bee l-6 corporate governance

8/6/2019 BEE L-6 Corporate Governance

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Lesson 6

Dr. Rachna Singh


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Definitiony the ways in which rights and responsibilities are shared between

the various corporate participants, especiallythe managementand the shareholders

y a set of rules that define the relationship betweenshareholders, managers, creditors, the government,employees and other internal and external stakeholders inrespect to their rights and responsibilities, or the system bywhich companies are directed and controlled. (taken from

Cadbury Committee of United Kingdom)

y The objective of corporate governance is to create added valueto the stakeholders .


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Shann TurnbullCorporate governance describes all the influencesaffecting the institutional processes, includingthose for appointing the controllers and/orregulators, involved in organizing the productionand sale of goods and services. Described in thisway, corporate governance includes all types offirms whether or notthey are incorporated undercivil law.

*Graduate School of Management Macquarie University, Published in: Corporate Governance: AnInternational Review, Blackwood, Oxford, October, 1997, vol. 5, no. 4, pp. 180-205,


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International principlesy the rights of shareholders, who should be timely

and properly informed aboutthe company, whoshould be able to participate in decisionsconcerning fundamental corporate changes, andwho should share in the profits ofthe company;

- equitable treatment of shareholders, especiallyminority and foreign shareholders, with fulldisclosure of material information and prohibitabusive self dealing and insider trading;


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- the role of stakeholders should be recognized as

established by law and ac

tive co-opera

tionbetween corporations and stakeholders in creating

wealth, jobs and financially sound enterprises;

- timely and accurate disclosure and transparency

on all matters material to company performance,ownership and its stakeholders;

- the responsibilities ofthe board in the

management, the supervision ofthe managementand the accountabilityto the company andshareholders.


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The Benefits of CorporateGovernance1. Easier to raise capital;2. Lower cost of capital;

3. Improved business performance and improvedeconomic performance;

4. Good impact on share price. (Due to the currentIndonesian situation, privatization of State-OwnedEnterprises can contribute significantlyto the statebudget)


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Stakeholder'Stakeholders are identified through the actual or

potential harms and benefits thatthey experience oranticipate experiencing as a result ofthe firm's actionsor inactions'. Donaldson & Preston (1995).

In 1963, the Stanford Research Institute defined asstakeholders as 'those groups without whose supportthe organisation would cease to exist'(Freeman1984:31).


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contd.Stakeholders are described byTurnbull (1997c,e,f) as 'strategic

stakeholders' as strategic issuesconcern the ability of a firm toexist. Strategic issues transcenddiscounted cash flow analysis

based on a relative performancemeasure of an 'opportunity rate ofreturn'.


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Why Corporate Governance?y Investment is an act of faithy Poor governance

y Undermines integrity of corporations and discourages the use of public

markets as a means to intermediate savingsy Particularlythe areas oftransparency and disclosure have been a major

factor behind instability in the financial markets across the globe

y Good corporate governancey Essential pre-requisite for the integrity and credibility of capital market

players

y

Contributes to the development of a vibrant economy and robust capitalmarkets

y Recent events have repeatedly proven the importance of corporategovernance standards, including the collapse of large globalcorporations


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Strengthening capital markets through corporate

governancey Improving the tone atthe topy Code of ethics - Not an annual exercise.talk about and demonstrate

the company's ethical standards again and againy Get colleagues, business heads to speak about core valuesy Make ethics part ofthe companys DNAy When someone does commit an ethical violation, a company should

move to fix the problem and remedythe harm as quickly as possible.y It also has to take appropriate action againstthe offending employee -

swiftly and firmly, even ifthe offending employee is a star performer

y Hold all of your managers accountable for setting the righttone.y That means disciplining or even firing them when they have failed to create

a culture of compliance

y CXOs themselves have to comply with the letter and the spirit oftherules


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Strengthening capital markets through corporate

governance

y Make character a part ofthe set of key hiring criteria

y Make integrity, ethics and compliance part ofthe

promotion, compensation and evaluation processes aswell

y Listen to employees including the bad news

y Deliver the message of integrity, honesty and

truthfulness to those with whom you do businessy Make it clear that you won'ttolerate compliance risks -

even ifthat means losing a lucrative piece of businessor a client or a transaction


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What is the Current Status on Corporate Governance

Practices?

What is the Current Status on Corporate Governance Practices?

Greater emphasis on leadership

by example

Boards are returning to basic

value systems Each culture should look back to

its roots for value systems Indias centuries old principles of

Dharma Strengthening

the moral fiber

of the

corporationValue systems are helpingbuild corporate governance

framework for companies

Boards are redefining value

creation Not merely increase in stock

prices

bee l-6 corporate governance

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