CORPORATE

GOVERNANCE

PRESENTED BY:
 INTRODUCTION
Corporate governance is the system by which
organisations are directed and controlled.

The Corporate governance structure specifies the

distribution of rights & responsibilities among
different participants in the corporation,such as
board,managers,shareholders, & other
stakeholders, and spells out the rules and
procedures for making decisions on corporate

FROM-Organisation from Economic Co-

operation and Development (April 1999)
 DEFINATION
BY Catherwood, Corporate governance means that
company manages its business in a manner that is
accountable & responsible to the shareholders.In a
wider interpretation,corporate governance includes
company’s accountability to shareholders and
other stakeholders such as
employees,suppliers,customers and local
community.
 PRINCIPLES
Transparency

Accountability

Independence

Reporting
 CORPORATE GOVERNANCE
IN INDIA THE MECHANISM
There are six mechanism to ensure
Corporate governance in our country.
1. The Companies Act 1956
2. The SEBI Act 1992
3. A market for corporate control
4. Participation of block shareholders in the
governance of companies
5. Audit and
6. Code of conduct
 SEBI CODE
To promote & rise the standards of corporate
governance among the companies listed in NSE the SEBI
appointed a committee on corporate governance under
the chairmanship of Kumar Manglam Birla.
Board of directors
Audit Committee
Remuneration of Directors
Board Procedure
Management
Shareholders
Report on corporate governance
Compliance
 Disclosure and transparency
Transparency is essential to risk assessment
Disclosure and transparency are the partners of
good governance. They demonstrate the quality
and reliability of information -- financial and non-
financial-- provided by management to lenders,
shareholders, and the public
 Why disclosure and transparency
matter
Empiricalevidence indicates that high standards of transparency
and disclosure can have a material impact on the cost of capital.

Reliableand timely information increases confidence among

decision-makers within the organization and enables them to make
good business decisions directly affecting growth and profitability.

Information also affects decision makers outside the entity--

shareholders, investors and lenders-- who must decide where and
at what risk to place their money.

The information a company provides should show decision-makers

and outside interests whether and to what extent corporations meet
legal requirements
 CON’T
Disclosure helps public understanding of a company's
activities, policies and performance with regard to
environmental and ethical standards, as well as its relationship
with the communities where the company operates.

Disclosure and transparency, as well as proper auditing, serve

as a deterrent to fraud and corruption, allowing firms to
compete on the basis of their best offerings and to
differentiate themselves from firms who do not practice good
governance.

Research has demonstrated that disclosure and transparency

also enhance stock market liquidity.
 ROLE OF AUDITORS
Financial reporting is a crucial element necessary
for the corporate governance system to function
effectively.[9] Accountants and auditors are the
primary providers of information to capital
market participants. The directors of the
company should be entitled to expect that
management prepare the financial information in
compliance with statutory and ethical
obligations, and rely on auditors' competence.
 CON’T
One area of concern is whether the auditing firm acts as both the
independent auditor and management consultant to the firm they are
auditing. This may result in a conflict of interest which places the integrity
of financial reports in doubt due to client pressure to appease
management. The power of the corporate client to initiate and terminate
management consulting services and, more fundamentally, to select and
dismiss accounting firms contradicts the concept of an independent
auditor. Changes enacted in the United States in the form of the Sarbanes-
Oxley Act (in response to the Enron situation as noted below) prohibit
accounting firms from providing both auditing and management consulting
services. Similar provisions are in place under clause 49 of SEBI Act in India.

The Enron collapse is an example of misleading financial reporting. Enron

concealed huge losses by creating illusions that a third party was
contractually obliged to pay the amount of any losses. However, the third
party was an entity in which Enron had a substantial economic stake. In
discussions of accounting practices with Arthur Andersen, the partner in
charge of auditing, views inevitably led to the client prevailing.
BOARD OF DIRECTORS
The board is key to good corporate
governance
An effective board of directors, properly
constituted, is the linchpin of good corporate
governance. Boards are responsible for
managerial performance in meeting the
stated objectives of the corporation,
compliance with applicable laws and
regulations, and protection of shareholder
rights.
 How the board is
constituted
The board should be composed of qualified individuals of integrity with a diversity
of experience. At a minimum, qualified means a good working knowledge of
corporate finance.

