CORPORATE GOVERNANCE

• DEFINITION • various defns summarising it as non-entity created / formed to generate profits / employment etc for benefit of the society in general • EVALUATION OF CORP STRUCTURE

Characteristics of corporation
• • • • Limited liability Transferability Legal personality Centralised management

CORPORATION
• • • • • • PURPOSE OF CORPORATION Human satisfaction Social structure Efficiency and efficacy Ubiquity and flexibility Identity

CORPORATION AS A
• Person • Moral person • Expectations of society • Expectations of market

CORPORATE GOVERNANCE
• • • • • Issues Ethical issues Efficiency issues Accountability issues -takeovers, mergers,acquisitions,insider trading , litigatations, restructuring of boards, Auditing practices / changes if any

CORPORATE GOVERNANCE
• It is defined as a system of structuring , operating and controlling a company with a view to achieve long term strategic goals to satisfy all stakeholders with the legal and regulatory requirements apart from meeting environmental and local community needs.it leads to the building of legal, commercial and institutional framework It also demarcates the boundaries within which these functions are to performed..

Corp governance v/s Corp management
• CORPORATE GOVERNANCE • External focus • Governance assumes an open system • Strategy oriented • Concerned with where the company is going • CORPORATE MANAGEMENT • Internal focus • Management assumes a closed system • Task oriented • Concerned with getting the company there

Theories of CORPORATE GOVERNANCE
• Theory of Macgrgor –based on theory X &Y • Theory of stewardship also based on the X & Y theory • Theory of agency-managers always do not think of interest of company alone but also their own interests hence they need to be controlled and monitored to follow plans and policies of the corporation.

Anglo-American model
Board of directors (Supervisors
Appoints and supervises Corporate structures Elect

Shareholders (owners)

Own

Officers (managers)
Lien Manage Hold Stake

Creditors

Stakeholders

Company

Legal system
Structural Framework

German model of CG
Supervisory board
Appoints and supervise Reports to Appoint 1/2

Employees and labor unions

Corporate structures

Management Board
(including labor relations director
Independently runs (day-today)

Appoint 1/2

Company
Own

Shareholders (own)

Japanese model of CG
Supervisory board
Ratifies Presidents decision Corporate structures Consults Appoint

Shareholders
Own

president

Consults

Executive mgt
Managers Loans

Provides managers

Monitors acts in emergencies

company

banks

CORPORATE GOVERNANCE CHARTER
• Board should have optimum combination of executive and non-executive directors, with half the board comprising of non-executive directors • FI’s do not seek a seat on the board to avoid potential conflict of interest • Chairman’s role should be different from that of the CEO

CORPORATE GOVERNANCE CHARTER
• The board should have a qualified and independent audit committee • The board should set up a renumeration committee for the policy specific renumeration package for executive directors • Board should clearly define the role of mgt • Disclosure must be made by the management to the board relating to all material , financial and commercial transactions.

CORPORATE GOVERNANCE
• • • • • • • • Types of directors Executive directors Non-executive directors Nominee directors Representative directors Alternative directors Shadow directors Associate directors

CORPORATE GOVERNANCE
• Executive director
• Is a member of the board of directors • Is an executive of the company and bound by the employment contract • Is appointed by the board of directors and is responsible to the shareholders

CORPORATE GOVERNANCE
• NON- EXECUTIVE DIRECTOR • are outside directors • Are not having any relationship with the company in any materialsitic way, with the promoters, its management and its subsidiaries • All information should be disclosed in the annual report .

CORPORATE GOVERNANCE
• NOMINEE DIRECTORS • Appointed by the banks,mutual funds, FI’s to safegaurd the interest of these institutions • Alongwith the other directors act in the overall interests of the company

CORPORATE GOVERNANCE
• REPRESENTATIVE DIRECTORS • Similar to the nominee directors • Safegaurd the overall interests of the employees , shareholders, customers etc. • Act in the overall interests of the company.

CORPORATE GOVERNANCE
• ALTERNATE DIRECTORS • Appointed as per the articles of association to act as substitute in absence of original directors • They enjoy all the powers of the directors on the board.

CORPORATE GOVERNANCE
• SHADOW DIRECTORS • Influence the decision of the board even though they are formally not on the board • Predominant in the family owned cos. • Can be held responsible in event of some situations wherein their influence is exercised. • Also called Associate director

CORPORATE GOVERNANCE
• • • • • TYPES OF BOARD STRUCTURES All executive board Majority executive board Majority outside board Two- tier supervisory board

CORPORATE GOVERNANCE
• All executive board • Does not have even one outside director • Prevalent in family owned cos and completely owned subsidiary cos. • Interests of the owner are safegaurded as the directors are all members of the management.

CORPORATE GOVERNANCE
• MAJORITY EXECUTIVE BOARD • Executive directors are in the majority & non-exec directors are in a minority • Non –exec. Directors are appointed to protect the interests of the shareholders etc. • Also to bring in the expertise and knowledge in the company

CORPORATE GOVERNANCE
• Non-exec directors act as a check on the various activities / decisions and also put pressure on the other directors of the board. • They are about one-third in number on the board • The flaw in this that the exec. Directors dominate and the boardroom becomes a virtual battleground.

