Corporate Governance

Corporate Governance RachnaBansalJora

Ownership and Management Rachna Bansal Jora, Sharda University

Key Constituents of Corporate Governance • The Board of Directors: The pivotal role in any system of corporate governance is performed by the board of directors. It is accountable to the stakeholders and directs and controls the management. It stewards the company, sets its strategic aim and financial goals and oversees their implementation, puts in place adequate internal controls and periodically reports the activities and progress of the company in the company in a transparent manner to all the stakeholders. • The shareholders: The shareholders' role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information in a transparent fashion, of the activities and progress of the company. • The Management: The responsibility of the management is to undertake the management of the company in terms of the direction provided by the board, to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the board to monitor the accountability of management to it. Rachna Bansal Jora, Sharda University

Corporate Governance • Contemporary corporate governance started in 1992 with the Cadbury report in the UK • Sir Adrian Cadbury, chairman of Bank of England • Cadbury was the result of several high profile company collapses • is concerned primarily with protecting weak and widely dispersed shareholders against self-interested Directors and managers Rachna Bansal Jora, Sharda University

SomeDefinitions • “Corporate Governance is the system by which companies are directed and controlled…” • Cadbury Report (UK), 1992 • “holding the balance between economic and social goals and between individual and communal goals.” • Sir Adrian Cadbury, Chairman of the Cadbury Committee Rachna Bansal Jora, Sharda University

An OECD Definition • “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” • Preamble to the OECD Principles of Corporate Governance, 2004 • OECD- organization of economic cooperation and development Rachna Bansal Jora, Sharda University

An Indian Definition • “…fundamental objective of corporate governance is the ‘enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.” • SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000 Rachna Bansal Jora, Sharda University

A Gandhian Definition • Trusteeship obligations inherent in company operations, where assets and resources are pooled and entrusted to the managers for optimal utilization in the stakeholders’ interests. Rachna Bansal Jora, Sharda University

World Bank • Corporate Governance can be defined from two aspects- corporations and public policy. • From a corporation perspective Corporate governance is relationship between owner, management board and other stake holders. • From a public policy perspective it refers to providing for the survival, growth and development of the company and at the same time its accountability in the exercise of power and control over companies. Rachna Bansal Jora, Sharda University

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. • ‘Good corporate governance' is simply 'good business'. Rachna Bansal Jora, Sharda University

Important Features • Promotes appropriate system of control • Concerned with relationship between a company’s management, board of directors, and the stakeholders. • Manage business in best interest of all. • Promotes transparency and accountability • Promoting best performance through best practice. Rachna Bansal Jora, Sharda University

Corporate Governance Ensures- • Adequate disclosures and effective decision making to achieve corporate objectives • Transparency in business transactions • Statutory and legal compliances • Protection of shareholder interests • Commitment to values and ethical conduct of business Rachna Bansal Jora, Sharda University

Essentials of Corporate Governance • Rights of shareholders • Equitable treatment of shareholders • Role of stakeholders in corporate governance • Disclosure and transparency • Responsibilities of the board • Integrity and Ethical Behavior Rachna Bansal Jora, Sharda University

Framework for Corporate Governance • Organizational Framework: • Ministry of Corporate Affairs (MCA) • Securities and Exchange Board of India (SEBI) • Legal Framework: • Companies Bill 2013 • The Securities Contracts (Regulation) Act, 1956 • Securities and Exchange Board of India Act, 1992 • Depositories Act, 1996 Rachna Bansal Jora, Sharda University

MCA • The Ministry of Corporate Affairs (MCA) is the main authority for regulating and promoting efficient, transparent and accountable form of corporate governance in the Indian corporate sector. It is constantly working towards improvement in the legislative framework and administrative set up, so as to enable easy incorporation and exit of the companies, as well as convenient compliance of regulations with transparency and accountability in corporate governance. Rachna Bansal Jora, Sharda University

SEBI • An improved corporate governance is the key objective of the regulatory framework in the securities market. Accordingly, Securities and Exchange Board of India (SEBI) has made several efforts with a view to evaluate the adequacy of existing corporate governance practices in the country and further improve these practices. It is implementing and maintaining the standards of corporate governance through the use of its legal and regulatory framework Rachna Bansal Jora, Sharda University

Purpose/Objectives and Goals of Corporations • To provide good and services to the market • To protect the environment • Satisfaction of Human Drives • Creation of wealth • Contribution in the GDP • Raising the standard of living • Nurture talents Rachna Bansal Jora, Sharda University

Issues in Corporate Governance • Distinguishing the roles of board and management • Composition of the board and related issues (Executive and non-executive director; independent and affiliated director) • Separation of the roles of the CEO and Chairperson • Should the boards have committees • Appointment of board and director’s remuneration • Disclosure and audit • Protection of shareholders and their expectations. • Dialogue with institutional shareholders Rachna Bansal Jora, Sharda University