Each board member should be able to devote sufficient time to his/her duties and
responsibilities

Boards should be composed of a substantial number of independent directors.

Boards should disclose to their shareholders and stakeholders their criteria for
independence.

Board committees on compensation, audit, and nominating should consist only of

independent directors. Executive sessions of the board should also be comprised
only of independent directors.

For family-owned business, outside directors are essential to "ask the hard
questions" of family owners, where the relationship between the business and the
family may be blurred.
 Board responsibilities
include:
Approve a core philosophy and mission

Monitor and evaluate corporate performance

Monitor and evaluate corporate strategy

Review and approve material transactions not in the course of ordinary business

Determine executive compensation

Evaluate senior management performance

Manage Executive Director/CEO succession

Maintain legal and ethical practices

Communicate with shareholders

Evaluate board performance

 SHAREHOLDERS
Shareholder interests are paramount.
A main purpose of corporate governance is to protect the interest of
a company's owners - the shareholders. The OECD principles on
corporate governance pay special attention to the rights of
shareholders and their equitable treatment. Here is a summary:

•Basic shareholder's rights should include the right to secure ways of

registering ownership, transfer shares, obtain timely and relevant
information on the corporation, vote in general shareholder
meetings, elect members of the board, and share in the profits.

•Shareholders should have the right to participate in, and be

sufficiently informed on decisions concerning fundamental corporate
changes such as amendments to the statutes, or articles of
incorporation or similar governing documents, and extraordinary
transactions that in effect result in the sale of the company.
 CON’T
•Shareholders should be informed of the rules, including voting
procedures, that govern general shareholders' meetings. Shareholders
should be given:

sufficient and timely information about the date, location and agenda, as well as
issues to be decided at the meeting;
opportunity to ask questions of the board and to place items on the agenda of
general meetings, subject to reasonable limitations;
the right to vote in person or in abstentia with equal treatment of such votes.

•Capitalstructures and arrangements that enable certain shareholders to

have a degree of control dis proportionate to their equity shares should
be disclosed.

•The rules and procedures concerning the acquisition of corporate control

in captial markets, and extraordinary transactions such as mergers, and
sales of substantial portions of shares, should be clearly articulated and
disclosed so that investors clearly understand their rights and recourse.
 CON’T
•Shareholders, including institutional investors, should carefully
consider the costs and benefits of excercising their voting rights.

•Allshareholders should receive equitable treatment, including

minority and foreign shareholders and all shareholders should be
able to obtain effective redress for violation of their rights. More
specifically:

shares of the same class should have the same vote,

information on the voting right should be provided
before the purchase of the share,any changes in voting
rights should be subject to shareholder vote,
custodians or nominees should cast votes as agreed
upon with the beneficial
 ACCOUNTING STANDARDS
Accountancy standards must be beyond reproach.

The economic and financial crisis which began in 1998 in certain Asian
countries and spread to other regions of the world, as well as recent
spectacular bankruptcy cases in the United States, underlined the need for
reliable and transparent accounting and financial reporting to support
sound decision-making by investors, lenders and regulatory authorities.

Accounting standards are essential to the efficient functioning of the

economy because decisions about the allocation of resources/investment
rely on credible, concise, transparent, easily comparable and
understandable financial information about the operations and financial
position of companies. In today's globalized economy, business decision
makers are becoming more vocal about the universal application of
identical accounting principles which would be a major contribution to
creating better and more easily comparable standards of financial
reporting.
 CON’T
National accounting standards should be in
conformity with international accounting and
financial reporting standards established by the
International Accounting Standards Board .

Accounting Standards as their own either without

amendment or with minor additions or deletions.
For assistance in designing new standards or
improving existing ones, countries can turn to
international initiatives such as the
Financial Stability Forum and the
International Forum on Accountancy Development
 CON,T
Management should not use legitimate or
illegitimate accounting strategies to artificially
enhance their reported earnings

Companies should not disclose only information

on financial performance, but the intangibles
and nonfinancial information that matter most
to value creation and sound decision-making;
 REGULATORY FRAMEWORK
Several national governments have already passed legislation dealing with the various
areas of corporate governance. In general, most national governments seem to support
governance regulation in response to market crisis or corporate fraud.

