Corporate Governance Final Project
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Transcript of Corporate Governance Final Project
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CHAPTER 1.
CORPORATE GOVERNANCE
INTRODUCTION
Corporate governance to the system by which operations are directed and controlled. The
governance structure specifies the distribution of rights and responsibities among different
participants in the corporation (such as the board of directors, managers, shareholders,
creditors, auditors, regulators and other stakeholders) and specifies the rules and procedures
for making decisions in corporate affairs. Governance provides the structure through which
corporations set and pursue their objectives, while reflecting the contet of the social,
regulatory and market environment. Governance is a mechanism for monitoring the actions,
policies and decisions of corporations. Governance involves the alignment of interests
among the stakeholders.
Corporate governance has also been defined as !a system of law and sound approaches by
which corporations are directed and controlled focusing on the internal and eternal
corporate structures with the intention of monitoring the actions of management anddirections and thereby agency risks which may stem from the misdeeds of corporate
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officers. "n contemporary business corporations, the main eternal stakeholders, debt
holders, trade creditors, suppliers, customers and communities affected by the corporations
activities. "nternal stakeholders are the board of directors, eecutives, and other employees.
#uch of the contemporary interest in corporate governance is concerned with mitigation or
preventing these conflicts of interests include include the processes, customs, policies, laws,
and institutions which have an impact on the way a company is controlled. $n important
theme of governance is the nature and etent of corporate accountability.
$ related but separate thread of discussions focuses on the impact of a corporate governance
system on economic efficiency, with a strong emphasis on shareholders welfare. "n large
firms where there is a separation of ownership and management and no controlling
shareholder, the principal%agent issue arises between upper%management (the !agent&)
which may have very different interests, and by definition considerably more information,
than shareholders' (the !principles&). The danger arises that rather than overseeing
management on behalf of shareholders, the board of directors may become insulated from
shareholders and beholden to management. This aspect is particularly present in
contemporary public debates and developments in regulatory policy.
conomic analysis has resulted in a literature on the subject. ne source defines corporate
governance as !the set of conditions that shapes the e post bargaining over the *uasi%rents
generated by a firm. The firm itself is modeled as a governance structure acting through the
mechanisms of contract. +ere corporate governance may include its relation to corporatefinance.
Corporate governance is the system by which companies are directed and
controlled. "t involves regulatory and market mechanisms, and the roles and
relationships between a company-s management, its board, its shareholders and
other stakeholders, and the goals for which the corporation is governed. "n
contemporary business corporations, the main eternal stakeholder groups are
http://en.wikipedia.org/wiki/Stakeholder_(corporate)
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shareholders, debt holders, trade creditors , suppliers, customers and
communities affected by the corporations activities.
"nternal stakeholders are the board of directors , eecutives , and other
employees.
Corporate Governance is a muti!"acete# su$%ect.
$n important theme of corporate governance is to ensure the accountability of
certain individuals in an organi/ation through mechanisms that try to reduce or
eliminate the principal%agent problem. $ related but separate thread of
discussions focuses on the impact of a corporate governance system in
economic efficiency, with a strong emphasis on shareholders welfare. There are
yet other aspects to the corporate governance subject, such as the stakeholder
view and the corporate governance models around the world.
Corporate governance as #e&ine# $' (E)I committee *In#ia+
is the $cceptance by management of the inalienable rights of shareholders
as the true owners of the corporation and of their own role as trustees on behalf
of the shareholders. "t is about commitment to values, about ethical business
conduct and about making a distinction between personal 0 corporate funds in
the management of a company. The definition is drawn from the
Gandhian principle of trusteeship and the 1irective 2rinciples of the "ndian
Constitution. Corporate Governance is viewed as business ethics and a moralduty. 3ee also Corporate 3ocial ntrepreneurship regarding employee who are
driven by their sense of integrity (moral conscience) and duty to society. This
notion stems from traditional philosophical ideas of virtue (or self governance)
and represents a !bottom%up& approach to corporate governance (agency) which
supports the more obvious !top%down& (systems and processes, i.e. structural)
perspective.
http://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Executive_(management)http://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Executive_(management)http://en.wikipedia.org/wiki/Executive_(management)http://en.wikipedia.org/wiki/Executive_(management)
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De&inition
Corporate Governance as an internal system encompassing policies, processes
and people, which serves the needs of shareholders and other stakeholders, by
directing and controlling management activities with good business savvy,
objectivity, accountability and integrity. 3ound corporate governance is reliant
on eternal market place commitment and legislation, plus a healthy board
culture, which safeguards policies and processes
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CHAPTER ,.
