unit 2 - corporate governance

7/28/2019 Unit 2 - Corporate Governance

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Prentice Hall, Inc. 2009 2-1

Corporation: a mechanism established to allow differentparties to contribute capital, expertise and labor fortheir mutual benefit

Corporation is governed by the board of directorsthat oversees top management with theconcurrence of the shareholders.


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Corporate governance: the relationship among theboard of directors, top management and shareholders indetermining the direction and performance of thecorporation


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Due care: Board of directors are responsible that thecorporation is not harmed by members of the board.Directors can be held liable


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Responsibilities of the Board of Directors

Sets corporate strategy, overall direction, mission, orvision

Hires and fires the CEO and top management

Controls, monitors, or supervises top management

Reviews and approves the use of resources

Cares for shareholders interests Assures that the corporation is managed in accordance

with state laws, security regulations and conflict ofinterest situations


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Key Responsibilities of Directors in India

Determination of Board Functions, i.e. premises withinwhich the board is to work annually

Setting values, mission and vision

Responsibility to prepare strategic plan, next yearsoperating plan and budget.

Providing standard benchmarks to evaluate theperformance and activities to assign accountability, tolook into requirements of resources and time frame

Responsibility to ensure that company has adequateresources

To monitor and progress towards achieving the agreedobjectives

Responsibility to prepare work plan for the year withmonthly benchmarks and time lines

Responsibility to mentor, monitor and evaluate CEO Responsibility to ensure compliance and disclosure to various acts

like Companies Act, SEBI ACT, Income Tax, Sales tax etc.

To communicate with stake holders & Overseeing mergers and

acquisitions


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Role of the Board in Strategic Management

Monitor developments inside and outside thecorporation

Evaluate and Influence management proposals,decisions and actions

Initiate and Determinethe corporations mission and

strategies


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Members of a Board of Directors

Inside Directors are officers or executives employed bythe boards corporation

Outside Directors are executives of other firms but arenot employees of the boards corporation


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Kinds of Directors

Executive Directors: full time employees of the company.Status and powers are derived from the position in thehierarchy

Non Executive Director: does not hold any mgnt.Position. Chosen exclusively to sit in the board as a parttime assignment.

Nominee Director: appointed by the third party to ensuresafety of their interest. For eg. Govt., ForeignCollaborators, Financial Institutions, Holding Companies

Representative Director: appointed to represent theinterest of stakeholders like suppliers, consumers oremployees. They enrich company through theirexpertise and specialization and helps in conscience andmutual understanding


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Kinds of Directors

Shadow Directors: Also called deemed directors. Have

same powers are Board but remain in background. Cangive instructions and exercise their power

Associate Director: title is given to senior managers as a

token of appreciation and recognition for the work done.They represent this title while dealing with outside

parties and can be held liable as Director


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Lead Director- is consulted by the Chair/CEO regardingboard affairs and coordinates the annual evaluation ofthe CEO

96% of U.S. companies that combine the Chairman andCEO positions had a lead director


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Members of a Board of Directors

Agency theory problems arise in corporations (where mgnt is differentfrom owners) because top management is not willing to accept

responsibility for their decisions unless they own a substantialamount of stock in the corporation

- Select less risky strategies to ensure profits in short run

- Secure their jobs

- Boost sales and assets figures to increase their salaries

However, if the board is from outside, they will use their expertise andexperience in making objective decisions to ensure profits in longrun. They will not indulge in illegal behaviour


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Stewardship theory as the result of long tenure withthe corporation, insiders (top management) tend toidentify with the corporation and its success. Act in thebest interest of the corporation more than self-interest.

While outside directors are associated with so manycompanies, dont have time, interest and availability forone single company.


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Nomination and Election of Board Members

Criteria for a good director include: Willingness to challenge management when necessary

Special expertise that is important to the company

Available for outside meetings to advise management

Expertise on global issues

Understands the firms key technologies and processes

Brings external contacts that are potentially valuable to the firm

Has detailed knowledge of the firms industry

Has high visibility in their field

Is accomplished at representing the firm to stakeholders


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Impact of the Sarbanes-Oxley Act on U.S. CorporateGovernance

Sarbanes Oxley Act 2002- designed to protectshareholders from excesses and failed oversight ofboards of directors

- Auditors should be outside independent directors- Whistleblower procedures- Ensure that no harsh action is taken anyone who

reports wrong doings

- ONE financial expert from outside the management- CEO and CFO will certify companys financial statements- No loans and advances to Corporate Officers


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Impact of the Sarbanes-Oxley Act on India1. Does not apply directly

2. However, they are required to disclose theirstatements from time to time

3. Globalization has also stressed on periodic disclosureof companies since foreign collaborators invest only incompanies where corporate governance rules arefollowed.

unit 2 - corporate governance

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