Why Corporate Governance • Several studies in India and abroad have indicated that markets and investors take notice of well managed companies and respond positively to them. Such companies have a system of good corporate governance in place, which allows sufficient freedom to the board and management to take decisions towards the progress of their companies and to innovate, while remaining within the framework of effective accountability. • In today's globalised world, corporations need to access global pools of capital as well as attract and retain the best human capital from various parts of the world. Under such a scenario, unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed. • The credibility offered by good corporate governance procedures also helps maintain the confidence of investors – both foreign and domestic – to attract more long-term capital. This will ultimately induce more stable sources of financing. Rachna Bansal Jora, Sharda University

Continued.. • A corporation is a congregation of various stakeholders, like customers, employees, investors, vendor partners, government and society. Its growth requires the cooperation of all the stakeholders. Hence it imperative for a corporation to be fair and transparent to all its stakeholders in all its transactions by adhering to the best corporate governance practices. • Good Corporate Governance standards add considerable value to the operational performance of a company by: • improving strategic thinking at the top through induction of independent directors who bring in experience and new ideas; • rationalizing the management and constant monitoring of risk that a firm faces globally; • limiting the liability of top management and directors by carefully articulating the decision making process; • assuring the integrity of financial reports, etc. Rachna Bansal Jora, Sharda University

Continued.. • It also has a long term reputational effects among key stakeholders, both internally and externally. • Also, the instances of financial crisis have brought the subject of corporate governance to the surface. They have shifted the emphasis on compliance with substance, rather than form, and brought to sharper focus the need for intellectual honesty and integrity. This is because financial and non-financial disclosures made by any firm are only as good and honest as the people behind them. • Good governance system, demonstrated by adoption of good corporate governance practices, builds confidence amongst stakeholders as well as prospective stakeholders. Investors are willing to pay higher prices to the corporates demonstrating strict adherence to internally accepted norms of corporate governance. Rachna Bansal Jora, Sharda University

Continued.. • Effective governance reduces perceived risks, consequently reduces cost of capital and enables board of directors to take quick and better decisions which ultimately improves bottom line of the corporate. • Adoption of good corporate governance practices provides long term sustenance and strengthens stakeholders' relationship. • A good corporate citizen becomes an icon and enjoy a position of respects. • Potential stakeholders aspire to enter into relationships with enterprises whose governance credentials are exemplary. • Adoption of good corporate governance practices provides stability and growth to the enterprise. Rachna Bansal Jora, Sharda University

OECD Principles of Corporate Governance I. Ensuring the Basis for an Effective Corporate Governance Framework The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities. II. The Rights of Shareholders and Key Ownership Functions: The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. III. The Equitable Treatment of Shareholders The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. Rachna Bansal Jora, Sharda University

Continued.. IV. The Role of Stakeholders in Corporate Governance: The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. V. Disclosure and Transparency: The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. VI. The Responsibilities of the Board: The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. Rachna Bansal Jora, Sharda University

Claims of Various Stakeholders • Obligation to Society • Obligation to Investors • Obligation to Employees • Obligation to Customers Rachna Bansal Jora, Sharda University

Ownership • The nature of the corporate governance problems in corporations is largely dependent on their ownership and control structures. The ownership structure is one of the key internal governance mechanisms. • Agency Problem: Agency theory holds a central role in the corporate governance literature. It describes the fundamental conflict between self-interested managers and owners, when the former have the control of the firm but the latter bear most of the wealth effects. Shareholders (the principal) provide funds to managers (the agent) to put them to productive use and generate returns for the principal. Given such a separation of ownership and control, agency problems between the shareholders and managers can arise when due to either asymmetric information (managers being better informed about company performance and prospects) or unobservable efforts of the managers (moral hazard), the managers are able to take self-serving actions (such as appropriating funds for over consumption of perquisites, empire building) at the expense of the dispersed shareholders. Rachna Bansal Jora, Sharda University

Ownership structure in Indian Firms • The ownership structure for any Indian corporate can be broken down into two major constituents—insiders and outsiders. • The definition of insiders depends on the structure of ownership and control in a corporation—in widely held corporations, insiders are the professional managers entrusted with the day to day running of a company, and in corporate with concentrated ownership and control (such as family-owned corporations), insiders are the controlling shareholders. In the Indian context, as per the definition of different types of owners laid down in Clause 35 of the Listing Agreement, insiders are promoters and persons acting in concert (PACs) • Whereas outside owners are essentially non-promoters who are further divided into institutional non-promoters and non-institutional non-promoters. Rachna Bansal Jora, Sharda University

Anglo American Model • Anglo-American model : This model is also called an ‘Anglo-Saxon model’ and is used as basis of corporate governance in U.S.A, U.K, Canada, Australia, and some common wealth countries. • The shareholders appoint directors who in turn appoint the managers to manage the business. Thus there is separation of ownership and control. • The board usually consist of executive directors and few independent directors. The board often has limited ownership stakes in the company. Moreover, a single individual holds both the position of CEO and chairman of the board. This model relies on effective communication between shareholders, board and management with all important decisions taken after getting approval of shareholders (by voting). Rachna Bansal Jora, Sharda University

