Corporate Governance and Ethical Aspect of Business
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Transcript of Corporate Governance and Ethical Aspect of Business
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Centre for Corporate Governance & Citizenship
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Corporate Governance, BankBoards & Directors
______________________________
Prof N Balasubramanian
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"This development has resulted in
incalculable and unjustifiable damage to
Brand India and Brand IT in particular.
What is especially ironic is that Satyam was
started by entrepreneurs who have served as
role models for an entire generation ofyoung Indians."... Anand Mahindra, Vice-chairman and MD, Mahindra Group,
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"The idea of corporate governance has not
sunk in as much as it should. Certainly we
have dynamic, modern companies in which
it has but in many family-owned businesses
it has not. We need truly independent
directors and auditors."3
- T K Bhaumik, Chief Economic Adviser,
JK Organization4, in January 2009.
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This was one of those few companies in Indiathat supposedly had been doing things the
right way - that is, the Western way. Itallegedly had all the checks and balances aU.S. company would want in an overseasbusiness partner. Its financial statementsreceived repeated clean bills of health from a
respected outside auditor,PricewaterhouseCoopers. And still itscorporate governance rotted away from theinside."1
- Matt Kelly, Editor-in-Chief, ComplianceWeek2, in January 2009
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Presentation Outline
Overview of Corporate Governance
Unique Dimensions of Banks Governance
Bank Boards, Directors, & Governance
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Overview of CorporateGovernance
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Some Definitions Corporate Governance is the system by
which companies are directed and
controlled Cadbury Report (UK), 1992
to do with Power and Accountability:who exercises power, on behalf of whom,
how the exercise of power is controlled. Sir Adrian Cadbury, in Reflections on Corporate
Governance, Ernest Sykes Memorial Lecture, 1993
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A Canadian Definition the process and structure..to direct and
manage the business and affairs of the
corporation with the objective of enhancing
shareholder value, which includes ensuring
the financial viability of the business.
W
here were the Directors? Guidelines forImproved Corporate Governance in Canada, TSE,
1994
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An Indian Definition fundamental objective of corporate
governance is the enhancement of the long-
term shareholder value while at the same
time protecting the interests of other
stakeholders.
SEBI (Kumar Mangalam Birla) Report on
Corporate Governance, January, 2000
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A Gandh
ian Definition
Trusteeship obligations inherent in
company operations, where assets and
resources are pooled and entrusted to the
managers for optimal utilisation in the
stakeholders interests.
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Some Furth
er DefinitionsCorporate governance is essentially about
leadership:
leadership for efficiency;
leadership for probity;
leadership with responsibility; and
leadership which is transparent and whichis accountable.
- PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH
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Wh
at is Corporate Governance? The Manner in which a Corporation is Run
Achieving its Objectives
Transparency of its Operations
Accountability & Reporting
Good Corporate Citizenship
The Processes & Operating Relationships thatBest Achieve Organisational Goals
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Some Governance Models
Finance or the Principal-Agent Model
Markets for Capital, Managerial Talent and
Corporate Control, Key determinant
In general, profit-maximisation goal is co-
functional with social-welfare-maximisation
Shareholders as Residual Claimants havesuperior control rights
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Exclusive Accountability to
Shareholders Risk-bearing Entrepreneurs
Residual Claimants
Winding-up Ranking: Last in Pecking Order
Boards Appointed by Shareholders
Non-congruence of Stake
holder Interests
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The Stakeholder Case
Firm Objective must be defined more widely than
just shareholder-value-maximisation, since risk
capital is not the only, or even the major input Residual Claimant RightsNotUniversally Valid,
eg, Circumscribed in case of pre-bankruptcy (US
Chapter XI) Situations
Other Such: Employees with Firm-specific
Specialised Skills, Customers/Vendors with
Substantial Stake in the Business, etc
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Towards an Integrated Model
One-Size does notFit All Circumstances
A Combination of Shareholder/Stakeholder
Models Necessary
Some Argue, While Shareholder Claim
Well Established, Stakeholder Claims Need
to be Proved
Tailor Model to Suit Unique Circumstances
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The Corporate Board
Central to Corporate Governance
Juxtaposed between Shareholders on the one
hand, and on the other, Managers of the Entity
(Cadbury)
Follows Distancing between Ownership and
Control (Berle and Means)Trustee for All Shareholders
Loyalty & Commitment Always to Company
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Board Role & Responsibility
Provide/ Exercise
Leadership and Strategic Guidance
Objective Judgement Independent of Management
Control over the Company
Direct and Control the Management of the
Company
Be Accountable at all times to All Shareholders
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Dimensions of Board
Responsibility Direction involves
Formulation & Review of Company Policies,
Strategies, Budgets and Plans, Risk
Management Policies, Top Level HR Policies,
etc
Setting Objectives & Monitoring Performance Oversight of Acquisitions, Divestitures,
Projects, Financial and Legal Compliance, etc
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Dimensions of Board
Responsibility Control Involves
Prescribing Codes of Conduct,
Overseeing Disclosure & Communication
Processes,
Ensuring Control Systems to Protect Company
Assets Reviewing Performance & Realigning Action
Initiatives to Achieve Company Objectives
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Dimensions of Board
Responsibility Accountability Involves
Creating, Protecting and Enhancing Company
Wealth and Resources
Timely and Transparent Reporting
Good Corporate Citizenry including Discharge
of Stakeholder Obligations and SocietalResponsibilities without Compromising the
Shareholder Wealth Maximisation Goal
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Corporate Governance & Capital Market
Drivers: A Conceptual Framework
Listed Corporations
(The Board & the Executive)
Regulators Government Stock Exchanges
(SEBI/RBI) Legislation Listing Agreements
Market Operators Institutional Investors Press/Media
(Rewards) (Pension Funds/Insce Cos) (Opinion Makers)
Lenders
(Banks/
Depositors)
Shareholders/
Stakeholders
REGULATION & LEGISLATION
Market Operations, Critique & Monitoring
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IsTh
ereMore to Business
than just the
Financial Numbers?
