Professional Documents
Culture Documents
22mba510a BLCG Module 5
22mba510a BLCG Module 5
22mba510a BLCG Module 5
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Contents of the Module
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Corporate Governance: Meaning
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Corporate Governance: Definition
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• OECD Definition
• CG is system/structure that directs/controls corporates
• CG structure:
• Specifies rights & responsibilities of stakeholders of the Corp
• Spells out rules and procedures for decision making
• Provides how Corp can achieve objectives
• Monitors performance
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Key performers Expectation -from a
stakeholders perspective
Stakeholders Performance Expectations
Investor Expects high dividend and capital appreciation in the organization.
Lender Lender Expects timely repayment of loan and interest
Supplier Supplier Expects fair terms and timely payments
Employee Employee Expects good working environment, fair remuneration and
security
Customer Customer Expects Quality product & services at fair price (value for
money)
Government Government Expects the company to partner in nation building by paying
taxes or directly spending on social projects
Society Expects the company to use resources judiciously so as to maintain
ecological balance and sustainable development and also partner in nation
building.
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Need for Corporate Governance
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Need for Corporate Governance contd…
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Need for Corporate Governance contd…
• Hostile Take-Overs:
• Hostile take-overs of corporations witnessed in several countries, put a question mark on the
efficiency of managements of take-over companies. This factors also points out to the need for
corporate governance, in the form of an efficient code of conduct for corporate managements.
• Huge Increase in Top Management Compensation:
• It has been observed in both developing and developed economies that there has been a great
increase in the monetary payments (compensation) packages of top level corporate executives.
There is no justification for exorbitant payments to top ranking managers, out of corporate funds,
which are a property of shareholders and society. This factor necessitates corporate governance to
contain the ill-practices of top managements of companies.
• Globalization:
• Desire of more and more Indian companies to get listed on international stock exchanges also
focuses on a need for corporate governance. In fact, corporate governance has become a
buzzword in the corporate sector. There is no doubt that international capital market recognizes
only companies well-managed according to standard codes of corporate governance.
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Fundamental Principles/Pillars of Corporate
Governance
• A company which applies the core principles of good corporate governance; fairness,
accountability, responsibility and transparency, will usually outperform other companies and will
be able to attract investors, whose support can help to finance further growth.
• Fairness: Fairness refers to equal treatment, for example, all shareholders should receive equal
consideration for whatever shareholdings they hold. In the UK this is protected by the Companies
Act 2006. However, some companies prefer to have a shareholder agreement, which can include
more extensive and effective minority protection. In addition to shareholders, there should also
be fairness in the treatment of all stakeholders including employees, communities and public
officials. The fairer the entity appears to stakeholders, the more likely it is that it can survive the
pressure of interested parties.
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Fundamental Principles/Pillars of Corporate
Governance
• Accountability: Corporate accountability refers to the obligation to give an
explanation or reason for the company’s actions and conduct. The Board of
Directors should be made accountable to the shareholders for the way in which
the company has carried out its responsibilities.
• The board should present a balanced and understandable assessment of the company’s
position and prospects;
• The board is responsible for determining the nature and extent of the significant risks it is
willing to take;
• The board should establish formal and transparent arrangements for corporate reporting
and risk management and for maintaining an appropriate relationship with the
company’s auditor, and
• The board should communicate with stakeholders at regular intervals, a fair, balanced
and understandable assessment of how the company is achieving its business purpose.
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Fundamental Principles/Pillars of Corporate
Governance
• Responsibility: It is the professional disciplines intended to help
a corporation stay competitive by being responsible to its four main
stakeholder groups: customers, employees, shareholders, and
communities.
• The professional disciplines included in the corporate responsibility
field include legal and financial compliance, business ethics, corporate
social responsibility, public and community affairs, investor relations,
stakeholder communications, brand management, environmental
affairs, sustainability, socially responsible investment etc.
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Fundamental Principles/Pillars of Corporate
Governance
• Transparency: Transparency means openness, a willingness by the company to provide clear
information to shareholders and other stakeholders. For example, transparency refers to the
openness and willingness to disclose financial performance figures which are truthful and
accurate.
• Disclosure of material matters concerning the organization’s performance and activities should be
timely and accurate to ensure that all investors have access to clear, factual information which
accurately reflects the financial, social and environmental position of the organization.
Organizations should clarify and make publicly known the roles and responsibilities of the board
and management to provide shareholders with a level of accountability.
• Transparency ensures that stakeholders can have confidence in the decision-making and
management processes of a company.
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Theories
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Agency Theory
• Agency theory examines the relationship between the agents and principals in the
business. The theory revolves around the relationship between the two and the
issues that may surface due to different risk perspectives and business goals.
