Corporate Governance &

Ethics
Introduction to Governance
What is Corporate Governance ?

• Corporate Governance refers to the way a corporation is governed.

It is the technique by which companies are directed and managed. It
means carrying the business as per the stakeholders’ desires. It is
actually conducted by the board of Directors and the concerned
committees for the company’s stakeholder’s benefit. It is all about
balancing individual and societal goals, as well as, economic and
social goals.
• Corporate Governance is the interaction between various
participants (shareholders, board of directors, and company’s
management) in shaping corporation’s performance and the way it
is proceeding towards. The relationship between the owners and the
managers in an organization must be healthy and there should be no
conflict between the two. The owners must see that individual’s
actual performance is according to the standard performance. These
dimensions of corporate governance should not be overlooked.
What is Corporate Governance ?
• Corporate Governance deals with the manner the providers of
finance guarantee themselves of getting a fair return on their
investment. Corporate Governance clearly distinguishes between
the owners and the managers. The managers are the deciding
authority. In modern corporations, the functions/ tasks of owners
and managers should be clearly defined, rather, harmonizing.
• Corporate Governance deals with determining ways to take
effective strategic decisions. It gives ultimate authority and
complete responsibility to the Board of Directors. In today’s
market- oriented economy, the need for corporate governance
arises. Also, efficiency as well as globalization are significant
factors urging corporate governance. Corporate Governance is
essential to develop added value to the stakeholders.
Major Players
 The Four Ps of Corporate
Governance
People
• People come first in the Four Ps because people
exist on every side of the business equation. They
are the founders, the board, the stakeholder and
consumer and impartial observer.
• People are the organizers who determine a
purpose to work towards, develop a consistent
process to achieve it, evaluate their performance
outcomes, and use those outcomes to grow
themselves and others as people.
 The Four Ps of Corporate
Governance
Purpose
• Purpose is the next step. Every piece of governance
exists for a purpose and to achieve a purpose. The ‘for’
is the guiding principles of the organization. Their
mission statement. Every one of their policies and
projects should exist to further this agenda.
• The ‘achieve’ is the small step on the road to completing
that large goal. It might seem pointless to type up
minutes for a meeting that felt irrelevant, but those
minutes and all the other governance from that meeting
contribute to making the business effective at achieving
it’s stated purpose.
 The Four Ps of Corporate
Governance
Process
• Governance is the process by which people achieve
their company’s purpose, and that process is developed
by analyzing performance. Processes are refined over
time in order to consistently achieve their purpose, and
it’s always smart to take a critical eye to your
governance processes.
• Can they be streamlined? Are they efficiently achieving
their purpose? It takes work to make your processes
function, but once they do you will quickly see how they
can help your company grow.
 The Four Ps of Corporate
Governance
Performance
• Performance analysis is a key skill in any industry.
The ability to look at the results of a process and
determine whether it was successful (or successful
enough), and then apply those findings to the rest
of your organization, is one of the primary functions
of the governance process.
• Using these results to develop personal skills, both
your own and your coworkers’, is how the Four Ps
cycle revolves endlessly. So take a critical eye to
your governance: is it performing?
The Four Ps of Corporate
 Importance of Corporate
Governance
• Corporate Governance is intended to increase the
accountability of your company and avoid massive
disasters before they occur. Failed energy giant
Enron, and its bankrupt employees and
shareholders, is a prime argument for the
importance of solid Corporate Governance. Well-
executed Corporate Governance should be similar
to a police department’s internal affairs unit,
weeding out and eliminating problems with
extreme prejudice.
 Importance of Corporate
Governance
Importance of Corporate
Governance
Changing Ownership Structure:-
• In recent years, the ownership structure of companies
has changed a lot. Public financial institutions, mutual
funds, etc. are the single largest shareholder in most of
the large companies. So, they have effective control on
the management of the companies. They force the
management to use corporate governance. That is, they
put pressure on the management to become more
efficient, transparent, accountable, etc. They also ask
the management to make consumer-friendly policies,
 to protect all social groups and to protect the
environment. So, the changing ownership structure has
resulted in corporate governance.
Growing Number of Scams
• In recent years, many scams, frauds and corrupt
practices have taken place. Misuse and
misappropriation of public money are happening
everyday in India and worldwide. It is happening
in the stock market, banks, financial institutions,
companies and government offices. In order to
avoid these scams and financial irregularities,
many companies have started corporate
governance.
 Importance of Corporate
Governance
Indifference on the part of Shareholders
• In general, shareholders are inactive in the
management of their companies. They only attend
the Annual general meeting. Postal ballot is still
absent in India. Proxies are not allowed to speak
in the meetings. Shareholders associations are not
strong. Therefore, directors misuse their power
for their own benefits. So, there is a need for
corporate governance to protect all the
stakeholders of the company.
 Need of Corporate Governance
Globalization
• Today most big companies are selling their goods in the global market. So,
they have to attract foreign investor and foreign customers. They also have
to follow foreign rules and regulations. All this requires corporate
governance. Without Corporate governance, it is impossible to enter,
survive and succeed the global market. Takeovers and Mergers
• Today, there are many takeovers and mergers in the business world.
Corporate governance is required to protect the interest of all the parties
during takeovers and mergers.
SEBI
• SEBI has made corporate governance compulsory for certain companies.
This is done to protect the interest of the investors and other stakeholders.
 Importance of Corporate
Governance
• Corporate Performance: Improved governance structures and
processes ensure quality decision-making, encourage effective
succession planning for senior management and enhance the
longterm prosperity of companies, independent of the type of
company and its sources of finance. This can be linked with improved
corporate performance- either in terms of share price or profitability.
• Enhanced Investor Trust: Investors consider corporate governance
as important as financial performance when evaluating companies for
investment. Investors who are provided with high levels of disclosure
and transparency are likely to invest openly in those companies. The
consulting firm McKinsey surveyed and determined that global
institutional investors are prepared to pay a premium of up to 40
percent for shares in companies with superior corporate governance
practices.
 Need of Corporate Governance

