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Corporate

governance
GROUP - E
What is corporate
governance?
§
§ Corporate Governance is concerned with holding
the balance between economic and social goals
and between individual and communal goals.
§
§ 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

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.
2. Competition
3. Debt covenants
4. Demand for assessment of performance (especially
financial statements.)
5. Government regulations
6. Media pressure
7. Take over
8.
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.
§

&
THE INFOSYS MODEL

• A formal code of business conduct and ethics.



• To be signed and adhered to by employees.

• Action against any employee for violation is
taken seriously

THE INFOSYS MODEL -Contents
• General standards of conduct

• Management of conflicts of interest

• Prohibition of exploitation of corporate opportunities

• Protection of company’s confidential information
• Use of assets
• An entire section on responsibilities to customers and
stakeholders.

Infosys Technologies: The Best
among Indian Corporate
• As per the Credit Lyonnais Securities Analysis (CLSA), the
corporate governance ratings of the Software firms are higher
than those of other Indian firms.

• Infosys, based in Bangalore, is a publicly held, ISO 9001 certified


company offering information technology consulting & software
services.

• The software offered include application development, E-Commerce
& Internet Consulting, Software Maintenance.

• Respected across the country, with very strong systems, high ethical
values & a nurturing working atmosphere.

§ Net income of US 1,155 million and revenue of US 4,176 million.


• At present having US 20.4 billion market capitalization


Achievements
• Voted as the Best Managed Company in Asia.


• Biggest exporters of Software.


• First to follow the US Generally Accepted Accounting
Principles before going for Nasdaq listing in 1991.


• Championed Corporate Governance in India
Narayana Murthy’s Global
1) Strategy
2)
3) Global Delivery Model – Producing where it is most cost
effective to produce & selling where it is most
profitable to sell.
4)
5)
6) Moving up the Value Chain – Getting involved in a
software development project at the earliest stage of
its life cycle.
7)
8)
9) PSPD Model – Predictability of Revenues, Sustainability
of Revenues, Profitability, Decision-making and risk
taking


ICSI National Award for Excellence in
Corporate Governance
Best Governed Companies
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-definitions

• Ethics defines what is good for the individual and
for society and establishes the nature of duties
that people owe to oneself and others in society

• The principle of conduct – professional ethics
• A system or philosophy of conduct
• A discipline dealing with what is good and bad-
moral duty and obligation
• A set of moral principles or values

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.

Current status on corporate
governance
• Insistence on forms and structures
• Overarching regulations
• Regulatory overkill
• Lack of adequate number of strong, independent
directors
• Large liabilities for companies and officers
• Has the pendulum swung too far?
• For the first time in the decade-long history of the Index
of Economic Freedom, the U.S. is no longer among
the top ten “most free” countries
• Wall Street Journal and the Heritage Foundation “Index
of Economic Freedom”

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

THANK YOU

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