UNIT – 1

CORPORATE
GOVERNANCE

Subject: Corporate Governance, Human Values and Ethics

Course Code: BBA 206

SUB TOPICS
 Corporate Governance – Meaning, significance and
principles, management and corporate governance
 Theories and models of corporate governance

 Whistle blowing, class action

 Role of institutional investors

 Codes and standards on corporate governance

 CSR: Concept, corporate philanthropy, strategic planning

and CSR
 Relationship of CSR with corporate sustainability

 Consumer Protection Act

 Investor Protection Act

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 CORPORATE GOVERNANCE -
MEANING
 Corporate governance is the system by which
companies are directed and controlled.

 Boards of directors are 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
an appropriate governance structure is in place.

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 Corporate Governance refers to the way in which companies
are governed and to what purpose.

 It identifies who has power and accountability, and who

makes decisions.

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SIGNIFICANCE OF CORPORATE
GOVERNANCE
 Good corporate governance creates transparent rules
and controls, guides leadership, and aligns the interests
of shareholders, directors, management, and employees.

 It helps build trust with investors, the community, and

public officials.

 Corporate governance can give investors and

stakeholders a clear idea of a company's direction and
business integrity.
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 It promotes long-term financial viability, opportunity, and
returns.

 It can facilitate the raising of capital.

 It can reduce the potential for financial loss, waste, risks,

and corruption.

 It is a game plan for resilience and long-term success.

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PRINCIPLES OF CORPORATE
GOVERNANCE

 Fairness
 Transparency

 Risk Management

 Responsibility

 Accountability

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EXAMPLES OF CORPORATE
GOVERNANCE: BAD AND GOOD
Volkswagen AG

 Tolerance or support of illegal activities can create

scandals like the one that rocked Volkswagen AG starting in
September 2015.
 The details of "Dieselgate" (as the affair came to be known)
revealed that for years, the automaker had deliberately and
systematically rigged engine emission equipment in its cars
to manipulate pollution test results in the U.S. and Europe.

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 ENRON
 The problem with Enron was that its board of directors
waived many rules related to conflicts of interest by
allowing the chief financial officer (CFO), Andrew
Fastow, to create independent, private partnerships to do
business with Enron.

 These private partnerships were used to hide Enron's

debts and liabilities.

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 PEPSICO
One company that seems to have consistently practiced
good corporate governance, and adapts or updates it
often, is PepsiCo. In drafting its 2020 proxy statement,
PepsiCo sought input from investors in six areas:
 Board composition, diversity, and refreshment, plus leadership structure
 Long-term strategy, corporate purpose, and sustainability issues
 Good governance practices and ethical corporate culture
 Human capital management
 Compensation discussion and analysis
 Shareholder and stakeholder engagement4Corporate Secretary.

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MANAGEMENT AND CORPORATE
GOVERNANCE
 The terms 'governance' and 'management' are often used
interchangeably, but there are important differences
between the two.

 Governance is the process of making and enforcing

rules, regulations and policies.

 Management is the application of those rules, regulations

and policies.

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 Corporate Governance Management

Designing and deciding the policies and Looking after the routine operations and
strategies of the organization. implementation.

Governing the organization. Managing the organization.

By shareholders by votes in AGM By the Board of Directors.

meetings.

Vision of the organization. Taking decisions to ensure the policies

determined by the governing body are
followed.
Strategy formulation and vision- Task-oriented function.
oriented.

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 THEORIES OF CORPORATE
GOVERNANCE

1. AGENCY THEORY: As the name suggests,

in the agency theory, the owner of the
Company hires the agent, that is, the manager
or director, to manage the affairs of the
Company in the best interest of the Company
and the owner.

• The problem arises when the person so

appointed works for self-interest and to
secure his basic salary and does not work to
increase the profit and life of the Company.

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 When the agent is appointed, there is delegation of power, and
there is separation of power and control from the hands of the
owner.

 The agent is responsible for the decisions taken and the

working of the Company.

PRINCIPAL ⇒HIRES ⇒ AGENT ⇒ WORK IN COMPANY’s

INTEREST.

