CORPORATE GOVERNANCE
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Corporate Governance
- Corporate Governance refers to the set of systems, principles and processes by which a company is governed.
- They provide the guidelines as to how the company can be directed or controlled – fulfill its goals and objectives – adds to the value of the co & beneficial to the stakeholders in the long run.
- Stakeholders – everyone ranging from the Board of Directors, Management, shareholders to customers, employees and society.
- C.G is the technique by which companies are directed and managed.
- It means carrying the business as per the stakeholder's desires.
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- It is all about balancing individual and social goals, as well as economic and social goals.
- It also deals with determining ways to take effective strategic decisions.
- Corporate Governance ensures transparency which ensures strong and balanced economic development.
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- It ensures that the interests of all shareholders are safeguarded.
- It encourages a trustworthy, moral as well as ethical environment.
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Meaning of Corporate Governance
- Refers to the relationship that exists between the different participants and defining the direction and performance of a corporate.
- Actors – The CEO, Board of Directors, Shareholders.
- Other Actors - Staff, Suppliers, Creditors Customers and the Community.
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- Corporate Governance is a systematic process by which companies are directed and controlled to enhance their wealth generation capacity.
- It is a set of relationships....
- Companies around the world are realizing better Corporate Governance adds considerable value to their operational Performance:-
- It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience and a host of new ideas.
- It rationalizes the management and monitoring of risk the firm faces globally.
- It limits the liability of top management and directors, carefully articulating the decision making process.
- It assures the integrity of financial reports.
- It has long term reputational effects among key stakeholders both internally and externally.
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The corporate governance framework consists of:
- (i) Explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights and rewards.
- (ii) Procedures for reconciling the conflicting interests of stakeholders in accordance with their duties, privileges and roles.
- (iii) Procedures for proper supervision, control and information-flows to serve as a system of checks-and-balances.
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Corporate governance consists of two elements:
- The long term relationship which has to do with checks and balances, incentives for manager and communications between management and investors.
- The transactional relationship which involves dealing with disclosure and authority.
Definitions
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- OECD (1999), “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, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance."
Concept of Corporate and Governance
- Corporate is a business or entity which has a separate legal personality, with limited liability or unlimited liability for its members or shareholders, who buy and sell their shares/stocks depending on the performance of the board of directors.
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- Governance is the act of governing. It refers to decisions that define expectations, grant power, or verify performance. It consists of either a separate process or part of decision making or leadership processes.
Good Corporate Governance
- It ensures:
- ? Adequate disclosures and effective decision making to achieve corporate objectives;
- ? Transparency in business transactions,
- ? Statutory and legal compliances,
- ? Protection of shareholder interests,
- ? Commitment to values and ethical conduct in business.
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- The aim of "Good Corporate Governance" is to ensure commitment of the board in managing the company in a transparent manner for maximizing long-term value of the company for its shareholders and all other partners. It integrates all the participants involved in the process, which is economic, and at social.
- A properly structured board capable of taking independent and objective decisions is in place at the helm of affairs;
- The board should be balance with regards to the representation of adequate number of non- executive and independent directors who take care of their 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;
- The board has an effective machinery to subserve the concerns of all 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;
- The board remains in effective to control the affairs of the company at all times.
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Significance and Importance of Corporate Governance
- Changing Ownership Structure
- Importance of Social Responsibility
- Growing Number of Scams
- Indifference on the part of Shareholders
- Globalization
- Takeovers and Mergers
- SEBI
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Benefits of Corporate Governance
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- 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.
- It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.
- Good corporate governance also minimizes wastages, corruption and mismanagement.
- It helps in brand formation and its development.
- It ensures an organization to manage in a manner that fits the best interests of all.
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Corporate Governance and the Economy
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- Good corporate governance practices should make firms more profitable and productive in turn contributing to the overall health of the economy.
- Why is it important ?
- Why was it in the news recently? (Corporate Fraud by Satyam)
Models of Corporate Governance
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- Market Model or Outsider Model
- Control Model or Insider Model
Model-1- Market Model
- Mathematical representation of the interactions among various participants, economic forces, and choices made.
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- Characteristics:
- A priority to market regulation.
- The owners of firms tend to have a transitory interest in the firm.
- The absence of close relationships between shareholders and management.
