INTRODUCTION TO CORPORATE GOVERNANCE 1 CONTENTS Corporate Governance

INTRODUCTION TO CORPORATE GOVERNANCE 1

CONTENTS �Corporate �Governance �Definition of corporate governance �Features of Corporate Governance �Objectives �Aim and purpose �Need and Importance �Elements �History of CG in India �Principles �Theories �Models �Conclusion. 2

CORPORATE q A corporation is an organization created (incorporated) by a group of shareholders who have ownership of the corporation. q The elected board of directors appoint and oversee management of the corporation. 3

GOVERNANCE q - the persons (or committees or departments etc. ) who make up a body for the purpose of administering something; q It deals with the processes and systems by which an organization or society operates. q Governance can be used with reference to all kind of organizational structure. 4

CORPORATE GOVERNANCE Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. 5

Features of Corporate Governance �Transparency �Protection of shareholders rights �Accountability �Ethical Procedures �Universal Application 6

�Transparency means openness, willingness of the company to provide clear information to shareholders and other stakeholders. �By protection of shareholders rights we mean that the basic rights like equal and fair treatment of shareholders should be given. 7

�Accountability means taking responsibility of all the actions done by corporations and presenting a fair and balanced assessment report of the company. �Ethical procedures should be followed i. e the moral principles that should be followed by a corporation should be applied. 8

� Universal application of corporate governance means that corporate governance is not a phenomenon restricted to only a few corporations, its applicability is all around the world. 9

OBJECTIVES OF GOOD CORPORATE GOVERNANCES q. Strengthen management oversight functions and accountability. q. Establish a code to ensure integrity. q. Creating transparency in dealings. q. Risk management and internal control. q. Disclosure of all relevant and material matters. q. Recognition and preservation of needs of shareholders q. Development of value oriented organization. 10

THE AIM AND PURPOSE OF CORPORATE GOVERNANCE � The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship (supervision) of those resources. � The aim is to align as nearly as possible the interests of individuals, corporations, and society. � The incentive to corporations and to those who own and manage them to adopt internationally accepted governance standards is that these standards will help them to achieve their corporate aims and to attract investment. � The incentive for their adoption by states is that these standards will strengthen the economy and discourage fraud and 11 mismanagement.

NEED & IMPORTANCE OF CORPORATE GOVERNANCE �Shapes the growth and future of capital market & economy. �Instrument of investor’s protection. �Protecting the interest of Shareholders and all other stakeholder. �Contributes to the efficiency of the business enterprise. �Creation of wealth. �Enables firm to compete internationally in sustained way. �Keeps an eye on the issues of insider training. 12

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REASONS FOR THE GROWING DEMAND FOR CORPORATE GOVERNANCE �Inadequacies and failures of an existing system often bring to the fore the need for norms and codes to remedy them. This is true of corporate governance too. Deficiencies in the Accounting Standards became more evident after many companies, in their eagerness to increase earnings and accelerate growth, exploited the weaknesses in the accounting standards to show inflated profits and understate liabilities. 14

BRIEF HISTORY OF CORPORATE GOVERNANCE IN INDIA �Following CII’s initiative, the Securities and Exchange Board of India (SEBI) set up a committee under Kumar Mangalam Birla to design a mandatory-cum-recommendatory code for listed companies �The Birla Committee Report was approved by SEBI in December 2000 �Became mandatory for listed companies through the listing agreement, and implemented according to a rollout plan. 15

�Following CII and SEBI, the Department of Company Affairs (DCA) modified the Companies Act, 1956 to incorporate specific corporate governance provisions regarding independent directors and audit committees. �In 2001 -02, certain accounting standards were modified to further improve financial disclosures. These were: �Disclosure of related party transactions. �Disclosure of segment income: revenues, profits and capital employed. �Deferred tax liabilities or assets. �Consolidation of accounts. 16

PARTIES TO CORPORATE GOVERNANCE q Board of directors q Managers q Workers q Shareholders or owners q Regulators q Customers q Suppliers q Community. 17

PRINCIPLES OF CORPORATE GOVERNANCE �Rights and equitable treatment of share holders. �Interests of other stakeholders. �Role and responsibilities of the board. �Integrity and ethical behavior. �Disclosure and transparency. 18

FACTORS INFLUENCING QUALITY OF GOVERNANCE q. Integrity of the management q. Ability of the board q. Adequacy of the process q. Commitment level of individual board members q. Quality of corporate reporting q. Participation management of stakeholders in the 19

Theories of Corporate Governance � Agency Theory � Shareholder or Stockholder theory � Stakeholder Theory � Stewardship Theory 20

Agency Theory �Agency theory defines the relationship between the principals (such as shareholders of company) and agents (such as directors of company). According to this theory, the principals of the company hire the agents to perform work. The principals delegate the work of running the business to the directors or managers, who are agents of shareholders. The shareholders expect the agents to act and make decisions in the best interest of principal 21

Shareholder or Stockholder Theory �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 role of shareholder theory can be seen in the demise of corporations such as Enron and World. Com where continuous pressure on managers to increase returns to shareholders led them to manipulate the company accounts. 22

Stakeholder Theory �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. 23

Stewardship Theory �The steward theory states that a steward protects and maximizes shareholders wealth through firm Performance. Stewards are company executives and managers working for the shareholders, protects and make profits for the shareholders. The stewards are satisfied and motivated when organizational success is attained. 24

Models of Corporate Governance 25

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Fairness Responsibility Transparency Accountability Corporate Governance Fundamental Pillars of Corporate Governance 33

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 34

RESPONSIBILITY Ensuring that corporations comply with relevant laws and regulations that reflect the society’s values FAIRNESS Ensuring the protection of shareholders’ rights and the enforceability of contracts with service/resource providers 35

ICSI NATIONAL AWARD FOR EXCELLENCE IN CORPORATE GOVERNANCE Best Governed Companies 36

MANDATED CG GUIDELINES AND DISCLOSURES Board of Directors: information that must be supplied q Annual, quarter, half year operating plans, budgets and updates. q Quarterly results of company and its business segments. q Minutes of the audit committee and other board committees. q Recruitment and remuneration of senior officers. q Materially important legal notices and claims, as well as any accidents, hazards, pollution issues and labor problems. q Any actual or expected default in financial obligations. 37

q. Details of joint ventures and collaborations. q. Transactions involving payment towards goodwill, brand equity and intellectual property. q. Any materially significant sale of business and investments. q. Foreign currency and other risks and risk management. q. Any regulatory non-compliance. 38

CONCLUSION �There are several corporate governance structures available in the developed world but there is no one structure, which can be singled out as being better than the others. There is no "one size fits all" structure for corporate governance. The Committee’s recommendations are not therefore based on any one model but are designed for the Indian environment. Corporate governance extends beyond corporate law. 39