Coporate Governance Lec 8
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Transcript of Coporate Governance Lec 8
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Corporate Governance
Lecture 9 & 10
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Important Websites
Securities & Exchange Board of India,
www.sebi.org
Academy of Corporate Governance
www.academyofcg.org
CII
www.ciionline.org
Organization for Economic Cooperation and Development(OECD)
www.oecd.org
European Corporate Governance Institute
www.ecgi.org
http://www.sebi.org/http://www.academyofcg.org/http://www.ciionline.org/http://www.oecd.org/http://www.ecgi.org/http://www.ecgi.org/http://www.oecd.org/http://www.ciionline.org/http://www.academyofcg.org/http://www.sebi.org/ -
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What is Corporate
Governance?
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Genesis & Importance of CG
Concept originated with separation of ownership &
management
Origin can be traced back to Agency Theory-- A theory
concerning the relationship between a principal
(shareholder) and an agent of the principal (company's
managers)
Corporatisation of business and increasing scales of
production
Opening of Economy
Compliance Requirements
Capital Markets are getting Institutionalized
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Customers
Shareholders
Board of Directors
Management
Employees
Society
Suppliers
Government
Environment
Corporate Governance Tripod
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Corporate Governance (CG)
Designing and implementing systems, procedures &institutions that ensure that management acts in the bestinterest of the owners or shareholders.
The fundamental objective of good CG is to strike a
balance at all times between shareholders & otherstakeholders.
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Stakeholder Perception of
Governance?
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Shareholders
Return on invested capital.
Debt Holders
High debt protection measures credit rating
CustomersMarket Share; Assessment of Customer satisfaction; Cost
savings passed on to customers etc.
Value creation Thru Governance:
Stakeholder perception
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Value creation Thru Governance:
Stakeholder perception Employees
Absolute Salary levels, adjusted growth in average annualsalaries; Intangibles etc.
Suppliers
Relative change in credit terms; Support/Intangibles tosuppliers, etc.
Society
Total direct taxes paid; Employment generated;Expenditure on social infrastructure; Environmental/Social
impact cost; Fair practices followed etc.
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Historical Developments
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International Developments
Organization for Economic Cooperation and
Development (OECD) has set a cogent
principles of corporate governance
A) The Right of shareholdersB The equitable treatment of shareholders
C) Role of Stakeholders
D) Disclosure and Transparency
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Developments in UK
Cadbury Committee Report- 1992 focused on
accountability & transparency aspects
Greenbury Committee Report-1995 highlighted the
executive and Directors role & compensationaspects
Myner Committee Report-1995 focussed on
productive relationship between owners and
managers
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Development in USA
CG came into forefront through shareholderactivism
California Public Employees Retirement
Systems ( CalPERS) is in the forefront ofshareholder activism and internationally creditedas a torch bearer of CG
Global Governance Principles- Accountability,
Transparency, Equity, Voting Methodimprovements, Long term vision
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CG. International Developments
Surbanes Oxley Act, 2002 Post ENRON development
Most comprehensive piece of legislation in last
70 years Quality Review Board ( Auditors
Independence)
Independent Directors
Whistle Blower Policy
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SEBI-
Malpractices took on significant proportions and
the grievances of retail investors increased
alarmingly.
GOI was rather helpless in solving the retailinvestors' grievances in such large volumes
because of the lack of proper penal provisions.
SEBI was constituted as a supervisory body toregulate and promote security markets.
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Developments in India
1997 : Release of CIIs Voluntary Code ofCorporate Governance for listed companies 2000 : Kumar Mangalam Birla committee by SEBI
Specific clause (Clause 49) in the ListingAgreement as prescribed by SEBI.
2002 : Naresh Chandra Committee 2003: Narayana Murthy Committee
Both dealt with issues of transparency & accountabilitydimensions of the board process. The Naresh Chandra
Committee also dealt with the role of the Audit function& the Audit Committee of the board.
2005: The Naresh Chandra Committee proposedsalient changes in the Partnership Act.
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Narayana Murthy Committee
Recommendations
Enhanced role of the Audit Committee
Written code of conduct for Executive
Management
Non-Executive Directors
Whistle Blower Policy
Subsidiary companies Liability of CEO / CFO
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Clause 49
At least 33% (in case of a non-executive chairman) and at least50% (in case of executive chairman) of the directors of the
board of a company to be independent.
Board Meetings to be held at least four times a year, with amaximum gap of four months between any two meetings.
No director to be a member of more than 10 boards /committees or chairman of more than 5 committees and informthe respective companies about these memberships.
Attendance of the directors at board meetings to be disclosed toshareholders.
All material, financial and commercial transactions where thereis personal interest of directors or potential conflict of interest-related party transactions to be fully disclosed.
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What are the various types of
Directors on Board
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Type of Directors
Executive directors have day-to-day managementresponsibilities
Non Executive Directors- take no part in the day-to-day
running of the business, but have the sameresponsibilities as executive directors. They use theirexperience and expertise to provide independentadvice and objectivity, and they usually have a role inmonitoring executive management.
