In this session, you learnt to interpret corporate governance and the role it

plays in business strategy. You also learnt to compare different corporate

governance models.

In this segment, you learnt about corporate governance. You also learnt
about the principles of corporate governance in India.

The Australian Institute of Company Directors has described corporate

governance as follows:

“Corporate governance encompasses the rules, relationships, policies,

systems and processes whereby authority within organisations is
exercised and maintained”

Corporate governance has many other descriptors as well. The following are
the descriptors in India:
You also learnt that these descriptors are strengthened by a series of
corporate governance principles and guidelines for the following:
● Responsibilities of the board
● Board composition and independence of directors
● Competency of directors
● Remuneration
● Related party transactions
● Reporting including disclosure and transparency
● Risk management
● Role of stakeholders in corporate governance
○ Shareholder participation
○ The rights of shareholders and key ownership functions
○ The equitable treatment of shareholders

In this segment, you learnt about a few examples of weak corporate

governance of companies like Satyam, Infosys and Enron and the changes
these companies have brought in the rules and regulations in the system over
time.
Satyam Computer Services Ltd was founded by two brothers B Ramalinga
Raju and B Rama Raju in Hyderabad, India, in 1987. The company got listed
on the Bombay Stock Exchange in 1991 and also listed its securities on the
New York Stock Exchange in 2001. However, by January 2009, Ramalinga
Raju resigned from the Satyam board, admitting to USD1 billion in
accounting irregularities.

The Raju brothers, two auditors and an adviser were all charged to have
conspired to overstate the company's earnings. This incident was partly
responsible for the Indian Companies Act of 2013.

Infosys is an international IT brand known for its high standards of corporate

governance. The founder and chairman, NR Narayana Murthy issued a public
declaration of the “drop in corporate governance standards at Infosys”
related to CEO compensation, severance and share buyback.

You also learnt about another governance failure that gained international
limelight, the Enron case in California. There, the lack of independence of
directors was a core driver of fraud and resulted in the incarceration of a
number of senior personnel.

In this session, you learnt that governance with a broad structure is intended
to enable good leadership and management within the business and offer
clear levels of accountability to minimise corruption.

As explained by Richard Levy, corporate governance is certainly needed for

the following:
● Look after the interest of shareholders
● Oversee the financial performance and the compliance with
regulations
 ● To understand the risks the company faces and make sure there are
plans in place to deal with those risks
● To evaluate and compensate the senior management appropriately

You also understood the challenges faced by the CEO and the board of
directors. Bob Finnochio argues that the board of directors hire the CEO and
the relationship between the board and the CEO has to be clear in terms of
the roles and responsibilities they share. He believes that:
● The board of directors should pick the right CEO for the company who
can deliver according to the shareholders’ interests, and
● The CEO must be well compensated in alignment with the
shareholders’ interests.

You learnt about the effectiveness of the board of directors as explained by

Ron Masulis that 99% of the time, there is only one option available to choose
to make any decision. Moreover, only 2.5% of the time, there is a
disagreement with the board of directors and the CEO.

He also concluded that the essential part of the board’s work is to supervise
and monitor the happenings in an organisation and, hence, it is important to
consider the diverse characteristics for choosing the board of directors.

In this session, you learnt that the globalisation of commerce and industry
has generated a need to appreciate the regional foundations of corporate
governance. The two corporate governance models are as follows:
You also learnt about some of the governance requirements from the
example of the World Bank, which are as follows:

Earlier in the course on strategy formulation, you also learnt about the
agency model, (also referred to as the shareholder model) stakeholder model
and stewardship model which were shown as the operational governance
models as part of the generic corporate governance framework.
Some of the limitations of these models include the following:
a. Agency model
○ Potential self-interest of the agent
○ Agency costs
b. Stakeholder model
○ Hard to identify and prioritise legitimate stakeholders
○ Which stakeholders should be the board members?
○ If management is made to be accountable to multiple
stakeholders, how does the board balance stakeholder interests
equitably?
○ The conflict with the established mantra that maximising
shareholders’ interests is the sole legal purpose of an
organization
c. Stewardship model
○ The model depends on exemplary human behaviour
○ The ‘model executive’ is flawed; executive behaviour has often
proven to be opportunistic
○ Senior executives can develop strong egos when looked upon as a
source of knowledge

