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Towards an inquiry into corporate governance research

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    • 1. 1TOWARDS AN INQUIRY INTOCORPORATE GOVERNANCERESEARCHPROFESSOR JAYASHREE SADRIANDDR SORAB SADRI
    • 2. 2BASIS This presentation is based on the researchconducted by Dr Sorab Sadri (2000-2005), DrSunita Sharma (2003-2006) and Dr SharukhTara (2005-2008), which has been later usedby several other doctoral scholars like Prof. JOke. It may be used as a guide to furtherscholarship.
    • 3. 3Objective of the research: To understand the policies and practices ofCorporate Governance and classify theliterature to provide an overview of the principalfindings of prior research. To suggest a corporate governance “medley”among the actors and institutions that affectcorporate governance interactions thatencompasses a broader view of governancethan has been considered in prior research. To design and develop an instrument to assessCorporate Governance in selected industries inthe Indian Financial Sector.
    • 4. 4Objective of the research: (Contd.) To establish the relationship betweenCorporate Governance and BusinessSustainability upon studying shareholderownership, transparency and disclosure, andmanagement performance. To test for reliability and validity of the House ofCorporate Governance model in selectedindustries in the Indian Financial Sector. To identify important gaps in the research thatrepresent promising avenues for future study.
    • 5. 5GLOBAL INITIATIVES TO IMPOSECORPORATE GOVERNANCE SIR ADRIAN CADBURY COMMITTEE – to address theissues related to corporate governance in the U.K. CORPORATE GOVERNANCE REPORT OF SINGAPOREGOVERNMENT SARBANES-OXLEY ACT, 2002 BY THE AMERICANCONGRESS which came into effect in July 2002 – toaddress all the issues associated with corporate failuresto achieve quality governance and to restore investors’confidence…Background of the proposedresearch:
    • 6. 6Background of the research:Williams (1996) identified four models ofcorporate control: 1. The Simple Finance Model; 2. The Stewardship Model; 3. The Stakeholder Model; and 4. The Political Model.
    • 7. 7Alternative Patterns of Separation of Ownership &Management Anglo-Saxon: Founder/entrepreneur Professionalmanager Exit: sell-out European: Founder/entrepreneur Heirs + professionalmanagement Retain ownership Asian/EM: Heirs Maintain ownershipBackground of the research:
    • 8. 81. Shareholder rights2. Equitable treatment of shareholders3. Role of shareholders4. Disclosure and transparency5. Responsibilities of the boardResearch Background
    • 9. 91. CII Report2. Kumarmangalam Birla Committee Report3. Clause 49 Requirements4. Naresh Chandra Committee5. Narayan Murthy ReportCurrent state of Corporate Governance inIndia:
    • 10. 10IMPLEMENTATION OF CORPORATEGOVERNANCE IN INDIA KUMAR MANGALAM COMMITTEE – constituted in May1999 to promote and raise the standard of corporategovernance in IndiaMANDATORY RECOMMENDATIONS OF BIRLACOMMITTEE: Applies to listed companies with paid-up capital Rs.3crores or more. Composition of Board of Directors – optimumcombination of executive & non-executive directors Audit Committee – with 3 independent directors withone having financial and accounting knowledge.
    • 11. 11MANDATORY RECOMMENDATIONSOF BIRLA COMMITTEE Remuneration Committee Board Procedures – At least 4 meetings of the board in a yearwith maximum gap of 4 months between 2 meetings. toreview operational plans, capital budgets, quarterly results,minutes of committee’s meeting. Director shall not be a member of more than 10 committeeand shall not act as chairman of more than 5 committeesacross all companies. Management discussion and analysis report coveringindustry structure, opportunities, threats, risks, outlook,internal control system Information sharing with shareholders
    • 12. 12 ROLE OF CHAIRMAN REMUNERATION COMMITTEE OF BOARD SHAREHOLDERS’ RIGHT FOR RECEIVING HALF YEARLYFINANCIAL PERFORMANCE POSTAL BALLOT COVERING CRITICAL MATTERS LIKEALTERATION IN MEMORANDUM ETC SALE OF WHOLE OR SUBSTANTIAL PART OF THEUNDERTAKING CORPORATE RESTRUCTURING FURTHER ISSUE OF CAPITAL VENTURING INTO NEW BUSINESSESNON-MANDATORYRECOMMENDATIONSOF BIRLA COMMITTEE
    • 13. 13IMPLEMENTATION OFRECOMMENDATIONS OF THEBIRLA COMMITTEE By introduction of Clause 49 in the listing agreement withstock exchanges the following Provisions were introduced. Composition of Board - In case of full time chairman, 50%non-executive directors and 50% executive directors Constitution of audit committee – With 3 independentdirectors with chairman having sound financialbackground. finance director and internal audit head to bespecial invitees and minimum 3 meetings to be convened.It should be responsible for review of financial performance0n half yearly/annually basis; appointment/removal/remuneration of auditors; review of internalcontrol systems and its adequacy.
