CORPORATE GOVERNANCE

CORPORATE GOVERNANCEMahipal Singh KheecheeMBA 3 rd Sem.

INTRODUCTION

Corporate governance is "the system by which companies are directed and controlled". It involves regulatory and market mechanisms, and the roles and relationships between a companys management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees.

WHAT IS CORPORATE GOVERNANCECorporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. In simpler terms it means the extent to which companies are run in an open & honest manner.

SOME DEFINITIONS

Good corporate governance practices instill in companies the essential vision, processes, and structures to make decisions that ensure longer-term sustainability. More than ever, we need companies that can be profitable as well as achieving environmental, social, and economic value for society.

Good corporate governance is the glue that holds together responsible business practices, which ensures positive workplace management, marketplace responsibility, environmental stewardship, community engagement, and sustained financial performance. This is even more true now as we work worldwide to restore confidence and promote economic growth.

MAIN OBJECTIVE OF CORPORATE GOVERNANCETo make the markets safe and investors friendlyTo provide investor protectionTo empower the shareholdersTo provide greater value to their holdingsEnhance the performance of companiesEnhance access to capitalEnhance long term prosperityProvide barrier to corrupt dealingsImpacts on the society as a whole

CORPORATE GOVERNANCE

Fundamental Pillars of Corporate Governance

AccountabilityTransparencyResponsibilityFairnessAccountabilityClarifying governance roles & responsibilities, and supporting voluntary efforts to ensure the alignment of managerial and shareholder interests and monitoring by the board of directors capable of objectivity and sound judgment.

TransparencyRequiring timely disclosure of adequate information concerning corporate financial performanceResponsibilityEnsuring that corporations comply with relevant laws and regulations that reflect the societys values

FairnessEnsuring the protection of shareholders rights and the enforceability of contracts with service/resource providers

PRINCIPLES OF CORPORATE GOVERNANCEInterests of other stakeholdersRole and responsibilities of the boardIntegrity and ethical behaviorDisclosure and transparencyRights and equitable treatment of shareholders

PRINCIPLES PLAYERS OF CORPORATE GOVERNANCE

Management

Banks and lenders

Board of Directors

Shareholders

Suppliers

Employees

Environment & the community at large

Regulators

Customers

11-12-201410A BALANCING ACT

FACTORS AFFECTING CORPORATE GOVERNANCEREGULATION AND THERE ENFORCEMENT

Since corporate governance failures have proved to be harmful not just for the organizations but also for the economy and the general public at large as well, there have been public pressures on the government and regulatory authorities to reform business practices and increase transparency. Consequently, it has become a part of the governments duty to ensure accountability and responsibility in corporate behavior.Effective disposal of this responsibility basically revolves around two things:First, the designing of regulatory commands i.e. the regulations and laws to ensure good corporate governance; andSecond is the enforcement of regulations.

RISK MANAGEMENT AND EFFECTIVE GOVERNANCE

In todays world, frauds are an undeniable fact of business life. Affecting all types of businesses. New technologies such as the Internet, and the development of fully automated accounting systems, have increased the opportunities for fraud to be committed. requiring experience and technical skill and can be very costly. Thus, there is no doubtthat fraud is best prevented, rather than dealt with after the fact. The most effective and appropriate response to the problem of fraud involves a combination of risk management techniques.Once suspected or discovered, investigating fraud is a specialist taskMECHANISMS AND CONTROLS Internal corporate governance controlsMonitoring by the board of directorsInternal control procedures and internal auditorsBalance of powerRemuneration PerformanceMonitoring by large shareholdersBanks and other large creditors External corporate governance controlsCompetitionDebt covenantsDemand for and assessment of performance informationGovernment regulationsManagerial labor marketMedia pressureTakeoversIMPORTANCE OF CORPORATE GOVERNANCECorporate governance ensures that a properly structured Board, capable of taking independent & objective decisions is at the helm of affairs of the company. This lays down the framework for creating long-term trust between the company & external providers of capital.It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience & a host of new ideas.It rationalizes the management & monitoring of risk that a corporation faces globally.Corporate governance emphasizes the adoption of transparent procedures & practices by the Board, thereby ensuring integrity in financial reports.CONTD It inspires & strengthens investors confidence by ensuring that there are adequate number of non-executive & independent directors on the Board, to look after the interests & well-being of all the stakeholders. Corporate governance helps provide a degree of confidence that is necessary for the proper functioning of a market economy, as it contemplates adherence to ethical business standards. Finally, globalization of the market place has ushered in an era wherein the quality of corporate governance has become a crucial determinant of survival of corporate. ISSUES OF CORPORATE GOVERNANCE Internal controls and internal auditors The independence of the entity's external auditors and the quality of their audits Oversight of the preparation of the entity's financial statements Review of the compensation arrangements for the chief executive officer and other senior executives

