CORPORATE GOVERNANCE:

INTRODUCTION

Issues relating to CG
Establishing Need of CG
Code
Code of Corporate
Practices
Benefits of Good CG
 Corporate Governance

• Dr. Sareen, Chairman, Indian Medical Council

at IMA annual meet in New Delhi on 30-Jan-
2011 said,



“India is crossing over from a Developing to a
Developed nation. It is disgusting to be facing
one scam after another ever since the start of
globalization in India. There is a character crisis
in India today.”

“Ethics can’t be taught,

Ethics is a way of life.”
Customer&Society
Issues in Corporate Governance:

• Corporate governance is the new

buzzword in corporate and academic
circles today.
• Everyone is talking about it.
• It means several things to different
people, depending on the sensitivity
and sensibility of the analyst.
• This overview discusses evolution of the
concept of Corporate Governance, and
• Explains its relevance and impact on the
economy.
Issues in Corporate Governance:

v Increasing Awareness
v
v Global Concerns
v
v Historical Perspective of Corporate
Governance
v
v Issues in Corporate Governance
 Relating Governance with Ethics

 Ethics - set of beliefs about right and

wrong behaviour

(Ethical behaviour conforms to
generally accepted social norms)
 Virtues - Habits that incline people to do
what is right (acceptable behaviour)
 Vices - Habits of unacceptable behavior
 Value system - Scheme of moral values
 Integrity – Integrity is a cornerstone of
ethical behavior
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 The Importance of Integrity

People with integrity ,




1.Act in accordance with a personal

code of principles
2.Extend to all people the same
respect and consideration that
you desire
3.Apply the same moral standards in
all situations

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 Role of Ethics in the Business

• Risk is the product of multiplying the

likelihood of an event by the impact of
its occurrence
• Risks associated with inappropriate
behaviour have increased due to
– Globalization
– Keen vigilance by
 EMPLOYEES
 SHAREHOLDERS, AND
 REGULATORY AGENCIES
•
8
The Importance of Good Business
Ethics

1.To gain the goodwill of the

community
2.To create an organization that
operates consistently
3.To produce good business
4.To protect the organization and its
employees from legal action
5.To avoid unfavorable publicity

9
 Recent Frauds in the Business
World

• Effect of unethical behaviour is seen the

recent scandals in companies world
over:
–
– WorldCom
– Enron Energy Corporation
– Lehman Bros.
– Dhabol Power Corporation

10
 American Scenario in 2002

v Giant corporations such as Enron,

WorldCom, Lehman Bros. and various
other global cos. failed and were
investigated for fraud and malpractices
v
v Many of their top executives were
penalized for committing fraud and
irregularities.
v
•
 Corporate Misgovernance in India

v Reasons for Corporate Misgovernance


Indian corporations were insulated. A
closed economy, a sheltered market,
limited need and access to global
business/trade, lack of competition,
lack of adequate regulatory framework
were all the causes. Besides, promoter
families ruled the roost. As a result,
there were a series of scams.
v Increasing Awareness
v Global Concerns
v What is Corporate Governance?
 From Academic Point of View


 Corporate governance addresses

Perceptions

problems that result from the

separation of ownership and
control .
 Developed Versus Developing

Countries
 In developing economies , one
must look to supporting
institutions – for example ,
strengthening weak judicial and
legal systems in order to better
enforce contracts and protect
Different

property rights . ( John D. Sullivan)

 Other Perceptions

 Corporate Governance … is
defined narrowly as relationship
of a company to its shareholders ;
or broadly as a relationship to
society . ( An article in Financial Times )
 Different Perceptions
 Corporate governance is a much broader
concept than just corporate management ,
and includes a fair, efficient and
transparent administration to meet certain
well-defined objectives.
 It is a system of structuring, operating and
controlling a company with a view to
achieving long-term strategic goals
 That satisfy the shareholders, creditors,
employees, customers and suppliers and
complying with the legal and regulatory
requirements, apart from meeting
environmental and local community needs.
 Need of Corporate Governance:

Corporate Governance Is Expected to

Deal with:
The Rights of Shareholders
The Equitable Treatment of Shareholders
The Role of Stakeholders in Corporate
Governance
Disclosure and Transparency
The Responsibilities of the Board including
those towards the Society
 Need of Corporate Governance:

To fulfill the Needs of the Corporate



Governance it calls for 3-factors:

 Transparency in decision-making
 Accountability which follows from
transparency because responsibilities could
be fixed easily for actions taken or not
taken, and
 Safeguarding the interests of the
stakeholders and the investors in the
organization through accountability
 Historical Perspective of Corporate
Governance

§ The Growth of Modern Ideas of Corporate

Governance from the USA
§ England Catches Up With US
§ The Cadbury Committee
§ The Aftermath of Cadbury Report
§ Corporate Governance in the Banking
Sector
§ Corporate Governance Issues in 21
century
 Issues in CG
§ Distinguishing the Roles of the Board and
the Management
§ The Board and Related Issues
§ Composition
§ Appointments
§ Separation of Company and the Ownership
§ The Committees under the Board
§ The Remuneration
§ Disclosure and Audit
§ Protection of Shareholder Rights and Their
Expectations
§ A Socially Responsible Corporate Citizen
 Summarizing Relevance and Need
v Relevance of Corporate Governance

Managements usually have an information
advantage over others. Good corporate
governance will ensure all stakeholders interests
are protected, while their requirements are
fulfilled.
v Need for and Importance of Corporate
Governance

To maximize long-term shareholder value
v Governance and Corporate Performance

These are very closely inter-related
v Investors’ Preference for Good Governance

Shareholders are prepared to pay a premium
for a company with good corporate governance
practices.
 How Do You Achieve
Good Corporate Governance

Good Corporate Governance Practices through



internal value system, corporate codes,

internal control systems etc are useful to:
§ Combating corruption,
§ Stakeholder protection,
§ Ensuring industrialization and
§ Economic development.
Primarily it establishes the need for a good


Corporate Governance Code

 Benefits of Good Corporate
Governance

1. Cultural improvement
2. Shareholders ’ confidence improvement
3. Premium on well governed company
stocks
4 . Preventing fraud and malpractices
5 . Protecting shareholders ’ interest
6 . Enhancing company ’ s valuation
7 . Ensuring compliance of laws and
8 . Creating competitive advantage