29-07-2021

Strategic Management - II
SESSION 9

Corporate Governance
 Corporate governance comprises of all activities undertaken to
‘control’, ‘regulate’, ‘manage’ and ‘govern’ the firm
 A company's board of directors is the primary force influencing
corporate governance.
 The basic principles of corporate governance are accountability,
transparency, fairness, and responsibility.

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The Structure of the Board

Board of Directors

Executive Directors Non- Executive Directors

Independent Non- Independent

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Board of Directors
Three Broad Functions
 Monitoring
• Interests of Stakeholders
 Decision making
• Dividends, hiring and firing of top management (CEO)
• Approval on key strategic decisions – M&As, international
expansion etc.
 Resource provisioning
• Knowledge
• Financial
• Reputation

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Board of Directors
Executive Directors
 Involved in day to day decision making of the firm
 Possess more information about the business, the firm and the
business environment
 Have the knowledge, power and information to act in self-serving
manner

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Board of Directors
Independent Directors
As per Companies Act,
• Every listed public company shall have at least one-third of the total number
of directors as independent directors
• SEBI clause 49 (listing agreement), requires atleast 50% directors to be
independent
An independent director in relation to a company must satisfy following
criteria
• Is a person of integrity and possesses relevant expertise and experience;
• Does not have any pecuniary relationship to the firm or does not have
transactions more that 10% of his total income
• Is not related to the management of the company
• Is not amongst Managing Director or Nominee director

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Board of Directors
Independent Directors
 Bring reputation, information, knowledge and legitimacy to the firm
 Monitor the interests of shareholders and other stakeholders
? Not involved in day to day operations of the firm
× Possess less knowledge about the firm, its strengths and weaknesses as
compared to executive directors
× May lack time and interest in decision making
? Less inclined towards risky decision making
? Work with caution, may slow the decision making process
× Suffer from “confirmation bias”
× May not be really independent !!!

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An Illustrative Example
Name Designation Independent
Adil Zainulbhai Non Executive Director Independent Director
Alok Agarwal Chief Financial Officer
Arundhati Bhattacharya Non Executive Director Independent Director
Dipak C Jain Non Executive Director Independent Director
Hital R Meswani Executive Director
K Sethuraman Group Co. Secretary & Compliance Officer
K V Chowdary Non Executive Director
Mukesh D Ambani Chairman & Managing Director
Nikhil R Meswani Executive Director
Nita M Ambani Non Executive Director
P M S Prasad Executive Director
Pawan Kumar Kapil Executive Director
Raghunath A Mashelkar Non Executive Director Independent Director
Raminder Singh Gujral Non Executive Director Independent Director
Savithri Parekh Jt. Co. Secreatary & Compliance Officer
Shumeet Banerji Non Executive Director Independent Director
Srikanth Venkatachari Jt. Chief Financial Officer
Yogendra P Trivedi Non Executive Director Independent Director

https://www.ril.com/OurCompany/Leadership/BoardofDirectors.aspx

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Corporate Governance Issues

Type – I, Agency Problem (Principal-Agent Problem)
 Agents (managers) tend to possess more information than principals
(owners).
 Different priorities of Managers and Owners.
 Managers can act in their own interest at the expense of the owners,
causing costs or losses .
 Such costs or losses to the owner are called agency costs.
 Can be overcome by –
• Restructuring compensation and benefits
• Enhanced monitoring
• Adequate disclosures

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Corporate Governance Issues

Type – II, Agency Problem (Principal-Principal Agency)
 Majority shareholders tend to possess more information and power
than minority shareholders.
 Divergence of interests between the majority (controlling) owners and
the minority shareholders
 Large controlling shareholders can obtain private benefits by
expropriating minority shareholders to the point of negatively
impacting firm market value
 Can be overcome by –
• Stricter laws
• Laws aimed at reducing the power of the CEO

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Thank You………..

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