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
 Characteristics of corporation
• Limited liability
• Transferability
• Legal personality
• Centralised management
 CORPORATION
• PURPOSE OF CORPORATION
• Human satisfaction
• Social structure
• Efficiency and efficacy
• Ubiquity and flexibility
• Identity
 CORPORATION AS A
• Person

• Moral person

• Expectations of society

• Expectations of market
CORPORATE GOVERNANCE
• Issues
• Ethical issues
• Efficiency issues
• Accountability issues
• -takeovers, mergers,acquisitions,insider
trading , litigatations, restructuring of
boards, Auditing practices / changes if any
 CORPORATE GOVERNANCE
• 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 stakeholders
with 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 the
boundaries within which these functions are to
performed..
 Corp governance v/s Corp
management
• CORPORATE • CORPORATE
GOVERNANCE MANAGEMENT
• External focus • Internal focus
• Governance assumes • Management assumes
an open system a closed system
• Strategy oriented • Task oriented
• Concerned with where • Concerned with
the company is going getting the company
there
 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.
 Anglo-American model
Board of directors Shareholders
(Supervisors Elect
(owners)

Appoints and
supervises
Own
Creditors
Officers
Corporate
structures

(managers)

Lien Stakeholders
Manage

Hold
Stake
Company
Legal system
Structural
Framework
 German model of CG
Appoint
Supervisory 1/2
board
Appoints and Reports
Employees and
supervise to labor unions

Management
Corporate
structures

Board
(including labor
relations director

Independently
runs (day-to-
Appoint
day)
1/2
Shareholders
Company (own)
Own
 Japanese model of CG
Appoint
Supervisory
board
Ratifies Consults
Presidents Shareholders
decision
president
Own
Corporate
structures

Consults

Provides
Executive mgt managers Monitors
acts in
emergencies
Managers
Loans
company banks
 CORPORATE GOVERNANCE
CHARTER
• Board should have optimum combination of
executive and non-executive directors, with
half the board comprising of non-executive
directors
• FI’s do not seek a seat on the board to avoid
potential conflict of interest
• Chairman’s role should be different from
that of the CEO
 CORPORATE GOVERNANCE
CHARTER
• The board should have a qualified and
independent audit committee
• The board should set up a renumeration committee
for the policy specific renumeration package for
executive directors
• Board should clearly define the role of mgt
• Disclosure must be made by the management to
the board relating to all material , financial and
commercial transactions.
 CORPORATE GOVERNANCE
• Types of directors
• Executive directors
• Non-executive directors
• Nominee directors
• Representative directors
• Alternative directors
• Shadow directors
• Associate directors
CORPORATE GOVERNANCE
• 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
CORPORATE GOVERNANCE
• NON- EXECUTIVE DIRECTOR
• are outside directors
• Are not having any relationship with the
company in any materialsitic way, with the
promoters, its management and its
subsidiaries
• All information should be disclosed in the
annual report .
CORPORATE GOVERNANCE
• NOMINEE DIRECTORS
• Appointed by the banks,mutual funds, FI’s
to safegaurd the interest of these institutions
• Alongwith the other directors act in the
overall interests of the company
CORPORATE GOVERNANCE
• 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.
CORPORATE GOVERNANCE
• 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.
CORPORATE GOVERNANCE
• 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 is
exercised.
• Also called Associate director
CORPORATE GOVERNANCE
• TYPES OF BOARD STRUCTURES
• All executive board
• Majority executive board
• Majority outside board
• Two- tier supervisory board
CORPORATE GOVERNANCE
• 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.
CORPORATE GOVERNANCE
• 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
CORPORATE GOVERNANCE
• Non-exec directors act as a check on the
various 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. Directors
dominate and the boardroom becomes a
virtual battleground.
CORPORATE GOVERNANCE
• MAJORITY OUTSIDE BOARD
• The board has a majority of outside non-exec.
Directors
• Prevalent in NYSE listed cos.
• They represent the majority shareholders like FI’s
MF’s,Banks etc and hence the functioning
becomes questionable and debatable as also the
effectiveness and independence , since they are
related directly or indirectly to the company.
CORPORATE GOVERNANCE
• 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.
CORPORATE GOVERNANCE
• Advisory board
• Many cos. Appoint advisory directors for
specific issues / assignments.
• They have no executive powers vested in
them .
CORPORATE GOVERNANCE
• DESIGNING THE BOARD
• the board size- depends on the size of the
company may be a min 2 or maybe 20 or
more
• The role of the chairman / CEO--
• Many cos. Prefer the same personfor both
the positions
• Duality in company subsidiary board
CORPORATE GOVERNANCE
• Duality in company subsidiary board
• The subsidiary board witnesses a lot of
clashes many a times due to conflicts
especially if it is felt that the parent board is
using this as a cash cow to finance its needs.
• The directors performance are measured by
the heads at the parent cos.
CORPORATE GOVERNANCE
• BOARD STYLES
• Rubber stamp boards
• Representative boards
• Country club boards
• Professional boards
CORPORATE GOVERNANCE
• ROLE OF THE DIRECTORS
• Directors assumes the twin roles while
governing the activities of the company
• Performance Role