-HAT I( CORPORATE GOVERNANCE
Corporate Governance is concerned with holding the balance between
economic and social goals and between individual and communal goals.
The corporate governance framework is there to encourage the efficient
use of resources and e*ually to re*uire accountability for the stewardship
of those resources.
The aim is to align as nearly as possible the interests of individuals,
corporations and society.
The primary purpose of corporate governance is to create wealth legally
and ethically.
This translates to bringing a high level of satisfaction to five
consultancies% customers, employees, investors, vendors and the society%
at%large
CHAPTER /.
CORPORATE GOVERNANCE IN INDIA
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The history of the development of "ndian corporate laws has been marked by
interesting contrasts. $t independence, "ndia inherited one of the world's
poorest economies but one which had a factory sector accounting for a tenth of the national product4 four functioning stock markets (predating the Tokyo 3tock
change) with clearly defined rules governing listing, trading and settlements5
a well%developed lending norms and recovery procedures. "nterims of corporate
laws and financial system, therefore, "ndia emerged far better endowed than
most other colonies. The 6789 Companies $ct as well as other laws governing
the functioning of joint%stock companies and protecting the laws governing the
functioning of joint%stock companies and protecting the investors rights built on
this foundation.
The beginning of corporate developments in "ndia were marked by the
managing agency system that contributed to the birth of dispersed e*uity
ownership but also give rise to the practice of management enjoying control
rights disproportionately greater than their stock ownership. The turn towards
socialism in the decades after independence marked by the 6786 "ndustries
(1evelopment and :egulation) act as well as the 6789 "ndustrial 2olicy:esolution put in place a regime and culture of licensing, protection and
widespread red%tape that bred corruption and stilled the growth of the corporate
sector. orbitant ta rates encouraged creative accounting practices and
complicated emolument structures to beat the system.
"n absence of a developed stock market, the three all%"ndia development finance
institutions (1;"s)% the "ndustrial ;inance Corporation of "ndia, the "ndustrial1evelopment
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proper credit appraisal or effective follow%up and monitoring. Their nominee
directors routinely served as rubber%stamps of the management of the day. ?ith
their support, promoters of businesses in "ndia could actually enjoy managerial
control with very little e*uity investment of their own.
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from i7rregularities in share transfers and registrations = deliberate or
unintentional. 3ometimes non%voting preferential shares have been used by
promoters to channel funds and deprive minority shareholders of their dues.
#inority shareholders have sometimes been defrauded by the management
undertaking clandestine side deals with the ac*uirers in the relatively scarce
event of corporate takeovers and mergers.
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"EATURE( O" CORPORATE GOVERNANCE
6. Corporate governance is concerned with how companies are controlled
and managed.
B. "t involves appropriate supervision and control over the top management.
. "t re*uires fair, transparent and efficient administration and effective
internal monitoring.
H. "t is meant to serve the interests of all the stakeholders in a company.
8. "t re*uires a legal and institutional framework within which companies
are to be managed.
9. Corporate governance goes beyond law, it re*uires high level of business
ethics and a sense of corporate social responsibility.
A. Corporate governance embraces as to how the set systems and processes
and how are the things are done within certain structural and
organi/ational systems.@. "t is an interplay between a company, its between a company, its
stakeholders the capital market and corporate laws.
CHAPTER .
PRINCIP2E( O" CORPORATE GOVERNANCE
The corporate governance practice in the Company is built in conformity with
the best international standards and recommendations set in the Code of
Corporate
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Corporate governance in t3e Compan' is $ase# on t3e &oo4ing principes4
Rig3ts an# e5uita$e treatment o& s3are3o#ers
rgani/ations should respect the rights of shareholders and help shareholders toeercise those rights. They can help shareholders eercise their rights by openly
and effectively communicating information and by encouraging shareholders to
participate in general meetings.
Accounta$iit'
The Code of Corporate Governance envisages accountability of the
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That a properly structured
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• Changing ownership structure% comple ownership structure involving
promoters, public financial instns, institutional shareholders (foreign in
terms of their ;1" and "ndian), banks, insurance companies and small
private investors. "t is a challenge for management of companies.
• 3ocial :esponsibilty% $n effective corporate governance provides for
regulating the duties of directors so that they act in the best interests of
customers, lenders, suppliers, and local community.
• 3cams% Corporate scams like +arshad #ehta, 3atyam etc have shaken the
public confidence, hence need for corporate governance.
• Corporate obligarchy% i.e. nly a small group of people govern an
organi/ation. "t has given rise to need for mechanisms and systems for
corporate governance.$lso, shareholders activism and shareholders
democracy have also developed.
