Corporate Governance &

Ethics
Unit I
What is Corporate Governance?
• If management is about running the business, corporate governance is
about seeing that it is run properly.

• Corporate Governance is the application of best management

practices, compliance of law in true letter and spirit and adherence
to ethical standards for effective management and distribution of wealth
and discharge of social responsibility for sustainable development of all
stakeholders.

• Hence, corporate governance deals with:

• the interaction of business’s management and its board of directors,
• its shareholders and lenders and its other stakeholders such as
employees, customers, suppliers, and the community of which it is a part.
• It is all about balancing individual and societal goals, as well as economic
and social goals 
• CG is a system by which companies are
• DIRECTED,
• OPERATED,
• REGULATED and
• CONTROLLED

• A corporate governance is a conscious, deliberate and

sustained efforts on the part of the corporate entity to strike
a judicious balance between its own interest and the
interests of various constitutes on the environment in which
it is operating.
Why Corporate Governance?
• Better access to external finance
• Lower costs of capital – interest rates on loans
• Improved company performance – sustainability
• Higher firm valuation and share performance
• Reduced risk of corporate crisis and scandals
Parties to Corporate Governance

• Shareholders
• Directors
• Managers
• Corporate Governance is about building the Relationships among
various participants in determining the direction and performance of a
corporation.
• Effective management of relationships among
• Shareholders
• Managers
• Board of directors
• Employees
• Customers
• Creditors
• Suppliers
• Community
Participants in Corporate Governance Process

Internal Stakeholders
 Shareholders
 Board of directors
 Audit committee
 Management
 Employees
 Internal auditors
Participants in Corporate Governance Process

External Stakeholders
 External auditors
 Governing bodies
 Communities
 Investors
 Creditors
 Customers and suppliers
Principles of Corporate Governance
 Sustainable development of all stakeholders- to ensure growth of all
individuals associated with or effected by the enterprise on sustainable
basis.

 Effective management and distribution of wealth – to ensue that

enterprise creates maximum wealth and judiciously uses the wealth so
created for providing maximum benefits to all stake holders and
enhancing its wealth creation capabilities to maintain sustainability.

 Discharge of social responsibility- to ensure that enterprise is

acceptable to the society in which it is functioning.
 Application of best management practices- to ensure excellence
in functioning of enterprise and optimum creation of wealth on
sustainable basis

 Compliance of law in letter & spirit- to ensure value enhancement

for all stakeholders guaranteed by the law for maintaining socio-
economic balance.

 Adherence to ethical standards- to ensure integrity, transparency,

independence and accountability in dealings with all stakeholders
Pillars of Corporate Governance
Accountability
 Ensure that management is accountable to the Board
 Ensure that the Board is accountable to shareholders

Fairness
 Protect Shareholders rights
 Treat all shareholders including minorities, equitably
 Provide effective redress for violations
Transparency
Ensure timely, accurate disclosure on all material matters,
including the financial situation, performance, ownership and
corporate governance.

Independence
• Procedures and structures are in place so as to minimize, or
avoid completely conflicts of interest
• Independent Directors and Advisers i.e. free from the
influence of others
Good Board Practices
• Clearly defined roles and authorities
• Duties and responsibilities of Directors understood
• Board is well structured
• Appropriate composition and mix of skills
• Appropriate Board procedures
• Director Remuneration in line with best practice
• Board self-evaluation and training conducted
Models of Corporate Governance
• 1. US Model-Anglo-American (Rule Based)
• 2. German Model-Continental European (2 Tier)
• 3. Japanese Model (Business Network )
• 4. Indian Model (Asian, Family Base)
• 2 main models around which the system of corporate governance has
developed are:
• (i) Liberal Model &
(ii) Co-ordinated model

-Liberal Model is common in Anglo American countries such as US, UK

and some old British colonial English speaking countries.
- It tends to give priority to the interests of the company’s
shareholders.

-Co-ordinated Model is found in Continental Europe and Japan.

- It recognizes the interest of workers, managers, suppliers,
customers and the community, in addition to the shareholder’s interest.
The Anglo- American Model
- It is a typical liberal model of governance, which is prevalent in the US,
UK and many English speaking countries of the erstwhile British Empire.

- The model calls for governance by the Board of Directors, which has
the power to choose the CEO.

