Corporate Governance &
Business Ethics.
Presented by
Prof. K N Mishra
COURSE OUTLINE
The concept of Corporate
Governance
The Mechanism
Principles of Corporate Governance
Issues relating to Corporate
Governance
WHAT IS A CORPORATE ?
In the Capitalist economy, the process of capital
accumulation that facilitates development of
economies by fuelling growth of its various
sectors such as industry, agriculture,
infrastructure, trade and commerce has
become institutionalized by the Corporation.
The corporation of today has come to replace
the sole proprietor of earlier times and tries to
maximize its profits and accumulate capital as
he did. However, it differs from individual
capitalist in two important aspects :
WHAT IS CORPORATE (Contd.)
(i) The life span of the corporation is much
longer, and (ii) it is more rational in
decision making by virtue of the fact that it
has the benefit of the collective wisdom of
the board of directors, and besides, they
take decisions using the principles of cost
accounting, and budget analysis, data
collection and processing and managerial
consulting.
What is Corporate (Contd..)
A corporation enjoys some privileges and is
also bound by responsibilities. A corporation
is defined as an association of persons
recognized by law as having a collective
personality. The corporation can act as if it
were distinct from its members; it has”
perpetual succession” and a common Seal. It
can therefore CONTRACT quite freely – it
can also be fined, but obviously it cannot be
sent to prison or incur penalties which can
only be applied to individuals.
WHAT IS GOVERNANCE ?
The concept of “governance” is as old as human
civilization. Simply stated ,
“governance” means
the process of decision-making and the
Process by which decisions are implemented
(or not implemented). Governance can be used
in several contexts such as Corporate
Governance, Local Governance, National
Governance and International Governance.
What is Governance (Contd.)
Theoretical basis of Corporate Governance :
there are four broad theories to explain and
elucidate corporate governance. These are:
Agency Theory
Stewardship Theory
Stakeholder Theory, and
Sociological Theory
AGENCY THEORY
Recent thinking about strategic management and business policy
has
been influenced by agency cost theory, though the roots of the
theory can be traced back to Adam Smith who identified an
agency problem (managerial negligence and profusion )in the
joint stock company. The fundamental theoretical basis of
corporate governance is agency costs.
Shareholders are the owners of any joint stock, limited liability
company and are the principals of the same. By virtue of their
ownership, the principals define the objectives of a company.
The management , directly or indirectly selected by shareholders
to pursue such objectives are the agents.
CONTD..
While the principals generally assume that the
agents would invariably carry out their
objectives, it is often seen that the objectives of
managers are at variance from those of the
shareholders. Such mismatch of objectives is
called the agency problem; the cost inflicted by
such dissonance is the agency cost. The core of
corporate governance is designing and putting in
place disclosures, monitoring, oversight and
corrective systems that can align the objectives
of the two sets of players as closely as possible
and, hence, minimize agency costs.
STEWARDSHIP THEORY
The stewardship theory of corporate governance discounts the
possible conflicts between corporate management and owners
and shows a preference for a board of directors made up
primarily of corporate insiders.
The stewardship theory assumes that managers are basically
trustworthy and attach significant value to their own personal
reputations. It defines situations in which managers are
stewards whose motives are aligned with the objectives of
their principles.
Control can be potentially counterproductive, because it
undermines the pro organizational behaviour of the steward by
lowering his / her motivation.
STAKEHOLDER THEORY
The stakeholder theory of corporate
governance represents a synthesis of
Economics, Behavioral Science, Business
Ethics and the stake-holder concept. In
essence, the theory considers the firm as an
input-output model by explicitly adding all
interest groups – employees, customers,
dealers, government and the society at large –
to the corporate mix.
SOCIOLOGICAL THEORY
The Sociological Theory approach to the study of
corporate governance has focused mostly on broad
composition and the implications for power and
wealth distribution in society. Problems of
interlocking directorships and the concentration of
directorships in the hands of a privileged class are
viewed as major challenges to equity and social
progress. Under this theory, board composition,
financial reporting, disclosure and auditing are
necessary mechanisms to promote equity and fairness
in Society
Define Corporate Governance
“Corporate Governance is the system by which
business corporations are directed and controlled.