Nominee directors- The interests of substantialshareholders or the companys bankers may berepresented by a nominee director.
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As per Clause 49 of Listing Agreement
Should not be related to promoters or management at the Boardlevel or at one level below the Board
Should not have been a partner or an executive of the statutory
audit firm or an internal audit firm or legal and consultancy firm,during last 3 years
Should not have been a supplier, service provider or customer ofthe company
Should not hold 2% or more shares of the company
Should not have been an executive of the Company in theimmediatelyproceeding 3 financial years
Shou
Appointment of Non Executive Director beyond continuousperiod of 9 years not permissible
Independent Director - Definition
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Independent Directors Clause 49
( 2005)
If the chairman of the board is a non-
executive director, at least one-third of the
company's board should comprise
independent directors. If the chairman isan executive director, at least one-half (or
50 per cent) should be independent
directors.
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Role of Independent Director
Shareholders Shareholders especially minority shareholderslook at independent directors providing
transparency in respect of the disclosures in
the working of the company and balance inresolving conflict areas.
Other Stakeholders
Evaluating the boards or managementdecisions in respect of employees, creditors
etc. and in protecting stakeholders interest.
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Independent Directors in the Board
Counterbalance management weaknesses in acompany.
Ensure legal & ethical behaviour at thecompany, while strengthening accounting
controls. Extend the reach of a company through
expertise, skills and knowledge and access todebt & equity capital.
Help a company survive, grow, and prosper overtime thru improved succession planning, thrumembership in the nomination committee.
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Committees of the Board
Audit Committee
Shareholders / Investors Grievance Committee,
Remuneration Committee (Non mandatory)
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Principles of Effective Governance
An effective and independent Board A proactive audit committee A compensation committee A nominating committee
A sound internal control framework A relevant code of ethical behaviour Clear enforced policies and procedures Effective management of risks
An effective well resourced internal audit function Independent effective external audit Transparent disclosure, effective communication, and
systems that ensure effective measurement andaccountability
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An Effective and Independent
Board Appropriate balance of independent and executive
directors
Effective mechanism, appropriate competence, adequateexperience, and sufficient information
Validating and approving the strategy and the operation ofbusiness, providing advice, counsel and feedback to theChief Executive
Ensure that the personal skills of the Directors are wellaligned with the needs of the company and evolvingregulations and standards
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Vodafone Barclays HSBC GE SingaporeAirlines
No. of BoardMembers
18 18-20 22-25 13-17 11-14
Non- Exec Directors8 9 14 One
third
5
IndependentDirectors
8 9 11 Twothird
6
Frequency of BoardMeetings
8 11 7 13 4
Nomtn Commt Yes Yes Yes Yes Yes
Compentn Commt Yes Yes Yes Yes Yes
Audit Commt Yes Yes Yes Yes Yes
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An Effective and Independent
Board Non-Executive Directors are expected to make two visits
to GE businesses, without management being present
Management briefing for new directors and independent
advice available as required- Singapore Airlines
Annual Review of director independence- Barclays
Annual Review of Chairmans performance- Vodafone
ome essent a ua t es o e ect ve o
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Individual directors should have
Highest standards of personal integrity Excellent judgment and an ability to make informed decisions
within time constraints Professional credibility
Capacity to think strategically Demonstrate sound communication skills Sound interpersonal skills Team orientation
The board, as a whole should ideally have
Strategic thinking Analytical skills, appropriate professional experience Effective communication skills Knowledge of the organization and the industry
ome essent a ua t es o e ect ve oof Directors
Some essential Qualities of effective BO
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Board should have a mix of Directors with skills in
Law Finance, including accounting expertise Marketing Operations relevant to the Companys activities including other
key industries in which the company operates Corporate Governance Human Resources Risk Management Merger and Acquisitions Other specific matters relevant to the company
Some essential Qualities of effective BOcontd
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Role of Board In CG
Guiding Corporate Strategy, Major Plans ofAction, Risk Policy, Annual Business Plans,
overseeing major capital expenditures,
acquisitions and disposals.
Monitoring managerial performance, conflicts of
interests of management, board members and
shareholders.
Monitoring misuse of corporate assets andabuse in related party transactions.
Achieving adequate returns for shareholders.
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Role of Board In CG
Compliance with Laws and regulations,including Maintaining integrity of accounting and
financial reporting systems Internal & operational controls
Systems for evaluating risk management
Interests of Stakeholders, such asemployees
Corporate Social Responsibility
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Best CG
L &T
Godrej Consumer Products
Infosys Wipro
Tata Motors
HDFC Dabur
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CG will lead to
Corporate Excellence
Profitability
Satisfied stakeholders such as shareholders,
customers, employees
Revenue and profit growth
Growth in market share
Growth in market value (Market
capitalization)
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Corporate Governance
Good corporate governance aims at increasingtransparency, accountability, investor protection,compliance with statutory laws and regulationsand value-creation for shareholders and other
stakeholders.
A companys most valuable asset is goodwill it
enjoys with its stakeholders and institutionalinvestors are willing to pay 20% more onaverage for companies with a good governancerecord.
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