Corporate

governance
UNIT-5
 CORPORATE GOVERNANCE

 CG refers to the set of processes, customs, polices, laws

and institutions, influencing the administration of a
corporation.
 CG includes the relationships among the many players
and the goals of the corporation.
 The rules of corporate governance define how power is
distributed among shareholders, boards of directors,
and managers and how disputes are settled.
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Characteristics of 21st century Corporation
 Business will be the key generator of wealth rather than
state.
 Competitive advantage will be retained by innovation,
constant commitment to self renewal and consistent learning
for self improvement
 Transparency and Accountability
 Restraint from greed, ethical compliance and dedicated team
to succeed with knowledge management rather than intrigues
and hypocritical work to beat competition.
 Personality cult of iconic leaders replaced by distributed
leadership of highly qualified technologists.
 In addition to Financial capital, human capital and natural
capital would play more important role to create wealth.
 Environmental protection will be one of the key priorities of
business.
 Trade barriers wont be there.
 Self regulation, initiative and natural justice will gain
importance.
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20th Century Business Attitudes
 The end justifies the means
 Leadership is the main thing
 Inform others when they need to know
 Business is serious and demands total commitment
 We are better than you
 Younger employees are better and cheaper
 There are winners and losers
 Not for profit activities are second rate
 I care for my business not mother Earth

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21st Century Business Attitudes
 Long term sustainable growth depends on ethical
approach
 Reach of leadership increases the empowerment of
people
 Transparency is the order of the day
 We are all better than others- team strength
 A combination of young and old works better
 Win-win for everyone works better
 Worthy non profit activities are real achievements
 Giving is a sign of strength
 I love my Planet

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 CORPORATE GOVERNANCE
The Organisation for Economic Co-operation and
Development (OECD) has defined corporate governance
as.. “a set of relationships between a company’s board, its
shareholders and other stakeholders; it also provides the
structure through which the objectives of the company are
set, and the means of attaining those objectives and
monitoring performance are determined”.
“Corporate governance is concerned with ways of bringing
the interest of investors and managers into line and
ensuring that firms are run from the benefit of investors.”

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The OECD Principles
The OECD Principles of Corporate Governance cover five
aspects:
1. Ensuring the basis for an effective corporate governance
framework
It emphasizes the role of corporate governance framework in
promoting transparent and fair markets, and the efficient
allocation of resources. It focuses on the quality and consistency
the different elements of regulations that influence corporate
governance practices and the division of responsibilities between
authorities. In particular, new emphasis is placed on the quality
of supervision and enforcement.

2. The rights and equitable treatment of shareholders and

key ownership functions
The chapter identifies basic shareholder rights, including the
right to information and participation through the shareholder
meeting in key company decisions.

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The chapter also deals with disclosure of control structures,
such as different voting rights. New issues in this chapter
include the use of information technology at shareholder
meetings, the procedures for approval of related party
transactions and shareholder participation in decisions on
executive remuneration.

3. Institutional investors, stock markets and other

intermediaries
This is a new chapter which addresses the need for sound
economic incentives throughout the investment chain, with a
particular focus on institutional investors acting in a fiduciary
capacity.
It also highlights the need to disclose and minimize conflicts of
interest that may compromise the integrity of proxy advisors,
analysts, brokers, rating agencies and others that provide
analysis and advice that is relevant to investors.

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4. The role of stakeholders in corporate governance
The Principles encourage active co-operation between
corporations and stakeholders and underline the importance of
recognising the rights of stakeholders established by law or
through mutual agreements. The chapter also supports
stakeholders’ access to information on a timely and regular
basis and their rights to obtain redress for violations of their
rights.

5. Disclosure and transparency

The chapter identifies key areas of disclosure, such as the
financial and operating results, company objectives, major share
ownership, remuneration, related party transactions, risk
factors, board members, etc.
New issues in this chapter include the recognition of recent
trends with respect to items of non-financial information that
companies on a voluntary basis may include, for example in
their management reports.