ELEMENTS OF CORPORATE GOVERNANCE Good Board practices

Control Environment

Transparent disclosure

Well-defined shareholder rights

Board commitment

Good Board PracticesClearly defined roles and authoritiesDuties and responsibilities of Directors understoodBoard is well structuredAppropriate composition and mix of skills Appropriate Board proceduresDirector Remuneration in line with best practiceBoard self-evaluation and training conducted

Control EnvironmentInternal control proceduresRisk management framework presentDisaster recovery systems in placeMedia management techniques in useBusiness continuity procedures in placeIndependent external auditor conducts auditsIndependent audit committee establishedInternal Audit FunctionManagement Information systems establishedCompliance Function established

Transparent DisclosureFinancial Information disclosedNon-Financial Information disclosedFinancials prepared according to International Financial Reporting Standards (IFRS)Companies Registry filings up to dateHigh-Quality annual report publishedWeb-based disclosure

Well-Defined Shareholder RightsMinority shareholder rights formalizedWell-organized shareholder meetings conductedPolicy on related party transactionsPolicy on extraordinary transactionsClearly defined and explicit dividend policy

Board CommitmentThe Board discusses corporate governance issues and has created a corporate governance committeeThe company has a corporate governance championA corporate governance improvement plan has been createdAppropriate resources are committed to corporate governance initiativesPolicies and procedures have been formalized and distributed to relevant staffA corporate governance code has been developedA code of ethics has been developedThe company is recognized as a corporate governance leader

Other EntitiesCorporate Governance applies to all types of organizations not just companies in the private sector but also in the not for profit and public sectors

Examples are NGOs, schools, hospitals, pension funds, state-owned enterprises

CORPORATE GOVERNANCE IN INDIAThe Indian corporate scenario was more or less stagnant till the early 90s.

The position and goals of the Indian corporate sector has changed a lot after the liberalization of 90s.

Indias economic reform programmer made a steady progress in 1994.

India with its 20 million shareholders, is one of the largest emerging markets in terms of the market capitalization.

SECURITIES EXCHANGE BOARD OF INDIAOn April 12, 1988, SEBI was established with objective of protecting the rights of small investors and regulating and developing the stock markets in India.

In 1992, the Bombay Stock Exchange (BSE),the leading stock exchange in India, witnessed the first major scam masterminded by Harshad Mehta.SECURITIES EXCHANGE BOARD OF INDIAAnalysts unanimously felt that if more powers had been given to SEBI, the scam would not have happened.

As a result the Government of India brought in a separate legislation by the name of SEBI Act 1992and conferred statutory powers to it.

Since then, SEBI had introduced several stock market reforms. These reforms significantly transformed the face of Indian Stock Markets

In India, the major example is Satyam which is one of the largest IT companies in India.Satyam ScandalOverstated assets and income

The results announced on October 17, 2009 overstated quarterly Revenues by percent and profits by 97 percent.

The global head of internal audit also illegally obtained loans for the company.

Created 13000 fake salary accounts

Created fake customer identities and generated fake invoices to inflate revenue

Satyam ScandalThe CEO was convinced that the gap in the balance sheets reached an unmanageable heights and could not be filled.Satyam Computer crashed by Rs 139.15 or 77.69 per cent to close at Rs 39.95, after the Chairman`s confessionBombay stock exchange fell 700 points

The Sensex recorded the biggest single-day loss in the past two months, after Satyam Computers Services, plunged 80 percent.

ICSI NATIONAL AWARD FOR EXCELLENCE IN CORPORATE GOVERNANCE2001 2014

Best Governed Companies

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ConclusionCorporate governance And economic development are intrinsically linked. Effective corporate governance systems promote the development of strong financial systems Which, in turn, have an unmistakably positive effect on economic growth and poverty reduction.As Indian companies compete globally for access to capital markets, many are finding that the ability to benchmark against world-class organizations is essential. For a long time, India was a managed, protected economy with the corporate sector operating in an insular fashion. But as restrictions have eased, Indian corporations are emerging on the world stage and discovering that the old ways of doing business are no longer sufficient in such a fast-paced global environment.