• Globalisation% :ise of international markets and need to get listed on
international stock echanges have prompted corporate to focus on
corporate governance.
• "nternational organi/ations like C, G$TT and ?T have all contributed
to rising awareness.
• "t lays down the framework for creating long%term trust between
companies and the eternal providers of capital.
• "t improves strategic thinking at the top by inducting independent
directors who bring wealth of eperience and a host of new ideas.
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• "t rationali/es the management and monitoring of risk that a firm faces
globally.
• "t limits the liability of top management and directors, by carefully
articulating the decisions making process.
• "t has long term reputational effects among key stakeholders, both
internally (employees) and eternally (clients, communities,
politicalJregulatory agents).
CHAPTER :.
9ECHANI(9 AND CONTRO2(
Corporate governance mechanisms and controls are designed to reduce
the inefficiencies that arise from ha/ard and adverse selection. There are both
internal monitoring system and eternal monitoring systems. "nternal monitoring
can be done, for eample, by one (or a few) large shareholder(s) in the case of
privately held companies or a firm belonging to a business group. ;urthermore
the various board mechanisms provide for internal monitoring. ternal
monitoring of managers behavior occurs when an independent third party (e.g.
the eternal auditor) attests the accuracy of information provided by management
to investors. 3tock analysis and debt holders may also conduct such eternal
monitoring. $n ideal monitoring and control system should regulate both
motivation and ability, while providing incentive alignment toward corporate
goals and objectives. Care should be taken that incentives are not so strong that
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some individuals are tempted top cross lines of ethical behavior, for eample by
manipulating revenue and profit figures to drive the share price of the company
up. "t can be further controlled with the help of two methods4
6. "nternal corporate governance controls
B. ternal corporate governance controls
INTERNA2 CORPORATE GOVERNANCE
"nternal corporate governance controls monitor and then take
corrective action to accomplish organi/ational goals. amples include4
6. 9onitoring $' t3e $oar# o& #irectors4
The board of directors, with its legal authority to hire, fire and
compensate top management safeguards invested capital. :egular
board meetings allow potential problems to be identified, discussed
and avoided. ?hilst non%eecutive directors are thought to be more
independent, they may not always result in more effective corporate
and may not increase performance outcomes, e ante. "t could be
argued, therefore, that eecutive directors look beyond the financial
criteria.
B. Interna contro proce#ures an# interna au#itors4
"nternal control procedures are policies implemented by an entity's
board of directors, audit committee, management and other personnel
to provide reasonable assurance of the entity achieving its objectives
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related tp reliable financial reporting, operating efficiency and
compliance with laws and regulations. "nternal auditors are personnel
within an organi/ation who test the design and implementation of the
entity's internal control procedures and the reliability of its financial
reporting.
. )aance o& po4er4 The simplest balance of power is very common5
re*uire that the 2resident be a different person from the Treasurer.
This application of separation of power is further developed in
companies where separate division checks and balances each other's
actions. ne group may propose company%wide administrative
changes, another group review and can veto the changes and a third
that the interests of people (customers, shareholders, employees)
outside the three groups are being met.
H. Remuneration4
2erformance%based remuneration is designs to relate some proportion
of salary to individual performance. "t may be in the form of cash or
non%cash payments such as shares and share options, superannuation
or other benefits. 3uch incentive schemes however are reactive in the
sense that they provide no mechanisms for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.
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E;TERNA2 CORPORATE GOVERNANCE CONTRO2(
ternal corporate governance controls encompass the controls eternal
3takeholders eercise over the organi/ation. amples include4
Competition
De$t covenants
Deman# an# assessment o& per&ormance in&ormation *esp.
&inancia statements+
Government reguations
9anageria a$or mar
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CHAPTER =.
PRO)2E9( O" CORPORATE GOVERNANCE
•Deman# &or in&ormation4 "n order to influence the directors, the shareholders
must combine with others to form a significant voting group which can pose a
real threat of carrying resolutions or appointing directors at a general meeting.
•9onitoring costs4 $ barrier to shareholders using good information is the cost
of processing it, especially to a small shareholder. The traditional answer to
this problem is the efficient market hypothesis (in finance, the efficient market
hypothesis (in finance markets are efficient), which suggests that the smallshareholder will free ride on the judgments of larger professional investors.
• (upp' o& accounting in&ormation> ;inancial accounts form a crucial link in
enabling providers of finance to minor directors. "mperfections in the financial
reporting process will cause imperfections in the effectiveness of corporate
governance. This should, ideally be corrected by the eternal auditing process.
•Roe o& t3e Accountant ? Au#itors> ;inancial reporting is a crucial element
necessary for the corporate governance system to function effectively.