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2. STEWARDSHIP THEORY : This theory was introduced by
Donaldson and Davis (1989).
 Stewards in the Company basically means the directors or the
manager of the Company.
 According to this theory, as a steward, when managers are
given the power to work in the interest of the Company, they
work responsibly for the organisational success and balanced
growth of all the stakeholders—the work in the interest of the
shareholders to maximise their wealth.

SHAREHOLDERS ⇒ EMPOWER THE TRUST ⇒ STEWARD

STEWARD⇒ ORGANISATIONAL SUCCESS⇒ 15

SHAREHOLDERS
3. RESOURCE DEPENDENCY THEORY: For efficient
working of any firm resources are required.
 The firm’s director has the responsibility to bring and make
efforts to bring resources to the firm.

 These resources can be information, skill, suppliers, buyers,

dealers, social groups etc to secure and enhance the
organizational functioning, performance, and its success.

DIRECTORS ⇒ BRING IN RESOURCES ⇒

ORGANISATIONAL SUCCESS
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4. STAKEHOLDER THEORY: According to this theory, the
manager should take steps in the interest to secure good
governance to improve the relationship and interaction
between the various stakeholders involved, such as Investors,
workers, board of directors’ shareholders, general public,
regulatory bodies, Business Partners, Employees, etc.
 This theory implies that the director is responsible and
accountable to a wide range of stakeholders involved in the
Company.
 This theory primarily focuses on balancing the interest of all
stakeholders whilst making any managerial decision and that
nobody’s interest is kept above the other’s and is not given
supremacy and the decision are taken in the long run interest17
of the Company.
5. TRANSACTION COST THEORY: The transaction
cost is the expense incurred while moving the thing from
one place to another or conducting an economic
transaction.
 The transaction cost can be monetary, extra time or
inconvenience caused.
 The Company works by making contracts and each
contract brings with it the compliance requirement and
some transaction costs.
 This theory suggests that the Company’s decision should
be such that it works to achieve the optimum
organizational structure.
 It should be economically efficient so that the cost of 18

exchange is minimised.
6. POLITICAL THEORY: This theory appeals to
righteousness.
 The manager should gain the shareholders’ trust and
votes rather than purchasing the voting power.
 This theory focuses on the government’s political
influence in the working of the Company that the
political power significantly influences corporate
governance.

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 MODELS OF CORPORATE
GOVERNANCE
 The Anglo-American Model
 The Continental Model

 The Japanese Model

 Indian models of corporate governance

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 THE ANGLO-AMERICAN MODEL
 This model can take various forms, such as the
Shareholder, Stewardship, and Political Models. The
Shareholder Model is the principal model at present.

 The Shareholder Model is designed so that the board of

directors and shareholders are in control. Stakeholders
such as vendors and employees, though acknowledged,
lack control.

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 Management is tasked with running the company in a
way that maximizes shareholder interest. Importantly,
proper incentives should be made available to align
management behavior with the goals of
shareholders/owners.

 The model accounts for the fact that shareholders

provide the company with funds and may withdraw
that support if dissatisfied. This is supposed to keep
management working effectively.

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THE CONTINENTAL MODEL
 Two groups represent the controlling authority under
the Continental Model. They are the supervisory board
and the management board.

 In this two-tiered system, the management board is

composed of company insiders, such as its executives.
The supervisory board is made up of outsiders, such as
shareholders and union representatives. Banks with
stakes in a company also could have representatives on
the supervisory board.

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 The two boards remain entirely separate. The size of
the supervisory board is determined by a country's laws
and can't be changed by shareholders.
 National interests have a strong influence on
corporations with this model of corporate governance.
Companies can be expected to align with government
objectives.
 This model also greatly values the engagement of
stakeholders, as they can support and strengthen a
company's continued operations.

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THE JAPANESE MODEL
 The key players in the Japanese Model of corporate
governance are banks, affiliated entities, major
shareholders called Keiretsu (who may be invested in
common companies or have trading relationships),
management, and the government.
 Smaller, independent, individual shareholders have no
role or voice.
 Together, these key players establish and control
corporate governance.

