Corporate Governance

Corporate
Governance
Corporate Governance
• Corporate Governance is the application of best
management practices, compliance of law in true
letter and spirit and adherence to ethical
standards for effective management and
distribution of wealth and discharge of social
responsibility for sustainable development of all
stakeholders.
• Conduct of business in accordance with
shareholders desires (maximising wealth) while
confirming to the basic rules of the society
embodied in the Law and Local Customs
Corporate Governance
 CORPORATE GOVERNANCE Corporate

Governance may be defined “as a set of systems,
processes and principles which ensure that a
company is governed in the best interest of all
stakeholders”. It is the system by which companies
are directed and controlled. It is about promoting
corporate fairness, transparency and accountability .
Why Corporate Governance?
• Better access to external finance

• Lower costs of capital – interest rates on loans
• Improved company performance – sustainability
• Higher firm valuation and share performance
• Reduced risk of corporate crisis and scandals
Corporate Governance - Parties
• Share holders – Those that own the company

• Manager - Guardians of the Company’s
assets forthe Shareholders
• Directors - Who use the Company’s assets
Owner
Board of Directors
CEO
Executives
Employees
Corporate Governance is NOT
• Corporate governance ≠ corporate / financial

management
• Corporate governance ≠ corporate social responsibility
or business ethics
What is Corporate Governance?
• If management is about running the business, corporate governance is about seeing

that it is run properly.
• All companies need managing and governing.

Corporate Governance – Pillars
Corporate
Governance
Accountability
Independence
Transparency
Fairness
Pillars of Corporate Governance

• Accountability
– Ensure that management is accountable to the Board
– Ensure that the Board is accountable to shareholders
• Fairness
– Protect Shareholders rights
– Treat all shareholders including minorities, equitably
– Provide effective redress for violations
• Transparency
– Ensure timely, accurate disclosure on all
matters, including the financial situation,
material
performance, ownership and corporate
governance
• Independence
– Procedures and structures are in place so
as to minimise, or avoid completely
conflicts of interest
– Independent Directors and Advisers i.e. free from
the influence of others
Theoretical Basis of Corporate Governance
o Agency Theory
o Problems with the Agency Theory
o Stewardship Theory
o Shareholder Vs Stakeholder
Approaches
o Stakeholder Theory
o Criticisms of the Stakeholder Theory
o Sociological Theory
Agency Theory
■ Management as agents of stockholders
■ Agency Cost rise issues (Trade-off)
■ Mechanisms reducing agency cost
■ Fair and Accurate Financial Disclosures
■ Financial and Non-Financial Disclosures
■ Efficient and Independent BoDs
Stewardship Theory
■ Managers are trustworthy
■ Managers attach significant value to their
own personal reputations
■ Manager is steward of principal
■ Steward will do good for organization
■ Controls will demotivate stewards
■ The theory defines
■ Managers are not motivaed by individual
goals but with the objectives of principles
■ A steward will choose the interessts of
his/her organization, and will not entertain
self-serving behavior
■ Control can be potentially
counterproductive
Shareholder Vs. Stakeholder
Theory
Shareholders are investors of the firm
Stakeholders
•
are all- interest groups:
•
• Employees, customers, dealers,
government and the society at large
• Ethics of care, theory of property rights
and so on
• Not applicable in
• practice
Criticism
• Difficulty in defining the
• concept Who is genuine
• stakeholder?
Practical?
Sociological Theory
• Focuses on:
• Board Composition
• Power and Wealth Distribution in
• Society Power in few hands ( privilege
Challenge
class)
• to equity and social issues
To promote• progress
equity and fairness
•
Board composition, financial

reporting, disclosure and auditing
Corporate Governance – Elements
Corporate Governance - Elements
Good Board Well Defined

Elements share holders
Practice
rights
Transparent Board
Disclosure Control Commitment
Environment
Board Responsibilities
 Overseeing strategic development & planning

