Corporate Governance

The 4 Ps
 An OECD Definition
• “Corporate governance involves a set of relationships
between a company’s management, its board, its
shareholders and other stakeholders ..also the
structure through which objectives of the company
are set, and the means of attaining those objectives
and monitoring performance are determined.”
– Preamble to the OECD Principles of Corporate Governance, 2004

2
 An Indian Definition
• “…fundamental objective of corporate
governance is the ‘enhancement of the long-
term shareholder value while at the same
time protecting the interests of other
stakeholders.”

– SEBI (Kumar Mangalam Birla) Report on Corporate

Governance, January, 2000

3
Globalization has not only significantly increasing and intensifying business
risks, but also it has compelled Indian companies to adopt international norms
of transparency and good governance. Corporate Governance policy
recognizes the challenge of this new business reality.

A meaningful policy on
Corporate Governance must provide empowerment to the executive
management of the Company, and simultaneously create a mechanism of
checks and balances which ensures that the decision making powers vested in
the executive management is not misused, but is used with care and
responsibility to meet stakeholder aspirations and societal expectations.
Corporate Governance initiative is based on two core principles. These
are:
1. Management must have the executive freedom to drive the
enterprise forward without undue restraints; and

2. This freedom of management should be exercised within a

framework of effective accountability
 Corporate Governance features
• CG is the set of processes, customs, policies, laws and
institutions affecting the way a company is directed,
administered or controlled
• CG also includes the relationships among the many
stakeholders.
• The principal stakeholders are the shareholders, management
and the board of directors
• Other stakeholders include employees, suppliers, customers,
banks and other lenders, regulators, the environment and the
community at large
• CG has a strong impact on economic efficiency and at the
same time emphasizes shareholder welfare
 CG cont..
• Quality is determined by the financial markets, legislation and other external
market forces plus the international organizational environment; how policies and
processes are implemented and how people are led

• External forces are, to a large extent, outside the circle of control of any board

• The internal environment is quite a different matter, and offers companies the
opportunity to differentiate from competitors through their board culture

• CG a system of structuring, operating and controlling a company with a view to

achieve long term strategic goals to satisfy shareholders, creditors, employees,
customers and suppliers, and complying with the legal and regulatory
requirements, apart from meeting environmental and local community needs
 Parties Involved in CG

• Parties involved in corporate governance

include the regulatory body e.g. the CEO, the
Board of Directors, Management and
Shareholders
• Other stakeholders who take part include
suppliers, employees, creditors, customers
and the community at large
 How Does it Work?
• In corporations, the shareholder delegates decision rights to the manager to act in
the principal's best interests

• This separation of ownership from control implies a loss of effective control by

shareholders over managerial decisions

• Partly as a result of this separation between the two parties, a system of

corporate governance controls is implemented to assist in aligning the incentives
of managers with those of shareholders

• A board of directors: plays a key role in corporate governance. It is their

responsibility to endorse the organization’s strategy, develop directional policy,
appoint, supervise and remunerate senior executives and to ensure accountability
of the organization to its owners & authorities
 Pros & Cons of Governance
• Profit maximization in the short term: a few
beneficiaries only
• Profit optimization in economical, social and
environmental terms: benefits to many
(stakeholders)
 CG Objectives
• Integrate economic, social & environmental objectives in the Corporate
Strategic Plan
• Translate objectives into a pragmatic Action Plan applicable at all levels of
the organization
• MBO for teams and for indiv. Including Marketers, Buyers especially in
relation to suppliers etc.

• External audits, audit reports, corrective actions if needed

• Education: managers, staff, etc.

• Issue Management: pro-activity allows to ensure a competitive advantage

 Corporate Governance
Vision,
To study 4m another Purpose Mission,
slide. Strategy

Equity
Ethics
Relationship
People 4 Ps Process
Mgmt.
Compliances
Innovation

Performan
ce Efficiency
Growth
Principles of corporate governance include:

1. Rights and equitable treatment of shareholders: Organizations should respect the

rights of shareholders and help shareholders to exercise those rights. They can help
shareholders exercise their rights by effectively communicating information that is
understandable and accessible
2.Interests of other stakeholders: Organizations should recognize that they have legal
and other obligations to all legitimate stakeholders.

3. Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the ability to
review and challenge management performance.

*Integrity and ethical behaviour: Ethical and responsible decision making is not only
important for public relations, but it is also a necessary element in risk management and
avoiding lawsuits. Organizations should develop a code of conduct for their directors and
executives that promotes ethical and responsible decision making.

4. Disclosure and transparency: Organizations should clarify and make publicly known
the roles and responsibilities of board and management to provide shareholders with a
level of accountability. Disclosure of material matters concerning the organization should
be timely and balanced to ensure that all investors have access to clear, factual
information.
5. Appropriate mix of executive and non-executive directors: The key roles of
Chairperson & CEO should not be held by the same person
 Issues involving CG Principles
• internal controls and the independence of the firm’s
auditors
• oversight and management of risk
• oversight of the preparation of the firm’s financial
statements
• review of the compensation arrangements for the CEO
officer and other senior executives
• the resources made available to directors in carrying out
their duties
• the way in which individuals are nominated for positions on
the board
• Dividend policy