corporate governance final project

8/20/2019 Corporate Governance Final Project

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CHAPTER 1.

CORPORATE GOVERNANCE

INTRODUCTION

Corporate governance to the system by which operations are directed and controlled. The

governance structure specifies the distribution of rights and responsibities among different

participants in the corporation (such as the board of directors, managers, shareholders,

creditors, auditors, regulators and other stakeholders) and specifies the rules and procedures

for making decisions in corporate affairs. Governance provides the structure through which

corporations set and pursue their objectives, while reflecting the contet of the social,

regulatory and market environment. Governance is a mechanism for monitoring the actions,

policies and decisions of corporations. Governance involves the alignment of interests

among the stakeholders.

Corporate governance has also been defined as !a system of law and sound approaches by

which corporations are directed and controlled focusing on the internal and eternal

corporate structures with the intention of monitoring the actions of management anddirections and thereby agency risks which may stem from the misdeeds of corporate


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officers. "n contemporary business corporations, the main eternal stakeholders, debt

holders, trade creditors, suppliers, customers and communities affected by the corporations

activities. "nternal stakeholders are the board of directors, eecutives, and other employees.

#uch of the contemporary interest in corporate governance is concerned with mitigation or

preventing these conflicts of interests include include the processes, customs, policies, laws,

and institutions which have an impact on the way a company is controlled. $n important

theme of governance is the nature and etent of corporate accountability.

$ related but separate thread of discussions focuses on the impact of a corporate governance

system on economic efficiency, with a strong emphasis on shareholders welfare. "n large

firms where there is a separation of ownership and management and no controlling

shareholder, the principal%agent issue arises between upper%management (the !agent&)

which may have very different interests, and by definition considerably more information,

than shareholders' (the !principles&). The danger arises that rather than overseeing

management on behalf of shareholders, the board of directors may become insulated from

shareholders and beholden to management. This aspect is particularly present in

contemporary public debates and developments in regulatory policy.

conomic analysis has resulted in a literature on the subject. ne source defines corporate

governance as !the set of conditions that shapes the e post bargaining over the *uasi%rents

generated by a firm. The firm itself is modeled as a governance structure acting through the

mechanisms of contract. +ere corporate governance may include its relation to corporatefinance.

Corporate governance is the system by which companies are directed and

controlled. "t involves regulatory and market mechanisms, and the roles and

relationships between a company-s management, its board, its shareholders and

other stakeholders, and the goals for which the corporation is governed. "n

contemporary business corporations, the main eternal stakeholder groups are

http://en.wikipedia.org/wiki/Stakeholder_(corporate)


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shareholders, debt holders, trade creditors , suppliers, customers and

communities affected by the corporations activities.

"nternal stakeholders are the board of directors , eecutives , and other

employees.

Corporate Governance is a muti!"acete# su$%ect.

$n important theme of corporate governance is to ensure the accountability of

certain individuals in an organi/ation through mechanisms that try to reduce or

eliminate the principal%agent problem. $ related but separate thread of

discussions focuses on the impact of a corporate governance system in

economic efficiency, with a strong emphasis on shareholders welfare. There are

yet other aspects to the corporate governance subject, such as the stakeholder

view and the corporate governance models around the world.

Corporate governance as #e&ine# $' (E)I committee *In#ia+

is the $cceptance by management of the inalienable rights of shareholders

as the true owners of the corporation and of their own role as trustees on behalf

of the shareholders. "t is about commitment to values, about ethical business

conduct and about making a distinction between personal 0 corporate funds in

the management of a company. The definition is drawn from the

Gandhian principle of trusteeship and the 1irective 2rinciples of the "ndian

Constitution. Corporate Governance is viewed as business ethics and a moralduty. 3ee also Corporate 3ocial ntrepreneurship regarding employee who are

driven by their sense of integrity (moral conscience) and duty to society. This

notion stems from traditional philosophical ideas of virtue (or self governance)

and represents a !bottom%up& approach to corporate governance (agency) which

supports the more obvious !top%down& (systems and processes, i.e. structural)

perspective.

http://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Executive_(management)http://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Creditorhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Executive_(management)http://en.wikipedia.org/wiki/Executive_(management)http://en.wikipedia.org/wiki/Executive_(management)


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De&inition

Corporate Governance as an internal system encompassing policies, processes

and people, which serves the needs of shareholders and other stakeholders, by

directing and controlling management activities with good business savvy,

objectivity, accountability and integrity. 3ound corporate governance is reliant

on eternal market place commitment and legislation, plus a healthy board

culture, which safeguards policies and processes


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CHAPTER ,.

