CORPORATE

GOVERNANCE
(BAEC0007)
BY: DR. ANKITA SAXENA
ASSISTANT PROFESSOR
IBM
 SYLLABUS
 Definition of Corporate Governance, Need and scope of Corporate Governance, OECD
Parameters and Principles related to Corporate Governance, Developments in India
related to Corporate Governance, Elements of Good Corporate Governance. Theories
& Models of Corporate Governance Prevalent Theories and Practices of Corporate
Governance, Popular Models for Governance. Major Corporate Governance Failures in
India & Abroad BCCI (UK), Enron (USA), Satyam Computer Services Ltd, Lehman
Brothers, Kingfisher Airlines.
 Regulatory Framework of Corporate Governance in India Initiatives and reforms- (CII
Code 1997), Kumar Mangalam Birla Committee (1999), NR Narayana Murthy
Committee (2005) and Uday Kotak Committee (2017), Relevant provisions of
Companies Act, 2013, SEBI: Listing Obligations and Disclosure Requirements
Regulations (LODR) 2015. Tools of Corporate Governance & Related Committees
Internal Audit, External Audit, Audit committee, Shareholder’s grievance committee,
Remuneration committee. Overview of Corporate Social Responsibility (CSR) Meaning,
Concept and Relevance of Corporate Social Responsibility, Corporate Responsibility of
Business towards Employees, Consumers and Community, CSR in India. CSR under the
Companies Act, 2013.
 Reference Books/ Text Books / Cases: ✵ Murthy CSV, Business Ethics and
Corporate Governance, HPH ✵ Bholananth Dutta, S.K. Podder – Corporation
Governance, VBH. ✵ Dr. K. Nirmala, Karunakara Reddy, Business Ethics and
Corporate Governance, HPH. ✵ S Prabhakaran; Business ethics and Corporate
Governance
 Intended Outcomes: After completion of the course, student will be able to:
✵ Understand the concept of corporate governance in organizations and its
essence for management.
 ✵ Discuss theories and models of corporate governance and their application.
✵ Discuss the major corporate governance failures in India & abroad.
 ✵ Define the tools of corporate governance & related committees.
 ✵ Understand the concept of corporate social responsibility of business
towards different stakeholders.
Definition
 Corporate governance is the system or structure of rules, practices,
and laws by which a firm is directed and controlled.
 The Board of directors manages the corporate governance and they are
responsible for every situation of the company.
 Refers to the way a corporation is governed. It is the technique by
which companies are directed and managed. It means carrying the
business as per the stakeholders' desires.
 Corporate governance is the system by which companies are directed
and controlled.
Cont…
 Corporate Governance refers to the way a corporation is
governed. It is the technique by which companies are directed
and managed.
 Corporate Governance is the interaction between various
participants (shareholders, board of directors, and company’s
management) in shaping corporation’s performance and the
way it is proceeding towards.
 The relationship between the owners and the managers in an
organization must be healthy and there should be no conflict
between the two. 
NEED & SCOPE

 Corporate governance refers to the accountability of the Board

of Directors to all stakeholders of the corporation i.e.
shareholders, employees, suppliers, customers and society in
general; towards giving the corporation a fair, efficient and
transparent administration.
 The managers are the deciding authority. In modern
corporations, the functions/ tasks of owners and managers
should be clearly defined, rather, harmonizing.
 Corporate Governance deals with determining ways to take
effective strategic decisions.
 Corporate Governance ensures transparency which ensures strong
and balanced economic development.
 It gives ultimate authority and complete responsibility to the Board
of Directors.
 In today’s market-oriented economy, the need for corporate
governance arises. Also, efficiency as well as globalization are
significant factors urging corporate governance.
 Corporate Governance is essential to develop added value to the
stakeholders.
Need for Corporate Governance

 Wide Spread of Shareholders

 Today a company has a very large number of shareholders
spread all over the nation and even the world; and a majority
of shareholders being unorganised and having an indifferent
attitude towards corporate affairs. The idea of shareholders’
democracy remains confined only to the law and the Articles of
Association; which requires a practical implementation through
a code of conduct of corporate governance.
(iii) Corporate Scams or Scandals:
 Misuse and misappropriation of public money are happening
everywhere i.e stock market, banks, financial institutions,
companies, and government offices. In order to avoid these
financial irregularities, companies need to start using corporate
governance.

