CORP OR A TE

GOVERNA NC E

DR. POONAM KAUSHAL

A S S I S TA N T P R O F E S S O R
I C FA I B U S I N E S S S C H O O L
 SOLE PROPRIETORSHIP

• The easiest and most popular form of business ownership is the sole proprietorship.

sole proprietorship
a business that is owned and operated by one person
 ADVANTAGES
• Sole proprietorship is easy and inexpensive to create.

The owner has complete authority over all business activities.

It is the least regulated form of business ownership.

The business pays no taxes; income is taxed at the personal rate of

the owner.
 DISADVANTAGES
The owner has unlimited liability.

Raising capital is more difficult.

The business is totally reliant on the skills and abilities of the owner.
unlimited liability: full responsibility for all debts and actions of a business

The death of owner dissolves the business unless there is a will to the
contrary.
 PARTNERSHIP
• A partnership draws on the skills, knowledge, and financial resources of more than one
person.

partnership
an unincorporated business with two or more owners who share the decisions, assets, liabilities, and
profits
 Corporation
What is a Corporation?

A corporation is a business entity that is owned by its

shareholder(s), who elect a board of directors to oversee the
organization’s activities.

The corporation is liable for the actions and finances of the

business – the shareholders are not. Corporations can be for-
profit, as businesses are, or not-for-profit, as charitable
organizations typically are.
The Companies Act 2013 of India defines
a company as-
A registered association which is an
artificial legal person, having an
independent legal, entity with a perpetual
succession, a common seal for its
signatures, a common capital comprised of
transferable shares and carrying limited
liability.
 COMPANY

• In a simple words a company may be defined as an “ association of

persons who contribute money or money’s worth to a common

stock and employ it in some trade or business , and who shares

the profit or loss there from.

 Feature OF COMPANY
1 SEPERATE LEGAL ENTITY
2. LIMITED LIABILITY
3. PERPETUAL EXISTENCE
4. COMMON SEAL
5. TRANSFERABILITY OF SHARE
6. SEPARATE PROPERTY
7. CAPACITY TO SUE OR TO BE SUED
 BASIS FOR
PRIVATE LIMITED COMPANY
COMPARISON
Meaning Private Limited Company refers to the
company which is not listed on a stock
exchange and the shares are held privately
by the members concerned.
PUBLIC LIMITED COMPANY
Public Limited Company implies a
company that is listed on a recognized
stock exchange and whose shares are
traded openly by the public.

Minimum number of 2 7
members
Maximum number of 200, except in case of one person company Unlimited
members
Minimum number of 2 3
directors
Articles of Association It must frame its own articles of It can frame its own articles of
association. association or adopt Table F.
Transfer of Shares The shares of a private company are not The shares of a public company
freely transferable, as there are are freely transferable, i.e. freely
restrictions in Articles of Association. traded in an open market called a stock
exchange.

Public Subscription Issue of shares or debentures to the public It can invite the public to subscribe to
is prohibited. its shares or debentures.
 Appointment of Two or more directors can be appointed One Director can be appointed by a single resolution.
Director by a single resolution.

Retirement of The directors are not required to retire 2/3rd of the total number of directors must retire by
Directors by rotation by rotation. The directors can be rotation.
permanent.

Place of Holding AGM can be held anywhere. AGM is held at the registered office or any other place
AGM where the registered office is situated.

Statutory Meeting Optional Compulsory

Quorum 2 members who are personally present at 5 members are required to present in person when the
(the minimum number the meeting, constitute a quorum, number of members as on the date of the meeting is 1000
of members of an irrespective of the number of members. or less.
assembly or society
that must be present at 15 members are required to present in person when the
any of its meetings to number of members as on the date of the meeting is more
make the proceedings than 1000 but less than 5000.
of that meeting valid).

30 members are required to present in person when the

number of members as on the date of the meeting is more
than 5000.
ISSUES IN CORPORATE GOVERNANCE
• Distinguishing the roles of Board and Management
• Composition of the board
• Separation of the roles of the CEO and Chairperson
• Appointments to the board and director’s re-election
• Director’s and executive’s remuneration
• Disclosure and Audit
• Protection of shareholder rights
THEORIES OF CORPORATE
GOVERNANCE

• Agency Theory

• Stewardship Theory

• Stakeholder Theory
 AGENCY THEORY

• Shareholders are the owners of any joint stock, limited liability company, and
are the Principals of the same.

