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m The concept of Corporation-What is a Corporate?

m Theoretical Basis of CG
m Agency Theory
m Stewardship Theory
m Stakeholder Theory
m CG Mechanisms
m CG systems
m Anglo-American Model
m German Model
m Japanese Model
m Indian Model of Governance
m Obligation to society at large , investors , employees,
& customers
m Managerial Obligation
Source: Fernando , Chapter 13
m ICMR , Chapter 19

m The major portion of capital is in the hands of few giant
corporations which are in a position to exercise
considerable control over industrial production
m ³The business corporation is an instrument through
which capital is assembled for the activities of producing
& distributing goods & services & making investments´
m ³A corporation is an artificial being , intangible & existing
only in the contemplation of the law . The important
properties are immortality , individuality & may act as a
single individual.´

m The corporation of today has come to replace the sole proprietor of earlier times & tries to maximize its profits m The corporate differs from the individual capitalist in 2 aspects: m The life span of the corporation is much longer m It is more rational in decision-making as it has the benefit of the collective wisdom of the BOD & they take decisions using the principles of cost accounting. it has ³perpetual succession´ & a common seal m It can therefore CONTRACT quite freely-it can also be fined . data collection & managerial consulting m Justice Lindlay¶s definition of a corporation m Enjoys some privileges & is bound by responsibilities m A corporation is an association of persons recognized by the law as having a collective personality m The corporation can act as if it were distinct from its members. but it obviously cannot be sent to prison or incur penalties which can only be applied to individuals . budget analysis .

it is a separate legal person & has rights & duties as any natural person has . though it has no political or civic rights m The corporation assets are separate & distinct from that of its members. it can sue & can be sued exclusively for it own purpose m The liability of shareholders is limited to the capital invested by them & the creditors have no right to the assets of the corporation .m Incorporated Association or registered under the prevalent Companies Act of the country m Artificial legal existence: A corporation is entitled to a separate legal existence . apart from the persons composing it m In the eyes of the law .

insolvency or death of any or all directors or shareholders m Perpetual existence of the company is preserved by the provision of transferability of shares .m The life of a corporation does not end with the exit. retirement . Law creates a company & law only can dissolve it m Common seal is a legal requirement & enhances the legal entity of the corporation m Extensive membership with millions of shareholders m Separation of management from ownership m Limited liability implies that the liability of the shareholders is limited to the amount unpaid on their shares irrespective of the obligations of the company m Transferability of shares without seeking permission from the company .

who define the objectives of a company m The management . Stewardship . Stakeholder . statutory auditors m Efficient & Independent Board of Directors who are fiduciaries of the shareholders . directly or indirectly selected by shareholders to pursue such objectives are the agents m The objectives of managers are sometimes at variance from those of shareholders which results in mismatch of objectives(agency problem)and a cost inflicted(agency cost) m CG . limited liability company & are the principals. accountable only to shareholders««´Independence´ .m Agency . monitoring . oversight & corrective systems that align the objectives of both groups m Incentive schemes & employee stock options for managers to align financial interests of executives with shareholders m Two broad mechanisms that reduce agency costs & improve CG m Fair & accurate financial disclosures which relate to the role of independent. puts in place disclosures. Sociological Theory m Agency Theory m Shareholders are the owners of any joint stock .

m The job of management is to prepare the accounts m Responsibility of statutory auditors to scrutinize such accounts . the findings are communicated to the shareholders & investors of the company . raise queries & objections(if the need arises) m Auditors arrive at a true & fair view of the financial position of the company & report their independent findings to the board of directors m Through the board of directors .

disclosure & auditing are still important mechanisms .they are stewards whose motives are aligned with the objectives of their principals m A steward¶ s behavior is pro-organizational rather than self-serving m Control may be counterproductive as it lowers motivation m The greatest barrier lies in the risk propensity of principals (Gandhiji¶s trusteeship) .needed to confirm managements' inherent trustworthiness m Stewardship theory has 2 basics: m Managers are not motivated by individual goals .m Stewardship Theory discounts the possible conflicts between corporate management & owners m Shows a preference for a board of directors made up primarily of corporate insiders m Financial reporting .

 The theory considers the firm as an input-output model by adding all interest groups-employees.Who really constitutes a genuine stakeholder?  2. property rights & theory of stakeholders as investors  Stakeholder theory upholds responsibilities to non-shareholder groups  Criticism:1.The theory diverts wealth away from shareholders to others & goes against the fiduciary obligations owed to shareholders  Sociological Theory focuses mostly on board composition & the implications of power & wealth distribution in society  Problems of interlocking relationships & concentration of directorships are challenges to equity  Board composition . local community . shareholders .financial reporting .to the corporate mix  Stakeholder theory is grounded in ethics of care . government . disclosure & auditing are mechanisms to promote equity . ethics of fiduciary relationships . creditors . customers . suppliers . society at large.

for the good of all concerned . separate from its owners m Shareholders nominate & elect directors who run the enterprise m The directors are the stewards & demonstrate their accountability to the shareholders in the form of regular financial reports & directors¶ reports m Shareholders also appoint independent auditors to report that these accounts show a true & fair picture m Regular shareholder meetings provide an opportunity for the directors to report & clarify shareholder doubts m CG is an umbrella term to cover the exercise of power over & within the company .m Why CG? m Corporation is an independent legal entity .