 Takeovers and Mergers

There are many takeovers and mergers are going on in the business
world. The need of corporate governance is to protect the interest
of all the parties during takeovers and mergers.
Cont..

 Comply with SEBI Requirement

SEBI has made corporate governance compulsory for
certain companies i.e for listed companies to comply with
its provisions. This SEBI requirement protects the interest
of the investors and other stakeholders. If any company
doesn’t comply with SEBI rules, it can bring a high
penalty.
Cont..

 4. Need of Social Responsibility

Today, social responsibility is given a lot of importance.
The Board of Directors (BOD) has to protect the rights of
the customers, employees, shareholders, suppliers, local
communities, government, etc. This is possible only if
they use corporate governance.
Benefits of Corporate Governance
 Good corporate governance ensures corporate success and economic growth.
 Strong corporate governance maintains investors’ confidence, as a result of
which, company can raise capital efficiently and effectively.
 It lowers the capital cost.
 There is a positive impact on the share price.
 It provides proper inducement to the owners as well as managers to achieve
objectives that are in interests of the shareholders and the organization.
 Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
 It helps in brand formation and development.
 It ensures organization is managed in a manner that fits the best interests of all
Scope of corporate governance

 1. Accountability
2. Fairness
3. Transparency
4. Independence
5. Compliance with rules
 1. Accountability – Accountability means a situation in
which any person is responsible and needs to give a
satisfactory reason for anything wrong in work. Corporate
governance makes accountability. 
 (a) Accountability ensures that working management i.e.
Managers, Employees is responsible to the Board Of Directors
( BOD ).

(b) Further, Accountability Ensure that the BOD is accountable

to shareholders if anything bad happens.
 2. Fairness
  (a) Corporate governance ( CG ) protects the rights of
Shareholders.
  (b) CG treat all shareholders equally including minorities i.e.
who has small part of company’s ownership.
  (c) Provides effective redressal for any violations i.e Customer
care
 3. Transparency
  (a) CG makes ensure timely, accurate disclosure on all
material matters of the company including the financial
situation, performance, ownership.
 4. Independence
   (a) CG makes procedures, rules, and structures in place
to minimize or avoid conflicts of interest
   (b) CG appoints Independent Directors and Advisers i.e.
to take the free decision from the influence of others
 5. Compliance with rules
   (a) CG ensures compliance with all the laws and code of
spirit.
   (b) Corporate governance is necessary to meet the
requirement of SEBI for listed companies
Organization of Economic Cooperation And
Development (OECD)

 The Organisation for Economic Co-operation and Development (OECD)

is an international organisation in which governments work together
to find solutions to common challenges, develop global standards,
share experiences and identify best practices to promote better
policies for better lives.
HOW IT WORKS

 OECD goal is to shape policies that foster prosperity, equality, opportunity

and well - being for all. The OECD regularly reviews its tools, policy analysis
and standards to ensure that they are fit for purpose and maintain their
relevance and impact.
 Supporting country reforms: from a think-tank to a ‘do-tank’
 Increasing OECD global reach
 Strengthening our contribution to global governance (e.g. G20/G7, APEC, UN)
 Innovating and rethinking our approach (e.g. NAEC, Strategic Foresight
 People-centred growth and well-being: a multi-disciplinary approach
Cont…

 As one of the world’s largest and most trusted sources of

comparative socio-economic data and analysis, we provide
knowledge and advise to inform better policies.
 We bring policy makers and policy shapers together to exchange
ideas, share experiences and forge progress across a range of
policy areas.
 We encourage countries to do better by developing
internationally agreed standards so that everyone plays by the
same rules and co-operates to reach shared objectives.
OECD Principles
 Ensuring the basis for an effective corporate governance framework: The
corporate governance framework should promote transparent and efficient
markets, be consistent with the rule of law and clearly articulate the division
of responsibilities among different supervisory, regulatory and enforcement
authorities.
 The rights of shareholders and key ownership functions: The corporate
governance framework should protect and facilitate the exercise of
shareholders’ rights.
 The equitable treatment of shareholders: The corporate governance
framework should ensure the equitable treatment of all shareholders, including
minority and foreign shareholders. All shareholders should have the opportunity
to obtain effective redress for violation of their rights.
cont…