The corporate governance structure specifies the
distributions of rights and responsibilities among
different participants in the corporation, such as, the
Board, Managers, Shareholders and other
Stakeholders, and spells out the rules and procedures
for making decisions on corporate affairs. By doing
this, it also provides the structure through which the
company objectives are set, and the means of
attaining those objectives and monitoring
performance.”
OECD’s definition ( April, 1999 ){Organization for
Economic co-operation & Development}
The concept of Corporate Governance
Corporate Governance looks at the complete
governance of corporations from their very
beginning, in entrepreneurship, through their
governance structures, company law,
privatization, to market exit and insolvency.
The integrity of corporations, financial
institutions and markets is particularly central
to the health of our economies and their
stability.
Contd…
Broadly speaking, Corporate Governance refers to “
the process, mechanism, principles and structure by
which the business and affairs of the company are
directed and managed and governed effectively. Its
goal is to enhance long term shareholder value
through improving corporate performance and
accountability while taking into account the interest
of other shareholders.”
The corporate governance structure specifies the
relations,, and the distribution of rights and
responsibilities among primarily three groups of
participants, viz.
Contd…
1. BOARD OF DIRECTORS
2. MANAGERS
3. SHAREHOLDERS.
• Corporate Governance system spells out the
rules and procedures for making decisions on
corporate affairs; it also provides the structure
through which the company objectives are set, as
well as the means of attaining and monitoring
the performance of those objectives.
CONTD….
• The fundamental concern of CG is to ensure
the conditions whereby an organization’s
directors and managers act in the larger
interests of the organization and its
shareholders in particular and stakeholder in
general, and to ensure the means by which
managers are held accountable to capital
providers for the use of assets. It allows a
more constructive and flexible response to
raise standards in running and managing a
company as opposed to strict statutory
requirements.
CONCEPT OF CORPORATE GOVERNANCE
4 p’s of Corporate Governance:
PEOPLE
PURPOSE
PROCESSES
PERFORMANCE
PEOPLE -- are the heart of any organization in
general and corporate governance in particular.
People associated with any organization include
– INVESTORS, EMPLOYEES, PARTNERS, CUSTOMERS,
SUPPLIERS, LENDERS, GOVT. and SOCIETY. People
orientation of Corporate Governance can be
measured based on the parameters of EQUITY,
ETHICS, and RELATIONSHIP.
Contd…
EQUITY– means (a) fair and equitable treatment to all.
In positive sense, equity means same behaviour, award,
appreciation etc. to all on achievement of the objectives. In
the negative sense, Equity talks about same extent and
kind of punishment for offence.
(b) Equity also means equitable distribution of wealth among
the people
Wealth Distribution indicates i) dividend to investors ii)
timely payment to Vendors and Lenders, iii) employee
benefits and security, iv) fair price to Customers, v)
payment of Govt. dues, vi) investment in CSR
(C) Another aspect of Equity is Citizenship and protection
of Human Rights
PEOPLE (CONTINUED)
ETHICS : Ethical practices of organizations include
Integrity. Propriety and Independence, Transparency in
operations and Disclosure of information, Anti-
corruption practices, Non money-laundering, Protection
of Intellectual Property Rights, Non counterfeiting,
Avoidance of harmful products, Proper insolvency or
closure process.
RELATIONSHIP : includes i) stakeholders’ empowerment
and engagement in management and decision making
process, harmonious culture, resolution of conflict
between employee and employee and between employee
and employer, environment, health, safety and
confidentiality.
PURPOSE
Another ‘P’ for Corporate Governance is PURPOSE. Purpose
must be
ESTABLISHED, MEASURABLE, ACTIONABLE &
COMMUNICATED.
Different aspects of Purpose are Vision – Mission and
Strategy.
The Vision and Mission are decided based on Unified and
Shared
Values of the organization, Stakeholders’ policies and
Organization
Commitment.
The Strategy leads to Strategic Action Plan, Performance
Metrics, Capacity Building Planning and Strategic
Management Team.
PROCESS
This ‘p’ of Corporate Governance includes:
Process Management, Process Compliances , and
Process Innovation.
The process should be Established, Integrated,
Documented , Automated, Implemented and
Maintained.