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 MARKET MODEL AND CONTROL MODEL
Two models of Corporate Governance are:
1. Market model or Outsider (shareholders) model
2. Control model or Insider (stakeholders) model

Market Model or Outsider (Shareholders) Model

The shareholder theory was originally proposed by Milton
Friedman and it states that the sole responsibility of business is
to increase profits.
It is based on the premise that management are hired as the
agent of the shareholders to run the company for their benefit,
and therefore they are legally and morally obligated to serve
their interests.
The only qualification on the rule to make as much money as
possible is “conformity to the basic rules of the society, both
those embodied in law and those embodied in ethical custom.”

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The shareholder theory is now seen as the historic way of doing
business with companies realising that there are disadvantages
to concentrating solely on the interests of shareholders.
A focus on short term strategy and greater risk taking are just
two of the inherent dangers involved.
The role of shareholder theory can be seen in the demise of
corporations such as Enron and WorldCom where continuous
pressure on managers to increase returns to shareholders led
them to manipulate the company accounts.

Control Model or Insider (Stakeholders) Model

Stakeholder theory, on the other hand, states that a company
owes a responsibility to a wider group of stakeholders, other
than just shareholders.
A stakeholder is defined as any person/group which can
affect/be affected by the actions of a business. It includes
employees, customers, suppliers, creditors and even the wider
community and competitors.

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Edward Freeman, the original proposer of the stakeholder
theory, recognised it as an important element of Corporate
Social Responsibility (CSR), a concept which recognises the
responsibilities of corporations in the world today, whether they
be economic, legal, ethical or even philanthropic.
Nowadays, some of the world’s largest corporations claim to
have CSR at the centre of their corporate strategy. Whilst there
are many genuine cases of companies with a “conscience”, many
others exploit CSR as a good means of PR to improve their
image and reputation but ultimately fail to put their words into
action.

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Issues in Corporate Governance
 Duties of Directors
 Composition and balance of the Board
 Remuneration and reward of the Directors
 Reliability of Financial Reporting and External Auditors
 Board’s responsibility for risk management and internal
control
 Shareholders Rights and Responsibilities
 CSR and Business Ethics

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Need and Importance of Corporate Governance
 Changing ownership patterns
 Importance of Social Responsibility
 Growing number of scams
 Indifference on the part of shareholders
 Globalisation
 Take-overs and mergers
 SEBI

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Benefits of Good Governance
 Good Corporate Governance ensures corporate success and
economic growth
 Strong Corporate Governance maintains investors confidence
– can raise capital efficiently
 It lowers the capital cost
 Positive impact on the share price
 Good Corporate Governance minimises wastages, corruption ,
risks and mismanagement
 Helps in Branding and its development
 Helps in the best interests of all.

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Obligation to Society
 CSR, Corporate Citizenship, Responsible business,
Sustainable Responsible Business (SRB), Corporate Social
Performance, Corporate self regulation built into the business
model
 Potential business benefits
 Human Resources
 Risk Management
 Brand Differentiation
 License to operate
 Stakeholder priorities

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Obligation to Investors
 Address Environmental Social & Governance (ESG) issues in
investment policy statements
 Support development of ESG related tools, metrics and
analysis
 Assess capabilities of Internal managers to incorporate ESG
issues
 Assess capabilities of External mangers to incorporate ESG
issues
 Encourage academic and other research on this theme
 Advocate ESG training for investment professionals

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Obligation to Employees, Customers and Managerial
Obligation
 Code of conduct
 Compliance with Law
 Disclosure of Information
 Accounting Records and Practices
 Prohibited payments
 Fair Dealing
 Conflict of interests
 Corporate opportunities
 Use of company property
 Safety and Environmental protection
 Fundamental Rights
 Responsibility
 Where to seek clarification
 Reporting breaches of the code

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