Session 10 PPCG

8/22/2019 Session 10 PPCG

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Session 10



• OECD Guidelines of CG 2004

• Convergence of CG Codes• Road Ahead



OECD CODE OF CG …

OBJECTIVES of the CODE

• I) Ensuring the basis for an effective corporategovernance framework;

• II) The rights of shareholders and key ownershipfunctions;

• III) The equitable treatment of shareholders;

• IV) The role of stakeholders;

• V) Disclosure and transparency;

• VI) The responsibilities of the board.



I. Effective Corporate

Governance Framework

• The corporate governance frameworkshould promote transparent and

efficient markets, be consistent withthe rule of law and clearly articulatethe division of responsibilities amongdifferent supervisory, regulatory and

enforcement authorities.



II. The Rights of Shareholders andKey Ownership Functions

The corporate governance

framework should protect andfacilitate the exercise of shareholders’ rights.



III. The Equitable Treatment of Shareholders

The corporate governanceframework should ensure theequitable treatment of allshareholders, including minority

and foreign shareholders.All shareholders should have theopportunity to obtain effectiveredress for violation of their rights.



IV. The Role of Stakeholders inCorporate Governance

The corporate governance framework

should recognise the rights of stakeholders established by law orthrough mutual agreements andencourage active co-operationbetween corporations and

stakeholders in creating wealth, jobs,and the sustainability of financiallysound enterprises.



V. Disclosure and

Transparency

The corporate governanceframework should ensure that

timely and accurate disclosure ismade on all material mattersregarding the corporation, includingthe financial situation, performance,ownership, and governance of thecompany.



VI. The Responsibilities of theBoard

The corporate governance framework

should ensure the strategic guidance

of the company, the effectivemonitoring of management by the

board, and the board’s accountability to

the company and the shareholders.



CONVERGENCE OF CG CODES

• The World Bank and OECD signed a MoU in Paris (21st June1999) for achieving convergence of CG Codes.

• Set up the Global Corporate Governance Forum (GCGF).

• The joint declaration stated :

“The improvement of corporate governance practices iswidely seen as one important element in strengthening

the foundation for individual countries’ long-term

economic performance and in contributing to a

strengthened international financial system. Therefore,corporate governance has emerged as an important focus

of efforts by multilateral organisations to assist countries

in improving financial architecture.



(Mervyn King, Chairman, King Committee on CorporateGovernance, South Africa -Developing CorporateGovernance Codes of Best Practices, Global CorporateGovernance Forum, World Bank, 2005, )

“Good corporate governance makes good, hard -nosed business sense. Countries with strong corporategovernance practices attract capital. Today’s domestic and international investors are likely to shy away from

countries that do not guarantee investor rights, that do not provide for adequate corporate disclosure, and that do not ensure sound board practices.Whilst globalization of economies has increased, and international corporate guidelines have been adopted,each country has its own values, societal norms, way of doing business, and special circumstances. Thus, to guide policymakers, market players, and corporations inadopting sound corporate governance practices at thelocal level, every country should endeavor to develop itsown corporate governance code.”



• The Road Ahead



CG :

Contemporary

Issues &Challenges



• Satire on Corporation

• Corporation Defined as

“Corporation is an ingenious device for

obtaining individual profit without individual

responsibility”. ( Satirist Ambrose)

• Quoted by Lieberman, Chairman US Senate Committee to

castigate the Board of Directors in the Enron scandal.

1. Corporate Goals vs Personal Goals



• Bursting of “Bubble” Co.s (1720)-British Parliament Act to regulatecompanies

• Watergate Scandal – US Federal law (Foreign Corrupt Practices Act,1977)

• Maxwell Scandal – Cadbury Code

• Fall of Enron , AA – SOX Act

• Collapse of Lehman Brothers etc., (2008 ) -- ???

