Corporate Governance. Historical perspective The concept of governance is as old as human...
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![Page 1: Corporate Governance. Historical perspective The concept of governance is as old as human civilization Manu Dharma Shastra Kautilya’s Arthashastra – 3.](https://reader036.fdocuments.us/reader036/viewer/2022081516/56649e205503460f94b0b678/html5/thumbnails/1.jpg)
Corporate Governance
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Historical perspective
• The concept of governance is as old as human civilization
• Manu Dharma Shastra
• Kautilya’s Arthashastra – 3rd Century BC
• Government of India – Satyameva Jayate
• M K Gandhi – My experiments with truth
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The Western World
• West started feeling the need of corporate governance as corporate misdemeanors increased
• Cadbury Committee
• The King Committee
• Hampel Committee
• Sarbarnes Oxley Act
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Recent US business failures
INVESTORCONFIDENCE
Collapsed Business Model
Fraud
Fraud: Expense Recognition Failure
Fraud: Revenue Recognition Failure
Revenue Recognition Confusion
Questionable Accelerated Revenue Recognition
Fraud: Shareholder Deception
Collapsed Business Model
Revenue Recognition Issues and Shareholder Deception
Inconsistent Billing Practices and Revenue Recognition Issues
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Top Management and Corporate Governance
• Role of the Board of Directors
• Responsibilities of Board of Directors
• Role of the Board
• Board Committees
• Role of a Chairman
• Role of CEO
• Creating an Effective Board
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Role of the BoD
• To make calls on shareholders in respect of money unpaid on their shares
• To issue debentures
• To borrow money otherwise than through debentures
• To invest the funds of the company
• To make loans
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Renewed ramifications
• The enterprise continues to remain effective on the standpoint of technology parameter
• The enterprise continues to achieve healthy market growth in competitive conditions
• Divestment and diversifications take place on sound lines
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Renewed ramifications
• Long term productivity and quality are never sacrificed at the altar of short term profitability
• Judicious earnings retention policy is adopted for financial growth , modernization et al
• Serious and sustained attention is adopted towards building a sound system of human values and exalted corporate culture
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Broad Agreement
• Oversee the management of the company’s assets
• Establish or approve the company’s mission , objective , strategy and policies
• Review management actions and financial performance of the company
• Hire and fire the principal executive and operating officers of the company
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Board Committees
• Audit Committee : It consists of independent directors who report to the board . The committee acts as a link between the board and external auditors
- Review the interim and final accounts - Solve any problem they come across while
completing the audit- Make recommendations re audit fees ,
selection & replacement of auditors
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Board Committees
• Remuneration Committee : This committee reviews the remuneration package of the executive directors and other top level managers
• Nominations Committee : Usually set up to select new non executive directors . The chairman of the board heads this committee
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Code and Laws on CG
• Reports of Committees on Corporate Governance
• Government Initiatives
• National Award initiated by the GOI
• Recent Development in other markets
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Constitution of Board
• Members of the Board may be classified into two groups – insiders and outsiders
• Both insiders and outsiders have their own advantages and disadvantages
• Insiders are better informed of strategic initiatives but will not counter CEO
• Outsiders will stand up against CEO but will lack complete information
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Some recommendations
• Cadbury Committee – majority of directors should be non executive directors
• The term of a director can be extended beyond 3 years after prior approval of stakeholders
• CII Report – At least 30% of the board ( chairman non executive) and 50%(chairman is CEO) of listed companies with turnover>Rs100 Crores should comprise of professionally competent and independent non executive directors
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Reports of Committees on Corporate Governance
• Cadbury Committee report
• CII Committee Report
• Kumara Managalam report
• Narayana Murthy Committee report
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Some recommendations
• CII Recommendations : No person should hold directorships in more than 10 companies.
• Non executive directors should actively participate in board affairs and not be passive advisors and should be adequately compensated through commissions and stock options
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List of broad criteria
Governance Structure
30%
Composition of Board
15%
Committees on the Board
15%
Disclosures in Annual Report
20%
Statutory Disclosure
10%
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List of broad criteriaNon Statutory Disclosures
10%
Timeliness and content of information
20%
Compliance with listing Agreement
6.67%
Contents on website
6.67%
Grievance resolution
6.67%
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List of broad criteria
Enhancement of Share Value
30%
Share Prices 10%
Return on Net Worth
20%
Total 100%
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Governance Structure
• Number of meetings held in a year
• Attendance records per meeting
• Attendance of individual director
• Number of meetings of the committees of the board
• Do Directors receive – Quarterly and annual sales plan, budgets , internal audit reports , any defaults by the company
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Disclosure in the Annual report
• Does the Annual report contain a statement of the remuneration policy and details of the remuneration of a director
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Enhancement of Share Value
• Growth in Sales
• Growth in Assets
• Solvency Ratio
• Margins
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Qualitative Criteria
• Employees – discharge policies , obligatory welfare, HRD succession policy
• Stakeholders – customer grievance handling , vendor grievance handling
• Regulations – FERA / FEMA Violations, excise , custom raids, show cause notice
• Society – concern for environment
• Ethical Code of Conduct
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Developments in other markets
• Implementation of the Sarbanes-Oxley Act
• European Union
• Asian & Latin American Markets