CORPORATE

GOVERNANCE

CS AMANDEEP CHUGGA
AGENDA OF UNIT 1
 Corporate Governance: An Overview
 Definition of Corporate Governance
 Need of Corporate Governance
 Scope of Corporate Governance
 Participants to Corporate Governance
 Importance and Benefits of Corporate Governance
 Role of Corporate Governance
 OECD Parameters and Principles
 Issues involved in Corporate Governance
 INTRODUCTION 3

Corporate Governance is “the conduct of business in

accordance with shareholders’ desires, which generally
is to make as much money as possible, while
conforming to the basic rules of the society embodied in
law and local customs.”

- Noble Laureate Milton Friedman

 INTRODUCTION 4

When combined, Corporate Governance means a set of systems,

procedures, policies, practices, standards put in place by a corporate to
ensure that relationship with various stakeholders is maintained in
transparent and honest manner and business is conducted ethically.

Corporate or a Corporation The root of the word

is derived from the Latin Governance is from
term “corpus” which means ‘gubernate’, which means
a “body”. to steer.

Governance means
administering the processes and
systems placed for satisfying
stakeholder expectation.
 5

 “Corporate Governance is the application of best management practices,

compliance of law in true letter and spirit and adherence to ethical
standards for effective management and distribution of wealth and
discharge of social responsibility for sustainable development of all
stakeholders.” The Institute of Company Secretaries of India

 “Corporate Governance is about promoting corporate fairness,

transparency and accountability”. James D. Wolfensohn (Ninth
President World Bank)
 ADVANTAGES OF CORPORATE 7

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. There is a positive impact on the share price.
4. It provides proper inducement to the owners as well as managers to achieve objectives that
are in interests of the shareholders and the organization.
5. Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
6. It helps in brand formation and development.
7. It ensures organization is managed in a manner that fits the best interests of all.
8. It reduces cost and aids in long term sustenance and growth of the Company.
 NEED FOR CORPORATE GOVERNACE 8

Better Access to Global

Corporate Performance Enhanced Investor Trust
Market

Enhancing Enterprises Easy Finance from

Combating corruption
valuation Institutions

Reduced Risk of
Corporate Crisis and Accountability
Scandals
(a) Corporate Performance 9
• Improved governance structures and processes ensure quality decision-making.
• It encourages effective succession planning for senior management and enhance the long term prosperity of
companies.

(b) Enhanced Investor Trust

• As individuals and institutions invest capital directly or through intermediary funds, they look to see if well- governed
corporate boards are there to protect their interests.
• Investors who are provided with high levels of disclosure and transparency such as relating to data on matters such as
pay governance, pay components, performance goals, and the rationale for pay decisions etc. are likely to invest openly
in those companies.

(c) Better Access to Global Market

• Good corporate governance systems attract investment from global investors, which subsequently leads to greater
efficiencies in the financial sector.
• International flows of capital enable companies to access financing from a much larger pool of investors.
• Adherence to good corporate governance practices helps improve the confidence of domestic investors, reduces the cost
of capital, enables good functioning of financial markets and ultimately leads to more stable sources of finance.
(d) Combating Corruption
• Corporate Governance enables a corporation to compete more efficiently and prevent fraud and malpractices 10

within the organization.

(e) Easy Finance from Institutions

• Well-governed companies receive higher market valuations.
• The credit worthiness of a company can be trusted on the basis of corporate governance practiced in the company.

(f) Enhancing Enterprise Valuation

• Improved management accountability and operational transparency fulfill investors’ expectations and confidence on
management and corporations, and in return, increase the value of corporations.

(g) Reduced Risk of Corporate Crisis and Scandals

• Effective Corporate Governance ensures efficient risk mitigation system in place.
• A transparent and accountable system makes the Board of a company aware of the majority of the risks involved in a
particular strategy.

(h) Accountability
• Investor relations are essential part of good corporate governance.
• Good Corporate Governance practices create the environment whereby Boards cannot ignore their accountability to these
stakeholders.
 SCOPE OF CORPORATE GOVERNANCE
1. Preparation of company’s financial statements: Financial disclosure is a very important and critical component of
corporate governance. The company should 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.

2. Internal controls and the independence of entity’s auditors: Internal control is implemented by the board of directors,
audit committee, management, and other personnel to provide assurance of the company achieving its objectives related
to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors, who are
given responsibility of testing the design and implementing the internal control procedures and the reliability of its
financial reporting, should be allowed to work in an independent environment.

