CORPORATE GOVERNANCE

Ankit TrivediProsenjit Sarkar

- INBM Jan ‘16

WHAT IS CORPORATE GOVERNANCE Technique by which companies are directed and managed.Carrying the business as per the stakeholders’ desires.Balancing individual and societal goals, as well as, economic and social goals.Determining ways to take effective strategic decisions. Ultimate authority and complete responsibility to the Board of Directors.Includes both social and institutional aspects.Encourages a trustworthy, moral, as well as ethical environment.

WHY CORPORATE GOVERNANCEBetter excess to external financeLower costs of capital-interest rates on loans Improved company performance-sustainabilityHigher firm valuation and share performance Reduced risk of corporate crisis and scandals

BENEFITS OF CORPORATE GOVERNANCE Good corporate governance ensures corporate success and economic growth.Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively.It lowers the capital cost.There is a positive impact on the share price.Good corporate governance also minimizes wastages, corruption, risks and mismanagement.It helps in brand formation and development.It ensures organization in managed in a manner that fits the best interests of all.

PRINCIPALS OF CORPORATE GOVERANANCE Sustainable development of all stake holder Effective management and distribution of wealth Discharge of social responsibilityApplication of best management practices Compliance of law in letter and spirit Adherence of ethical standard

PILLARS OF COPERATE GOVERNANCE

ACCOUNTABILITYEnsure that management is the accountable to the boardEnsure that board is the accountable to shareholders

FAIRNESSProtect share holders rights Treat all share holders including minorities and equality Provide effective redress for violations

TRANSPARENCYEnsure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance

INDEPENDENCEProcedures and structures are in place so as to minimize, or avoid completely conflicts of interest Independent directors and advisers i.e free from the influences of others

THEORIES OF CORPORATE GOVERNANCE The Theories of Corporate Governance are:

1. Agency Theory2. Stakeholders and Resource Dependency Theory3. Stewardship Theory4. Social Contract Theory5. Legitimacy Theory6. Political Theory7. Trusteeship (Gandhism)

THEORIES OF CORPORATE GOVERNANCE Agency Theory An agent is employed by a principal to carry out a task on their

behalf. Agency refers to the relationship between a principal and their

agent. Agency costs are incurred by principals in monitoring agency

behavior because of a lack of trust in the good faith of agents. By accepting to undertake a task on their behalf, an agent becomes

accountable to the principal by whom they are employed. The agent is accountable to that principal.

THEORIES OF CORPORATE GOVERNANCE Companies that are quoted on a stock market such as the London Stock Exchange are often extremely complex and require a substantial investment in equity to fund them, i.e. they often have large numbers of shareholders.

Shareholders delegate control to professional managers (the board of directors) to run the company on their behalf.

The Directors (agents) have a fiduciary responsibility to the shareholders (principal) of their organisation (usually described through company law as 'operating in the best interests of the shareholders').

Shareholders normally play a passive role in the day-to-day management of the company.

Directors own less than 1% of the shares of most of the UK's 100 largest quoted companies and only four out of ten directors of listed companies own any shares in their business.

Separation of ownership and control leads to a potential conflict of interests between directors and shareholders.

The agents' objectives (such as a desire for high salary, large bonus and status for a director) will differ from the principal's objectives (wealth maximisation for shareholders).

THEORIES OF CORPORATE GOVERNANCE

THEORIES OF CORPORATE GOVERNANCE Trusteeship Socio-economic philosophy that was propounded by Mahatma

Gandhi Provides a means by which the wealthy people would be the

trustees of trusts that looked after the welfare of the people in general

Gandhi believed that the rich people could be persuaded to part with their wealth to help the poor

He believed that wealth belongs to the community and must be used for the welfare of the community

THEORIES OF CORPORATE GOVERNANCE Trusteeship The Gandhian concept of Trusteeship is not only in perfect sync

with, but goes much farther than, the modern expectations of corporate stewardship

it stands for caring for other peoples’ money and resources entrusted to the care of corporate directors and executive management and is also sensitive to the broader needs of the society

Increasing evidence of migration towards a more inclusive model of governance based on Trusteeship ; Balasubramanin (2008)

The primary challenge with the Trusteeship Model is that it cannot be implemented by prescriptions alone but, to succeed, needs to be accompanied by transformational change of the hearts and minds

THEORIES OF CORPORATE GOVERNANCE Stakeholder Theory A stakeholder is defined as any person/group which can affect/be

affected by the actions of a business. It includes employees, customers, suppliers, creditors and even the wider community and competitors.

THEORIES OF CORPORATE GOVERNANCE

STAKEHOLDER THEORYThe theory states that a company owes a responsibility to a wider group of stakeholders, other than just shareholdersFirms should recognize the interests of stakeholders that have a vested interest in the corporation. RE Freeman (1984) Research indicate that the country environment or political-economic climate affect corporate performance, Shleifer and Vishny (1997), Doidge et al (2007), Aggarwal et al (2009). Balance Scorecard by Kaplan & Norton is an example of this approach

ISSUES OF CORPORATE GOVERNANCEDistinguishing the roles of board and managementComposition of the board and related issuesSeparation of the roles of CEO and chairpersonShould the board have committeesAppointments to the board and directors'-election

ISSUES OF CORPORATE GOVERNANCEDirectors’ and executives ‘ remuneration:Disclosure and audit:Protection of shareholder rights and their expectations:Dialogue with institutional shareholder:Should investor have a say in making a company “socially responsible corporate citizen”?