• Combating Corruption: Companies that are transparent, and have

sound system that provide full disclosure of accounting and auditing
procedures, allow transparency in all business transactions, provide
environment where corruption would certainly fade out. Corporate
Governance enables a corporation to compete more efficiently and
prevent fraud and malpractices within the organization.
• Easy Finance from Institutions: Several structural changes like
increased role of financial intermediaries and institutional investors,
size of the enterprises, investment choices available to investors,
increased competition, and increased risk exposure have made
monitoring the use of capital more complex thereby increasing the
need of Good Corporate Governance. Evidences indicate that
wellgoverned companies receive higher market valuations. The credit
worthiness of a company can be trusted on the basis of corporate
governance practiced in the company.
• Enhancing Enterprise Valuation: Improved management
accountability and operational transparency fulfill investors
expectations and confidence on management and corporations, and
in return, increase the value of corporations.
• Reduced Risk of Corporate Crisis and Scandals: Effective
Corporate Governance ensures efficient risk mitigation system in
place. A transparent and accountable system makes the Board of a
company aware of the majority of the mask risks involved in a
particular strategy, thereby, placing various control systems in place
to facilitate the monitoring of the related issues.
• Accountability: Investor relations are essential part of good
corporate governance. Investors directly/ indirectly entrust
management of the company to create enhanced value for their
investment. The company is hence obliged to make timely disclosures
on regular basis to all its shareholders in Corporate Governance is
integral to the existence of the company.
Need of Corporate Governance
Corporate Governance Model
 MODELS OF CORPORATE
GOVERNANCE
ANGLO-AMERICAN MODEL
Anglo-American Model
 Composition of the Board
• The board of directors of most corporations that follow
the Anglo-US model includes both “insiders” and
“outsiders”. An “insider” is as a person who is either
employed by the corporation (an executive, manager or
employee) or who has significant personal or business
relationships with corporate management. An
“outsider” is a person or institution which has no direct
relationship with the corporation or corporate
management.
• A synonym for insider is executive director; a synonym
for outsider is non-executive director or independent
director.
 Disclosure Requirements in the Anglo-US
Model
The following information are required to disclose:
• Corporate financial data on a quarterly basis
• A breakdown of the corporation’s capital structure
• Substantial background information on each nominee to the board of
directors (including name, occupation, relationship with the company,
and ownership of stock in the corporation)
• The aggregate compensation paid to all executive officers (upper
management) as well as individual compensation data for each of the
five highest paid executive officers
• All shareholders holding more than five percent
• Information on proposed mergers and restructurings
• Proposed amendments to the articles of association
• Names of individuals and/or companies proposed as auditors

Case of Apple
• The top shareholders of Apple are
• Arthur Levinson - Chairman of the board
• Tim Cook - Chief executive officer (CEO)
• Jeff Williams - Chief operating officer (COO)
• Albert A. Gore Jr. - Member of the board
• Deirdre O’Brien - Senior vice president, retail
and people
 Case of Apple-Board Structure
• Arthur D. Levinson - Chairman of the Board - CEO of Calico
• James A. Bell - Audit Committee – Retired president of Boeing
• Tim Cook - CEO, Apple – Management
• Albert A. Gore Jr. - Compensation Committee – founder and current
chair of The Climate Reality Project
• Andrea Jung - Compensation Committee Chair – President and chief
executive officer of a non-profit organization, Grameen America
• Monica Lozano - Audit Committee – Retired Chief Executive Officer
of La Opinión
• Ronald D. Sugar - Audit Committee Chair – Director of Chevron
• Susan L. Wagner - Nominating Committee Chair – Retired Chief
Operating Officer of BlackRock
 German Model
• This is also called European Model. It is believed that
workers are one of the key stakeholders in the company and
they should have the right to participate in the management
of the company. The corporate governance is carried out
through two boards, therefore it is also known as two-tier
board model. These two boards are:
• Supervisory Board: The shareholders elect the members of
Supervisory Board. Employees also elect their
representative for Supervisory Board which are generally
one-third or half of the Board.
• Board of Management or Management Board: The
Supervisory Board appoints and monitors the Management
Board. The Supervisory Board has the right to dismiss the
Management Board and re-constitute the same.
German Model
 Composition of the Board
• The two-tiered board structure is a unique construction of the
German model.
• German corporations are governed by a supervisory board and a
management board. The supervisory board appoints and dismisses
the management board, approves major management decisions;
and advises the management board. The supervisory board usually
meets once a month.
• A corporation’s articles of association sets the financial threshold of
corporate acts requiring supervisory board approval. The
management board is responsible for daily management of the
company.
• The management board is composed solely of “insiders”, or
executives. The supervisory board is composed of labor/employee
representatives and shareholder representatives.
 Disclosure Requirements in the German
Model
• The disclosure regime in Germany differs from the US regime,
generally considered the world’s strictest, in several notable ways.
• These include: semi-annual disclosure of financial data, compared
with quarterly disclosure in the US;
• aggregate disclosure of executive compensation and supervisory
board compensation, compared with individual data on executive
and board compensation in the US;
• no disclosure of share ownership of members of the supervisory
board, compared with disclosure of executive and director’s stock
ownership in the US; and significant differences between German
accounting standards and US GAAP.
• One key accounting difference in Germany is that corporations are
permitted to amass considerable reserves. These reserves enable
 German corporations to understate their value. This practice is not
permitted under US GAAP.

