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-OECD
Corporate 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.
Definition
The 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
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 Nonexecutive 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 Rotate directors through various
Chairman
committees
Avoid inside
committees
Ensure a
directors
directors
majority
of
on
the Ensure that outside directors meet
alone
outside Ensure efficient information flow
Limit the number of other boards Insist on regular attendance at
on which the directors can serve
board meetings by all directors
Impose a retirement age
Establish an orientation program
for new directors
Key Principles
Governance
Openness
of
Division of
responsibility
External
Audit
Internal
Audit
Supply of
Information
Key
Principles
Appointment
To
board
Internal
Control
Director’s
Remuneration
Accountability
Good
Financial
Reporting
Corporate
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
Governance System
Corporate

Increased Employee motivation

Better information System

Effective ethical policies

Stronger organizational Structure

Conducive
environment
company objectives
for
achieving
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 Reportaccountability aspects
1992
focused
on

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
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
the shareholders
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
Corporate Excellence
and

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
capitalization)
market
value
(Market
Thank You