• The shareholders, true owners of the corporation, as principals, elect the
executives to act and take decisions on their behalf. The aim is to represent the
views of the owners and conduct operations in their interest.
• Despite this clear rationale for electing the board of directors, there are a lot of
instances when complicated issues come up and the executives, knowingly or
unknowingly, take decisions that do not reflect shareholders’ best interest.
• In the dynamic business environment, the agency theory of corporate governance
has garnered much attention and is seen and evaluated from different points of
view.
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Agency Theory contd…
• The dividend payout policy of a corporation. The majority of shareholders expect high dividends
payouts when the company is making huge profits. With this, not only do they enjoy extra cash
on their hands, but it also boosts the current value of the capital stock they hold.
• The executives, on the other hand, as a part of the long-term strategy, may decide to retain a
large part of profits. Retention could be for a requirement of some technology advancement or
some critical asset purchase in the near future.
• A conflict of interest may arise between the shareholders and executives in such situations. Such
disagreements can create a feeling of contention between the owners and controllers of the
company, often resulting in inefficiencies and sometimes even losses.
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Agency Theory contd…
• Agency theory in corporate finance is gaining momentum for all the right reasons. With markets
getting volatile as ever, it becomes imperative that both the interests of the shareholders and the
company are taken care of.
• The shareholders should trust the company’s management and go the extra mile to understand
their day-to-day business decisions.
• Similarly, the management should also keep the interests of the company’s true owners in their
mind.
• Clear communication should be sent out explaining the rationale behind major business decisions
to help shareholders understand and appreciate changes, if any.
• A robust corporate policy can help to keep differences at bay.
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Stewardship Theory
• For Stewardship theory, managers seek other ends besides financial ones. These include a sense
of worth, altruism, a good reputation, a job well done, a feeling of satisfaction and a sense of
purpose.
• The Stewardship theory holds that managers inherently seek to do a good job, maximize company
profits and bring good returns to stockholders. They do not necessarily do this for their own
financial interest, but because they feel a strong duty to the firm.
• The theory holds that individuals in management positions do not primarily consider themselves
as isolated individuals. Instead, they consider themselves part of the firm. Managers, according to
stewardship theory, merge their ego and sense of worth with the reputation of the firm.
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Stewardship Theory contd….
• The consequences of stewardship theory revolve around the sense that the individualistic agency
theory is overdrawn. Trust, all other things being equal, is justified between managers and board
members.
• In situations where the CEO is not the chairman of the board, the board can rest assured that a
long-term CEO will seek primarily to be a good manager, not a rich man.
• Alternatively, having a CEO who is also chairman is not a problem, since there is no good reason
that he will use that position to enrich himself at the expense of the firm.
• Put differently, stewardship theory holds that managers do want to be richly rewarded for their
efforts, but that no manager wants this to be at the expense of the firm.
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Stockholder/ Shareholder Theory
• The Friedman doctrine, also called shareholder theory or stockholder theory or
shareholder primacy theory. Milton Friedman
• Shareholder theory is the view that the only duty of a corporation is to
maximize the profits accruing to its shareholders. This is the traditional view of
the purpose of a corporation, since many people buy shares in a company
strictly in order to earn the maximum possible return on their funds.
• If a company were to do anything not associated with earning a profit, the
shareholder would either attempt to remove the board of directors or would
sell his shares and use the funds to buy shares in some other company that is
more committed to earning a profit.
• Under shareholder theory, the only reason management is working on behalf of
shareholders is to deliver maximum returns to them, either in the form of
dividends or an increased share price. Thus, managers have an ethical duty to
the owners to generate significant value. 20
• To take this concept one step further, a corporation should not engage in any type of
philanthropy, since that is not its purpose. Instead, the corporation can deliver dividends to its
shareholders, who then have the option to donate the money for philanthropic purposes, if they
choose to do so. The only case in which a corporation should donate money is when the
amount of the donation creates a benefit that is approximately equivalent to or greater than
the amount of the donation.
• Shareholder theory has been criticized by proponents of stakeholder theory, who believe the
Friedman doctrine is inconsistent with the idea of corporate social responsibility to a variety
of stakeholders. They argue it is morally imperative a business takes into account all of the people
who are affected by its decisions. They also argue that taking into account the interests of
stakeholders can benefit the company and its shareholders;
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Stockholder/ Shareholder Theory
• Central to this model is the axiom of shareholder primacy, which presupposes that corporations
should mainly be managed for the welfare of shareholders. Arising out of such a presupposition is
that theoretically a residual power rests with the shareholders so that they can choose the persons
to whom operational power is delegated. It also entitles them to participate in major corporate
decisions, including exercising the power of hiring or firing the board of directors, usually at an
annual general meeting (AGM). In practice, however, it has been contended that the ability of
shareholders to meaningfully exercise such control over the direction of their company is severely
limited by the very procedures, which govern such meetings and corporate officers elections. For
example, it is directors rather than shareholders that typically set the agenda of an AGM, and by
implication directors determine the issues that come up for voting. By contrast, it has been shown
that it is either difficult or impossible for shareholders to get binding resolutions of their own onto
the agenda.
