Assignment

Of

Organizational
Effectiveness and Change

Topic:-Corporate Governance

SUBMITTED TO: SUBMITTED BY:

DR B.S.CHAUHAN Mohit Saxena
ROLL NO: 901117027

M.B.A. (I.B): 4st-SEM

 Introduction

In A Board Culture of Corporate Governance, business author Gabrielle O'Donovan

defines corporate governance as 'an internal system encompassing policies, processes and
people, which serves the needs of shareholders and other stakeholders, by directing and
controlling management activities with good business savvy, objectivity, accountability and
integrity. Sound corporate governance is reliant on external marketplace commitment and
legislation, plus a healthy board culture which safeguards policies and processes'.
O'Donovan goes on to say that 'the perceived quality of a company's corporate governance
can influence its share price as well as the cost of raising capital. Quality is determined by
the financial markets, legislation and other external market forces plus how policies and
processes are implemented and how people are led. External forces are, to a large extent,
outside the circle of control of any board. The internal environment is quite a different
matter, and offers companies the opportunity to differentiate from competitors through
their board culture. To date, too much of corporate governance debate has centered on
legislative policy, to deter fraudulent activities and transparency policy which misleads
executives to treat the symptoms and not the cause.

It is a system of structuring, operating and controlling a company with a view to achieve

long term strategic goals to satisfy shareholders, creditors, employees, customers and
suppliers, and complying with the legal and regulatory requirements, apart from meeting
environmental and local community needs.

Report of SEBI committee (India) on Corporate Governance defines corporate governance

as the acceptance by management of the inalienable rights of shareholders as the true
owners of the corporation and of their own role as trustees on behalf of the shareholders. It
is about commitment to values, about ethical business conduct and about making a
distinction between personal & corporate funds in the management of a company.” The
definition is drawn from the Gandhian principle of trusteeship and the Directive Principles
of the Indian Constitution. Corporate Governance is viewed as business ethics and a moral
duty. See also Corporate Social Entrepreneurship regarding employees who are driven by
their sense of integrity (moral conscience) and duty to society. This notion stems from
traditional philosophical ideas of virtue (or self governance) and represents a "bottom-up"
approach to corporate governance (agency) which supports the more obvious "top-down"
(systems and processes, i.e. structural) perspective.

Impact of Corporate Governance

The positive effect of corporate governance on different stakeholders ultimately is a
strengthened economy, and hence good corporate governance is a tool for socio-economic
development.

Parties to corporate governance

Parties involved in corporate governance include the regulatory body (e.g. the Chief
Executive Officer, the board of directors, management, shareholders and Auditors). Other
stakeholders who take part include suppliers, employees, creditors, customers and the
community at large.

In corporations, the shareholder delegates decision rights to the manager to act in the
principal's best interests. This separation of ownership from control implies a loss of
effective control by shareholders over managerial decisions. Partly as a result of this
separation between the two parties, a system of corporate governance controls is
implemented to assist in aligning the incentives of managers with those of shareholders.
With the significant increase in equity holdings of investors, there has been an opportunity
for a reversal of the separation of ownership and control problems because ownership is
not so diffuse.

A board of directors often plays a key role in corporate governance. It is their responsibility
to endorse the organisation's strategy, develop directional policy, appoint, supervise and
remunerate senior executives and to ensure accountability of the organisation to its
owners and authorities.

The Company Secretary, known as a Corporate Secretary in the US and often referred to as

a Chartered Secretary if qualified by the Institute of Chartered Secretaries and
Administrators (ICSA), is a high ranking professional who is trained to uphold the highest
standards of corporate governance, effective operations, compliance and administration.

All parties to corporate governance have an interest, whether direct or indirect, in the
effective performance of the organization. Directors, workers and management receive
salaries, benefits and reputation, while shareholders receive capital return. Customers
receive goods and services; suppliers receive compensation for their goods or services. In
return these individuals provide value in the form of natural, human, social and other
forms of capital.

