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Corporate Governance

What is 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 equally to require accountability for the stewardship of those resources.
The aim is to align as nearly as possible the interests of individuals, corporations and society

Cont..
The primary purpose of corporate governance is to create wealth legally and ethically. This translates to bringing a high level of satisfaction to five constituencies -- customers, employees, investors, vendors and the societyat-large. The raison d'tre of every corporate body is to ensure predictability, sustainability and profitability of revenues year after year. - N R Narayana Murthy

History of Corp Gov in India


Following CIIs initiative, the Securities and Exchange Board of India (SEBI) set up a committee under Kumar Mangalam Birla to design a mandatory-cumrecommendatory code for listed companies The Birla Committee Report was approved by SEBI in December 2000 Became mandatory for listed companies through the listing agreement, and implemented according to a rollout plan

Issues in Corporate Governance


Asymmetry of power Asymmetry of information Interests of shareholders as residual owners Role of owner management Theory of separation of powers Division of corporate pie among stakeholders

Principles of Corporate Governance

Principle 1: Performance Orientation


The principal objective of business enterprises is to enhance economic value for all shareholders by making the most efficient use of resources. A company that meets this shareholder value creation objective will have greater internally generated resources.

Principle 2: Nomination and Compensation Committees


A nomination committee with a written mandate and terms of reference consistent with good practice may ensure the selection of directors and a chief executive officer (CEO) of the highest calibre. A compensation committee should set the compensation policy for directors and senior management.

Principle 3: Disclosure
To ensure transparency, companies annual reports should disclose true and fair accounting information prepared in accordance with applicable standards; consider substance over form in the presentation of accounts; disclose and discuss all material risks.

Principle 4: Audit Committee


Audit committees with the following attributes are more effective: composed solely of independent directors, at least two of whom should have the requisite knowledge of accountancy, financial analysis, and financial reporting; at least one member should have a good understanding of the business of the enterprise.

Principle 5: Code of Conduct


All enterprises must have a written code of business conduct and establish systems to ensure that it and all applicable laws are followed in letter and spirit.

Principle 6: Conflicts of Interest


Directors owe a fiduciary duty to the company that requires them to act in the best interest of the company. Actual and potential conflicts of interest should be identified, disclosed, and explained in sufficient detail to enable valid judgments to be made on their adverse impact.

There is an inextricable relationship among the objectives of corporate performance, social development, and environmental protection. Enterprises, to be sustainable, will need to recognize and effectively deal with this triad of concerns, which, at times, may conflict with each other.

Principle 7: Environmental and Social Commitment

Principle 8: Conduct of the Board of Directors


Directors are expected to preserve and enhance shareholder value. Their effectiveness can be enhanced if they are legally empowered, have the requisite qualifications for the board committees on which they sit, make the needed time commitment.

Principle 9: Responsibilities of Investors


The pursuit of good corporate governance in investee enterprises is a risk management tool. Institutional investors, general partners, and fund managers have a fiduciary duty to actively monitor and vote on issues vital to the success of enterprises in which they invest as guardians of the savings entrusted to them.

Principle 10: The Role of Directors in Turnaround Situations


Directors of troubled companies must play a proactive role in turnaround situations, but avoid preferential treatment of creditors, or trade when the company is insolvent.

Corporate Governance Mechanisms


Internal Governance Mechanisms Board of director Managerial incentive compensation Ownership concentration External Governance Mechanisms Market for Corporate Control

Mechanism of control
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers' behavior, an independent third party (the external auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability

1. Internal corporate governance control .


2. External corporate governance control .

Internal corporate governance control


Organizationally based mechanism Monitoring by the board of directors. Internal control procedures and internal auditors. Balance of power. Remuneration

External corporate governance control


It encompasses the control of external stake holders exercise over the organization. Competition Debt covenants Demand for assessment of performance (especially financial statements.) Government regulations Media pressure Take over

1. 2. 3. 4. 5. 6.

Corporate governance & firm performance


Corporate governance represents the relationship among stakeholders that is used to determine & control the strategic direction & performance of the organization. Corporate governance involves oversight in areas where owners, managers & members of board director may have conflicts of interest.

Parties to Corporate Governance


Chief Executive officer
Responsibilities. International Use. Structure. In the Media. CEO Search Firms.

Board of Directors
Use of corporate property. Transaction with Company. Conflict of duties and interest. Proper purpose. Classification

Management
Basic function of management. Formation of the business policy. How to implement policies and strategy. Where policies and strategies fit in the planning process. Areas and categories and implementation of management. Multi divisional management hierarchy.