Case of Volkswagen
Board of Management
• Murat Aksel, Functional Responsibility ‘Procurement’
• Oliver Blume, Brand Group ‚Sport & Luxury‘
• Markus Duesmann, Brand Group ‘Premium’
• Gunnar Kilian, Functional Responsibility ‘Human Resources’ and Brand Group ‘Truck &
Bus‘
• Thomas Schmall-von Westerholt, Functional Responsibility ‘Technology’
• Hiltrud Dorothea Werner, Functional Responsibility ‘Integrity and Legal Affairs’
• Frank Witter, Functional Responsibility ‘Finance and IT’
 Volkswagen - Supervisory Board
• Hans Dieter Pötsch, Chairman • Bertina Murkovic, Chairman of the Works Council of
Volkswagen Commercial Vehicles
• Dr. Hussain Ali Al Abdulla, Board Member of Qatar
Investment Authority • Bernd Osterloh, Chairman of the General and Group
Works Councils of Volkswagen AG
• Dr. Hessa Sultan Al Jaber, Former Minister of Information
and Communications Technology, Qatar • Dr. jur. Hans Michel Piëch, Lawyer in private practice
• Dr. Bernd Althusmann, Minister of Economic Affairs, • Dr. jur. Ferdinand Oliver Porsche, Member of the Board
Labor, Transport and Digitalisation for the Federal State of Management of Familie Porsche AG
of Lower Saxony Beteiligungsgesellschaft
• Kai Bliesener, Head of Vehicle Construction (LPP) / • Dr. rer. comm. Wolfgang Porsche, Chairman of the
Automotive and Supplier Industry Coordinator at IG Supervisory Board of Porsche Automobil Holding SE and
Metall Chairman of the Supervisory Board of Dr. Ing. h. c. F.
Porsche AG
• Dr. Hans-Peter Fischer, Chairman of the Board of
Management of Volkswagen Management Association • Conny Schönhardt, trade union secretary for the IG
(VMA) Metall Board of Management in the unit for Strategic and
Political Planning
• Marianne Heiß, CEO of BBDO Group Germany GmbH
• Athanasios Stimoniaris, Chairman of the Group Works
• Jörg Hofmann, IG Metall
Council of MAN SE and of TRATON SE
• Ulrike Jakob, Deputy Chairman of the Works Council at
• Stephan Weil, Minister-President of the Federal State of
the Volkswagen AG Kassel plant
Lower Saxony
• Dr. Louise Kiesling, Entrepreneur
• Werner Weresch, Chairman of the General Works
• Peter Mosch, Chairman of the General Works Council of Council and Group Works Council of Dr. Ing. h.c. F.
AUDI AG Porsche AG
 Japanese Model
• Japanese companies raise significant part of
capital through banking and other financial
institutions. Since the banks and other
institutions stakes are very high in businesses,
they also work closely with the management of
the company. The shareholders and main
banks together appoint the Board of Directors
and the President. In this model, along with the
shareholders, the interest of lenders is
recognized.
 Composition of the Board
• The board of directors of Japanese corporations is composed
almost completely of insiders, that is, executive managers, usually
the heads of major divisions of the company and its central
administrative body.
• If a company’s profits fall over an extended period, the main bank
and members of the keiretsu may remove directors and appoint
their own candidates to the company’s board.
• Another practice common in Japan is the appointment of retiring
government bureaucrats to corporate boards; for example, the
Ministry of Finance may appoint a retiring official to a bank’s
board.
• In the Japanese model the composition of the board of directors
is conditional upon the corporation’s financial performance.
Disclosure Requirements in the Japanese
Model

