Unit- I

Introduction to Corporate
Governance
Introduction
 Corporate governance is nothing more than how a
corporation is administered or controlled. Corporate
governance takes into consideration company
stakeholders as governmental participants, the
principal participants being shareholders, company
management, and the board of directors.
 Adjunct participants may include employees and
suppliers, partners, customers, governmental and
professional organization regulators, and the
community in which the corporation has a presence.
Cont…
 Because there are so many interested parties, it’s inefficient
to allow them to control the company directly.
 Instead, the corporation operates under a system of
regulations that allow stakeholders to have a voice in the
corporation commensurate with their stake, yet allow the
corporation to continue operating in an efficient manner.
 Corporate governance has become a well-discussed and
controversial topic among corporations, shareholders, and
the general public.
 However, the debate over what constitutes “good
governance” often lacks structure, making it difficult for
shareholders and stakeholders alike to have a constructive
discussion about how to improve corporate outcomes.
What is Corporate Governance?
 It is the system of rules, practices and processes by which a
company is directed and controlled.
 Corporate Governance specifies the distribution of
rights and responsibilities among different participants in
corporation.
 Corporate governance essentially involves balancing the
interests of a company's many stakeholders, such as
shareholders, management, customers, suppliers,
financiers, government and the community.
 Corporate Governance refers to the way a corporation is
governed. It is the technique by which companies are
directed and managed.
Definition
 In the words of L. V. V Iyer, “Corporate governance is a
set of systems and processes which ensure that the
company is managed to best interests‟ of all the
stakeholders. The set of systems that help the task of
corporate governance to include certain structural and
organizational aspects; the process that helps
corporate governance will embrace how things are done
within such structure and organizational systems”.
Cont…
 According to Cadbury Committee Report (1992),
“Corporate governance is the system by which the
companies are directed and controlled. The board of
directors is 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 appropriate governance is in place”.
Salient Features of C. G
 It is a set of system and process which embrace
organizational structure.
 It ensures that company works in the best interest of
stakeholders.
 It denotes direction and leadership
 It explains relationship b/w directors, owners and
managers.
 It attempt to put a check on working of an
organization.
Cont…
 It protects interest of bond holders on one hand and
society on other hand.
 It holds the balance b/w economic and social goals.
 It ensures timely flow of all information to board
directors.
 It ensures the sound system of risk management and
internal control.
 It leads to transparency in working of corporate affairs.
Implementation of C. G
 Commitment of management for the principal of
integrity and transparency in business operations.
 Legal and administrative framework created by Govt.
Improving C. G
 Abolition of SICA (Sick Industries Companies Act)
 Implementation of Benami Transactions Prohibition.
 Compliance with applicable rules and
regulations.(Clause 49 of SEBI & Comp. Act 1956)
 Appropriate constitution of BOD
 Timely flow of information to BOD
 Timely information to Audit Committee
 Sound System of risk & internal control
Cont.
 Nomination & compensation committee
 Transparency
 Timely Disclosure (Annual Report)
 Audit committee
 Code of contact
 Social Commitment
 Responsibility of investors (Voting)
 Equitable treatment of shareholders
 Dialogue with institutional shareholders
Cont.
 Role of stakeholders in corporate governance
 Constructive use of Annual General Meeting
 Proper means of communication
 Shareholders / Investors Grievances Committee
Scope of C. G
 It provides the structure for setting objectives and
providing means to attain them.
 It provides Good leadership which is both transparent
and accountable.
 It is concerned with holding the balance between
economic and social goals and b/w individual and
community goals.
 it assures the corporate entities are being controlled
and directed.
 It concerned with the ethics, Values and morals of the
company and its directors.
Benefits of the Good C. G
 Reduce risk
 Stimulate Performance
 Improve access to capital markets
 Enhance the marketability of goods and services.
 Improves leadership
 Demonstrate transparency and social accountability
 Promoter’s transparency in decision making process.
Importance of Corporate
Governance
 It takes an appropriate action to ensure that the
company's financial statement.
 It discloses the nature type and value, of all material
related party transactions.