A key factor is an individual's decision to participate in an organisation e.g. through

providing financial capital and trust that they will receive a fair share of the organisational
returns. If some parties are receiving more than their fair return then participants may
choose to not continue participating leading to organizational collapse.

PRINCIPLES
Key elements of good corporate governance principles include honesty, trust and integrity,
openness, performance orientation, responsibility and accountability, mutual respect, and
commitment to the organization.

Of importance is how directors and management develop a model of governance that aligns
the values of the corporate participants and then evaluate this model periodically for its
effectiveness. In particular, senior executives should conduct themselves honestly and
ethically, especially concerning actual or apparent conflicts of interest, and disclosure in
financial reports.

Commonly accepted principles of corporate governance include:

 Rights and equitable treatment of shareholders : Organizations should respect

the rights of shareholders and help shareholders to exercise those rights. They can help
shareholders exercise their rights by effectively communicating information that is
understandable and accessible and encouraging shareholders to participate in general
meetings.
 Interests of other stakeholders: Organizations should recognize that they have
legal and other obligations to all legitimate stakeholders.
 Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the ability to
review and challenge management performance. It needs to be of sufficient size and
have an appropriate level of commitment to fulfill its responsibilities and duties. There
are issues about the appropriate mix of executive and non-executive directors.
 Integrity and ethical behaviour: Ethical and responsible decision making is not
only important for public relations, but it is also a necessary element in risk
management and avoiding lawsuits. Organizations should develop a code of conduct for
 their directors and executives that promotes ethical and responsible decision making. It
is important to understand, though, that reliance by a company on the integrity and
ethics of individuals is bound to eventual failure. Because of this, many organizations
establish Compliance and Ethics Programs to minimize the risk that the firm steps
outside of ethical and legal boundaries.
 Disclosure and transparency: Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide shareholders
with a level of accountability. They should also implement procedures to independently
verify and safeguard the integrity of the company's financial reporting. Disclosure of
material matters concerning the organization should be timely and balanced to ensure
that all investors have access to clear, factual information.
Issues involving corporate governance principles include:

 internal controls and internal auditors

 the independence of the entity's external auditors and the quality of their audits
 oversight and management of risk
 oversight of the preparation of the entity's financial statements
 review of the compensation arrangements for the chief executive officer and other
senior executives
 the resources made available to directors in carrying out their duties
 the way in which individuals are nominated for positions on the board
 dividend policy
Nevertheless "corporate governance," despite some feeble attempts from various quarters,
remains an ambiguous and often misunderstood phrase. For quite some time it was
confined only to corporate management. That is not so. It is something much broader, for it
must include a fair, efficient and transparent administration and strive to meet certain well
defined, written objectives. Corporate governance must go well beyond law. The quantity,
quality and frequency of financial and managerial disclosure, the degree and extent to
which the board of Director (BOD) exercise their trustee responsibilities (largely
an ethical commitment), and the commitment to run a transparent organization- these
should be constantly evolving due to interplay of many factors and the roles played by the
more progressive/responsible elements within the corporate sector. John G. Smale, a
former member of the General Motors board of directors, wrote: "The Board is responsible
for the successful perpetuation of the corporation. That responsibility cannot be relegated
to management."[6] However it should be noted that a corporation should cease to exist if
that is in the best interests of its stakeholders. Perpetuation for its own sake may be
counterproductive.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action
to accomplish organizational goals. Examples include:

