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• OECD Guidelines of CG 2004 • Convergence of CG Codes • Road Ahead
OECD CODE OF CG …
OBJECTIVES of the CODE • I) Ensuring the basis for an effective corporate governance framework; • II) The rights of shareholders and key ownership functions; • III) The equitable treatment of shareholders; • IV) The role of stakeholders; • V) Disclosure and transparency; • VI) The responsibilities of the board.
Effective Corporate Governance Framework
• The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.
II. The Rights of Shareholders and
Key Ownership Functions The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.
III. The Equitable Treatment of Shareholders
The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.
IV. The Role of Stakeholders in Corporate Governance The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
V. Disclosure and Transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
VI. The Responsibilities of the Board
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
CONVERGENCE OF CG CODES
• The World Bank and OECD signed a MoU in Paris (21st June 1999) for achieving convergence of CG Codes. • Set up the Global Corporate Governance Forum (GCGF). • The joint declaration stated : “The improvement of corporate governance practices is widely seen as one important element in strengthening the foundation for individual countries’ long-term economic performance and in contributing to a strengthened international financial system. Therefore, corporate governance has emerged as an important focus of efforts by multilateral organisations to assist countries in improving financial architecture.
Mervyn King, Chairman, King Committee on Corporate Governance, South Africa -Developing Corporate Governance Codes of Best Practices, Global Corporate Governance Forum, World Bank, 2005, )
“Good corporate governance makes good, hard-nosed business sense. Countries with strong corporate governance practices attract capital. Today’s domestic and international investors are likely to shy away from countries that do not guarantee investor rights, that do not provide for adequate corporate disclosure, and that do not ensure sound board practices. Whilst globalization of economies has increased, and international corporate guidelines have been adopted, each country has its own values, societal norms, way of doing business, and special circumstances. Thus, to guide policymakers, market players, and corporations in adopting sound corporate governance practices at the local level, every country should endeavor to develop its own corporate governance code.”
• The Road Ahead
CG : Contemporary Issues &Challenges
1. Corporate Goals vs Personal Goals
• Satire on Corporation • Corporation Defined as
“Corporation is an ingenious device for obtaining individual profit without individual responsibility”. ( Satirist Ambrose)
• Quoted by Lieberman, Chairman US Senate Committee to castigate the Board of Directors in the Enron scandal.
Corporate Failures & Governance Reforms
• Bursting of “Bubble” Co.s (1720)-British Parliament Act to regulate companies • Watergate Scandal – US Federal law (Foreign Corrupt Practices Act, 1977) • Maxwell Scandal – Cadbury Code • Fall of Enron , AA – SOX Act • Collapse of Lehman Brothers etc., (2008 ) -- ??? • Indian Corporate Scams- Clause 49 of SEBI • Satyam Fraud ( Jan. 2009) • 2G scam • Coalgate scam
India – Decade of Scams 1992-2002
1992-1996 1995-96 1996-97 1995-98 1998 2001
Harshad Mehta Scam MNCs allotted shares to themselves below market prices, investors lost Rs.5,000 Cr Vanishing Companies scam – 3,911 companies raised Rs.25,000 cr, vanished Plantation Companies mopped Rs.50,000 Cr NBFCs – thousands of crore mopped up from the public promising huge returns The Mutual Fund scam psu banks raise Rs 15,000 Cr. all flopped BPL, Sterlite , Videocon price-rigging Harshad Ketan Parekh Price rigging with bear cartel
Corporate reforms in India – SEBI regulation, clause 49
Issue 2. Managing Other Peoples’ Money
Skepticism of Adam Smith • Grave doubts about Future of Joint Stock Companies • Adam Smith & Karl Marx Joint Stock Companies unworkable • Owners negligent • Directors have self-interests
• “The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private co- partnery frequently watch over their own” Adam Smith, Wealth of Nations,1776
3.Separation of ownership and control
• Dispersion of Stocks • Separation of ownership & control • “But have we any justification for assuming that those in control of a modern corporation will also choose to operate it in the interests of the owners?”
Berle & Means The Modern Corporation and
Private Property, (1932/1967).
4. Managers as Agents or Stewards
• Principal /Owner- Agent /Manager Issues Discretionary Powers of managers Conflicts of interests between principal and agent - “The manager in a firm will choose a set of activities for the firm such that the total value of the firm is less than it would be if he were the sole owner.” • Agency costs : Corporate Governance mechanism should reduce agency costs -( Jensen & Meckling)
• The stewardship theory of firm is contrary to the agency theory. • Whereas the agency theory has its origin in economics, stewardship theory has its roots in psychology and sociology. • Stewardship theory assumes that managers are stewards of owner’s wealth and that their interests align* [Davis, Schoomen & Donaldson, 1997]. • The manager puts interests of the company he manages before his own. • He feels that his own goals are best accomplished by serving the interests of the organization.