• Japan’s disclosure regime differs from the US regime (generally

considered the world’s strictest) in several notable ways.
• Semi-annual disclosure of financial data, compared with quarterly
disclosure in the US.
• Aggregate disclosure of executive and board compensation,
compared with individual data on the executive compensation in
the US.
• Disclosure of the corporation’s ten largest shareholders, compared
with the US requirement to disclose all shareholders holding more
than five percent of the corporation’s total share capital.
• Significant differences between Japanese accounting standards and
US Generally Accepted Accounting Practices (US GAAP).
 Members of the Board - Sony
• Kenichiro Yoshida – Chairman
• Hiroki Totoki - Executive Deputy President
• Shuzo Sumi - Tokio Marine & Nichido Fire Insurance Co., Ltd
• Tim Schaaff - Chief Product Officer,
• Kazuo Matsunaga - Former Vice-Minister of Economy, Trade and Industry
• Toshiko Oka - CEO, Oka & Company Ltd.
• Sakie Akiyama - Founder, Saki Corporation
• Wendy Becker - Non-Executive Director, Great Portland Estates plc
• Yoshihiko Hatanaka - Representative Director
• Adam Crozier - Insider
• Keiko Kishigami - Former Partner, Ernst & Young
• Joseph A. Kraft Jr. - Managing Director, Bank of America Merrill Lynch
Japan
 Indian Model
• The model of corporate governance is derived from different
corporate governance models like Anglo-US and German model.
This is because there are types of corporations such as private
companies, public companies and public sector undertakings.

• SEBI and Companies Act 2013 are playing a key role in corporate
governance in India.

• Clause 49 of the SEBI guidelines on Corporate Governance as

amended on 29 October 2004 has made major changes in the
definition of independent directors, strengthening the
responsibilities of audit committees and improving quality of
financial disclosures.
SEBI - Board Composition
 Companies Act, 2013
Board Structure:
Section 149 of the Companies Act, 2013 provides for
appointment of minimum 03 directors in a public
company and 02 directors in a private company.
A board can have a maximum of 15 directors
It is mandatory to appoint a women director for
listed company or private company with one
hundred crore rupees of share capital.
Section 149(3) mandates that every company will
have one resident director.
 Provisions of Companies Act

• Stakeholder Relationship Committee: To resolve the conflicts

between the shareholders and the board of directors and
address their grievances.
• Audit Committee: It looks after the financial reports and
disclosures of a company.
• Nomination and Remuneration Committee: It decides the
selection criteria for the key managerial personnel (KMP) and
determines the remuneration of the KMP’s and directors.
• Related Party Transactions: A business transaction with
relatives of Directors or KMP is considered as Related Party
Transactions. It is very important to scrutinize transactions
with related parties.
• Serious Fraud Investigation Offence

SEBI’s role
• SEBI sets standards in which the securities market must
operate, protecting the rights of issuers and investors.

• SEBI has power to investigate circumstances where

market or its players have been harmed and can enforce
govern standards with directives.

• SEBI may terminate from the securities list any company

that does not comply with its governance standards and
regulation.
 SEBI’s role
• To curb the malpractices such as Lack of transparency
in the trading operations and prices charged to
clients, Poor services due to delay in passing contract
notes or not passing contract notes, Delay in making
payments to clients or in giving delivery of shares.

• To prevent insider trading by agents of companies or

brokers rigging and manipulating prices.
 Infosys – Board Structure
• Nandan Nilekani - Chairman - Founder
• Salil Parekh - Managing Director
• Pravin Rao – COO – Insider
• Kiran Mazumdar Shaw- Independent Director
• D Sundaram - Independent Director
• Uri Levine - Independent Director
• Bobby Parikh - Independent Director

RIL – Board Structure

• Mukesh D. Ambani – Chairman & MD – Promoter

• Nita M Ambani - Non Executive Director - Family

• Nikhil R. Meswani - Executive Directors – Family

• Hital R. Meswani - Executive Directors – Family

• Pawan Kumar Kapil - Executive Director

• Yogendra P Trivedi - Non Executive Director

• Raghunath A Mashelkar - Non Executive Director • Raminder Singh Gujral -

Non Executive Director
• Arundhati Bhattacharya - Non Executive Director

• P M S Prasad - Executive Director

• Dipak C Jain - Non Executive Director

• Adil Zainulbhai - Non Executive Director

• Shumeet Banerji - Non Executive Director

• K V Chowdary - Non Executive Director
Corporate Governance

Theoretical Approaches
AGENCY THEORY
Agency Relationship
CONFLICT BETWEEN MANAGERS AND SHAREHOLDERS
SELF-INTERESTED BEHAVIOUR
INTEREST
COST OF SHAREHOLDER-MANAGEMENT CONFLICT
MECHANISIMS FOR DEALING WITH SHAREHOLDER-MANAGER CONFLICT
STOCKHOLDERS VERSUS CREDITORS: A SECOND AGENCY THEORY
AGENCY AND ETHICS
 Agency Cost
• Monitoring Cost: The cost involved in monitoring the agents in the
company. For example cost of having a board to monitor the activities
of the managerial behavior to safeguard the interest of the
shareholders.
• Bonding Cost: Those costs incurred to bind the employees with the
contractual obligations to restrict their activities. For example cost
incurred to control the managerial movement from the company and to
hold them for long term, where the managers give assurance to the
principal that they are acting in the principal's best interests.
• Residual Loss: In case the monitoring bonding costs are not enough to
diverge the principal and agent interests, additional costs are incurred
which are called the residual costs.
•
STEWARDSHIP THEORY
Difference between Agency and
Stewardship
• Agency theory refers to the relationship between the owner and the
agent, while stewardship theory refers to the relationship between
the owner and the steward.
• The agency theory is based on management and economic
principles, whereas stewardship theory is based on psychology and
sociology.
• Agency theory claims that improved performance is due to the
implemented governance structures by the principal to limit the
opportunistic behavior of the agent, whereas stewardship theory
claims that the improved performance is due to the principal
encouraging governance structure that motivates proorganizational
behavior of the steward.
• According to agency theory, managers work for their self
servinginterests, while according to stewardship theory, managers
are motivated and work hard for the principal’s interest.

