Corporate Governance

Why Strategy fails?

Formulation failure

Inability to forecast environmental trends Not able to foresee competitive moves Wrong business definition

Implementation failure

Structure & systems Culture & Ethics Leadership (Most important??)

Strategy Control

Types of Control:

Behavior Controls
Policies, rules, SOPs, directives

Output Controls
Objectives, targets, milestones

Input Controls
Resources, knowledge, skills, values

Ownership
Indicates ownership control
Shareholders (Owners and Directors: Same??)

Persons responsible for direction are accountable to owners

Agency Theory explains key reason of failure?

Problems arise in corporations because the agents (BOD and top management) are not willing to work in the interest of owners (especially small).

Influence of Stakeholders

SHAREHOLDERS

BOARD OTHER STAKEHOLDERS

FINANCIAL MARKETS
MANAGEMENT

PRODUCT/ MARKETS

Management of Board

CONFLICT OF INTEREST
FREEDOM TO MANAGE

FRAUD

Governance
Derived from latin word gubernare which means to rule or to steer
Indicates ability, capability & stability of Corporates Corporate Governance Practices impart balance between exercise of power and

acceptance of accountability

Corporate Governance

Defined: Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.
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Corporate Governance
RELATIONSHIPS AMONG:

SHAREHOLDERS

DIRECTORS

MANAGERS

Corporate Governance

No consistent link between board

membership, leadership, structure, and financial performance of firm Investors pay more for a firms stock when positive toward good corporate governance Belief that

Good governance leads to better performance over time Reduces risk of company finding itself in trouble Governance is a major strategic issue
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Governance vis--vis Management

Governance
Strategy Oriented Framing of Policy External Focus

Management
Task Oriented Execution of Tasks Internal Focus

Better Governance leads to Better Management

Corporate Governance
Synonym for sound management,

transparency and disclosure

In the words of J. Wolfensohn, former President of the World Bank,

Corporate Governance is about promoting corporate fairness, transparency and accountability

Direction
Laying down Policy Decisions
Guidelines what is to be done as opposed to how to be done

Corporate Governance
Setting corporate strategy, overall direction, mission or vision Hiring and firing the CEO and top management

Board of Directors

Controlling, monitoring, or supervising top management Reviewing and approving the use of resources

Caring for shareholder interests

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Corporate Governance
Role of the Board in strategic management

Monitor
Developments inside and outside the corporation

Evaluate & Influence

Review proposals, advise, provide suggestions

and alternatives

Initiate & Determine

Delineate corporations mission and specify

strategic options

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Board Structure

SIZE

COMPOSITION

COMPETENCES

COMPENSATION

Board Processes

STYLE

TASKS COMMITTEES
AUDIT REMUNERATION

FINANCE

Board of Directors

Board of Director Membership

Wiling to challenge management Special expertise Availability for advice and meetings Expertise on global issues Understands key technologies External contacts valuable to the firm Detailed knowledge of industry High visibility in field Accomplished in representing firm to stakeholders
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Board of Directors
Boards more involved in reviewing, evaluating, and shaping strategy Institutional investors active on boards pressure on CEO for firm performance Shareholders demand directors own more than token amounts of the firms stock
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Board of Directors
Boards becoming smaller Boards taking more control of board functions Corporations becoming more global; international experience needed Societal expectations that boards balance profitability and social responsibility Diversity of board members
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Why Corporate Governance now?

Failure of a corporation affects

shareholders employees (they tend to lose their jobs) customers (they are deprived of quality products and concerns are raised about after sales service) government (they lose revenue and have to deal with problem of unemployment) lenders (sticky loans now called as non-performing assets NPAs) creditors (fear of non-recovery of amounts due) suppliers (lose valuable customers which is turn affects their operations)

Why Corporate Governance now?

Overwhelming Public Interest
Erosion in faith of stakeholders No corporation can work in isolation; what happens in one affects others and the economy as well All stakeholders feel impact

Core of Corporate Governance

Independence Disclosure Transparency Ethics Risk Assessment Risk Containment/Management Entire model of Corporate Governance is based on JUDGMENT, PRUDENCE & WISDOM

Action Habits Character Thoughts Words

 Watch your actions, they become your habits

Watch your habits, they become your character

Watch your character, they become your thoughts

Watch your thoughts, they become your words Watch your words, they become your actions

Independent Directors
Meaning of Independence Are they policemen in civil clothes? Degree of Independence Should independent directors possess business intellect? Freedoms Are freedoms unfettered? Remuneration Skill Enhancement

Ethics
Ethics is knowing the difference between what you have a right to do and what is right to do.
..Potter Stewart

Social Responsibility

Key question for strategic decision makers:

Should strategic decision makers be responsible only to shareholders or do they have broader responsibilities?

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Social Responsibility
Friedmans Traditional View
There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits

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Social Responsibility
Carrolls Four Responsibilities
Economic Legal Ethical Discretionary
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Social Responsibility

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Social Responsibility
Moral Relativism

Morality is relative to some personal, social or cultural standard and that there is no method for deciding whether one decision is better than another.
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Social Responsibility
Kohlbergs Levels of Moral Development

Preconventional Level
Concern for self

Conventional Level
Consideration of laws and norms

Principled Level
Adherence to internal moral code
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Social Responsibility

Code of Ethics:

Specifies how an organization expects its employees to behave while on the job.

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Social Responsibility
Ethics
The consensually accepted standards of behavior for an occupation, trade, or profession

Morality
The precepts of personal behavior based on religious or philosophical grounds

Law
Formal codes that permit or forbid certain behaviors
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Social Responsibility
Approaches to Ethical Behavior Utilitarian Actions and plans judged by consequences Individual Rights People have fundamental rights to be respected in all decisions Justice Distribution of costs and benefits to be equitable, fair, and impartial

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Why Ethical Code?

