Corporate

governance
 What corporate Governance is…
• 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.
• The corporate 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
 Cont…..
• The primary purpose of corporate governance is to
create wealth legally and ethically.
• This translates to bringing a high level of
satisfaction to five constituencies -- customers,
employees, investors, vendors and the society-at-
large.
• The raison d'être of every corporate body is to
ensure predictability, sustainability and profitability
of revenues year after year.

• - N R Narayana Murthy
• Corporate Governance involves Promoting-
I. Transparency
II. Accountability
III. Equanimity
Governance and performance
• Good governance leads to good performance
• It creates an open and transparent system
• It improves communication and breaks down
systematic barriers to flow of information
• Good governance allows decision making
based on data. It reduces risk
• Good governance helps in creating a brand
and creates comfort for all stakeholders and
society
Issues in Corporate Governance

• Asymmetry of power
• Asymmetry of information
• Interests of shareholders as residual owners
• Role of owner management
• Theory of separation of powers
• Division of corporate pie among stakeholders
Corporate Governance Mechanisms

• Internal Governance Mechanisms

• Board of director
• Managerial incentive compensation
• Ownership concentration
• External Governance Mechanisms
• Market for Corporate Control
 Mechanism of control

Corporate governance mechanisms and controls are designed

to reduce the inefficiencies that arise from moral hazard
and adverse selection. For example, to monitor managers'
behavior, an independent third party (the external auditor)
attests the accuracy of information provided by
management to investors. An ideal control system should
regulate both motivation and ability

1. Internal corporate governance control .

2. External corporate governance control .
External corporate governance control
It encompasses the control of external stake holders
exercise over the organization.

1. Competition
2. Debt covenants
3. Demand for assessment of performance (especially
financial statements.)
4. Government regulations
5. Media pressure
6. Take over
Internal corporate governance control

Organizationally based mechanism

• Monitoring by the board of directors.

• Internal control procedures and internal auditors.
• Balance of power.
• Remuneration
Parties to Corporate Governance

Chief Executive officer

• Responsibilities.
• International Use.
• Structure.
• In the Media.
• CEO Search Firms.
 Board of Directors
• Use of corporate property.
• Transaction with Company.
• Conflict of duties and interest.
• Proper purpose.
• Classification
 Management
• Basic function of management.
• Formation of the business policy.
• How to implement policies and strategy.
• Where policies and strategies fit in the planning
process.
• Areas and categories and implementation of
management.
• Multi divisional management hierarchy.
 Share holders
• The right to propose shareholder resolution.
• The right to share in distributions of the
company's income.
• The right to purchase new shares issued by the
company.
• The right to a company's assets during, a
liquidation of the company.
Corporate governance & firm performance

 Corporate governance represents the relationship among

stakeholders that is used to determine & control the
strategic direction & performance of the organization.

 Corporate governance involves oversight in areas where

owners, managers & members of board director may have
conflicts of interest.
ICSI National Award for Excellence in Corporate
Governance
Best Governed Companies
TOP 5 COMPANY’S : CORPORATE GOVERNANCE

COMPANY’S (2006) COMPANY’S (2005) COMPANY’S (2004)

●
● Abhishek Industries
●
Abhishek ●
Abhishek
ltd. Industries ltd. Industries ltd.
●
● Bajaj Auto Ltd. ●
Bajaj Auto Ltd. ●
Adnani Exports
●
● Bharat Forge Ltd. ●
Bharat Tele- Ltd.
●
● Chennai Petroleum Ventures Ltd. ●
Bajaj Auto Ltd.
Corp. Ltd ●
Canara Bank ●
Bharat Petroleum
●
Clariant Chemicals ●
Clariant (India) Corp. Ltd
(India) Ltd. Ltd. ●
Canara Bank
 Examples of Good
Corporate Governance
Infosys
• “The primary purpose of corporate leadership
is to create wealth legally and ethically. This
translates to bringing a high level of
satisfaction to five constituencies - customers,
employees, investors, vendors and the
society-at-large. The raison d'être of every
corporate body is to ensure predictability,
sustainability and profitability of revenues
year after year.”
 
• - N. R. Narayana Murthy
Chairman of the Board and Chief Mentor
 ITC
Over the years, ITC has evolved from a single product
company to a multi-business corporation. Its
businesses are spread over a wide spectrum,
ranging from cigarettes and tobacco to hotels,
packaging, paper and paperboards and international
commodities trading. Each of these businesses is
vastly different from the others in its type, the state
of its evolution and the basic nature of its activity, all
of which influence the choice of the form of
governance. The challenge of governance for ITC
therefore lies in fashioning a model that addresses
the uniqueness of each of its businesses and yet
strengthens the unity of purpose of the Company as
a whole.
Benefits of Good Corporate Governance

• Having better access to external finance.

• Lower costs of capital.
• Improved company performance.
• Higher firm valuation and share performance.
• Reduced risk of corporate crises and scandals
Factor influence the corporate governance

• 1. The ownership structure

• 2. The structure of company boards
• 3. The financial structure
• 4. The institutional environment
•
problems of corporate governance

• Demand for information

• Monitoring costs
• Supply of accounting information
 Problem of corporate governance
• We lay structures over the corporate business, and fail to
organize the business
• Corporate Performance Management reports against overlaid
structures
• Accounting accounts for only part of the business cycle and
against the wrong entities
• We govern the corporation by rules and regulations, because
we cannot manage the actual business
 ETHICS AND CORPORATE
GOVERNANCE
 Deals with determination what is ‘right'," fair, prior
and just" in decisions and actions made that affect
stake holders.

 It focuses on the business relationship with

employees, customers, stockholders, creditors,
suppliers and member of the society in which it
operates.

• Corporate ethics , is a matter of leadership.

.
 Purpose of ethics

• Ethics are the guiding principles.

• Where the proposed business activity/ operation of the

company borders on the unknown, the company needs
to apply the ethics principle to decide on the project.

• Ethics help make relationships mutually pleasant and

productive- imbibes a sense of community among
members- a sense of belongingness to society.
 Concluding remarks
• By and large, Indian listed companies have been legally
mandated to follow fairly strict standards of corporate
governance and disclosure
• Comparisons will show that the standards are far stronger
than all Asian countries, and in general stronger than most
OECD countries
• Indian corporate sector regulators and companies have been
quick to incorporate some of the best international corporate
governance and disclosure practices
• The need of the day is more training… of directors, audit
committee members and senior executives of companies
• The challenge is to design and sustain a system that imbibes
the spirit of corporate governance… and not merely the letter
of the law