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1. CHAPTER 1CHAPTER 1
CORPORATE GOVERNANCE:CORPORATE GOVERNANCE:
AN OVERVIEWAN OVERVIEW

2. OBJECTIVESOBJECTIVES
Corporate governance is the new buzzword inCorporate governance is the new buzzword in
corporate and academic circles today. It meanscorporate and academic circles today. It means
several things to several people, depending onseveral things to several people, depending on
the sensitivity of the analyst and his vestedthe sensitivity of the analyst and his vested
interest in it. This chapter gives an overview ofinterest in it. This chapter gives an overview of
the concept, defines it, discusses its evolutionthe concept, defines it, discusses its evolution
and explains its relevance and impact on theand explains its relevance and impact on the
economy.economy.

3. CHAPTER OUTLINECHAPTER OUTLINE
 Capitalism at CrossroadsCapitalism at Crossroads
 Increasing AwarenessIncreasing Awareness
 Global ConcernsGlobal Concerns
 What Is Corporate Governance?What Is Corporate Governance?
 Governance Is More Than Just BoardGovernance Is More Than Just Board
Processes and ProceduresProcesses and Procedures
 A Historical Perspective of CorporateA Historical Perspective of Corporate
GovernanceGovernance
 Issues in Corporate GovernanceIssues in Corporate Governance

4.  Capitalism at CrossroadsCapitalism at Crossroads
 America’s Hall of Shame – 2002America’s Hall of Shame – 2002
Giant corporations such as Enron Worldcom, Dynegy,Giant corporations such as Enron Worldcom, Dynegy,
Waste Management, Adelphia Communications, Tyco,Waste Management, Adelphia Communications, Tyco,
Imclone Systems and Rite Aid failed and were beingImclone Systems and Rite Aid failed and were being
investigated for fraud and malpractices.investigated for fraud and malpractices.
Many of their top executives were penalised forMany of their top executives were penalised for
committing fraud and irregularities.committing fraud and irregularities.

5.  Corporate Misgovernance in IndiaCorporate Misgovernance in India
 Reasons for Corporate MisgovernanceReasons for Corporate Misgovernance
Indian corporations were insulated. A closed economy,Indian corporations were insulated. A closed economy,
a sheltered market, limited need and access to globala sheltered market, limited need and access to global
business/trade, lack of competition, lack of adequatebusiness/trade, lack of competition, lack of adequate
regulatory framework were all the causes. Besides,regulatory framework were all the causes. Besides,
promoter families ruled the roost. As a result, therepromoter families ruled the roost. As a result, there
were a series of scams.were a series of scams.
 Increasing AwarenessIncreasing Awareness
 Global ConcernsGlobal Concerns
 What is Corporate Governance?What is Corporate Governance?

6. Definitions of Corporate Governance:Definitions of Corporate Governance:
From the Academic Point of ViewFrom the Academic Point of View
““Corporate governance addresses problems that resultCorporate governance addresses problems that result
from the separation of ownership and control.”from the separation of ownership and control.”
From the Angle of Developed Versus Developing CountriesFrom the Angle of Developed Versus Developing Countries
John D. Sullivan: “In developing economies, one mustJohn D. Sullivan: “In developing economies, one must
look to supporting institutions – for example, shoringlook to supporting institutions – for example, shoring
up weak judicial and legal systems in order to betterup weak judicial and legal systems in order to better
enforce contracts and protect property rights.enforce contracts and protect property rights.
Narrow Versus Broad Perceptions of Corporate GovernanceNarrow Versus Broad Perceptions of Corporate Governance
Corporate Governance… is defined narrowly as theCorporate Governance… is defined narrowly as the
relationship of a company to its shareholders or, morerelationship of a company to its shareholders or, more
broadly, as a relationship to society.broadly, as a relationship to society.
(An article in(An article in Financial TimesFinancial Times ))

7. ““Corporate governance is not just corporateCorporate governance is not just corporate
management; it is a much broader concept and includesmanagement; it is a much broader concept and includes
a fair, efficient and transparent administration to meeta fair, efficient and transparent administration to meet
certain well-defined objectives. It is a system ofcertain well-defined objectives. It is a system of
structuring, operating and controlling a company with astructuring, operating and controlling a company with a
view to achieving long-term strategic goals to satisfyview to achieving long-term strategic goals to satisfy
shareholders, creditors, employees, customers andshareholders, creditors, employees, customers and
suppliers and complying with the legal and regulatorysuppliers and complying with the legal and regulatory
requirements, apart from meeting environmental andrequirements, apart from meeting environmental and
local community needs. When it is practised under alocal community needs. When it is practised under a
well-laid out system, it leads to the building of a legal,well-laid out system, it leads to the building of a legal,
commercial and institutional framework and demarcatecommercial and institutional framework and demarcate
the boundaries within which these functions arethe boundaries within which these functions are
performed.”performed.”
(A. C. Fernando. “Corporate Governance – The Time for a(A. C. Fernando. “Corporate Governance – The Time for a
Metamorphosis”,Metamorphosis”, The Hindu BusinesslineThe Hindu Businessline , July 9, 1997.), July 9, 1997.)