To To To To To To command respect and confidence maintain Independence maintain Integrity maintain Excellence ensure Objectivity ensure Ethical Behaviour

Ethics

Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful. ..Samuel Johnson

SEBI Framework
Controls through Clause 49 of the Listing Agreement Board of Directors

Composition
Executive:Non-executive Directors 50:50 Non-executive Chairman 1/3rd Independent

Directors Executive Chairman 50% Independent Directors

SEBI Framework
Board of Directors

Compensation
Prior approval of shareholders

Frequency of Meetings
4 meetings, Gap not to exceed 4 months

Code of Conduct
Board + Senior Management

SEBI Framework
Audit Committees

Composition
3 Directors, 2/3rd independent, financially

literate

Meetings
4 per year Gap between 2meetings Max. 4 months

SEBI Framework
Audit Committees

Powers
To investigate any activity within its terms of reference. To seek information from any employee.

To obtain outside legal or other professional advice.

To secure attendance of outsiders with relevant

expertise, if it considers necessary.

Role Review of Information

SEBI Framework
Subsidiary Companies Disclosures

Related Party Transactions Disclosure of Accounting Treatment Board Disclosures Risk Management Proceeds from Public Issues, Rights Issues etc Remuneration of Directors Management Shareholders

SEBI Framework
CEO/CFO Certification Report on Corporate Governance Compliance Certificates

Powers of Directors
General Powers Power vests in BOD can do all such acts and things as the company is authorised to exercise and do Restrictions on powers of Board

Some powers to be exercised through resolutions in Board Meetings Making calls, Issuing Debentures, Borrowing Money, Investing Funds, Making Loans

Control by Directors
Annual operating plans and budgets Capital Budgets Results of Company and its divisions and segments Minutes of committees of Board Information on Senior Level Appointments Show cause, demand, prosecution and penalty notices Accidents, Dangerous Occurrences, Pollution problems

Control by Directors
Default in financial obligation Details of Joint Venture or Collaboration Agreements Significant investment in Assets, Trademarks, Goodwill etc. Related Party Transactions Significant Labour Problems Foreign Exchange Exposures Non-compliance of regulatory and statutory requirements

Evaluation and Control

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Strategic Audit:

Type of management audit that is extremely useful as a diagnostic tool to pinpoint corporate-wide problem areas and to highlight organizational strengths and weaknesses.

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Audit Steps:

Evaluate current performance results Review corporate governance Scan and assess the external environment Scan and assess the internal environment Analyze strategic factors using SWOT Generate and evaluate strategic alternatives Implement strategies Evaluate and control

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Styles of Corporate Governance

High

Degree of Involvement By Top Management

Entrepreneurship management

Partnership management

Chaos

Remote

management
Low Low

management
High

Degree of Involvement By Board of Directors

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Board of Directors Continuum

DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT Low (Passive) Phantom Rubber Stamp Permits officers to make all decisions. It votes as the officers recommend on action issues. Minimal Review Formally reviews selected issues that officers bring to its Nominal Participation Involved to a limited degree in the performance or review of selected key decisions, indicators, or programs of management. Active Participation Approves, questions, and makes final decisions on mission, strategy, policies, and objectives. Has active board committees. Performs fiscal and management audits. Catalyst Takes the leading role in establishing and modifying the mission, objectives, strategy, and policies. It has a very active strategy committee.

High (Active)

Never knows what to do, if anything; no degree of involvement.

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Top Management
Responsibilities of Top Management:

Provide executive leadership and a strategic vision

Manage the strategic planning process

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Top Management
CEO and Clear Strategic Vision Common Characteristics: CEO articulates a strategic vision CEO presents a role for others CEO communicates high performance standards and shows confidence in followers
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Defining CEO
In an organization that has a board of directors, the "chief executive officer" is (usually) the singular organizational position that is primarily responsible to carry out the strategic plans and policies as established by the board of directors. Chief executive reports to the board of directors Without a board of directors (sole proprietorship, partnership, etc.), the "chief executive officer" is (usually) the singular organizational position (other than partnerships, etc.) that sets the direction and oversees the operations of an organization.

Role of CEO
LEADER Advises the Board Advocates / promotes organization and stakeholder change related to organization mission Supports motivation of employees in organization products/programs and operations VISIONARY / INFORMATION BEARER Ensures staff and Board have sufficient and up-to-date information Looks to the future for change opportunities Interfaces between Board and employees Interfaces between organization and community

DECISION MAKER Formulates policies and planning recommendations to the Board Decides or guides courses of action in operations by staff

Role of CEO
MANAGER Oversees operations of organization Implements plans Manages human resources of organization Manages financial and physical resources BOARD DEVELOPER Assists in the selection and evaluation of board members Makes recommendations, supports Board during orientation and selfevaluation Supports Board's evaluation of Chief Executive

Knowledge & Skill Role of CEO

Basics in Management and Leadership Planning Organizing Leading Coordinating Activities and Resources (including performance management)

Role: Chairman The chairman's role includes managing the board's business and acting as its facilitator and guide. This can include: Determining board composition and organization; Clarifying board and management responsibilities; Planning and managing board and board committee meetings; Developing the effectiveness of the board.

Strategic Management Process

Strategic Planning Staff - Supports top management and business units in the strategic planning process.

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Strategic Management Process

Strategic Planning Staff

Responsibilities: Identify and analyze company-wide strategic issues, suggest corporate strategic alternatives Work as facilitators with business units to guide them through the strategic planning process
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Risk Assessment & Management

Risk Assessment & Management