You are on page 1of 23

Internal corporate governance mechanism

Corporate Governance
A relationship among stakeholders used to determine and control the strategic direction and performance of organizations Concerned with making strategic decisions moreeffectively Used to establish order between a firms owners and its top-level managers whose interests may be in conflict

Corporate Governance mechanisms


Internal mechanism Board of Directors Functional Committees of Board Code of conduct whistle blowers. External mechanism Regulatory Oversight (Financial market regulator) Legal System (Company law, Bankruptcy law) Corporate Control activity Institutional investors (CalPERS, FIIs) Capital market access Rating Agencies External Auditors

Types of Directors
Executive Directors (Infosys) Non- Executive directors (Independent Directors and family members) (Hindalco board) Nominee Directors (Tata Power) Representative Directors for employees, suppliers (Cummins) Alternative directors (Patni) Shadow directors (Ranbaxy) Associate directors

Types of Board structure


All executive board (Most of the unlisted firms) Majority Executive board (family business firms) Majority outsider board - (Software companiesSatyam, Wipro) Two Tier structure Advisory board Murugappa Corporate Board

Issues in designing the board


The board size The role of chairman and CEO Duality of board membership in a subsidiary boards

Board Styles
Based on concern for relationship among directors and Concern for effective communication

Rubber stamp board (low, low) (fully owned subsidiaries) Country club board (high, low) Representative board (low, high) Professional board (high, high)

Role of directors
Performance role Provides specialized knowledge specialists Lawyers, Auditors, Academics (Infosys, RIL) Caters the needs of corporation for networking, representing and adding status

Role of directors
Conformance Role Ensure top management following policies and procedures laid down by the board

Responsibilities
Responsibilities to the shareholders Obligation to maintain honesty and integrity Proper presentation of documents and annual accounts

Duties of the directors


Exercise care in the discharge of functions as Directors Attend Board meetings and devote sufficient time and attention to the affairs of the company Not to be negligent and not to commit or let others commit tort-liable acts (Tort -wrongful act that causes injury to a person or property and for which the law allows a claim by the injured party to recover damages -money)

Duties of the directors


Not to misuse power Protect the interests of creditors and employees Maintain confidentiality Not to exercise power for a collateral purpose Not to waste company assets

Role of Chairman
Manage the board and conduct of meetings Good business and financial knowledge Maintain good relations with the Executive directors Independent directors and CEO

Role of CEO with respect to board


Good relationship with directors and Chairman Assist the executive directors in presenting the strategic proposals To present the company to the investors To act as a representative of executive directors while interacting with independent directors

Functions of the board


Strategic role Policy making role - Like code of conduct Monitoring and supervisory role

Committees of the board


Audit committee Compensation Committee Nomination committee Finance committee Investors grievance committee

Corporate Code
Corporate Codes are the policy statements which guides the behavior of employees based on the value systems of the company. The top management and board has the responsibility prepare the Corporate Code

Types of corporate codes


Compliance Code : Directive Statements which provide guidance and prohibit certain kind conduct Corporate Credos: The broad general statements of corporate commitments relating to constituencies, values and Objectives Management Philosophy Statements : The formal statements of companys value system

Types of Compliance code


Special documents Code of conduct Circulated letters about company policies for employees while dealing business partners

Code of Conduct
Companies' policy statements that define ethical standards for the employee conduct Code varies from company to company Can take a number of formats and address any issue like workers' rights, behavior with customers . Codes of conduct create a proper environment to help identify and reinforce within the firm those critical success factors which improve its capacity to compete in a rapidly changing environment.

Process of corporate code


Identification of key behavior developing the code Review Communicate the code Implement Update

Code of Conduct an example


Code of conduct @ Grasim Industries Ltd

Whistle Blowing
Whistle blowing - the deed of making exposures about the corporate fraud and corruption to the public in anticipation of implementing appropriate measures of correction. whistleblower - an employee, former employee, or member of an organization, especially a business or government agency, who reports misconduct to people or entities that have the power and presumed willingness to take corrective action. The misconduct which are reported, by and large, include an infringement of law, rule, regulation and/or a constant menace to public interest, such as health/safety violations, fraud and corruption.