You learnt from the examples of SBI and HDFC, how both companies have set
up different committees to conduct and manage internal controls as part of
their corporate governance models. These companies have set up the
following committees:

A. SBI:
a. Audit committee
b. Nomination and remuneration committee
c. Risk management committee
d. Stakeholders relationship committee
e. Corporate social responsibility (CSR) committee
B. HDFC:
a. Operations committee
 b. Reporting committee
c. Compliance committee

In this segment, you learnt about the unitary and dual-tier models of
corporate governance. You also learnt about the cooperatives and
partnerships governance models.

The model of co-determination aligned with dual boards is best illustrated by

the German governance model. The dual-tiered model has stakeholders
represented on the supervision board.

According to the German Federal Ministry of Labour and Social Affairs

(2019):
The co-determination laws guarantee that workers have a say in the terms and
conditions of employment and in the economic planning and decision-making of
the company.

Worker participation takes place at the following two levels:

The other aspects of the dual-tier model are as follows:

You also learnt about the distinction between the unitary board structure
and the dual board codetermination structure through the following
diagram:

You also learnt in detail about the other two corporate governance models –
cooperatives and partnerships
You also learnt about another governance theory, state-owned enterprises
(SOE), that exists in many nations but is very prominent in China. Under these
practices, the government of the day establishes an organisation to operate
within a commercial environment.

Over the last two decades, China has moved to a stronger level of
governance based on the Organization of Economic Cooperation and
Development (OECD) principles of governance and by focusing on market
globalisation.

You also learnt that it is important to address corporate governance in the

Indian context. Some insights based on the work of Vijaya Thyil and Suzanne
Young are as follows:
You learnt from the examples of the Indian dairy cooperative society, Amul,
and its three-tier model, where these units have leaders who work with
professionals hired by the union to implement policies and practices. Amul’s
three-tier governance model is as follows:

1. Village-level cooperatives
2. District-level federation of milk unions
3. State-level federation of unions

You also learnt from the example of ONGC, a state-owned or state-run

organisation and how its governance structure is different from that of Amul.

The governance structure of ONGC is as follows:

1. The board of directors, consisting of a chairman and managing director
(CMD) and six whole-time directors.
2. The board members are elected through a general meeting.
3. The board of directors and the CMD of ONGC are nominated by the
Government of India.
 4. The CMD is a senior official from the Indian Administrative Service
(IAS).

In this segment, you learnt about the future of corporate governance. You
also learnt about the principles associated with corporate governance.

As a review of governance principles, Too and Weaver (2014) offered the

following diagram to help organisations monitor their governance status.
They argued that an organisation must address each of the five components
that are interrelated.
Also, in 2018, the UK modified its corporate governance legislation to
introduce six key principles, referred to at the Wates Principles (2018). These
six principles are as follows:
1. Purpose and leadership
2. Board composition
3. Director responsibilities
4. Opportunity and risk
5. Remuneration
6. Stakeholder relationships and engagement

You also learnt about the five actions that boards must address beyond 2020
as presented by Celia Huber, Sebastian Leape, Larisa Mark and Bruce
Simpson. They argue that fundamentally, the purpose is about leadership,
and organisations need all their leaders to provide purpose-driven
inspiration during difficult times. These five actions are as follows:
You also learnt that the models of governance are premised such that most
nations legislate that companies have boards. We have seen a number of
governance models designed for an individual organisation. But what would
be the future of governance?
Should an organisation:

● Challenge its governance model?

● Demand more board directors’ time and engagement?
● Demand a stronger stakeholder or shareholder focus?
● Demand more board diversity?
● Demand a larger proportion of independent directors?
● Mandate an extensive ESG program or reject it?

You learnt from the example of Infosys, as to how the company has adopted
the best business and governance practices to establish credibility and
confidence among all stakeholders.

Its seven strong and independent directors with diverse backgrounds and
initiatives, such as global reporting initiatives, demonstrate why Infosys is
featured as one of the best-governed companies.

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