• Conformance Role
CORPORATE GOVERNANCE
• Performance Role
• To bring in the expertise ,knowledge,
special skills, networking ,representation
and adding status to the company
• Boosts the confidence of the shareholders
and stakeholders in general due to their
own position / influence in the society
CORPORATE GOVERNANCE
• CONFORMANCE ROLE
• the director plays the role of a watchdog
wherein it is ensured that the company
follows the stipulated rules / laws etc and
also ensures that the internal processes are
followed.
CORPORATE GOVERNANCE
• 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
CORPORATE GOVERNANCE
• ROLE OF THE CHAIRMAN
• Manage the board set standards & ensure
that the management puts in practice all
policies
• Address legal issues
• Should have a good understanding of the
financials & the direction in which the
company should head in future
CORPORATE GOVERNANCE
• Good relationship with the CEO , executive
directors and non-executive directors
• In terms of they reporting the matters and
advising 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
CORPORATE GOVERNANCE
• ROLE OF THE CEO
• Should establish a good and strong
working relationship with the chairman
building trust , confidence and good
communications
• Knowing the strengths and weaknesses of
the CEO the chairman also can work
towards the growth and development of the
organisation
CORPORATE GOVERNANCE
• FUNCTIONS OF THE CEO
• Assist the executive directors in strategic
areas & provide leadership & guidance to
all the stakeholders.
• Project the company in front of the media
and other stakeholders
• Intervene when required
CORPORATE GOVERNANCE
• 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
CORPORATE GOVERNANCE
• STRATEGIC ROLE OF THE BOARD
• Systematic level strategy
• Structural and portfolio strategy
• Implementation strategy
POLICY MAKING ROLE
• Monitoring and supervisory role
CORPORATE GOVERNANCE
• COMMITTEES OF THE BOARD
• Audit committee
• Renumeration committee
• Nomination committee
CORPORATE GOVERNANCE
CODES AND LAWS
SELF REGULATORY CODES
• Self regulation and self regulatory roles
• Easier to operate and implement
• Identification of complex problems at early
stage
CORPORATE GOVERNANCE
REPORT OF COMMITTEES ON CG
CADBURY COMMITTEE REPORT
• Decision making should not be a single authority
–CEO & 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
CORPORATE GOVERNANCE
• Term of directors should not exceed 3 yrs
and can be extended only with prior
approval of the shareholders
• Shd be full transperancy in matters relating
to direct emoluments-a mix of pay & perf
pay
• Renumeration committee of non-exec
directors should determine pay for directors
CORPORATE GOVERNANCE
• Interim company report should give balance
sheet info and should be reviewed by the
auditor
• Pension funds shd be managed seperately
• Professional and executive relationship bet
board and executives
• Info regarding audit fees should be made
public and auditors be changed periodically
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