 The role of stakeholders in corporate governance: The corporate

governance framework should recognise the rights of stakeholders
established by law or through mutual agreements and encourage
active co-operation between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound enterprises.
 Disclosure and transparency: The corporate governance framework
should ensure that timely and accurate disclosure is made on all
material matters regarding the corporation, including the financial
situation, performance, ownership, and governance of the company.
 The responsibilities of the board: The corporate governance
framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the board’s
accountability to the company and the shareholders.
Elements of Good Corporate Governance

 Good Board Practices

 Control Environment
 Transparent Disclosure
 Well-defined shareholder rights
 Board Commitment
Theories of Corporate Governance
 Agency Theory
 Stewardship Theory
 Resource Dependency Theory
 Stakeholder Theory
 Transaction Cost Theory
 Political Theory
Agency Theory
 defines the relationship between the principals (such as
shareholders of company) and agents (such as directors of
company).
 According to this theory, the principals of the company hire the
agents to perform work. The principals delegate the work of
running the business to the directors or managers, who are agents
of shareholders.
 The shareholders expect the agents to act and make decisions in
the best interest of principal. On the contrary, it is not necessary
that agent make decisions in the best interests of the principals.
Cont…

 The management should act in best interest of company’s

shareholders who are having ownership in business.
 It tends to resolve the disputes between the shareholders and
management.
 Principals delegate decision making authority to agents because
many decisions that affect the principal financially are made by
the agent, conflict of interest can arise. This is some times
referred to as agency problem.
AGENCY PROBLEM

 Agency problem refers to the conflict between the

managers and shareholders where shareholders if not
given dividend and share value tends to remain stagnant
for long in the market may feel that managers are driven
by their self interest and may not be acting in best
interest of shareholders.
 Aligning managerial incentive with shareholders' interest is
the key to solve this problem. Incentive in form of shares
would make managers aim towards maximizing of share
value.
Stewardship Theory
 The steward theory states that a steward protects and maximises
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.
 Developed by Donaldson & Davis focusses on understanding the
existing relationships between ownership and management of the
company.
 Managers are considered as steward which means that someone
is responsible to protect and act in the best interest of
shareholders.
Cont…
 It is opposite to agency theory which mentions the conflict of interest between
managers and shareholders.
 Managers are considered as committed to business, responsible, working towards
accomplishment of vision, mission of organization.
 They are the one who brings out collectivism in organization and align everyone’s
objective for the growth of the business.
 Focusses on recognizing various groups in the organization and empowers with
motivation and delegation of work.
 Balances all stakeholders and add significant value to organization reputation.
 There exist a strong relationship between managers and success of the organization
 Stewards tries to maximize shareholders wealth by constantly increasing profitability
and efficiency of the business.
 More control and restrictions over managers may lower their motivation & hence turn them out
unproductive since they take most of the strategic decisions for growth of business in long run.
Stakeholder Theory

 Stakeholder theory incorporated the accountability of

management to a broad range of stakeholders.
 It states that managers in organizations have a network of
relationships to serve – this includes the suppliers, employees
and business partners.
 The theory focuses on managerial decision making and interests
of all stakeholders have intrinsic value, and no sets of interests is
assumed to dominate the others
Resource Dependency Theory

 focuses on the role of board directors in providing access to resources

needed by the firm. It states that directors play an important role in
providing or securing essential resources to an organization through
their linkages to the external environment.
 The provision of resources enhances organizational functioning, firm’s
performance and its survival. The directors bring resources to the firm,
such as information, skills, access to key constituents such as suppliers,
buyers, public policy makers, social groups as well as legitimacy.
 Directors can be classified into four categories of insiders, business
experts, support specialists and community influentials.
Transaction Cost Theory
 Transaction cost theory states that a company has number of contracts within
the company itself or with market through which it creates value for the
company.
  "make or buy" decision
 Transaction cost theory (Wiliamson) was first discussed in the context of the
decision by a firm whether to do something in-house or to outsource.
 High transaction costs for outsourcing may suggest an in-house solution whereas
low transaction costs for outsourcing would support the argument to outsource.
 Political Theory: brings the approach of developing voting support from
shareholders, rather by purchasing voting power. It highlights the allocation of
corporate power, profits and privileges are determined via the governments’
favour.
CORPORATE GOVERNANCE MODELS

 a) The Anglo-American Model

 b) Model from Germany
 c) Japanese Model
 d) Model of Social Control
 e) Model from India.
The Anglo-American Model