-HAT I( CORPORATE GOVERNANCE

Corporate Governance is concerned with holding the balance between

economic and social goals and between individual and communal goals.

The corporate governance framework is there to encourage the efficient

use of resources and e*ually to re*uire accountability for the stewardship

of those resources.

The aim is to align as nearly as possible the interests of individuals,

corporations and society.

The primary purpose of corporate governance is to create wealth legally

and ethically.

This translates to bringing a high level of satisfaction to five

consultancies% customers, employees, investors, vendors and the society%

at%large

CHAPTER /.

CORPORATE GOVERNANCE IN INDIA


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The history of the development of "ndian corporate laws has been marked by

interesting contrasts. $t independence, "ndia inherited one of the world's

poorest economies but one which had a factory sector accounting for a tenth of the national product4 four functioning stock markets (predating the Tokyo 3tock

change) with clearly defined rules governing listing, trading and settlements5

a well%developed lending norms and recovery procedures. "nterims of corporate

laws and financial system, therefore, "ndia emerged far better endowed than

most other colonies. The 6789 Companies $ct as well as other laws governing

the functioning of joint%stock companies and protecting the laws governing the

functioning of joint%stock companies and protecting the investors rights built on

this foundation.

The beginning of corporate developments in "ndia were marked by the

managing agency system that contributed to the birth of dispersed e*uity

ownership but also give rise to the practice of management enjoying control

rights disproportionately greater than their stock ownership. The turn towards

socialism in the decades after independence marked by the 6786 "ndustries

(1evelopment and :egulation) act as well as the 6789 "ndustrial 2olicy:esolution put in place a regime and culture of licensing, protection and

widespread red%tape that bred corruption and stilled the growth of the corporate

sector. orbitant ta rates encouraged creative accounting practices and

complicated emolument structures to beat the system.

"n absence of a developed stock market, the three all%"ndia development finance

institutions (1;"s)% the "ndustrial ;inance Corporation of "ndia, the "ndustrial1evelopment


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proper credit appraisal or effective follow%up and monitoring. Their nominee

directors routinely served as rubber%stamps of the management of the day. ?ith

their support, promoters of businesses in "ndia could actually enjoy managerial

control with very little e*uity investment of their own.


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from i7rregularities in share transfers and registrations = deliberate or

unintentional. 3ometimes non%voting preferential shares have been used by

promoters to channel funds and deprive minority shareholders of their dues.

#inority shareholders have sometimes been defrauded by the management

undertaking clandestine side deals with the ac*uirers in the relatively scarce

event of corporate takeovers and mergers.


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"EATURE( O" CORPORATE GOVERNANCE

6. Corporate governance is concerned with how companies are controlled

and managed.

B. "t involves appropriate supervision and control over the top management.

. "t re*uires fair, transparent and efficient administration and effective

internal monitoring.

H. "t is meant to serve the interests of all the stakeholders in a company.

8. "t re*uires a legal and institutional framework within which companies

are to be managed.

9. Corporate governance goes beyond law, it re*uires high level of business

ethics and a sense of corporate social responsibility.

A. Corporate governance embraces as to how the set systems and processes

and how are the things are done within certain structural and

organi/ational systems.@. "t is an interplay between a company, its between a company, its

stakeholders the capital market and corporate laws.

CHAPTER .

PRINCIP2E( O" CORPORATE GOVERNANCE

The corporate governance practice in the Company is built in conformity with

the best international standards and recommendations set in the Code of

Corporate


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Corporate governance in t3e Compan' is $ase# on t3e &oo4ing principes4

Rig3ts an# e5uita$e treatment o& s3are3o#ers

rgani/ations should respect the rights of shareholders and help shareholders toeercise those rights. They can help shareholders eercise their rights by openly

and effectively communicating information and by encouraging shareholders to

participate in general meetings.

Accounta$iit'

The Code of Corporate Governance envisages accountability of the


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That a properly structured


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• Changing ownership structure% comple ownership structure involving

promoters, public financial instns, institutional shareholders (foreign in

terms of their ;1" and "ndian), banks, insurance companies and small

private investors. "t is a challenge for management of companies.

• 3ocial :esponsibilty% $n effective corporate governance provides for

regulating the duties of directors so that they act in the best interests of

customers, lenders, suppliers, and local community.

• 3cams% Corporate scams like +arshad #ehta, 3atyam etc have shaken the

public confidence, hence need for corporate governance.

• Corporate obligarchy% i.e. nly a small group of people govern an

organi/ation. "t has given rise to need for mechanisms and systems for

corporate governance.$lso, shareholders activism and shareholders

democracy have also developed.