WHISTLEBLOWINGWhistle blowing in its most general form involves calling (public) attention to wrong doing, typically in order to avert harm.It is an attempt by a member or former member of an organization to disclose wrong doing in or by the organization.

KINDS OF WHISTLE BLOWINGInternal Whistle blowing is made to someone within the organization Personal Whistle blowing is blowing the whistle on the offender, here the charge is not against the organization or system but against one individualThe impersonal, External Whistle Blowing

INSIDER-TRADINGIt refers to a situation, where in a person, by virtue of his position to access unpublished price sensitive information of the company, gains such access and subsequently uses the information obtained for his or her personal benefits. Insider trading is dealing in securities of a listed company by any person who has knowledge of material inside information which is not available to general public.It is breach of a fiduciary duty or other relationship of trust, and confidence.It is a crime if made to get wrongful gain or avoid losses

INSIDER TRADING & CORPORATE GOVERNANCEInsider trading has many governance implications, affecting:The organization of companies;The duties of directors of managing boards and supervisory boards and other corporate insiders;The permitted flow of information within companies;The disclosure duties imposed to companies.

The main problem in insider trading is conflict of interests and the misuse of power –in this case it relates to the power over privileged information.

CREDIT RATINGEstimates the credit worthiness of an individual, corporation, or even a country.

It is an evaluation made by credit bureaus of a borrower’s overall credit history.

They are based on financial history and current assets and liabilities. a credit rating tells a lender or investor the probability of the subject being able to pay back a loan.

Commercial credit risk is the largest and most elementary risk faced by many banks and it is a major risk for many other kinds of financial institutions and corporations as well.

Many uncertain elements are involved in determining both how likely it is that an event of default will happen and how costly default will turn out to be if it does occur.

CREDIT RATING AGENCIES IN INDIACRISIL(Credit Rating Information Services of India Ltd)ICRA(Information and Credit Rating Services ltd)CARE (Credit Analysis and Research Ltd)FITCH India

CRISILThe first rating agency ‘Credit Rating Information Services of India Ltd. , CRISIL, was promoted jointly in 1987 jointly by the ICICI and the UTI. Other shareholders included ADB, LIC, HDFC Ltd, General Insurance Corporation of India and several other foreign and Indian Banks.It pioneered the concept of credit rating in the country and since then has introduced new concepts in credit rating services and has diversified into related areas of information and advisory activities.It became public in 1993.In 1996, it formed a strategic alliance with S&P rating group.

SERVICES OFFERED BY CRISILCredit Rating ServicesAdvisory ServicesCredibility first rating and evaluation ServicesTraining Services

ICRA LTDInformation and Credit Rating Services (ICRA) has been promoted by IFCI Ltd as the main promoter and started operations in 1991.

Other shareholders are UTI, Banks, LIC, GIC, Exim Bank, HDFC and ILFS.

It provides Rating, Information and Advisory services ranging from strategic consulting to risk management and regulatory practice.

The main objectives of ICRA are to assist investors both individual and institutional in making well informed decisions

To assist issuers in raising funds from a wider investor base.To enable banks, investment bankers, Brokers in placing debt with investors.

To provide regulators with market driven systems to encourage the healthy growth of capital markets.

It provides rating services, information services and advisory services.

CARE LTD.Credit Analysis and Research Ltd or CARE is promoted by IDBI jointly with Financial Institutions, Public/Private Sector Banks and Private Finance Companies.It commenced its credit rating operations in October, 1993 and offers a wide range of products and Services in the field of Credit Information and Equity Research.It also provides advisory services in the areas of securitization of transactions and structuring Financial Instruments.It offers services like 1. Credit rating of debt instruments 2. Advisory services like securitization transactions, structuring financial instruments, financing infrastructure projects and municipal finances 3. Information services like providing information to companies, industry and businesses. 4. Equity research

FITCH RATINGS INDIA LTD.It is the latest entrant in the credit rating Business in the country as a joint venture between the international credit Rating agency Duff and Phelps and JM Financial and Alliance Group.In addition to debt instruments, it also rates companies and countries on request.

RATING PROCESSThe process begins with issue of rating request letter by the issuer of the instrument and signing of the rating agreement.CRA assigns an analytical team consisting of two or more analysts one of whom would be the lead analyst and serve as the primary contact.Meeting with Management- The analytical team obtains and analyses information relating to its financial statements, cash flow projections and other relevant information. Discussion with management on management philosophy, competitive position, financial policies and future plans.

RATING PROCESS CONT-Discussions on financial projections based on objectives and growth plan , risks and opportunities.Rating committee- after meeting with the management the analysts present their report to a rating committee which then decides on the rating.After the committee has assigned the rating, the rating decision is communicated to the issuer, with reasons or rationale supporting the rating.Dissemination to the Public: Once the issuer accepts the rating, the CRAs disseminate it, along with the rationale, to the print media.

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