Corporate governance is a way to regain credibility with the public, particularly with
investors.
 
. Laws may dictate how rights and responsibilities are distributed between the general
assembly, the board of directors and the management.

In many countries, legislation outline the compensation, evaluation, and composition of

the Board of Directors, as well as the directors' responsibilities.

These governments seem to believe that the Board has a direct effect on the
governance standard of the company. If the board is well managed, and the interests of
both employees and investors are properly represented, the company will perform
efficiently.
 
 CON’T
The most common legislation under corporate
governance addresses accounting practices and
financial reporting. The government and public
have a right to accurate financial information.
 
The aim of most legislation, as well as many of the
codes of best practice, is to protect shareholder
rights. Both laws that ensure shareholder
representation on the Board, and those that
regulate auditing practices, have been created to
safeguard investor interests.
 
 CON’T
Legislation may be included in current
corporate or finance law, mandated by a
securities exchange commission, or covered
by recent corporate governance regulation.

Many nations have created commissions to

examine national governance standards, with
the intent of passing or amending legislation
in the future..
 
 WHAT IS CORPORATE SOCIAL
RESPONSIBILITY(CSR)?

A commitment to behave ethically and contribute to

economic development while improving the quality of life
of our workforce and their families as well as the local
community at large.
 WHY CORPORATE SOCIAL RESPONSIBILITY?

 Business is a product of environment

 Impact on the environment

INTERNAL BUSINESS EXTERNAL

ENVIRONMENT DECISION ENVIRONMENT
Models of Corporate
Social Responsibility
 ACKERMEN’s MODEL:

First Phase: Top management

recognize social problem.

Second Phase: Co. appoints staff

specialists

Third Phase: Implementation

Pro’s
and
Cons
 ARGUMENTS FOR SOCIAL RESPONSIBILITY

 Changed public expectations of Business

 Public Image

 Avoidance of Government Regulation

 Business has the resources

Prevention is better than cure

 ARGUMENTS AGAINST SOCIAL RESPONSIBILITY

 Profit maximization

 Society has to pay the cost

 Lack of Social Skills

 Lack of accountability

 Friedman’s View- Economic & Legal

 COMITTEES:-
Shri Kumar Mangalam Committee:

Constituted in May 1999 to promote and raise the

standard of corporate governance in India.

Mandatory recommendations of Birla Committee:

 Applies to listed companies with paid up capital of Rs.3

crore and above.
 Composition of Board of Directors- Optimum
combination of executive and non-executive directors.
 Audit Committee- With 3 independent directors with
one having financial and accounting knowledge.
Mandatory Recommendations of Birla Committees:

 Remuneration Committee

 Board Procedures- Atleast 4 meetings of the board in a

year with maximum gap of 4 months between 2
meetings.

 Director shall not be a member of more than 10

committees and shall not act as chairman of more than 5
committees across all companies.
 Non-Mandatory Recommendations of Birla
Committee:

 Role of chairman

 Remuneration committee of Board

 Shareholder’s Right for receiving half yearly financial

performance

 Sale or whole of Substantial part of the undertaking

 Corporate restructuring

 Further issue of capital

 Venturing into new business.

 Naresh Chandra Committee:

Committee headed by Shri Naresh Chandra constituted in

August 2002 to examine corporate Audit, Role of
Auditors, Relationship of Auditor and Company.

Recommendations:-
 Recommended a list of disqualification for audit
assignments like Direct relationship with company, any
business relationship with client, personal relationship
with director.
 Audit Firms not to provide services such as accounting,
internal audit assignments etc to clients.
 Audit committee to be first point of reference for
appointment of auditors.
 CEO & CFO of listed company to certify on fairness,
correctness of annual audited accounts.
 Composition of Board of Directors.
SEBI constituted a committee headed by the Shri N.R.
Narayana Murthy to review existing code of corporate
governance.

Recommendations:

 Strengthen the responsibilities of Audit Committee

 Improving Quality of Financial Disclosures
 Utilization of proceeds from IPO
 To Assess & Disclosure Business Risks
 Formal code of conduct for board.