    • 14. 14 Remuneration of Directors – Remuneration of non-executive directors to be decided by the board.details of remuneration package, stock options,performance incentives of directors to bedisclosed Board Procedures – At least 4 meetings in a year.director not to be member of more than 10committees and chairman of more than 5committees across all companies: CLAUSE 49 REQUIREMENTS
    • 15. 15In addition, under Clause 49Management discussion & Analysisreport – should include: (a) industrystructure & developments (b)opportunities & threats (c) segmentwise or product wise performance
    • 16. 16RECENT DEVELOPMENTS COMMITTEE HEADED BY SHRI NARESH CHANDRACONSTITUTED IN AUGUST 2002 TO EXAMINE CORPORATEAUDIT, ROLE OF AUDITORS, RELATIONSHIP OF COMPANY &AUDITOR RECOMMENDATION OF NARESH CHANDRA COMMITTEE: RECOMMENDED A LIST OF DISQUALIFICATIONS FOR AUDITASSIGNMENTS LIKE DIRECT RELATIONSHIP WITHCOMPANY, ANY BUSINESS RELATIONSHIP WITH CLIENT,PERSONAL RELATIONSHIP WITH DIRECTOR AUDIT FIRMS NOT TO PROVIDE SERVICES SUCH ASACCOUNTING, INTERNAL AUDIT ASSIGNMENTS ETC. TOAUDIT CLIENTS AUDITOR TO DISCLOSE CONTINGENT LIABILITIES &HIGHLIGHT SIGNIFICANT ACCOUNTING POLICIES
    • 17. 17RECENT DEVELOPMENTS RECOMMENDATION OF NARESH CHANDRA COMMITTEE: AUDIT COMMITTEE TO BE FIRST POINT OF REFERENCE FORAPPOINTMENT OF AUDITORS CEO & CFO OF LISTED COMPANY TO CERTIFY ON FAIRNESS,CORRECTNESS OF ANNUAL AUDITED ACCOUNTS REDEFINITION OF INDEPENDENT DIRECTORS – DOES NOTHAVE ANY MATERIAL, PECUNIARY RELATIONSHIP ORTRANSACTION WITH THE COMPANY COMPOSITION OF BOARD OF DIRECTORS STATUTORY LIMIT ON THE SITTING FEE TO NON-EXECUTIVEDIRECTORS TO BE REVIEWED RECOMMENDATIONS HAVE FORMED PART OF COMPANIES(AMENDMENT) BILL, 2003
    • 18. 18 SEBI CONSTITUTED A COMMITTEE HEADED BY SHRI N. R.NARAYANA MURTHY TO REVIEW EXISTING CODE OF CORPORATEGOVERNANCE RECOMMENDATIONS: STRENGHTENING THE RESPONSIBILITIES OF AUDIT COMMITTEE IMPROVING QUALITY OF FINANCIAL DISCLOSURES UTILISATION OF PROCEEDS FROM IPO TO ASSESS & DISCLOSE BUSINESS RISKS FORMAL CODE OF CONDUCT FOR BOARD WHISTLE BLOWER POLICY TO BE PALCE IN A COMPANYPROVIDING FREEDOM TO APPROACH THE AUDIT COMMITTEE SUBSIDIARIES TO BE REVIEWED BY AUDIT COMMITTEE OFHOLDING COMPANYRECENT DEVELOPMENTS
    • 19. 19CORPORATE GOVERNANCE - ULTIMATEOBJECTIVETO ATTAIN HIGHEST STANDARD OFPROCEDURES AND PRACTICES FOLLOWEDBY THE CORPORATE WORLD SO AS TOHAVE TRANSPARENCY IN ITSFUNCTIONING WITH AN ULTIMATE AIM TOMAXIMISE THE VALUE OF VARIOUSSTAKEHOLDERS.
    • 20. 20Redefining Corporate Governance Processes and Structure by whichbusiness and affairs of corporatesector is directed and managed…
    • 21. 21Criteria for Good Governance Ownership Rights of Shareholder (C1) Transparency & Disclosure (C2) Performance of the Management (C3) Effectiveness of Board of Directors (C4) Equitable Treatment of Stake Holders (C5) Leadership, Ethics and Culture (C6)
    • 22. 22HENCE Any meaningful research into corporategovernance must follow the above route. This involves: (administering questionnaires,conducting, conducting focused interviewsand remembering all the time that data isimportant) Never forget that correlation does not implycausation

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