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THE INDIAN MODEL
 In Indian models of corporate governance The
Securities and Exchange Board of India
(SEBI) played an important role.
 The newly created SEBI Act of 1992 presented two
issues and provided statutory powers Protection of
investors and Market expansion.
 The Government of India’s Department of Company
Affairs includes SEBI. From a control system to
prudential regulation, SEBI has transitioned.
 It has the authority to control how stock markets and all
of its participants, including listed companies, operate.
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WHISTLE BLOWING

 When an employee discovers unethical, immoral or

illegal actions at work, the employee makes a decision
about what to do with this information.

 Whistle blowing is the term used to define an employee’s

decision to disclose this information to an authority
figure (boss, media or government official).

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WHO IS WHISTLEBLOWER?
 A whistleblower is a person, who could be an employee
of a company, or a government agency, disclosing
information to the public or some higher authority about
any wrongdoing, which could be in the form of fraud,
corruption, etc.

 There are two types of whistleblowers:

 Internal

 External

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 Internal whistleblowers are those who report the
misconduct, fraud, or indiscipline to senior officers of
the organisation such as Head Human Resource or CEO.

 External whistleblowers is a term used when

whistleblowers report the wrongdoings to people outside
the organisation such as the media, higher government
officials, or police.

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 The crime or wrongdoing could be in the form of fraud,
deceiving employees, corruptions, or any other act which
misleads people.

 The Whistle Blowers Protection Act, 2011 lays down the

complete framework to investigate alleged cases of
wrongdoing.

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CLASS ACTION
 1. A class action, a class suit, or a representative action
is a form of lawsuit in which a large group of people
collectively bring a claim to court and/or in which a
group of defendants is being sued.

 2. This is the new provision inserted under the

Companies Act,2013.

 A class action allows a number of claimants with a

common grievance against a company to file a lawsuit
against it.
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ROLE OF INSTITUTIONAL
INVESTORS
 Institutional investors play a central role in
incorporating development.
 The institutions leverage their financial clout in shaping
corporate behaviours.
 These investors are typically large organizations that
pool member contributions and act as intermediaries.
 An institutional investor is a company or organization
that invests money on behalf of other people.

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 Mutual funds, pensions, and insurance companies are
examples.

 Institutional investors often buy and sell substantial

blocks of stocks, bonds, or other securities and, for
that reason, are considered to be the whales on Wall
Street.

 Broadly speaking, there are six types of institutional

investors: endowment funds, commercial banks,
mutual funds, hedge funds, pension funds, and
insurance companies.
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 Institutional investors face fewer protective regulations
compared to average investors because it is assumed the
institutional crowd is more knowledgeable and better
able to protect themselves.

 Institutional investors have the resources and

specialized knowledge for extensively researching a
variety of investment opportunities not open to retail
investors.

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 Because institutions are moving the biggest positions
and are the largest force behind supply and demand in
securities markets, they perform a high percentage of
transactions on major exchanges and greatly influence
the prices of securities.

 In fact, institutional investors today make up more than

90% of all stock trading activity.

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CODES AND STANDARDS ON
CORPORATE GOVERNANCE

What is a corporate governance code?

 The code of corporate governance contains guidelines
for companies on how to strengthen their governance.

 It is a set of principles for the best practice in corporate

governance.

 A cross between a guidebook and a rulebook; it usually

recommends how directors and executives should
handle governance.
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 A company's board of directors is the primary force
influencing corporate governance.

 Bad corporate governance can destroy a company's

operations and ultimate profitability.

 The basic principles of corporate governance

are accountability, transparency, fairness,
responsibility, and risk management of corporate
governance worldwide.

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WHAT DOES A CORPORATE
GOVERNANCE CODE COVER?
In general, these codes are checklists for corporate
governance professionals, allowing them to track their
progress in:
 Leadership and a board’s responsibilities to the
company
 Effectiveness, incorporating skillset matches, time
management, etc.
 Accountability

 Remuneration explicitly ensuring that it conforms to

industry standards
 Relationships with shareholders
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WHY ARE CORPORATE
GOVERNANCE CODES IMPORTANT?
 Government and stakeholder pressure to do well is
mounting. The price for falling short is rising.
 Legislation mandating corporate governance is being
expanded and is increasingly cross-border in focus.
 Investors want clarity and safety in this turbulent
economic time.
 The rise in the importance of Environmental, Social
and Corporate governance (ESG) demonstrates that the
world values corporate integrity and wants to maintain
that priority in future.
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CORPORATE SOCIAL
RESPONSIBILITY (CSR): CONCEPT
 Corporate social responsibility (CSR) is a
self-regulating business model that helps a company be
socially accountable to itself, its stakeholders, and the
public.