 It helps to disclosing the full remuneration, including
present and future benefits, of each director, the CEO
and 5 most senior executives.
 It ensure the complies with the provision of a
recognized code of governance.
Cont.
 It discloses what action the company has taken to
promote a timely and balanced disclosure of all
material matters.
 It discloses what action the board has taken to
establish a sound system of risk management and
system of internal control.
 it states whether the board structures companies a
majority of non-executive independent directors,
including the status of the chairman and include
relevant details of each directors’.
Cont.
 It discloses the board’s role and functions.
 It discloses the process adopted to evaluate the
performance of the board, board members and the
CEO.
 It discloses the nature of the company’s environmental
, occupational health and safety and workforce
management police and practices.
Contents of code
A Code of ethics provides company policy on corporate
ethical standards which are as follows:
 Employment practices
 Responsibility to the community and other identified
stakeholders.
 Relations with customer and suppliers.
 Responsibility to shareholders and financial
community.
Benefits of ethical and
environmental reporting
 Allowing companies to assure investors and lenders
that environment and occupational risk are
responsibly managed.
 Enhancing employee moral.
 Minimizing the risk of regulatory intervention.
 Allowing high quality public relation.
 Establish ethical, social and environmental issues as
key policy and strategy elements.
Dimensions in C. G
 Legislation laws and infrastructure
 Corporate themselves
 Society
C. G: Past and Present Practices
 The 1990’s marked a remarkable change in the Indian
business environment (Private sector Entry)
 In 1996, CII ( Confederation of Indian Industry) took a
special initiative on C. G. (To develop and promote code of
C. G)
 SEBI Appointed “Kumara Mangalam Birla C. G Committee”
and the recommendations made by the committee by
accepted and implemented by SEBI in 2000. In recent years
, the “Narayan Murthy Committee” and “Naresh Chandra
Committee” were also setup by SEBI.
 Effective C. G. ensure the better resources a location and
management rising the return on capital.
Cont.
 The world bank’s C. G country assessment are a
diagnostic instrument based on the OECD principals
of C.G.
 The recent years in Indian a series of legal and
regulatory reforms have transformed in Indian C. G.
Steps for Making C. G Efficient
 Commitment of the management
 Legal and Administration framework
 Transparency in decision making
 Proper implementation of codes
 Improving the system
 Abolishing sick units Act.
 Reviewing Banking System
 Making Laws Effective
 Strict Compliance
 Increasing role of Independent Directors
 Highlighting Governance role
Global Corporate Governance
The global C. G Forum is an International
Finance Corporation (IFC). (It promotes sustainable
economic growth)
Global Partners
- OECD (Organization for Economic Co – operation and
Development)
- CIPE – Center for international Private Enterprise
- ICGN – International Corporate Governance Network
- CWE – Commonwealth Secretariat
- UIA – Union of international Association
- Globethics.net
Global C. G Forum
 It contribute to the sustainable private sector
development.
 C. G Forum’s Mandate
- Raising awareness and building consensus
- Sponsoring Research
- Disseminating best practice materials and
Publications
- Supporting institution and capacity building
OECD Principles
 Image
OECD Principles
 Fairness
- I Principle - C. G framework should protect shareholder rights.
- II Principle - C. G framework should insure equitable treatment for
all shareholders.
 Responsibility
- III Principle - C. G framework should recognize the rights of the
stakeholders by law and encourage effective b/w Corporations and
Participants
 Transparency
- IV Principle - C. G framework should ensure that timely and accurate
disclosure is made on all material matters.
 Accountability
- V Principle - C. G framework should ensure strategic guidance of the
company.
Issues in Corporate Governance
 A strategic approach to C. G
 Relationship B/W C. G and Corporate Strategy
 Role of corporate governance
Cont.
 Global Industrial Competition
 - Competitive Strategy
 - Benchmarking
 -Promotional Strategies
 -Corporate restructuring
 -Merger and Acquisition
Cont.
 C. G and Financial Performance
 - Corporate finance
 - Relationship B/W C. G and Financial Performance
 - Shareholder value
 - How shareholder value can be increased.