Corporate governance


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Corporate governance

  1. 1. Corporate Governance
  2. 2. Corporate Governance <ul><li>The system by which companies are directed and controlled. </li></ul><ul><li>The way in which the affairs of the corporations are handled by their respective Boards and Officers. </li></ul><ul><li>Current focus of corporate governance is Stakeholders not shareholders. </li></ul>
  3. 3. Corporate Governance <ul><li>Due to global concern about unethical practices adopted by large number of publicly held companies, need was felt to review corporate governance. </li></ul><ul><li>In UK, the Cadbury Committee (1992) and the Hampel Committee (1995) have gone into the various aspects, specially, the financial matters, related to the governance of companies by its board. </li></ul>
  4. 4. Corporate Governance <ul><li>In India, the CII devised a code of desirable corporate governance under chairmanship of Rahul Bajaj in 1997. </li></ul><ul><li>Several committees followed: </li></ul><ul><ul><li>Kumar Mangalam Committee on Corporate Governance (1999) </li></ul></ul><ul><ul><li>Naresh Chandra Committee on Corporate Audit and Governance (2002) </li></ul></ul><ul><ul><li>Narayan Murthy SEBI Committee on Corporate Governance (2003) </li></ul></ul><ul><ul><li>National Foundation for Corporate Governance by the Ministry of Corporate Affairs of the GOI in partnership of CII, Institute of Company Secretaries and the Institute of CA of India </li></ul></ul>
  5. 5. Corporate Governance <ul><li>NFCG defines Corporate Governance </li></ul><ul><li>In narrow sense </li></ul><ul><li>‘ Corporate Governance involves a set of relationships amongst the company’s management, its board of directors, shareholders and other stakeholders. </li></ul><ul><li>These relationships which involve various rules and incentives, provide the structure through which objectives of the company are set and the means of attaining those objectives and monitoring performance are determined.’ </li></ul><ul><li>In broad sense </li></ul><ul><li>‘ Corporate Governance is the extent to which companies are run in an open and honest manner.’ </li></ul>
  6. 6. Good Corporate Governance <ul><li>According to NFCG the key elements of good Corporate Governance are </li></ul><ul><ul><li>Transparency of corporate structures and operations </li></ul></ul><ul><ul><li>Accountability of management and board </li></ul></ul><ul><ul><li>Responsibility toward employees, creditors, suppliers and local communities. </li></ul></ul>
  7. 7. Good Corporate Governance <ul><li>In holistic terms Good Corporate governance is concerned with instituting: </li></ul><ul><ul><li>An effective board </li></ul></ul><ul><ul><li>Code of governances </li></ul></ul><ul><ul><li>Transparency in disclosure of information related to financial and operational performance </li></ul></ul><ul><ul><li>Reliability of financial reporting </li></ul></ul><ul><ul><li>Effective auditing and evaluation system </li></ul></ul><ul><ul><li>Effectiveness and efficiency of operations </li></ul></ul><ul><ul><li>Compliance with laws and regulations and </li></ul></ul><ul><ul><li>Proper risk management system </li></ul></ul><ul><ul><li>Safeguarding of assets </li></ul></ul><ul><ul><li>Encouraging whistle bowing policies </li></ul></ul>
  8. 8. Corporate Governance <ul><li>Organisational Perspective- </li></ul><ul><ul><li>Maximizing the value , subject to meeting the organisation’s financial, legal and other contractual obligations. </li></ul></ul><ul><li>Societal Perspective- </li></ul><ul><ul><li>Corporate governance is about nurturing enterprises while ensuring accountability in the exercise of power and patronage therefore minimizing the divergence between private and social returns . </li></ul></ul>
  9. 9. Social Responsibility <ul><li>Corporate citizenship </li></ul><ul><li>Social Responsibility tells what an organisation ‘ought to do’ </li></ul><ul><li>Social Responsibility should be considered in all aspects of strategy formulation and implementation including vision, mission, objectives </li></ul><ul><li>Still a debatable issue </li></ul>
