Corporate Governance

Corporate Governance PGDM

What is Corporate Governance??? • The process and responsibility of the Board of Directors in ensuring the management of a corporation conducts business in such a way as to meet the expectations of its various stakeholders • Besides financial returns for shareholders this also includes impact on employees environment and community at large.

Definition-OECD 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. Spells out the rules and procedures for making decisions on corporate affairs.

Definition The Kumar Mangalam Birla Committee constituted by SEBI has observed that: “Strong corporate governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.”

Indian Scenario • The standard of corporate governance was poor during the earlier decades dominated by family business houses. • They operated in a virtually closed economy and could manipulate the rules governing the licence-permit raj by generous donations to political parties, and other corrupt practices.

Why is Corporate Governance important??? • As we are increasingly moving towards open and market driven economic systems, a number of companies catering to international markets • These companies are required to comply with enhanced disclosure and stringent listing requirements. • Institutional investors, both foreign and domestic are becoming important players in the stock market. • They are increasingly demanding more information and transparency in operations • No. of International events (like joint ventures, mergers, takeovers) are taking place so it is required that proper corporate governance practices should be followed.

Issues in Corporate Governance • Ethical Issues • Efficiency Issues • Accountability Issues

Issues in Corporate Governance (contd) • Opening of Economy • Rising importance of institutional investors • Growth of private companies • Insider Trading • Growth and magnitude of corporate groups • Rise in hostile takeovers

Objectives of Corporate Governance • A properly structured Board capable of taking independent and objective decisions is in place at the helm of affairs; • The board is balanced as regards the representation of adequate number of Non-executive and independent directors who will take care of the 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;

Objectives of Corporate Governance • The Board has an effective machinery to sub serve the concerns of 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; and • The Board remains in effective control of the affairs of the company at all times. • The overall endeavor of the Board should be to take the organization forward, to maximize long term value and share holder’s wealth.

Board Structures and Processes for Good Governance

Key Principles of Good Corporate Governance Openness Integrity Accountability

Functions of the BOARD • Strategic Role • Systematic level strategy • Structural and Portfolio strategy • Implementation strategy • Policy Making • Monitoring and Supervisory Role

Committees of the BOARD • Audit committee • Remuneration committee • Nomination committee

Benefits of Good Corporate Governance System • Increased Employee motivation • Better information System • Effective ethical policies • Stronger organizational Structure • Conducive environment for achieving company objectives

International Developments • Organization for Economic Cooperation and Development (OECD) has set certain principles in areas of corporate governance • The Right of shareholders • Equitable treatment of shareholders • Role of stakeholders • Disclosure and transparency • The responsibilities of Board

Developments in UK Cadbury Committee Report- 1992 focused on accountability aspects • Audit Committee to comprise of minimum three members • Listed companies to publish full financial statements annually and half-yearly reports interim. • Code of Best Practices to incorporate • Board to present assessment of company’s position • Directors to report on effectiveness of internal control systems

Development in USA • CG came into forefront through shareholder activism • California Public Employees Retirement Systems (CalPERS) is in the forefront of shareholder activism and internationally credited as a torch bearer of CG • CalPERS have brought out the good governance principles: • Accountability • Transparency • Equity • Voting Method improvements • Long term vision

Principles for Corporate Governance in the Common wealth (1999) • Ensure that the corporation complies with all relevant laws, regulations and codes of best business practice • Ensure that the corporation communicates with shareholders and other stakeholders effectively • Serves the legitimate interests of the shareholders and account to them fully • Regularly review the procedures and processes to ensure the effectiveness of its internal systems and control • Ensure annually that the corporation will continue as a going concern in its next fiscal year

Developments in India • Voluntary code of Corporate Governance for listed companies - CII - 1998 • Kumar Mangalam Birla committee by SEBI - 2000 • Companies (Amendment Act), 2000 & Clause 49 of listing agreement -2000 • Naresh Chandra Committee by SEBI - 2002 • Companies (Amendment) Bill of 2003 • N.R.Narayana Murthy Committee -2003

Kumar Mangalam Birla Report • In 1999 SEBI constituted- under the chirmanship of Shri Kumarmangalam Birla • Committee submitted its report in year 2000 • Based on these recommendations Clause 49 was incorporated in the Listing Agreement

Kumarmangalam Birla Committee Report • Board should have an optimum combination of Executive and Non- Executive directors and at least 50 % should be non-executive • An independent Audit committee should be set up by Board • Remuneration Committee should be set up by Board • There should be a separate section on CG in Annual Report with details on level of compliance by the company

The Naresh Chandra Committee (appointed by Department of Company Affairs) • It has suggested that the partners and at least 50% of the engagement team responsible for either the audit of a listed company should be rotated every five years • The committee also recommends that no partner or member of the engagement team should be employed by or become a director of a client company with whom he worked preceding two years. • The committee has considered the need for reviewing the manner in which the three professional bodies- the Institute of Chartered Accountants. Cost and Works’ Accountants, the Company Secretaries regulate their membership. It has recommended the setting up of independent quality review boards (QRBs), one for each of the three organizations. • It has also recommended the setting up of Corporate Serious Fraud Office for punishing erring professionals.

Professionalization of Corporate Governance • Distinguish Management from Control • Active Role of Institutional Investors • Expand Role of Non- Executive Directors • Proper and Timely Information to Board • Size of Board • Improve Accounting and Reporting Practices

Corporate Governance and Corporate Excellence • The essence of good corporate governance is transparency, accountability, investor protection, compliance with statutory laws and regulations and value-creation for shareholders and other stakeholders. • A company’s most valuable asset is goodwill it enjoys with its stakeholders and institutional investors are willing to pay 20% more on average for companies with a good governance record.

Corporate Excellence • Profitability • Satisfied stakeholders such as shareholders, customers, employees • Revenue and profit growth • Growth in market share • Growth in market value (Market capitalization)

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Corporate Governance