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
Separation of Ownership from Management
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
SEPARATION OF OWNERSHIP FROM
MANAGEMENT:
Promoters/Shareholders should exercise their ownership rights in
the general meetings of the company and ought not to throw their
weight in the Board meetings.
Boards should be allowed to function and decide with complete
freedom what is good for the company and its various stakeholders.
DISTINGUISHING THE ROLES OF BOARD AND MANAGEMENT:

The business of a company is to be managed ‘by or under the

direction of’ the board.
The responsibility of managing the business is delegated by the board
to the CEO, who in turn delegates the responsibility to other senior
executives.
Thus, the board occupies a key position between shareholders
(owners) and company’s management.
ROLE OF THE BOARD
• Establish Vision and Mission.
• Strategic direction, policy and advice.
• Overseeing implementation of its policies.
• Appointment & evaluating performance of CEO and senior
management staff.
• Ensuring stakeholder relationships.
• Risk mitigation.
• Procuring resources.
 STRATEGIC BOARD FOR BETTER CG
Optimum size: The optimum board size will result in greater involvement of
directors which will lead to more cohesive functioning and faster decisions.
Independence: Strategic board should have less insiders and more outsiders
to maintain independence /objectivity in decision making.
Diversity: The board should be composed of directors with varied
expertise, experience & diverse professional qualifications and also of
people with different ethnic and cultural backgrounds in tune with rapid
globalisation of businesses.
Vision: The board should have a longer vision and broader responsibility
than those of CEO and top management
 COMPOSITION OF BOARD SEC. 149

Minimum Number of Directors:

a. Public Company : 3 directors
b. Private Company : 2 directors
c. One Person Company : 1 director
Maximum number of directors restricted to 15
Maximum directorships: 20 companies including 10 directorships in
public companies
Listed public company to have at least 1/3rd of total directors as IDs.

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 NUMBER OF IDS IN OTHER COMPANIES: RULE 4

Following companies shall have at least two directors as IDs:-

i. paid up share capital of ₹ 10 cr. +; or
ii. turnover of ₹ 100 cr. +; or
iii.in aggregate, outstanding loans, debentures and deposits
exceeding ₹ 50 cr.
iv. Where a company ceases to fulfil any of three conditions for 3
consecutive years, it shall not be required to comply with this
requirement

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SEPARATION OF THE ROLES OF CHAIRPERSON & CEO
Chairperson leads the board.
CEO leads the senior management team

• The board evaluates the performance of senior executives including the

CEO.

• Combining the role of both the CEO and the Chairman removes an
important check on senior management’s activities.

• The Chairman should be an ID to provide the appropriate counterbalance

and to check the power of the CEO. 25
SEPARATION OF THE ROLES OF CHAIRPERSON & CEO

• Sec.203 provides that an individual shall not be appointed or re-

appointed as Chairperson as well MD or CEO of the company at the
same time after the date of commencement of the Act unless the:-
a. article of the company provide otherwise; or
b. company does not carry multiple businesses

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APPOINTMENTS TO THE BOARD AND DIRECTOR’S RE-ELECTION

appointment-_-re-appointment-of-directors-policy_2019.pdf
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

• The steward theory states that a steward protects and maximizes shareholders
wealth through firm Performance.
• Stewards are company executives and managers working for the shareholders,
protects and make profits for the shareholders.
• The stewards are satisfied and motivated when organizational success is attained
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.
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?
 A