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• Agency relationships occur when one partner in a transaction (the principal) delegates authority to another (the agent) and the welfare of the principal is affected by the choices of the agent
. • This separation of ownership from management causes conflict of interests of managers (agents) with the interests of the owners ( Shareholders).Divergence of Interest • The Concept of limited Liability in the corporate from organization has separated ownership and the management.
Agency Theory The following are the sources of conflicts. Decisions which puts managers job to risk are avoided. 2. Managers may work for their Individual objective. . 4. The managers may demand excessive remuneration. 3. Managers may act to enhance their personal reputation and not that of the firm. The managers may demand: 1.
• Monitoring expenditures by principals • Bonding expenditures by agents • Residual loss of the principal .Agency Costs Agency costs. incur to protect principal’s interests and to reduce the possibility that agents will misbehave.
-The Institute of Company Secretaries of India . Compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”.Corporate Governance What is Governance? “Corporate Governance is the application of best management practices.
CORPORATE GOVERNANCE CORPORATE MANAGEMENT External Focus Governance assumes an open system Internal Focus Management assumes a closed system Strategy-orientated Task-orientated Concerned with where the company is Concerned with getting the company going there .
National Regulatory Agencies. Professional Institutes. Industry Associations NGO Result of Appropriate Accountability & Responsibility to Stake holders & .Corporate Governance of an Organization Internal Governance Internal Control of Organisation External Governance Monitoring Systems International Agencies.
Constituents Of Corporate Governance • The Board of Directors • Pivotal role • Accountable to stakeholders • Directs management • The Shareholders & Stakeholders • To participate in appointment of directors • To hold the BoD accountable for governance through proper disclosures • The Management • To act on the direction of the BoD • To provide requisite information to the BoD for decision making • To implement and monitor control systems .
Internal audit 4. Supervisory board/committee/team 2. Disclosure of information 6. Audit committee 3. Risk management framework 7.Corporate Governance Frame Work 1. Statutory audit 5. Internal control framework .
Corporate Governance Accountability Responsibility Transparency Fairness Fundamental Pillars of Corporate Governance .
and supporting voluntary efforts to ensure the alignment of managerial and shareholder interests and monitoring by the board of directors capable of objectivity and sound judgment. Transparency Requiring timely disclosure of adequate information concerning corporate financial performance .Accountability Clarifying governance roles & responsibilities.
Responsibility Ensuring that corporations comply with relevant laws and regulations that reflect the society’s values Fairness Ensuring the protection of shareholders’ rights and the enforceability of contracts with service/resource providers .
Better societies.Why Corporate governance matters? • Enhances performance of companies • Enhances access to capital • Enhances long term prosperity. increasing oversight. • Provides a barrier to corrupt dealings. introducing Codes of Ethics etc • Impacts on the society as a whole: Better companies.limiting discretionary decision making. .
Problem of corporate governance • We lay structures over the corporate business. and fail to organize the business • Corporate Performance Management reports against overlaid structures • Accounting accounts for only part of the business cycle and against the wrong entities • We govern the corporation by rules and regulations. because we cannot manage the actual business .
Theories of Corporate Governance • Anglo-American model • German model of CG • Japanese model of CG .
Dr. • Also. the code was released. Bharat Forge. the Confederation of Indian Industry. unlike most OECD countries. the corporate governance initiative in India was not triggered by any serious nationwide financial. banking and economic collapse. ICICI and many others . over 25 leading companies voluntarily followed the code: Bajaj Auto. Nicholas Piramal. It was called Desirable Corporate Governance: A Code – Between 1998 and 2000. the initiative in India was initially driven by an industry association. Reddy’s Laboratories. Hindalco. BSES. Infosys.History Of Corporate Governance in India • Unlike South-East and East Asia. – In April 1998. HDFC.
around 4.000 crores without starting business – Misdeed of Companies • Plantation. Sheep rearing.000 • companies with 25. FDI 3) Impact of Privatisation – New structure of ownership – Multinational Companies . BPO etc. 2) Impact of Globalization – – – – Integration with Foreign Market Foreign Investors expectations New Business Opportunities --.IT & ITES..Driving Forces of CG in India 1) Unethical Business Practices – Security Scams ---Harshad Mehtha Security Scam • Equity allotments at discount rates to the controlling groups • Disappearance of Companies (1993-94) . etc. New Capital formation – FII.
The financial structure 4. The ownership structure 2.Factor influencing corporate governance 1. The structure of company boards 3. The institutional environment .
Corporate Mis-Governance .
which is based on the recommendations of the Kumaramangalam Birla Committee report. • Details of new appointees as directors shall be provided to the shareholders. • The remuneration paid to all directors shall be disclosed in the annual report.THE SEBI CODE The key elements of the SEBI code. the majority of them being independent. are as follows: • At least one-half of the board shall comprise of non-executive directors and at least one-third of the board shall comprise of independent directors. It shall meet at least thrice a year. • A Management Discussion and Analysis Report should form part of the annual report. • An audit committee of at least three non-executive directors shall be set up. • The auditors of the company should give a certificate regarding compliance on corporate governance. 21 / 32 . • The annual report shall have a section on corporate governance.
corporate observers. and management experts. journalists.EXECUTIVE COMPENSATION Executive compensation has become a very controversial issue. In contrast to the morass of unfounded charges and countercharges in which public debate has become entangled. and accounting have begun scientific enquiry into issues like : What are the sources of conflict between managers and shareholders? Why do executive compensation plans often fail to promote value creation? How should incentive compensation plans be designed to align the interests of managers with shareholders? 22 / 32 . researchers in the fields of economics. finance. It has generated a lot of debate among legislators. economists.
with very strong systems. E- • • • Respected across the country. ISO 9001 certified company offering information technology consulting & software services. At present having US 20.155 million and revenue of US 4.176 million. Infosys.Infosys Technologies: The Best among Indian Corporates • As per the Credit Lyonnais Securities Analysis (CLSA).4 billion market capitalisation. . • • Net income of US 1. the corporate governance ratings of the Software firms are higher than those of other Indian firms. Software Maintenance. based in Bangalore. high ethical values & a nurturing working atmosphere. Commerce & Internet Consulting. is a publicly held. The software offered include application development.
.Achievements • Voted as the Best Managed Company in Asia. • First to follow the US Generally Accepted Accounting Principles before going for Nasdaq listing in 1991. • Biggest exporters of Software. • Championed Corporate Governance in India.
Narayana Murthy’s Global Strategy 1) Global Delivery Model – Producing where it is most cost effective to produce & selling where it is most profitable to sell. Sustainability of Revenues. . 3) PSPD Model – Predictability of Revenues. Profitability. 2) Moving up the Value Chain – Getting involved in a software development project at the earliest stage of its life cycle. De-risking.
ICSI National Award for Excellence in Corporate Governance Best Governed Companies .
.Concluding Observations • • • Code of CG should be redesigned to reflect international best practices Stringent enforcement of Law More effective coordination and cooperation between SEBI. DCA • • • CG mechanism should be flexible and suitable Overall ethical values in all segments should be promoted for effective accounting. auditing. disclosure and transparent system.
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