- CEO has the power delegated by the board to manage the company on a
daily basis, he or she needs board approval for certain major decisions.

- Duties of the board may include policy making, decision making ,

monitoring management performance and corporate control etc.
Key Players in the Anglo-US Model
Players in the Anglo-US model include
management, directors, shareholders (especially
institutional investors), government agencies,
stock exchanges, self-regulatory organizations
and consulting firms which advise corporations
and/or shareholders on corporate governance.
MANAGEMENT SHAREHOLDERS

DIRECTORS

Major Players in the Anglo-US Model

 Composition of the Board of Directors in the Anglo-US Model

• Insiders (executive director)

• Is a person who is either employed by the corporation who
has significant business relationship with corporate
management.
• Outsiders (non-executive director or independent director)
• Is a person/institution which has no direct relationship with
the corporation or management
Regulatory Framework in the Anglo-US
Model
• In the UK and US, a wide range of laws and regulatory codes define
relationships among management, directors and shareholders.
• In the US, a federal agency,
• the Securities and Exchange Commission (SEC), regulates the securities
industry, establishes disclosure requirements for corporations and regulates
communication between corporations and shareholders as well as among
shareholders.
The regulatory framework of corporate governance in the UK is as below:
- parliamentary acts and
- rules established by self-regulatory organizations, such as the Securities and
Investment Board, which is responsible for oversight of the securities market.
The Japanese Model
The Japanese model is characterized by:
- a high level of stock ownership by affiliated banks and
companies
- a banking system characterized by strong, long-term links
between bank and corporation;
- a legal, public policy and industrial policy framework
designed to support and promote “keiretsu” i.e. group of
affiliated corporations.
Key Players in the Japanese Model
• In the Japanese model, the four key players are:
• main bank (a major inside shareholder):
• affiliated company or keiretsu (a major inside shareholder),
• management and
• the government
• Share Ownership Pattern in the Japanese Model
In Japan, financial institutions and corporations firmly hold ownership
of the equity market.

In both the Japanese and the German model, banks are key
shareholders.

Regulatory Framework in the Japanese Model

In Japan, government ministries have traditionally been extremely
influential in developing industrial policy.
The primary regulatory bodies are the Securities Bureau of the
Ministry of Finance, and the Securities Exchange Surveillance
Committee
German Model
• The German corporate governance model differs
significantly from both the Anglo-US and the Japanese
model, although some of its elements resemble the
Japanese model.
• Banks hold long-term stakes in German corporations,
and, as in Japan, bank representatives are elected to
German boards.
 This is also called as 2 tier board model as there are 2 boards viz. The
supervisory board and the management board. It is used in countries
like Germany, Holland, France, etc.

 Usually a large majority of shareholders are banks and financial

institutions.

 The shareholder can appoint only 50% of members to constitute the

supervisory board. The rest is appointed by employees and labour
unions.

 The mandatory inclusion of labor/employee representatives on larger

German supervisory boards distinguishes the German model from both
the Anglo-US and Japanese models.
Composition of the Management Board
• The two-tiered board structure is a unique construction of the German model.
• German corporations are governed by a supervisory board and a
management board.
• The supervisory board appoints and dismisses the management board,
approves major management decisions; and advises the management board.
The supervisory board usually meets once a month. A corporation’s articles of
association sets the financial threshold of corporate acts requiring supervisory
board approval.
• The management board is responsible for daily management of the company.
• The management board is composed solely of “insiders”, or executives.
The supervisory board contains no “insiders”, it is composed of labor/employee
representatives and shareholder representatives.
• The Industrial Democracy Act and the Law on Employee Co-determination
regulate the size and determine the composition of the supervisory board; they
stipulate the number of members elected by labor/employees and the number
elected by shareholders.
Indian Model
 This model is run by a family-owned business, this is prevalent in Asian and
Latin American countries, where companies are owned by families.

 The model of corporate governances found in India is a mix of the Anglo-

American and German models. This is because in India, there are three types of
Corporation viz. private companies, public companies and public sectors
undertakings (which includes statutory companies, government companies,
banks and other kinds of financial institutions).

 Each of these corporation have a distinct pattern of shareholding. For e.g. In

case of companies, the promoter and his family have almost complete control
over the company. They depend less on outside equity capital. Hence in private
companies the German model of corporate governance is followed.