Best practices in business corporate governance

1. CORPORATE
GOVERNANCE
Ankit Trivedi
Prosenjit Sarkar
- INBM Jan ‘16

2. WHAT IS CORPORATE
GOVERNANCE
Technique by which companies are directed and
managed.
Carrying the business as per the stakeholders’
desires.
Balancing individual and societal goals, as well as,
economic and social goals.
Determining ways to take effective strategic
decisions.
Ultimate authority and complete responsibility to
the Board of Directors.
Includes both social and institutional aspects.
Encourages a trustworthy, moral, as well as ethical
environment.

3. WHY CORPORATE
GOVERNANCE
Better excess to external finance
Lower costs of capital-interest rates on
loans
Improved company performance-
sustainability
Higher firm valuation and share
performance
Reduced risk of corporate crisis and
scandals

4. BENEFITS OF CORPORATE
GOVERNANCE
Good corporate governance ensures corporate
success and economic growth.
Strong corporate governance maintains investors’
confidence, as a result of which, company can raise
capital efficiently and effectively.
It lowers the capital cost.
There is a positive impact on the share price.
Good corporate governance also minimizes
wastages, corruption, risks and mismanagement.
It helps in brand formation and development.
It ensures organization in managed in a manner
that fits the best interests of all.

5. PRINCIPALS OF CORPORATE
GOVERANANCE
Sustainable development of all stake
holder
Effective management and distribution
of wealth
Discharge of social responsibility
Application of best management
practices
Compliance of law in letter and spirit
Adherence of ethical standard

6. PILLARS OF COPERATE
GOVERNANCE

7. ACCOUNTABILITY
Ensure that management is the accountable to the
board
Ensure that board is the accountable to shareholders

8. FAIRNESS
Protect share holders rights
Treat all share holders including
minorities and equality
Provide effective redress for violations

9. TRANSPARENCY
Ensure timely, accurate disclosure on
all material matters, including the
financial situation, performance,
ownership and corporate governance

10. INDEPENDENCE
Procedures and structures are in place
so as to minimize, or avoid completely
conflicts of interest
Independent directors and advisers i.e
free from the influences of others

11. THEORIES OF CORPORATE
GOVERNANCE
The Theories of Corporate Governance are:
1. Agency Theory
2. Stakeholders and Resource Dependency Theory
3. Stewardship Theory
4. Social Contract Theory
5. Legitimacy Theory
6. Political Theory
7. Trusteeship (Gandhism)

12. THEORIES OF CORPORATE
GOVERNANCE
Agency Theory
 An agent is employed by a principal to carry out a task on their
behalf.
 Agency refers to the relationship between a principal and their agent.
 Agency costs are incurred by principals in monitoring agency
behavior because of a lack of trust in the good faith of agents.
 By accepting to undertake a task on their behalf, an agent becomes
accountable to the principal by whom they are employed. The agent
is accountable to that principal.

13. THEORIES OF CORPORATE
GOVERNANCE
Companies that are quoted on a stock market such as the London Stock Exchange
are often extremely complex and require a substantial investment in equity to
fund them, i.e. they often have large numbers of shareholders.
Shareholders delegate control to professional managers (the board of directors)
to run the company on their behalf.
The Directors (agents) have a fiduciary responsibility to the shareholders
(principal) of their organisation (usually described through company law as
'operating in the best interests of the shareholders').
Shareholders normally play a passive role in the day-to-day management of the
company.
Directors own less than 1% of the shares of most of the UK's 100 largest quoted
companies and only four out of ten directors of listed companies own any shares
in their business.
Separation of ownership and control leads to a potential conflict of interests
between directors and shareholders.
The agents' objectives (such as a desire for high salary, large bonus and status for
a director) will differ from the principal's objectives (wealth maximisation for
shareholders).

14. THEORIES OF CORPORATE
GOVERNANCE

15. THEORIES OF CORPORATE
GOVERNANCE
Trusteeship
 Socio-economic philosophy that was propounded by Mahatma
Gandhi
 Provides a means by which the wealthy people would be the trustees
of trusts that looked after the welfare of the people in general
 Gandhi believed that the rich people could be persuaded to part with
their wealth to help the poor
 He believed that wealth belongs to the community and must be used
for the welfare of the community

16. THEORIES OF CORPORATE
GOVERNANCE
Trusteeship
 The Gandhian concept of Trusteeship is not only in perfect sync with,
but goes much farther than, the modern expectations of corporate
stewardship
 it stands for caring for other peoples’ money and resources entrusted
to the care of corporate directors and executive management and is
also sensitive to the broader needs of the society
 Increasing evidence of migration towards a more inclusive model of
governance based on Trusteeship ; Balasubramanin (2008)
 The primary challenge with the Trusteeship Model is that it cannot be
implemented by prescriptions alone but, to succeed, needs to be
accompanied by transformational change of the hearts and minds

17. THEORIES OF CORPORATE
GOVERNANCE
Stakeholder Theory
 A stakeholder is defined as any person/group which can affect/be
affected by the actions of a business. It includes employees,
customers, suppliers, creditors and even the wider community and
competitors.

18. THEORIES OF CORPORATE
GOVERNANCE

19. STAKEHOLDER THEORY
The theory states that a company owes a responsibility
to a wider group of stakeholders, other than just
shareholders
Firms should recognize the interests of stakeholders that
have a vested interest in the corporation. RE Freeman
(1984)
Research indicate that the country environment or
political-economic climate affect corporate performance,
Shleifer and Vishny (1997), Doidge et al (2007), Aggarwal
et al (2009).
Balance Scorecard by Kaplan & Norton is an example of
this approach

20. ISSUES OF CORPORATE
GOVERNANCE
Distinguishing the roles of board and management
Composition of the board and related issues
Separation of the roles of CEO and chairperson
Should the board have committees
Appointments to the board and directors'-election

21. ISSUES OF CORPORATE
GOVERNANCE
Directors’ and executives ‘ remuneration:
Disclosure and audit:
Protection of shareholder rights and their expectations:
Dialogue with institutional shareholder:
Should investor have a say in making a company “socially
responsible corporate citizen”?

