CORPORATE GOVERNANCE

1. CORPORATE GOVERNANCE ZeenatJabbar

2. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically, from one that was related to agency cost, it is now perceived to encompass everyone’s interests. This chapter discusses the theoretical basis, mechanisms and the divergent models of corporate governance and culminates in the identification of an ideal corporation.

3. OUTLINE • The Concept of Corporation • Theoretical Basis of Corporate Governance • Agency Theory • Stewardship Theory • Stakeholder Theory • Corporate Governance Mechanisms • Corporate Governance Systems • Indian Model of Governance • What Is Good Corporate Governance • Obligation to Society at Large • Obligation to Investors • Obligation to Employees • Obligation to Customers • Managerial Obligation

4. What is a Corporate? The term “corporate” refers to an association of many persons, who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss arising therefrom. The common stocks so contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are its members. The proportion of the capital to which each member is entitled is his share. Shares are always transferable, although the right to transfer them is often more or less restricted.

5. What is Governance? Governance is the process of decision making and the process by which decisions are implemented or not implemented.

6. Characteristics of a Corporation • Incorporated Association • Artificial Legal Existence • Perpetual Existence • Common Seal • Extensive Membership • Separation of Management and Ownership • Limited Liability • Transferability of shares

7. Theoretical Basis of Corporate Governance • Agency Theory • Problems with the Agency Theory • Stewardship Theory • Shareholder Vs Stakeholder Approaches • Stakeholder Theory • Criticisms of the Stakeholder Theory • Sociological Theory

8. Behavioural Differences

9. Psychological Mechanisms

10. Situational Mechanisms

11. Corporate Governance Mechanisms • The Importance of Corporate Governance • Contemporary Corporate Governance Situation • Growing Awareness and Societal Responses Corporate Governance Systems • Anglo-American Model • The German Model • The Japanese Model • Indian Model of Corporate Governance

12. Fig.1 : The Anglo-American Model Elect Shareholders Board of Directors (Supervisors) Appoints & Supervises Own Creditors Officers (Managers) Lien on Stakeholders Stake in Manage Legal/Regulatory System Company Monitors & Regulates

13. Fig.2 : The German Model Shareholders Appoint – 50% Supervisory Board Appoints and Supervises Management Board (Including Labour Relations Officer) Appoint – 50% Manage Employees and Labour Unions Company

14. Fig.3 : The Japanese Model elect Shareholders Supervisory Board (Including President) Provides Loans Ratifies the President’s Decisions President Provides Managers Monitors & Acts in Emergencies Consults Executive Management (Primarily Board of Directors) Manages Own Main Bank Company Owns Provides Loans

15. External Environment Government Regulations, Corporate Culture, Structure, Policies, Guidelines etc. Characteristics, Influences Company Acts Depositors, Borrowers, SEBI Customers and other Stock Exchanges External Stakeholders Internal Environment Company vision; mission, policies, norms Internal Auditors Stakeholders Board of Directors CORPORATE GOVERNANCE SYSTEM Proper governance Shareholder value Corporate Governance Outcomes / Benefits to Society Transparency Investor protection Concern for customer Healthy corporate sector development Fig.4 : Indian Corporate Governance Model

16. What Is Good Corporate Governance?Obligation to society at large • National Interest • Political Non-alignment • Legal Compliances • Rule of Law • Honest and Ethical Conduct • Corporate Citizenship • Ethical Behaviour • Social Concerns • Corporate Social Responsibility

17. Obligation to investors • Environment-friendliness • Health, Safety and Working Environment • Competition • Trusteeship • Accountability • Effectiveness and Efficiency • Timely Responsiveness • Corporations Should Uphold the Fair Name of the Country • Towards Shareholders • Measures Promoting Transparency and Informed Shareholder Participation • Transparency • Financial Reporting and Records

18. Quality of Products and Services • Products at Affordable Prices • Unwavering Commitment to • Customer Satisfaction Obligation to customers Obligation to employees • Fair Employment Practices • Equal-opportunities Employer • Encouraging Whistle Blowing • Humane Treatment

19. Participation • Empowerment • Equity and Inclusiveness • Participative and Collaborative Environment Managerial obligation • Protecting Company’s Assets • Behaviour Towards Government 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

20. Johnson & Johnson’s excellent Credo exemplarily epitomises what an ideal corporate should aspire to be. Our Credo We believe our first responsibility is to the doctors, nurses and patients,to mothers and fathers and all others who use our products and services.In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costsin order to maintain reasonable prices.Customers' orders must be serviced promptly and accurately.Our suppliers and distributors must have an opportunity to make a fair profit.

21. We are responsible to our employees,the men and women who work with us throughout the world.Everyone must be considered as an individual.We must respect their dignity and recognize their merit. They must have a sense of security in their jobs.Compensation must be fair and adequate,and working conditions clean, orderly and safe.We must be mindful of ways to help our employees fulfill their family responsibilities.Employees must feel free to make suggestions and complaints.There must be equal opportunity for employment, developmentand advancement for those qualified.We must provide competent management,and their actions must be just and ethical.

22. We are responsible to the communities in which we live and workand to the world community as well.We must be good citizens – support good works and charitiesand bear our fair share of taxes.We must encourage civic improvements and better health and education.We must maintain in good orderthe property we are privileged to use,protecting the environment and natural resources. Our final responsibility is to our stockholders.Business must make a sound profit.We must experiment with new ideas.Research must be carried on, innovative programs developed and mistakes paid for.New equipment must be purchased, new facilities provided and new products launched.

23. Reserves must be created to provide for adverse times.When we operate according to these principles,the stockholders should realize a fair return. Johnson & Johnson Corporate Governance in India • Problems • Inadequate Sanction and Enforcement. • No clear demarcation of control mechanisms between SEBI, DCA and Stock Exchanges. • Lack of Professionalism of Directors • Institutional Investors show poor commitment • Indian boards are not professional • Unindependent Independent directors • Whistle Blower Policy not in place

24. Too many unlisted companies • Accounting gimmicks • Poor Shareholder participation • Obliging auditors • Soft State, lethargic judiciary, inefficient market regulator, poor enforcement machinery, and a value system which is indifferent to moral turpitudes.

25. However things are improving now • The market is competition – driven • Professional new players are coming in • High growth in market – capitalisation • Well-focussed, well-researched portfolio investors • Media influences • Influence of banks and financial institutions • Realisation among Indian companies of the benefits of corporate governance and • Impending Capital Account Convertibility will exert its own pressure.