• • • • • •
Contrary to Agency Theory Managers are stewards of owners’ wealth Interests of mangers align with interests of owners Managers’ goals are served by organizational goals Agency theory – X , Stewardship - Y , Theory of Man X - Man driven to work by economic needs like wealth, power; hence to be controlled • Y – Man motivated to work by higher needs like achievement , recognition and self-esteem ; managers not opportunistic
5.Shareholders vs Stakeholders
• Groups / individuals/Institutions who can substantially affect / be affected by the company are stakeholders • A stakeholder holds a stake , rather than just a share • Shareholders ,the employees ,customers ,creditors ,suppliers ,community , govt. , society & environment are stakeholders • All stakeholders contribute to long-term value addition of the company Justification for CSR
Corporate Gov.: Social Objective
• “Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. ”(Shleifer and Vishni) • Corporate Governance has several claimants – shareholders and other stakeholders – which include suppliers, customers, creditors, bankers, employees of the company, the government and the society at large. The fundamental objective of corporate governance is the enhancement of shareholder value, keeping in view the interests of other stakeholders. ( Kumar Mangalam Birla Committee)
6.Profit vs Social Good
• Company is a for profit organization. • But earning profit is no longer acceptable as the sole purpose of business.
• It is now accepted that the purpose of business is not just to make profit as an end by itself, but to make profit so that the business can do something more or better; “profit would be the means to that larger end.” -Charles Handy HBR 2002 • “Profit for a company is like oxygen for a person .If you don’t have enough of it, you’re out of the game. But if you think your life is about breathing, you’re really missing something.” – Peter Drucker • Sustainable business strategy must harmonize the twin objectives of profit and social good.
CORPORATE SUSTAINABILITY: COMPONENTS
1) Economic sustainability To manage its assets to ensure business continuity; To ensure liquidity at all times i.e. cash flow to meet financial commitment Competitive Productivity Returns for shareholders.
Environmental sustainability – Consumes natural resources effectively; – ensures not to cause emissions which accumulate in the environment at a rate beyond natural system’s capacity to absorb and – Actions should be on principles of Sustainability ( least harm & long term )
Social sustainability - Meet the expectations of society - add value to communities - take care of Human and Social Capital.
(1)PROFITS along with
(2) Corporate ethics , (3) social responsibility & (4)sustainable development are emerging as major objectives of corporate strategy
EMERGING LANDSCAPE of CORPORATE GOVERNANCE
Responsibilities of Shareholders & Stakeholders
1. Shareholders – Active &Vigilant Role ,Shareholder Activism, Effective participation in AGM , Obtain material information ,Control managers thro’ Board 2. Employees – ethical conduct , whistle blower role 3. Suppliers – integrity pact with company 4. Customers-promote ethical, socially responsible Co . 5. Society – Should favor socially responsible company 6. Government – institution building for good CG 7. Environmental Groups – Promote Sustainable Development
Emerging Role of Independent Directors
• Shareholders’ Preference- They ensure Board independence • Friend, Philosopher and guide of shareholders • Trustees of society • No conflict of interests with the company • Attitude of constructive dissatisfaction in Boardroom • Balance conflicting interests of stakeholders • Initiation of board agendas – proactive role • Promote strategic management, ethics and social responsibility • Training- Orientation- Evaluation of IDs
Emerging Role of Directors
Ensure Good Governance Promote Long Term Sustainability of the Company Disclosure & adequate information to shareholders Risk management policy (Political, Technology, Financial, Legal) Promote democratic decision making (minority shareholder rights) Fiduciary Duties towards company Redress shareholder grievances Accurate accounting and reliable auditing Promote Ethics ,Transparency &Fair practices
Emerging Role of Managers
Role of the Managers
(1) The managers, as the agents of the shareholders and the officers of the Board, should be professionally competent, responsible and trustworthy. (2) The managers should devote their fulltime attention for value addition to the enterprise. They should be loyal and diligent in discharge of their duties. (3) The managers will have to ensure observance of code of ethics in their work in relation with the customers, vendors and business partners. (4) Managers must help the Board reduce agency costs of management.
(5) Every manager must strive to observe utmost economy, cut down cost of production and eliminate wasteful expenditure in order to make the enterprise competitive. (6) Every manager should contribute to prevention of malpractices, corruption and abuse of authority in the enterprises and should act as whistle blower to unearth malpractices and cases of breach of ethical values in the enterprise. (7) The advantage of professional competence possessed by the managers in public enterprises must translate into higher productivity and creativity in the interest of long-term sustainability of the public enterprises.
CG : Agenda for Reforms
• • • • • • • • •
Power & Potential of Board :Board Empowerment Value addition in Boardroom Supervision of Financial Health of Co. Qualification &Selection of Directors ( Also CEO ,IDs) Accountability & Evaluation of Directors Strategic management by Board Independent & Objective decision making Risk policy formulation & review Better Human Resource Management
• • • • • • • • •
Long term sustainability of corporation Shareholder Activism- Better disclosures Better democracy-interests of minority shareholders Enhancing Credibility& Supervision of Auditors Effective Internal Controls Active Role of IDs Ethics and corporate values Social Responsibility & Sustainable Development Triple bottom line approach (profit , people & planet / economic , social & environmental concerns) • Emergence of the Ethical Corporation
• The modern corporations are shaping the future of the world economy. • The twenty first century will see competition among the countries based upon the power and strength of their business corporations. • In the coming years, ethical and well-governed companies will be preferred as the investment destinations . • Independence of the Board, credibility of the auditors and observance of corporate ethics are the hallmarks of good corporate governance. • Emergence of Ethical Corporation
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