 No universal definition of corporate

governance
 In the narrowest sense, Friedman defined
corporate governance as “the conduct of
business in accordance with shareholder’s
desires, which generally is to make as much
money as possible, while conforming to the
basic rules of the society embodied in law
and local customs
 OECD has defined corporate governance to mean
“A system by which business corporations are
directed and controlled”
 CII defined as “Corporate Governance deals with
laws, procedures, practices and implicit rules that
determine a company’s ability to take informed
managerial decisions vis-à-vis its claimants – in
particular, its shareholders, creditors, customers,
the state and employees. There is global
consensus about the objective of ‘good’
corporate governance: maximising long-term
shareholders value”
 KMB Committee observe that: “Strong
corporate governance is indispensable to
resilient and vibrant capital markets and is an
important instrument of investor protection.
It is the blood that fills the veins of
transparent corporate disclosure and high
quality accounting practices. It is the muscle
that moves a viable and accessible financial
reporting structure.”
 Narayan Murthy Committee observed that:
“Corporate governance is the acceptance by
management of the inalienable rights of
shareholders as the true owners of the
corporation and of their own role as trustees
on behalf of the shareholders. It is about
commitment to values, about ethical business
conduct and about making a distinction
between personal and corporate funds in the
management of a company.”
 Derives from profit maximisation
 It ensures that the long term strategic
objectives and plans are effectively and
efficiently achieved
 It ensures transparency in the corporate
dealings and transactions
 It concerns the relationship which the
shareholders and the directors share with
each other
 Corporate
Governance

