the full board,
which retains collective responsibility for decision making.
Involvement in committees allows directors to deepen their knowledge of the
organisation, become more actively engaged and fully utilise their experience.
Additionally, the existence of committees can indicate to investors that the board is
taking particular issues seriously.
Basically, Committees enable better management of full board's time and allow
in-depth scrutiny and focused attention, which will lead ultimately to evolve
appropriate strategies. Committees are a sub-set of the board, deriving their
authority from the powers delegated to them by the board.
In Australia,
http://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-
responsibilities/role-of-board-committees?no_redirect=true
https://www.investopedia.com/terms/c/corp-social-responsibility.asp
https://cleartax.in/s/corporate-social-responsibility
http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17518
https://www.ril.com/ar2017-18/report-on-
csr.html#:~:text=Reliance%20has%20strategically%20chosen%20the,and%20Herita
ge%20and%20Urban%20Renewal.
https://www.ril.com/ar2015-16/csr.html
https://www.infosys.com/investors/corporate-governance/documents/corporate-
social-responsibility-policy.pdf
https://www.infosys.com/investors/corporate-governance/social-responsibility.html
https://www.infosys.com/infosys-foundation/initiatives.html
https://www.cadilapharma.com/https://www.cadilapharma.com/about/csr/ast/uploads/
2019/05/Cadila-Pharmaceuticals-CSR-Policy.pdf
https://www.cadilapharma.com/about/csr/
http://www.pepsicoindia.co.in/en-IN/live/story/pepsico-india-csr-policy
https://www.coca-colaindia.com/stories/ccipl-csr-
policy#:~:text=As%20a%20responsible%20corporate%20citizen,over%20the%20pas
t%20several%20years
https://www.coca-colaindia.com/stories/csr-activity
https://www.coca-colacompany.com/sustainable-business
https://www.google.com/search?q=csr+contribution+in+india&rlz=1C1CHBF_enIN91
2IN912&oq=csr+contribution+&aqs=chrome.2.69i57j0l5j0i7i30l4.12646j0j7&sourceid
=chrome&ie=UTF-8

https://www.sbsc.in/pdf/resources/1587721117_Lecture_Notes_on_Code_of_Corpor
ate_Governance.pdf