Shareholder Theory
• Shareholder theory is the view that the only duty of a corporation is
to maximize the profits accruing to its shareholders. This is the
traditional view of the purpose of a corporation, since many people
buy shares in a company strictly in order to earn the maximum
possible return on their funds.
• If a company were to do anything not associated with earning a profit,
the shareholder would either attempt to remove the board of directors
or would sell his shares and use the funds to buy shares in some other
company that is more committed to earning a profit.
• Under shareholder theory, the only reason management is working on
behalf of shareholders is to deliver maximum returns to them, either
 in the form of dividends or an increased share price. Thus, managers
have an ethical duty to the owners to generate significant value.

Influence of Shareholder Theory

shareholders have the right to do the following:
• Sell their shares
• Vote on those nominated for the board
• Nominate directors
• Vote on mergers and changes to the corporate
charter
• Receive dividends
• Gain information on publicly traded companies
• Sue for a violation of fiduciary duty
• Buy new shares
Stakeholder Theory
• The stakeholder theory of corporate governance focuses on the
effect of corporate activity on all identifiable stakeholders of the
corporation. This theory posits that corporate managers (officers
and directors) should take into consideration the interests of each
stakeholder in its governance process. This includes taking efforts to
reduce or mitigate the conflicts between stakeholder interests. It
looks further than the traditional members of the corporation
(officers, directors, and shareholders) and also focuses on the
interests of any third party that has some level of dependence upon
the corporation. Stakeholders are generally divided into internal and
external stakeholders.
• Internal Stakeholders - Are the corporate directors and employees,
who are actually involved in corporate governance process.
• External Stakeholders - May include creditors, auditors, customers,
suppliers, government agencies, and the community at large.
 Significance of Stakeholder
Theory
• The interests of the company’s employees.
• The need to foster the company’s business
relationships with suppliers, customers and others.
• The impact of the company’s operations on the
community and the environment.
• The desirability of the company maintaining a
reputation for high standards of business conduct.
• The need to act fairly as between members of the
company,” according to the Act.
 Stakeholders and Shareholders

• Before getting into the differences, there is a similarity

between stakeholders and shareholders. That similarity is
their importance: in recent years, corporations have begun
to be answerable to their stakeholders and shareholders
alike. Unlike in the past, where corporations were mostly
interested in issues related to their shareholders.
• There has been a rise in something called corporate social
responsibility (CSR), which encourages companies to take
the interest of all stakeholders into consideration when
making decisions, rather than just the interests of its
shareholders.
 Resource Based Approach
• The resource-based view (RBV) of the organization is a
strategy for achieving competitive advantage.
• The core idea of the theory is that instead of looking at the
competitive business environment to get a niche in the
market, the organization should instead look within at the
resources and potential it already has available.
• According to RBV, it is significantly easier to exploit new
opportunities using resources and competencies that are
already available, rather than having to acquire new skills,
traits or functions for each different opportunity.
• Barney's 1991 article "Firm Resources and Sustained
Competitive Advantage" is widely cited as a pivotal work
in the emergence of the resource-based view.
 Types of Resource
• Tangible assets: These are physical things - for example, property,
land, products and capital. These are resources which can generally
be bought easily on the market and thus offer little competitive
advantage, as other organizations can also acquire identical assets
quickly if they should like.
• Intangible assets: This refers to items and concepts that have no
physical value but can still claim to be owned by the organization.
This may refer to any reputation, trademarks or intellectual property
which the organization may possess. Some of these - e.g. reputation
- are built up over a significant period of time, and is something
which other competitors or comparable organizations cannot buy on
the market. These will likely stay within the organization and are
their main source of competitive advantage.
 Assumptions of RBV

• Heterogeneous: This first major assumption is that resources, skills

and capabilities must vary significantly from one organization to
another. If these organizations had the exact same set of resources
and individuals, they would not be able to employ varying strategies
in order to compete with one another.
• Immobile: The second assumption of RBV is that resources are
immobile, and thus unable to move freely from organization to
organization (e.g. employee movement), at least over the shortterm.
Due to this, organizations are unable to quickly replicate the
resources of rival organizations and therefore implement the same
strategies. Intangible assets - knowledge, processes, intellectual
property, etc. - are more likely to be 100% immobile than are
tangible assets.
VRIO Framework-Barney (1991)
• Valuable: Resources are valuable if they can help to increase the value of the
service or product supplied to customers or others reliant on the organization.
This can be improved by increasing differentiation, decreasing the cost of
production, or other general modifications to improve the quality and worth of
the service.
• Rare: Any resources - both tangible or intangible - which can only be acquired
by one or very few organizations, may be considered rare. If organizations have
the same resources or capabilities, this can result in competitive parity.
• Low Imitability: If an organization holds resources which are valuable or rare,
they can at least achieve a competitive advantage in the short-term. However,
to sustain this advantage the resources need to be costly to imitate or
substitute, or else rivals may begin to close the gap by obtaining the same or
similar resources.
• Organized to capture value: Resources do not necessarily convey a competitive
advantage - if the organization, its systems and its processes are not designed
to exploit the resource to its fullest, then it cannot hope to gain a competitive
advantage.
 Dynamic Capability Approach

