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Submitted To:
Corporate Governance
Submitted By:
Prabal Pradhan
EMBA Fall 2015 Semester III
DEFINITION
Corporate governance is the set of processes, customs, policies, laws, and institutions
controlled.Corporate governance also includes the relationships among the many stakeholders
Interests of other stakeholders: Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders,
including employees, investors, creditors, suppliers, local communities, customers, and
policy makers.
Role and responsibilities of the board: The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate
size and appropriate levels of independence and commitment.
Disclosure and transparency: Organizations should clarify and make publicly known
the roles and responsibilities of board and management to provide stakeholders with a
level of accountability. They should also implement procedures to independently verify
and safeguard the integrity of the company's financial reporting. Disclosure of material
matters concerning the organization should be timely and balanced to ensure that all
investors have access to clear, factual information.
KEY PARTIES INVOLVED IN CORPORATE GOVERNANCE: -
The agency view of the corporation posits that the shareholder forgoes decision rights
(control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as a
result of this separation between the two investors and managers, corporate governance
mechanisms include a system of controls intended to help align managers' incentives with
those of shareholders. Agency concerns (risk) are necessarily lower for a controlling
shareholder.
Former Chairman of the Board of General Motors John G. Smale wrote in 1995: "The board
is responsible for the successful perpetuation of the corporation. That responsibility cannot be
relegated to management." A board of directors is expected to play a key role in corporate
governance. The board has responsibility for: CEO selection and succession; providing
feedback to management on the organization's strategy; compensating senior executives;
monitoring financial health, performance and risk; and ensuring accountability of the
organization to its investors and authorities. Boards typically have several committees (e.g.,
Compensation, Nominating and Audit) to perform their work.
The OECD Principles of Corporate Governance (2004) describe the responsibilities of the
board; some of these are summarized below:
Board members should be informed and act ethically and in good faith, with due
diligence and care, in the best interest of the company and the shareholders.
Review and guide corporate strategy, objective setting, major plans of action, risk policy,
capital plans, and annual budgets.
Select, compensate, monitor and replace key executives and oversee succession planning.
Align key executive and board remuneration (pay) with the longer-term interests of the
company and its shareholders.
Ensure a formal and transparent board member nomination and election process.
Ensure the integrity of the corporations accounting and financial reporting systems,
including their independent audit.
Where committees of the board are established, their mandate, composition and working
procedures should be well-defined and disclosed.
CORPORATE GOVERNANCE: EXTERNAL AND INTERNAL
FACTORS
The most prominent group of actors in corporate governance are the companys directors.
They can be either executive or non-executive directors (NEDs); the numbers and split of
executives to NEDs will partly depend upon the regulatory regime of the country. It is
generally the case that investors and regulators prefer there to be more NEDs, as their
independent scrutiny of the company, its controls and strategies, provide a more robust
governance structure. In a unitary board structure, all directors share legal responsibility for
company activities and all are accountable to the shareholders. In most countries, all directors
are subject to retirement by rotation, where they either step down or offer themselves for re-
election (by the shareholders) for another.Directors are collectively responsible for the
companys performance, controls, compliance and behaviour. This means that the board of
directors must discuss and agree strategies to maximize the long-term returns to the
companys shareholders. They must also comply fully with relevant regulatory requirements
that will include legal, accounting and governance-framework.
Company-secretary
In most countries, the appointment of a company secretary is a compulsory condition of
company registration. This is because the company secretary has important responsibilities in
compliance, including the responsibility for the timely filing of accounts and other legal
compliance issues. In addition to this responsibility for compliance with relevant laws and
regulatory frameworks, the company secretary often advises directors of their regulatory and
legal responsibilities and duties. His or her primary loyalty is always to the company. This
means that in any conflict with another member of the company (such as a director), the
company secretary must always take the side most likely to benefit the company (rather than
any single director).
The major roles include:
ensuring the timely and accurate filing of audited accounts and other documents to
statutory authorities (e.g. government companies agencies and tax authorities)
providing members (e.g. shareholders) and directors with notice of relevant meetings
organising resolutions for and minutes from major company meetings (like the AGM)
Sub-board-management: -
Sometimes referred to as middle management, managers below board level are a crucial
part of the governance system. It is the employees, led by sub-board management, that
implement strategies, meet compliance targets and collect the information and data on which
board-level decisions are made.
