2. Corporate Governance
• It is a system by which business corporations are
directed and controlled
• Specifies the distribution of rights and
responsibilities among different participants in
the corporation
• Also specifies the rules and procedures for
making decisions on corporate affairs
• Provides the structure through which the
company objectives are set and the means of
attaining those objectives and monitoring
performance
3. Corporate Governance
• It can be defined narrowly as the relationship of
a company with its stakeholders or more
broadly, its relationship with society
• It is about promoting corporate fairness,
transparency and accountability
• It is a system and a process, consistent with
principles and practices which are used by
corporate firms of a free and open society
• It assigns final authority and full responsibility of
managing the firm to the Board of Directors of
the firm
4. Corporate Governance Concepts
• Milton Friedman, ‘Corporate Governance is to
conduct the business in accordance with
owner or shareholders’ desires, which
generally will be to make as much money as
possible, while conforming to the basic rules
of the society embodied in law and local
customs’.
5. Corporate Governance Concepts
• J.Wolfensohn, President, World Bank,
‘Corporate Governance is about promoting
corporate fairness, transparency and
accountability’
6. Corporate Governance Concepts
• Is a set of process or set of systems and process
to ensure that the company is managed to suit
the best interests of all stakeholders
• Internal Stakeholders : Promoters, Employees,
Workmen and Executives
• External Stakeholders : Shareholders, Customers,
Suppliers, Financial Institutions, Dealers, Vendors,
Bankers, Community, Trade Bodies, Government,
Regulators and Fauna and Flora of the area
7. Corporate Governance Concepts
• Voluntary Ethical Code of Business
• Transparency, Integrity and Accountability of
the Management
• Deals with laws, procedures, practices and
implicit rules that determine a company’s
ability to take correct managerial decisions for
its stakeholders
8. Need for Corporate Governance
• Market driven economy
• Globalization and Liberalization
• Severe and chaotic competition (Efficiency
and Effectiveness are now the critical success
factor)
• High and consistent standards for reporting
• Changing ownership structure
9. Parties to Corporate Governance
• Primary social
stakeholders
– Customers
– Suppliers
– Investors
– Managers and
Employees
– Local Communities
– Business Partners
– Global citizens
• Secondary social
stakeholders
– Government
– Society
– Unions
– Media and
Communicators
– Trade bodies
– Competitors
10. Parties to Corporate Governance
• Primary non-social
stakeholders
– Natural Environment
– Non-human species
– Future Generations
• Secondary non-social
stakeholders
– Environmental
pressure groups
– Animal welfare
pressure groups
11. Principles of Corporate Governance
• Rights and Equitable treatment of
shareholders
• Accountability
• Disclosure and transparency
• Integrity and ethical behavior
• Interest of other stakeholders
• Role and responsibilities of the Board
• Transparency
12. Issues involving Corporate Governance
Principles
• Mechanisms and Controls (designed to reduce
the inefficiencies that arise)
• Internal Corporate Governance controls
• Monitoring by the Board of Directors
(safeguard invested capital)
• Remuneration (Performance based
remuneration)
13. Appointment of Directors
• Four Types of Directors in a limited company
– Working Directors
– Non-Working Directors but from the entrepreneurs’
family
– Outside directors inducted for their expertise in some
area connected with the firm’s business eg.
advocates, chartered accountants and technical
consultants
– Directors nominated by lending financial institutions
and banks
14. Steps to be taken in Governing
Corporations
• Forward looking reporting (Reports to be
strategic)
• Score-card approach (should give the salient
features of the report at a glance)
• Measurements and controls (develop forms
with digital approach to make measurement
possible)
• Responsibility and Accountability (to
stakeholders is the foremost interest)
15. Steps to be taken in Governing
Corporations
• Transparency of Operations (especially with
the stakeholders)
• Trust with teams
• Fairness (sense of justice in all its dealings)
16. Ethical Business
Ideas behind Corporate Governance
• Adequate information to stake holders
• Focused approach
• Stream-lined delegation
• Professional management
• This would result in maximizing the shareholder
value and in protecting the interest of other
stakeholders
17. Corporate Governance in India
• Main issues in the area of Corporate Governance
in India
• Role of Board of Directors (independent and
effective board)
• Composition of the Board
• Audit Committee (>5 crore paid-up capital must
establish audit committee; may include non-
executive directors, auditors, the company
secretary or any senior manager)
18. Corporate Governance in India
• Shareholders Committee (SEBI’s code
provides for constitution of shareholders’
committee under the chairmanship of non-
executive director - to ensure that grievances
of shareholders)
19. SEBI Code of Corporate Governance
• Issued by SEBI dated 21.2.2000
• SEBI constituted a committee on Corporate
Governance under chairmanship of Kumar
Mangalam Birla
• To promote and raise the standard of
Corporate Governance in respect of Listed
companies
20. SEBI Code of Corporate Governance
Board of Directors
• Optimum combination of executive and non-
executive directors (not less than 50%)
• All pecuniary relationship or transactions of
non-executive directors to be disclosed in
Annual Report
21. SEBI Code of Corporate Governance
Audit Committee
• To meet 3 times a year
• Shall have powers
– To investigate any activity within the terms of
reference
– To seek info from any employee
– To obtain outside legal and other professional
advice
22. SEBI Code of Corporate Governance
• Role of audit committee
– Oversight of company’s financial reporting process
– Recommending appointment and removal of external
auditor
– Reviewing with management the annual financial
statements before submission
– Reviewing findings of any internal investigation
– Discussing with external auditor
– Reviewing company’s financial and risk management
policies
– To look into reasons for substantial defaults in payment
to depositors, debenture holders, shareholders, etc
23. SEBI Code of Corporate Governance
Remuneration of Directors
• Remuneration of non-executive directors to
be fixed by Board of Directors
• Remuneration to be disclosed in the
Corporate Governance section of the annual
report
24. SEBI Code of Corporate Governance
Board Procedure
• Board meeting to be held at least 4 times a
year
• Maximum time gap between any 2 meetings
is 4 months
• A director shall not be a member in more than
10 committees in which companies he is
director
25. SEBI Code of Corporate Governance
Management
• Directors’ Report or Management Discussion
and Analysis Report should form part of the
annual report
• All transactions where the Board’s personal
interest, that has potential conflict with
interest of the company must be disclosed
26. SEBI Code of Corporate Governance
Shareholders
• Company has to inform about the
appointment of director to its share holder
• Quarterly results, presentation made to
analysts shall be made available on company
website
• Form a Board Committee to redress
shareholder and investors
27. SEBI Code of Corporate Governance
Report on Corporate Governance
• Separate section on Corporate Governance in
the Annual Report with detailed Compliance
Report on Corporate Governance
28. SEBI Code of Corporate Governance
Compliance
• Obtain a Certificate from Auditors of the
Company regarding compliance of conditions of
corporate Governance
• Annex such certificate with the Directors Report
which is sent annually to all shareholders of the
Company
• Sent to Stock Exchanges along with annual
returns filed by the Company
