BUSINESS & TECHNOLOGY

CHAPTER- 11
Governance & Social Responsibility
Governance
Separation of ownership and control :
Separation of ownership and control refers to the situation in a company where
the people who own the company (the shareholders)
are not the same people as those
who run the company (the Board of Directors).
Benefits:
§ Expertise to run the Company,
§ Managers cannot personally contribute all the capital needed to run the business, so they have to bring
in external capital from investors who often have no interest in the day-to-day operations of the
company
Risks:
§ the directors may run the business in their own interests, rather than those of the shareholders and
other stakeholders. This is referred to as the ‘agency problem’ & the managers will work only as an
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employee.
Corporate Governance
It is the set of processes and policies by which a company is directed, administered and controlled.

In Corporate Governance, there will be proper (not excess or less) role of Board of Directors &
Auditors (both internal & external).

The main recommendations of best practice in effective corporate governance tend to include the following
areas :
§ The membership of the Board of Directors – both executive and non- executive directors (NEDs).
§ How directors’ remuneration is decided and disclosed.
§ The role of both internal and external audit.
§ How the public has a right to know how the company is being governed.

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Corporate Governance
Non-executive directors (NEDs) :
They are not employees of the company and have no managerial responsibilities, and do not run in day-
to-day running of the organization.

They can have their say in the Board Meetings & in Annual General Meetings. NEDs should be
independent as far as possible and should not be biased.

They have the following roles in the Organization :

1. Strategy Development
2. Performance Management
3. Risk management and effective control
4. People appointment & renumeration

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Corporate Governance
Non-executive directors (NEDs) :

NEDs must not do the following as it will comprise their independence :

§ have been an employee of the company in the last five years
§ have had a material business interest in the company for the last three years
§ participate in the company’s share options or pension schemes
§ have close ties with company directors or senior employees
§ serve as a NED for more than nine years with the same company.

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Corporate Governance
Renumeration Committees :

A remuneration committee is a committee made up of non-executive directors which is responsible for

deciding on the pay and incentives offered to executive directors.

Nomination Committee :

A nomination committee is formed in order to ensure that the composition of the board is balanced. There could
be mixture of :
1. Expertise,
2. Executive – Non-Executive,
3. Backgrounds,
4. Independences,
5. Promoter Groups,
6. Race & Genders, etc.

Public Oversight :
It helps to disclose the information to the public as a whole like publishing the reports for general meeting.
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Corporate Governance
Audit Committees :

An audit committee consists of independent NEDs who are responsible for monitoring and reviewing the
company's internal financial controls and the integrity of the financial statement

Responsibilities :
§ Reviewing accounting policies and financial statements as a whole to ensure that they are appropriate and
balanced.
§ Review systems of internal controls and risk management within the organisation. (Note that risk management
may be dealt with by a separate committee – the risk committee.)
§ Agreement of the work agenda for the internal audit department, as well as reviewing the results of internal
audit work.
§ Making recommendations to the board, for them to put to the shareholders, relating to the appointment and
removal of the external auditors as well as their remuneration and terms of engagement.
§ Liaising with the external auditors, in particular relating to the review and monitoring of the external auditor’s
independence and objectivity as well as the effectiveness of the audit process.
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Benefits of Corporate Governance
Improved Mandatory
Decision Transparency Requirements
Making

Investor Stronger
Confidence control

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OECD Principles of Corporate Governance

1. Promote transparent and fair markets and support effective supervision and enforcement.
2. Protect shareholders' rights and ensure all are fairly treated (i.e. including minority shareholders).
3. Provide stock markets to contribute to good corporate governance (e.g. by prohibiting insider trading
4. Recognize the rights of all stakeholders, not just shareholders.
5. Ensure timely and accurate disclosure of all material matters, including financial position, performance,
ownership and governance.
6. Ensure the strategic guidance of the entity, effective monitoring of management by the board and the
board’s accountability to the entity and their shareholders.

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Corporate Social Responsibility
Corporate social responsibility (CSR) refers to the idea that a company should be sensitive to the needs and
wants of all its stakeholders, rather than just the shareholders.

CSR is also closely linked to sustainable development, which suggests that organizations should use resources in
such a way that they do not compromise the needs of future generations

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Corporate Social Responsibility
Importance :
1. Enhance the organization’s reputation,
2. Good employees retention is easy,
3. Long run perspective of the Company : a responsible Company can run for a longer period,
4. Being environmentally friendly can save money
5. Social upliftment and enhancement of the customers intending to use the Company products.

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Stakeholder Needs Analysis
It focuses on :

- Who are the stakeholders,

- What are their needs

It can also form a part of the Corporate Social Responsibility.

Q : How many types of Stakeholders are there?

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Committees
A committee is a group of people who are appointed to administer, discuss or make reports concerning a subject.

A committee can :
§ Brainstorm new ideas for the organization.
§ Allow people with different skills and knowledge to work together in a coordinated manner.
§ Act as a delaying mechanism.
§ Can help to make or implement decisions within the organization.
§ Oversee a function or procedure
§ Gather information about a particular issue.

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Committees
Executive committee – It is a committee with administrative powers & control to manage the affairs of an
organization.
The Board of Directors of a company is an example of an executive committee, which is appointed to run the
company.

Standing committee – These are formed for a particular purpose on a permanent basis. Disciplinary Committee is
an example of Standing Committee

Ad-hoc committee – These are formed to complete a particular task and have a limited duration.

Sub-committee – this is simply a subordinate committee comprised of members appointed by a parent

committee.

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Committees

Madhesh
Production
Comm
Executive Bagmati
Committee
Sales Bagmati
Comm

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Committees
Disadvantages :
Advantages :
• Slow decision making.
• Bring together necessary skills or
• No individual responsibility in decision
knowledge.
making
• Proper decisions can be taken.
• Conflicts amongst the members,
• Easily acceptable decisions to the
• Domination of powerful members.
Organization,
• Power of an individual or group cannot
be implied in Organization,
• Collective responsibility amongst
members.

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END OF CHAPTER

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