CORPORATE GOVERNANCE
• MAJORITY OUTSIDE BOARD • The board has a majority of outside non-exec. Directors • Prevalent in NYSE listed cos. • They represent the majority shareholders like FI’s MF’s,Banks etc and hence the functioning becomes questionable and debatable as also the effectiveness and independence , since they are related directly or indirectly to the company.

CORPORATE GOVERNANCE
• TWO TIER SUPERVISORY BOARD • It has 2 boards-the non-exec. Supervisory and the exec. Management board • Supervisory board monitors the plans and performances of the management board. • Can appoint / fire a CEO of the company • Adopted by EC unions and German cos.

CORPORATE GOVERNANCE
• Advisory board • Many cos. Appoint advisory directors for specific issues / assignments. • They have no executive powers vested in them .

CORPORATE GOVERNANCE
• DESIGNING THE BOARD • the board size- depends on the size of the company may be a min 2 or maybe 20 or more • The role of the chairman / CEO-• Many cos. Prefer the same personfor both the positions • Duality in company subsidiary board

CORPORATE GOVERNANCE
• Duality in company subsidiary board • The subsidiary board witnesses a lot of clashes many a times due to conflicts especially if it is felt that the parent board is using this as a cash cow to finance its needs. • The directors performance are measured by the heads at the parent cos.

CORPORATE GOVERNANCE
• • • • • BOARD STYLES Rubber stamp boards Representative boards Country club boards Professional boards

CORPORATE GOVERNANCE
• ROLE OF THE DIRECTORS • Directors assumes the twin roles while governing the activities of the company • Performance Role • Conformance Role

CORPORATE GOVERNANCE
• Performance Role • To bring in the expertise ,knowledge, special skills, networking ,representation and adding status to the company • Boosts the confidence of the shareholders and stakeholders in general due to their own position / influence in the society

CORPORATE GOVERNANCE
• CONFORMANCE ROLE • the director plays the role of a watchdog wherein it is ensured that the company follows the stipulated rules / laws etc and also ensures that the internal processes are followed.

CORPORATE GOVERNANCE
• RESPONSIBILITIES OF A DIRECTOR • Attend the board meetings and make positive contribution • Not to misuse /abuse power,company assets • Maintain credibility • Protect interests of the creditors • Act in the best interests of the stakeholders

CORPORATE GOVERNANCE
• ROLE OF THE CHAIRMAN • Manage the board set standards & ensure that the management puts in practice all policies • Address legal issues • Should have a good understanding of the financials & the direction in which the company should head in future

CORPORATE GOVERNANCE
• Good relationship with the CEO , executive directors and non-executive directors • In terms of they reporting the matters and advising on issues deemed to be in the best interests of the organisation. • Act decisively in the time of crisis • Act as rep of the company

CORPORATE GOVERNANCE
• ROLE OF THE CEO • Should establish a good and strong working relationship with the chairman building trust , confidence and good communications • Knowing the strengths and weaknesses of the CEO the chairman also can work towards the growth and development of the organisation

CORPORATE GOVERNANCE
• FUNCTIONS OF THE CEO • Assist the executive directors in strategic areas & provide leadership & guidance to all the stakeholders. • Project the company in front of the media and other stakeholders • Intervene when required

CORPORATE GOVERNANCE
• • • • FUNCTIONS OF THE BOARD Responsibility for the functions of the BoD Provides strategic guidance to the company Provides timely & accurate reports on the financial & non-financial indicators of the company • Plays the role of performance and conformance

CORPORATE GOVERNANCE
• • • • STRATEGIC ROLE OF THE BOARD Systematic level strategy Structural and portfolio strategy Implementation strategy POLICY MAKING ROLE • Monitoring and supervisory role

CORPORATE GOVERNANCE
• • • • COMMITTEES OF THE BOARD Audit committee Renumeration committee Nomination committee

CORPORATE GOVERNANCE
CODES AND LAWS SELF REGULATORY CODES • Self regulation and self regulatory roles • Easier to operate and implement • Identification of complex problems at early stage

CORPORATE GOVERNANCE
REPORT OF COMMITTEES ON CG CADBURY COMMITTEE REPORT • Decision making should not be a single authority –CEO & Chairman should be diff • Non-exec directors should give independent decisions on the matters entrusted • Majority of directors shd be independent and not have financial interests in the company

CORPORATE GOVERNANCE
• Term of directors should not exceed 3 yrs and can be extended only with prior approval of the shareholders • Shd be full transperancy in matters relating to direct emoluments-a mix of pay & perf pay • Renumeration committee of non-exec directors should determine pay for directors

CORPORATE GOVERNANCE
• Interim company report should give balance sheet info and should be reviewed by the auditor • Pension funds shd be managed seperately • Professional and executive relationship bet board and executives • Info regarding audit fees should be made public and auditors be changed periodically

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