Corporategovernance Aconceptualframework 141203105638 Conversion Gate02

8/10/2019 Corporategovernance Aconceptualframework 141203105638 Conversion Gate02

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Corporate Governance A Conceptual Analysis


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Introduction to CG Corporate governance is how a corporation isadministered or controlled.

Corporate Governance is a set of processes,customs ,policies ,laws & instructions aectingthe way a corporations is directed ,administratedor controlled.

The participants in the process include employeesand suppliers ,partners, customers , government

and professional organization regulators ,and thecommunities in which the organization has apresence.


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Definition of Corporate

GovernanceIn other words ;CG may be de%ned as a set of systems, processes and principleswhich ensures that a company is governed in the best interest ofall the staeholders.

t is the system by which the companies are directed andcontrolled. t is about promoting corporate fairness, transparencyand accountability.

In other words, good corporate governance is siplygood business! It ensures"

Ade#uate disclosures and e$ective decision a%ing to

achieve corporate ob&ectives!

'ransparency in business transaction!

Statutory and (egal Copliances

)rotection o* shareholder interests

Coitent o* values and ethical conduct o* business


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Diagram


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Objectives of CorporateGovernance

+! 'o build an environent o* trust andcondence aong those having copeting andcon-icting interest!

.! 'o enhance shareholders value and protectinterest o* other sta%e holders!

/! 'o have syste and procedure!

'e0t 1oo% page +23!

Advantages


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'( )ight and *"uitable Treatment toshareholders.

+( nterest of other taeholders.

-( )ole and )esponsibility of the oard.

/( ntegrity and *thical ehavior.

0( 1isclosure and Transparency.

Te2t boo page '3+

Principles of CorporateGovernance


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FRAMEWORK for CG

STAKEHOLDERS

Private EXTERNALINTERNALRegulatory

SHAREHOLDERS

BOARD OFDIRECTORS

Appointsand

MonitorsReports to

MANAGEMENT

Operates

Core functions

Financial Sector- Debt- Equity

Markets- Competitive factors and

foreign markets- Foreign Direct Investment

- Corporate Control

Reputational

Agents- Accountants- Lawyers- Credit Ratings- InvestmentBankers

- Financial media- Investment

advisors- ResearchCorporateGovernance

- Analysis

Standards(for exampleaccounting and auditing)

Laws and regulations


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Introduction to Framework

4+5'he shareholders are given necessary reports ,information to guide them in appointing and re4appointing an eective oard of 1irectors who managethe day to day operations of the company. There is a

clear cut distinction between the owners and thestaeholders, the employees, the %nancers whoempower the oard of 1irectors to run the companyeectively. Thus ,the %rst principle in the frame wor isthat there is clear cut distinction between the 5wnership

and the 6rofessional 7anagement of the Company. 8ndall the staeholders are informed about the day to dayoperations through various reports and data.


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Introduction to Framework4.5 'here are any sta%eholder in the copany"

9a( The shareholders which again can be further sub4divided as thegeneral shareholders, the employee shareholder who have got*56 9*mployee toc 5ption 6lan(,the nstitutional nvestors 98ll

the "uali%ed nstitutional uyers( and %nally the promoter groupwho have considerable stae in the company. Their main ob$ective

is to ma2imize the wealth of the shareholders.9b( The 1istributors or the channel partners are also the staeholders,

their main ob$ective is to be part of a value chain and mae timelydeliveries across the country.

9c( The Customers are also the staeholders whose main ob$ective is

to get best "uality product or service at the most competitiverate.

9d( The employees whose main ob$ective is to get the most lucrative

salary and pers to motivate them to put in their very best.


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Introduction to Framework4/5 'he reputational agents which would be part o*

the Corporate 6raewor% would be!9a( 8ccountants.

9b( :egal *2perts.

9c( Credit )ating 8gencies

9d( ;inancial and nvestment 8dvisors

9e( ;inancial 7edia

475 'he regulatory *raewor% includes all the regulatoryauthorities li%e S81I and the Stoc% 80change which would

ensure that all the principles laid down are *ollowed!

(ast para te0t boo% page +93


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Framework of CorporateGovernance


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FIVE GOVERNANCEPRINCIPLES FOR CG

4A5!8$ective (eadership"The C*5


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415!Capable :anageent"Capable management includes setting in place the broad principlesunder which the agency operates , including setting clear ob$ectives and

an appropriate ethical framewor operating in the public interest=establishing due process= de%ning duty of care to the agencies client

group etc. 9Te2t boo>pg'@A(.

