Introduction to Corporate Governance

1. Prepared by:
Mr. B.M.Naik, Teaching Assistant
Department of Studies in Commerce
Rani Channamma University, Belagavi
P.G. Centre, Jamkhandi.

2.  Evolution of CG, Need, theories of CG.
 Mechanisms of CG, Models of CG, issues of
governance, Regulatory Framework of CG in India;
Corporate failures and scams,
 The concept of Whistle Blowing; CG initiatives in
India; Ethical standards in CG practices; e-
Governance; CG in PSU’s and banks

3.  The topic of corporate governance is a vast subject
that enjoys a long and rich history. It’s a topic that
incorporates managerial accountability, board
structure and shareholder rights. The issue of
governance began with the beginning of corporations,
dating back to the East India Company, the Hudson’s
Bay Company, the Levant Company and other major
chartered companies during the 16th and 17th
centuries.

4.  While the concept of corporate governance has
existed for centuries, the name didn’t come into vogue
until the 1970s. It was a term that was only used in the
United States. The balance of power and decision-
making between board directors, executives and
shareholders has been evolving for centuries. The
issue has been a hot topic among academic experts,
regulators, executives and investors.

5.  In the 1970s, things began to change as the Securities
and Exchange Commission (SEC) brought the issue of
corporate governance to the forefront when they
brought a stance on official corporate governance
reforms. In 1976, the term “corporate governance” first
appeared in the Federal Register, the official journal of
the federal government.

6.  Corporate Governance is an increasingly significant
aspect of business and organizational management,
extending to international politics and trade laws; and to
globalized economics, corporations and organizations,
and markets.
 Theories, standards and regulations relating to
Corporate Governance began to develop properly in the
1990s, so it is a relatively recent field of economic and
management practice.

7.  Corporate governance is a system of rules,
practices and processes that are used by a
corporation to direct and control its actions.
 It’s a way to offer a balance between the varying
corporate entities, such as stakeholders, management,
customers, suppliers, financiers, government and
community.

8.  Corporate Governance is the application of best
management practices, compliance of law in true letter
and spirit and adherence to ethical standards for
effective management and distribution of wealth and
discharge of social responsibility for sustainable
development of all stakeholders.

11.  Wide spread of shareholders.
 Changing ownership structure.
 Corporate scams or scandals.
 Huge increase in top management
compensation.
 Globalization.

13.  To Protect the interest of shareholder’s right
 To ensure the equitable treatment to all the
shareholders
 To recognise the rights of stakeholders
 To ensure the strategic guidance of the company.

14.  Mainly CG theories are classified as:
 A) Agency theory
 B) Shareholder theory
 C) stakeholder theory
 D)Stewardship theory
 E) Resource Dependency theory
 F)Transaction cost theory
 G) Political theory

15.  According to this theory, managers act as 'Agents' of
the corporation. The owners or directors set the central
objectives of the corporation. Managers are
responsible for carrying out these objectives in day-to-
day work of the company. Corporate Governance is
control of management through designing the
structures and processes.

16.  This theory explains;
 The owners are the principals, But principals may not
have knowledge or skill for getting the objectives executed
 managers act as 'Agents' of the firm.
 The principal authorizes the mangers to act as 'Agents'
and a contract between principal and agent is made.
 the agent should act in good faith.
 The agent protect the interest of the principal and should
remain faithful to the goals.


17.  According to this theory, it is the corporation which
is considered as the property of shareholders/
stockholders.
 They can dispose of this property, as they like.
They want to get maximum return from this
property.


18.  The role of managers is to maximize the wealth of
the shareholders. They, therefore should exercise
due diligence, care and avoid conflict of interest and
should not violate the confidence reposed in them.
The agents must be faithful to shareholders.

19.  According to this theory, the company is seen as an
input-output model and all the interest groups which
include creditors, employees, customers, suppliers,
local-community and the government are to be
considered. From their point of view, a corporation
exists for them and not the shareholders alone.
 The different stakeholders also have a
self interest. The interest of these
different stakeholders is at times conflicting. The
managers and the corporation are responsible to
mediate between these different stakeholders interest.

20.  The stake holders have solidarity with each other. This
theory assumes that stakeholders are capable and
willing to negotiate and bargain with one another. This
results in long term self interest.

21.  The word 'steward' means a person who manages
another's property or estate. Here, the word is used in
the sense of guardian in relation to a corporation, this
theory is value based.
 The managers and employees are to safeguard the
resources of corporation and its property and interest
when the owner is absent. They are like a caretaker.
 They have to take utmost care of the corporation. They
should not use the property for their selfish ends.
 This theory thus makes use of the social approach to
human nature.

