Corporate Governance –

A Conceptual Analysis
 Introduction to CG
• Corporate governance is how a corporation is
administered or controlled.
• Corporate Governance is a set of processes
,customs ,policies ,laws & instructions affecting the
way a corporations is directed ,administrated or
controlled.
• The participants in the process include employees
and suppliers ,partners, customers , government
and professional organization regulators ,and the
communities in which the organization has a
presence.
 Definition of Corporate
Governance
Sir Adrian Cadbury ; “Corporate Governance is
concerned with holding the balance between
economic & social goals and between individual and
communal goals. The CG framework is there to
encourage the efficient use of resources and equally
to require stewardship of those resources. The aim is to
align as nearly as possible the interest of individuals,
corporations and society.”
Gabriele O’Donovan; CG is an internal system
encompassing policies ,processes & people which
serves the needs of shareholders & management
activities, by directing & controlling management
activities with good business savvy objectivity,
accountability & integrity.
 Definition of Corporate
Governance
In other words ;
CG may be defined as a set of systems, processes and
principles which ensures that a company is governed in the
best interest of all the stakeholders.
It is the system by which the companies are directed and
controlled. It is about promoting corporate fairness,
transparency and accountability.
In other words, ‘good corporate governance’ is simply
‘good business’. It ensures:
• Adequate disclosures and effective decision making to
achieve corporate objectives.
• Transparency in business transaction.
• Statutory and Legal Compliances
• Protection of shareholder interests
• Commitment of values and ethical conduct of business
Diagram
 Objectives of Corporate
Governance
1. To build an environment of trust and confidence among
those having competing and conflicting interest.
2. To enhance shareholders value and protect interest of
other stake holders.
3. To have system and procedure.

Advantages
Text Book page 159.
 Principles of Corporate
Governance
1) Right and Equitable Treatment to
shareholders.
2) Interest of other Stakeholders.
3) Role and Responsibility of the Board.
4) Integrity and Ethical Behavior.
5) Disclosure and Transparency.
Text book page 162
 FRAMEWORK for CG
INTERNAL Private EXTERNAL
Regulatory
STAKE
SHAREHOLDERS Standards (for example
HOLDERS accounting and auditing)

Laws and regulations

BOARD OF
DIRECTORS
Reputational
Agents
Financial Sector
- Accountants
- Debt
Appoints - Lawyers
- Equity
Reports to and - Credit Ratings
Monitors - Investment
Bankers
- Financial media Markets
MANAGEMENT - Investment - Competitive factors and
advisors foreign markets
- Research - Foreign Direct Investment
Operates Corporate - Corporate Control
Governance
Core functions - Analysis
 Introduction to Framework
(1) The shareholders are given necessary reports ,
information to guide them in appointing and re-
appointing an effective Board of Directors who manage
the day to day operations of the company. There is a
clear cut distinction between the owners and the
stakeholders, the employees, the financers who
empower the Board of Directors to run the company
effectively. Thus ,the first principle in the frame work is
that there is clear cut distinction between the
Ownership and the Professional Management of the
Company. And all the stakeholders are informed about
the day to day operations through various reports and
data.
 Introduction to Framework
(2) There are many stakeholder in the company:
(a) The shareholders which again can be further sub-divided as the
general shareholders, the employee shareholder who have got
ESOP (Employee Stock Option Plan),the Institutional Investors (All the
qualified Institutional Buyers) and finally the promoter group who
have considerable stake in the company. Their main objective is to
maximize the wealth of the shareholders.
(b) The Distributors or the channel partners are also the stakeholders,
their main objective is to be part of a value chain and make timely
deliveries across the country.
(c) The Customers are also the stakeholders whose main objective is to
get best quality product or service at the most competitive rate.
(d) The employees whose main objective is to get the most lucrative
salary and perks to motivate them to put in their very best.
 Introduction to Framework
(3) The reputational agents which would be part of the
Corporate Framework would be.
(a) Accountants.
(b) Legal Experts.
(c) Credit Rating Agencies
(d) Financial and Investment Advisors
(e) Financial Media

(4) The regulatory framework includes all the regulatory

authorities like SEBI and the Stock Exchange which would
ensure that all the principles laid down are followed.