Share holders
The right to propose shareholder resolution. The right to share in distributions of the company's income. The right to purchase new shares issued by the company. The right to a company's assets during, a liquidation of the company.

&

THE INFOSYS MODEL


A formal code of business conduct and ethics. To be signed and adhered to by employees. Action against any employee for violation is taken seriously

THE INFOSYS MODEL Contents


General standards of conduct Management of conflicts of interest Protection of companys confidential information Obligations under securities laws Use of assets An entire section on responsibilities to customers and stakeholders.

Infosys Technologies: The Best among Indian Corporate


As per the Credit Lyonnais Securities Analysis (CLSA), the corporate governance ratings of the Software firms are higher than those of other Indian firms. Infosys, based in Bangalore, is a publicly held, ISO 9001 certified company offering information technology consulting & software services. The software offered include application development, ECommerce & Internet Consulting, Software Maintenance. Respected across the country, with very strong systems, high ethical values & a nurturing working atmosphere. Net income of US 1,155 million and revenue of US 4,176 million. At present having US 20.4 billion market capitalization

Achievements
Voted as the Best Managed Company in Asia. Biggest exporters of Software. First to follow the US Generally Accepted Accounting Principles before going for Nasdaq listing in 1991.

Championed Corporate Governance in India

Narayana Murthys Global Strategy


1) Global Delivery Model Producing where it is most cost effective to produce & selling where it is most profitable to sell.

2)

Moving up the Value Chain Getting involved in a software development project at the earliest stage of its life cycle.
PSPD Model Predictability of Revenues, Sustainability of Revenues, Profitability, Demaking and risk taking

3)

ICSI National Award for Excellence in Corporate Governance


Best Governed Companies

Current status on corporate governance


Insistence on forms and structures Overarching regulations Regulatory overkill Lack of adequate number of strong, independent directors Large liabilities for companies and officers Has the pendulum swung too far? For the first time in the decade-long history of the Index of Economic Freedom, the U.S. is no longer among the top ten most free countries Wall Street Journal and the Heritage Foundation Index of Economic Freedom

Benefits of Good Corporate Governance


Having better access to external finance. Lower costs of capital. Improved company performance. Higher firm valuation and share performance. Reduced risk of corporate crises and scandals

Factor influence the corporate governance


1. The ownership structure 2. The structure of company boards 3. The financial structure 4. The institutional environment problems of corporate governance Demand for information Monitoring costs Supply of accounting information

Problem of corporate governance


We lay structures over the corporate business, and fail to organize the business Corporate Performance Management reports against overlaid structures Accounting accounts for only part of the business cycle and against the wrong entities We govern the corporation by rules and regulations, because we cannot manage the actual business

ETHICS-definitions
The word ethics is derived from the Greek word ethos meaning character and latin word mores meaning customs To better understand ethics let us understand and contrast the definition of ethics and law

Law is a consistent set of universal rules that are widely published, generally accepted and usually enforced. These rules describe the ways in which people are required to act in society. Ethics defines what is good for the individual and for society and establishes the nature of duties that people owe to oneself and others in society

What are ethics


The principle of conduct professional ethics A system or philosophy of conduct A discipline dealing with what is good and bad- moral duty and obligation A set of moral principles or values

ETHICS AND CORPORATE GOVERNANCE


Deals with determination what is right'," fair, prior and just" in decisions and actions made that affect stake holders. It focuses on the business relationship with employees, customers, stockholders, creditors, suppliers and member of the society in which it operates. Corporate ethics , is a matter of leadership.

Adhere to corporate credos-code of conduct.


Development of IQ,EQ and SQ culture.

Purpose of ethics
Ethics are the guiding principles. Where the proposed business activity/ operation of the company borders on the unknown, the company needs to apply the ethics principle to decide on the project. Ethics help make relationships mutually pleasant and productive- imbibes a sense of community among members- a sense of belongingness to society.

laws
Law is a consistent set of universal rules that are widely published, generally accepted and usually enforced. These rules describe the ways in which people are required to act in society.

Relation between ethics and law

Concluding remarks
By and large, Indian listed companies have been legally mandated to follow fairly strict standards of corporate governance and disclosure Comparisons will show that the standards are far stronger than all Asian countries, and in general stronger than most OECD countries Indian corporate sector regulators and companies have been quick to incorporate some of the best international corporate governance and disclosure practices The need of the day is more training of directors, audit committee members and senior executives of companies The challenge is to design and sustain a system that imbibes the spirit of corporate governance and not merely the letter of the law

THANK YOU

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