3. Review of compensation arrangements for chief executive officer and other senior executives: Performance-based
remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or
non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however,
are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can
elicit myopic behaviour.
 SCOPE OF CORPORATE GOVERNANCE

4. The way in which individuals are nominated for the positions on the board: The Board of Directors have the power to
hire, fire and compensate the top management. The owners of a business who have decision-making authority, voting
authority, and specific responsibilities, which in each case is separate and distinct from the authority, and responsibilities of
owners and managers of the business entity.

5. The resources made available to directors in carrying out their duties: The duties of the directors are the fiduciary
duties similar to those of an agent or trustee. They are entrusted with adequate power to control the activities of the company.

6. Oversight and management of risk: It is important for the company to be fully aware of the risks facing the business and
the shareholders should know that how the company is going to tackle the risks. Similarly the company should also be aware
about the opportunities lying ahead.
 PARTICIPANTS TO CORPORATE
13

GOVERNANCE

GOVERNING OR
REGULATORY CEO BOD MANAGEMENT STAKEHOLDERS
BODY
 ROLE OF CORPORATE GOVERNANCE 14

The role of effective corporate governance is of immense significance to the society as a whole. It can be summarized
as follows:

1. Corporate governance ensures the efficient use of resources.

2. It makes the resources flow to those sectors or entities where there is efficient production of goods and services

and the return is adequate enough to satisfy the demands of stakeholders.

3. It provides for choosing the best managers to administer scarce resources.

4. It helps managers remain focused on improving performance and making sure that they are replaced when they

fail to do so.

5. It pressurizes the organization to comply with the laws, regulations and expectations of society.

6. It assists the supervisor in regulating the entire economic sector without partiality and nepotism.

7. It increases the shareholders’ value, which attracts more investors. Thus, corporate governance ensures easy
 ROLE OF CORPORATE GOVERNANCE 15

8. As corporate governance leads to higher consumer satisfaction, it helps in increasing market share and sales. It also

reduces advertising and promotion costs.

9. Employees are more satisfied in organizations that follow corporate governance policies. This reduces the employee

turnover, which results in the reduction in the cost of human resource management. Only a satisfied employee can

create a satisfied customer.

10. Corporate governance reduces the procurement and inventory cost. It helps in maintaining a good rapport with

suppliers, which results in better and more economical inventory management system.

11. Corporate governance helps in establishing good rapport with distributors providing not only better access to the

market, but also reducing the cost of production.

 16

Should Corporate
Governance be Voluntary
or Mandatory ?
 OECD PARAMETERS AND 17

PRINCIPLES
 The Organization for Economic Cooperation and Development (OECD) laid down some principles of corporate
governance.
 Good corporate governance is not an end in itself. It is a means to create market confidence and business integrity, which
in turn is essential for companies that need access to equity capital for long term investment.
 Access to equity capital is particularly important for future oriented growth companies and to balance any increase in
leveraging.
 The Principles provide guidance through recommendations and annotations across six chapters

I. Ensuring the basis for an effective corporate governance IV. The role of stakeholders in corporate governance
framework

II. The rights and equitable treatment of shareholders and key V. Disclosure and transparency
ownership functions

III. Institutional investors, stock markets, and other VI. The responsibilities of the board
intermediaries
1.ENSURING THE BASIS FOR AN EFFECTIVE CORPORATE
GOVERNANCE FRAMEWORK
The corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources. It
should be consistent with the rule of law and support effective supervision and enforcement:

A. The corporate governance framework should be developed with a view to its impact on overall economic performance, market integrity and the
incentives it creates for market participants and the promotion of transparent and well-functioning markets.

B. The legal and regulatory requirements that affect corporate governance practices should be consistent with the rule of law, transparent and
enforceable.

C. The division of responsibilities among different authorities should be clearly articulated and designed to serve the public interest.

D. Stock market regulation should support effective corporate governance

E. Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfil their duties in a professional and
objective manner. Moreover, their rulings should be timely, transparent and fully explained.

F. Cross-border co-operation should be enhanced, including through bilateral and multilateral arrangements for exchange of information.
2.THE RIGHTS AND EQUITABLE TREATMENT OF SHAREHOLDERS AND
KEY OWNERSHIP FUNCTIONS

A. Basic shareholder rights should include the right to: ownership registration, transfer of shares, dividend, voting right, to
receive material information

B. Shareholders should be sufficiently informed about, and have the right to approve or participate in, decisions
concerning fundamental corporate changes

C. Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and
should be informed of the rules, including voting procedures, that govern general shareholder meetings

D. Shareholders, including institutional shareholders, should be allowed to consult with each other on issues
concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse.
E. All shareholders of the same series of a class should be treated equally. Capital structures and arrangements that enable
certain shareholders to obtain a degree of influence or control disproportionate to their equity ownership should be disclosed.

