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What is Corporate Governance
It is a means to maximize long term shareholder value in a legal and ethical manner ensuring fairness, courtesy and dignity in all transactions of the Company.
What is Corporate Governance
It refers to the guideline, procedures, rules for decision making. It suggests how to monitor the performance. It has to do with power and accountability; who exercises power, on behalf of whom and how the exercise of power is controlled
The Need for Corporate Governance
Poor Governance can harm national economic performance. Poor disclosures and audit procedures result in deteriorating financial conditions of the Corporations. Poor governance undermines the confidence in the markets and hold the financial system hostage.
Factors behind the Origin of Corporate Governance
In the era of globalization, foreign investors have become very careful about investing their money. Kumar Mangalam Birla Committee Report appointed by SEBI has formulated some guidelines. Increasing active rate of investigative reporting in business journalism. Mergers and acquisitions taking place at a fast pace.
Important issues of Corporate Governance
Social responsibility Multiple, divergent expectations of the shareholders. Fair Business deals Prevention of corruption
The CEO as a Corporate Governor
Good public governance is about putting public good over private good and being a good corporate citizen. Corporate governance translates into fairness, transparency, raising the trust and confidence in shareholders and understanding societal responsibility.
Corporate Governance in India
Private Sector- categories of shareholders
Promoter director – Called as a functional director and belongs from the promoter group. Professional director - Category of directors who are invited by the promoter group on the basis of competence and favourable personal equation. Institutionally nominated – These positions are fulfilled by senior activities or person of good reputation.
Public Sector – categories of directors
Functional directors – Full time employees of the PSUs. Govt. directors – They are the bureaucrats from different controlling administrative ministry. Outside directors
Distinction between management and control
Management -Initiation ( proposals for managing the resources of the firms are developed) Implementation ( execution of approved proposals) Control Ratification ( proposals developed in the initiation stage are evaluated, if suitable, approved) Monitoring ( Assessment of executive’s performance and implementation of proper reward system)
Active role of Institutional Investors
Give a direct voice in governance Need to improve their own governance
Expand the role of non – executive directors
CII has recommended the following : NED’ s should occupy at least 30% of the board seats. There must be a limit on the number of Boards on which a person cans serve. An audit committee, having at least three non-executive directors must be set and given access to all the information. All the NED ‘s must be compensated well for their time and efforts
Proper and Timely Information to the Board
Ensure that the Board is well equipped with information. Information should be available on long term plans, budgets, competitive developments, quarterly results etc.,
Size of the Board
Optimum size of the Board (10-12) Bigger boards would be less effective as there will be a problem of coordination.
Improve Accounting and reporting Practices
Business line reporting Group accounting EPS reporting
Factors in Corporate governance
Transparency in decision making Accountability which follows from transparency because responsibility could be fixed easily for actions taken or not taken Accountability is for safeguarding the interests of the stakeholders and the investors in the organization
Pre requisites for corporate governance
Commitment of the management for the principle of integrity and transparency in business operations. Legal and administrative framework created by the government.
Need for corporate governance in India
Financial scams Legal and administrative framework in India provides for excellent scope for current practices.
Specific steps to improve corporate governance
Abolition of the Sick Industries Companies Act (SICA) and BIFR. Banking Secrecy Act – Reveal those who are wilful defaulters. Benami Transactions Prohibition Act and Prevention of Money Laundering Act
The Power of Ethical Management
Is the decision you are taking legal? If it is not legal, it is not ethical. Is the decision you are taking fair? It should be a win-win situation for both the parties entering into an agreement or if it is a general policy or a multi – level agreement, there should be equal risk and reward to all concerned. Eleventh Commandment test – If the decision you are taking is such that if it is known in the public through media, will you feel ashamed? If you are feeling ashamed then it is not an ethical decision.
