Corporate Governance

What is Corp Gov? Y is it Important? Who is responsible for delivering it?How is it diff frm Corp Mngmt? Corporate governance is the system by which businesses are directed and controlled. CG means setting up systems, procedures and institutions that ensure that management acts in the best interests of the long term sustainability of the business. The fundamental objective of good corporate governance is to strike a balance at all times between needs to enhance shareholders wealth not being detrimental to the interest of the other stakeholders.

Corporate governance is the system by which business corporations are directed and contained. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decisions on corporate affairs. By doing this it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance

Importance of Corporate Governance

1. Ensures that a company is managed in the best interest of the shareholders & other stakeholders. 2. Good corporate governance ensures corporate success and economic growth. 3. Helps to ensure that an appropriate & adequate system of controls operates within a company hence assets may be safeguarded. 4. Strong corporate governance encourages both transparency & accountability which helps maintain investors confidence, as a result of which, company can raise capital efficiently and effectively. 5. It lowers the capital cost. 6. There is a positive impact on the share price. 7. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. 8. Good corporate governance also minimizes wastages, corruption, risks and mismanagement. 9. It helps in brand formation and development.

Who is responsible for delivering corporate governance?

A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organisation's strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organisation to its owners and authorities.

Corporate governance and Corporate management

Corporate management is the general process of making decisions within a company. Corporate governance is the set of rules and practices that ensure that a corporation is serving all of its stakeholders. For example, a corporate management team might decide that a company should purchase a new headquarters; a corporate governance policy would require that the company's CEO does not have a relative work as the real-estate broker on that transaction. Corporate governance differs from corporate management in that governance is primarily about protecting a business, while management is more about growing it. Governance refers to the policies and procedures set in place to ensure a business operates within the law and for the optimal benefit of all stakeholders. Management refers to the techniques executives use to help the company operate and flourish.

Role/Functions of the Board:

1. Exercise accountability to shareholders and be responsible to relevant stakeholders The board of directors is appointed to act on behalf of the shareholders to run the day to day affairs of the business. The principal role of the board of directors is to oversee the function of the organization and ensure that it continues to operate in the best interests of all stakeholders. The directors must periodically report the activities and programs of the company in a transparent manner to the stakeholders.

2. Set strategy and structure Review and evaluate present and future opportunities, threats and risks in the external environment and current and future strengths, weaknesses and risks relating to the company. Determine strategic options, select those to be pursued, and decide the means to implement and support them. Determine the business strategies and plans that underpin the corporate strategy. Ensure that the company's organisational structure and capability are appropriate for implementing the chosen strategies.

3. Delegate to management

Delegate authority to management, and monitor and evaluate the implementation of policies, strategies and business plans. Determine monitoring criteria to be used by the board. Ensure that internal controls are effective. Communicate with senior management. Boards must take a hard look at its own performance evaluation and enable continuous feedback and communication cycle.

4. Ensure that risk management systems are in place & working An organizations success is, in large part, driven by how wisely it takes risks and how effectively it manages the risks it faces. The board sets the tone of the organizations risk culture. The board cannot and should not be involved in actual day-to-day risk management. Directors should instead, through their risk oversight role, satisfy themselves that the risk management processes designed and implemented by executives and risk managers are adapted to the boards corporate strategy and are functioning as directed, and that necessary steps are taken to foster a culture of riskadjusted decision-making throughout the organization.

5. Reviewing and approving the use of organizational resources

Monitor major capital expenditure Ensure timely and accurate disclosures on all material matters regarding the corporation, including the financial situation Monitor and avoid abuse in related party transactions. Avoid misuse of corporate assets. Onus of compliance to all applicable laws

Role/ Functions of Management:

1. Assisting the board in its decision making process in respect to strategy, policies, code of conduct and performance targets by providing necessary inputs. 2. Implementing the policies and the code of conduct as laid down by the board. 3. Managing the day to day affairs of the co. to maximize the shareholder value. 4. Providing timely, accurate information on financial matters to the board, board committees and the shareholders 5. Ensure compliance of all regulations and laws. 6. Setting up and implementing an effective internal control system. 7. Co-operating and facilitating efficient working of board committees. 8. It recommends to the board, its plans on M&A, divestment, new markets etc and implement the same after the boards approval.

Board v/s Management

Management acts, the Board oversees. In most circumstances, the board plays an oversight role. However, depending on the issue or the companys situation, the role of the board can swing from overseer to active participant. Typically, we see boards more actively involved in strategy and CEO succession while management is actively involved in operations and planning. Its important that board members and executive management agree on how involved the board will be in key areas.