In terms of governance, trade unions are able to deliver the compliance of a workforce. If a
strategy needs a high level of commitment, a union can help to unite the workforce behind
the strategy and ensure everybody is committed to it. This can also mean that management
and workforce are seen as united by external stakeholders; this can make the achievement of
strategies more likely. By collective bargaining over pay and conditions, agreement usually
signifies that the workforce buys in to the agreed strategy or activity.
A trade union can be a key factor in the checks and balances of power within a corporate
governance structure. Where management abuses occur, it is often the trade union that
provides the first and most effective reaction against it; this can often work to the advantage
of shareholders, especially when the abuse has the ability to affect productivity. Unions are
often good at highlighting management abuses such as fraud, waste, incompetence and greed,
all of which are unhelpful traits in board members.
Linked to the above, trade unions help to maintain and control one of the most valuable assets
in an organisation, the employees. Where a helpful and mutually constructive relationship is
cultivated between union and employer, then an optimally efficient industrial relations
climate exists, thus reinforcing the productivity of human resources in the organisation. In
defending members interests and negotiating terms and conditions, the union helps to ensure
that the workforce is content and able to work with maximum efficiency and effectiveness.
EXTERNAL FACTORS
Shareholders
Shareholder and other investors (e.g. fixed-return bond-holders) are usually considered the
most important external actors in corporate governance. In the agency relationship that exists
between shareholders and directors, the shareholders are the principals. They have the right to
expect agents (directors) to act in their best economic interests and to observe a fiduciary
duty towards them.
Shareholders incur agency costs in monitoring the activities and actions of agents (directors).
These are the costs of monitoring and checking on directors behaviour. Examples of agency
costs are attending relevant meetings (AGMs and EGMs), studying company results and
analysts reports, and making direct contact with companies through investor relations
departments. When a shareholder holds shares in many companies, the total agency costs can
be prohibitive; shareholders therefore encourage directors rewards packages to be aligned
with their own interests so that they feel less need to continually monitor directors activities.
There are two types of shareholder: small investors and institutional investors. Small
investors are individuals who hold shares in unit trusts, funds and individual companies. They
typically buy, hold or sell small volumes and tend to have fewer sources of information on
companies than institutional investors. They also often have narrower and less robust
portfolios, which can mean that agency costs are higher, as the individuals themselves study
the companies they have invested in for signs of changes in strategy, governance or
performance.
Institutional investors are by far the biggest investors in companies, and they dominate the
share volumes on most of the worlds stock exchanges. Pension funds, insurance companies,
unit trust companies and similar financial institutions hold large numbers of shares in
individual funds with each fund being managed by a fund manager. Individuals, either
directly or through investment products (such as pensions or endowments) buy into
investment funds that are then managed, by selectively buying, holding or selling shares and
other investments. When the fund grows or reduces in value, the member gains or loses value
as a result. Fund managers do have some influence over the companies that they hold shares
in, with greater influence obviously being associated with higher proportionate holdings.
Fund managers need to be aware of the performance and governance of many companies in
their funds, so agency costs can be very large indeed. To reduce these, they make use of
information from several sources on the companies and also seek to have directors benefit
packages aligned with their own interests as much as possible.
Stock exchanges
Shares are bought and sold through stock exchanges. Each of the main international stock
exchanges keeps an index of the value of shares on that exchange; this is the most frequently
quoted number, referring to the total value of the shares on that exchange. In London, for
example, the FTSE All Share (Financial Times Stock Exchange) index is a measure of all of
the shares listed in London. In New York, it is the Dow Jones index and in Hong Kong, it is
the Hang Seng index.
The value of any share on a stock exchange is calculated continuously, based on the demand
and supply of that share. Demand for shares is driven by the expected future returns on that
share which, in turn, is driven by expected company performance. Information suggesting an
increase in performance will tend to increase demand for a given share; anything suggesting a
deterioration in performance will cause fewer shares to be demanded. The price of a share
rises and falls with supply and demand until the equilibrium price is achieved (when the same
number of shares is supplied and demanded). Any change in supply or demand will then
move the equilibrium price (i.e. the share price on the stock exchange).
