Csr13(cg) (1)


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Csr13(cg) (1)

  1. 1. Corporate Governance
  2. 2. References for Corp. Governance Securities & Exchange Board of India, www.sebi.org Harvard Business Review, ‘Readings on Corporate Governance’ Academy of Corporate Governance www.academyofcg.org
  3. 3. Genesis of Governance Debate Concept originated with separation of ownership & management Corporatisation of business and increasing scales of production Origin can be traced back to ‘Agency Theory’ propounded by Berle & Means
  4. 4. Corporate Governance Tripod Board of Directors Environment Customers Employees Suppliers Shareholders Society Management Government
  5. 5. Defining Corporate Governance ……. Systems, procedures and institutions that ensure that management acts in the best interests of the owners or shareholders On going debate about whether it should be ‘shareholders’ interest or all ‘stakeholders’ interest that the management should serve
  6. 6. Shareholder v/s Stakeholder Debate Debate ongoing with strong proponents on either side Moot point is the timeframe In the long run, interests of all are likely to converge & need to be balanced Sustainability of the enterprise is of paramount importance
  7. 7. Theoratical Underpinnings What is a Corporation? Agency Theory Stewardship Theory Stakeholder Theory Sociological Theory
  8. 8. Governance Systems Systems and structures differ in historical and local condition specific context Entrepreneurial Form Banking Dominated Form Managerial Form Institutional Form Democratic Corporate Form
  9. 9. Revisiting Corporate Excellence Profitability Growth Top line Bottom line Increasing Market Share Satisfied Stakeholders
  10. 10. InSearch of Excellence Bias for Action Closeness to Consumers Hands on, Value Driven Productivity through People Autonomy & Intrapreneurship Stick to Knitting
  11. 11. Built to Last Remarkable resilience Profit maximization not the only / primary objective Do not brutalize themselves with the tyranny of “OR”, instead embrace genius of “AND”.
  12. 12. Why good governance is an imperative ? Immediate Factors Corporate debacles Vanishing companies Corporate frauds Rating downgrades Pending investors’ complains
  13. 13. Why good governance is an imperative ? Structural Factors Globalisation of markets Indian companies tapping international markets for resources Institutionalisation of securities markets
  14. 14. CG…. International Developments Cadbury Committee, UK 1992 Baseline consensus in UK’s financial markets Focuses on accountability & Transparency Greenbury Committee 1995 Executive’s & director’s role and compensation Myner Committee, UK Role of institutional investors 1995
  15. 15. CG…. International Developments California Public Employees Retirement System, USA Global governance principles New York Stock Exchange proposals NASDAQ proposals
  16. 16. CG…. International Developments Surbanes Oxley Act, 2002 Post ENRON development Most comprehensive piece of legislation in last 70 years Quality Review Board ( Auditor’s Independence) Independent Directors Whistle Blower Policy
  17. 17. CG…. International Developments German Model Banking dominated organisational form Conservative & risk averse boards A unique system of 2–tier boards No official codes, but provisions in the company legislation Of late, demand for professionalising supervisory boards
  18. 18. CG…. International Developments King Committee, South Africa 1994 Bosch Report, Australia 1995 Toronto Stock Exchange guidelines 1994 Malayasian Code 1999
  19. 19. OECD Principles Recognises multiplicity of economic environments Only recommendatory in nature Intended to assist member governments in evaluating their legal, institutional and regulatory framework
  20. 20. Implementation Modalities Available options are Thru General Legislation Through Stock Exchanges Through independent and well publicised ratings Through institutional activism and nominee directors Through self regulation
  21. 21. Implementation Choices Most experts are averse to generally applicable standards and legal intervention Internationally, self regulation linked to openness and accountability, seems to generate maximum support Self regulation may not work in India, at least in the foreseeable future – A judicious mix of all the approaches may be required
  22. 22. CG…. Developments in India CII’s Desirable Code of Corporate Governance 1998 SEBI Committee I (Chair: Kumar Mangalam Birla) 2000 SEBI Committee II (Chair: N R Narayan Murthy) 2002
  23. 23. Clause 49 of Listing Agreement Board Structure  At least 50 % of Directors to be non-executive  Minimum independent directors 33 % with non-executive chairman 50 % with executive chairman Board Procedures  A minimum of 4 board meetings in a year, with a gap not exceeding four months  Resume of directors seeking appointment / reappointment
  24. 24. Clause 49 of Listing Agreement Mandatory Board Committees Audit committee Investor’s grievance Committee Mandatory Disclosures Director’s remuneration Related Party Transactions Penalties & Strictures
  25. 25. Clause 49 of Listing Agreement Information to Shareholders Date, time & venue of AGM Market price data Listing on exchanges & security code Number of complaints, of which pending Un-audited quarterly results & half yearly results Demat status Postal ballot
  26. 26. SEBI Committee II & Revised Clause 49 Enhance role for Audit committee Age ceiling for directors Maximum of 3 terms (3yrs each) for independent directors Code of conduct & whistle blower policy mandatory Definition of ‘Independent directors’ – so far not defined
  27. 27. CG…. Developments in India Naresh Chandra Committee 2002 Draws heavily on Sarbanes-Oxley Act of US Independent directors – tighter definition - exemption from criminal liabilities Auditors – barred from taking up non-audit services – audit partner rotation – cooling off period of 2 years Professional bodies – Umbrella quality review board Disciplinary powers with a prosecution directorate -
  28. 28. Unresolved Issues Is good governance related to better competitive / financial performance ? Should board performance be evaluated ? If so by whom ? Do independent directors need to be trained ? How should independent directors be compensated ?
  29. 29. Corporate Governance…. a recap Divorce of ownership & management Shareholder v/s stakeholder debate Implementation choices Clause 49 of the listing agreement Board structure & procedures Board committees Disclosures Shareholder information
  30. 30. CG - Road ahead Need to graduate from compliance in letter to compliance in spirit Co-opt softer issues on the agenda Apply principles of good governance and accountability across sectors Work towards national governance