22.  The managers should manage the corporation as if it
is their own corporation. They are not agents as such
but occupy a position of stewards.
 The managers are motivated by the principal's
objective and the behavior pattern is collective, pro-
organizational and trustworthy.
 Under this theory, first of all values as standards are
identified and formulated. Second step is to develop
training programmes that help to achieve excellence.
Thirdly, moral support is important to fill any gaps in
values.


23.  Transaction cost theory: Transaction cost
theory states that a company has number of
contracts within the company it self or with market
through which it creates value for company .
 Political theory : political theory brings the
approach of developing voting support from
shareholders, rather by purchasing voting power.
It highlight the allocation of corporate power profits
& privileges are determined via the governments
favor.

24.  Political theory : political theory brings the
approach of developing voting support from
shareholders, rather by purchasing voting power.
It highlight the allocation of corporate power profits
& privileges are determined via the governments
favor.

26.  Internal Mechanism :The foremost sets of controls for a
corporation come from its internal mechanisms. These
controls monitor the progress and activities of the
organization and take corrective actions when the business
goes off track.
 External Mechanism :External control mechanisms are
controlled by those outside an organization and serve the
objectives of entities such as regulators, governments,
trade unions and financial institutions.
 Independent Audit: An independent external audit of a
corporation’s financial statements is part of the overall
corporate governance structure. An audit of the company's
financial statements serves internal and external
stakeholders at the same time.

27. 1. The Anglo-American Model.
2. German Model.
3. The Japanese Model.
4. Indian Model of Governance.

28.  This model is also called an “Anglo-Saxon Model” & is
used basis of corporate governance in U.S.A, U.K,
Canada, Australia & some common wealth countries.
 The shareholders appoint directors who in turn appoint
the managers to manage the business . Thus there is
separation of ownership & control.
 The board usually consist of executive directors & few
independent directors. The board often has limited
ownership stakes in the company . Moreover a single
individual holds both the position of CEO & chairman
of the board.

29.  This system (model) relies on effective
communication between shareholders, board &
management with all important decisions taken
after getting approval of shareholders (by voting).
MANAGEMENT SHAREHOLDERS
BOD

30. BOD
(supervisor)
Shareholders
Stakeholders
Company
Officers
(Managers)
Regulatory/ legal
System
Creditors

31.  This model is also called as “2 tier board model” as
there are 2 boards viz. The supervisory board and the
management board. It is used in countries like
Germany, Holland, France etc.
 Usually a large majority of shareholders are banks &
financial institutions. The shareholders can appoint
only 50% of members to the constitute the supervisory
board. The rest is appointed by employees & labour
unions.
Key Players
 Banks
 Corporate Institutions

32. Supervisory Board
Management Board
(including labour
relation board)
Employees &
Labour unions
Shareholders
Company
Appoints
&
supervise
s
Manage
Appoint 50%
Own
Appoint 50%

33.  Corporations - 41%
 Banks - 27%
 Pension funds - 3%
 Individual owners - 4%
 Foreign Investors - 19%

34.  A banking system characterized by strong, long-term
links between banks and corporation
 A legal, public policy and industrial policy framework
designed to support and promote “ keiretsu” ( set of
companies with interlocking business relationships
and shareholdings)
 BOD composed of solely insiders and comparatively
low(in some corp.,non-existent) level of input of
outside shareholders
 Equity financing is important for japanese corporations
 Insiders and their affiliates are the major shareholders
in most japanese corporations.

35. Supervisory Board
(Including president)
President
Ratifies (make officially valid) the
President’s decisions
Consults
Executive
Management

36. Major shareholders
Government Banks
Management

37. In Japan, Financial institutions and corporations
firmly hold ownership of equity market.
 Insurance companies
Banks 43%
 Corporations - 25%
 Foreign - 3%

38.  The model of corporate governances found in India is
a mix of the Anglo-American and German models.
This is because in India, there are three types of
corporation viz. private companies, public companies
and public sectors undertakings ( which includes
statutory companies, government companies, banks
and other kinds of financial institutions)
 Each of these corporation have a distinct pattern of
shareholding. For e.g In case of companies, the
promoter and his family have almost complete control
over the company. They depend less on outside
equity capital. Hence in private companies the
German model of corporate governances is followed.

39.  Conflicts of Interest.
 Over sight Issues. ( unthinkingness)
 Accountability Issues.
 Transparency.
 Ethics violations.
 Protection of shareholders & their expectations.
 Disclosure & Audit.
 Theory of separation of power.
 Asymmetry ( lack of equality ) of power.
 Asymmetry of information.

