Corporate governance

Understanding
‘CORPORATE GOVERNANCE’
requires understanding of
What a ‘CORPORATION’ is…?
10/29/2015 1© Manish Puranik 9823021823 I OCT 2015

Phases of Business
- Feudalism
- Mercantilism
- Capitalism
- Consumerism

Evolution of Business
- Guilds
- Mass Production
- Mass Distribution
- Mass Marketing
- Mass Collaboration

Henry Ford once said,
"A great business is really too big to be human..."
Indeed, that is the purpose of the corporate structure, to
TRANSCEND the ability and lifespan of any individual.
And it is also the challenge of the corporation. The
efforts by humans in directing and controlling other
humans, whether through DEMOCRACY or FASCISM,
whether by carrots or sticks, have been notoriously
UNSUCCESSFUL. Efforts by humans to control institutions
are an even greater challenge.

“Corporation is body of persons (that is) granted a character
legally recognizing them as a separate entity having its own rights,
privileges and liabilities distinct from those of its members.”
(Heritage Dictionary)
“The privilege of engaging in such commerce in corporate form is
one which the state may confer or may withhold as it sees fit.”
(Louis Brandeis, former US Supreme Court Justice)
“A Corporation is an artificial being, invisible, intangible, existing
only in the contemplation of law.”
(Former US Chief Justice John Marshall)

The very elements of the corporate structure that have made it so
robust – the limitation on liability, the "personhood" that can
continue indefinitely – make it very difficult to impose limits to
ensure that the corporation acts in a manner consistent with the
overall public interest.
Indeed, the corporate structure creates both the motive and the
opportunity for externalizing costs to benefit the insiders. As we will
see, most of the problems and failures and obstacles we find in
looking at corporate functioning from both a micro and macro
perspective come from this seemingly intractable element of their
existence.
In other words, we must make sure that we have created a structure
that is not just perpetual, but SUSTAINABLE.

WHY SHOULD CORPORATION EXIST?
 To provide outlet for satisfaction of human drives
 Social Structure: Corporate form is another form of social
structure which brings together resources (financial and other)
 Efficiency and efficacy: Return of resource use and fulfillment of
objectives
 Ubiquity and flexibility: No boundaries of space or time –
Corporate is flexible precisely because it is able to take risks;
corporate is a form of transferring enterprise risk to the society
 Identity: As a source of job, as a means of exercise and hone
one’s skills as an employee, as a creator of brands

Four characteristics essential to the vitality and appeal
of corporate form are –
 Limited Liability
 Free transferability of investor interests
 Legal personality (attributable entity, life span,
purpose)
 Centralized Management – Shareholders give up part
of their right in exchange for limited liability. Centralized
management provides for efficient operations without
the shareholders interfering in operational matters.
(Source: Corporate Governance by Robert A. G. Monks, Nell Minow)

How can the vitality maintained and purpose
accomplished?
Structure and Processes that will provide for –
• Well developed, sophisticated, level playing market
place.
• Laws imposed by the legislature for governance.
• Private laws established by the corporate in its dealings
with the stakeholders.
• Behavior and visionary leadership in the corporate
organizations.

KEY ELEMENTS OF CORPORATION
SENIOR MANAGEMENT
(Responsible Performance)
SHAREHOLDERS
(Responsible Ownership)
BOARD OF DIRECTORS
(Responsible Monitoring)

 Shareholders are the owners of the corporation and, as a result,
have a direct financial interest in the performance of the
corporation.
 Thus, the top management and the board of directors ultimately
work for the benefit of the corporation’s shareholders.
 Shareholders are granted special privileges depending on the
class of stock they hold in the corporation, including the right to
vote on matters such as elections of directors to the board of
directors, the right to share in the distributions of the corporation’s
income, and the right to the corporation’s assets upon the
liquidation of the corporation.
 Importantly, shareholders are generally not empowered to
initiate significant corporate plans and actions on behalf of the
corporation, although such plans and actions may require
shareholder approval.

The board of directors has the ultimate responsibility for the
oversight of the corporation’s business and affairs. One of the most
important oversight responsibilities of the board of directors is to
monitor the senior management on behalf of the shareholders.
These oversight responsibilities include:
 Selecting, determining the compensation of, and replacing, to the
extent appropriate, senior management.
 Overseeing the conduct of the corporation’s business to evaluate
whether it is being properly run by senior management.
 Reviewing and, where appropriate, approving financial objectives
and major corporate plans and actions proposed by top
management

Senior management’s responsibilities include:
 Developing and, following approval by the board of
directors, implementing strategic plans.
 Developing and, following approval by the board of
directors, operating within annual plans and budgets.
 Maintaining an efficient and appropriate management
and organizational structure.
 Identifying and managing risks taken by the
corporation.
 Establishing internal controls to ensure accurate
financial reporting and providing channels for reports of
potential misconduct

In connection with the performance of such oversight
responsibilities, the members of the board of directors have
certain duties under state law, the general notion of which is
that they have a DUTY OF CARE and a DUTY OF LOYALTY to
the corporation and its shareholders.
Duty of care means they have to exercise the same care in
terms of managing the corporation’s money as they would if
they were managing their own money.
Duty of loyalty means they have to always act in the best
interests of the corporation and its shareholders (i.e., they
must put the interests of the corporation and its shareholders
ahead of their own personal interests in making business
decisions on behalf of the corporation).

