CorporateGovernance &INDIAN MNC’s -Shreevatsa, 2nd sem MBA studenT RVIM,
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 society- at-large.• The raison dêtre 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• Unlike South-East and East Asia, the corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic collapse• Also, unlike most OECD countries, the initiative in India was initially driven by an industry association, the Confederation of Indian Industry – In December 1995, CII set up a task force to design a voluntary code of corporate governance – The final draft of this code was widely circulated in 1997 – In April 1998, the code was released. It was called Desirable Corporate Governance: A Code – Between 1998 and 2000, over 25 leading companies voluntarily followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy‟s Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI and many others
History of Corp Gov in India• Following CII‟s initiative, the Securities and Exchange Board of India (SEBI) set up a committee under Kumar Mangalam Birla to design a mandatory-cum- recommendatory 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
History of Corp Gov in India• Following CII and SEBI, the Department of Company Affairs (DCA) modified the Companies Act, 1956 to incorporate specific corporate governance provisions regarding independent directors and audit committees• In 2001-02, certain accounting standards were modified to further improve financial disclosures. These were: – Disclosure of related party transactions – Disclosure of segment income: revenues, profits and capital employed – Deferred tax liabilities or assets – Consolidation of accounts• Initiatives are being taken to (i) account for ESOPs, (ii) further increase disclosures, and (iii) put in place systems that can further strengthen auditors‟ independence
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
Corporate Governance Mechanisms• Internal Governance Mechanisms• Board of director• Managerial incentive compensation• Ownership concentration• External Governance Mechanisms• Market for Corporate Control
Mechanism of controlCorporate 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 ability1. Internal corporate governance control .2. External corporate governance control .
Internal corporate governance controlOrganizationally 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.1. Competition2. Debt covenants3. Demand for assessment of performance (especially financial statements.)4. Government regulations5. Media pressure6. Take over
RegulationRules versus principles• Rules are typically thought to be simpler to follow than principles, demarcating a clear line between acceptable and unacceptable behavior• In practice rules can be more complex than principles.• They may be ill-equipped to deal with new types of transactions not covered by the code. Moreover, even if clear rules are followed, one can still find a way to circumvent their underlying purpose - this is harder to achieve if one is bound by a broader principle.• Principles on the other hand is a form of self regulation. It allows the sector to determine what standards are acceptable or unacceptable. It also pre-empts over zealous legislations that might not be practical.
Cont……… Enforcement• Enforcement can affect the overall credibility of a regulatory system. They both deter bad actors and level the competitive playing field. Nevertheless, greater enforcement is not always better, for taken too far it can dampen valuable risk-taking There are various integrated governance, risk and compliance solutions available to capture information in order to evaluate risk and to identify gaps in the organization‟s principles and processes.• This type of software is based on project management style methodologies such as the ABACUS methodology which attempts to unify the management of these areas, rather than treat them as separate entities.
Cont….Action Beyond Obligation• Enlightened boards regard their mission as helping management lead the company.• They are more likely to be supportive of the senior management team.• Enlightened directors recognize that it is not their role to be involved in the day-to-day operations of the corporation.• They lead by example. Overall, what most distinguishes enlightened directors from traditional and standard directors is the passionate obligation they feel to engage in the day- to-day challenges and strategizing of the company. Enlightened boards can be found in very large, complex companies, as well as smaller companies
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.
Board of composition Remuneration/compensation• Researchers have found support for the relationship between frequency of meetings and profitability.• Others have found a negative relationship between the proportion of external directors and profitability, while others found no relationship between external board membership and profitability.• Compensation is used to motivate the CEOs to act in the best interest of the firm.• Pay is linked to performance of the firm.• CEOs receive excessive funds when the corporate
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 companys income.• The right to purchase new shares issued by the company.• The right to a companys 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 company‟s 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, E- Commerce & 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 Murthy’s Global Strategy1) 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.3) PSPD Model – Predictability of Revenues, Sustainability of Revenues, Profitability, De- making and risk taking
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.
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