22. WHISTLEBLOWING
Whistle blowing in its most general form involves calling
(public) attention to wrong doing, typically in order to
avert harm.
It is an attempt by a member or former member of an
organization to disclose wrong doing in or by the
organization.

23. KINDS OF WHISTLE BLOWING
Internal Whistle blowing is made to someone within the
organization
 Personal Whistle blowing is blowing the whistle on the
offender, here the charge is not against the organization
or system but against one individual
The impersonal, External Whistle Blowing

24. INSIDER-TRADING
It refers to a situation, where in a person, by virtue of his
position to access unpublished price sensitive
information of the company, gains such access and
subsequently uses the information obtained for his or
her personal benefits.
Insider trading is dealing in securities of a listed
company by any person who has knowledge of material
inside information which is not available to general
public.
It is breach of a fiduciary duty or other relationship of
trust, and confidence.
It is a crime if made to get wrongful gain or avoid losses

25. INSIDER TRADING &
CORPORATE GOVERNANCE
Insider trading has many governance implications,
affecting:
The organization of companies;
The duties of directors of managing boards and
supervisory boards and other corporate insiders;
The permitted flow of information within companies;
The disclosure duties imposed to companies.
The main problem in insider trading is conflict of
interests and the misuse of power –in this case it relates
to the power over privileged information.

26. CREDIT RATING
Estimates the credit worthiness of an individual,
corporation, or even a country.
It is an evaluation made by credit bureaus of a borrower’s
overall credit history.
They are based on financial history and current assets and
liabilities.
a credit rating tells a lender or investor the probability of
the subject being able to pay back a loan.
Commercial credit risk is the largest and most elementary
risk faced by many banks and it is a major risk for many
other kinds of financial institutions and corporations as
well.
Many uncertain elements are involved in determining both
how likely it is that an event of default will happen and
how costly default will turn out to be if it does occur.

27. CREDIT RATING AGENCIES IN
INDIA
CRISIL(Credit Rating Information Services of India Ltd)
ICRA(Information and Credit Rating Services ltd)
CARE (Credit Analysis and Research Ltd)
FITCH India

28. CRISIL
The first rating agency ‘Credit Rating Information
Services of India Ltd. , CRISIL, was promoted jointly in
1987 jointly by the ICICI and the UTI. Other shareholders
included ADB, LIC, HDFC Ltd, General Insurance
Corporation of India and several other foreign and Indian
Banks.
It pioneered the concept of credit rating in the country
and since then has introduced new concepts in credit
rating services and has diversified into related areas of
information and advisory activities.
It became public in 1993.
In 1996, it formed a strategic alliance with S&P rating
group.

29. SERVICES OFFERED BY CRISIL
Credit Rating Services
Advisory Services
Credibility first rating and evaluation Services
Training Services

30. ICRA LTD
Information and Credit Rating Services (ICRA) has been
promoted by IFCI Ltd as the main promoter and started
operations in 1991.
Other shareholders are UTI, Banks, LIC, GIC, Exim Bank,
HDFC and ILFS.
It provides Rating, Information and Advisory services
ranging from strategic consulting to risk management and
regulatory practice.
The main objectives of ICRA are to assist investors both
individual and institutional in making well informed
decisions
To assist issuers in raising funds from a wider investor
base.
To enable banks, investment bankers, Brokers in placing
debt with investors.
To provide regulators with market driven systems to
encourage the healthy growth of capital markets.

31. CARE LTD.
Credit Analysis and Research Ltd or CARE is
promoted by IDBI jointly with Financial
Institutions, Public/Private Sector Banks and
Private Finance Companies.
It commenced its credit rating operations in
October, 1993 and offers a wide range of
products and Services in the field of Credit
Information and Equity Research.
It also provides advisory services in the areas
of securitization of transactions and structuring
Financial Instruments.
It offers services like 1. Credit rating of debt
instruments 2. Advisory services like
securitization transactions, structuring
financial instruments, financing infrastructure
projects and municipal finances 3. Information
services like providing information to
companies, industry and businesses. 4. Equity
research

32. FITCH RATINGS INDIA LTD.
It is the latest entrant in the credit
rating Business in the country as a joint
venture between the international credit
Rating agency Duff and Phelps and JM
Financial and Alliance Group.
In addition to debt instruments, it also
rates companies and countries on
request.

33. RATING PROCESS
The process begins with issue of rating
request letter by the issuer of the
instrument and signing of the rating
agreement.
CRA assigns an analytical team
consisting of two or more analysts one
of whom would be the lead analyst and
serve as the primary contact.
Meeting with Management- The
analytical team obtains and analyses
information relating to its financial
statements, cash flow projections and
other relevant information.
Discussion with management on
management philosophy, competitive
position, financial policies and future
plans.

34. RATING PROCESS CONT-
Discussions on financial projections based
on objectives and growth plan , risks and
opportunities.
Rating committee- after meeting with the
management the analysts present their
report to a rating committee which then
decides on the rating.
After the committee has assigned the
rating, the rating decision is communicated
to the issuer, with reasons or rationale
supporting the rating.
Dissemination to the Public: Once the
issuer accepts the rating, the CRAs
disseminate it, along with the rationale, to

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36. BIBLIOGRAPHY
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