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CORPORATE

GOVERNANCE

Mahipal Singh
Kheechee
MBA 3 rd Sem.

INTRODUCTION

Corporate governance is "the system by which


companies are directed and controlled". It involves
regulatory and market mechanisms, and the roles
and
relationships
between
a
companys
management, its board, its shareholders and other
stakeholders, and the goals for which the
corporation is governed. In contemporary business
corporations, the main external stakeholder groups
are shareholders, debt holders, trade creditors,
suppliers, customers and communities affected by
the corporation's activities. Internal stakeholders are
the board of directors, executives, and other
employees.

WHAT IS CORPORATE GOVERNANCE

Corporate governance is the set of processes,


customs, policies, laws, and institutions
affecting the way a corporation (or company)
is directed, administered or controlled.
Corporate governance also includes the
relationships among the many stakeholders
involved and the goals for which the
corporation is governed. In simpler terms it
means the extent to which companies are run
in an open & honest manner.

SOME DEFINITIONS

Good corporate governance practices instill in


companies the essential vision, processes, and
structures to make decisions that ensure longerterm sustainability. More than ever, we need
companies that can be profitable as well as
achieving environmental, social, and economic value
for society.
Good corporate governance is the glue that holds
together responsible business practices, which
ensures
positive
workplace
management,
marketplace
responsibility,
environmental
stewardship, community engagement, and sustained
financial performance. This is even more true now as
we work worldwide to restore confidence and

MAIN OBJECTIVE OF CORPORATE


GOVERNANCE

To make the markets safe and investors friendly

To provide investor protection

To empower the shareholders

To provide greater value to their holdings

Enhance the performance of companies

Enhance access to capital

Enhance long term prosperity

Provide barrier to corrupt dealings

Impacts on the society as a whole

Fairness

Responsibility

Transparency

Accountabilit
y

CORPORATE
GOVERNANCE

Fundamental Pillars of Corporate


Governance

Accountability
Clarifying governance roles & responsibilities, and
supporting voluntary efforts to ensure the alignment
of

managerial

and

shareholder

interests

and

monitoring by the board of directors capable of


objectivity and sound judgment.

Transparency
Requiring timely disclosure of adequate information
concerning corporate financial performance

Responsibility
Ensuring that corporations comply with relevant
laws and regulations

that reflect the societys

values

Fairness
Ensuring the protection of shareholders rights and
the enforceability of contracts with service/resource
providers

PRINCIPLES OF CORPORATE GOVERNANCE

Interests of other stakeholders

Role and responsibilities of the board

Integrity and ethical behavior

Disclosure and transparency

Rights and equitable treatment of


shareholders

PRINCIPLES PLAYERS OF CORPORATE


GOVERNANCE
Board of Directors

Management
Banks and lenders
Customers
Shareholders

Employees
Environment &
the community at large
Regulators

Suppliers
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7/14/15

A BALANCING ACT

FACTORS AFFECTING CORPORATE


GOVERNANCE

REGULATION &
THERE
ENFORCEMENT

RISK
MANAGEMENT &
EFFECTIVE
GOVERNANCE

REGULATION AND THERE ENFORCEMENT

Since corporate governance failures have proved to


be harmful not just for the organizations but also for
the economy and the general public at large as well,
there have been public pressures on the government
and regulatory authorities to reform business
practices and increase transparency.

Consequently, it has become a part of the


governments duty to ensure accountability and
responsibility in corporate behavior.

Effective disposal of this responsibility basically


revolves around two things:

First, the designing of regulatory commands i.e. the


regulations and laws to ensure good corporate

RISK MANAGEMENT AND EFFECTIVE


GOVERNANCE

In todays world, frauds are an undeniable fact of


business life.

Affecting all types of businesses. New technologies


such as the Internet, and the development of fully
automated accounting systems, have increased the
opportunities for fraud to be committed.

requiring experience and technical skill and can be


very costly. Thus, there is no doubt

that fraud is best prevented, rather than dealt with


after the fact. The most effective and appropriate
response to the problem of fraud involves a
combination of risk management techniques.

MECHANISMS AND CONTROLS

Internal corporate
governance controls

External corporate
governance controls

Competition

Monitoring by the board of


directors

Debt covenants

Internal control
procedures and internal
auditors

Demand for and


assessment of
performance
information

Government
regulations

Balance of power

Remuneration
Performance

Managerial labor
market

Monitoring by large
shareholders

Media pressure

Takeovers

Banks and other large


creditors

IMPORTANCE OF CORPORATE GOVERNANCE

Corporate governance ensures that a properly


structured Board, capable of taking independent &
objective decisions is at the helm of affairs of the
company. This lays down the framework for creating
long-term trust between the company & external
providers of capital.

It improves strategic thinking at the top by


inducting independent directors who bring a wealth
of experience & a host of new ideas.

