Chapter 1 corporate governance overview

Corporate Governance
Corporate governance is the combination of rules, processes or laws by which businesses are
operated, regulated or controlled.
 The term encompasses the internal and external factors that affect the interests of a
company’s stakeholders, including shareholders, customers, suppliers, government
regulators and management.
 The board of directors is responsible for creating the framework for corporate
governance that best aligns business conduct with objectives.
 Specific processes that can be outlined in corporate governance include action plans,
performance measurement, disclosure practices, executive compensation decisions,
dividend policies, procedures for reconciling conflicts of interest and explicit or implicit
contracts between the company and stakeholders.
 An example of good corporate governance is a well-defined and enforced structure that
works for the benefit of everyone concerned by ensuring that the enterprise adheres to
accepted ethical standards, best practices and formal laws. Alternatively, bad corporate
governance is seen as poorly-structured, ambiguous and noncompliant, which could
damage the image or financial health of a business.

Objectives of Corporate Governance

 To align corporate goals of its stakeholders (society,shareholders,etc.)

 Corporate governance a way of Life rather than a Code
 To strengthen corporate functioning and discourage mismanagement
 To achieve corporate goals by making investment in profitable investment outlets.
 To specify responsibility of the B.O.D and managers in order to ensure good
corporate performance.
 There is a global consensus about the objective of ‘good’ corporate governance:
maximising long-term shareholder value

Corporate Governance is a system of structuring, operating and controlling a company

with the following specific aims:—
(i) Fulfilling long-term strategic goals of owners;
(ii) Taking care of the interests of employees;
(iii) A consideration for the environment and local community;
(iv) Maintaining excellent relations with customers and suppliers;
(v) Proper compliance with all the applicable legal and regulatory requirement
Principles of corporate governance:
While corporate governance structure may vary, most organizations incorporate the
following key elements:
• All shareholders should be treated equally and fairly. Part of this is making sure
shareholders are aware of their rights and how to exercise them.
• Legal, contractual and social obligations to non-shareholder stakeholders must be upheld.
This includes always communicating pertinent information to employees, investors,
vendors and members of the community.
• The board of directors must maintain a commitment to ensure accountability, fairness,
diversity and transparency within corporate governance. Board members must also possess
the adequate skills necessary to review management practices.
• Organizations should define a code of conduct for board members and executives, only
appointing new individuals if they meet that standard.
• All corporate governance policies and procedures should be transparent or disclosed to
relevant stakeholders.

Conflict management in corporate governance:

One purpose of corporate governance is to implement a check and balances system that
minimizes conflicts of interest. Conflicts typically arise when two involved parties have
opposing opinions on the way the business should be conducted. Since a board of directors
is typically a mix of internally and externally involved members, corporate governance is a
non-biased way to approach conflict. Conflicts could occur when executives disagree with
shareholders. For example, the shareholders will typically want to solely pursue interests
that generate profit while the chief executive officer might want to invest in better
employee engagement efforts. Another type of conflict could arise if multiple shareholders
disagree with each other. It would be the role of corporate governance to define how these
matters are settled.

Regulation of corporate governance:

Corporate governance has received increased attention because of high-profile scandals
involving abuse of corporate power or alleged criminal activity by corporate officers.
Therefore, laws and regulations have been passed to address the components of corporate
governance.
• Sarbanes-Oxley Act: This act was passed after it was found that high-profile companies
and their executives were committing fraud. As a result, emphasis was placed on corporate
governance as a way to restore faith in public companies.
• Gramm-Leach-Bliley Act: This act regulated the ways that financial institutions handled
privation information, making it crucial for corporate governance to include how to oversee
financial organizations and stakeholders.
• Basel II: This is a business standard that minimizes the financial effect of risky operational
 decisions. The rights of shareholders are covered under this standard, thus affecting
corporate governance
.
Example of Corporate Governance PepsiCo
It's common to hear of bad corporate governance examples, mainly because it is the reason
some company's blow up and end up in the news. It's rare to hear of companies with good
corporate governance because it is the good corporate governance that keeps them out of
the news as no scandal has occurred. One company that has consistently practiced good
corporate governance and seeks to update it often is PepsiCo. In drafting its 2020 proxy
statement, PepsiCo took input from investors to
focus on six areas:
• Board composition, diversity, and refreshment, and leadership structure
• Long-term strategy, corporate purpose, and sustainability issues
• Good governance practices and ethical corporate culture
• Human capital management
• Compensation discussion and analysis
• Shareholder and stakeholder engagement
The company included in its proxy statement a side-by-side graphic that depicted the
current leadership structure, which shows a combined chair and CEO along with an
independent presiding director, and a link between the compensation of the company's
"Winning With Purpose" vision and changes to the executive compensation program

Benefits of Corporate Governance:

1. Good corporate governance ensures corporate success and economic growth.
2. Strong corporate governance maintains investors’ confidence, as a result of which,
company can raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve objectives
that are in interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.

Importance of Corporate Governance:

 It shapes the growth and future of capital markets of the economy
 It helps in raising funds from capitals markets
 It links company’s management with its financial reporting system.
 It improves efficiency and effectiveness of the enterprise and wealth of the economy
  It improves international image of the corporate sector and enables home
companies to raise global
 It help management to take innovative decisions for effective functioning of the
enterprise

Corporate Governance models:

MODEL 1
In the first version of McKinsey’s model called “The Market Model” governance chain,
there are efficient, well-developed equity markets and dispersed ownership, something
common in the developed industrial nations such as the US, UK, Canada and Australia.
Corporate governance is basically how companies deal fairly with problems that arise from
“separation of ownership and effective control.” This model illustrates conditions and
governance practices that are better understood and appreciated and as such highly
valued by sophisticated global investors

Model 2
In the second version of McKinsey’s model called “The Control Model,” governance chain
is represented by
Underdeveloped equity markets, concentrated (family) ownership, less shareholder
transparency and inadequate protection of minority and foreign shareholders, a paradigm
more familiar in Asia, Latin America and some east European nations. In such transitional
and developing economies there is a need to build, nurture and grow supporting
institutions such as a strong and efficient capital market regulator and judiciary to enforce
contracts or protect property rights

Corporate mis governance:

Reasons of corporate Mis governance: