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CORPORATE GOVERNANCE

DEFINITION

various defns summarising it as non-entity

created / formed to generate profits /

employment etc for benefit of the society in

general

EVALUATION OF CORP STRUCTURE

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Characteristics of corporation

Limited liability

Transferability

Legal personality

Centralised management

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CORPORATION

PURPOSE OF CORPORATION

Human satisfaction

Social structure

Efficiency and efficacy

Ubiquity and flexibility Identity

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CORPORATION AS A

Person

Moral person

Expectations of society

Expectations of market

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Issues

Ethical issues

Efficiency issues

Accountability issues

-takeovers, mergers,acquisitions,insidertrading , litigatations, restructuring of

boards, Auditing practices / changes if any

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It is defined as a system of structuring , operating

and controlling a company with a view to achieve

long term strategic goals to satisfy all stakeholderswith the legal and regulatory requirements apart

from meeting environmental and local community

needs.it leads to the building of legal, commercial

and institutional framework It also demarcates theboundaries within which these functions are to

performed..

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Corp governance v/s Corp

management CORPORATE

GOVERNANCE

External focus Governance assumes

an open system

Strategy oriented

Concerned with wherethe company is going

CORPORATEMANAGEMENT

Internal focus Management assumes

a closed system

Task oriented

Concerned withgetting the companythere

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Theories of CORPORATE

GOVERNANCE Theory of Macgrgor based on theory X &Y

Theory of stewardship also based on the X & Y

theory Theory of agency-managers always do not think

of interest of company alone but also their own

interests hence they need to be controlled and

monitored to follow plans and policies of the

corporation.

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Anglo-American model

Shareholders

(owners)

Company

Officers

(managers)

Board of directors

(Supervisors

Creditors

Stakeholders

Legal systemStructuralFramework

Hold

Stake

Lien

Own

Elect

Appoints and

supervises

Manage

Corporate

structures

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German model of CG

Supervisory

board

Management

Board(including labor

relations director

Company

Employees and

labor unions

Shareholders

(own)

Appoints and

supervise

Reports

to

Appoint

1/2

Own

Independently

runs (day-to-

day)

Corporate

structures

Appoint

1/2

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Japanese model of CG

Supervisory

board

president

Executive mgt

company

Shareholders

banks

Ratifies

Presidents

decision

Consults

Appoint

Own

Provides

managersMonitors

acts in

emergencies

Loans

Managers

ConsultsCorporate

structures

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CHARTER Board should have optimum combination of

executive and non-executive directors, with

half the board comprising of non-executivedirectors

FIs do not seek a seat on the board to avoidpotential conflict of interest

Chairmans role should be different fromthat of the CEO

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CHARTER The board should have a qualified and

independent audit committee

The board should set up a renumeration committeefor the policy specific renumeration package forexecutive directors

Board should clearly define the role of mgt

Disclosure must be made by the management tothe board relating to all material , financial andcommercial transactions.

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Types of directors

Executive directors

Non-executive directors

Nominee directors

Representative directors

Alternative directors Shadow directors

Associate directors

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Executive director

Is a member of the board of directors

Is an executive of the company and bound

by the employment contract

Is appointed by the board of directors and is

responsible to the shareholders

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NON- EXECUTIVE DIRECTOR

are outside directors

Are not having any relationship with thecompany in any materialsitic way, with thepromoters, its management and its

subsidiaries All information should be disclosed in theannual report .

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NOMINEE DIRECTORS

Appointed by the banks,mutual funds, FIs

to safegaurd the interest of these institutions

Alongwith the other directors act in the

overall interests of the company

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REPRESENTATIVE DIRECTORS

Similar to the nominee directors

Safegaurd the overall interests of the

employees , shareholders, customers etc.

Act in the overall interests of the company.

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ALTERNATE DIRECTORS

Appointed as per the articles of association

to act as substitute in absence of original

directors

They enjoy all the powers of the directors

on the board.

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SHADOW DIRECTORS

Influence the decision of the board even

though they are formally not on the board Predominant in the family owned cos.

Can be held responsible in event of some

situations wherein their influence isexercised.

Also called Associate director

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TYPES OF BOARD STRUCTURES

All executive board

Majority executive board

Majority outside board

Two- tier supervisory board

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All executive board

Does not have even one outside director

Prevalent in family owned cos and

completely owned subsidiary cos.

