Corporate governance is concerned with holding the balance between economic and social goals and

between individual and communal goals.The governance framework is there to encourage the
efficient use of resources and equally to require accountability for the stewardship of those resources.
The aim is to align as nearly as possible the interests of individuals, corporations and society. The
incentive for corporations is to achieve their corporate aims and to attract investment. The incentive
for states is to strengthen their economies and discourage fraud and mismanagement. Sir
Adrian Cadbury/ 2004
Given the enormous economic power and strength of corporations around the world, and the pressing
need for all-round and inclusive development of the peoples in different geographies, it would be a great
achievement if such power could be harnessed towards such equitable and sustainable development."
Dr. Chandra IIM-B, 2008
Corporate Governance: the context
The traditional view of Corporate Governance are based on the three fundamental assumptions for the
corporations existence:
Primacy of the Shareholder
Diversity of the shareholder groups
Maximization of shareholders wealth
These are supported in mature capitalistic economies by:
Well functioning market system
Highly developed legal institutions
Ensuring checks & balances for good corporate behaviour
Corporate governance is most commonly viewed as both the structure and the relationships,
which determine corporate direction & performance.
The Board of Directors is typically central to corporate governance.
Its relationship to the other primary participants, typically shareholders and
management, is critical.
The authority structure of a firm lies at the heart of the issue:
who has claim to the cash flow of the firm, who has a say in its strategy and its
allocation of resources ?
It creates both the temptations for cheating and the rewards for honesty, inside
the firm
Direction shapes Corporate Efficiency, Effectiveness & Compliance, Employee
Wellbeing and Social Responsibility
The system of checks and balances, both internal and external, which ensures that the companies
discharge their accountability to all stakeholders and act in a socially responsible way in all areas of
their business activity (Solomon & Solomon).
Much of the contemporary interest in corporate governance is concerned with
mitigation of the conflicts of interests between stakeholders.
Ways of mitigating/preventing these conflicts of interests include the processes,
customs, policies, laws & institutions which impact the way a company is controlled
Corporate Governance needs to stimulate both business prosperity and accountability to multiple
stakeholders
Corporate Governance crisis and reform is essentially cyclical:
Waves of corporate governance reform and increased regulation occur during periods of
recession, corporate collapse and re-examination of the viability of regulatory systems.
During long periods of expansion, active interest in governance diminishes, as companies
and shareholders become again more concerned with the generation of wealth, than in
its retention.


Corporate Governance: Elements ...ctd
Corporate Governance applies to all types of organizations not just companies in the private
sector but also in the not for profit and public sectors
Examples are NGOs, schools, hospitals, pension funds, state-owned enterprises
Corporate Governance is by way of legislation or best practice Code
US adopted legislation in 2002 - Sarbanes Oxley Act
Most other developed and emerging market countries have adopted best practice
Codes e.g. Combined Code in the UK, Cromme Code in Germany etc.
These codes are voluntary and operate on comply or explain approach
Corporate Governance: Elements
The environment for governance:
International deregulation of financial markets
Increasing scale and activity of corporations
Growth of investment institutions
Effective monitoring necessary for security of investments
Recognition that governance matters for accountability, performance and attracting capital.
A general trend in society towards openness, transparency and disclosure.

The Four Pillars:
Accountability
Management to The Board & Board to Shareholders
Fairness
Protect shareholders rights and treat them equitably
Provide effective redress in event of violation(s)
Transparency & Disclosures
Ensure timely, accurate disclosure on all material matters: the financial
situation, performance, ownership & governance
Independence
Procedures and structures to minimize or avoid completely conflicts of interest
Accountability
The Cadbury Report, (UK: 1992) was the first to set out a code which companies,
though not bound to, were expected to comply with, state that in their Annual Reports
and justify three main areas of non-compliance.
The Board of Directors, auditing & shareholding
focussing attention on The Board as the principal mechanism of corporate
governance, requiring monitoring and assessment.
Auditing (and accounting) were deemed to provide the transparency and
communication with shareholders and stakeholders.
Lastly, the report highlighted the importance of institutional shareholders as the
largest and most influential group.
This led, more than of other reforms, to the shift of Directors dialogue
towards greater accountability and engagement
Which has led to the more significant shift to corporate responsibility
towards a range of stakeholders encouraging greater (corporate)
social responsibility.
Another area of concern, addressed by the Greenbury Report, (UK:1995) addressed
the balance between Directors remuneration and company performance.
Many other reports strengthened the framework of corporate governance: viz. the
Turnbull Report (UK: 1999) focussing attention on the system of internal controls as
was done by Treadway Commission (US: 1987)