• Globalisation% :ise of international markets and need to get listed on

international stock echanges have prompted corporate to focus on

corporate governance.

• "nternational organi/ations like C, G$TT and ?T have all contributed

to rising awareness.

• "t lays down the framework for creating long%term trust between

companies and the eternal providers of capital.

• "t improves strategic thinking at the top by inducting independent

directors who bring wealth of eperience and a host of new ideas.


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• "t rationali/es the management and monitoring of risk that a firm faces

globally.

• "t limits the liability of top management and directors, by carefully

articulating the decisions making process.

• "t has long term reputational effects among key stakeholders, both

internally (employees) and eternally (clients, communities,

politicalJregulatory agents).

CHAPTER :.

9ECHANI(9 AND CONTRO2(

Corporate governance mechanisms and controls are designed to reduce

the inefficiencies that arise from ha/ard and adverse selection. There are both

internal monitoring system and eternal monitoring systems. "nternal monitoring

can be done, for eample, by one (or a few) large shareholder(s) in the case of

privately held companies or a firm belonging to a business group. ;urthermore

the various board mechanisms provide for internal monitoring. ternal

monitoring of managers behavior occurs when an independent third party (e.g.

the eternal auditor) attests the accuracy of information provided by management

to investors. 3tock analysis and debt holders may also conduct such eternal

monitoring. $n ideal monitoring and control system should regulate both

motivation and ability, while providing incentive alignment toward corporate

goals and objectives. Care should be taken that incentives are not so strong that


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some individuals are tempted top cross lines of ethical behavior, for eample by

manipulating revenue and profit figures to drive the share price of the company

up. "t can be further controlled with the help of two methods4

6. "nternal corporate governance controls

B. ternal corporate governance controls

INTERNA2 CORPORATE GOVERNANCE

"nternal corporate governance controls monitor and then take

corrective action to accomplish organi/ational goals. amples include4

6. 9onitoring $' t3e $oar# o& #irectors4

The board of directors, with its legal authority to hire, fire and

compensate top management safeguards invested capital. :egular

board meetings allow potential problems to be identified, discussed

and avoided. ?hilst non%eecutive directors are thought to be more

independent, they may not always result in more effective corporate

and may not increase performance outcomes, e ante. "t could be

argued, therefore, that eecutive directors look beyond the financial

criteria.

B. Interna contro proce#ures an# interna au#itors4

"nternal control procedures are policies implemented by an entity's

board of directors, audit committee, management and other personnel

to provide reasonable assurance of the entity achieving its objectives


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related tp reliable financial reporting, operating efficiency and

compliance with laws and regulations. "nternal auditors are personnel

within an organi/ation who test the design and implementation of the

entity's internal control procedures and the reliability of its financial

reporting.

. )aance o& po4er4 The simplest balance of power is very common5

re*uire that the 2resident be a different person from the Treasurer.

This application of separation of power is further developed in

companies where separate division checks and balances each other's

actions. ne group may propose company%wide administrative

changes, another group review and can veto the changes and a third

that the interests of people (customers, shareholders, employees)

outside the three groups are being met.

H. Remuneration4

2erformance%based remuneration is designs to relate some proportion

of salary to individual performance. "t may be in the form of cash or

non%cash payments such as shares and share options, superannuation

or other benefits. 3uch incentive schemes however are reactive in the

sense that they provide no mechanisms for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.


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E;TERNA2 CORPORATE GOVERNANCE CONTRO2(

ternal corporate governance controls encompass the controls eternal

3takeholders eercise over the organi/ation. amples include4

Competition

De$t covenants

Deman# an# assessment o& per&ormance in&ormation *esp.

&inancia statements+

Government reguations

9anageria a$or mar


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CHAPTER =.

PRO)2E9( O" CORPORATE GOVERNANCE

•Deman# &or in&ormation4 "n order to influence the directors, the shareholders

must combine with others to form a significant voting group which can pose a

real threat of carrying resolutions or appointing directors at a general meeting.

•9onitoring costs4 $ barrier to shareholders using good information is the cost

of processing it, especially to a small shareholder. The traditional answer to

this problem is the efficient market hypothesis (in finance, the efficient market

hypothesis (in finance markets are efficient), which suggests that the smallshareholder will free ride on the judgments of larger professional investors.

• (upp' o& accounting in&ormation> ;inancial accounts form a crucial link in

enabling providers of finance to minor directors. "mperfections in the financial

reporting process will cause imperfections in the effectiveness of corporate

governance. This should, ideally be corrected by the eternal auditing process.