Audit Committee
Audit Committee of the Board forms a bridge between the board, internal auditors and the external independent auditors. It overseas/ supervises the audit function in addressing the issue of financial reporting in a transparent manner.

Importance:
The audit committee is established with the aim of enhancing confidence in the integrity of an organizations processes and procedures relating to internal control and corporate reporting including financial reporting. Audit Committee provides an independent reassurance to the board through its oversight and monitoring role. Among many responsibilities the boards entrust the Audit Committee with the transparency and accuracy of financial reporting and disclosures, effectiveness of external and internal audit functions, robustness of the systems of internal audit and internal controls, effectiveness of anti-fraud, ethics and compliance systems, review of the functioning of the whistleblower mechanism. Audit Committee may also play a significant role in the oversight of the companys risk management policies and programs.

Functions: 1. Transparency and accuracy of financial reporting and disclosures Oversight of the companys financial reporting process and the disclosure of the financial information with the assurance that the same are correct, sufficient and credible. Reviewing with management the annual financial statements before submission to the board, focusing primarily on; Any changes in accounting policies and practices. Qualifications in draft audit report. Significant adjustments arising out of audit Compliance with accounting standards. Compliance with stock exchange and legal requirements concerning financial statements. Any related party transactions that may have potential conflict with the interests of company at large. 2. Effectiveness of external and internal audit functions Recommending the appointment and removal of the external auditors Fixation of audit fee and approval of payment of any other fee. Discussion with the external auditors before the audit commences, of the nature and scope of the audit. Also post audit discussion to ascertain any area of concern.

3. Robustness of the systems of internal audit and internal controls Reviewing with the management , external and internal auditors the adequacy of internal control systems. Discussion with internal auditors of any significant findings and follow up thereon. 4. Effectiveness of anti-fraud, ethics and compliance systems Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or failure of internal control systems and reporting the matter to the board. Review of the functioning of the whistleblower mechanism 5. Oversight of the companys risk management policies and programs Reviewing with the management the companys financial and risk management policies. Looking into the reasons for substantial defaults in the payments to the depositors, debenture holders, (in case of non- payment of declared dividends) and creditors.

What do shareholders expect from external statutory auditors

External Statutory auditor performs the certification of the financial reports of the corporations. The external auditor completes a review of the companys financial situation and its annual financial statements. The auditor then signs off on the companys annual statements with the report findings. This external report is usually included within the companys annual report to its shareholders.

Non Executive Director A member of a company's board of directors who is not part of the executive team. They are not employees of the company or affiliated with it in any other way and are differentiated from inside directors. A non-executive director (NED) typically does not engage in the day-to-day management of the organization, but is involved in policy making and planning exercises. In addition, nonexecutive directors' responsibilities include the monitoring of the executive directors, and to act in the interest of any stakeholders. Difference between Non-executive and Independent director Non-executive directors are the custodians of the governance process. They are not involved in the dayto-day running of business but monitor the executive activity and contribute to the development of strategy. Independent directors are directors who do not have any other material or pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, except sitting fees
Non-executive directors are allowed to hold shares in the company while independent directors are not

Role of Independent directors (6)

Independent directors are thought to bring with them a number of advantages, including independence in their views and the ability to bring an outside perspective into the board meetings. They are expected to be independent from the management and act as the trustees of shareholders. This implies that they are obligated to be fully aware of and question the conduct of organizations on relevant issues. The IDs can play the crucial role of bringing objectivity to the decisions made by the board of directors by playing a supervisory role. While they need not take part in the companys day-today affairs or decision making, they should ask the right questions at the right time regarding the boards decisions. Raising the appropriate red flags at the right time would help them in avoiding the occurrence of unwanted situations and their consequences to a great extent. Further, as their primary function is to comment on corporate strategy and to direct general policy and overall supervision of the company, they can help to provide effective leadership. Independent directors also aid in the balancing of the interests of the shareholders, employees and creditors. This balancing role is particularly important in situations where conflicts arise between the interests of the executive directors and the shareholders, for example, in a management buy out scenario. The presence of independent directors serves in bringing about impartiality in the board as a whole.