Fairness & Independence : parties
Government Agencies & Authorities
Stock Exchanges
The Management
The Board including its Chair
The Chief Executive Officer
Other Senior & Line Managers
Shareholders
Auditors
May include influential stakeholder e.g. Creditors, Customers & (local) Community
Fairness & Independence : control
Government Agencies & Authorities and Stock Exchanges principally influence the ownership
and control structures.
Control and ownership structure refers to the types and composition of shareholders in
a corporation.
Ownership is typically defined as the ownership of cash flow rights whereas control
refers to ownership of control or voting rights
Ownership is not control due to the existence of : dual-class shares, voting
coalitions, proxy votes, clauses in the articles of association that confer
additional voting rights to certain shareholders.
Some features or types of control and ownership structure involving Corporate Groups include
pyramids, cross-holdings, rings, and webs:
German Konzern are legally recognized corporate groups with complex structures.
Japanese Kiretsu () and South Korean chaebol (which tend to be family-controlled)
are corporate groups which consist of complex interlocking business relationships and
shareholdings.
Cross-shareholding are an essential feature of keiretsu and chaebol groups.
Family interests dominate ownership and control structures of many corporations (Indian!).
It has been suggested the oversight of family controlled corporation is superior to that
of corporations "controlled" by institutional investors!
The significance of institutional investors varies substantially across countries:
In Anglo-American countries and Europe, institutional investors dominate the market
for stocks in larger corporations
The large pools of invested money are designed to maximize the benefits of
diversified investments in a very large number of different corporations with
sufficient liquidity.
This strategy aims to eliminate individual firms risks. Thus, institutional
investors have relatively little interest in the governance of a particular
corporation,
the agenda of these institutional investors is primarily securitization of their
interests.
Majority of shares in the Japan are held by financial companies and corporations. These
are not institutional investors if their holdings are largely within the group.
Fairness & Independence : Activism
Shareholder Activism: is the use of equity stake to put public pressure on management.
The goals range from financial
increase of shareholder value through changes in corporate policy, financing
structure, cost cutting, etc.
non-financial
divestment from particular countries and/or businesses, adoption of
environmental & socially responsible policies, etc.
Shareholder activism can take any of several forms: proxy battles, publicity campaigns,
resolutions, litigation and negotiations with management.
Internet has enabled smaller shareholders to voice their opinions
Transparency & Disclosure
Transparency is operating in such a way that it is easy for others to see what actions are
performed.
Corporate Transparency is the set of information, privacy, and business policies to
improve corporate decision-making and operations openness to employees,
stakeholders, shareholders and the general public. Traditionally, the PR function is
responsible.
Within the organization, terms (depicting styles) like fish-bowl and glass wall
are gaining popularity;
Applied to the business society interface, increasing use of information
communications technology has accelerated the radical increase in the
openness of organizational process and data e.g. Wiki-leaks
Disclosure implies The submission of facts and details concerning assets, situations, or operations