4C5!Diligent :onitoring"1iligent 7onitoring of riss, and the eectiveness of mitigatingstrategies, should include processes to access the delivery of outputsand "uality of control systems overtime enabling the identi%cation of

corrective actions for continuous improvement. ystems operating in achanging environment re"uire close monitoring. 9Te2t boo>pg'@A(.

4D5!esponsible is% :anageent"

)esponsible ris management establishes process for identifying,analyzing and mitigating riss that could prevent the agency fromachieving its business ob$ectives 9Te2t boo>pg'@A(.


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485!Clear Accountability and esponsibility"Clear accountability and responsibility is primarily through the C*5 to theresponsible 7anagers and the *2ecutive 1irectors>.. 9Te2tboo>pg'@'(


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Advantages/Benefits of

Corporate Governance

9'(. *nhancing overall company performance.

9+(. 6reparing a small enterprise for growth, and sohelping to secure new business opportunities when they

arise.9-(. ncreasing attractiveness to investors and lenders ,which enables faster growth.

9/(. ncreasing the company


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Corporate Governance :

Principal Agency Relationship

Principal

Agency

Agent Third Party

Principals obligation toperfor

mcon

tract

Contract with third party onbehalf of principal

Wh P lA


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What is Principal AgentRelationship

8 principal4agent# relationship arises when the personwho owns a %rm is not the same as the person whomanages or controls it.

;or e2ample ,investors or %nanciers 9principals( hiremanagers9agents( to run the %rm on their behalf.

nvestors need managers specialized human capital togenerate returns on their investments, and managersmay need investors< fund since they may not have

enough capital of their own to invest.n this case there is a separation between the %nancingand he management of the %rm, i.e there is a separationbetween ownership and management.

P lA


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Principal-AgencyRelationship

;urther reading>.page '@0.


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Models of the CorporationSHAREHOLDER MODEL STAKEHOLDER MODEL

1.In its narrowest sense (ShareholderModel), corporate governance oftendescribes the formal system ofaccountability of senior management tothe shareholders.

1.In its widest sense (StakeholderModel) ,corporate governance can beused to describe the network of formaland informal relations involving thecorporation.

2.More recently ,the stakeholder approach emphasizes on contributions by

stakeholders that can contribute to the long-term performance of the firm andshareholder value ,and the shareholder approach also recognizes that businessethics and stakeholder relation can have an impact on the reputation and long-term success of the corporation.

3.Therefore, the difference between these two models is not as stark as it seems,

and instead a question of emphasis

Conti.page 174 Conti.page 175


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Agency Theory'.8 simple agency model suggests that , as a result of

information asyetries 4all the sta%eholders nothaving all the in*oration about the copany!'here ay be *ew who %now ore about thecopany than others, this is called in*orationasyetry5!

+.They would be led by self interest. The principals wouldalso lac trust as regards their agents and will see toresolve these concerns by putting in place mechanisms toalign the interests of the agents with the principals and

to reduce the scope for information asymmetries andopportunistic behavior.

-.This is done through periodic reporting of the %nancialaspects of the company.

This B1*5clip will mae it clear as to what are the

C G
http://c/Users/Administrator/Videos/RealPlayer%20Downloads/Principal%20Agent%20Problem%20-%20YouTube.mp4http://c/Users/Administrator/Videos/RealPlayer%20Downloads/Principal%20Agent%20Problem%20-%20YouTube.mp4


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Corporate GovernanceCodes

Introduction"

Governance occurs $ust as a corporate entity ac"uires life andparticularly when ownership of the enterprise is separated from

its management.

The governance phase was not in vogue in the management

literature until 'DA.

8dam mith recognized the importance of corporate governancelong bac though he did not use the phrase.

8ccording to him,


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Corporate GovernanceCodes

:eaning > Denition

8 code is a set of rules ,which are accepted as generalprinciples, or a set of written rules ,which states how thepeople of a particular organization or country should behave#

Thus it is a set of standards agreed by a group of people whodo a particular $ob. 8 regulation is an o!cial rules that laysdown how things should be done. oth codes andregulation are set of rules# or principles# or standards#that and are intended to control, guide or manage behavior orthe conduct of individuals woring in an organizations, thebasic dierence being that codes are


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Benefits of self-regulatory Codesnternational Capital 7arets Group 9'+( listed the following bene%ts of selfregulation.