• The theory is criticized for ‘unethically’ strengthening further the already rich and powerful societal
segments – shareholders and managers rather than empowering the weaker sections of society –
lower level employees, local communities, the poor, women and children.
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Corporate Governance in India
• The Companies Act, 2013 got assent of the President of India on 29 th August, 2013 and
it was enacted on 12th September, 2013 repealing the old Companies Act, 1956.
• The Companies Act, 2013 provides a formal structure for corporate governance by
enhancing disclosures, reporting and transparency through enhanced as well as new
compliance norms.
• Apart from this, the Monopolies and Restrictive Trade Practices Act, 1969 (which is
replaced by the Competition Act 2002), the Foreign Exchange Regulation Act,1973
(which has now been replaced by Foreign Exchange Management Act,1999), the
Industries (Development and Regulation) Act, 1951 and other legislations also have a
bearing on the corporate governance principles.
• In addition to various acts and guidelines by various regulators, non-regulatory bodies
have also published codes and guidelines on Corporate Governance from time to time.
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• For example, Desirable Corporate Governance Code by the Confederation of Indian Industries
(CII) in 2009.
• On 21 August 2002, the Ministry of Finance appointed the Naresh Chandra Committee to examine
various corporate governance issues primarily around auditor – company relationship, rotation of
auditors and defining Independent directors.
• This was followed by constitution of the Narayana Murthy Committee (2003) by SEBI, which provided
recommendations on issues such as audit committee’s responsibilities, audit reports, independent
directors, related parties, risk management, independent directors, director compensation, codes of
conduct and financial disclosures.
• Many of these recommendations were then incorporated in the Revised Clause 49 that is seen as an
important statutory requirement.
• The issue of corporate governance for listed companies came into prominence with the report
of the Kumar Mangalam Birla Committee (2000) set up by SEBI in the to suggest inclusion of
a new clause, Clause 49 in the Listing Agreement to promote good corporate governance.
Further, after enactment of the Companies Act, 2013, SEBI has amended Clause 49 in 2013 to
bring it in line with the new Act.
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Corporate Governance Framework in
India
The Indian framework on Corporate Governance has been vastly in sync with the international standards.
Broadly, it can be described in the following:
• The Companies Acts 2013 has provisions concerning Independent Directors, Board Constitution, General
meetings, Board meetings, Board processes, Related Party Transactions, Audit Committees, etc.
• SEBI (Securities and Exchange Board of India) Guidelines ensure the protection of investors and have
mandated the companies to adhere to the best practices mentioned in the guidelines.
• Accounting Standards issued by the ICAI (Institute of Chartered Accountants of India) wherein the ICAI is an
autonomous body and issues accounting standards. The disclosure of financial statements is also made
mandatory by the ICAI backed by the Companies Act 2013, Sec. 129.
• Standard Listing Agreement of Stock Exchanges applies to the companies whose shares are listed on
various stock exchanges.
• Secretarial Standards Issued by the ICSI (Institute of Company Secretaries of India) issues standards on
‘Meetings of the board of Directors’, General Meetings’, etc.. The companies Act 2013 empowers this
autonomous body to provide standards which each and every company is required to adhere to so that they
are not punished under the Companies Act itself.
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Elements of Corporate Governance
2. Control Environment
3. Transparent disclosure
5. Board commitment
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Good Board Practices
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Control Environment
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Well-Defined Shareholder Rights
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Board Commitment
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Other Entities
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Issues in Corporate Governance in India
• Although there exist many issues in the field of Corporate Governance especially in
India, an effort has been made to highlight only the major ones here:
• Board performance
• The requirement of at least one woman director is necessary, and also the balance of
executive and non-executive directors are not maintained. Evaluation is not
performed from time to time and transparency is lost somewhere. The performance
is not result oriented. These requirements are not always met with.
• Independent Directors
• Independent directors are appointed for a reason which does not seem to be fulfilled
in the current scenario. Even after SEBI guidelines being issued to the corporates, for
the appointment of an audit committee or giving of a comprehensive definition of the
independent directors, the actual situation appears to be worse.
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• Accountability to Stakeholders
• The accountability is not restricted to that of the shareholders or the company, it is for the society at large and also the
environment. The directors are not to keep in mind their own interests but also the interests of the community.
