Corporate governance refers to the framework of rules and practices by which a company is directed and controlled. It involves balancing the interests of stakeholders including shareholders, management, and the community. The main focus of corporate governance includes corporate performance, strategic direction, CEO selection and compensation, risk oversight, and shareholder engagement. There are two agency problems - separation of ownership and control can lead to expropriation of shareholder wealth by managers, and controlling shareholders can ignore company interests to benefit themselves. Effective corporate governance relies on internal institutions like the board of directors and external ones like regulatory agencies to protect stakeholder rights and induce management to consider stakeholder welfare.

1. Corporate
Governance
- Conceptual Framework
Dr M Manjunath Shettigar

2. Corporate Governance - Meaning
Corporate governance refers to
 a framework covering effective instruments and transparent
operational mechanisms
 put in place to ensure that the corporate entity works
 as per the declared corporate purpose, complies with the
government rules and regulations, and follows accepted
ethical norms,
 while balancing and protecting the interest of all
stakeholders
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3.  Corporate governance is the system of rules, practices and processes by
which a company is directed and controlled.
 Corporate governance essentially involves balancing the interests of a
company's many stakeholders, such as shareholders, management,
customers, suppliers, financiers, government and the community.
 Since corporate governance also provides the framework for attaining a
company's objectives, it encompasses practically every sphere of
management, from action plans and internal controls to performance
measurement and corporate disclosure.
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4. Issues addressed in CG
Although the details will vary across corporations, the main focus should be on:
 Corporate performance and strategic direction.
 CEO selection, compensation and succession.
 Internal controls, risk oversight and compliance.
 Crisis preparedness.
 Shareholder engagement.
 Interface with stakeholders
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5. Limited Liability Companies
Entrepreneurs translate ideas into business proposals
Initially they get funding from friends, angel investors
and venture capitalists.
As the business grows they invite public to contribute
to the equity capital of the company.
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6. Limited Liability Companies (Contd.)
Companies also borrows money from financial
institutions and public.
Public limited companies get their securities listed to
make those more attractive due to convenience of
trading.
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7. Limited Liability Companies (Contd.)
Non-controlling shareholders are like sleeping partners.
They look for growth in the value of their investment.
Value of shares depends on sustainability of the firm and
its ability to achieve growth and Return on Invested
capital higher than the cost of capital.
Shareholders get back their investment by selling shares
to another investor.
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8. Limited Liability Companies (Contd.)
Limited liability
Perpetual succession
Juridical person
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9. Agency Problem 1
Separation of ownership and control
Professional managers
Dispersed shareholders
Opportunistic behaviour of the manager, who has
100% control over assets, but very less share in
company’s cash flows
Expropriation of shareholders’ wealth by the
manager.
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10. Agency Problem 2
Controlling shareholder (e.g., promoter)
Company’ interest is ignored to benefit the
controlling shareholder.
Tunneling of company’s assets for the benefit of the
controlling shareholder
Abusive related party transactions
Family governance dominates corporate governance
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11.  How should the companies be run ?
 What should be their main goal ?
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12. Shareholder Theory
The core objective function of a firm is to create
shareholder value.
Stakeholders should be managed by analysing their
level of interest and power.
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13. Stakeholder Theory
Whatever the ultimate aim of the corporation or
other form of business activity, managers and
entrepreneurs must take into account the legitimate
interests of those groups and individuals who can
affect (or be affected by) their activities.
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14. Enlightened Shareholder Value
“Corporations should pursue shareholder wealth with
a long-run orientation that seeks sustainable growth
and profits based on responsible attention to the full
range of relevant stakeholder interests”.
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15. Corporate Governance
The design of institutions that induce or force
management to internalise the welfare of
stakeholders.
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16. Key Institutions
Internal:
The board of directors (Board)
External:
Ministry of corporate affairs and institutions under it
(e.g., SFIO, NCLT, NAFRA and Competition
Commission)
(Serious Fraud Investigation Office, National Company Law Tribunal, National
Financial Reporting Authority)
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17. Key Institutions
SEBI and capital markets
Courts of law
Independent directors
Credit Rating Agencies
Capital market players – Institutional investors &
others
Market for corporate control
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18. Pillars of Corporate Governance
Transparency – within the Board and outside the
Board
Accountability – management’s accountability to the
Board and Board’s accountability towards
stakeholders
Equity – equity among all stakeholders, including
various groups of shareholders
Responsibility (social)
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19. Board of Directors: Apex Decision-
making Body
Independence
Diversity
Size
Process
Culture
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20. Rights of Stakeholders
Shareholders’ rights are protected by the Companies
Act 2013
Other stakeholders’ rights are protected by explicit
and implicit contracts; and laws and institutions that
enforce those contracts
Contract Act; Sales of Goods Act; Negotiable
Instruments Act; Environmental Laws; Labour Laws;
and others
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21. Beyond Agency Problem
Strategy crafting and implementation
Enterprise risk management and business
sustainability
Internal Financial Control
Enterprise performance management
Succession planning
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22. Independent Directors: Challenges
Who appoints the independent directors?
Are they monitors?
Are they advisors?
Are they resource providers?
Do they lack motivation?
Are they competent?
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23. IDs– Factors That Hinder Performance
Do not rock the boat syndrome
None wants to be a dissenting peer
Overwhelmed by the charisma of the CEO
Familiarity bias – misplaced loyalty
Group consensus
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24. Shareholder’s Rights
Vote in general meetings
Appoint directors
Appoint auditors
Approve financial statements
Receive information
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25. Restriction on Power of The Board
Shareholders’ approval by special resolution is required
to:
Sell, lease or otherwise dispose of an undertaking in
which the investment exceeds 20 per cent of net worth
or which generates 20 per cent of the total income.
To invest otherwise in trust securities the amount of
compensation received as a result of any merger or
amalgamation
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26. Restriction on Power of The Board (Contd.)
Borrow money where the total borrowings will
exceed the aggregate of paid up share capital and
free reserves, apart from temporary loans from
company’s bankers
Remit or give time for the repayment of, any debt
due from a director.
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27. Managerial Remuneration
Shareholders’ approval is required to pay
remuneration to directors exceeding the limit
specified in the Companies Act 2013 (section 197)
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28. Majority of Minority Rule
Majority of shareholders, other than those who are
related parties to the company, shall approve related
party transactions of an amount exceeding the
specified amount.
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29. Shareholder Activism
Institutional shareholders
Proxy advisory firms
Class action suits
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30. Re-Cap
Agency problem 1
Agency problem 2
Shareholder theory and stakeholder theory
Transparency, accountability and equity
Beyond agency problem
Designing institutions
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31. Re-Cap (Contd.)
Independent Board
Independent auditor
Shareholder activism
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32. THANKS
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