'.n self regulation# it is possible to ipose ethical standards, whichgoes beyond those, which can be imposed by statutory legislation.

+.#elf4regulators are directly accountable to the members of their groupE.elf4regulatory systems have built4in motivation to regulate for eectivenessand least interference.

-. elf4regulation operates in an environment where there is a willingness toaccept regulations formulated from with in the common good of the group.

/.The regulated have an opportunity to participate at all levels of the self4regulatory process. This mae it easier for them to appreciate and acceptnew regulation.

0.elf4regulators has a build4in system of checs and balances as the

regulated see it as their duty to e2pose non4compliance.3.elf4regulators can identify comple2 regulatory problems at an early stageand develop suitable solution before these problems reach a stage that candisrupt group operations

@.elf4regulations are more comprehensive than o!cial regulations and areeasier to operate and implement.


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Role and Responsibilities of TopAuthority in CorporateGovernance C8O

C?AI:A@

1OAD

:A@AGI@G DI8C'O

IG?'S o* I@8S'O and S?A8?O(D8S


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Roles of a Chief Executive Officer

Leader Visionary/InformationBearer

Decision Maker

Manager

Board Developer

Responsibilities of CEO

1.Board Administration and Support

2.Programe ,Product and Service Delivery

3.Financial ,Tax, Risk and Facilities Management

4.Human Resource Management

5.Communication and Public Relations

6.Fundraising (nonprofit organisation)

Ch


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ChairmanTo be read from pg 'A+ eth 6ublication

Board-Role & responsibilityTo be read from pg 'A+ eth 6ublication

BOARD MEMBERS

a) The Officer

b) The President

d) Secretary

c) The Vice President

e) Treasurer

f) Executive Director g) Board Committee andCommittee


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Different CommitteeExecutive Committee

Budget and Administration Committee

Nominating Committee

Governance Committee

Revenue Generation Committee

Policy Committee

Medical Advisory Board

Program Committee


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Managing DirectorThe %rst building bloc of Corporate Governance to be put up inplace in a company is the 7anaging 1irector 9also nown as theChief *2ecutive(.n startups this position is generally %lled by thefounder.

Fhatever the size or nature of the company, the role of the

7anaging 1irector?Chief *2ecutive is to ensure that the companyachieves its strategic ob$ectives and to provide leadership anddirection to sta.

is her role depends on the stage of growth of the company.Typically, the scope of the role becomes more clearly de%ned as

the company develops and the supporting Corporate Governanceframewor re"uired is clearer. ;or e2ample, once such aframewor is developed ,the 7anaging 1irector?Chief *2ecutivemay delegate some responsibilities to members of the7anagement Team.

Rl fM i


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Role of ManagingDirector/Chief Executive

)age +B9 Seth )ublication

Riht fI t d


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Rights of Investors andShareholders

+! oting )owers on :a&or Issues!

.! Ownership in a )ortion o* copany8arnings

/! 'he ight to 'rans*er

7! ight to receive dividend

2! Opportunity to Inspect 1oo%s o* accountsand records!

9! 'he right to sue *or wrong*ul act!


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Distinguishing the Roles of

Board and ManagementConstitutions of more and more companies stressand underline that the businesses is to be managedby or under the direction of the board.#

n such a practice, the responsibility for managing

the business is delegated by the board to the C*5,who in turn delegates the responsibility to othersenior e2ecutive.

Thus, the board occupies a ey position between

the shareholders 9owners( and the company


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Separation of the roles of the CEO and Chairperson

To be read from pg.'@@&'@D

Should the board have Committees??

Appointments:- The Board and the Directors Re-elections

Remuneration of Directors and Executives Remuneration.Disclosure and Audit


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Role and Responsibility of a Non-executive Director

BOARD OF DIRECTORS

Executive Non-executive

Though the law treats them simply as directors and both carry equal

responsibility ,they have different roles to play. The non-executiveindependent directors are generally given the chairmanship of important

committee like Audit Committee, Nomination Committee andRemuneration committee

They are closer to action. They can question the executives directly. They

observe from a distance how well executives are performing their duties.


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Corporategovernance Aconceptualframework 141203105638 Conversion Gate02

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