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CHAPTER 1 CORPORATE GOVERNANCE: AN OVERVIEW

OBJECTIVES
Corporate governance is the new buzzword in corporate and academic circles today. It means several things to several people, depending on the sensitivity of the analyst and his vested interest in it. This chapter gives an overview of the concept, defines it, discusses its evolution and explains its relevance and impact on the economy.

CHAPTER OUTLINE
Capitalism at Crossroads
Increasing Awareness Global Concerns What Is Corporate Governance? Governance Is More Than Just Board Processes

and Procedures A Historical Perspective of Corporate Governance Issues in Corporate Governance

Capitalism at Crossroads Americas Hall of Shame 2002

Giant corporations such as Enron Worldcom, Dynegy, Waste Management, Adelphia Communications, Tyco, Imclone Systems and Rite Aid failed and were being investigated for fraud and malpractices.
Many of their top executives were penalised for committing fraud and irregularities.

Corporate Misgovernance in India Reasons for Corporate Misgovernance

Indian corporations were insulated. A closed economy, a sheltered market, limited need and access to global business/trade, lack of competition, lack of adequate regulatory framework were all the causes. Besides, promoter families ruled the roost. As a result, there were a series of scams.
Increasing Awareness Global Concerns What is Corporate Governance?

Definitions of Corporate Governance:

From the Academic Point of View


Corporate governance addresses problems that result from the separation of ownership and control.

From the Angle of Developed Versus Developing Countries


John D. Sullivan: In developing economies, one must look to supporting institutions for example, shoring up weak judicial and legal systems in order to better enforce contracts and protect property rights.

Narrow Versus Broad Perceptions of Corporate Governance


Corporate Governance is defined narrowly as the relationship of a company to its shareholders or, more broadly, as a relationship to society.
(An article in Financial Times)

Corporate governance is not just corporate management;


it is a much broader concept and includes a fair, efficient and transparent administration to meet certain well-defined objectives. It is a system of structuring, operating and

controlling a company with a view to achieving long-term


strategic goals to satisfy shareholders, creditors, employees, customers and suppliers and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs. When it is practised under a well-laid out system, it leads to the building of a legal, commercial and institutional framework

and demarcate the boundaries within which these functions


are performed.
(A. C. Fernando. Corporate Governance The Time for a Metamorphosis, The Hindu Businessline, July 9, 1997.)

Different Perceptions in Definitions

Governance Is More Than Just Board Processes and Procedures


The Rights of Shareholders The Equitable Treatment of Shareholders

The Role of Stakeholders in Corporate Governance


Disclosure and Transparency The Responsibilities of the Board

A Historical Perspective of Corporate Governance


From a Narrow to a Broader Vision (Shareholder to Stakeholder perspective)

The Growth of Modern Ideas of Corporate Governance from the USA


England Catches Up With US The Cadbury Committee The Aftermath of Cadbury Report Corporate Governance in the Banking Sector Revival of Corporate Governance Issues in the New Millennium

Issues in Corporate Governance

Distinguishing the Roles of the Board and the Management Composition of the Board and Related Issues Separation of the Roles of the CEO and the Chairperson Should the Board Have Committees Appointments to the Board and Directors Re-election Directors and Executives Remuneration Disclosure and Audit Protection of Shareholder Rights and Their Expectations Dialogue with Institutional Shareholders Should Investors have a say in making a Company Socially Responsible Corporate Citizen

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Relevance of Corporate Governance


Managements usually have an information advantage over others. Good corporate governance will ensure all stakeholders interests are protected, while their requirements are fulfilled.

Need for and Importance of Corporate Governance


To maximise long-term shareholder value

Governance and Corporate Performance


These are very closely inter-related

Investors Preference for Good Governance


Shareholders are prepared to pay a premium for a company with good corporate governance practices.

Strategies and Techniques Basic to Sound Corporate Governance


Corporate values, codes, internal control systems etc. are useful to ensure flow of capital for combating corruption, stakeholder protection, ensuring industrialisation and economic development.

Benefits of Good Corporate Governance to a Corporation


Culture within the organisation and industry improves
Shareholder confidence improves Companies that are seen as well governed get a premium for their stocks Creation and enhancement of a corporations competitive advantage

Enabling a corporation perform efficiently by preventing fraud and malpractices Providing protection to shareholders interest Creates additional shareholder value over time Enhancing the valuation of an enterprise Ensuring compliance of laws and regulations