$ccountants and auditors are the primary providers of information to capital
and participants. The directors of the company should be entitled to epect the
management prepare the financial information in compliance with statutory
and ethical obligations and rely on auditor's competence.
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Current accounting practice allows a degree of choice of method in determining the
method of measurement, criteria for recognition, and even the definition the
accounting entity. The eercise of this choice to improve apparent performance
(popularly known as creative accounting) imposes etra information costs on users.
"n the etreme, it can involve non%disclosure of information.
CHAPTER 1@.
2EGA2 "RA9E-OR
Corporate Governance an# 2a4 Re&orms in In#ia
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received on good corporate governance. $ +igh 2owered Central Coordination
and #onitoring Committee (CC#C), co%chaired by 3ecretary, 1epartment of
Company $ffairs and Chairman, 3
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The predominant form of corporate governance in "ndia is -insider model'
wherepromoters dominate governance in every possible way. "ndian corporate
which reflect the pure -outsider model' are relatively small in number.
$ distinguishing feature of the "ndian 1iaspora is the implicit acceptance that
corporate entities belong to founding families.
The listing agreement, the main instrument, through which 3
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interesting to note that despite corporate governance in the form of clause H7
was already introduced in the year BDDD5 it could not prevent securities scam of
BDDB. vents in the stock echanges have eposed the lack of ethical conduct by
many "ndian corporate4
:ampant insider trading by the promoters in league with big market players.
#assive price riggingJ manipulation by the promoters in league with big
market players prior to mergers and takeovers.
Gross misuse of bank funds for clandestine stock market operations.
Criminally motivated investment in violation of laid down norms.
#any companies, which raised money from the capital market through public
issues, have not paid any dividend for more than five years.
The total amount of money (collected through public offerings) duped by the
vanishing companies is calculated to be :s 99,@96 billion5
Eon%performing assets of scheduled commercial banks amounted to :s
8@,88Hbillion as on 6 #arch BDD.
In a##ition sma investors 3ave ost t3eir 3ar# earne# mone' in t3e stoc
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• Fack of ethics, selfish conscience, and breach of trust on the part of the
promoters.
• Fack of ade*uate compliance mechanism, supervision, proper inspection,
effective regulation and preventive action by regulators like 1epartment
of Company $ffairs, :egistrar of Companies,
strengthening the position of internal and outside auditors5
allowing mergers and ac*uisitions approved by a panel5
re*uiring more independent outside directors on boards5
introducing the supervisory board or two% tier system5
CHAPTER 11.
9EA(URE( CON(TITUTED ) R)I "OR CORPORATE
GOVERNANCE
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• #inistry of Corporate $ffairs has set up Eational ;oundation of
Corporate Governance (E;CG) as a non%profit body to deliberate and
advise on good corp. governance.
• E;CG has made action plan for corp. governance norms on themes%
• i. ;or institutional investors.
• ii. ;or independent directors on board.
• iii. ;or $udit
• C"" 0 3
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+ence, the disclosure standards need to be further broad%based in consonance
with improvements in the capability of market players to analyse the
information objectively.
The off%site surveillance mechanism is also active in monitoring the movement
of assets, its impact on capital ade*uacy and overall efficiency and ade*uacy of
managerial practices in banks. :
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Corporate Governance has become the latest bu//word today. $lmost every country
has institutionali/ed a set of Corporate Governance codes, spelt out best practices
and has sought to impose appropriate board structures. 1espite the Corporate
Governance revolution there eists to universal benchmark for effective levels of
disclosure and transparency. There are several corporate governance structures
available in the developed world but there is no one structure, which can be singled
out as being better than the others. There is no !one si/e fits all& structure for
corporate governance. Corporate governance etends beyond corporate law.
"ts fundamental objective is not the mere fulfillment of the re*uirements of law but
in ensuring commitment of the board in managing the company in a transparent
manner for maimi/ing long term shareholder value. ffectiveness of corporate
governance system cannot merely be legislated by law. $s competition increases,
technology pronounces the death of distance and speeds up communication. The
environment in which companies operate in "ndia also changes. "n the dynamic
environment the systems of corporate governance also need to evolve.
The recommendations made by different epert committees will go a long way in
raising the standards of corporate governance in "ndian companies and make them
attractive destinations for local and global capital. These recommendations will also
form the base for further evolution of the structure of corporate governance in
consonance with the rapidly changing economic and industrial environment of the
country in the new millennium.
)I)2IOGRAPH
www. 4i
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www.nsein#ia.com
www.$sein#ia.com
www.tatastee.com