Unit 1

Corporate Governance
Meaning, definitions, objectives, concepts,
issues and challenges. Landmarks in the
emergence of Corporate
Governance. 4Lectures [4 hours 40m]

Purpose of CG
For Sustainable growth and success of any country or society in depending upon
its collective function of its resources.
Resources = natural resources of the country, strategic, geographic location,
people, and intellectual capital.
In a country private participation has a prominent role in utilization of all these
resources. It involves the determination of the Government, culture, quality of life,
and sustainable development of society.
This helps to keep the primary aspects, such as discipline, peace, education,
planning and implementation in the society depend upon the culture and the
nature of the society.
Corporate governance is to protect human values and rights, implementation of
laws in a non discriminatory manner, an effective, impartial and quick judicial
system, transparent public agencies and official decision-making, accountability for
decision made about public issues and resources by public officials, devolution of
resources and decision-making power to local levels and bodies in rural and urban
areas, participation and inclusion of all citizens in debating public policies and
choices.
Meaning
Corporate governance is the system by which
companies are directed and managed. It
influences how the objectives of the company
are set and achieved, how risk is monitored &
assessed, & how performance is optimized.
Good corporate governance structures
encourage companies to create value (through
entrepreneurialism, innovation, development &
exploration) and provide accountability &
control systems commensurate with the risks
involved

Berle and Means Model of Ownership and Control
Board of Directors
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National &
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Corporate governance is generally perceived as a
set of codes and guidelines to be followed by
companies.
But governance is more that just board processes
and procedures, it also involves relationships
between a companys management, its board,
shareholders and other stakeholders.
The OECD has emphasis on:
Rights of shareholders
Equitable treatment of shareholders
Role of stakeholders in corporate governance
Disclosure and transparency
Responsibilities of the board.
OBJECTIVES
To build up an environment of trust &
confidence amongst competing & conflicting
interest.
To enhance shareholders value & protect the
interest of other stakeholders by enhancing
the corporate performance & accountability.
Corporate Governance Life Cycle
Maturity Governance
challenges
Growth Governance challenges:
Launch Governance Challenges:
Maintain alertness
Board assessment
Advance value
commitments
Risk management
Develop board directors.
Engage stakeholders.
Raise capital
Recruit board of directors
Establish accountability
Time
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IPO
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Public Corporation
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Public Corporation
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Source: Clarke T. (2006)
Definitions
The framework of rules and practices by which a board of
directors ensures accountability, fairness,
and transparency in a company's relationship with its
all stakeholders (financiers, customers, management, empl
oyees, government, and the community).
The corporate governance framework consists of (1) explicit
and implicit contracts between the company and the
stakeholders for distribution of responsibilities, rights,
and rewards, (2) procedures for reconciling the sometimes
conflicting interests of stakeholders in accordance with
their duties, privileges, and roles, and (3) procedures for
proper supervision, control, and information-flows to serve
as a system ofchecks-and-balances.
Also called corporation governance.
OECD Definition of Corporate
Governance

"OECD defines corporate governance as follows:
Procedures and processes according to which an
organization is directed and controlled. The
corporate governance structure specifies the
distribution of rights and responsibilities among
the different participants in the organization
such as the board, managers, shareholders and
other stakeholders and lays down the rules and
procedures for decision-making.
OECD- Organization for Economic Co-operation
and Development.


Cadbury Report Definition of
Corporate Governance

"Corporate governance is the system by which
companies are directed and controlled. The boards of
directors are responsible for the governance of their
companies. The shareholders role in governance is to
appoint the directors and the auditors to satisfy
themselves that an appropriate governance structure is
in place. The responsibilities of the board include
setting the companys strategic aims, providing the
leadership to put them into effect, supervising the
management of the business and reporting to
shareholders on their stewardship. The boards actions
are subject to laws, regulations and the shareholders in
general meeting."

