CORPORATE GOVERNANCE (module) - PPT.pptx

Why a new Law was needed?
• ‘is corporate governance a vital component of
successful business or is it simply another fad
that will fade away over time?
ISSUES AND CONCEPTS
2
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Emergence
3
Notorious collapse of Enron in 2001 -
has focused international attention on
company failures and the role of strong
corporate governance

Narrow view, where
Corporate Governance is
restricted to the relationship
between a company and its
shareholders
- Agency Theory
Broader view- company and other
stakeholders, employees,
customers, supplies, bondholders
etc
- ‘Stakeholder Theory’.
Corporate Governance - theoretical perspective
4
Accountability
to shareholders.
Accountability to
shareholders & and
other stakeholders

What is CG ??
5
corporate governance is the system of checks
and balances, both internal and external to
companies, which ensures that companies
discharge their accountability to all their
stakeholders and act in a socially responsible
way in all areas of their business activity.

CG - UK
6
Well Developed
Market
Diverse
shareholder base
More agency
problems

The development of corporate governance
UK
7

Cadbury Report (1992)
Operation of the main board;
Establishment, composition, and operation of key board
committees
Non-executive directors;
Disclosure to investors regarding information about instances of
non-compliance & enables them to decide - non-compliance is
justified.
:
8
m

9
Greenbury Report (1995)
The size of directors’ remuneration packages and their
inconsistent and incomplete disclosure in’ annual
reports
The presence of a remuneration committee comprised
of independent non-executive directors
The adoption of performance measures linking rewards
to the performance

Hampel Report (1998)
The interests of various stakeholders
Directors are responsible for relations with stakeholders;
but they are accountable to the shareholders’
Important role of institutional investors
10

11
Combined Code (1998) - ‘comply or explain’
Myners (2001, 2008) - six principles [ effective decision-
making; clear objectives; risk and liabilities; performance
assessment; responsible ownership; transparency; and
reporting]
Higgs (2003) - there should be a comprehensive induction
programme for new non-executive directors
Smith (2003 ) - Review of Audit Committees

directors’ duties are codified;
greater use of electronic communications
simpler model Articles of Association for private companies
private companies will not be required to have a company secretary
shareholders will receive more timely information;
encourage institutional investors to disclose how they use their votes
Companies Act 2006 - CG
12

13
Financial Reporting Council - is responsible for promoting high
standards of corporate governance
Maintaining an effective Combined Code on Corporate Governance
Ensuring internal control
Influencing EU and Global Corporate Governance developments;
Helping to promote boardroom professionalism and diversity;
Encouraging constructive interaction between company boards and
institutional shareholders

14
CORPORATE GOVERNANCE IN GERMANY
Philosophy- “confrontation” at one end
and “co-operation” at the other

• Management board (Vorstand) - responsible for
managing the enterprise
• Supervisory Board (Aufsichtsrat)
Dual Board System,
15

16
Key characteristics influencing German corporate governance
Feature Key characteristic
Main business form ------ Public or private companies
limited by shares
Predominant ownership
structure ---- Financial and non-financial
companies
Legal system --- civil law
Board structure --- dual
Important aspect ---- compulsory employee
representation on
supervisory board

17
Japan’s Corporate Governance System is often likened to that of
Germany because banks can play an influential role .
stakeholders is seen to be an important aspect.
CORPORATE GOVERNANCE IN JAPAN

• Obligation
• Family &
• Consensus.
Charkham (1994)
18

Key characteristic
19
Main business form Public limited company
Predominant ownership structure Keiretsu
Legal system civil law
Board structure dual

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Mission and role of the board of directors -
The board should be comprised of outside directors & and inside directors
Mission and role of the committees established within the board of directors- establish
various committees like an audit committee, compensation committee, and nominating
committee
Leadership responsibility of the CEO-
CEO’S role is to formulate management strategies with the aim of maximizing corporate
value
Addressing Shareholder Derivative Litigation-
A litigation committee established to determine whether litigation action should be made
against directors or executives against whom the company/ shareholders may have a claim.
Securing fairness and transparency for executive management
Reporting To The Shareholders And Communicating With Investors
The Code

Asian Corporate Governance Association (ACGA)
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‘White Paper on Corporate Governance in Japan
The system of governance in most listed companies is not meeting the needs
of stakeholders or the nation at large in three ways:
• By not providing for adequate supervision of corporate strategy;
• By protecting management from the disdpline of the market, thus
rendering the development of a healthy and effident market in corporate
control all but impossible;
• By failing to provide the returns that are vitally necessary to protect Japan’s
soda!safety net-its pension system.