Companies that are publicly owned are subject to detailed disclosure laws about their
financial condition, operating results, management compensation, and other areas of
their business.
Disclosure laws are designed to protect investors through the disclosure of business and
financial information that could be considered relevant to making an investment
decision.
GAAP and specific rules of the accounting profession require that certain types
of information be disclosed in a business's audited financial statements.
Court rulings on disclosure laws indicate a movement away from the traditional "Let the buyer beware"
(caveat emptor) concept toward one of good faith and fair dealing
Voluntary disclosure is the provision of information by a companys management beyond statutory
requirements and is carried out extensively by many companies.
To avoid court challenges in areas where disclosure laws are subject to interpretation,
businesses tend to err on the side of disclosing information rather than concealing it.
Voluntary disclosure benefits investors, companies and the economy; e.g. it helps
investors make better capital allocation decisions and lowers firms' cost of capital
Firms balance the benefits of voluntary disclosure against the costs, which include the
cost of procuring the information to be disclosed, and decreased competitive advantage
The extent and type of voluntary disclosure differs by geographic region, industry, and
company size.
Good Board practices & processes
Clearly defined & understood roles/responsibilities/ duties and authorities of the Board
the Directors
The Board is well structured with appropriate skill-mix
Self evaluation, retained learning & training instituted
Board remuneration in line with best practices
Control Environment
Robust internal control procedures
Risk management framework present
Disaster recovery systems instituted
Media relationship practiced
Independent auditors & internal audit committee
Transparent disclosure
Financial & non-Financial information disclosed (web based) in high quality annual
reports
Financial prepared as per International Financial Reporting Systems (IFRS)
Company Registry filings updated
Well-defined shareholder rights
Well organized shareholder meetings
Minority shareholder rights formalized
Explicit policies on related party transactions , extra-ordinary transactions and
dividends
Board commitment
Codes for governance & ethics widely circulated
Recognition for good governance & sustainability
Corporate Governance: Mechanism
Three internal governance mechanisms and a single external one are used in the modern corporation
The internal mechanisms are:
Ownership Concentration, represented by types of shareholders and their different
incentives to monitor managers
Governance mechanism is defined by the no. of large-block shareholders & the
percentage of shares owned
Large block shareholders: shareholders owning a concentration of at least 5
percent of a corporations issued shares
Large block shareholders have a strong incentive to monitor management closely
They may also obtain Board seats, which enhances their ability to monitor
effectively
Institutional owners: financial institutions such as stock- mutual funds and
pension funds that qualify to large block shareholder positions
The growing influence of institutional owners shapes strategy and the incentive to
discipline ineffective managers
Increased shareholder activism supported by various rulings in support of
shareholder involvement and control of managerial decisions
Shareholder Activism
Other Shareholders can convene to discuss corporations direction
If a consensus exists, shareholders can vote as a block to elect their candidates
to the board
Proxy fights
There are limits on shareholder activism available to institutional owners in
responding to activists tactics