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Economic
An Enterprises Triple Effect on Society
BusinessImpact
Sustainable Development Equal Opportunities
Waste Control Education &
Culture
Emissions Community
Regeneration
Energy Use Human Rights
Product Employee
Life-cycle Volunteers
Product Wealth Productive Ethical
Value Generation Employment Trading
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The Triple-Bottomline Impact
Business Impact
environment society
economics
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Governance Orientation Matrix
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Governance Orientation &
Sustainable Profits
G
Y
STEW S IP
S STAI ABLE
P O ITLI E
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Unique Dimensions of BankGovernance
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Unique Dimensions in Bank
Governance Bank Role in Good Governance Two-fold:
Governance Within
Governance at Clients
As Fund-Providers, Banks GenerateMultiplier Impact on Economy
Confidence &
Trust Key Bank Distress,Failure, Dis-Repute Impacts Economy,
Erodes Country Standing Globally
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Unique Dimensions in Bank
Governance Stakeholder Dimension Very Strong in
Banks-
Depositors Borrowers
Employees
Community
Regulators
Government
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Unique Dimensions in Bank
Governance Banking Risk Potential
Internal Fraud & External Fraud, Highly
Likely, since cash/cash equivalents closest ingrab-chain
Employment Practices/ Workplace Safety
Product, Process, Business Practices Damages to Physical Assets & IPR/Brands
Business Disruption MajorThreat
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Unique Dimensions in Bank
Governance Non-Compliance (Intentionally or
Otherwise) with Laws, Rules, Regulations
Consequences of (Non) Compliance Risk in
Banks
Legal or Regulatory Sanctions
Financial or Reputational Loss
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Unique Dimensions in Bank
Governance Banks as Promoters of Good Governance
Prescribing Governance Standards at
Borrowers (IFC, CalPERS, FIs) Encourage by Preferential Lending Rates,
OtherTerms
Discourage by Adversarial Lending Rates,
OtherTerms A Measure of Strengthening Protection of Bank
Assets, Hence Good for Banks OwnGovernance
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Some Unique Dimensions of Public
Sector Bank Governance in Developing
Economies
Political & Bureaucratic Interventions
Banking as a Policy Instrument
Supervisory Interventions, Micro-Managing
Captive Resource of First Resort
Suspect Independence of Supervisory Institutions Lack of Accurate/ Timely Accounting &
Disclosure Practices
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Bank Boards, Directors, &
Governance
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Some Unique Attributes &
Responsibilities of Bank Boards
&Directors Assume Responsibility for Effective & Efficient
Management, through Oversight Mechanisms
Integrity is Indivisible; Role Model Director is theMost Persuasive Statement of Ethical values
ConsiderTransparency as the Norm.
Confidentiality should not lead to Opacity Continued
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Some Unique Attributes &
Responsibilities of Bank Boards &
Directors
Ultimate Responsibility forTrue and Fair
Presentation Rests with the Board
Poor Leadership Infects.
Adapted from Guidance for the Directors of Banks, Jonathan Charkham, (2003)
[OECD-World Bank] Global Corporate Governance Forum, Washington
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Some Closing Thoughts
Right-Size the Board and its Composition
Complementary Skill-Sets & Financial
Acumen Essential
Fit & Proper Criteria for Membership
More Focus on Oversight, Less on Micro-
Management
Contribution as Important as Surveillance
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Some Closing Thoughts
Minimise Conflict of Interest Potential
Respect Minority / External Shareholders
Rights (Listed Public Sector Banks)
Bank Boards to Go That Extra Mile: Go
Beyond What is Prescribed to What is
Appropriate That Way lies GreaterValuations & Better Reputations
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