13 Corp Gov - An Overview

8/12/2019 13 Corp Gov - An Overview

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Business Ethics

Corporate GovernanceAnOverview


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Capitalism

Corporate governance is seen as a solutionto the collapse of several high profile firms

The temptation to fudge accounts and takecredit for unearned profits is irresistible

A key problem is the failure of auditors tosafeguard the interest to shareholders

CEOs are now seen as villains who gambleaway the retirement savings of the public


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Reaction

The Surbanes-Oxley Act now requires CEOsand CFOs to swear before a notary thatresults have not omitted any material fact

This means that they are liable for civil andcriminal action in case of infringements


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India

Government corruption has diluted theaccountability of businessmen

PSU dominance and inefficiency ensures thatthe cost of misgovernance is passed to thepublic

Employees at all levels in PSUs are seen to

contribute to misgovernance

Comparatively only top management is seento be responsible for misgovernance in

private firms


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Series of Scams

Harshad Mehta scam in 1992 involved many banks and resulted in astockmarket crash

In 1991 MNCs consolidated their holdings by issuing equity tocontrolling groups at steep discounts

In 1993-94, 3911 companies that raised Rs.25000 crores vanished In 1995-96, plantation companies raised Rs.50000 crores and

vanished

In 195-98, PSU banks raised Rs.15000 crores by promising fixedreturns on MFs

In 1999-2000 many companies raised money by adding Infotechto their names and then vanished

In 2001 Ketan Parikh rigged prices by using a bear cartel

In 2009, Ramalinga Raju the CEO of Satyam siphoned off billions

into his own pocket


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Reasons for Misgovernance

A closed economy without modernregulations

Control by promoter families who own 3.3%of paid-up capital on average

Liberalization has forced a changed


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Increasing Awareness

In 1999 SEBI appointed the KumarMangalam Birla committee to mandateinternational standards of governance

By 2003 all listed companies joined the code

Economic shocks forced reform in developedcountries whereas liberalization was the

cause in India

Very few of the 100 top companies beforeliberalization survive today because of

misgovernance


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Global Concerns

Few issues are as important as corporategovernance

The Russian economy collapsed in 1998because of diversion of corporate assets bymanagers to the extent of $100b

The Asian crisis was also because of

corporate governance


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Corporate Governance

Deals with the agency problem

Focuses on

Internal structure and rules of the BLOD Creation of independent audit committees

Rules for disclosure of information toshareholders and creditors

Control of management


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Corp Governance Model

Shareholders elect directors to representthem

Directors vote on key issues and adoptmajority decision

Shareholders and others can hold directorsaccountable

Company adopts accounting standards togenerate information necessary for directorsand other stakeholders

Companys policies adhere to national, state


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McKinseys Model

Model 1Market Model

Well developed equity markets and dispersedownership

Corporate governance is basically how firms dealfairly with agency problems

Model 2Control Model

Underdeveloped equity markets, concentrated (family)

ownership, less transparency and inadequateprotection of minority and foreign shareholders

Grow supporting institutions like capital marketregulators and judiciary to enforce contracts and

property rights


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Concerns of Government

Management accountability

Investments in management

Discipline and replacement of bad management

Enhancing corporate performance

Transparency

Shareholder activism

Investor protection

Improving capital market access

Promoting long term investment

Encouraging innovation


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OECD Emphasis

Rights of shareholders

Equitable treatment of shareholders

Role of stakeholders in corporate governance Disclosure and transparency

Responsibilities of the board


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Rights of shareholders

Secure share ownership

Voting rights

Full disclosure

Participation in decisions on sale or any change inassets including mergers and new share issues

Know capital structure and arrangements that enablecertain shareholders to obtain disproportionate control

All transactions at fair prices and fair conditions Anti-takeover devices should not be used