 Management selection, supervision and
upgrading.
 Maintenance of good member relations.
 Protecting and optimizing the organization’s
assets.
 Fulfilling legal requirements
Good Board Practices
• Clearly defined roles and authorities

• Duties and responsibilities of Directors understood
• Board is well structured
• Appropriate composition and mix of skills
• Appropriate Board procedures
• Director Remuneration in line with best practice
• Board self-evaluation and training conducted
Good Board procedures
• Appropriate Board procedures
• Director Remuneration in line with best
practice
• Board self-evaluation and training conducted
Board Commitment
 • The Board discusses corporate governance issues and has created a
corporate governance committee
 • The company has a corporate governance champion
 • A corporate governance improvement plan has been created
 • Appropriate resources are committed to corporate governance initiatives
 • Policies and procedures have been formalised and distributed to relevant
staff
 • A corporate governance code has been developed
 • A code of ethics has been developed
 • The company is recognised as a corporate governance leader
Control Environment
• Internal control procedures
• Independent audit committee established
• Risk management framework present
• Internal Audit Function
• Disaster recovery systems in place
• Management Information systems established
• Media management techniques in use
• Compliance Function established
• Business continuity procedures in place
• Independent external auditor conducts audit
Transparent Disclosure
• Financial Information disclosed

• Non-Financial Information disclosed
• Financials prepared according to International
Financial Reporting Standards (IFRS)
• Companies Registry filings up to date
• High-Quality annual report published
• Web-based disclosure
Well-Defined Shareholder Rights
• Minority shareholder rights formalised

• Well-organised shareholder meetings
conducted
• Policy on related party transactions
• Policy on extraordinary transactions
• Clearly defined and explicit dividend
policy
Board Commitment
• The Board discusses corporate governance issues and has created a

corporate governance committee
• The company has a corporate governance champion
• A corporate governance improvement plan has been created
• Appropriate resources are committed to corporate governance
initiatives
• Policies and procedures have been formalised and distributed to relevant
staff
• A corporate governance code has been developed
• A code of ethics has been developed
• The company is recognised as a corporate governance leader
Corporate Governance- Indian Perspective
 • Applicable laws and regulations: Key being Companies Act 2013 and
SEBI guidelines. Also rules of stock exchanges like NSE/BSE.
 • SEBI guidelines and Clause 49: Applicable to all listed companies in
India. Relates to board composition, role of audit committee, CEO/CFO
certification of financial statements etc.
 • Voluntary guidelines by MCA: Laid down best practices to be adopted
voluntarily by companies.
 • Stock exchange requirements: Corporate governance requirements
specified by NSE/BSE as listing conditions. Mandatory for listed companies.
 • Adoption by companies: Top companies like Infosys, TCS and Wipro
known for adopting good governance practices. However, adoption remains a
challenge for smaller companies.
Challenges to Effective Corporate
Governance
 • Promoter dominance: Promoters holding majority stake and controlling
board and management remains an area of concern. Minority shareholders'
interests not fully protected.
 • Lack of transparency: Insufficient transparency in board procedures,
related party transactions, accounting policies are persistent issues.
 • Non-compliance: Non-adherence to laws and regulations continue to
some extent despite penalties like fines.
 • Insider trading: Prohibition of Insider Trading norms need stricter
compliance.
 • Corruption: Issues like bribery exist though institutional mechanisms are
being strengthened.
Thanks

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Corporate

 CORPORATE GOVERNANCE Corporate

• Better access to external finance

• Share holders – Those that own the company

• Corporate governance ≠ corporate / financial

• If management is about running the business, corporate governance is about seeing

• All companies need managing and governing.

Pillars of Corporate Governance

Board composition, financial

Good Board Well Defined

 Overseeing strategic development & planning

• Clearly defined roles and authorities

• Financial Information disclosed

• Minority shareholder rights formalised

• The Board discusses corporate governance issues and has created a

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