40. 1. The companies Act 2013 :
The new companies law contains many
provision related to good corporate governance
like composition of board of directors, Admitting
women directors, Directors Training& Evaluation,
Internal Audit, Risk management etc. Such
provision of new company law in providing a
good corporate governance structure.

41. 2. Securities & Exchange Board of India
(SEBI) :
The SEBI is a regulatory authority
established on April 12,1992. The SEBI was
established with the main purpose of curbing (
restrict) the malpractices and protecting the
interesting of its investors. It comes up with
corporate governance norms.

42. 3. Standard Listing Agreement of stock Exchanges:
It is for all those companies whose shares are listed
on stock exchange. All companies are required to file
the listing agreement of stock exchange where its
shares are listed.
4. Secretarial Standards issued by ICSI (Institute of
company secretaries of India):
It is an autonomous body constituted by company
secretaries Act,1980. It is a body to regulated and
develop the profession of company secretaries is
India.

43. 5. Accounting Standards issued by the ICAI
(INSTUTUTE OF CHARTERED ACCOUNTANTS
OF INDIA) :
ICAI is a statutory body
established by chartered accounts Act, 1949 It
issues accounting standards for disclosure of
financial information some disclosure of
accounting policies followed in preparation of
financial statement, cash flow statement, for
assessing ability of an enterprise.

44.  Earning overstated (Ahold co. Netherland).
 False transaction (Parmalat co. U.S.A ).
 Looting by CEO (Tyco co. U.S.A ).
 Improper shares deals (Tyco co. U.S.A ).
 Board failure (Satyam co. India ).
 Accounts falsification (Satyam co. India ).
 Failure to react competition.
 Mismanagement .
 Technological failures.
 Dishonest Audit Committees.

45.  Complacency.( Comfort)
 Arrogance.
 Poor accounting controls.
 Non-independent internal audit department.
 Poor management information.
 Lack of transparency.
 Greed. ( intense & selfish desire )

46. It is the act of telling the authorities or the public
that organization you are working for its doing
something immoral or illegal.

47.  Fraud.
 Damage to the environment.
 Health & safety in danger.
 Breach of law & justice.
 Breach of trust & loyalty.
 Threat of life.
 Lost jobs & careers.

48.  Internal Whistle blowing : An employee
informs about the misconduct to his officers or
seniors holding positions in the same
organization.
 External Whistle blowing : Here the
employees informs about the misconduct to any
third person who is not a member of an
organization, such as a lawyer or legal body.

49.  Ministry of Corporate Affairs has been pursuing
the agenda of providing an effective regulatory
framework to the Indian corporate sector that
enables them to freely exploit their entrepreneurial
energies while contributing to the overall growth of
the society.
 Some of major initiatives are as under:
 (1) Green Initiatives in the Corporate
Governance:(a) Allowing service of
Documents including Balance Sheets and
Auditors report etc through e-mail addresses

50.  b) Participation by Directors and shareholders in
meetings through video conferencing :
 (c) Voting in General Meeting of Companies through
electronic mode
 (d) Issue of Digital Certificates by Registrar of
Companies:
 (2) Simplification in Procedures and Process under
Companies Act, 1956:
 (a) Incorporation of new Company within 24 hours by
end of July, 2011
 (b) Issue of License under section 25 (non profit
companies) of the Companies Act, 1956 :
 (C) Various E-forms are approved online :

51.  (3) e-Payments in the Ministry: The payment of
filing fee by the companies has been made
completely online.
 (4) International Financial Reporting Standards
(IFRS) : In the field of financial reforms,
convergence of Indian Accounting Standards
called Indian AS’s with International Financial
Reporting Standards (IFRS) has been approved
by the Ministry in February, 2011
 (5) Investor awareness programmes :

52. It is the application of information &
communication technology for delivering
government services, exchange of information,
communication transactions, integration of various
stand-alone systems & services between
government-to-citizen (G2C), government-to-
business(G2B).

53.  To build an informed society.
 To increase government and citizen participation.
 To encourage citizen participation.
 To bring transparency in the governing process.
 To make the government accountable.
 To reduce the cost of governance.
 To reduce the reaction time of the government.

54.  Speed.
 Savings cost.
 Transparency.
 Accountability.

55.  Loss of Interpersonal communication.
 High set-up cost and Technical difficulties.
 Illiteracy .
 Cybercrime/ Leakage of personal Information.
Examples: 1. Hacking personal accounts.
2. Fake website creating.
3. ATM system hacked in kolkata.

56. Thank you