•Roe o& t3e Accountant ? Au#itors> ;inancial reporting is a crucial element

necessary for the corporate governance system to function effectively.

$ccountants and auditors are the primary providers of information to capital

and participants. The directors of the company should be entitled to epect the

management prepare the financial information in compliance with statutory

and ethical obligations and rely on auditor's competence.


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Current accounting practice allows a degree of choice of method in determining the

method of measurement, criteria for recognition, and even the definition the

accounting entity. The eercise of this choice to improve apparent performance

(popularly known as creative accounting) imposes etra information costs on users.

"n the etreme, it can involve non%disclosure of information.

CHAPTER 1@.

2EGA2 "RA9E-OR

Corporate Governance an# 2a4 Re&orms in In#ia


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received on good corporate governance. $ +igh 2owered Central Coordination

and #onitoring Committee (CC#C), co%chaired by 3ecretary, 1epartment of

Company $ffairs and Chairman, 3


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The predominant form of corporate governance in "ndia is -insider model'

wherepromoters dominate governance in every possible way. "ndian corporate

which reflect the pure -outsider model' are relatively small in number.

$ distinguishing feature of the "ndian 1iaspora is the implicit acceptance that

corporate entities belong to founding families.

The listing agreement, the main instrument, through which 3


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interesting to note that despite corporate governance in the form of clause H7

was already introduced in the year BDDD5 it could not prevent securities scam of

BDDB. vents in the stock echanges have eposed the lack of ethical conduct by

many "ndian corporate4

:ampant insider trading by the promoters in league with big market players.

#assive price riggingJ manipulation by the promoters in league with big

market players prior to mergers and takeovers.

Gross misuse of bank funds for clandestine stock market operations.

Criminally motivated investment in violation of laid down norms.

#any companies, which raised money from the capital market through public

issues, have not paid any dividend for more than five years.

The total amount of money (collected through public offerings) duped by the

vanishing companies is calculated to be :s 99,@96 billion5

Eon%performing assets of scheduled commercial banks amounted to :s

8@,88Hbillion as on 6 #arch BDD.

In a##ition sma investors 3ave ost t3eir 3ar# earne# mone' in t3e stoc


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• Fack of ethics, selfish conscience, and breach of trust on the part of the

promoters.

• Fack of ade*uate compliance mechanism, supervision, proper inspection,

effective regulation and preventive action by regulators like 1epartment

of Company $ffairs, :egistrar of Companies,

strengthening the position of internal and outside auditors5

allowing mergers and ac*uisitions approved by a panel5

re*uiring more independent outside directors on boards5

introducing the supervisory board or two% tier system5

CHAPTER 11.

9EA(URE( CON(TITUTED ) R)I "OR CORPORATE

GOVERNANCE


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• #inistry of Corporate $ffairs has set up Eational ;oundation of

Corporate Governance (E;CG) as a non%profit body to deliberate and

advise on good corp. governance.

• E;CG has made action plan for corp. governance norms on themes%

• i. ;or institutional investors.

• ii. ;or independent directors on board.

• iii. ;or $udit

• C"" 0 3


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+ence, the disclosure standards need to be further broad%based in consonance

with improvements in the capability of market players to analyse the

information objectively.

The off%site surveillance mechanism is also active in monitoring the movement

of assets, its impact on capital ade*uacy and overall efficiency and ade*uacy of

managerial practices in banks. :


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Corporate Governance has become the latest bu//word today. $lmost every country

has institutionali/ed a set of Corporate Governance codes, spelt out best practices

and has sought to impose appropriate board structures. 1espite the Corporate

Governance revolution there eists to universal benchmark for effective levels of

disclosure and transparency. There are several corporate governance structures

available in the developed world but there is no one structure, which can be singled

out as being better than the others. There is no !one si/e fits all& structure for

corporate governance. Corporate governance etends beyond corporate law.

"ts fundamental objective is not the mere fulfillment of the re*uirements of law but

in ensuring commitment of the board in managing the company in a transparent

manner for maimi/ing long term shareholder value. ffectiveness of corporate

governance system cannot merely be legislated by law. $s competition increases,

technology pronounces the death of distance and speeds up communication. The

environment in which companies operate in "ndia also changes. "n the dynamic

environment the systems of corporate governance also need to evolve.

The recommendations made by different epert committees will go a long way in

raising the standards of corporate governance in "ndian companies and make them

attractive destinations for local and global capital. These recommendations will also

form the base for further evolution of the structure of corporate governance in

consonance with the rapidly changing economic and industrial environment of the

country in the new millennium.

)I)2IOGRAPH

www. 4i


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