• The Management, directly or indirectly selected by shareholders to pursue

organizational objectives, are the agents.

• Agency theory is a principle that is used to explain and resolve issues in the
relationship between business principals and their agents. Most commonly,
that relationship is the one between shareholders, as principals, and company
executives, as agents.
 AGENCY THEORY

• Agency Costs
• A type of internal cost that arises from, or must be paid to, an agent acting on
behalf of a principal.
• Agency costs arise because of core problems such as conflicts of interest between
shareholders and management. Shareholders wish for management to run the
company in a way that increases shareholder value. But management may wish to
grow the company in ways that maximize their personal power and wealth that
may not be in the best interests of shareholders.
AGENCY THEORY
• Agency theory specifies mechanisms which reduces Agency Loss. These
includes:-
– Incentives schemes for managers which reward them financially for
maximizing shareholder’s interests.
– Disclosure of relevant information
• There are two broad mechanisms that help reduce agency costs:
– Fair and accurate financial disclosure
– Efficient and independent board of directors
 STEWARDSHIP THEORY
• This theory assumes that managers are basically trustworthy and attach
significant value to their own personal reputation.

• Financial disclosures and audit are still important mechanisms, but there is a
fundamental presumption that these mechanisms are needed to confirm
management's inherent trustworthiness.
STEWARDSHIP THEORY
• Characteristics of stewardship theory:-
– Managers are not motivated by their individual goals, but rather they are
stewards whose motives are aligned with the objectives of their principals.
– Given a choice between self-serving behaviors and pro-organizational
behaviors, a steward’s behavior will not depart from the interests of his/her
organization.
– Control can be potentially counterproductive, because it undermines the
pro-organizational behavior of the stewards, by lowering his/her
motivation.
STAKEHOLDER THEORY

Shareholders/stockholders
Vs.
Stakeholders
 STAKEHOLDER THEORY
• Stakeholder theory is a theory of organizational management and business ethics that addresses
morals and values in managing an organization.
• It was originally detailed by R. Edward Freeman in the book Strategic Management: A
Stakeholder Approach, and identifies and models the groups which are stakeholders of a
corporation, and both describes and recommends methods by which management can give due
regard to the interests of those groups
 STAKEHOLDER THEORY
• Stakeholders can be defined as "any group or individual who can affect, or is affected by, the
achievement of a corporations purpose”.
• The focus of the stakeholder theory is articulated in two core questions:-
– Firstly, what is the purpose of the firm?
– Secondly, what responsibility does management have to stakeholders?
 Systems of Corporate Governance

• The Anglo-American Model

• The German Model; and

• The Japanese Model

THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE

Board of Directors Shareholders

(Owners)

Appoints and Supervises

Creditors

Officers
(Managers)
Stakeholders
(Employees, Suppliers, Creditors)
Manages

Company
Legal System
THE ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE

• Also known as Unitary Board Model

• In this system, all directors participate in a single board comprising both executive and non-executive
directors.
• This approach tends to be shareholder-oriented.
• Being the basis of corporate governance in America, Britain, Canada, Australia and other common-
wealth countries including India.
 SALIENT FEATURES OF THE ANGLO-AMERICAN
MODEL OF CORPORATE GOVERNANCE
• The ownership of the companies is more or less equally divided between individual shareholders and
institutional shareholders.

• Directors are rarely independent of management.

• Companies are typically by run by professional managers who have negligible ownership stakes. There
is fairly clear separation of ownership and management.
SALIENT FEATURES OF THE ANGLO-AMERICAN
MODEL OF CORPORATE GOVERNANCE

• Most institutional investors are reluctant activists. They view themselves as portfolio investors.
If they are not satisfied with a company’s performance, they simply sell the securities and quit.
• The disclosure norms are comprehensive, the rules against insider-trading tight.
• Discourages large investors from taking an active role in corporate governance.
GERMAN MODEL OF CORPORATE GOVERNANCE
• Also known as the two-tier board model.

• Corporate governance is exercised through two boards. Upper board (Supervisory Board) supervises
the executive board (Management Board) on behalf of stakeholders.