• Dynamic capability is a theory of competitive advantage

in rapidly changing environments. We reconcile this
explanation with previous theories of competitive
advantage, showing how it informs and complements
explanations based on market positions, firm resources,
and creative destruction.
• The concept was defined by David Teece, Gary Pisano
and Amy Shuen, in their 1997 paper Dynamic
Capabilities and Strategic Management, as "the firm’s
ability to integrate, build, and reconfigure internal and
external competences to address rapidly changing
environments”.
 Dynamic Capability Approach
• The resource-based view of the firm emphasizes sustainable
competitive advantage; the dynamic capabilities view, on the
other hand, focuses more on the issue of competitive survival in
response to rapidly changing contemporary business conditions.
• Dynamic capabilities theory concerns the development of
strategies for senior managers of successful companies to adapt
to radical discontinuous change, while maintaining minimum
capability standards to ensure competitive survival.
• For example, industries which have traditionally relied on a
specific manufacturing process can't always change this process
on short notice when a new technology arrives; when this
happens, managers need to adapt their own routines to make the
 most of their existing resources while simultaneously planning for
future process changes as the resources depreciate.

Dynamic Capability Approach -

Process
• Learning: It requires employees and managers to reorganize
their routines to promote interactions that lead to
successful solutions to particular problems, to recognize and
avoid dysfunctional activity and to make appropriate use of
alliance and acquisition to bring new strategic assets into the
firm from external sources.
• New assets: Increasingly competitive advantage also
requires the integration of external activities and
technologies through alliances and partnerships.
• Transformation of existing assets: Firms must develop
processes to make changes inexpensively while
accomplishing reconfiguration and transformation ahead of
the competition. This can be supported by decentralization,
local autonomy and strategic alliances.
 Institutional economics

• Institutional economics focuses on understanding the role of the

evolutionary process and the role of institutions in shaping economic
behavior.
• Institutional economics emphasizes a broader study of institutions
and views markets as a result of the complex interaction of these
various institutions (e.g. individuals, firms, states, social norms).
• American economist Thorstein Veblen laid the foundation for
institutional economics. He tried to replace the concept of people as
the makers of economic decisions with the idea that people are
continually affected by changing customs and institutions.
• Business enterprise, he believed, was carried on for the amassing of
money rather than the production of goods.
Institutions
Economies of Institutions
Economic Institution
Institutional Economies
Markets as Institutions
Transaction Cost Theory
Transaction Cost
 Transaction Cost

• The way in which a company is organized can determine its

control over transactions, and hence costs. It is in the
interests of management to internalize transactions as much
as possible, to remove these costs and the resulting risks and
uncertainties about prices and quality.
TRANSACTION COST
 Transaction Cost
1. Search and information costs
• These are the costs associated with looking for
relevant information and meeting with agents
with whom the transaction will take place. The
stock exchange is one such example, as they
bring the buyers and sellers of financial assets
together. The stockbroker’s fee is a type of
information transaction cost.
2. Bargaining costs
 Transaction Cost
• These are the costs related to coming to an
agreement that is agreeable to the parties
involved in drawing up a contract. Bargaining
costs can either be very cheap, such as buying
a newspaper, or can be very expensive, such
as trading a basketball player from one team
to another.
3. Policing and enforcement costs
• These are the costs associated with making sure
that the parties in the contract keep their word
 Transaction Cost
and do not default on the terms of the contract.
In the real world, people often deviate from the
contract, and thus, enforcement costs are
incurred while governing contracts. Lawyer fees
are an example of such a cost.
 Causes of Transaction Cost
• Bounded rationality is the idea that we make decisions
that are rational, but within the limits of the information
available to us and our mental capabilities. Economists
who think of us as ‘boundedly rational’ don’t see us as
an ‘economic superman’ that spends his life optimizing
the happiness created by every decision.
• Instead, they see us as satisficers — as people who
choose the option that will satisfy their needs and wants
without putting too much effort into making sure
they’ve considering every single possibility.
CAUSES OF TRANSACTION COST
 Causes of Transaction Cost
• Opportunism, a foundational assumption of many
economic theories that claims human beings are
generally self-interested and will take advantage of
others when possible. For example, some economic
actors will take advantage of another party to advance
their own interests by making false promises,
misrepresenting intentions, reneging on agreements, or
changing the terms of a deal to benefit themselves.
Other economic actors will be less deliberate by
attempting to benefit from free riding. Such behavior,
deliberate or otherwise, leaves the “honest” party to
the exchange worse off.
 Causes of Transaction Cost