What is corporate governance?
Corporate governance refers to the set of systems,
principles and processes by which a company is
governed. They provide the guidelines as to how the
company can be directed or controlled such that it can
fulfil its goals and objectives in a manner that adds to
the value of the company and is also beneficial for all
stakeholders in the long term. Stakeholders in this case
would include everyone ranging from the board of
directors, management, shareholders to customers,
employees and society. The management of the
company hence assumes the role of a trustee for all
the others.
What are the principles underlying
corporate governance?
Corporate governance is based on principles such as
conducting the business with all integrity and fairness,
being transparent with regard to all transactions,
making all the necessary disclosures and decisions,
complying with all the laws of the land, accountability
and responsibility towards the stakeholders and
commitment to conducting business in an ethical
manner. Another point which is highlighted in the SEBI
report on corporate governance is the need for those
in control to be able to distinguish between what are
personal and corporate funds while managing a
company.
Why is it important?
Corporate governance is needed to create a corporate culture of
consciousness, transparency and openness. It refers to a combination of
laws, rules, regulations, procedures and voluntary practices to enable
companies to maximize shareholders long-term value. It should lead to
increasing customer satisfaction, shareholder value and wealth.
Fundamentally, there is a level of confidence that is associated with a
company that is known to have good corporate governance.
The presence of an active group of independent directors on the board
contributes a great deal towards ensuring confidence in the market.
Corporate governance is known to be one of the criteria that foreign
institutional investors are increasingly depending on when deciding on
which companies to invest in.
It is also known to have a positive influence on the share price of the
company.
Having a clean image on the corporate governance front could also make it
easier for companies to source capital at more reasonable costs.
Unfortunately, corporate governance often becomes the centre of
discussion only after the exposure of a large scam.
Why was it in the news recently?
Corporate governance has most recently been debated after the
corporate fraud by Satyam founder and chairman Ramalinga Raju.
In fact, trouble started brewing at Satyam around December 16
when Satyam announced its decision to buy stakes in Maytas
Properties and Infrastructure for $1.3 billion. The deal was soon
called off owing to major discontentment on the part of
shareholders and plummeting share-price. However, in what has
been seen as one of the largest corporate frauds in India, Raju
confessed that the profits in the Satyam books had been inflated
and that the cash reserve with the company was minimal. Ironically,
Satyam had received the Golden Peacock Global Award for
Excellence in Corporate Governance in September 2008 but was
stripped of it soon after Raju's confession.
Issues and challenges
Distinguishing the role of board and management
Composition of the board and related issues
Separation of the role of CEO and chairperson
Should the board have the committees?
Appointments to the board and directors re-election
Directors and executives remuneration
Disclosure and audit
Protection of shareholder rights and their expectations
Dialogues with institutional shareholders
Should investors have a say in making a company
socially responsible corporate citizen?

Landmarks in the emergence of
Corporate Governance
The history about the emergence of corporate governance
is all about the scam and issues raises in the corporate
administration, where the issues has been highlighted,
shaped and refined and transverse to acquire to some level
of perfection at the administrative function.
The emergence of the corporate governance as a fair and
transparent mechanism to run and administrate
corporations in a manner that would result in long term
shareholder value and benefits to the entire society.
There has been a perceptible change in peoples minds as
to the objective of a corporation and was purposely
intended to exclusively benefit the shareholders and all its
stakeholders.
Corporate governance gained importance after the
Watergate scandals in US. Investigations highlighted control
failures that had allowed several major corporations to
make illegal political contributions and to bribe US
Government officials. This led to the development of the
Foreign and Corrupt Practices Act of 1977, that contains
specific provisions regarding the establishment,
maintenance and review of systems of internal control.
This was followed in 1979 by the Securities and Exchange
Commissions proposals for mandatory reporting on internal
financial controls.
In England, the seeds of modern corporate governance
were sown by the BCCI scandal. Another landmark that
heightened peoples awareness and sensitivity on the issue
was the failure of Barings Banks. These are just a couple of
examples of corporate failure due to absence of a proper
structure and objectives in the top management that affect
the shareholders and other interested parties.
The Cadbury Committee investigated the
accountability of the board of directors to
shareholders and to the society. The Cadbury
Code of Best Practices had 19 recommendations in
the nature of guidelines for the board of directors,
non-executive directors, executive directors and
such other officials.
The stated objectives of the Cadbury Committee
was to help raise the standards of corporate
governance and the level of confidence in financial
reporting and auditing by setting out clearly what
it sees as the respective responsibilities of those
involved and what it believes is expected of them.

Latter introduced,
The Paul Ruthman Committee
The Greenbury Committee, 1995
The Hampel Committee, 1995
The Combined Code 1998
The Turnbull Committee, 1999
OECD principles
McKinsey Survey on corporate governance
Sarbanes-Oxley 2002
SEBIs Initiatives
Kumar Mangalam Birla Committee, 1999


The Indian government accordingly set up working
Group on the Companies Act in August 1996 for this
purpose.
In 1996, The Confederation of Indian Industrys
Initiative took special action on corporate governance.
The initiatives flowed from public concerns regarding
the protection of investors' interest, especially of the
small investor, the promotion of transparency within
business and industry, the need to move towards
international standards in terms of disclosure of
information by the corporate sector and through all
this, to develop a high level of public confidence in
business and industry.