Board of Directors
Group of shareholder-elected individuals (usually called directors) whose primary responsibility
is to act in the owners interests by formally monitoring and controlling the corporations top-
level executives
Three director classifications - Insider, related outsider, and outsider:
Insiders: the firms CEO and other top-level managers
Related outsiders: individuals uninvolved with day-to-day operations, but who have a
relationship with the firm
Outsiders: individuals who are independent of the firms day-to-day operations and
other relationships
As stewards of an organization's resources, an effective and well-structured board of directors
can influence the performance of a firm:
Oversee managers to ensure the company is operated in ways to maximize shareholder
wealth
Direct the affairs of the organization
Punish and reward managers
Protect shareholders rights and interests
Protect owners from managerial opportunism

Executive Compensation
Governance mechanism that seeks to align the interests of top managers and owners through
salaries, bonuses, and long-term incentive compensation: stock awards and stock options
Generally, thought to be excessive and out of line with performance
Factors complicating the executive compensation mechanism:
Strategic, top-level decisions are complex, non-routine and affect the firm over an
extended period, making it difficult to assess the decisions current effectiveness
Other intervening variables affect the firms performance over time
Incentive schemes provide no mechanism for preventing mistakes or opportunistic,
myopic behavior.
Institutional investors have little/no direct interest in running of a firm
BOARD DUTIES AND FUNCTIONS: OECD Principles of Corporate Governance 2004
Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and
business plans; setting performance objectives, monitoring and implementation and corporate
performance; and overseeing major capital expenditure, acquisitions and other divestitures.
Monitoring the effectiveness of the companys governance practices and making changes as
needed.
Selecting, compensating, monitoring and, when necessary, replacing key executives and
overseeing succession planning.
Aligning key executives and board remuneration with the longer term interests of the company
and its shareholders.
Ensuring a formal and transparent board nomination and election process
Monitoring and managing potential conflicts of interest of management, board members and
shareholders, including misuse of corporate assets and abuse of related party transactions.
Ensuring the integrity of the corporations accounting and financial reporting systems, including
the independent audit and appropriate systems of control are in place, in particular systems for
risk management, financial and operational control, and compliance with the law and relevant
standards.
Overseeing the process of disclosure & communication



The single external one is:
Market for Corporate Control
This market is a set of potential owners seeking to acquire undervalued firms
and earn above-average returns on their investments by replacing (ineffective)
top-level management teams.
External governance:
Arises from the threat of potential investors who wish to acquire a firm with the intent
or governing for better than average wealth creation
Becomes active only when internal controls have failed
Ineffective managers are usually replaced in/by takeovers
Golden handshake/ parachute
Need for external mechanisms exists to:
Address weak internal corporate governance and correct suboptimal
performance relative to competitors
Discipline ineffective or opportunistic managers
Threat of takeover may lead firm to operate more efficiently
However, changes in regulations have made hostile takeovers difficult
E.g. prevent asset stripping
Internal governance:
hinges on the ability of the board to monitor the firm's executives - is a function of its
access to information
Directors expectedly possess superior knowledge of the domain process and evaluate
top management on the quality of its decisions
The Board often look beyond the confines of financial criteria
Internal control procedures are implemented by an entity's board of directors, audit
committee, management, and other personnel to provide reasonable assurance
Balance of power: The simplest balance of power require that the President be a
different person from the Treasurer:
Single headed or shared, supportive control ?
Speed vis-a-vis Sanity!
Divergent views
UK mandates separation for balanced control,
US practice is single-headed for speed & cohesion. Expectedly, all have the same
interest in view!
Europe practices clear separation of responsibilities with veto rights with the
Supervisors.
Japanese resort to team-worked responsibility, decision making with Leader.

Ethics
Responsibilties of Business:
Classical view: There is one and only one social responsibility of business to use its resources
and engage in activities designed to increase its profits so long as they stay within the rules of
the game, which is to say: engages in open and free competition without deception and fraud.
(Milton Freidman )
Contemporary View: A representative model was proposed by A.B. Carroll. managers have
four areas of responsibility: Economic, Legal, Ethical and Social.

Ethics: consensually accepted standards of behaviour for an occupation, trade or a profession:
Business Ethics is considered to integrate core values like honesty, trust, respect and fairness
in a code, legally driven. Leading to:
Utilitarian approach actions and plans are judged by their consequences.
Behaviour should result in the greatest good at least cost.
Likely that some stakeholders are minimized.
Individual Rights approach - fundamental rights of humans should be respected in all
decisions.
Can get distorted (selfish) when a strong individual view-point prevails.
Justice approach - proposes that decision makers be equitable, fair and impartial for
distributing costs and benefits.
However, can lead to conflict in cases where compensatory justice is applied
e.g. Reservation.
Fund managers and directors opine that preventing unethical behaviour in companies
through cold, legalistic and mechanistic means cannot alter a persons general
approach.
Concurrently, many opine Business ethics is a contradiction in terms since ethics is
broadly defined as codes of behaviour for the benefit of society.
Morality: precepts of personal behaviour that are based on religious and/or philosophical
grounds
Leads to moral relativism that no decision is better than another given the difference
in personal interpretation.
Could lead to confusion in determining ethical behaviour; enables people to justify
behaviour as long as it is not illegal.
Law: refers to formal codes that permit or forbid behaviours and may not enforce ethics or morality

