Becg.l-8.Cg- Nature & Evolution of Cg

7/22/2019 Becg.l-8.Cg- Nature & Evolution of Cg

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Nature & Evolution of

Corporate Governance(Lesson-8: BECG)

Prof. C. Anand

Faculty IBS, Hyderabad


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Contents

This deals with:-

1. Definition of Corporate Governance (CG)

2. Nature of CG

3.

Evolution of CG4. Business Ethics and CG

5. Claims of various Stakeholders

6. Anticipating and Avoiding Unethical Consequences

7. Value Orientation of the Firm


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1. Definition of Corporate

Governance

Corporate Governance (CG) is defined as thesystems and frameworks by which organizationsare directed and controlled. CG is concernedwith standards, systems, processes, controls,

accountabilities and decision-making at the heartof, and at the highest levels of, an organization.

Good CG, and the guidance that comes with it,provides an organization with clearaccountabilities. Individual officers will have theconfidence to carry out their jobs efficiently andknow what standards are expected of them. Thisin turn leads to increased confidence in, and

respect for the work.


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CG is the system by which businesscorpoprations are directed and controlled. CGstructure specifies the distribution of rights andresponsibilities among different participants in thecorporation, such as, the board, managers,

shareholders and other stakeholders and spells outthe rules and procedures for making decisions oncorporate affairs. By doing this, it also providesthe structure through which the companyobjectives are set and the means of attaining thoseobjectives and monitoring performance..(OECD).


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1. Definition of Corporate

Governance (Contd.)

CG is the sum of those activities, which

make up the internal regulations of the

business in compliance with the obligationsplaced on the firm by legislation, ownershipand control. annonBehind the formal systems of

corporate governance lie the corevalues of an organization.


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2. Nature of Corporate Governance (CG)

CG is a set of structural arrangements that are emergingin free market economies to align the management ofcompanies with the interest of their shareholders (inparticular) and other stakeholders, and society at large.

CG addresses 3 basic issues: (i) Ethical Issues (Frauds,bribes, gifts,etc. to potential customers for achieving thegoal of maximizing long term owner value) ; (ii) EfficiencyIssues (concerned with performance of management); and(3) Accountability Issues (arising out of stakeholdersneed

for transparency of management in conduct of business.

Scope of CG: It is limited to ensuring stable income levels forshareholders.


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3. Evolution of CG

In the beginning (a few decades ago), the government wasexpected to ensure good CG and conduct. Most

shareholders believed that stringent government controls

would prevent malpractices of the corporations for fear of

punishment. However, there was soon a growing realization that Govt.

was not always the best guardian of public interest.

Shareholders began to feel the need for market driven CG

that would be more democratic and flexible. This led to thebirth of self-imposed CG within the corporate system. The

active participation of various stake holders like

shareholders, FIs, etc. have strengthened the CG

mechanism and helped to evolve beyond a set of static

rules.


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3. Evolution of CG (Contd.)

Factors that contributed to the evolution of

CG:

1. Responsibility for ensuring good corporateconduct shifted from Govt. to a free-

market economy.

2. Active participation of individual andinstitutional investors.

3. Increasing competition in global economy.


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The enhanced competition in the Globaleconomy has compelled corporations toperform better by going in for cost-cutting,

corporate restructuring, M&As, downsizing,etc. All these activities can be carried outsuccessfully only if there is proper CG.

Thus, market forces, active individual and

institutional investor participation, andenhanced competition have helped CG toevolve beyond a set of static rules.


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Evolution of CG in India:

In India, the concept of CG is still in nascent

stage. Recommendations of Kumaramangalam

Birla and CII Committees are the first steps

in India towards ensuring better CG. Prior to the above recommendations, SEBI

had taken various steps to strengthen CG in

India.


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Some of the steps of SEBI to strengthen CG:1. Strengthening of disclosure norms for IPOs

following the recommendations of Y H Malegam

Committee.

2. Providing information in directors Reports for

utilization of funds and variations between

projected and actual use of funds as per

Companies Act. (Cash Flow and Funds Flowstatements in Annual Reports)

3. Declaration of Quarterly Results


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4.Mandatory appointment of Compliance Officerfor monitoring the share transfer process andensuring compliance with various rules and

regulations.5.Timely disclosure of material and price

sensitive information (All material eventshaving bearing on performance of company)

6. Dispatch of one copy of Balance Sheet to everyHousehold and Abridged Balance Sheet to allshareholders.


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7. Issue of guidelines for preferential allotmentat market related prices

8. Issue of regulations providing for a fair and

transparent framework for takeovers andsubstantial acquisitions.


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4. Business Ethics and CG

Business Ethics:

It studies the moral

justification of economic

systems, whethernational or

international. Within a

given system it studies

the moral justification ofthe systems structures

and practices.

Corporate Governance:

It is the system by whichbusiness corporations aredirected and controlled. It

specifies the distribution ofrights and responsibilitiesamong different participantsin the corporation such as,the Board, managers,

shareholders and otherstakeholders, and spells outthe rules and procedures formaking decisions oncorporate affairs.


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The term Stakeholders refers to shareholders,employees, customers, suppliers, lenders andsociety at large. The primary purpose of anyorganization is to maximize the shareholder value.Paying attention to the needs and rights of all thestakeholders of a business is a useful way ofdeveloping ethically responsible behavior bymanagers. Ethical organization is one that

recognizes its responsibilities towards stakeholdersand considers their interest when taking managerialdecisions. Companies have responsibilities andobligations that extend beyond interests and needsof the shareholders.


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Hosmer proposed 5 managerialresponsibilities viz. Ethical, Conceptual,Technical, Functional and Operational.

Ethical responsibilities include the distributionof benefits and allocation of costs in amanner that is considered right, proper andjust by the stakeholders. Business has

responsibilities to a much wider range ofstakeholders than merely its shareholders,directors and creditors.

6 A ti i ti d A idi U thi l


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6. Anticipating and Avoiding Unethical

Consequences

Unethical Practice

(Behavior)

Impact on Decision

Maker

Likely result of the

behavior

Coercion Fear of harm

Alter decision choice

Increased product or

service quality

Deceptive Information False impression

Alter Decision choice

Reduced satisfaction.

Theft Lose resources Increased costs or

eliminate product orservice.

Bribery Unearned personal

gain

Alter decision choice

Increased Cost

Reduced product or

service quality.


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There is a growing recognition of the importance of

the relationship between the buyer and the seller and

the role of this relationship in aiding a firm to

become or remain competitive in todays global

market.

A firm with value orientation always tries to achieve

higher value for itself from time to time. It can be

customer-value orientation,market-value orientation

or even cultural-value orientation. A Businessscustomer- value orientation is the essence of market

orientation.


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Market-Value Orientation is moving less than the

organizationscultural value orientation.

Five of the most recognized cultural valuedimensions in the business literature are

individualism/collectivism, masculinity/femininity,

uncertainty avoidance, power distance, and time

orientation.

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