Corporate governance may be defined as the broad
range of policies and ethical practices which are
adopted by an organization in its dealing with the
stakeholders. In 1994 the King Report on Corporate
Governance (King I) was published by the King
Committee on Corporate Governance, headed by
former High Court judge, Mervyn King S.C. King I,
incorporating a Code of Corporate Practices and
Conduct. In the words of the King Committee:

“...successful governance in the world in the 21st century requires companies
to adopt an inclusive and not exclusive approach. The company must be
open to institutional activism and there must be greater emphasis on the
sustainable or non-financial aspects of its performance. Boards must apply
the test of fairness, accountability, responsibility and transparency to all acts
or omissions and be accountable to the company but also responsive and
responsible towards the company’s identified stakeholders. The correct
balance between conformance with governance principles and performance
in an entrepreneurial market economy must be found, but this will be
specific to each company…”

According to Sir Adrian Cadbury,
"Corporate Governance is concerned
with holding the balance between
economic and social goals and
between individual and communal
goals.
The corporate governance framework is there to
encourage the efficient use of resources and equally to
require accountability for the stewardship of those
resources. The aim is to align as nearly as possible the
interests of individuals, corporations and society"

Foundation of Corporate Governance
Corporate Governance is based on Ethics and not Morals;
‘Ethics’ as residing in relationships. They are visible, negotiated
commitments and behavior between the parties involved.
As individuals and entities that are accountable to certain
‘others’ in a covert way. Morals are privatized, individually
arrived norms that are based on belief that the individual
wishes to base his or her morality upon; accountability to
others in a general, non-particular overt ways.
However, Ethical conduct requires Moral imagination rather
than righteous rigidities!

Formation of SEBI
Security and Exchange
Board of India
following the historic
fiscal crisis of 1991
1992
‘Desirable Corporate
Governance: A Code’ –
By CII – Confederation
of Indian Industries
1998
Kumar Mangalam Birla
Committee by SEBI to
promote and raise the
standards of Corporate
Governance
1999
Key recommendations
of KMB Committee
Clause 49 of the
Listing Agreement of
Stock Exchanges.
2000
Companies Bill – Based
on recommendation of
Dr. J. J. Irani Committee
setup in 2004.
2008
NASSCOM – National
Association of
Software and Services
Companies formed a
committee chaired by
Narayan Murthy.
2010
EVOLUTION OF CORPORATE GOVERNANCE IN INDIA

Narayan Murthy, Founder of Infosys says, “Corporate
Governance, to me, is about maximizing shareholder
value legally, ethically and on a sustainable basis, while
ensuring fairness to every stakeholder – the company’s
customers, employees, investors, vendor-partners, the
government of land and the community.
Thus Corporate Governance is
reflection of company’s culture,
policies, how it deals with its
stakeholders and its commitment
to values.”

Corporate Governance is the structure that is intended to make
sure that the right questions get asked and that checks and
balances are in place to make sure that the answers reflect
what is best for creation of long-term, sustainable value and
trigger positive actions towards it…!

Rules and ‘imposed’ structures do not work – Classis
case is ENRON – well developed, sophisticated and
level-playing market place
o Before the fall most admired company
o Most respected Auditor
o Highly respected Board: Former Stanford Professor,
Member of British House of Lords, Former Head of GE
Power Div, Former Deputy Secretary of Treasury,
Prominent Business Leaders of Hong Kong
o Very sophisticated statements of code of conducts, etc.

Does this mean more Rules? NO…
“A Check the Box’” approach to Corporate
Governance will not inspire a true sense of ethical
obligation. It could lead to an array of inhibiting
‘politically correct’ dictates. If this were the case,
ultimately corporations will not strive to meet
higher standards; they would only stain under
new costs associated with fulfilling a mandated
process that could produce little of the desired
effect. They would lose the freedom to make
innovative decisions that an ethically sound
entrepreneurial culture requires”. William Donaldson
Chairman, SEC

Three Levels of Corporate Responsibility
 Material Obligations to shareholders, employees,
customers, suppliers and creditors, to pay taxes and meet
statutory duties.
 Responsibility arising out of actions of companies in
carrying out their primary task and includes making the
most of community’s human resources and avoiding
environmental damage, etc.
 Society’s priorities over company’s commercial interests.

To ensure Good Governance
Structures should be created that
will make sure that the RIGHT
questions get asked and CHECKS and
BALANCES are in place that reflects
what is best for the creation of
LONG-TERM SUSTAINABLE VALUE.

Boards must be free to
drive their companies
forward, but exercise that
freedom within a
framework of effective
accountability. This is the
essence of any system of
good corporate
governance…!
Sir Adrian Cadbury in ‘The
Financial Aspects of Corporate
Governance’ – 1 Dec 1992

GOVERNANCE
CSR
ACCOUNTABILITY
CONTROL
TRANSPARENCY
TRUSTEESHIP
ETHICS
FAIRNESS

SUSTAINABILITYSUSTAINABILITY
ENVIRONMENTAL
STEWARDSHIP
SOCIAL PROGRESS
ECONOMIC GROWTH
Socio-
economic
Socio-
environmental
Eco-
efficient
PEOPLE PLANET
PROFIT

The Voluntary activities undertaken by companies to operate in an
Economically, Socially and Environmentally Sustainable manner
Beyond the minimum required by law.

Corporate governance

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