Shelly lec 10_be
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Transcript of Shelly lec 10_be
What is Corporate Governance??? The process and responsibility of the Board
of Directors in ensuring the management of a corporation conducts business in such a way as to meet the expectations of its various stakeholders
Besides financial returns for shareholders this also includes impact on employees environment and community at large.
Definition-OECDCorporate governance is the system by which business corporations are directed and controlled.
The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as the board, managers, shareholders and other stakeholders.
Spells out the rules and procedures for making decisions on corporate affairs.
DefinitionThe Kumar Mangalam Birla Committee constituted by SEBI has observed that:
“Strong corporate governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.”
Indian Scenario The standard of corporate governance was
poor during the earlier decades dominated by family business houses.
They operated in a virtually closed economy and could manipulate the rules governing the licence-permit raj by generous donations to political parties, and other corrupt practices.
Why is Corporate Governance important???
As we are increasingly moving towards open and market driven economic systems, a number of companies catering to international markets
These companies are required to comply with enhanced disclosure and stringent listing requirements.
Institutional investors, both foreign and domestic are becoming important players in the stock market.
They are increasingly demanding more information and transparency in operations
No. of International events (like joint ventures, mergers, takeovers) are taking place so it is required that proper corporate governance practices should be followed.
Issues in Corporate Governance (contd)
Opening of Economy
Rising importance of institutional investors
Growth of private companies
Insider Trading
Growth and magnitude of corporate groups
Rise in hostile takeovers
Objectives of Corporate Governance
A properly structured Board capable of taking independent and objective decisions is in place at the helm of affairs;
The board is balanced as regards the representation of adequate number of Non-executive and independent directors who will take care of the interests and well being of all the stakeholders;
The Board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information;
Objectives of Corporate Governance The Board has an effective machinery to sub serve the
concerns of stakeholders;
The Board keeps the shareholders informed of relevant developments impacting the company;
The Board effectively and regularly monitors the functioning of the management team; and
The Board remains in effective control of the affairs of the company at all times.
The overall endeavor of the Board should be to take the organization forward, to maximize long term value and share holder’s wealth.
Board Structures and Processes for Good Governance
STRUCTURES PROCESSES
Limit the size of Board Develop guidelines for committees
Separate the role of CEO and Chairman
Rotate directors through various committees
Avoid inside directors on the committees
Ensure that outside directors meet alone
Ensure a majority of outside directors
Ensure efficient information flow
Limit the number of other boards on which the directors can serve
Insist on regular attendance at board meetings by all directors
Impose a retirement age Establish an orientation program for new directors
Key Principles of Good Corporate Governance
ExternalAudit
Internal Audit
Director’sRemuneration
FinancialReporting
InternalControl
Appointment To
board
Supply ofInformation
Division of responsibility
KeyPrinciples
Openness
Accountability
Integrity
Functions of the BOARD Strategic Role
Systematic level strategy Structural and Portfolio strategy Implementation strategy
Policy Making
Monitoring and Supervisory Role
Benefits of Good Corporate Governance System
Increased Employee motivation
Better information System
Effective ethical policies
Stronger organizational Structure
Conducive environment for achieving company objectives
International Developments Organization for Economic Cooperation and Development
(OECD) has set certain principles in areas of corporate governance
The Right of shareholders
Equitable treatment of shareholders
Role of stakeholders
Disclosure and transparency
The responsibilities of Board
Developments in UK
Cadbury Committee Report- 1992 focused on accountability aspects
Audit Committee to comprise of minimum three members
Listed companies to publish full financial statements annually and half-yearly reports interim.
Code of Best Practices to incorporate
Board to present assessment of company’s position Directors to report on effectiveness of internal control
systems
Development in USA CG came into forefront through shareholder activism
California Public Employees Retirement Systems (CalPERS) is in the forefront of shareholder activism and internationally credited as a torch bearer of CG
CalPERS have brought out the good governance principles:
Accountability Transparency Equity Voting Method improvements Long term vision
Principles for Corporate Governance in the Common wealth (1999)
Ensure that the corporation complies with all relevant laws, regulations and codes of best business practice
Ensure that the corporation communicates with shareholders and other stakeholders effectively
Serves the legitimate interests of the shareholders and account to them fully
Regularly review the procedures and processes to ensure the effectiveness of its internal systems and control
Ensure annually that the corporation will continue as a going concern in its next fiscal year
Developments in India Voluntary code of Corporate Governance for listed companies
- CII - 1998
Kumar Mangalam Birla committee by SEBI - 2000
Companies (Amendment Act), 2000 & Clause 49 of listing agreement -2000
Naresh Chandra Committee by SEBI - 2002
Companies (Amendment) Bill of 2003
N.R.Narayana Murthy Committee -2003
Kumar Mangalam Birla Report In 1999 SEBI constituted- under the
chirmanship of Shri Kumarmangalam Birla
Committee submitted its report in year 2000
Based on these recommendations Clause 49 was incorporated in the Listing Agreement
Kumarmangalam Birla Committee Report
Board should have an optimum combination of Executive and Non- Executive directors and at least 50 % should be non-executive
An independent Audit committee should be set up by Board
Remuneration Committee should be set up by Board
There should be a separate section on CG in Annual Report with details on level of compliance by the company
The Naresh Chandra Committee (appointed by Department of Company Affairs)
It has suggested that the partners and at least 50% of the engagement team responsible for either the audit of a listed company should be rotated every five years
The committee also recommends that no partner or member of the engagement team should be employed by or become a director of a client company with whom he worked preceding two years.
The committee has considered the need for reviewing the manner in which the three professional bodies- the Institute of Chartered Accountants. Cost and Works’ Accountants, the Company Secretaries regulate their membership. It has recommended the setting up of independent quality review boards (QRBs), one for each of the three organizations.
It has also recommended the setting up of Corporate Serious Fraud Office for punishing erring professionals.
Professionalization of Corporate Governance Distinguish Management from Control
Active Role of Institutional Investors
Expand Role of Non- Executive Directors
Proper and Timely Information to Board
Size of Board
Improve Accounting and Reporting Practices
Corporate Governance and Corporate Excellence The essence of good corporate governance
is transparency, accountability, investor protection, compliance with statutory laws and regulations and value-creation for shareholders and other stakeholders.
A company’s most valuable asset is goodwill it enjoys with its stakeholders and institutional investors are willing to pay 20% more on average for companies with a good governance record.
Corporate Excellence Profitability
Satisfied stakeholders such as shareholders, customers, employees
Revenue and profit growth
Growth in market share
Growth in market value (Market capitalization)