• In this model, although stakeholders own the company, they do not entirely dictate the governance
mechanism.
GERMAN MODEL OF CORPORATE
GOVERNANCE
• In this model, shareholders elect 50% of members of supervisory board and the other half is
appointed by Labor Unions.
• Employees and Labor Unions also enjoys a share in governance.
GERMAN MODEL OF CORPORATE GOVERNANCE

Supervisory Board
Appoints 1/2

Appoints &
Appoints and Reports To
Supervise Employees & Labor
Supervises
Unions
Management Board
(Includes Labor Relation
Director)

• Manages (day-to-day)
Manage (Day-to-
Day) Appoints 1/2

Company
Shareholders
(Owners)
JAPANESE MODEL OF CORPORATE
GOVERNANCE

• In this model, financial institutions play a crucial role in governance.

• The shareholders and the main bank collectively appoints the board of directors and the
president.
SALIENT FEATURES OF JAPANESE
MODEL OF CORPORATE GOVERNANCE

• The president who consult both the supervisory board and the executive management is
included.

• Importance of lending bank is highlighted.

 Japanese Model of Corporate Governance

Supervisory Board
(Including President)
Ratifies Monitors acts in emergencies
Appoints
President’sand Consults
decision
Supervises Banks
(Loans)
President

Consults
• ManagesExecutive
(day-to-day)
Management
(Primarily Board of Director)

Manage (Day-to-
Day) Shareholders
(Owners)
Company
INDIAN CORPORATE GOVERNANCE MODEL
External Environment
Government regulation, Corporate culture,
policies, guidelines etc. Internal environment structure, influences.
Company’s Act Company vision; mission; policies; norms Depositors, Borrowers,
SEBI Internal Board of Customers & other
Stock exchanges stakeholders Auditors Directors stakeholders

Proper governance Corporate Governanceshareholder value

System
Corporate Governance Outcomes / Benefits to society

Investor protection concern for customer

Healthy Corporate Sector Development

 BENEFITS OF CORPORATE
GOVERNANCE
• Creation and enhancement of a corporation’s competitive advantage.
– Competitive advantage grows naturally when a corporation facilitate the creation of value for its buyers.
– Creating competitive advantage require both the vision to innovate and the strategy to manage the process of
delivering value.
– An effective Board should be one that is able to craft such strategies and flexible to accommodate
opportunities and threats.
BENEFITS OF CORPORATE
GOVERNANCE
• Enabling a corporation perform efficiently by preventing fraud and malpractices.
• Providing protection to shareholder’s interest.
• Enhancing valuation of corporation
– through improved management and operational transparency.
• Ensuring legal compliance.
Board Structures and Styles
TYPES OF DIRECTORS

• Executive directors
• Non-executive Directors
• Nominee Directors
• Representative Directors
• Alternative directors
• Shadow Directors
• Associate Directors
TYPES OF BOARD STRUCTURES

• Depending on the type of directors on the board or their to the company, board structures can
be of four types:-

• All-Executive Board
• Majority Executive Board
• Majority outside Board
• Two-Tier Supervisory Board
ISSUES IN DESIGNING A BOARD

• The Board size

• Role of the chairmen and the Chief Executive

POWERS, DUTIES & LIABILITIES OF
BOARD OF DIRECTOR
 WHO IS A DIRECTOR?
• Section 2 (13):-
– A Director includes any person occupying the position of director by whatever name called.
• The important factor to determine whether a person is or is not a director is to refer to the nature of the
office and its duties.
• It does not matter by what name he is called. If he performs the functions of a director, he would be
termed as director in the eyes of law.
WHO IS A DIRECTOR?