 By practicing corporate social responsibility, also called

corporate citizenship, companies can be conscious of the
kind of impact they are having on all aspects of society,
including economic, social, and environmental.

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 Engaging in CSR means that, in the ordinary course of
business, a company is operating in ways that
enhance society and the environment instead of contributing
negatively to them.

Examples of CSR
 Pfizer Engages in Charitable Endeavors

 Netflix Improves Labor Policies

 Johnson & Johnson Reduces Environmental Impact

 Starbucks Diversifies its Workforce

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CORPORATE PHILANTHROPY
 An increasing amount of companies have identified
effective methods of supporting their communities and
assuming responsibility for their societal impact.

 One of the most popular ways of accomplishing these goals

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is through corporate philanthropy, meaning activities in
which companies voluntarily invest in social causes.
 According to the Council on Foundations, corporate
philanthropy refers to the investments and activities a
company voluntarily undertakes to responsibly
manage and account for its impact on society.
 Philanthropic investments and activities include: Money,
Donations of products.

 Corporate philanthropy has become increasingly popular

in recent years, as consumers now expect a certain
level of accountability and transparency from
corporate entities.

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Gift matching
 Matching gifts are a popular type of corporate
philanthropy effort. In matching gift programs,
companies donate the same amount of money to a
nonprofit or community organization that other
stakeholders do.

Volunteer grants
 In volunteer grant programs, companies usually donate
money to nonprofits and community organizations
matching stakeholders' volunteer hour contributions.

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Employee grants
 Companies may allow their employees to designate
which nonprofit or community organizations to receive
philanthropic donations. In employee grant programs,
companies usually award monetary grants to
organizations selected by employees.

Community grants
 Community grant programs typically allow nonprofit or
community organizations to apply for funding from a
company. Companies choose to fund particular
organizations depending on their goals for social impact.

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Community works
 Community works programs refer to those initiatives in
which companies donate specific products, services or
infrastructure to local communities. For example, a
company may choose to build the infrastructure for a
new park or donate laptop computers to a local school
needing technology resources.

Scholarships
 Scholarship and fellowship programs are some of the
most common corporate philanthropy initiatives. They're
typically straightforward endeavors that seek to support
promising community leaders, students and other
individuals financially. 46
Volunteer support initiatives
 Volunteer support initiatives typically entail companies
donating employee time to support nonprofit or
community organizations. Sometimes, companies
partner with organizations to provide specialized support
aligned with their unique abilities. For example, a
technology company may host a program in which
employees volunteer to teach older community members
computer literacy skills.

Corporate sponsorship
 Corporate sponsorship is a standard type of
philanthropic initiative in which companies provide
financial support to nonprofit or community 47

organizations which help further their particular mission.

STRATEGIC
PLANNING AND CSR

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RELATIONSHIP OF CSR WITH
CORPORATE SUSTAINABILITY
 Sustainability focuses on meeting the needs of the
present without compromising the ability of future
generations to meet their needs or maintaining well-
being over a long, perhaps even an indefinite period.

 Sustainability is composed of three pillars: economic,

environmental, and social.

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 There is direct relation between CSR and the
sustainability of the resources as the more consumption
of the resources the less sustainability of the resources.

 Companies are challenged to help society as a whole to

achieve a sustainable development.

 Sustainable management thus revolves around what the

company does to advance sustainability and attempts to
maximize its contribution in this respect.

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CONSUMER PROTECTION ACT

Concept of Consumer Protection

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FEATURES OF CONSUMER
PROTECTION ACT

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OBJECTIVES

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IMPORTANCE OF CONSUMER
PROTECTION ACT

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CONSUMER RESPONSIBILITY

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DISTRICT FORUM

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STATE FORUM

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NATIONAL FORUM

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INVESTOR PROTECTION ACT

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