Corporate Governance

PGDM

What is Corporate Governance??? The process and responsibility of the Board

of Directors in ensuring the management of a corporation conducts business in such a way as to meet the expectations of its various stakeholders

Besides financial returns for shareholders this also includes impact on employees environment and community at large.

Definition-OECDCorporate governance is the system by which business corporations are directed and controlled.

The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stakeholders.

Spells out the rules and procedures for making decisions on corporate affairs.

DefinitionThe Kumar Mangalam Birla Committee constituted by SEBI has observed that:

“Strong corporate governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.”

Indian Scenario The standard of corporate governance was

poor during the earlier decades dominated by family business houses.

They operated in a virtually closed economy and could manipulate the rules governing the licence-permit raj by generous donations to political parties, and other corrupt practices.

Why is Corporate Governance important???

As we are increasingly moving towards open and market driven economic systems, a number of companies catering to international markets

These companies are required to comply with enhanced disclosure and stringent listing requirements.

Institutional investors, both foreign and domestic are becoming important players in the stock market.

They are increasingly demanding more information and transparency in operations

No. of International events (like joint ventures, mergers, takeovers) are taking place so it is required that proper corporate governance practices should be followed.

Issues in Corporate Governance

Ethical Issues

Efficiency Issues

Accountability Issues

Issues in Corporate Governance (contd)

Opening of Economy

Rising importance of institutional investors

Growth of private companies

Insider Trading

Growth and magnitude of corporate groups

Rise in hostile takeovers

Objectives of Corporate Governance

A properly structured Board capable of taking independent and objective decisions is in place at the helm of affairs;

The board is balanced as regards the representation of adequate number of Non-executive and independent directors who will take care of the interests and well being of all the stakeholders;

The Board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information;

Objectives of Corporate Governance The Board has an effective machinery to sub serve the

concerns of stakeholders;

The Board keeps the shareholders informed of relevant developments impacting the company;

The Board effectively and regularly monitors the functioning of the management team; and

The Board remains in effective control of the affairs of the company at all times.

The overall endeavor of the Board should be to take the organization forward, to maximize long term value and share holder’s wealth.

Board Structures and Processes for Good Governance

STRUCTURES PROCESSES

Limit the size of Board Develop guidelines for committees

Separate the role of CEO and Chairman

Rotate directors through various committees

Avoid inside directors on the committees

Ensure that outside directors meet alone

Ensure a majority of outside directors

Ensure efficient information flow

Limit the number of other boards on which the directors can serve

Insist on regular attendance at board meetings by all directors

Impose a retirement age Establish an orientation program for new directors

Key Principles of Good Corporate Governance

ExternalAudit

Internal Audit

Director’sRemuneration

FinancialReporting

InternalControl

Appointment To

board

Supply ofInformation

Division of responsibility

KeyPrinciples

Openness

Accountability

Integrity

Functions of the BOARD Strategic Role

Systematic level strategy Structural and Portfolio strategy Implementation strategy

Policy Making

Monitoring and Supervisory Role

Committees of the BOARD

Audit committee

Remuneration committee

Nomination committee

Benefits of Good Corporate Governance System

Increased Employee motivation

Better information System

Effective ethical policies

Stronger organizational Structure

Conducive environment for achieving company objectives

International Developments Organization for Economic Cooperation and Development

(OECD) has set certain principles in areas of corporate governance

The Right of shareholders

Equitable treatment of shareholders

Role of stakeholders

Disclosure and transparency

The responsibilities of Board

Developments in UK

Cadbury Committee Report- 1992 focused on accountability aspects

Audit Committee to comprise of minimum three members

Listed companies to publish full financial statements annually and half-yearly reports interim.

Code of Best Practices to incorporate

Board to present assessment of company’s position Directors to report on effectiveness of internal control

systems

Development in USA CG came into forefront through shareholder activism

California Public Employees Retirement Systems (CalPERS) is in the forefront of shareholder activism and internationally credited as a torch bearer of CG

CalPERS have brought out the good governance principles:

Accountability Transparency Equity Voting Method improvements Long term vision

Principles for Corporate Governance in the Common wealth (1999)

Ensure that the corporation complies with all relevant laws, regulations and codes of best business practice

Ensure that the corporation communicates with shareholders and other stakeholders effectively

Serves the legitimate interests of the shareholders and account to them fully

Regularly review the procedures and processes to ensure the effectiveness of its internal systems and control

Ensure annually that the corporation will continue as a going concern in its next fiscal year

Developments in India Voluntary code of Corporate Governance for listed companies

- CII - 1998

Kumar Mangalam Birla committee by SEBI - 2000

Companies (Amendment Act), 2000 & Clause 49 of listing agreement -2000

Naresh Chandra Committee by SEBI - 2002

Companies (Amendment) Bill of 2003

N.R.Narayana Murthy Committee -2003

Kumar Mangalam Birla Report In 1999 SEBI constituted- under the

chirmanship of Shri Kumarmangalam Birla

Committee submitted its report in year 2000

Based on these recommendations Clause 49 was incorporated in the Listing Agreement

Kumarmangalam Birla Committee Report

Board should have an optimum combination of Executive and Non- Executive directors and at least 50 % should be non-executive

An independent Audit committee should be set up by Board

Remuneration Committee should be set up by Board

There should be a separate section on CG in Annual Report with details on level of compliance by the company

The Naresh Chandra Committee (appointed by Department of Company Affairs)

It has suggested that the partners and at least 50% of the engagement team responsible for either the audit of a listed company should be rotated every five years

The committee also recommends that no partner or member of the engagement team should be employed by or become a director of a client company with whom he worked preceding two years.

The committee has considered the need for reviewing the manner in which the three professional bodies- the Institute of Chartered Accountants. Cost and Works’ Accountants, the Company Secretaries regulate their membership. It has recommended the setting up of independent quality review boards (QRBs), one for each of the three organizations.

It has also recommended the setting up of Corporate Serious Fraud Office for punishing erring professionals.

Professionalization of Corporate Governance Distinguish Management from Control

Active Role of Institutional Investors

Expand Role of Non- Executive Directors

Proper and Timely Information to Board

Size of Board

Improve Accounting and Reporting Practices

Corporate Governance and Corporate Excellence The essence of good corporate governance

is transparency, accountability, investor protection, compliance with statutory laws and regulations and value-creation for shareholders and other stakeholders.

A company’s most valuable asset is goodwill it enjoys with its stakeholders and institutional investors are willing to pay 20% more on average for companies with a good governance record.

Corporate Excellence Profitability

Satisfied stakeholders such as shareholders, customers, employees

Revenue and profit growth

Growth in market share

Growth in market value (Market capitalization)

Thank You