Social Responsibility:
Corporate Social Responsibility: generally refers to transparent business practices that are based on
ethical values, compliance with legal requirements, respect for people, communities, and the
environment.
Beyond making profits, companies are responsible for the totality of their impact on
people and the planet.
Increasingly, stakeholders expect that companies should be more environmentally and
socially responsible in conducting their business.
alternatively referred to as corporate citizenship, which essentially means that a
company should be a good neighbour within its host community.
Given the sea change brought about by globalization in the corporate environment, companies want to
increase their ability to manage their profits and risks, and to protect the reputation of their brands.
There is also fierce competition for skilled employees, investors and consumer
loyalty.
How a company relates with its workers, its host communities and the
marketplace can greatly contribute to the sustainability of its business.
There are many CSR organizations and business
associations promoting CSR in diverse industries - big small, and medium-sized.
CSR IEE: Integrated External Engagement:
Michael Porter and Mark Kramer summarize the result of CSR so far: a hodgepodge
of uncoordinated CSR and philanthropic activities disconnected from the companys
strategy that neither make any meaningful social impact nor strengthen the firms long-
term competitiveness.
We are finding out quite rapidly that to be successful long term we have to ask: what do we actually
give to society to make it better? Weve made it clear to the organization that its our business model,
starting from the top. Paul Polman, CEO of Unilever
Business Sustainability
In 1983, UNWCED United Nations World Commission on Environment & Development (aka
The Bruntland Commission) was set up to address growing concern with the accelerating
deterioration of the human environment and natural resources and the consequence of that
deterioration for economic and social development.
Published In 1987, the Bruntland Report gave the world the most widely used definition of
sustainable development: development that meets the need of the present without
compromising the ability of future generations to meet their own needs.
The report contains two key concepts:
The concept of needs, particularly the essential needs of the worlds poor, to which
over riding priority should be given
The idea of limitations imposed by the state of technology and social organization on
the environments ability to meet present and future needs.
The International Institute for Sustainable Development provides the variation:
For the business enterprise, sustainable development means adopting strategies that meet the
needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the
human & natural resources that will be needed in the future.
The I PAT formula was developed in the 70s to explain human consumption in terms of three
components:
population numbers,
levels of consumption (which it terms "affluence", indicative of lifestyle), and
impact per unit of resource use (which is termed "technology", because this impact
depends on the technology used)
I = P A T
The three responsibilities of Sustainability
The triple bottom line (abbreviated as "TBL" or "3BL", and also known as "people, planet,
profit"captures an expanded spectrum of values and criteria for measuring organizational (and
societal) success.
Triple bottom line score-card means expanding the traditional (financial) reporting framework
to take into account ecological and social performance:
"People" (human capital) pertains to fair and beneficial business practices toward
labour, the community and region in which a corporation conducts its business.
"Planet" (natural capital) refers to sustainable environmental practices. A TBL endeavor
reduces the ecological footprint by both controlling consumption and reducing waste.
"Profit" is the economic value created (for the society in which it operates) by the
organization after deducting the cost of all inputs, including the cost of the capital tied
up. It differs from traditional accounting definitions of profit:
Full Cost, materiality; Provisioning by probability etc.
The linear take, make, dispose model relies on:
Large quantities of easily accessible resources and energy,
Working towards efficiency a reduction of resources and fossil energy consumed per
unit of manufacturing output
Recently, with some precautions for pollution control & environmental
degradation
This will not alter the finite nature of the resource stocks but can only delay the inevitable.
A change of the entire operating system seems necessary.
The linear model turned services into products that can be sold, but this throughput approach
is a wasteful one.
In the past, reuse and service-life extension were often strategies in situations of scarcity or
poverty and led to products of inferior quality. Today, they are signs of good resource
husbandry and smart management.
A circular economy is an alternative to a traditional linear economy (make, use, dispose) in
which we keep resources in use for as long as possible, extract the maximum value from them
whilst in use, then recover and regenerate products and materials at the end of each service life.