- The existence of an active market for corporate control and takeovers.
- The primacy of shareholder rights over those of other organizational groups.
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Control Model
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- Represented by underdeveloped equity markets, concentrated ownership, less shareholder transparency and inadequate protection of minority and foreign shareholders.
Control Model
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- The priority to stakeholders control
- The owners of firms tend to have an enduring interest in the company
- They often hold positions on the Board of Directors or in senior managerial positions
- The relationships between management and shareholders are close and stable
- There is little by way of a market for corporate control
- The existence of formal rights for employees to influence managerial decisions
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- Corporate governance is about promoting corporate fairness, transparency and accountability.
- Corporate Governance means doing everything better to improve relations between companies and their shareholders.
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OECD on Corporate Governance
- Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions.
- Rights and equitable treatment of shareholders
- Interests of other stakeholders
- Role and responsibilities of the board
- Integrity and ethical behavior
- Disclosure and transparency
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A Historical Perspective of Corporate Governance
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- The seeds of modern corporate governance were probably sown by the Watergate scandal in the United States.
- Cadbury Committee Report in the United Kingdom (1992)
- Recommendations of the National Association of Corporate Directors of the US (1995)
- After Enron and Worldcom failures
- On 21 August 2002, the Department of Company Affairs (DCA) under the Ministry of Finance and Company Affairs appointed a Committee to examine various corporate governance issues.
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Issues in Corporate Governance
- Duties of Directors
- Composition and Balance of the Board
- Remuneration and Reward of Directors
- Reliability of Financial Reporting and External Auditors
- Board's Responsibility for Risk Management and Internal Control
- Shareholders' Rights and Responsibilities
- Corporate Social Responsibility and Business Ethics
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Relevance of Corporate Governance
- Corporate governance (CG) is a set of systems, principles and processes, about how companies are directed and controlled.
- It regulates the way boards manage the running of a company by its executives, and how board members are accountable to shareholders and the company.
- This has a direct influence on company's attitude, accountability and responsibility, towards all stakeholders including employees, shareholders, and customers alike.
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Cont..
- Superior CG plays a fundamental role in strengthening the integrity and efficiency of financial markets.
- Inadequate corporate governance however undermines a company's potential and at worst leads to financial difficulties and even may result in fraud.
- Well governed companies usually outperform other companies and are able to attract new investors whose support can help to finance further growth.
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Theoretical basis for Corporate Governance
- The fundamental theoretical basis of corporate governance is agency costs.
- In a limited liability company structure a number of investors provide the risk capital. They are called shareholders, the deemed owners of the company.
- They delegate the power to manage the company to board of directors.
- Principal-agent relationship
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- Core of the Corporate Governance – Ethical Conduct of Business.
- Unless the corporations adopt and demonstrate ethical conduct and act in the best interest of its various stakeholders , will not be able to succeed.
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Obligation to Society
- A corporation is a creation of law as an association of persons forming part of the society in which it operates.
- Its activities are bound to impact the society as the society's values would have an impact on the corporation.
Cont..
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- National Interest
- Political non-alignment
- Legal compliance
- Rule of law
- Honest and ethical conduct
- Corporate Citizenship
- Ethical behaviour
- Social concerns
- CSR
- Environment friendliness
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Cont..
- Healthy and safe working environment
- Competition
- Trusteeship
- Accountability
- Effectiveness and efficiency
- Timely responsiveness
- Corporations should uphold the fair name of the country
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Obligations to Investors
- The investors as shareholders and providers of capital are of paramount importance to the corporation.
- ? Towards shareholders
- ? Measures promoting transparency and informed shareholder participation
- ? Transparency
- ? Financial reporting and records
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Obligation to Employees
- Fair employment practices
- Equal opportunities employer
- Encouraging whistle blowing
- Humane treatment
- Participation
- Empowerment
- Equity and inclusiveness
- Participative and collaborative environment
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Obligation to Customers
- Quality of products and services
- Products at affordable prices
- Unwavering commitment to customer satisfaction
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Managerial Obligation
- Protecting company's assets
- Behaviour towards govt agencies
- Control
- Consensus-oriented
- Gifts and donations
- Role and responsibilities of corporate board and directors
- Direction and management must be distinguished
- Managing and whole-time directors
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