Last para text book page 169

Framework of Corporate
Governance
 FIVE GOVERNANCE
PRINCIPLES FOR CG
(A).Effective Leadership: The CEO’s leadership role in
governance is fundamental(important);an indication of
leadership is the effective way in which the organization as
a whole works together under the CEO’s leadership. The
Executives also has a collective responsibility to provide
leadership ,communicating coherent governance principles
throughout the agency and ensuring the operation of the
checks and balances with effective governance demands.
1.Executive Leadership Group…….
2.Embracing better/more comprehensive management
performance…..
3.Monitoring policies directed……………..
4.Management Information System is in place……….
5.Reviewing its own process and effectiveness……….
 FIVE GOVERNANCE
PRINCIPLES FOR CG
(B).Capable Management:
Capable management includes setting in place the broad principles
under which the agency operates , including setting clear objectives
and an appropriate ethical framework operating in the public interest;
establishing due process; defining duty of care to the agencies client
group etc. (Text book…pg170).
(C).Diligent Monitoring:
Diligent Monitoring of risks, and the effectiveness of mitigating strategies,
should include processes to access the delivery of outputs and quality of
control systems overtime enabling the identification of corrective actions
for continuous improvement. Systems operating in a changing
environment require close monitoring. (Text book…pg170).
(D).Responsible Risk Management:
Responsible risk management establishes process for identifying,
analyzing and mitigating risks that could prevent the agency from
achieving its business objectives (Text book…pg170).
 FIVE GOVERNANCE
PRINCIPLES FOR CG
(E).Clear Accountability and Responsibility:
Clear accountability and responsibility is primarily through the CEO to the
responsible Managers and the Executive Directors….. (Textbook…pg171)
 Advantages/Benefits of
Corporate Governance
(1). Enhancing overall company performance.
(2). Preparing a small enterprise for growth, and so helping
to secure new business opportunities when they arise.
(3). Increasing attractiveness to investors and lenders , which
enables faster growth.
(4). Increasing the company’s ability to identify and mitigate
risks, manage crises and respond to changing market trends.
(5). Increasing market confidence as a whole.
(6). All companies suffer from corporate scandals, which
scare potential investors away from the market.
 Corporate Governance :
Principal Agency Relationship
Principal’s obligation

to perform contract
Principal

Agency

Contract with third party on

behalf of principal

Agent Third Party

 What is Principal Agent
Relationship
A “principal-agent” relationship arises when the person
who owns a firm is not the same as the person who
manages or controls it.
For example ,investors or financiers (principals) hire
managers(agents) to run the firm on their behalf.
Investors need managers specialized human capital to
generate returns on their investments, and managers may
need investors’ fund since they may not have enough
capital of their own to invest.
In this case there is a separation between the financing
and he management of the firm, i.e there is a separation
between ownership and management.
 Principal-Agency
Relationship
Further reading….page 175.
 Models of the Corporation
SHAREHOLDER MODEL STAKEHOLDER MODEL

1.In its narrowest sense (Shareholder 1.In its widest sense (Stakeholder
Model), corporate governance often Model) ,corporate governance can be
describes the formal system of used to describe the network of formal
accountability of senior management to and informal relations involving the
the shareholders. corporation.
2.More recently ,the stakeholder approach emphasizes on contributions by
stakeholders that can contribute to the long-term performance of the firm and
shareholder value ,and the shareholder approach also recognizes that business
ethics and stakeholder relation can have an impact on the reputation and long-
term success of the corporation.

3.Therefore, the difference between these two models is not as stark as it seems,
and instead a question of emphasis

Conti….page 174 Conti….page 175

 Agency Theory
1.A simple agency model suggests that , as a result of
information asymmetries (all the stakeholders not having all
the information about the company. There may be few who
know more about the company than others, this is called
information asymmetry).
2.They would be led by self interest. The principals would also
lack trust as regards their agents and will seek to resolve
these concerns by putting in place mechanisms to align the
interests of the agents with the principals and to reduce the
scope for information asymmetries and opportunistic
behavior.
3.This is done through periodic reporting of the financial
aspects of the company.
This VIDEO clip will make it clear as to what are the
challenges.
 Corporate Governance
Codes
Introduction:
Governance occurs just as a corporate entity acquires life and
particularly when ownership of the enterprise is separated from its
management.
The governance phase was not in vogue in the management
literature until 1980.
Adam Smith recognized the importance of corporate
governance long back though he did not use the phrase.
According to him,
“The directors of the companies being the managers of the
peoples’(shareholders) money than their own ,it can not well be
expected that they should watch over it with the same anxious
vigilance with the partners in a private corporation frequently
watch over their own. ”
 Corporate Governance
Codes
Meaning & Definition
“A code is a set of rules ,which are accepted as general
principles, or a set of written rules ,which states how the
people of a particular organization or country should
behave”
Thus it is a set of standards agreed by a group of people
who do a particular job. A regulation is an official rules that
lays down how things should be done. Both codes and
regulation are “set of rules” or “principles” or “standards”
that and are intended to control, guide or manage
behavior or the conduct of individuals working in an
organizations, the basic difference being that codes are
“self imposed” or “self-regulated” sets of rules, while
regulations and “official” i.e imposed by the State
(government)
 Benefits of self-regulatory Codes
International Capital Markets Group (1992) listed the following benefits of self
regulation.
1.In “self regulation” it is possible to impose ethical standards, which goes
beyond those, which can be imposed by statutory legislation.
2.”Self-regulators are directly accountable to the members of their group". Self-
regulatory systems have built-in motivation to regulate for effectiveness and least
interference.
3. Self-regulation operates in an environment where there is a willingness to
accept regulations formulated from with in the common good of the group.
4.The regulated have an opportunity to participate at all levels of the self-
regulatory process. This make it easier for them to appreciate and accept new
regulation.
5.Self-regulators has a build-in system of checks and balances as the regulated
see it as their duty to expose non-compliance.
6.Self-regulators can identify complex regulatory problems at an early stage and
develop suitable solution before these problems reach a stage that can disrupt
group operations
7.Self-regulations are more comprehensive than official regulations and are
easier to operate and implement.
Role and Responsibilities of Top
Authority in Corporate
Governance
• CEO
• CHAIRMAN
• BOARD
• MANAGING DIRECTOR
• RIGHTS of INVESTOR and SHAREHOLDERS
 Roles of a Chief Executive Officer

