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Corporate Governance Assgn

Corporate Governance Assgn

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Published by Atreya Terry Vyas

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Published by: Atreya Terry Vyas on Jul 14, 2012
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QUES-1
Corporate governance
is "the system by which companies are directed and controlled"(Cadbury Committee, 1992). It involves regulatory and market mechanisms, and the
roles and relationships between a company’s management, its board, its shareholders
and other [Stakeholder (corporate)|stakeholder]]s, and the goals for which thecorporation is governed.In contemporary business corporations, the main externalstakeholder groups are shareholders, debtholders, trade creditors,suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are theboard of directors, executives,and other employees. India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the trueowners of the corporation and of their own role as trustees on behalf of theshareholders. It is about commitment to values, about ethical business conduct andabout making a distinction between personal & corporate funds in the management of acompany." It has been suggested that the Indian approach is drawn from the Gandhianprinciple of trusteeship and the Directive Principles of the Indian Constitution, but thisconceptualization of corporate objectives is also prevalent in  Anglo-American and most other jurisdictions.The Cadbury and OECD reports present general principals around which businessesare expected to operate to assure proper governance
 
Rights and equitable treatment of shareholders
:Organizations should respectthe rights of shareholders and help shareholders to exercise those rights. Theycan help shareholders exercise their rights by openly and effectivelycommunicating information and by encouraging shareholders to participate ingeneral meetings.
 
Interests of other stakeholders
:Organizations should recognize that they havelegal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, localcommunities, customers, and policy makers.
 
Role and responsibilities of the board
 
The board needs sufficient relevantskills and understanding to review and challenge management performance. Italso needs adequate size and appropriate levels of independence andcommitment
 
Integrity and ethical behavior
 
Integrity should be a fundamental requirement inchoosing corporate officers and board members. Organizations should develop acode of conduct for their directors and executives that promotes ethical andresponsible decision making.
 
Disclosure and transparency
:Organizations should clarify and make publiclyknown the roles and responsibilities of board and management to provide
 
stakeholders with a level of accountability. They should also implementprocedures to independently verify and safeguard the integrity of the company'sfinancial reporting. Disclosure of material matters concerning the organizationshould be timely and balanced to ensure that all investors have access to clear,factual information.YESCorporate governance mechanisms and controls are designed to reduce theinefficiencies 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 systemshould regulate both motivation and ability.
Internal corporate governance controls
Internal corporate governance controls monitor activities and then take corrective actionto accomplish organisational goals. Examples include:
 
Monitoring by the board of directors
: The board of directors, with its legalauthority to hire, fire and compensate top management, safeguards investedcapital. Regular board meetings allow potential problems to be identified,discussed and avoided. Whilst non-executive directors are thought to be moreindependent, they may not always result in more effective corporate governanceand may not increase performance.
 Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm's executivesis a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate topmanagement on the basis of the quality of its decisions that lead to financialperformance outcomes,
ex ante 
. It could be argued, therefore, that executivedirectors look beyond the financial criteria.
 
Internal control procedures and internal auditors
: Internal control proceduresare policies implemented by an entity's board of directors, audit committee,management, and other personnel to provide reasonable assurance of the entityachieving its objectives related to reliable financial reporting, operating efficiency,and compliance with laws and regulations. Internal auditors are personnel withinan organization who test the design and implementation of the entity's internalcontrol procedures and the reliability of its financial reporting
 
Balance of power
: The simplest balance of power is very common; require thatthe President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisionscheck and balance each other's actions. One group may propose company-wideadministrative changes, another group review and can veto the changes, and a
 
third group check that the interests of people (customers, shareholders,employees) outside the three groups are being met.
 
Remuneration
: Performance-based remuneration is designed to relate someproportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other  benefits. Such incentive schemes, however, are reactive in the sense that theyprovide no mechanism for preventing mistakes or opportunistic behavior, andcan elicit myopic behavior.
 
Monitoring by large shareholders
and/or 
monitoring by banks and otherlarge creditors
: Given their large investment in the firm, these stakeholdershave the incentives, combined with the right degree of control and power, tomonitor the management.In publicly-traded U.S. corporations, boards of directors are largely
chosen 
by thePresident/CEO and the President/CEO often takes the Chair of the Board position for his/herself (which makes it much more difficult for the institutional owners to "fire"him/her). The practice of the CEO also being the Chair of the Board is known as"duality". While this practice is common in the U.S., it is relatively rare elsewhere. In theU.K., successive codes of best practice have recommended against duality.
External corporate governance controls
External corporate governance controls encompass the controls external stakeholdersexercise over the organization. Examples include:
 
competition
 
debt covenants
 
demand for and assessment of performance information (especiallyfinancialstatements)
 
government regulations
 
managerial labour market
 
media pressure
 
takeovers
Systemic problems of corporate governance
 
Demand for information: In order to influence the directors, the shareholdersmust combine with others to form a voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.
 
Monitoring costs: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to thisproblem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggeststhat the small shareholder will free ride on the judgments of larger professionalinvestors.

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