• Asset specificity can be an issue in contractual

agreements between companies. An agreement
may require one company to build and use highly
specific assets that are of value only to the other
company in the contract. It may also require that
other company to rely solely on the company that
is creating those highly specific assets.
• One variation of asset specificity is site specificity.
An asset might be considered highly specific
Causes of Transaction Cost
because it is impossible or prohibitively expensive
to move to a different location.
 Linking Governance with
Performance

Corporate Governance
Firm Performance
Financial Performance • Return on Net worth •
• Return on Assets Return on Sales
• Operating Cash Flow • Stock Return
• Operation Margin • Market Capitalization
• Sales growth • Price Earning measure
• Net profit growth • Price to Book measure
Market • Tobin’s Q
Performance
• Stock Price

Governance Mechanisms
• Board Size
• Independent Board
• Board Meetings
• Managerial Ownership
• Board Ownership
• Concentrated Ownership
• CEO Duality
• Audit Committee
 Corporate Governance and Financial
Performance
• The question is whether corporate governance
really affects the financial performance.
• Good corporate governance reduces the conflict
and the expropriation by the shareholders and
managers in the company. Which focuses on the
decision making process of the company and leads
to better financial performance.
• To understand the effect, we need to test the
influence of various corporate governance
mechanisms on financial performance.
 Corporate Governance and
Market Performance
• The question is how corporate governance can
affect or influence the market performance of
the companies.
• The fundamental theory of corporate
governance states that governance leads to
transparency, accountability, better
information flow and investors’ protection.
• This leads to better investor sentiment and
resulted into higher market performance.
Corporate Governance
Practices
Practices and Elements of
Corporate Governance
1. Selection, compensation, succession, and removal
in the context of organizational life cycle
• (a) Board of Directors and independent directors:
Past and present
• (b) Chief Executive Officer
• (c) Executives
• (d) Gender specific issues
2. Governance in differently controlled businesses
(promoter organization, public and private
organizations).
The Board’s Responsibilities

• In good faith: Acting honestly and dealing fairly.

• Best interests of the corporation: Emphasizing
the director’s primary allegiance to the corporate
entity.
• To act diligently to become and remain generally
informed, and, when appropriate, to bring
relevant information to the attention of the other
directors.
 Duties of the Board

• Duty of Care: The Duty of Care is the most

important duty owed by a director to a
corporation. A typical (state) corporation statute
defining a director’s Duty of Care provides that a
director’s duties must be performed “with such
care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under
similar circumstances.”
DUTIES OF THE BOARD
 Duties of the Board
• This Duty of Care is very broad and requires
directors to diligently perform their obligations.
• Business Judgment Rule: The Business Judgment Rule
works in conjunction with the director’s Duty of Care.
Under this rule, a director will not be held liable for
mere negligence if exercising his or her Duty of Care.
The rule can be stated as, “A director who exercises
reasonable diligence and who, in good faith, makes an
honest, unbiased decision will not be held liable for
mere mistakes and errors in business judgment.”
• The rule protects directors from decisions that turn out
badly for their corporation, even when the directors
 Duties of the Board
acted diligently and in good faith in authorizing the
decision.
• Duty of Loyalty: The Duty of Loyalty exists as a result of the
fiduciary relationship between directors and the
corporation. A fiduciary relationship is defined as a
relationship of trust and confidence, such as between a
doctor and patient, or attorney and client.
• The nature of the relationship includes the concepts that
neither party may take selfish advantage of the other’s trust
and may not deal with the subject of the relationship in a
way that benefits one party to the disadvantage of the
other.
 Duties of the Board
• A director must perform his or her duties in good faith and
in a manner in which the director believes is in the best
interests of the corporation and its shareholders.
• Liability: The officers and directors when they cause
financial harm to the corporation, act solely on their
own behalf and to the detriment of the corporation, or
commit a crime or wrongful act. Certain acts may
subject an officer or director to personal liability, and
other acts, although they would otherwise subject them
to liability, may be either indemnified by or insured
against by the corporation.
 Duties of the Board
• Indemnification of officers and directors means that the
corporation will reimburse them for expenses incurred
and amounts paid in defending claims brought against
them for actions taken on behalf of the corporation.
 Board’s Role: A Governance
Perspective

• First, the paramount duty of the board of directors of a

public corporation is to select the chief executive officer
(CEO) and to oversee the CEO and senior management
in the competent and ethical operation of the
corporation on a day-to-day basis.
• Second, it is the responsibility of the board to operate
the corporation in an effective and ethical manner to
produce value for shareholders. Board members are
expected to know how the corporation earns its income
 Board’s Role: A Governance
and what risks the corporation is undertaking in the
course of carrying out its business.
Perspective
• Third, it is the responsibility of board, under the oversight of
the audit committee and the board, to produce financial
statements that fairly present the financial condition and
results of operations of the corporation and to make the
timely disclosures investors need to assess the financial and
business soundness and risks of the corporation.
• Fourth, it is the responsibility of the board, through its audit
committee, to engage an independent accounting firm to
audit the financial statements prepared by management,
 Board’s Role: A Governance
issue an opinion that those statements are fairly stated in
accordance with Generally Accepted Accounting Principles
and oversee the corporation’s
relationship with the outside auditor
Perspective