 Monitoring by the board of directors: The board of directors, with its legal
authority to hire, fire and compensate top management, safeguards invested capital.
Regular board meetings allow potential problems to be identified, discussed and
avoided. Whilst non-executive directors are thought to be more independent, they may
not always result in more effective corporate governance and may not increase
performance. Different board structures are optimal for different firms. Moreover, the
ability of the board to monitor the firm's executives is a function of its access to
information. Executive directors possess superior knowledge of the decision-making
process and therefore evaluate top management on the basis of the quality of its
decisions that lead to financial performance outcomes, ex ante. It could be argued,
therefore, that executive directors look beyond the financial criteria.
 Internal control procedures and internal auditors: Internal control procedures
are policies implemented by an entity's board of directors, audit committee,
management, and other personnel to provide reasonable assurance of the entity
achieving its objectives related to reliable financial reporting, operating efficiency, and
compliance with laws and regulations. Internal auditors are personnel within an
organization who test the design and implementation of the entity's internal control
procedures and the reliability of its financial reporting
 Balance of power: The simplest balance of power is very common; require that the
President be a different person from the Treasurer. This application of separation of
power is further developed in companies where separate divisions check and balance
each other's actions. One group may propose company-wide administrative changes,
another group review and can veto the changes, and a third group check that the
interests of people (customers, shareholders, employees) outside the three groups are
being met.
 Remuneration: Performance-based remuneration is designed to relate some
proportion of salary to individual performance. It may be in the form of cash or non-
cash payments such as shares and share options, superannuation or other benefits.
 Such incentive schemes, however, are reactive in the sense that they provide no
mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic
behavior.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders
exercise over the organization. Examples include:

 competition
 debt covenants
 demand for and assessment of performance information (especially financial
statements)
 government regulations
 managerial labor market
 media pressure
 takeovers

Systemic problems of corporate governance

 Demand for information: In order to influence the directors, the shareholders must
combine with others to form a significant voting group which can pose a real threat of
carrying resolutions or appointing directors at a general meeting.
 Monitoring costs: A barrier to shareholders using good information is the cost of
processing it, especially to a small shareholder. The traditional answer to this problem
is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH)
asserts that financial markets are efficient), which suggests that the small shareholder
will free ride on the judgements of larger professional investors.
 Supply of accounting information: Financial accounts form a crucial link in enabling
providers of finance to monitor directors. Imperfections in the financial reporting
process will cause imperfections in the effectiveness of corporate governance. This
should, ideally, be corrected by the working of the external auditing process.

Corporate governance models around the world

Although the US model of corporate governance is the most notorious, there is a
considerable variation in corporate governance models around the world. The intricated
shareholding structures of keiretsus in Japan, the heavy presence of banks in the equity of
German firms, the chaebols in South Korea and many others are examples of arrangements
which try to respond to the same corporate governance challenges as in the US.

In the United States, the main problem is the conflict of interest between widely-dispersed
shareholders and powerful managers. In Europe, the main problem is that the voting
ownership is tightly-held by families through pyramidal ownership and dual shares (voting
and nonvoting). This can lead to "self-dealing", where the controlling families favor
subsidiaries for which they have higher cash flow rights.

Anglo-American Model
There are many different models of corporate governance around the world. These differ
according to the variety of capitalism in which they are embedded. The liberal model that is
common in Anglo-American countries tends to give priority to the interests of
shareholders. The coordinated model that one finds in Continental Europe and Japan also
recognizes the interests of workers, managers, suppliers, customers, and the community.
Each model has its own distinct competitive advantage. The liberal model of corporate
governance encourages radical innovation and cost competition, whereas the coordinated
model of corporate governance facilitates incremental innovation and quality competition.
However, there are important differences between the U.S. recent approach to governance
issues and what has happened in the UK. In the United States, a corporation is governed by
a board of directors, which has the power to choose an executive officer, usually known as
the chief executive officer. The CEO has broad power to manage the corporation on a daily
basis, but needs to get board approval for certain major actions, such as hiring his/her
immediate subordinates, raising money, acquiring another company, major capital
expansions, or other expensive projects. Other duties of the board may include policy
setting, decision making, monitoring management's performance, or corporate control.

The board of directors is nominally selected by and responsible to the shareholders, but

the bylaws of many companies make it difficult for all but the largest shareholders to have
any influence over the makeup of the board; normally, individual shareholders are not
offered a choice of board nominees among which to choose, but are merely asked to
rubberstamp the nominees of the sitting board. Perverse incentives have pervaded many
corporate boards in the developed world, with board members beholden to the chief
executive whose actions they are intended to oversee. Frequently, members of the boards
of directors are CEOs of other corporations, which some see as a conflict of interest.