Corporate
(Where wealth of
Governance
innumerable individuals
has been concentrated (Supervising and
into huge aggregates and managing the company
whereby control over this to the best interest of all
wealth has been stakeholders)
surrendered to a unified
direction)
 The theme of corporate governance is to establish
a framework for how the Board of Directors would
oversee the company’s performance and perform
it’s various functions on behalf of the owners.
 It ensures that long term strategic objectives and
plans are established and proper management
structure is in place to achieve these objectives.
 It inspires and strengthens investor’s confidence.
 It ensures transparency in the corporate world.
 It maintains the integrity and reputation of the
organization.
 Problems:
◦ Increasing misdeeds in the corporate world.
◦ Non executive directors do not perform their duties.
◦ Representatives of FI’s on the board do not take
their jobs seriously.
◦ Investors at large are loosing interest in the
management.
◦ IMF and World Bank has warned the Govts of the
third world countries that unless they clamp down
heavily on corruption and mal practices, they are
not interested in providing assistance.
 CG is all about the nitty gritties of how a
company fulfills its obligations to investors
and other stake holders. It is about
commitment to values and ethical business
conduct and a high degree of transparency. It
is about creating shareholder wealth while
ensuring a fair play to all other stake holders
and society at large.
 Purpose, Role and Powers of Board
◦ Board as a main functionary is primarily responsible
to ensure value creation for its stakeholders
◦ Absence of clearly designated role and powers of
Board weakens accountability mechanism and
threatens the achievement of organizational goals
◦ There should be clear identification of purpose,
powers, roles and responsibilities of the Board, CEO
and the Chairman of Board
◦ The board’s purpose should be clearly documented
in a Board Charter
 Legislation
◦ Clear and unambiguous legislations and regulations
are fundamental to effective corporate governance
 Management environment
◦ Setting-up of clear objectives and appropriate
ethical framework
◦ Providing for transparency and clear enunciation of
responsibility and accountability
◦ Implementing sound business planning and
assessment of business risk
◦ Having right people and right skill for the jobs
◦ Evaluating performance
 Board skills- A Board should have a mix of
the following skills, knowledge and
experience:
◦ Operational or technical expertise
◦ Commitment to establish leadership
◦ Financial skills
◦ Legal skills and
◦ Knowledge of Government and regulatory
environment
 Board appointments
◦ To ensure that the most competent people are
appointed on the board
◦ Well defined and open procedure must be in place
for reappointments as well as for appointment of
new directors
◦ High on the priority should be an understanding of
skill requirements of the Board
◦ All new directors should be provided with a letter of
appointment setting out in detail Board’s purpose,
duties and responsibilities
 Board induction and training
◦ Directors must have a broad understanding of the
area of operation of the company’s business,
corporate strategy and challenges being faced by
the board
 Board independence
◦ This can be achieved by associating sufficient
number of independent directors with the board
◦ The board needs to be capable of assessing the
performance of managers with an objective
perspective
 Board meetings
◦ Directors must devote sufficient time and give due
attention to meet their obligations
◦ Effectiveness of board meetings is dependent on
carefully planned agendas and providing relevant
papers and materials to directors sufficiently prior
to board meetings
 Code of conduct
◦ Organization should explicitly prescribe norms of
ethical practices and code of conduct are
communicated to all stakeholders
 Strategy setting
◦ The objective of the company must be clearly
documented in a long term corporate strategy
including an annual business plan together with
achievable and measurable performance targets
and milestones
 Business and community obligations
◦ Commercial objectives and community service
obligations should be clearly documented after
approval by the Board
◦ Stakeholders must be informed
 Financial and operational reporting
◦ The Board requires comprehensive, regular,
reliable, timely, correct and relevant information
which is appropriate to discharge its functions of
monitoring corporate performance
◦ The reports should be available to Board members
well in advance to allow informed decision-making
 Monitoring the Board performance
◦ Board must monitor and evaluate its performance
collectively and also that of individual directors at
periodic intervals, using key performance indicators
besides peer review
 Audit Committee
◦ It is responsible for liaison with the management,
internal and statutory auditors, reviewing the adequacy
of internal control and compliance with significant
policies and procedures, reporting to the Board on the
key issues
 Risk management
◦ There should be a clearly established process of
identifying, analyzing and treating risks, which could
prevent the company from achieving its objectives
◦ Appropriate control procedures in the form of a risk
management plan must be put in place to manage risk
◦ The Board has the ultimate responsibility for identifying
major risks to the organization and ensuring that senior
management takes step to detect, monitor and control
these risks
 Quality of governance primarily depends on
following factors:
◦ Integrity of the management
◦ Ability of the Board
◦ Adequacy of the processes
◦ Commitment level of individual Board members
◦ Quality of corporate reporting
◦ Participation of stakeholders in the management
 Corporate governance thinking is strongly
influenced by geographical boundaries
 Each country is characterized by its rather
‘unique’ governance model
 Therefore, we refer to a corporate governance
model as the specific corporate governance
structures and processes that are embodied
in a country’s legal, institutional and cultural
context
 All characteristics of systems of corporate
governance have legal, institutional and cultural
dimensions and are an useful analytical tool to
cover a major part of the spectrum of governance
models:
◦ the role of capital markets in the national economy
◦ External market for corporate control and anti-take-over
mechanisms
◦ Ownership and control (shareholders right and
protection)
◦ The board system
◦ Disclosure rules and accounting standards
◦ The role of the firm and accountability
 The governance literature identifies two
corporate governance systems i.e. Anglo-
American “market oriented” or “outsider system”
and the Latin/Japanese system “network
oriented” or “insider system”
 The outsider system
◦ Control and ownership are distinct and separate
◦ Since equity ownership is widely dispersed among a
large number of institutional holders and small
investors, control vests with professional managers
◦ The model is also refereed to as principal-agent model
◦ Characterized by long-term financing through equity
and corporate bond markets
 ◦ Shares are widely dispersed among many (anonymous)
shareholders
◦ This system is dominated by listed companies
◦ Managers and directors have the obligation to ensure that
firms are run in the interest of the shareholders

 The insider system

◦ The insider model has two variants:
 European – relatively small compact group of shareholders
exercise control over corporation.
 East Asian – the founding family generally holds the controlling
shares either directly or through holding companies.
◦ Equity and corporate bond markets play a less pronounced
role
◦ Countries have by definition a relatively small stock market
◦ Companies have a concentrated ownership
structure
◦ The insider system attaches more importance to the
interests of all stakeholders
◦ Directors serve as an instrument to create
stakeholder wealth