governance

1. Chapter One:
Corporate Governance:
An Overview
Corporate Governance-Principles, Policies & Practices
- A. C. Fernando

3. Learning objectives
 Modern Corporate Form of Business
 Corporate Stakeholders
 Reasons for Corporate Misgovernance
 Definition of Corporate Governance
 Need for Corporate Governance
 Issues in Corporate Governance

4. Various Types of Company
Joint Stock Company can be of various types
depending on-
 Mode of incorporation
 Number of Members
 Controlling basis
 Nationality of the company

5. Corporate Stakeholders
Corporate Stakeholders are those without whose
support the corporate organization would cease to
exist.
 Internal stakeholders: who engage in economic
transactions with the organization.
 External Stakeholders: do not engage in direct
economic transaction but their actions can affect the
business.

6. Reasons for Corporate Misgovernance
 Pseudo democratic government
 Unethical involvement of concerned authority
 Large number of privately owned corporations

7. Definition of Corporate Governance
 refers to the relationship among the board of
directors, top management and shareholders in
determining the direction and performance of the
corporation.
 From the academic point of view-
 “Corporate governance addresses problems that result from
the separation of ownership and control.”

8. Two-version Governance Chain Model
To understand the Governance Practice throughout the world,
there are two chain models prescribed by McKinsey & Company:

9. Definition of Corporate Governance
 From the angle of Developed versus Developing Countries-
 John D. Sullivan: “In developing economies, one must look to
supporting institutions - for example, shoring up weak judicial and
legal systems in order to better enforce contracts and protect
property rights.”
 Narrow versus Broad Perceptions of Corporate Governance-
 Corporate Governance is defined narrowly as the relationship
of a company to its shareholders or, more broadly, as a
relationship to society.
(An article in financial times)

10. Definition of Corporate Governance
 “Corporate governance is not just corporate management; it is much broader
concept and includes a fair, efficient and transparent administration to meet
certain well-defined objectives. It is a system of structuring, operating and
controlling a company with a view to achieving long-term strategic goals to
satisfy shareholders, creditors, employees, customers and suppliers and
complying with the legal and regulatory requirements, apart from meeting
environmental and local community needs. When it is practiced under a well-
laid out system, it leads to the building of a legal, commercial and institutional
framework and demarcate the boundaries within which these functions are
performed.”
- A. C. Fernando

11. Different Perceptions in Definitions
 Governance is more than just board processes and
procedures.
 The rights of shareholders
 The equitable treatment of shareholders
 The role of stakeholders in corporate governance
 Disclosure and transparency
 The responsibilities of the board

12. Need for and Importance of Corporate
Governance
 Basic principles of Corporate Governance:
1) Principle of fairness
2) Transparency principle
3) Principle of accountability
4) Fiduciary principle
5) Reliability principle
6) Principle of Dignity
7) Propriety principle
8) Responsiveness principles

13. Issues in Corporate Governance
 Distinguishing the roles of board and management
 Composition of the board and related issues
 Separation of the roles of the CEO and the Chairperson
 Should the board have committees?
 Appointments to the board and directors’ re-election
 Directors’ and executives’ remuneration
 Disclosure and audit
 Protection of shareholder rights and their expectations
 Dialogue with institutional shareholders
 Should investors have a say in making a company socially responsible
corporate citizen?

16. Benefits to Society
1. Great deal to attract investors.
2. Free transferability of investor interests and
prevent systematic banking crisis.
3. Promote CG where the market system is weak or
yet not in shape; and
4. Help to combat corruption;
5. Improve managing the firm.

17. Benefits of CG to a Corporation
1. Enhancement of corporation’s competitive
advantage;
2. Prevents fraud and malpractice inside the
organization;
3. Protection to shareholders’ interest;
4. Enhance valuation of an enterprise; and
5. Ensure compliance of law