The fundamental objective of
Corporate Governance –
‘enhancement of shareholder value,
keeping in view the interests of
other stakeholders’
CORPORATE GOVERNANCE IN INDIA
22

Emergence of Corporate Governance in India
23
SEBI appointed in May 1997 the Kumar Mangalam Birla Committee
Companies Amendment Act, 2000 introduced
• - Setting up of Audit Committee & Directors’ Responsibility Statement
Kumar Mangalam Birla Committee recommendations adopted by SEBI in 2000
Clause 49 introduced in Listing Agreement
Narayana Murthy Committee recommendations revised Clause 49
Definition of independent directors
Certificate by CFO & CEO
Risk Assessment & Mitigation strategy of the company
Code of Conduct for top Management

non-executive chairman
one-third of the board
independent directors
The Code -
Listing Rules
24
executive chairman
half of the board should be
independent
Board of directors :

25
Nominee directors - should have the same responsibility as other
directors and be accountable to the shareholders
Chairman of the Board - the roles of chairman and chief executive are
different
Audit Committee - qualified and independent audit committee is
established to help to enhance confidence in the company’s disclosures.
Remuneration Committee - established to make recommendations on
executive directors’ remuneration
Board Procedures - four times a year with a maximum of four months
between any two meetings & director should not be involved in more
than ten committees or act as chairman of more than five committees
across all companies with which he is a director

26
Management - disclosure in the annual report, either as part of the
directors’ report, or as a ‘management discussion and analysis’
report, about the company’s position, its outlook, performance, and
other relevant areas of interest to shareholders
Shareholders - able to participate effectively in the annual general
meeting &
Growing influence of institutional investors is recognized
Manner of Implementation - a series of mandatory and non-
mandatory recommendations.
Most of India's corporate governance shortcomings are no worse
than in other Asian countries and its banking sector has one of the
lowest proportions of non-performing assets, signifying that
corporate fraud and tunneling are not out of control

CORPORATE GOVERNANCE IN USA
27
“The world moves forward on the character of good men” —
Rev. Edmund A. Walsh. S. J.

The Assets Of The Entity Were Properly Protected
The Policies Of The Entity Were Being Complied With
Financial Records Were Accurate And Reliable
Prevention And Detection Of Fraud
Role of the internal auditor
Introduction of information technology into business operations
Management -
Focus
28

Executive Compensation
29
say-on-pay proposal
A quantitative and qualitative analysis to assess the
alignment between pay and performance
Realizable Pay-
List of qualitative factors used to analyze pay-for-
performance alignment at large cap companies to include
“realizable pay”
Golden Parachute Proposals
The Dodd-Frank Act requires companies to hold separate
shareholder votes on potential “golden parachute”
payments when they seek approval for mergers, sales and
certain other transactions.

A negative vote on individual directors, committee members or the entire
board - when the board has failed to take sufficient action on a shareholder
proposal
Greater flexibility in recommending a vote against only certain board
members, rather than the full board
Count parent and subsidiary boards as two separate boards.
ISS -
Recommendations
30

New Corporate Governance
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Establishment of one tier board
members of the management board and the
supervisory board who have an (in) direct conflict of
interest can no longer be part of the decision-
making process
appointment of women on the company boards
allocation of tasks in the articles of association
management board members of listed companies
will no longer be protected against dismissals

Corporate Governance In Family Business
32
family-owned
business
sole traders
partnerships
private
companies
public
companies
Relatively Small Group Of Individuals Can Retain Ownership, Power, And
Control

Change over
33
Acquisitions facilitated the growth of family controlled
firms in the first half of the century, they also diluted
their ownership and ultimately their control in the second
half.