In addition to listing, pricing and transacting share buying and selling, stock exchanges can
also have a role in the governance of the companies listed on the exchange. Listing rules are
sometimes imposed on listed companies and in many cases, listing rules concern governance
arrangements not covered elsewhere by company law. In the UK, for example, it is a stock
exchange requirement that listed companies comply with the Combined Code on Corporate
Governance: not a legal requirement but a stock exchange requirement. Other listing rules
concern reporting behaviour. In a rules-based jurisdiction, the law underpins corporate
governance and reduces the need for stock market listing rules.
Auditors
The most obvious role of auditors in corporate governance is to report to shareholders that,
having audited the companys accounts, the accounts are accurate (a true and fair view is the
term used in some countries). Audit is also a legal requirement in compliance with company
law as a condition of company registration and the granting of limited liability.
In some countries, this also applies to military equipment and medical supplies. When this is
the case, regulation typically applies to pricing and supply contracts. In some countries, many
large companies are owned, directly or indirectly, wholly or partially, by the host government.
Nationalised companies are part of the economic fabric of many developing countries but
tend to feature less prominently in more developed countries. It is generally believed that the
profit motive, created by the agency relationship in a conventional shareholderdirector
arrangement, creates and stimulates greater economic efficiency than in nationalised
companies.
Governments control corporate governance through the imposition of legislation and the
enforcement through a judiciary of common and statute laws. Although governments usually
have a range of political and social objectives in mind when controlling business, they also
rely heavily on tax revenues levied on company profits and, where relevant, sales and other
transaction taxes.
One reason for the deregulation of much economic activity is the need to increase tax
revenues and create employment by gaining the economic efficiencies offered by competition
and executive reward packages that are aligned to added shareholder value.
ROLE OF PROFESSIONALS
A company secretary is often call the conscience of the company so professional bodies must
be the conscience of the regulators and to a certain extent society in their areas of expertise
whether these are financial, construction, environmental fields or other areas. Only
professional bodies acting with their greatest asset integrity as their foundation stone can
perform such a role. In Corporate Governance, Role of professionals is as follows, Normally,
Role of professionals can be two types;
EXAMPLE:
Satyam scandal: Showed corporate governance can be Skin-deep It was dubbed Indias
Enron. The Rs. 7,000 crore frauds (it is now over Rs. 10,000crores and rising), the biggest in
Indias history, wiped off $2 billion worth shareholders wealth in the week that followed
Ramalinga Rajus riding a tiger not knowing how to get off without being eaten. It exposed
glaring shortcomings of corporate governance, threatening Indias appeal to foreign investors.
This is a lesson for corporate houses. In the new companies Act, we propose to give more
powers to independent directors.
WHY CORPORATE GOVERNANCE IS IMPORTANT?
Growing Number of Scams: In recent years, many scams, frauds and corrupt practices
have taken place. Misuse and misappropriation of public money are happening everyday
in India and worldwide. It is happening in the stock market, banks, financial institutions,
companies and government offices. In order to avoid these scams and financial
irregularities, many companies have started corporate governance.
Globalization: Today most big companies are selling their goods in the global market.
So, they have to attract foreign investor and foreign customers. They also have to follow
foreign rules and regulations. All this requires corporate governance. Without Corporate
governance, it is impossible to enter, survive and succeed the global market.
Takeovers and Mergers: Today, there are many takeovers and mergers in the business
world. Corporate governance is required to protect the interest of all the parties during
takeovers and mergers.
APPLE INC.
Apple is a multinational company that makes computer hardware (the Macintoshes), software
(OS X, iOS, watchOS and tvOS), and mobile devices (iPod, iPhone and iPad) like music
players. Apple calls its computers Macintoshes or Macs, and it calls its laptops MacBooks.
Their popular line of mobile music players is called iPod, their smartphone line is called
iPhone and their Tablet line is called iPad. Apple sells their products all around the world.
Apple Inc. used to be called Apple Computer, Inc., but Apple changed their name after
introducing the original iPhone.