• Risk Management
• The risk management techniques are to be mandatorily be undertaken by the directors as per the Company Laws and they
have to mention in their report to shareholders as well. This is not being done in the most sincere manners required for
the job.
• Privacy and Data Protection
• This is an important governance issue. Cybersecurity has evolved to be the most important aspect of modern governance.
Good governance can only be achieved once the directors and other leaders in the company are well known about the
hazards in this field.
• Corporate Social Responsibility (CSR)
• Being among the few countries to legislate on CSR, it is mandatory for companies to invest minimum 2% of the profits in
the last 3 years for CSR activities. Otherwise proper reasons should be mentioned in the reports in case of failure. The
companies seem to be reluctant towards making such investments.
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Benefits of good Corporate Governance
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• https://www.investopedia.com/updates/enron-scandal-summary/
• Read the case
• https://www.tatasteel.com/investors/integrated-report-2018-19/
corporate-governance-report.html
• https://www.academia.edu/37119597/
CORPORATE_GOVERNANCE_PRACTICES_IN_INDIA
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OECD Principle for CG
• Corporate governance is crucial for the integrity and efficiency of financial markets. Poor corporate
governance reduces a company's potential and can lead to financial problems and fraud.
• Companies that are well-governed typically outperform their competitors, and attract investors who
can help finance future expansion.
• In 1999, the Organization for Economic Cooperation and Development published Principles of
Corporate Governance and have since become a global benchmark for policymakers, investors, firms,
and other stakeholders.
• They've also been adopted as one of the Financial Stability Board's Key Standards for Sound Financial
Systems, and they're the foundation for the World Bank's Corporate Governance Reports on the
Observance of Standards and Codes (ROSC).
• The OECD revised version of the OECD Principles of Corporate Governance on April 22, 2004. It
included a number of new proposals as well as changes to existing ones. A consultation process
included OECD members and representatives from OECD and non-OECD areas.
• A second review of the principles was conducted in 2014/15 based on the 2004 version of the
principles with significant contributions from OECD's regional corporate governance roundtables in
Latin America, Asia, the Middle East and North Africa, as well as experts, an online public consultation,
and the OECD's official advisory bodies, the Business and Industry Advisory Committee (BIAC) and the
Trade Union Advisory Committee (TUAC).
• The OECD principles urge businesses to ensure that they have processes in place to resolve any
potential conflicts of interest, and provide a framework for internal complaints about management or
board appointments.
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Framework of OECD Principles contd…
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Framework of OECD Principles contd…
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Framework of OECD Principles contd…
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Framework of OECD Principles contd…
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Framework of OECD Principles contd…
• The role of stakeholders in corporate governance: The corporate governance framework should recognize
the rights of stakeholders established by law or through mutual agreements and encourage active co-
operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of
financially sound enterprises.
• Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective
redress for violation of their rights.
• Mechanisms for employee participation should be permitted to develop.
• Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient
and reliable information on a timely and regular basis.
• Stakeholders, including individual employees and their representative bodies, should be able to freely communicate
their concerns about illegal or unethical practices to the board and to the competent public authorities and their
rights should not be compromised for doing this.
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Framework of OECD Principles contd…
• Disclosure and transparency
• The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the
financial situation, performance, ownership, and governance of the company.
• Disclosure should include, but not be limited to, material information on: The financial and
operating results of the company, Company objectives and non-financial information, Major
share ownership, including beneficial owners, and voting rights, Remuneration of members
of the board and key executives, Information about board members, including their
qualifications, the selection process, other company directorships and whether they are
regarded as independent by the board, Foreseeable risk factors, Issues regarding employees
and other stakeholders, Governance structures and policies, including the content of any
corporate governance code or policy and the process by which it is implemented.
• Information should be prepared and disclosed in accordance with high quality standards of
accounting and financial and non-financial reporting.
• An annual audit should be conducted by an independent, competent and qualified, auditor
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in accordance with high-quality auditing standards
Framework of OECD Principles contd…
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Corporate Governance during Covid-19
pandemic
• COVID-19 and Comparative Corporate Governance (fordham.edu)
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Global trends
• Globally, there is an increased realization and an acceptability that good corporate governance is
a means to create a business environment of trust, transparency and accountability in order to
support investment, financial stability and sustainable economic growth.
• In the global and highly interconnected world of business and finance where money and
corporate operations constantly cross borders, creating trust is something that we need to do
together.
• The following table identifies some of the key global trends in the landscape of Corporate
Governance and benchmark these against the Indian Companies Act 2013 and Clause 49
requirements.
• Global Trends in Corporate Governance 5 Key Global Trends in Corporate Governance and
Indian Regulatory Initiatives*
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End of the Module
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