Interests of the owner are safegaurded as

the directors are all members of the

management.

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MAJORITY EXECUTIVE BOARD

Executive directors are in the majority &

non-exec directors are in a minority

Non exec. Directors are appointed to

protect the interests of the shareholders etc.

Also to bring in the expertise and

knowledge in the company

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Non-exec directors act as a check on thevarious activities / decisions and also put

pressure on the other directors of the board. They are about one-third in number on the

board

The flaw in this that the exec. Directorsdominate and the boardroom becomes avirtual battleground.

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TWO TIER SUPERVISORY BOARD

It has 2 boards-the non-exec. Supervisory

and the exec. Management board

Supervisory board monitors the plans and

performances of the management board.

Can appoint / fire a CEO of the company

Adopted by EC unions and German cos.

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Advisory board

Many cos. Appoint advisory directors for

specific issues / assignments.

They have no executive powers vested in

them .

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DESIGNING THE BOARD

the board size- depends on the size of the

company may be a min 2 or maybe 20 ormore

The role of the chairman / CEO--

Many cos. Prefer the same personfor boththe positions

Duality in company subsidiary board

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Duality in company subsidiary board

The subsidiary board witnesses a lot of

clashes many a times due to conflictsespecially if it is felt that the parent board is

using this as a cash cow to finance its needs.

The directors performance are measured bythe heads at the parent cos.

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BOARD STYLES

Rubber stamp boards

Representative boards

Country club boards

Professional boards

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ROLE OF THE DIRECTORS

Directors assumes the twin roles while

governing the activities of the company

Performance Role

Conformance Role

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Performance Role

To bring in the expertise ,knowledge,

special skills, networking ,representationand adding status to the company

Boosts the confidence of the shareholders

and stakeholders in general due to theirown position / influence in the society

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CONFORMANCE ROLE

the director plays the role of a watchdog

wherein it is ensured that the companyfollows the stipulated rules / laws etc and

also ensures that the internal processes are

followed.

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RESPONSIBILITIES OF A DIRECTOR

Attend the board meetings and make

positive contribution

Not to misuse /abuse power,company assets

Maintain credibility

Protect interests of the creditors

Act in the best interests of the stakeholders

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ROLE OF THE CHAIRMAN

Manage the board set standards & ensure

that the management puts in practice allpolicies

Address legal issues

Should have a good understanding of thefinancials & the direction in which thecompany should head in future

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Good relationship with the CEO , executive

directors and non-executive directors

In terms of they reporting the matters andadvising on issues deemed to be in the best

interests of the organisation.

Act decisively in the time of crisis

Act as rep of the company

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ROLE OF THE CEO

Should establish a good and strong

working relationship with the chairmanbuilding trust , confidence and goodcommunications

Knowing the strengths and weaknesses ofthe CEO the chairman also can worktowards the growth and development of theorganisation

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FUNCTIONS OF THE CEO

Assist the executive directors in strategic

areas & provide leadership & guidance toall the stakeholders.

Project the company in front of the media

and other stakeholders

Intervene when required

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FUNCTIONS OF THE BOARD

Responsibility for the functions of the BoD

Provides strategic guidance to the company Provides timely & accurate reports on the

financial & non-financial indicators of the

company Plays the role of performance and

conformance

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STRATEGIC ROLE OF THE BOARD

Systematic level strategy

Structural and portfolio strategy

Implementation strategy

POLICY MAKING ROLE

Monitoring and supervisory role

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COMMITTEES OF THE BOARD

Audit committee

Renumeration committee

Nomination committee

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CODES AND LAWS

SELF REGULATORY CODES

Self regulation and self regulatory roles

Easier to operate and implement

Identification of complex problems at early

stage

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REPORT OF COMMITTEES ON CG

CADBURY COMMITTEE REPORT

Decision making should not be a single authorityCEO & Chairman should be diff

Non-exec directors should give independent

decisions on the matters entrusted

Majority of directors shd be independent and not

have financial interests in the company

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Interim company report should give balancesheet info and should be reviewed by the

auditor Pension funds shd be managed seperately

Professional and executive relationship betboard and executives

Info regarding audit fees should be madepublic and auditors be changed periodically

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Documents

ethics_CG