F. Related-party transactions should be approved and conducted in a manner that ensures proper management of
conflict of interest and protects the interest of the company and its shareholders.

G. Minority shareholders should be protected from abusive actions by, or in the interest of, controlling
shareholders acting either directly or indirectly, and should have effective means of redress. Abusive self
dealing should be prohibited.

H. Markets for corporate control should be allowed to function in an efficient and transparent manner.
 3.Institutional investors, stock markets, and other intermediaries
The corporate governance framework should provide sound incentives throughout the investment chain and provide for stock
markets to function in a way that contributes to good corporate governance:
A. Institutional investors acting in a fiduciary capacity should disclose their corporate governance and voting policies with
respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights.

B. Votes should be cast by custodians or nominees in line with the directions of the beneficial owner of the shares.

C. Institutional investors acting in a fiduciary capacity should disclose how they manage material conflicts of interest that may
affect the exercise of key ownership rights regarding their investments.

D. The corporate governance framework should require that proxy advisors, analysts, brokers, rating agencies and others that
provide analysis or advice relevant to decisions by investors, disclose and minimize conflicts of interest that might
compromise the integrity of their analysis or advice.

E. Insider trading and market manipulation should be prohibited and the applicable rules enforced.

F. For companies who are listed in a jurisdiction other than their jurisdiction of incorporation, the applicable corporate
governance laws and regulations should be clearly disclosed. In the case of cross listings, the criteria and procedure for
recognizing the listing requirements of the primary listing should be transparent and documented.

G. Stock markets should provide fair and efficient price discovery as a means to help promote effective corporate governance.
4. The role of stakeholders in corporate governance

The corporate governance framework should recognise the rights of stakeholders established by law or through mutual
agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises:

A. The rights of stakeholders that are established by law or through mutual agreements are to be respected.

B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for
violation of their rights.

C. Mechanisms for employee participation should be permitted to develop.

D. Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and
reliable information on a timely and regular basis.

E. Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their
concerns about illegal or unethical practices to the board and to the competent public authorities and their rights should not be
compromised for doing this.

F. The corporate governance framework should be complemented by an effective, efficient insolvency framework and by
effective enforcement of creditor rights.
5. Disclosure and transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters
regarding the corporation, including the financial situation, performance, ownership, and governance of the company:

A. Disclosure should include, but not be limited to, material information on:
1. The financial and operating results of the company.
2. Company objectives and non-financial information.
3. Major share ownership, including beneficial owners, and voting rights.
4. Remuneration of members of the board and key executives.
5. Information about board members, including their qualifications, the selection process, other company directorships and
whether they are regarded as independent by the board.
6. Related party transactions.
7. Foreseeable risk factors.
8. Issues regarding employees and other stakeholders.
9. Governance structures and policies, including the content of any corporate governance code or policy and the process by
which it is implemented.
B. Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and
non-financial reporting.

C. An annual audit should be conducted by an independent, competent and qualified, auditor in accordance with high-quality
auditing standards in order to provide an external and objective assurance to the board and shareholders that the financial
statements fairly represent the financial position and performance of the company in all material respects.

D. External auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional
care in the conduct of the audit.

E. Channels for disseminating information should provide for equal, timely and cost-efficient access to relevant information
by users
 6.The responsibilities of the board
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of
management by the board, and the board’s accountability to the company and the shareholders:

A. Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the
company and the shareholders.

B. Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly.

C. The board should apply high ethical standards. It should take into account the interests of stakeholders.

D. The board should fulfil certain key functions, including:

 Reviewing and guiding corporate strategy
 Monitoring the effectiveness of the company’s governance practices and making changes as needed.
 Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.
 Overseeing the process of disclosure and communications.
E. The board should be able to exercise objective independent judgement on corporate affairs.

F. In order to fulfil their responsibilities, board members should have access to accurate, relevant and timely information.

G. When employee representation on the board is mandated, mechanisms should be developed to facilitate access to
information and training for employee representatives, so that this representation is exercised effectively and best contributes to
the enhancement of board skills, information and independence
THANK YOU