CGCSR
Corporate Disclosure and Investor protection
SEBI disclosure and investor protection Guidelines: Fixation and justification of issue price Risk Factors and Management perception Industry analysis report Installed capacity and capacity utilisation Past track record and projected financial analysis Comparison of financial data with industry averages Stock Market data analysis Profitability Ratios Earning per share (EPS) NAV Per share Return on Net worth P/E Ratio
Disclosure and Transparency as per OECD principles
Disclosure should include, but not be limited to material information on financial and operating results of the co. , objectives etc
Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure
An annual audit should be conducted by an independent, component and qualified, auditor in order to provide and external and objective assurance to the board and shareholders.
External auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit
Channels for disseminating information should provide for equal, timely and cost efficient access to relevant information by users.
The corporate Governance framework should be complemented by an effective approach that addresses and promotes the provision of analysis or advise by analysts brokers etc.
Recent Theoretical development on corporate governance
Agency Theory Stewardship theory Stakeholder Theory Sociological theory
Agency Theory Roots from Adam smith who identified an agency problem Terms :- Principal, Agent, Agency cost and agency problem Principal:- Shareholders (the owners) Agents:- Management Agency problem:- the mismatch in the objectives of
shareholders and managers Agency cost :- The extent to which the returns to the
owners fall. The core corporate governance is designing and putting in
place disclosures, monitoring, “oversight” and corrective systems that can align the objectives of the two sets of players as closely as possible and, hence, minimize agency cost.
Two broad mechanism that help reduce agency cost and improve performance through better governance
Fair and accurate financial disclosure Efficient and independent board of
directors
Problems with the Agency Theory
The total control of management is neither feasible nor required under this theory.
The question of its utility as a theoretical model to promote corporate governance.
The assumption in the trade-off that shareholders make on employing agents is that they must accept a certain level of self-interested behaviours in delegation responsibility to others.
Assumption of shareholders getting correct and adequate information to make effective control. Equity investors rarely get these and besides they rarely make clear their exact target returns, and yet dlegate authority to meet the target.
Stewardship theory This theory assumes that managers are basically trustworthy
and attach significant value to their own personal reputations. It defines situations in which managers are stewards whose motives are aligned with the objectives of their principles.
Given a choice between self-serving behaviour and pro-organisational behaviour, a steward’s behaviour will not depart from the interests of his/her organisation.
Control can be potentially counterproductive, because it undermines the pro-oragnisational behaviour of the steward, by lowering his/her motivation
Stakeholder Theory The theory synthesis of economics, behavioural science,
business ethics and the stakeholder concept. The theory considers the firm as an input-out put model
by explicitly adding all interest groups-employees, customers, dealers, government and the society at large –to the corporate mix
It is grounded in many normative, theoretical perspectives including ethics of care, the ethics of fiduciary relationships, social contract theory, theory of property rights etc.
Problems of Stakeholder theory
Defining the stakeholder? Expansive list It is not applicable in practice by
corporations
Sociological theory
This has focus on board composition and the implications for power and wealth distribution in society. Problems of interlocking directorships and the concentration of directorships in the hands of a privileged class are viewed as major challenges to equity and social progress.
Governance Orientation Matrix
Globalisation and corporate governance The company should follow the governance
mechanism which will be commonly acceptable to all over the world.
Due to open market sys., the company should be more careful in their operations. Any small corruption will be known to the people since people are now aware of their rights, and privileges, the company’s duties and responsibilities.
The good governance will be a competitive advantage for the company in the world wide market among the competitors
Models of corporate governance
Anglo-American Model German Model Japanese Model Indian Model (Mix of anglo-American)
Anglo-American model Also known as Unitary board model/Anglo-
Saxon model All directors participate in a signle board
comprising both executive and non-executive directors in varying proportions
Shareholder-oriented The basis in America, Britain, Canada,
Australia and other commonwealth countries including India
Major Features of Anglo-American Model
The ownership of companies is more or less equally divided between individual shareholders and institutional shareholders
Directors are rarely independent of management
Companies are typically run by professional managers who have negligible ownership stakes. There is a fairly clear separation of ownership and management.
Major Features of Anglo-American Model
Most institutional investors are reluctant activists. If they are not satisfied with the co.’s activities they will just sell the securities.
Disclosure norms are comprehensive, the rules against the insider trading tight, and the penalties for price manipulations stiff, all of which provide adequate protection to the small investor and promote general market liquidity
The Anglo American Model
-Shareholders
Board of Directors(Supervisors) Stakeholders
Officers(Managers)
Company
Regulatory/Legal SystemCreditors
Appoints & Supervises
Manage
Lien on
Stake in
Monitors and Regulates
Own
German Model Also known as two-tier board model
The CG is exercised through two boards, in which the upper board supervises the executive board on behalf of stakeholders.
More societal oriented and is called the continental European approach
German Model Though shareholders own the company, they
do not entirely dictate the governance mechanism. They elect 50% of members of supervisory board and the other half is appointed by labour unions, ensuring that employees and labourers also enjoy a share in the governance
The supervisory board appoints and monitors the management board.
Adopted in Germany, Holland and to the extent France.
The German Model Appoint – 50%
Employees and labour unions
Supervisory Board
Management Board (Including Labour Relations Officer
Shareholders
Company
Appoints and supervises
Manage
Own
Appoint 50%
The Japanese Model
This is the business nerwork model It reflects the cultural relationships
seen in the Japanese Keiretsu network, in which boards tend to be large, predominantly executive and often ritualistic.