Family-owned firms and governance
34
Minority share-holder oppression, which may be more acute in
family-owned firms
Managers may act for the controlling family, but not for shareholders
in general
Agency issues -- the use of pyramidal groups to separate ownership
from control, the entrenchment of controlling families, and non-
arm’s-length transactions between related companies that are
detrimental to public investors

Less chance of agency problems
Less driven by the short-term demands of the market
Once the firm has moved beyond the stage where authority is
vested in the founders, it becomes necessary to clarify
responsibilities and the process for taking decisions
Advantages
35

Advantages Of A Formal Governance Structure
36
Defined structure with defined channels for
decision-making
The board can tackle areas that may be sensitive
from a family viewpoint but which nonetheless
need to be dealt with - succession planning is a
case in point
External shareholders would take a keen
interest: the appointment of non-executive
directors.

Cadbury plc;
37
An Example Of A Family Firm
Founded in the first part of the nineteenth century by john cadbury
His two sons joined the firm in 1861
The firm became a private limited liability company, cadbury brothers Ltd
Non-family directors were first appointed to the firm in 1943,
1962, a publicly quoted company with the family members still being the
majority on the board and holding a control-ling interest
The direct family involvement, via either large shareholdings or board
membership, therefore declined over the years
2007, Cadbury Schweppes revealed plans to split its business into two separate
entities
In 2009, Kraft launched a hostile takeover bid for Cadbury. Cadbury decided to
fight to retain its independence.

Difficulties Encountered in Governance
 The board of directors will comprise essentially of
bureaucrats drawn from various ministries
 The chief executive or managing director not
necessarily professionals with the required expertise
 Difficult to attract expert professionals as
independent directors.
 Managed and governed according to the whims and
fancies of politicians and bureaucrats.
Corporate Governance in state-owned business
- the MOU system Introduction
38

OECD Guidelines
State-owned Enterprises
39
Ensuring an effective legal and regulatory framework
for state-owned enterprises
Clear separation between the state’s ownership
function and other state functions
Should not be exempt from the application of general
laws and regulations
Should face competitive conditions regarding access to
finance
government should not be involved in the day-to-day
management

Should be assigned a clear mandate and ultimate
responsibility for the company’s performance.
Monitoring of management and strategic guidance & power to
appoint and remove the CEO
Can exercise objective and independent judgment
Carry out an annual evaluation to appraise their performance
Responsibilities Of The Boards
-State-owned Enterprises
40

Governance in India
41
The Indian economy is characterized by strong macro-
fundamentals
Challenges :
Economy’s transition to a higher and more inclusive growth
path
Structural changes
Expectations

Concept of MoU
42
Designed to provide flexibility and autonomy to central public
sector enterprises
The rationale for mou could be derived from principal/agent
theory.
A negotiated incentive contract (mou)
Is viewed as a device to reveal information and motivate
managers to exert effort.
Performance contracts will improve performance only if they
elicit both the government’s and the firms’ commitment

MoU in India
43
Low profitability
Lack of competitiveness
Extensive regulation
The Memorandum of Understanding (MoU) System in
India was introduced in the year 1986

1. Arjun Sengupta Committee Report (1984)
2. National Council of Applied Economic Research (2004)
3. Report of the Working Group (2008)
4. S.K. Roongta Committee Report (2011)
5. Mankad Committee and Task Force (2012)
various committees
44

45
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• Memorandum of Understanding system in India
has been consistently moving towards
improvement
• Corporate governance practices need to be
understood as a significant part of the broader
CPSE reform and renewal programmed
Conclusion
46

Why a new law was needed?
47
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The following good governance practices to enhance the autonomy
as well as efficiency of the cpses:
A. Professionalizing the CPSE boards by including managers from the
private sector in the CPSE boards as independent directors;
B. Rolling out leadership development programmes which would be
compulsory for the board members; and
C. Increasing transparency of the cpses by making internal controls
and audit strong, as well as carrying out supplementary audits on a
timely basis.

Why a new law was needed?
48
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THANK YOU

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