OECD principles of corporate governance

The OECD (Organization for Economic Co-operation and Development) Principles of Corporate Governance adopted in 1999 and expanded in 2004, have become an international benchmark for policymakers, investors, corporations and other stakeholders worldwide. They are recognised by the Financial Stability Board as one of the 12 key standards for international financial stability and form the basis for the corporate governance component of the World Bank Report on the Observance of Standards and Codes. The principles are non-binding and intended to assist member and non-member governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries and to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance. As such, the Principles are intended to provide a set of guidelines for the implementation of an effective corporate governance framework; not only for companies themselves but rather for an entire system of legislation, regulation and guidelines. The basic areas addressed are: Ensuring the basis for an effective corporate governance framework The rights of shareholders and key ownership functions The equitable treatment of shareholders The Role of Stakeholders in Corporate Governance Disclosure and transparency The Responsibilities of the board

Corporate governance issues in family owned business (9)

Family firms have a lower market value than non-family firms Investors, both shareholders and creditors may look with distrust on family-controlled companies, because of the risk that the controlling family may abuse the rights of other non-family shareholders. The stock market reacts negatively to the appointment of family heirs as managers. Family control exhibits weaknesses when descendants are involved in top management. Family firms face challenge of attracting good specialists to assume management positions. They face even more difficulties in retaining such qualified professionals. Quite often, especially during the early, start-up stages of the family business, the company and family relationships are not clearly distinguished. This is particularly true with respect to financial relations and accounts i.e. the companys and familys assets are not legally separated. This causes problems in distinguishing company-owned assets, and how company owned assets can be used by the family as a shareholder. Existing governance-related policies are informal, as a general rule. Such common understandings may not be as universally-held or understood. As a result, there could be some uncertainty or misunderstanding on the part of external investors and non-family employees. Weaknesses in governance systems of family businesses are most evident in internal controls, internal audit and risk management. Since many family businesses are managed by the founders or their children, the control environment is largely tailored to their needs. These controls do not grow along with the company, as the business becomes more complex. This gap is a primary area of concern for external investors Conflicts among the siblings who run the business or misunderstandings between different family branches may spill over to the companys domain and create problems for other shareholders.

Solution: (6) Separate functions of ownership, control and management Create family offices to clarify the boundaries between the familys and companys accounts Develop the skills and knowledge of heirs so they can become responsible owners, as they can assume various roles as an owner, director or an employee The family council, created to address family issues should remain completely separate from the board of directors and from shareholders meetings, both of which focus on company-related decisions. The family can create a liquidity fund, which could be used by the family to redeem the shares of family members who wish to pursue their own interests outside of the family business. The presence of independent directors can reinforce the boards mediating role. Independent directors can provide an outside, objective perspective for business decision-making. They can act independently to resolve conflicts of interest

Triple bottom line reporting

The TBL is an accounting framework that incorporates three dimensions of performance: social, environmental and economic. This differs from traditional reporting frameworks as it includes ecological (or environmental) and social measures that can be difficult to assign appropriate means of measurement. The TBL dimensions are also commonly called the three Ps: people, planet and profits or the 3 pillars Environmental Measures or Planet It refers to sustainable environmental practices. A TBL company endeavors to benefit the natural order as much as possible or at the least do no harm and minimise environmental impact by, carefully managing its consumption of energy and non-renewables and reducing manufacturing waste as well as rendering waste less toxic before disposing it in a safe and legal manner. Social Measures or People It pertains to fair and beneficial business practices toward labour and the community and region in which a corporation conducts its business. It could include measurements of education, equity and access to social resources, health and well-being, quality of life, and social capital. Economic Measures or Profit Profit is the economic value created by the organization after deducting the cost of all inputs, including the cost of the capital tied up. Within a sustainability framework, the "profit" aspect needs to be seen as the real economic benefit enjoyed by the host society. It therefore differs from traditional accounting definitions of profit. It is the real economic impact the organization has on its economic environment.

Ethics and Corporate Governance

Business ethics and corporate governance are two significant factors that impact a company and how it operates. Business ethics represent the values, principles or characteristics that a company follows when conducting business in the economy. Corporate governance is the internal framework that a company designs and implements to govern and protect those invested into the company. The relationship between ethics and governance comes from an organizations owner or executive managers, who create the governance and decide which ethical principles employees will follow. Corporate governance is a term used to describe the structure of organizations that guides the running of the organization by those in charge. The role of business ethics in corporate governance refers to the manner in which ethics is applied during the process of running or administering the organization. Business ethics in corporate governance can be applied in the way the management of the organization, deals with both internal and external issues. An example of the role of business ethics in corporate governance is the way in which the management of a company deals with the issue of the selection of employees. The ethical manner of selecting employees should be based on criteria that include the possession of the necessary human capital, rather than on superficial attributes, such as nationality or physical attractiveness. Business ethics in corporate governance can also be seen in the manner of remuneration that the company uses to compensate the employees for their services to the organization. The question would be whether the company applies the same schedule or rate of remuneration for deserving employees. For example, some companies might adopt different schedules for offering bonuses and other types of remuneration to certain categories of employees, while ignoring other equally deserving employees. Business ethics in corporate governance can also be seen in the manner in which the management of a company relates with individuals and external businesses, such as distributors, consumers and business partners. It may also be applied to the manner in which a company relates with host communities and the society at large. One of the ethical considerations that the management of an organization must necessarily address is the issue of responsible corporate behavior, including topics like giving back to the community and ensuring that they do not pollute the environment unnecessarily directly or indirectly through its own actions or the actions of any entity affiliated to it.