Apple was started in 1976 by Steve Jobs and Steve Wozniak. Before they made the company,
they sold "blue boxes", which had telephone buttons on them. People could use them to make
telephone calls from pay phones without paying any money. It did this by pretending to be a
telephone operator. The company's first product is now called the Apple I computer. They
were almost ready to sell it, but a problem happened. Steve Wozniak was working for the
computer company Hewlett-Packard, and the papers that said he could work there said he had
to give everything he invented to the company before he could do what he wanted to do with
it. He showed the first Apple I to the boss at Hewlett-Packard, but they did not want his
computer. Wozniak was then free to do what he wanted to do with the Apple I. It began
selling in 1976. In 1977, they made their second computer, called the Apple II, which later
became very successful compared to Apple I.
CORPORATE GOVERNANCE AT APPLE INC.
The Board of Directors (the Board) of Apple Inc. (the Corporation) has adopted these
governanceguidelines. The guidelines, in conjunction with the Corporations articles of
incorporation, bylaws, andthe charters of the committees of the Board, form the framework of
governance of the Corporation. Thegovernance structure of the Corporation is designed to be
a working structure for principled actions,effective decision-making and appropriate
monitoring of both compliance and performance.
The Board oversees the Chief Executive Officer (the CEO) and other senior management in
thecompetent and ethical operation of the Corporation on a day-to-day basis and assures that
the long-terminterests of the shareholders are being served. To satisfy its duties, directors are
expected to take aproactive, focused approach to their position, and set standards to ensure
that the Corporation iscommitted to business success through the maintenance of high
standards of responsibility and ethics.
The Nominating and Corporate Governance Committee is responsible for reviewing the
qualifications ofpotential director candidates and recommending to the Board those
candidates to be nominated forelection to the Board. The Nominating and Corporate
Governance Committee will consider theindividuals background, skills and abilities, and
whether such characteristics qualify the individual tofulfil the needs of the Board at that time.
The Board should monitor the mix of skills and experience ofits directors in order to assure
that the Board has the necessary tools to perform its oversight functioneffectively.
Shareholders also may nominate directors for election at the Corporations annual meetingof
shareholders by following the provisions set forth in the Corporations bylaws. Candidates
should beselected for, among other things, their independence, character, ability to exercise
sound judgment,diversity, age, demonstrated leadership, skills, including financial literacy,
and experience in the contextof the needs of the Board.
It is the policy of the Corporation that the Board consist of at least a majority of independent
directorswho either meet or exceed the independence requirements of the National
Association of Securities Dealers Automated Quotations (NASDAQ) Stock Market.The
Board will consider all relevant facts and circumstances in making a determination of
independencefor each director and may consider, as appropriate, imposing independence
requirements morestringent than those required by NASDAQ.
Serving on the Corporations Board requires significant time and attention. Directors are
expected to spend the time needed and meet as often as necessary to discharge their
responsibilities properly. Adirector who also serves as the CEO of the Corporation should not
serve on more than two boards ofother public companies in addition to the Corporations
Board. Directors other than the CEO of theCorporation should not serve on more than four
boards of other public companies in addition to theCorporations Board.
The Board expects its directors, as well as officers and employees, to act ethically. Directors
are expected to adhere to the Corporations Business Conduct Policy and the Guidelines
Regarding Director Conflicts of Interest.
The Corporation will provide new directors with materials, briefings and additional
educational opportunities to permit them to become familiar with the Corporation and to
enable them to perform their duties. Directors also are encouraged to visit the Corporations
facilities and meet with Corporation employees throughout their tenure on the Board. In
addition, directors are encouraged to attend accredited director education programs at the
Corporations expense.
Directors serve for a one-year term and until their successors are elected. There are no limits
on the number of terms that a director may serve. The Board believes the Corporation
benefits from the contributions of directors who have developed, over time, increasing insight
into the Corporation. The Nominating and Corporate Governance Committee reviews
periodically the appropriateness of each directors continued service.
A director may not stand for re-election after age 75, but need not resign until the end of his
or her term.
A director who intends to resign or retire or refuses to stand for re-election to the Board must
submit written notice to the General Counsel of the Corporation. For resignations and
retirements, the director must state the effective date of the resignation or retirement. For
resignations, the director also must state that the director has no disagreement with the
Corporations operations, policies or practices or, if the director has such a disagreement, the
director must describe the disagreement. For refusals to stand for re-election, the director
must state when the election in question will occur.