• Fifth, it is the responsibility of the board, through its

corporate governance committee, to play a leadership
role in shaping the corporate governance of the
corporation. The corporate governance committee also
should select and recommend to the board qualified
director candidates for election by the corporation’s
shareholders.
 Board’s Role: A Governance
• Sixth, it is the responsibility of the board, through its
compensation committee, to adopt and oversee the
implementation of compensation policies, establish
goals for performance-based compensation, and
determine the compensation of the CEO and senior
management.
 Board’s Role: A Governance
Perspective

• Seventh, it is the responsibility of the board to

respond appropriately to shareholders’
concerns.
• Eighth, it is the responsibility of the
corporation to deal with its employees,
 Board’s Role: A Governance
customers, suppliers and other constituencies
in a fair and equitable manner.
Determinant of the Board
• The question is here which are the factors that
influence and determine the board structure. As
board structure of a firm takes all kinds of crucial
decision, looks after the firm performance, and
investors’ interest in the firm.
• In a typical modern firm, there are firm-specific
factors, ownership patterns, and country
governance standards basically influence the
board structure of a firm.
The significance of the Board
Board
Structure Firm Value

Profitability
Board of
Director

Growth
Opportunities

Corporate Stock Price

Governance
 Board effectiveness
• An effective board leads to better corporate
governance.
• Better board structure monitors and regulate the
managerial actions and decides their remuneration.
• Board independency checks the large owners influence
in the company.
• Board diversity takes better and fair decision for the
investors.
• An effective board reduces the agency problem in the
firms.
 Who Is a Chief Executive Officer
(CEO)?
• A chief executive officer (CEO) is the highest-ranking executive in a
company, whose primary responsibilities include making major
corporate decisions, managing the overall operations and resources
of a company, acting as the main point of communication between
the board of directors (the board) and corporate operations and
being the public face of the company.
• A CEO's role varies from one company to another depending on the
company's size, culture, and corporate structure.
• In large corporations, CEOs typically deal only with very high-level
strategic decisions and those that direct the company's overall
growth. In smaller companies, CEOs often are more hands-on and
involved with day-to-day functions.
• CEOs can set the tone, vision, and sometimes the culture of their
organizations.

The Difference Between CEO and

COB
• The CEO directs the operational aspects of a company;
the board of directors oversees the company as a
whole, while the leader of the board is called the
chairman of the board (COB).
• The board has the power to overrule the CEO's
decisions, but the chairman of the board does not have
the power to overrule the board.
• Instead, the chairman is considered a peer with the
other board members. In some cases, the CEO and the
chairman of the board can be the same person, but
many companies split these roles between two people.
Roles of Chief Executive Officer
• Advises the Board
• Advocates / promotes organization and stakeholder
change related to organization mission.
• Supports motivation of employees in organization
products/programs and operations.
• Ensures staff and Board have sufficient and up-to-date
information
• Looks to the future for opportunities
• Interfaces between Board and employees
• Interfaces between organization and community
Roles of Chief Executive Officer

• Formulates policies and planning

recommendations to the Board
• Decides or guides courses of action in
operations by staff.
• Oversees operations of organization
• Implements plans
• Manages human resources of organization
• Manages financial and physical resources
 Measures of CEO
Compensation

Age

Tenure

Measures of CEO
Gender Decision
CEO
Making
CEO Duality

Qualification

Experience
 CEO and Firm Performance

• As CEO are the main functional head of the

company, so their decisions matters to the fate of
the company.
• Hence, the question is whether CEO’s decision
affect the overall firm.
• What are the required parameters of the firm
needs to be considered while considering CEO
decision.
• To find the answers, there is a need to test the CEO
decision and overall firm performance.
 Effect of CEO Decision on Firm
Firm
Growth

Financial Shareho
CEO Measures of Return lders’
Decision CEO Interest
Making
Market
Return

Firm
Value
CEO Succession Planning
• Review the old CEO evaluations and current need of the
company.
• Generate necessary criteria to build a succession
planning profile
• Identify if there are internal or external candidates.
• Use the right tools to make a comparison between the
candidates.
• Establish internal goal setting for the role.
• Ensuring of the understanding of the board’s clear
organizational expectations.
 Process to appoint a Chief
Executive Officer
• Prepare notice of board meeting along with draft resolution(s) to be passed in the
board meeting for candidate consideration for appointment as Chief Executive
Officer.
• Sending of Notice along with Agenda of Board meeting to all the Directors of
company.
• Convene board meeting and pass the following Board Resolution.
• Sending of Outcome of Board Meeting to Stock exchange wherever company’s
securities are listed within 30 minutes from the conclusion of meeting.
• Issue letter of appointment to the candidate for their appointment as Chief
Executive Officer.
• File e-Form MGT-14 and DIR-12 along with attachments with the Registrar of
Companies regarding appointment of director and simultaneously as a Chief
Executive Officer within thirty (30) days from appointment as Chief Executive
Officer .
• Sending of Appointment letter to Chief Executive Officer and entry in register,
and minute books of company.

Factors affecting CEO Selection

• Company size
• Public vs. Private
• Number of branches or Locations
• Relevant Industry Experience
• Prior Experience in the CEO Role