German Model • This is also called as 2 tier board model as there are 2 boards viz. The supervisory board and the management board. • It is used in countries like Germany, Holland, France, etc. • Usually a large majority of shareholders are banks and financial institutions. • The shareholder can appoint only 50% of members to constitute the supervisory board. The rest is appointed by employees and labor unions. Rachna Bansal Jora, Sharda University

Japanese Model • This model is also called as the business network model, usually shareholders are banks/financial institutions, large family shareholders, corporate with cross-shareholding. • There is supervisory board which is made up of board of directors and a president, who are jointly appointed by shareholder and banks/financial institutions. • Most of the directors are heads of different divisions of the company. Outside director or independent directors are rarely found of the board. Rachna Bansal Jora, Sharda University

Indian Model • The model of corporate governances found in India is a mix of the Anglo-American and German models. This is because in India, there are three types of Corporation viz. private companies, public companies and public sectors undertakings. • Each of these corporation have a distinct pattern of shareholding. For e.g. In case of companies, the promoter and his family have almost complete control over the company. They depend less on outside equity capital. Hence in private companies the German model of corporate governance is followed. Rachna Bansal Jora, Sharda University

Board of Directors • A group of top executives and very senior managers in a company constitute its board of directors. • BOD is a bridge who links shareholders and management for the company. • Duty of BOD is to ensure that the organization is run effectively in the best interest of the shareholders. • Board’s prime duty is to monitor the management’s performance on behalf of the shareholders. Rachna Bansal Jora, Sharda University

Boards of Directors • Executive Director: an inside director who is also an executive with the organization. Executive director is a term sometimes applied to the chief executive officer (CEO) or managing director of an organization. • Non Executive Director: A non-executive director is a member of the board of directors of a company who does not form part of the executive management team. They are not employees of the company or affiliated with it in any other way and are differentiated from inside directors, who are members of the board who also serve or previously served as executive managers of the company. • Independent Director and Affiliated Director • Nominee Director: An individual who is given the role of a non executive director on the firm’s board of directors, in place of another person, investor or financial institution. • Inside director - a director who, in addition to serving on the board, has a meaningful connection to the organization • Outside director - a director who, other than serving on the board, has no meaningful connections to the organization Rachna Bansal Jora, Sharda University

Duties of BODs- • Organizational Long term goals, Strategic Goals • Capital structure of the company • Allocation of resources • Select the right talent to run the business • Financial debts • Quarterly results • Projection on manpower, finance, output etc. • Purchase or disposal of assets. • Research and development • Company’s competitors and their position in the market etc. Rachna Bansal Jora, Sharda University

Ethical standards and duties of BODs • Duty of legitimacy • Duty of care • Duty of trust • To maintain independent views & critical reviews • To uphold primary loyalty of a director • To uphold values of corporate governance (transparency, accountability and honesty) • To own social responsibility • Protection of the interests of minority owners • To pay attention to task performance and delivery of primary roles • To learn, develop and communicate Rachna Bansal Jora, Sharda University

Board Management Relationship • Flow of information • The Chief Executive Officer and Chairman • Former CEO as Director • Election or nomination of directors • Tenure of directors • Nature of Voting • Compensation to directors Rachna Bansal Jora, Sharda University

Triple Bottom Line Rachna Bansal Jora, Sharda University

TBL • Triple bottom line (abbreviated as TBL or 3BL) incorporates the notion of sustainability into business decisions. The TBL is an accounting framework with three dimensions: social, environmental (or ecological) and financial. The TBL dimensions are also commonly called the three Ps: people, planet and profits and are referred to as the "three pillars of sustainability." Interest in triple bottom line accounting has been growing in both for-profit, nonprofit and government sectors. Rachna Bansal Jora, Sharda University

TBL • The concept behind the triple bottom line is that equal consideration is given to economic, ecological and social aspects of business performance reporting. Performance indicators cover three key areas:- • Economic Indicators – concern an organisation’s impacts, both direct and indirect, on the economic resources of its stakeholders and on economic systems at the local, national, and global levels. Included within economic indicators are the reporting organisation’s wages, pensions and other benefits paid to employees; dues received from customers and paid to suppliers; and taxes paid and subsidies received. Rachna Bansal Jora, Sharda University

TBL • Environmental Indicators – concerns an organisation’s impact on living and non-living natural systems, including eco-systems, land, air and water. Included within environmental indicators are the environmental impacts of products and services; energy, material and water use; greenhouse gas and other emissions; effluents and waste generation; impacts on biodiversity; use of hazardous materials; recycling, pollution, waste reduction and other environmental programmes; environmental expenditures; and fines and penalties for non-compliance. • Social Indicators - concern an organisation’s impacts on the social systems within which it operates. GRI social indicators are grouped into three clusters: labour practices (e.g., diversity, employee health and safety), human rights (e.g., child labour, compliance issues), and broader social issues affecting consumers, communities, and other stakeholders (e.g., bribery and corruption, community relations). Rachna Bansal Jora, Sharda University

Corporate Governance