pension funds & insurance companies m Ownership structures of public companies are often complex m Growing Awareness & Responses m CG code by CII in the wake of interest generated by the Cadbury Committee .m Shares listed on a stock exchange are held by diverse shareholders- private individuals . followed by ASSOCHAM & SEBI m SEBI appointed Kumara Mangalam Birla Committee& adopted the report in mid2000.partly-owned subsidiaries . which became applicable to all Indian companies from 1 April 2001 m Major companies now operate through group structures of wholly-owned subsidiary companies .Department of Company Affairs included CG provisions & amended the Companies Act . banks . m RBI also constituted a committee m Based on inputs from these committees.

m Known as the ˜    .

all of which protect small investors& promote market liquidity m They discourage large investors from taking an active role in CG m A-A model of CG encourages radical innovation & cost competition .. they sell the securities in the market & quit m The disclosure norms are comprehensive. the rules against insider trading tight & the penalties for price manipulation stiff.If they are not satisfied with a company¶s performance . m Fairly clear separation of ownership & management m Most institutional investors are reluctant activists who view themselves as portfolio investors . direction and oversight & appoints &supervises the managers who take care of daily activities m The ownership of companies is equally divided between individual & institutional shareholders m Companies are run by professional managers with negligible ownership stakes . which is the Anglo-Saxon approach to CG followed in Anglo-American countries m All directors participate in a single board comprising both executive & non- executive directors in varying proportions m The model tends to be shareholder-oriented m BOD perform 3 functions :representation .

m Known as the      .

appoints and monitors the management board m The management board conducts the day-to-day operations independently .CG is exercised through 2 boards: supervisory & management board m ‰pper(supervisory) board supervises the management board on behalf of stakeholders m Shareholders elect 50 per cent of the members on the supervisory board and the other half is appointed by labor unions & employees m Employees & laborers are not just stakeholders. they also have a say in the governance mechanism .but has to report to the supervisory board .They become responsible for the policies that are implemented by them m The supervisory board which is appointed jointly by the shareholders & labor unions .

m Known as the ˜     .

which reflects the cultural relationships in the Japanese   ˜network. predominantly executive & often ritualistic m The financial institutions have a major role in the governance mechanism m The shareholders along with the main bank together appoint the board of directors & the president m Even the President is appointed on the basis of a consensus between the share holders and the banks m The President consults the supervisory board & their relationship is hierarchical m The supervisory board usually ratifies whatever decisions the president takes m The financial institutions that finance the business have a crucial role .even though the shareholders are the owners of the business m Banks even have the power to suspend the board in case of an emergency! . in which boards tend to be large ..

Besides cross- holding among groups of firms is common in Japan m Institutional investors view themselves as long-term investors & play an active role in corporate management m Disclosure norms are not very stringent . checks on insider trading are not comprehensive & emphasis on liquidity is not high m There is hardly any system of corporate control in these countries . mergers & takeovers are rare occurrences .m Banks & financial institutions have substantial stakes in the equity capital of companies .

his family & associates closely hold the private companies & they exercise maximum control over the activities of the company(Reliance . strengthening of oversight committees m CG developments in India show a paradigm shift from the German/Japanese model to the Anglo-American model .Birla ) m Role of external equity finance is minimal m Public enterprises . government ±appointed Naresh Chandra 2003&SEBI¶s Narayan Murty 2000 recommendations are remarkably similar to England¶s Cadbury Committee & ‰S Sarbanes-Oxley Act m Thrust of legislative reforms-Greater transparency. central & state governments choose members of the board m Even after disinvestment of PS‰s . government has major hold over activities m Indian government constituted 3 committees-SEBI-appointed Kumar Mangalam Birla 2000.& independent scrutiny of corporate accounts .m Mix of the Anglo-American & German/Japanese models m Pattern of private companies-the founder .

especially the senior management . which should have the following desiderata: m Obligation to society at large . BOD & its officials . but are made by the combined efforts of all stakeholders m Law & regulation alone cannot bring about changes in corporate to behave better to benefit all concerned m The company & its officers . should strictly follow a code of conduct . to investors.m Bad governance is recognized as the root cause of corrupt practices in our societies m Nations as well as corporations are expected to provide good governance to benefit all their stakeholders m Good corporate are not born . to employees .to customers & managerial obligation .

MD.CFO & CCO Corporate Citizenship Social concerns CSR Environment-friendliness Competition & Trusteeship Corporations should uphold the Fair Name of the country .CEO.m National interest m Political non-alignment m Legal compliance as per tax laws m Rule of law with full protection of rights . executive & non-executive directors. particularly minority shareholders m Honest & ethical conduct of Directors.

m Towards shareholders m Measures promoting transparency & informed shareholder participation m Transparency m Financial reporting & records m Internal accounting & audit procedures-all required information shall be accessible to the company¶s auditors . non-executive & independent directors on the board& other authorized parties & government agencies m Any willful misrepresentation of financial accounts & reports will be regarded as a violation of firm¶s ethical conduct& invite appropriate civil or criminal action .

m Fair employment practices m Equal Opportunities Employer m Encouraging whistle blowing with comfortable reporting channels & an effective whistle blower policy m Humane treatment m Participation & Empowerment m Equity & Inclusiveness m Participative & Collaborative Environment .

m åuality of Products & services m Products at Affordable prices m ‰nwavering commitment to customer satisfaction .

m Protecting company¶s assets m Behavior towards government agencies m Control exercised within a framework of appropriate checks & balances m Consensus-oriented on what is in the best interest of the whole community & how this can be achieved m Gifts & donations m Roles & Responsibilities of Corporate Board & Directors m Direction & management must be distinguished m Managing & Whole-time Directors are required to devote whole or substantially whole of their time to the affairs of the company .