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Equitable treatment of

shareholders

No undue difficulties in voting

Change in voting rights subject to approval byshareholders

Insider trading should be prohibited

Directors should disclose material interest intransactions

Avoid conflict of interest by directors

Interested directors should not participate indecisions that concern them


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Role of stakeholders in corp

gov

Allow employee representation on the BOD

Involve creditors in insolvency proceedings

Relevant information is a must forshareholder activism


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Disclosure and Transparency

Includes financial details, operating results,governance structure and policies, BOD andtheir remuneration, risk factors and material

information on employees and otherstakeholders

Annual audits by independent auditors in

accordance with high quality standards


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Responsibilities of BOD

Corporate strategy, risk, compensation andperformance, accounting and reporting


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Modern Corp Gov

Started with the Watergate scandal in the US

This resulted in regulations that preventedcorporations from making illegal political

contributions and bribery

Cadbury Committee appointed in the UK in 1991

Cadbury submitted a Code of Best Practices

which was not mandatory But LSE listing agreements required the annual

report to report on compliance and explainreasons for non-compliance


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Cadbury Aftermath

Requirement that directors should report on the effectiveness of thesystem of internal control beyond financial matters causedcontroversy

Further scandals resulted in the appointment of the Ron Hampel

committee This extended directors responsibilities to include risk assessment

and minimization of fraud risk

An earlier report by Greenbury addressed directors remuneration

Finally a Combined Code was added to the LSE listing agreement

Further report by Turnbull required confirmation that risk had beenmanaged and that an embedded risk management process was inplace


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Issues in Corp Gov

Distinguishing roles of BOD and management

Composition of the board

Separation of the roles of CEO and Chairperson

Should the board have committees Appointments to the BOD and re-election

Directors and executives remuneration

Disclosure and audit

Protection of shareholder rights and their expectations

Dialogue with institutional shareholders

Should investors have a say in CSR


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Distinguishing roles of BOD

and management

Select, decide remuneration, evaluate and change theCEO

Indirectly oversee the business and evaluate if it is being

correctly managed Review and approve financial objectives and plans

Render advice and counsel top management

Identify and recommend candidates for election to the

BOD Review systems to comply with all laws

All other functions required to be performed by law


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Composition of BOD

Optimum combination of executive and non-executive directors with not less than 50% ofnon-executives

If chairman is non-executive at least 1/3rdshould be independent directors andotherwise at least half should be independent


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Separation of CEO and

Chairperson

Combining results in conflicts in decisionmaking and concentration of power

The CEO leads management whereas thechairman leads the board

The board evaluates the CEO and socombining the roles results in conflicts of

interest Also the work load on both is heavy and so

combining the roles results in inefficiency


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Should the Board have

committees

They lessen the burden of the BOD

Many regulations require committees fornomination, remuneration and audit

Should have written terms of referenceoutlining authority and duties

Should have access to company executivesand outside expertise at company expense

Independent and experienced people shouldbe appointed to committees


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Appointments to BOD and re-

election

Shareholders elect directors but in practicethe nomination committee selects andappoints directors and gets him formally

elected by shareholders at the ensuing AGM

In fact, shareholders only endorse theappointment


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Directors and executives

remuneration

Shareholders are entitled to information ondirectors remuneration and its determination

Key issues

Transparency

Pay for performance

Process for determination

Severance payments Pensions for non-executive directors


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Disclosure and Audit

Lucid and balanced assessment of financialsituation through audited statements

Key issues

Should boards have audit committees

How to compose the audit committee

How to ensure auditor independence

What precautions to be taken Regulation regarding non-audit services

Should board formalize performance standards


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Protection of shareholder

rights and expectations

Should there be one share one vote

Should voting be by show of hands or by poll

Can resolutions be bundled Is shareholder approval required for all major

transactions


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Dialogue with institutional

shareholders

They should maintain regular contact

Should participate in AGMs and use votingrights

Should exercise all rights as owners

Should exercise interest in boardappointments

Should enhance standards of governanceinstead of simply selling shares whendissatisfied


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Should investors force CSR

Environment and economic gains are notcontradicting goals but contribute to long termperformance


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Relevance of Corp

Governance

Research shows that governance andperformance are correlated

Fis consider governance to be as importantas performance

Investors are prepared to pay a premium forgovernance


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Benefits to Society

Transparency brings benefits to all and preventssystematic banking crises

Research proves that strong protection of

minority shareholders leads to large and liquidcapital markets

Competitive capital markets promote

governance Transparency reduces corruption

Ensures that right business strategies, M&A forthe right reasons and performance based

compensation


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Benefits to Corporations

Creation and enhancement of competitiveadvantage

Prevents fraud and malpractice

Protects shareholders interests

Enhances enterprise value

Ensures compliance with laws


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13 Corp Gov - An Overview

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