• A director may, therefore, be defined as a person having control over the direction, conduct,
management or superintendence of the affairs of a company.
• Thus, Any person in accordance with whose directions or instructions, the board of directors of
a company is accustomed to act is deemed to be a director of the company.
POWERS OF DIRECTORS
• Section 292(1) of the Companies Act, provides that the Board of directors of accompany shall exercise
the following powers on behalf of the company and it shall do so by means of resolution passed at
meeting of the Board:-
• (a) the power to make calls on shareholders in respect of money unpaid on their shares;
• (b) the power to issue debentures;
• (c) the power to borrow moneys otherwise than on debentures;
• (d) the power to invest funds of the company;
• (e) the power to make loan.
DUTIES OF THE DIRECTORS

• Mainly divided into two parts:-

• 1. Statutory Duties

• 2. General Duties
STATUTORY DUTIES
• To file return of allotment: Section 75 of the Companies Act, requires a company to file with the
Registrar, within a period of 30 days

• To disclose interest:- In respect of contracts with director, Section299 casts an obligation on a director
to disclose the nature of his concern or interest(direct or indirect), if any, at a meeting of the Board of
directors.
STATUTORY DUTIES

• To disclose receipt from transfer of property (sec. 319):- Any money received by the director
from the transferee in connection with the transfer of the company’s property or undertaking
must be disclosed to the members of the company and approved by the company in general
meeting. Otherwise, the amount shall be held by the directors in trust for the company.
 STATUTORY DUTIES
• Duty to attend Board meetings. [Section 283 (1) (G)]
• To convene statutory, Annual General meeting (AGM) and also extraordinary general meetings
[ Section 165,166 &169]
• To prepare and place at the AGM along with the balance sheet and profit & loss account, a report on
the company’s affairs including the report of the Board of Directors
STATUTORY DUTIES

• To authenticate and approve annual financial statement (Section 215).

• To appoint first auditor of the company (Section 224).
• To make a declaration of solvency in the case of Members’ voluntary winding up(Section 488).
GENERAL DUTIES

• Duty of good faith:

– The directors must act in the best interest of the company.

– Interest of the company implies the interest of the present and future members of the company on the
footing that company would be continued as going concern.
GENERAL DUTIES

• Duty of care:

– A director must display care in performance of work assigned to him. He is, however, not expected
to display an extraordinary care but that much care which a man of ordinary prudence would take in
his own case.
GENERAL DUTIES

• Duty not to delegate:

– Director being an agent is bound by the maxim

delegatus nonpotest delegare. which means a delegatee
can not further delegate. Thus, a director must perform
his functions personally.
LIABILITES

Liability to the company

• (A) Breach of fiduciary duty:-
– where a director acts dishonestly to the interest of the company, he will be held liable for breach of
fiduciary duty.
– Most of the powers of directors are powers in trust, and therefore, should be exercised in the interest
of the company and not in the interest of the directors or any section of members.
LIABILITES

Liability to the company

• (B) Ultra vires acts:-
– Directors are supposed to act within the parameters of the provisions of the Companies Act,
Memorandum and Articles of Association, since these lay down the limits to the activities of the
company and consequently to the powers of the Board of directors.
 LIABILITES
Liability to the company
• (C) Negligence: As long as the directors act within their powers with reasonable skill and care as
expected of them as prudent businessman, they discharge their duties to the company. But where they
fail to exercise reasonable care, skill and diligence, they shall be deemed to have acted negligently in
discharge of their duties and consequently shall be liable for any loss or damage resulting there from
LIABILITES

Liability to the company

• (D) Mala fide acts:-
– Directors are the trustee for the moneys and property of the company handled by them, as well as,
exercise of the powers vested in them. If they dishonestly or in a mala fide manner, exercise their
powers and perform their duties, they will be liable for breach of trust and may be required to make
good the loss or damage suffered by the company by reason of such mala fide acts.
LIABILITES

Liability to third parties

• (A) Prospectus: Failure to state any particulars as per the requirement of the section56 and
Schedule II of the act or miss-statement of facts in prospectus renders a director personally
liable for damages to the third party. Section 62 provides that a director shall be liable to pay
compensation
 Liability to third parties
• (B) With regard to allotment: Directors may also incur personal
liability for:
– (a) Irregular allotment, i.e., without filing a copy of the statement in lieu of
prospectus(Section 70) - [Section 71(3)]
– (b) For failure to repay application monies in case of minimum subscription
having not been received within 120 days of the opening of the issue: Under
section 69(5)
 Liability to third parties
• (c) Failure to repay application monies when application for listing of
securities are not made or is refused: Under section 73(2) . where the
permission for listing of the shares of the company has not been applied or
such permission having been applied for, has not been granted, the
company shall forthwith repay without interest all monies received from
the applicants in pursuance of the prospectus, and, if any such money is
not repaid within eight days after the company becomes liable to repay