 Shareholder’s rights were recognized and they are given power

to elect all the board members.
 Board members directs the management of the company
 They have the right to elect all the members of the Board and
the Board directs the management of the company.
German Model
 This is also called European Model. It is believed that workers are one
of the key stakeholders in the company and they should have the right
to participate in the management of the company.
 The corporate governance is carried out through two boards, therefore
it is also known as two-tier board model. These two boards are:
 Supervisory Board: The shareholders elect the members of Supervisory
Board. Employees also elect their representative for Supervisory Board
which are generally one-third or half of the Board.
 Board of Management or Management Board: The Supervisory Board
appoints and monitors the Management Board. The Supervisory Board
has the right to dismiss the Management Board and re-constitute the
same.
Japanese Model
 Japanese companies raise significant part of capital
through banking and other financial institutions.
 Since the banks and other institutions stakes are very high
in businesses, they also work closely with the management
of the company.
 The shareholders and main banks together appoint the
Board of Directors and the President.
 In this model, along with the shareholders, the interest of
lenders is recognised.
Indian Model

 Formulated including combined features of American,

German and Japanese models.
 Financial disclosure, greater transparency and
independent scrutiny of corporate accounts was
emphasized.
 MAJOR CORPORATE
GOVERNANCE FAILURE
 ENRON
 The Enron scandal, which broke out in October 2001, eventually led to the bankruptcy of the Enron
Corporation, an American energy company based in Houston, Texas. It was the largest bankruptcy
reorganization in American history at that time.
 The primary reason for the failure of Enron was attributed to an audit failure. The problem faced by
Enron was despite having structures and mechanisms in place for good corporate governance. Nobody
flaunted and flouted these rules and regulations! The board of directors turned a blind eye to open
violation of the code. Particularly, when it allowed the CFO to serve in special purpose entities(SPEs).
The auditors failed to prevent suspect and questionable accounting. The auditors did not even examine
the SPE transactions.
 Enron shareholders filed a $40 billion lawsuit after the company’s stock price fell. It achieved a high of
US$90.75 per share in mid-2000, plummeted to less than $1 by the end of November 2001. On
December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code.
As a result of the scandal, the US
government introduced new
regulations and legislation to expand
the accuracy of financial reporting for
public companies. The Sarbanes-Oxley
Act was introduced as a result of the
Enron scandal. It increased penalties
for destroying, altering, or fabricating
records in federal investigations or for
attempting to defraud shareholders.
It also increased the accountability of
audit firms to remain unbiased and
independent of their clients.
 SATYAM
 Satyam began facing problems from December the 16th, 2008. Its chairman Mr Ramalinga
Raju, in a surprise move announced a $1.6 billion bid for two Maytas companies. He wanted
to deploy the cash available for the benefit of investors. Raju’s family promoted and
controlled the two companies.
 The share prices plunged 55% voicing concern towards Satyam’s poor corporate governance.
They overturned the decision in 12 hours. This resulted in the resignation of several
independent directors of the firm. Thus, this resulted in a further fall in the share prices of
Satyam.
 On 7th January 2009 B Ramalinga Raju, the founder of Satyam Computer Services, confessed
to a Rs 7,000-crore  balance sheet fraud . He had hidden it from the IT company’s board,
employees and auditors for several years. He revealed in his confession that his attempt to
buy Maytas companies was his last attempt to “fill fictitious assets with real ones”.
The government reacted to the
fraud by overhauling the regulatory
framework.It introduced the new
Companies Act 2013, which fixed
liabilities of auditor and
independent directors, among
other changes. In 2014, market
regulator SEBI amended Clause 49
of listing guidelines to improve
corporate governance.
BCCI
https://slideplayer.com/slide/5089182/
CONCLUSION
 Corporate governance is critical issue faced by all
companies. The above cases highlight the fact that poor
corporate governance can lead to a downfall of the
largest companies. Regulatory bodies have increased
their scrutiny on the firms are under increased scrutiny
by regulatory bodies which increases the importance of
good governance. Digital solutions can help firms
implement a robust governance mechanism to help
significantly reduce risk of governance failure.