Leader Visionary/Information Bearer Manager

Decision Maker Board Developer

Responsibilities of CEO

1.Board Administration and Support

2.Programe ,Product and Service Delivery

3.Financial ,Tax, Risk and Facilities Management

4.Human Resource Management

5.Communication and Public Relations

6.Fundraising (nonprofit organisation)

 Chairman
To be read from pg 102 Seth Publication

Board-Role & responsibility

To be read from pg 102 Seth Publication

BOARD MEMBERS

a) The Officer

b) The President

c) The Vice President

d) Secretary

e) Treasurer
g) Board Committee and
f) Executive Director Committee
 Different Committee
Executive Committee

Budget and Administration Committee

Nominating Committee

Governance Committee

Revenue Generation Committee

Policy Committee

Medical Advisory Board

Program Committee
 Managing Director
The first building block of Corporate Governance to be put up
in place in a company is the Managing Director (also known
as the Chief Executive).In startups this position is generally
filled by the founder.
Whatever the size or nature of the company, the role of the
Managing Director/Chief Executive is to ensure that the
company achieves its strategic objectives and to provide
leadership and direction to staff.
His her role depends on the stage of growth of the company.
Typically, the scope of the role becomes more clearly defined
as the company develops and the supporting Corporate
Governance framework required is clearer. For example,
once such a framework is developed ,the Managing
Director/Chief Executive may delegate some responsibilities
to members of the Management Team.
 Role of Managing
Director/Chief Executive
Page 106 Seth Publication
 Rights of Investors and
Shareholders
1. Voting Powers on Major Issues.
2. Ownership in a Portion of company Earnings
3. The Right to Transfer
4. Right to receive dividend
5. Opportunity to Inspect Books of accounts and
records.
6. The right to sue for wrongful act.
 Distinguishing the Roles of
Board and Management
Constitutions of more and more companies stress and
underline that the businesses is to be managed “by or
under the direction of the board.”
In such a practice, the responsibility for managing the
business is delegated by the board to the CEO, who in
turn delegates the responsibility to other senior
executive.
Thus, the board occupies a key position between the
shareholders (owners) and the company’s
management (day-to-day managers of the
company’s resources)
 Thrust areas of Corporate Governance
Composition of Board

In case of non- executive

In case of executive chairman, at least 1/3rd of
chairman, at least ½ of the board should
the board should be compromise independent
independent directors directors
Non-executive Directors
Executive Directors 51% or more

Shareholder BOARD OF DIRECTORS

African

Shareholder Shareholder Shareholder Shareholder

Japan UK/US France/Germany India/China
 Separation of the roles of the CEO and Chairperson
Should the board have Committees??

Appointments:- The Board and the Directors’ Re-elections

Remuneration of Directors and Executives’ Remuneration.

Disclosure and Audit

To be read from pg.177&178

Role and Responsibility of a Non-executive Director

BOARD OF DIRECTORS

Executive Non-executive

Though the law treats them simply as directors and both carry equal
responsibility ,they have different roles to play. The non-executive
independent directors are generally given the chairmanship of important
committee like Audit Committee, Nomination Committee and
Remuneration committee

They are closer to action. They can question the executives directly. They
observe from a distance how well executives are performing their duties.