Features of Japanese corporate governance mechanism
The president who consults both the supervisory board and the executive management is included
Importance of the lending bank is highlighted
The Japanese Model Appoint Supervisory Board
(Including President)
President
Executive Management(Primarily Board of
Directors)
Company
Shareholders Main Bank
Ratifies the president’s decisions
Consults
Manages
Provides managers, monitors and acts in emergencies
Own
Provides loans
Owns
Provides managers
Common features in German and Japanese models Banks and financial institutions have substantial
stakes in the equity capital of companies. Besides, cross holding among groups of firms is common in Japan.
Institutional investors in both the countries view themselves as long term investors. They play a fairly active role in corporate managements
The disclosure norms are not very stringent, checks on insider trading are not very comprehensive and effective, and the emphasis on liquidity is not high. All these factors lead to the efficiency of the capital market
There is hardly any system of corporate control in these countries; mergers and take-overs are rare occurrences.
Indian Model Governance Similar to UK model The Indian corporates are governed by the
Company’s Act of 1956 The pattern of private companies is mostly
that of closely held or dominated by a founder, his family and associates.
India has adopted the key tenets of the Anglo- American external and internal control mechanism after economic liberalisation.
Indian corporate governance modelExternal environment
Government regulations, Corporate culture, structure,Policies, guidelines etc. Characteristics, indluences
Internal Environment Company Vision, Mission,Policies,Norms
Company ActSEBIStock Exchange Corporate
Governance System
Internal stakeholders
AuditorsBoard of directors
Depositors, Borrowers,Customers andOther externalStakeholders
Proper governance Shareholder Value
Corporate governance outcomes/benefits to society
TransparencyInvestor protection concern for customer
Healthy corporate sector development
The important committees: Recommended the “Best practices”
The SEBI appointed Kumar Mangalam Birla committee (2000)
The Government appointed Naresh Chandra Committee (2003)
SEBI’s Narayana Murthy Committee England’s Cadbury Committee America’s Sarbanes-Oxley Act
Obligation to the society at a Large National Interest Political non alignment Legal compliances Rule of Law Honest and ethical
conduct Corporate citizenship Ethical Behaviour Social Concerns Corporate Social
Responsibility
Environment-friendliness Healthy and safe working
environment Competition Trusteeship Accountability Effectiveness and
efficiency Timely responsiveness Corporations should
uphold the fair name of the country
Obligation to Investors
Towards shareholders Measures promoting transparency
and informed shareholder participation
Transparency Financial reporting and records
Obligation to employees Fair employment practices Equal opportunities employer Encouraging whistle blowing Human treatment Participation Empowerment Equity and inclusiveness Participative and collaborative environment
Obligation to customers
Quality of products and services Products at affordable prices Unwavering commitment to customer
satisfaction
Managerial obligation Protecting company’s assets Behaviour towards government agencies Control Consensus-oriented Gifts and donations (avoid) Role and responsibilities of corporate board
and directors Direction and management must be
distinguished Managing and whole-time directors
Good governance model
-
The Good Governance Model developed by Governance International provides a new framework for policy-makers, public managers and community leaders who want to improve the governance capacity of their organisation.
"brings together the three main elements of governance:(1) multiple stakeholders (2) political and social values(3) policy outcomes
The Good Governance Model offers a flexible framework which can be used in a number of different ways:
As a self-assessment test to develop a first understanding of how well your organisation manages governance issues.
As a tool for benchmarking stakeholder perceptions and developing a 'Governance Balanced Scorecard'.
As a tool for the Governance Health Check to improve your partnership working.
Corporate Governance Mechanism
Internal Mechanisms Ownership Concentration Board of Directors Executive compensation Multi-divisional structure
External Mechanism Market for corporate control
Internal governance mechanisms
Ownership concentration:- High relative amounts of shares owned by individual shareholders and institutional investors
Board of Directors:- Individuals responsible for representing the firm’s owners by monitoring top-level managers’ strategic decisions
Executive Compensation:- The use of salary, bonuses and long term incentives to align manager’s interests with shareholders’ interests.
Internal mechanism
Multi-divisional structure:- The creation of individual business divisions to closely monitor top-level managers’ strategic decisions
External Governance mechanism
Market for corporate control:- The purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitiveness.
11-42 © 2006 by Nelson, a division of Thomson Canada Limited.
Governance Mechanisms
Ownership Concentration
Large block shareholders have a strong incentive to monitor management closely.
In Canada such shareholders account for 65% to 70% of publicly traded stocks (59% in the U.S.)
-Their large stakes make it worth their while to spend time, effort & expense to monitor closely.
-Institutional owners are financial institutions such as stock mutual funds and pension funds that control large-block shareholder positions.
11-43 © 2006 by Nelson, a division of Thomson Canada Limited.
Insiders
Outsiders
Boards of Directors
Set compensation of CEO & decide when to replace the CEO.
- Formally monitor & control the firm’s top-level executives.
-May lack contact with day to day operations.
A firm’s CEO & other top-level managers
RelatedOutsiders
Individuals not involved with a firm’s day-to-day operations, but who have a relationship with the company
Individuals independent of a firm’s day-to-day operations and other relationships
Governance Mechanisms
Governance issues and national cultures
Changing global environment Globalisation Information technology Knowledge society Learning society Transnational management
Multiple Spheres of Cultureor ‘interfaces’ (Saner)
! National/regionalProfessional
Functional
Company
Industry
National Cultures(Hofstede)
Country clusters: Anglo Germanic Nordic Latin European Latin America Arab ...
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