Each director who retires or substantially changes his or her principal occupation or business
association from the position he or she held when initially elected to the Board shall tender
his or her resignation to the Board at the time of such change by sending written notice to the
General Counsel of the Corporation. The Board does not believe that a non-employee director
in this circumstance necessarily should be required to leave the Board. Instead, the Board
believes that the Nominating and Corporate Governance Committee should review each
situation and make a recommendation to the Board as to the continued appropriateness of
Board membership under the new circumstances.
The fundamental role of the directors is to exercise their business judgment to act in what
theyreasonably believe to be the best interests of the Corporation and its shareholders. In
fulfilling thatresponsibility, directors reasonably may rely on the honesty and integrity of the
Corporations seniormanagement and expert legal, accounting, financial and other advisors.
Annual Meeting Attendance: All directors are expected to attend the Corporations
annual meeting ofshareholders.
Scheduling of Board Meetings and Attendance: The Board will meet at least four times
per year. Directorsare expected to prepare for, attend and participate in all Board and
applicable committee meetings, andto spend the time needed to meet as often as
necessary to discharge their obligations properly.
Agenda: At the beginning of each year the Board will set, to the extent foreseeable and
practicable, aschedule of agenda items to be discussed during the year. Any director may
suggest items to beincluded on the agenda or raise subjects at a Board meeting that are
not on the agenda for thatmeeting. An agenda for each Board meeting, along with
information and data that is important to theBoards understanding of the business to be
conducted at the Board meeting, should be distributed todirectors in advance of the
meeting so that Board meeting time may be focused on questions that theBoard has about
the materials. Certain matters may be discussed at the meeting without
advancedistribution of written materials, as appropriate.
The Board expects to hold executive sessions without the presence of management, including
the CEOand other non-independent directors, at least four times per year. In general, the
Board reserves timefollowing each regularly scheduled meeting to allow the independent
directors to meet in executivesession. The executive sessions shall be led by the Chairman of
the Board if one has been elected. If aChairman of the Board has not been elected, the Board
will appoint a Lead Director or Co-Lead Directorsto conduct executive sessions and for such
other purposes as the Board finds appropriate. If more thanone Lead Director is appointed,
the Board may prescribe different responsibilities to each Co-LeadDirector.
The Board believes that management speaks for the Corporation. Individual directors
occasionally maymeet or otherwise communicate with various constituencies that are
involved with the Corporation, butit is expected that directors would do this with the
knowledge of management and, in most instances,absent unusual circumstances or as
contemplated by the committee charters, at the request ofmanagement.
Standing Committee Charters: Each standing committee will have its own charter. The
charter will setforth the purpose, authority and responsibilities of the standing committee
in addition to thequalifications for standing committee membership.
Meeting and Agenda: The chair of each standing committee will determine, in
consultation with theappropriate standing committee members and members of
management, and in accordance with thestanding committees charter, the frequency and
length of standing committee meetings and thestanding committees agenda. Each
standing committee will establish, to the extent foreseeable andpractical, a schedule of
agenda items to be discussed during the year. The schedule for each standingcommittee
will be furnished to the full Board.
Directors are encouraged to talk directly with any officer or employee of the Corporation.
Senior officersare invited to attend Board meetings from time to time to provide additional
insight into the itemsbeing discussed.
XVII. Director Compensation
The Compensation Committee will review the form and amount of director compensation
annually andrecommend any changes to the Board. Non-employee directors are expected to
receive a substantialportion of their annual retainer in the form of equity. Employee directors
are not paid additionalcompensation for their services as directors.
The Board should undertake an evaluation of the Board, its Committees and each member at
leastannually to determine whether it and its members and committees are functioning
effectively. TheNominating and Corporate Governance Committee is responsible for
coordinating and overseeing theannual Board evaluation process in accordance with the
charter and principles of that committee.
The Compensation Committee should conduct, and review with the Board, an annual
evaluation of theperformance of all executive officers, including the CEO. The Compensation
Committee is expected touse this review in the course of its deliberations when considering
the compensation of the CEO andsenior management. The Board also reviews the CEO
performance evaluation to ensure that the CEO isproviding effective leadership of the
Corporation. As part of the annual evaluation, the Board and theCEO should conduct an
annual review of management development and succession planning for seniormanagement,
including the CEO.