• Indian Corporate Scams- Clause 49 of SEBI

• Satyam Fraud ( Jan. 2009)

• 2G scam

• Coalgate scam

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Corporate Failures & Governance Reforms



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1992 Harshad Mehta Scam

1993 MNCs allotted shares to themselves below marketprices, investors lost Rs.5,000 Cr

1992-1996 Vanishing Companies scam – 3,911 companiesraised Rs.25,000 cr, vanished

1995-96 Plantation Companies mopped Rs.50,000 Cr

1996-97 NBFCs – thousands of crore mopped up from thepublic promising huge returns

1995-98 The Mutual Fund scam psu banks raiseRs 15,000 Cr. all flopped

1998 BPL, Sterlite , Videocon price-rigging Harshad

2001 Ketan Parekh Price rigging with bear cartel

Corporate reforms in India – SEBI regulation, clause 49

India – Decade of Scams 1992-2002



Skepticism of Adam Smith

• Grave doubts about Future of Joint Stock Companies

•Adam Smith & Karl Marx

Joint Stock Companies unworkable

•Owners negligent

• Directors have self-interests

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Issue 2. Managing Other Peoples’ Money



• “The directors of such companies, however,being the managers rather of other people’smoney than of their own, it cannot well beexpected that they should watch over it with

the same anxious vigilance with which thepartners in a private co- partnery frequentlywatch over their own”

Adam Smith, Wealth of Nations,1776

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• Dispersion of Stocks

• Separation of ownership & control

• “But have we any justification for assuming that

those in control of a modern corporation will alsochoose to operate it in the interests of theowners?”

Berle & Means The Modern Corporation and Private Property, (1932/1967).

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3.Separation of ownership and control



• Principal /Owner- Agent /Manager IssuesDiscretionary Powers of managers

Conflicts of interests between principal and agent

- “The manager in a firm will choose a set of activities for the

firm such that the total value of the firm is less than it would

be if he were the sole owner.”

• Agency costs : Corporate Governance mechanism shouldreduce agency costs

-( Jensen & Meckling)

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4. Managers as Agents or Stewards



• The stewardship theory of firm is contrary to theagency theory.

• Whereas the agency theory has its origin ineconomics, stewardship theory has its roots in

psychology and sociology.• Stewardship theory assumes that managers are

stewards of owner’s wealth and that theirinterests align* [Davis, Schoomen & Donaldson,1997].

• The manager puts interests of the company hemanages before his own.

• He feels that his own goals are best accomplishedby serving the interests of the organization.



• Contrary to Agency Theory

• Managers are stewards of owners’ wealth

• Interests of mangers align with interests of owners

• Managers’ goals are served by organizational goals

• Agency theory – X , Stewardship - Y , Theory of Man

• X - Man driven to work by economic needs likewealth, power; hence to be controlled

• Y – Man motivated to work by higher needs likeachievement , recognition and self-esteem ;

managers not opportunistic

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• Groups / individuals/Institutions who cansubstantially affect / be affected by the companyare stakeholders

• A stakeholder holds a stake , rather than just a

share • Shareholders ,the employees ,customers

,creditors ,suppliers ,community , govt. , society& environment are stakeholders

• All stakeholders contribute to long-term valueaddition of the company

Justification for CSR

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5.Shareholders vs Stakeholders



Corporate Gov.: Social Objective

• “Corporate governance deals with the ways in which suppliersof finance to corporations assure themselves of getting a

return on their investment. ”(Shleifer and Vishni)

•Corporate Governance has several claimants – shareholdersand other stakeholders – which include suppliers, customers,creditors, bankers, employees of the company, thegovernment and the society at large. The fundamentalobjective of corporate governance is the enhancement of

shareholder value, keeping in view the interests of otherstakeholders.

( Kumar Mangalam Birla Committee)



6.Profit vs Social Good

• Company is a for profit

organization.

• But earning profit is no longeracceptable as the sole purpose

of business.



• It is now accepted that the purpose of business is

not just to make profit as an end by itself, but tomake profit so that the business can dosomething more or better; “ profit would be themeans to that larger end .”

-Charles Handy HBR 2002• “Profit for a company is like oxygen for a person.If you don’t have enough of it, you’re out of thegame. But if you think your life is aboutbreathing, you’re really missing something.” –Peter Drucker

• Sustainable business strategy must harmonize thetwin objectives of profit and social good.



7.Corporate Sustainability



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CORPORATE SUSTAINABILITY: COMPONENTS

1) Economic sustainability -

To manage its assets to ensure business

continuity; To ensure liquidity at all times i.e. cash flow

to meet financial commitment

Competitive Productivity

Returns for shareholders.