  10. 10. Different Views On CSR <ul><li>Major activity of business is economic, where social functions should be left to other institutions like government </li></ul><ul><ul><li>Milton Friedman, ‘ only social responsibility of business was to maximise profits for shareholders, staying within the realm of law’ - </li></ul></ul><ul><ul><li>“ The business of business is business”. </li></ul></ul><ul><ul><li>Elaine Sternberg, ‘ there is a human rights case against CSR, which is that a stakeholder approach to management deprives shareholders of their property rights.’ </li></ul></ul>
  11. 11. Different Views On CSR <ul><li>Social responsiveness is imperative for business. Primarily part of the society and have to serve the societal interests </li></ul><ul><ul><li>Keith Davis ‘ social responsibility rises from an Enlightened Self Interest where organisations realize that it is in their own best interest to act in ways that community considers socially responsible. </li></ul></ul>
  12. 12. Different Views On CSR <ul><li>Middle path: All corporates should not try to take up all social issues. </li></ul><ul><li>Economic goals and social responsiveness need not be conflicting rather should be achieved simultaneously. </li></ul><ul><li>Porter and Kramer </li></ul><ul><ul><li>CSR is not an issue of pitting business against society rather it is a relationship of interdependence. </li></ul></ul><ul><ul><li>It should not be thought of in a generic way rather something appropriate to company’s strategy. </li></ul></ul>
  13. 13. Some facts <ul><li>David Wheeler and Maria Sillanpa in “The Stakeholder Corporation” state </li></ul><ul><ul><li>that by 1998, 51 out of the 100 largest economies were not nation states, but corporations. </li></ul></ul><ul><ul><li>General Motors was bigger than Denmark; </li></ul></ul><ul><ul><li>Toyota was bigger than South Africa. </li></ul></ul><ul><li>At the same time </li></ul><ul><li>In 1999, the United Nations reported </li></ul><ul><ul><li>that the world's then three richest people - Bill Gates of Microsoft, the Sultan of Brunei and the Walton family of the Wall Mart retail chain - were worth more than the combined gross domestic product of the world's 34 poorest nations. </li></ul></ul>
  14. 14. Social Responsibility <ul><li>Social responsibility is to be interlinked with all phases of strategic management </li></ul><ul><li>Legal code of conduct </li></ul><ul><li>Market pressures </li></ul><ul><li>Social pressures </li></ul><ul><li>Major areas of concern </li></ul><ul><ul><li>Pollution, health, education, community, social welfare, rural development </li></ul></ul>
  15. 15. CSR Benefits <ul><li>Corporates have experienced a range of bottom line benefits, which include improved financial performance </li></ul><ul><li>Enhanced brand image & reputation </li></ul><ul><li>Increased ability to attract and retain employees </li></ul><ul><li>Easier access to capital </li></ul><ul><ul><li>The Social Investment Forum reports that, in the U.S. in 1999, there is more than $2 trillion in assets under management in portfolios that use screens linked to ethics, the environment, and corporate social responsibility. </li></ul></ul>
  16. 16. CSR in India <ul><li>Research on 536 companies in India (2005) </li></ul><ul><ul><li>42 % companies are not active in CSR. </li></ul></ul><ul><ul><li>Older companies & those with greater turnovers were more likely to be socially responsible. </li></ul></ul><ul><ul><ul><li>Companies more than 40 years old & turnover greater than Rs 5 billion were found to follow a consistent CSR strategy. </li></ul></ul></ul><ul><ul><li>17 % have a written policy on CSR. </li></ul></ul><ul><ul><ul><li>26 % PSU’s have written policy on CSR. </li></ul></ul></ul><ul><ul><ul><li>Only 6 % Private companies have written policy on CSR. </li></ul></ul></ul>
  17. 17. CSR in India Preferred areas for CSR Companies 12 % Farm based activities 20 % Livelihood – Non farm based activities 23 % Infrastructure Development 28 % Community Support 38 % Natural Resource Management 56 % Health 66 % Education 76 % Donating money to Social causes 76 % Adhering to Labour Standards 84 % Meeting Environmental Standards
  18. 18. CSR: International comparison *India, Indonesia, Malaysia, the Philippines, Singapore, South Korea and Thailand Source: Chambers, Chapple, Moon and Sullivan (2003) 24% Indonesia 41% Mean of Seven countries* 72% India 98% United Kingdom CSR Penetration Rate Country