Five Golden Rules of best corporate governance practices are:

1. Ethics: Business needs to be truly acting in a way which goes beyond purely profit-based motivations, towards a model which works for everyone An ethical approach is fundamental to sound business practice as it underpins the structures and systems used to ensure good governance and without it governance will fail. So business morality or ethic must permeate an organisation from top to bottom and embrace all stakeholders. 2. Align Business Goals: The business should be targeting an appropriate and achievable goal which properly reflects the expectations of the stakeholders. The Goal must have been arrived at after due consideration of all the interests concerned, and an appropriate weighting which recognizes that the various stakeholders have different claims on the organisation.

3. Strategic management: Good corporate governance requires an effective strategic management process to be in place which incorporates stakeholder value. Good corporate governance is, or should not just be about compliance and risk management, but more positively, good strategic management. Any successful organization requires high and disciplined level of planning. Any failure in strategic management within the organization will lead to the failure of the essential structure and visibility required to achieve goals and avoid pitfalls.

4. Organisational Effectiveness: The organisation should be framed to embody the most appropriate shape and style of management to achieve success, and that it is constructed to serve the needs of all the key stakeholding groups. With an inappropriate organisation in place, the goal will not be achieved, and the approach to business will be vulnerable to a falling short in ethical behaviour. Furthermore, any relationship between the way the business is being run and the expectations of the various non-managerial stakeholders will be purely coincidental. 5. Reporting: Effective systems of stakeholder communication should be in place to ensure transparency and accountability. From finding out what stakeholders think of the company to disclosing full details of how it is run, communication plays a vital role throughout. The only way to judge if the whole company and its culture is ethical and well run for all the stakeholders, is by talking and listening to all the stakeholders. This needs a monitoring and reporting system which is connected directly to the stakeholders upon whom the success depends. A good system provides the instruments whereby management and all the other stakeholders can be made aware of the progress in implementing the agreed strategy.

Sustainable Development
Sustainable development refers to the attempt to balance todays business practices while maintaining the environment for future generations. It requires aligning economic success with environmental and social responsibility which will ensure long-term business success. Growing environmental concerns, coupled with public pressure and stricter regulations, are changing the way people do business across the world. Industry is on a three-stage journey from environmental compliance, through environmental risk management, to long-term sustainable development strategies. The aim is to seek win-win situations which can achieve environmental quality, increase wealth, and enhance competitive advantage. Companies integrate sustainable development into their business strategies as a natural extension of many corporate environmental policies. In the pursuit of economic, environmental and community benefits, management considers the long-term interests and needs of the stakeholders. Sustainable development strategies uncover business opportunities in issues which, earlier might be regarded as costs to be borne or risks to be mitigated. Results include new business processes with reduced external impacts, improved financial performance, and an enhanced reputation among communities and stakeholders. For the business enterprise, sustainable development means adopting strategies and activities that meet the needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the human and natural resources that will be needed in the future.

Business Ethics
Definition
The study of proper business policies and practices regarding potentially controversial issues, such as corporate governance, insider trading, bribery, discrimination, corporate social responsibility and fiduciary responsibilities.

A few different business ethics theories exist, such as the utilitarian, rights, justice, common good and virtue approach. The most basic business ethics concepts can be summed up as the values of honesty, integrity and fairness.

Excuse #1: There are situations when its okay to lie, cheat or steal. Excuse #2: The world has changed its values, so I must change mine too. Excuse #3: Everyone else is doing it, so I must do it in order to compete. Excuse #4: Its legal. So its ethical. Excuse #5: A leader cannot be ethical and successful at the same time.

whistle blowing policy

An important aspect of accountability and transparency is a mechanism to enable all individuals to voice concerns internally in a responsible and effective manner when they discover information which they believe shows serious malpractice.