Process Management : It has different aspects
such as , Organization Management, Resource
Management, Supply Chain Management,
Marketing and Brand Promotion, Outsourced
Process Management, Environment & Energy
Management, Relationship Management,
Information System Management, Risk &
Crisis Management.
CONTD…
Process Compliances : The Plant /
Unit /Organization has to comply with various
rules regulations, statutes and laws enforced by
State and Central Govt. which includes Compliance
Mgt., Independent Assurance Mechanism and
Whistle Blowing.
Process Innovation : includes Knowledge &
Innovation Mgt. and Benchmarking
Performance
Performance is a must in order to achieve GROWTH through
EFFICIENCY . Performance should be measured, analyzed and
Communicated.
Efficiency can be segregated into different types as Operational
(resources) Efficiency, Asset or Infrastructure Efficiency,
and Management Process Efficiency.
GROWTH in any Organization brings in increase in income of
organization and stakeholder, increase in net worth or market
share, expansion and diversification, and increase in
opportunities for stakeholders.
CORPORATE GOVERNANCE weighs more with the optimum
use of both Capital and Manpower with their respective growth.
As a vital part of the process, it should meet the expectations of
all stakeholders beginning with Equity in providing Dividend to
investors, timely payment to Vendors and Lenders, securing the
employees with benefits, and fair prices to Customers.
SEBI (Disclosure & Investor Protection)
GUIDELINES
Disclosure in Offer Documents:
Fixation & Justification of Issue Price
Risk factors & Management Perception
Industry Analysis Report
Installed Capacity & Capacity utilization
Past Track Record & Projected Financial Analysis
Comparison of Financial Data with Industry Averages
Stock Market Data Analysis
Significant Financial Ratios; Profitability Ratios
Earning per Share (EPS) ; NAV per Share
Return on Net Worth; P / E Ratio
Disclosure and Transparency of operations of an Organization is the
most desirable thing in the stakeholders’ world. SEBI guidelines
serve this purpose.
Clause 49 of Companies Act,1956
&Corporate Governance
In India, the Companies Act, 1956 lays the
responsibility of financial statements on the
Board of Directors.
The Board is also responsible for maintaining
proper books of account which would give a
true and fair view of the financial Position and
comply with the Accounting Standards.
The principles ‘truth and fairness’ of the books of
account embody the robustness of internal
controls, duly audited by internal and statutory
auditors, the responsibility of which also lies
with the board .
.LISTING AGREEMENT CONDITIONS.
Industry structure and development
Management discussion and analysis of
financial condition
Segment-wise and Product-wise performance
Market Price Data – Monthly High and Low
relation to broad based indices like BSE Sensex
Matters to be placed before the Board
Annual Operating Plans and Budgets
Foreign Exchange exposure
Material default in Financial Obligation
Report on Risk Management – SWOT Analysis
Principles of corporate governance
An effective corporate governance system relies
on a combination of internal and external
discipline to maximize corporate performance,
minimize risk, and protect the interests of
investors and stakeholders
The Organization for Economic Co-Operation
and Development (OECD) has laid out a set of
basic principles that should guide the
functioning of corporate governance systems
in almost every country.
Principles of Corporate Governance (Contd..)
Below is a brief listing of the 2004 OECD
Principles of Corporate Governance :
1. Basis for an effective corporate governance
framework– this first principle sets the
important context for the other principles.
Transparent and efficient markets
Rule of Law
Clear division of responsibilities among
authorities
Continued…
2. Rights of shareholders
Secure ownership
Information
Participation
Voting
Share of profits
3. Equitable treatment of shareholders
Equal voting rights
Protection of minority and foreign shareholders
No insider trading or self-dealing
CONTD…
4. Role of stakeholders
Respect for legal rights and agreements
Co-operation between corporations and
stakeholders
Access to information
Communication and redress for
violations
Continued….
5. Disclosure and Transparency
Timely and accurate disclosure of material
information
Disclosure of financial situation, performance,
ownership, governance
Accounting standards
Audits of financial statements
Contd..
6. Responsibilities of the Board
Strategic guidance
Monitoring of management
Accountability to the company and shareholders
Duty of care
Duty of loyalty
Institutional framework for markets and protection
of minority shareholders are two additional
concerns of special importance to emerging
markets.