Corporate governance is the net result of the individual sense of values, the values held in society or part of a society like professional bodies or business associations and finally the system of public governance. If those who violate the norms are effectively punished then there is a fear and there will be adherence of the principles of
Kumaramangalam Birla Committee recommendations: Three Constituents
Shareholders the Board of Directors the Management
Applicability of recommendations
Mandatory Non mandatory
absolutely essential for the framework of corporate governance and virtually form its core which can be enforced through the amendment of the listing agreement
Applicable to the listed companies, their directors, management, employees and professionals associated with such companies, The ultimate responsibility for putting the recommendations into practice lies directly with the board of directors and the management of the company. Recommendations will apply to all the listed private and public sector companies, in accordance with the schedule of implementation. As for listed entities, which are not companies, but body corporates (e.g. private and public sector banks, financial institutions, insurance companies etc.) incorporated under other statutes, the recommendations will apply to the
Board Of directors
The Board of a Company provides leadership and strategic guidance, objective judgment independent of the management to the Company and exercises control over the Company. The Board must fulfils its legal requirements and also must be aware and understanding of its responsibilities. An effective corporate governance system is one, which allows the Board to perform these dual functions efficiently
Functions of the Board Of directors
Directs the Company by formulating and reviewing the Company’s policies. Controls the Company and its management by laying down the code of conduct. Is accountable to the shareholders for creating, protecting and enhancing wealth and resources of the Company. Is not involved in day to day
Composition of the Board Of directors
Executive directors are involved in the day to day management of the Companies Non executive directors bring external and wider perspective and independence to the decision making. Non executive directors may be independent or non-independent.
Receive director’s remuneration Do not have any other material pecuniary relationship or transactions with the Company, its promoters, its management etc., Emphasis on the calibre of the non executive directors.
Optimum combination of executive and non-executive directors with not less than 50% of the board comprising the non executive directors. At least one third of the board should comprise of independent directors
Institutions should appoint nominees on the board of Companies only on a selective basis where such appointment is considered necessary to protect the interest of the Institution
Chairman of the Board
The role of the Chairman is to ensure that the board meetings are conducted in an effective manner. The Chairman’s role should in principle be different from that of the Chief Executive.
Non mandatory recommendation
A non executive Chairman should be entitled to maintain a Chairman’s Office at the Company's expense and also allowed reimbursement of expenses incurred in the performance of his duties.
Oversight of the finance function and monitoring Relies on the senior financial management and the outside auditors.
A qualifies and independent audit committee should be set up by the board of a Company. This would go a long way in enhancing the credibility of the financial disclosures of a Company and promoting transparency
Composition of the Audit Committee
Minimum of 3 members ( non executive directors, majority being independent and with at least one director having financial and accounting knowledge) The chairman of the committee should be an independent director. The Chairman should be present at AGM to answer shareholder queries. The Company Secretary should act as the Secretary to the Committee ( the above are mandatory recommendations)
Meet at least thrice a year One meeting before finalization and one every 6 months Quorum should be either 2 members or 1/3rd of the members of the audit committee whichever is higher and there should be a minimum of two independent directors. ( this is a mandatory recommendation
Frequency of meetings and quorum of the Audit committee
Powers of the Audit Committee
To investigate any activity within its terms of reference To seek information from any employee To obtain outside legal or other professional advice To secure services of outsiders with relevant expertise ( this is a mandatory recommendation)
The Board of Directors should decide the remuneration of the non-executive directors The annual report must contain : - all elements of the remuneration package of all the directors - Details of fixed component and performance linked incentives - Service contracts, notice period, severance fees - Stock option details, if any
( this is a mandatory recommendation)
The Board meetings should be held at least 4 times in a year with a maximum time gap of 4 months between any two meetings. A director should not be a member in more than 10 committees or act as a Chairman of more than 5 committees across all companies in which he is a director. Every director must inform the Company about the Committee positions he occupies in other Companies and notify changes as and when they take place.
Management is responsible for ensuring that the principles of corporate governance are adhered to and enforced. Disclosures must be made by the management to the Board relating to all material financial and commercial transactions, where they have personal interest that may have potential conflict with the interest of the Company at large
The GBM provide an opportunity to the shareholders to address their concerns to the Board of Directors and comment on and demand any explanation on the Annual report or on the overall functioning of the Company.
Responsibilities of Shareholders
Show a greater degree of interest and involvement in the appointment of directors and the auditors. Inform themselves about the new directors.
Right to transfer and registration of shares. Obtaining relevant information on the Company on a timely and regular basis Participating and voting in shareholder meetings Electing members of the Board Right to information on takeovers, sale of assets or divisions of the Company and changes in the Capital structure. Half yearly declaration of financial performance including summary of significant events in the last 6 months should be sent to each household of shareholders.
( these are mandatory recommendations)
A board committee under the chairmanship of a non-executive director should be formed to specifically look into the redressal of shareholder complaints like transfer of shares, non-receipt of balance sheet, non receipt of declared dividends etc., ( this is a mandatory recommendation)
Have acquired large stakes in the equity share capital of listed companies . They have a bigger role to play in corporate governance as retail investors look upon them for positive use of their voting rights.
Corporate governance must ensure commitment of the Board in managing the Company in a transparent manner for maximising long term shareholder value.
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