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CORPORATE

GOVERNANCE
Dr Y R Reddy

Corporate

Corporate is adjective meaning of or relating to a corporation derived from


the noun corporation.

A corporation is an organization created (incorporated) by a group of


shareholders who have ownership of the corporation.

The elected Board of directors are appointed and they oversee


management of the corporation.

Governance
Oxford English Dictionary defines Governance as the act, manner, fact
or function of governing, sway, control
The word has Latin origins that suggest the notion of 'steering'. It deals with
the processes and systems by which an organization or society operates.

Corporate

Governance
Corporate governance is the process and
structure used to direct and manage the
business and affairs of the company towards
enhancing business prosperity and corporate
accountability with the ultimate objective of
realizing long-term shareholder value, whilst
taking into account the interest of other
stakeholders.
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Brief Indian History of CG


Kautilyas(Chanakya) Arthashastra is the oldest book (around 300 B.C) on
Management available to the world
This masterpiece covered a wide range of topics and also recommended that
the king shall not consult with any advisor who had a vested interest in the
outcome of a particular project.
establishment of an ethical code of conducta topic which has received a
great deal of attention now during the past few years after corporate
scandals
the codification of accounting rules into one uniform system to prevent
problems in translating financial data between disparate methods of
accounting a subject which the international accounting community is
dealing with in terms of the convergence of accounting standards.

Sher Shah Suri (1540-1545) was regarded as best governor of medieval India

In the western world The East India Company introduced a Court of Directors,
separating ownership and control (U.K., the Netherlands) in 1600s
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Why Governance
In the today environment
Managers must be monitored and institutional
arrangements must provide some checks and
balances to make sure they dont abuse their
power
Transaction cost be limited
Enhancement of shareholder value
Rational on Authority/ Delegation

Governance
Governance can be used with reference to all kind of organizational structure
e.g.
1. Corporates like Tata & Reliance
2. Municipal corporation/ Gram panchyat
3. Central/ State Government
4. Partnership firm
5. NGO- not for profit organization

Corporate Governance &


Corporate Management
Governance

Management

CORPORATE
GOVERNANCE

CORPORATE
MANAGEMENT

External Focus

Internal Focus

Governance
assumes an open
system

Management
assumes a closed
system

Strategy- oriented

Task-oriented

Concerned with
Concerned with
where the company getting the
is going
company there

Fairness

Responsibility

Transparency

Accountabilit
y

Corporate
Governance

Fundamental Pillars of Corporate


Governance
Source: Malaysian Institute of Corporate Governance

Accountability
Clarifying governance roles &
responsibilities, and supporting voluntary
efforts to ensure the alignment of
managerial and shareholder interests and
monitoring by the board of directors
capable of objectivity and sound
judgment.

Transparency
Requiring timely disclosure of adequate
information concerning corporate financial
performance

Responsibility
Ensuring that corporations comply with
relevant laws and regulations that reflect
the societys values

Fairness
Ensuring the protection of shareholders
rights and the enforceability of contracts
with service/resource providers

Why to follow CG

Better access to External Finance


Lower cost of capital- lesser interest rates
Improved company performance
Higher firm valuation- sustainability
Reduced risk of corporate scams and
frauds

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Corporate Governance of an
Organisation

International scenario
Year

Name of Committee/Body Areas/Aspects Covered

1992

Sir Adrian Cadbury Committee,


UK

Financial Aspects of Corporate Governance

1994

Mervyn E . Kings Committee ,


South Africa

Corporate Governance

1995

Greenbury Committee , UK

Directors Remuneration

1998

Hampel Committee, UK

Combine Code of Best Practices

1999

Blue Ribbon Committee, US

Improving the Effectiveness of Corporate Audit


Committees

1999

OECD

Principles of Corporate Governance

1999

CACG

Principles for Corporate Governance in


Commonwealth

2003

Derek Higgs Committee, UK

Review of role of effectiveness of Non-executive


Directors

2003

ASX Corporate Governance


Council, Australia

Principles of Good Corporate Governance and Best


Practice Recommendations
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Indian scenario
Year

Name of
Areas/Aspects Covered
Committee/Body

1998

Confederation of
Indian Industry (CII)

Desirable Corporate Governance A Code

1999

Kumar Mangalam
Birla Committee

Corporate Governance

2002

Naresh Chandra
Committee

Corporate Audit & Governance

2003

N. R. Narayana
Murthy Committee

Corporate Governance

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Objectives of good corporate


governance
1.

Strengthen management oversight functions and accountability

2.

Balance skills, experience and independence on the board appropriate to


the nature and extent of company operations

3.

Establish a code to ensure integrity

4.

Safeguard the integrity of company reporting

5.

Risk management and internal control

6.

Disclosure of all relevant and material matters

7.

Recognition and preservation of needs of shareholders

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Parties to corporate governance


1.

Board of directors

2.

Managers

3.

Workers

4.

Shareholders or owners

5.

Regulators

6.

Customers

7.

Suppliers

8.

Community (people affected by the actions of the organization)

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Framework of Corporate
Company Governance
1.

Supervisory Board/ Committee/ Team

2.

Audit Committee

3.

Internal Audit

4.

Statutory Audit

5.

Disclosure of information

6.

Risk management framework

7.

Internal Control framework

8.

Whistle blower policy

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Clause 49 in Listing agreement

The Listing agreement was first introduced by Bombay Stock Exchange


and later followed by other stock exchanges

SEBI, vide its circular dated February 21, 2000, specified principles of
corporate governance and introduced a new clause 49 in the Listing
agreement of the Stock Exchanges.

The Listing agreement contains 51 clauses

Listing means admission of the securities to dealings on a recognised stock


exchange. The securities may be of any public limited company, Central or
State Government, quasi governmental and other financial
institutions/corporations, municipalities, etc.

Listing helps in free transferability , leads to transparency in disclosure of


information and ensures official quotation is available.
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