8. Different Perceptions in DefinitionsDifferent Perceptions in Definitions
 Governance Is More Than Just Board Processes andGovernance Is More Than Just Board Processes and
ProceduresProcedures
The Rights of ShareholdersThe Rights of Shareholders
The Equitable Treatment of ShareholdersThe Equitable Treatment of Shareholders
The Role of Stakeholders in Corporate GovernanceThe Role of Stakeholders in Corporate Governance
Disclosure and TransparencyDisclosure and Transparency
The Responsibilities of the BoardThe Responsibilities of the Board

9.  A Historical Perspective of Corporate GovernanceA Historical Perspective of Corporate Governance
From a Narrow to a Broader VisionFrom a Narrow to a Broader Vision
(Shareholder to Stakeholder perspective)(Shareholder to Stakeholder perspective)
The Growth of Modern Ideas of Corporate GovernanceThe Growth of Modern Ideas of Corporate Governance
from the USAfrom the USA
England Catches Up With USEngland Catches Up With US
The Cadbury CommitteeThe Cadbury Committee
The Aftermath of Cadbury ReportThe Aftermath of Cadbury Report
Corporate Governance in the Banking SectorCorporate Governance in the Banking Sector
Revival of Corporate Governance Issues in the New MillenniumRevival of Corporate Governance Issues in the New Millennium

10.  Issues in Corporate GovernanceIssues in Corporate Governance
o Distinguishing the Roles of the Board and the ManagementDistinguishing the Roles of the Board and the Management
o Composition of the Board and Related IssuesComposition of the Board and Related Issues
o Separation of the Roles of the CEO and the ChairpersonSeparation of the Roles of the CEO and the Chairperson
o Should the Board Have CommitteesShould the Board Have Committees
o Appointments to the Board and Directors’ Re-electionAppointments to the Board and Directors’ Re-election
o Directors’ and Executives’ RemunerationDirectors’ and Executives’ Remuneration
o Disclosure and AuditDisclosure and Audit
o Protection of Shareholder Rights and Their ExpectationsProtection of Shareholder Rights and Their Expectations
o Dialogue with Institutional ShareholdersDialogue with Institutional Shareholders
o Should Investors have a say in making a Company SociallyShould Investors have a say in making a Company Socially
Responsible Corporate CitizenResponsible Corporate Citizen

11. Relevance of Corporate GovernanceRelevance of Corporate Governance
Managements usually have an information advantage overManagements usually have an information advantage over
others. Good corporate governance will ensure allothers. Good corporate governance will ensure all
stakeholders interests are protected, while their requirementsstakeholders interests are protected, while their requirements
are fulfilled.are fulfilled.
Need for and Importance of Corporate GovernanceNeed for and Importance of Corporate Governance
To maximise long-term shareholder valueTo maximise long-term shareholder value
Governance and Corporate PerformanceGovernance and Corporate Performance
These are very closely inter-relatedThese are very closely inter-related
Investors’ Preference for Good GovernanceInvestors’ Preference for Good Governance
Shareholders are prepared to pay a premium for a companyShareholders are prepared to pay a premium for a company
with good corporate governance practices.with good corporate governance practices.

12. Strategies and Techniques Basic to Sound CorporateStrategies and Techniques Basic to Sound Corporate
GovernanceGovernance
Corporate values, codes, internal control systems etc. areCorporate values, codes, internal control systems etc. are
usefuluseful to ensure flow of capital for combating corruption,to ensure flow of capital for combating corruption,
stakeholderstakeholder protection, ensuring industrialisation and economicprotection, ensuring industrialisation and economic
development.development.
Benefits of Good Corporate Governance to a CorporationBenefits of Good Corporate Governance to a Corporation
Culture within the organisation and industry improvesCulture within the organisation and industry improves
Shareholder confidence improvesShareholder confidence improves
Companies that are seen as well governed get a premium forCompanies that are seen as well governed get a premium for
their stockstheir stocks
Creation and enhancement of a corporation’s competitiveCreation and enhancement of a corporation’s competitive
advantageadvantage

13. Enabling a corporation perform efficiently by preventingEnabling a corporation perform efficiently by preventing
fraud and malpracticesfraud and malpractices
Providing protection to shareholders’ interestProviding protection to shareholders’ interest
Creates additional shareholder value over timeCreates additional shareholder value over time
Enhancing the valuation of an enterpriseEnhancing the valuation of an enterprise
Ensuring compliance of laws and regulationsEnsuring compliance of laws and regulations