It rationalizes the management & monitoring of risk


that a corporation faces globally.

Corporate governance emphasizes the adoption of


transparent procedures & practices by the Board,
thereby ensuring integrity in financial reports.

CONTD

It inspires & strengthens investors confidence by


ensuring that there are adequate number of non-executive
& independent directors on the Board, to look after the
interests & well-being of all the stakeholders.

Corporate governance helps provide a degree of


confidence that is necessary for the proper functioning of
a market economy, as it contemplates adherence to ethical
business standards.

Finally, globalization of the market place has ushered in


an era wherein the quality of corporate governance has
become a crucial determinant of survival of corporate.

ISSUES OF CORPORATE GOVERNANCE

Internal controls and internal auditors

The independence of the entity's external


auditors and the quality of their audits

Oversight of the preparation of the entity's


financial statements

Review of the compensation arrangements for


the chief executive officer and other senior
executives

ELEMENTS OF CORPORATE GOVERNANCE

Good Board practices

Control Environment

Transparent disclosure

Well-defined shareholder rights

Board commitment

Good Board Practices

Clearly defined roles and authorities

Duties and responsibilities of Directors understood

Board is well structured

Appropriate composition and mix of skills

Appropriate Board procedures

Director Remuneration in line with best practice

Board self-evaluation and training conducted

Control Environment

Internal control procedures

Risk management framework present

Disaster recovery systems in place

Media management techniques in use

Business continuity procedures in place

Independent external auditor conducts audits

Independent audit committee established

Internal Audit Function

Management Information systems established

Compliance Function established

Transparent Disclosure

Financial Information disclosed

Non-Financial Information disclosed

Financials prepared according to


Financial Reporting Standards (IFRS)

Companies Registry filings up to date

High-Quality annual report published

Web-based disclosure

International

Well-Defined Shareholder Rights

Minority shareholder rights formalized

Well-organized shareholder meetings conducted

Policy on related party transactions

Policy on extraordinary transactions

Clearly defined and explicit dividend policy

Board Commitment

The Board discusses corporate governance issues


and has created a corporate governance committee

The company has a corporate governance champion

A corporate governance improvement plan has been


created

Appropriate resources are committed to corporate


governance initiatives

Policies and procedures have been formalized and


distributed to relevant staff

A corporate governance code has been developed

A code of ethics has been developed

The company is
governance leader

recognized

as

corporate

Other Entities

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,


funds, state-owned enterprises

pension

CORPORATE GOVERNANCE IN INDIA

The Indian corporate scenario


stagnant till the early 90s.

was

more

or

less

The position and goals of the Indian corporate sector


has changed a lot after the liberalization of 90s.

Indias economic reform programmer made a steady


progress in 1994.

India with its 20 million shareholders, is one of the


largest emerging markets in terms of the market
capitalization.

SECURITIES EXCHANGE BOARD OF INDIA

On April 12, 1988, SEBI was established with


objective of protecting the rights of small investors
and regulating and developing the stock markets in
India.

In 1992, the Bombay Stock Exchange (BSE),the


leading stock exchange in India, witnessed the first
major scam masterminded by Harshad Mehta.

SECURITIES EXCHANGE BOARD OF INDIA

Analysts unanimously felt that if more powers had


been given to SEBI, the scam would not have
happened.

As a result the Government of India brought in a


separate legislation by the name of SEBI Act
1992and conferred statutory powers to it.

Since then, SEBI had introduced several stock


market reforms. These reforms significantly
transformed the face of Indian Stock Markets

In India, the major example


is Satyam which is one of the
largest IT companies in India.

Satyam Scandal

Overstated assets and income

The results announced on October 17,


2009 overstated quarterly Revenues by
percent and profits by 97 percent.

The global head of internal audit also


illegally
obtained
loans
for
the
company.

Created 13000 fake salary accounts

Created fake customer identities and


generated fake invoices to inflate
revenue

Satyam Scandal

The CEO was convinced that the gap in the


balance sheets reached an unmanageable heights
and could not be filled.

Satyam Computer crashed by Rs 139.15 or 77.69


per cent to close at Rs 39.95, after the Chairman`s
confession

Bombay stock exchange fell 700 points

ICSI NATIONAL AWARD FOR EXCELLENCE IN CORPORATE


GOVERNANCE
2001 2014

Best Governed Companies

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2014

Conclusion

Corporate governance And economic development are


intrinsically linked.

Effective corporate governance systems


development of strong financial systems

Which, in turn, have an unmistakably positive effect on


economic growth and poverty reduction.

As Indian companies compete globally for access to capital


markets, many are finding that the ability to benchmark
against world-class organizations is essential.

For a long time, India was a managed, protected economy


with the corporate sector operating in an insular fashion.

But as restrictions have eased, Indian corporations are


emerging on the world stage and discovering that the old
ways of doing business are no longer sufficient in such a

promote

the