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2) Environmental sustainability -

– Consumes natural resources effectively;

– ensures not to cause emissions which accumulate in

the environment at a rate beyond natural system’s capacity to absorb and

– Actions should be on principles of Sustainability

( least harm & long term )



3) Social sustainability

- Meet the expectations of society

- add value to communities- take care of Human and Social Capital.



Goals of (1)PROFITS

along with

(2) Corporate ethics ,

(3) social responsibility &

(4)sustainable development

are emerging as major objectives of corporate strategy



EMERGING LANDSCAPE

of

CORPORATE GOVERNANCE



Responsibilities of

Shareholders & Stakeholders

1. Shareholders – Active &Vigilant Role ,ShareholderActivism, Effective participation in AGM , Obtainmaterial information ,Control managers thro’ Board

2. Employees – ethical conduct , whistle blower role

3. Suppliers – integrity pact with company4. Customers-promote ethical, socially responsible Co .

5. Society – Should favor socially responsible company

6. Government – institution building for good CG

7. Environmental Groups – Promote SustainableDevelopment



Emerging Role of Independent Directors

• Shareholders’ Preference- They ensure Board

independence• Friend, Philosopher and guide of shareholders

• Trustees of society

• No conflict of interests with the company

• Attitude of constructive dissatisfaction in Boardroom

• Balance conflicting interests of stakeholders

• Initiation of board agendas – proactive role

• Promote strategic management, ethics and socialresponsibility

• Training- Orientation- Evaluation of IDs



Emerging Role of Directors

Ensure Good Governance

Promote Long Term Sustainability of the Company

Disclosure & adequate information to shareholders

Risk management policy (Political, Technology, Financial,Legal)

Promote democratic decision making (minority shareholderrights)

Fiduciary Duties towards company

Redress shareholder grievances

Accurate accounting and reliable auditing Promote Ethics ,Transparency &Fair practices



Emerging Role of Managers

Role of the Managers



Role of the Managers

(1) The managers, as the agents of theshareholders and the officers of the Board, shouldbe professionally competent, responsible andtrustworthy.

(2) The managers should devote their fulltime

attention for value addition to the enterprise. Theyshould be loyal and diligent in discharge of theirduties.

(3) The managers will have to ensure observanceof code of ethics in their work in relation with the

customers, vendors and business partners.(4) Managers must help the Board reduce agencycosts of management.



(5) Every manager must strive to observe utmost

economy, cut down cost of production and eliminatewasteful expenditure in order to make the enterprisecompetitive.

(6) Every manager should contribute to prevention of malpractices, corruption and abuse of authority in theenterprises and should act as whistle blower tounearth malpractices and cases of breach of ethicalvalues in the enterprise.

(7) The advantage of professional competence

possessed by the managers in public enterprises musttranslate into higher productivity and creativity in theinterest of long-term sustainability of the publicenterprises.



• Power & Potential of Board :Board Empowerment

• Value addition in Boardroom

• Supervision of Financial Health of Co.

• Qualification &Selection of Directors ( Also CEO ,IDs)

• Accountability & Evaluation of Directors

• Strategic management by Board

• Independent & Objective decision making

• Risk policy formulation & review

• Better Human Resource Management

CG : Agenda for Reforms



• Long term sustainability of corporation

• Shareholder Activism- Better disclosures

• Better democracy-interests of minority shareholders

• Enhancing Credibility& Supervision of Auditors

• Effective Internal Controls• Active Role of IDs

• Ethics and corporate values

• Social Responsibility & Sustainable Development

• Triple bottom line approach (profit , people & planet /economic , social & environmental concerns)

• Emergence of the Ethical Corporation



• The modern corporations are shaping the future of the worldeconomy.

• The twenty first century will see competition among the

countries based upon the power and strength of their

business corporations.• In the coming years, ethical and well-governed companies will

be preferred as the investment destinations .

• Independence of the Board, credibility of the auditors and

observance of corporate ethics are the hallmarks of goodcorporate governance.

• Emergence of Ethical Corporation

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The Outlook



thank you

Session 10 PPCG

Documents

Transcript of Session 10 PPCG