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corporategovernanceneedmeaningUNIT 1.pptx
- 1. CORPORATE GOVERNANCE Made by:Prof Ruchita Ramani
- 2. Introduction Corporate governanceis a multi-faceted subject.An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. Corporate governance is the combination of rules, processes or laws by which businesses are operated, regulated or controlled. The term encompasses the internal and external factors that affect the interests of a company’s stakeholders, including shareholders, customers, suppliers, government regulators and management.
- 3. Corporate Governance CorporateGovernance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. Conduct of business in accordance with shareholders desires (maximising wealth) while confirming to the basic rules of the society embodied in the Law and Local Customs
- 4. Definition • The CadburyCommittee Report in 1992 had a clear but narrow definition,“Corporate governance is the system by which companies are directed and controlled. • Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and auditors and to satisfy themselves that the appropriate governance structure is in place.”
- 5. What is CorporateGovernance? Corporate Governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate Governance essentially involves balancing the interest of the company’s many stakeholders such as shareholders, management, customers, suppliers, financiers, government and the community.
- 6. Corporate Governance Relationshipsamong various participants in determining the direction and performance of a corporation. Effective management of relationships among – Shareholders – Managers – Board of directors – employees – Customers – Creditors – Suppliers – community
- 7. Why Corporate Governance? Better access to external finance Lower costs of capital – interest rates on loans Improved company performance – sustainability Higher firm valuation and share performance Reduced risk of corporate crisis and scandals
- 8. Principles of CorporateGovernance Sustainable development of all stake holders- to ensure growth of all individuals associated with or effected by the enterprise on sustainable basis Effective management and distribution of wealth – to ensue that enterprise creates maximum wealth and judiciously uses the wealth so created for providing maximum benefits to all stake holders and enhancing its wealth creation capabilities to maintain sustainability
- 9. Discharge ofsocial responsibility- to ensure that enterprise is acceptable to the society in which it is functioning Application of best management practices- to ensure excellence in functioning of enterprise and optimum creation of wealth on sustainable basis Compliance of law in letter & spirit- to ensure value enhancement for all stakeholders guaranteed by the law for maintaining socio-economic balance Adherence to ethical standards- to ensure integrity, transparency, independence and accountability in dealings with all stakeholders
- 10. 4 P’s ofCorporate Governance
- 11. People People comefirst in the Four Ps because people exist on every side of the business equation. They are the founders, the board, the stakeholder and consumer and impartial observer. People are the organisers who determine a purpose to work towards, develop a consistent process to achieve it, evaluate their performance outcomes, and use those outcomes to grow themselves and others as people.
- 12. Purpose Purpose isthe next step. Every piece of governance exists for a purpose and to achieve a purpose. The‘for’ is the guiding principles of the organization.Their mission statements. Every one of their policies and projects should exist to further this agenda.
- 13. Performance Performance analysisis a key skill in any industry. The ability to look at the results of a process and determine whether it was successful (or successful enough), and then apply those findings to the rest of your organization, is one of the primary functions of the governance process.
- 14. Process Governance isthe process by which people achieve their company’s purpose, and that process is developed by analysing performance. • Processes are refined over time in order to consistently achieve their purpose, and it’s always smart to take a critical eye to your governance processes.
- 16. Four Pillars ofCorporate Governance Accountability Fairness Transparency Independence
- 17. Accountability Ensure thatmanagement is accountable to the Board Ensure that the Board is accountable to shareholders
- 18. Fairness Protect Shareholdersrights Treat all shareholders including minorities, equitably Provide effective redress for violations
- 19. Transparency Ensure timely, accuratedisclosure on all material matters, including the financial situation, performance, ownership and corporate governance
- 20. Independence Procedures andstructures are in place so as to minimise, or avoid completely conflicts of interest Independent Directors andAdvisers i.e. free from the influence of others
- 21. Elements of CorporateGovernance Good Board practices Control Environment Transparent disclosure Well-defined shareholder rights Board commitment
- 22. Good Board Practices Clearly defined roles and authorities Duties and responsibilities of Directors understood Board is well structured Appropriate composition and mix of skills
- 23. Good Board procedures Appropriate Board procedures Director Remuneration in line with best practice Board self-evaluation and training conducted
- 24. Control Environment Internalcontrol procedures Risk management framework present Disaster recovery systems in place Media management techniques in use
- 25. Control Environment Businesscontinuity procedures in place Independent external auditor conducts audits Independent audit committee established
- 26. Control Environment InternalAuditFunction Management Information systems established Compliance Function established
- 27. Transparent Disclosure FinancialInformation disclosed Non-Financial Information disclosed Financials prepared according to International Financial Reporting Standards (IFRS)
- 28. Transparent Disclosure CompaniesRegistry filings up to date High-Quality annual report published
- 29. Well-Defined Shareholder Rights Minority shareholder rights formalised Well-organised shareholder meetings conducted Policy on related party transactions
- 30. Well-Defined Shareholder Rights Policy on extraordinary transactions Clearly defined and explicit dividend policy
- 31. Board Commitment TheBoard discusses corporate governance issues and has created a corporate governance committee The company has a corporate governance champion A corporate governance improvement plan has been created Appropriate resources are committed to corporate governance initiatives
- 32. Board Commitment Policiesand procedures have been formalised and distributed to relevant staff A corporate governance code has been developed A code of ethics has been developed The company is recognised as a corporate governance leader
- 33. Other Entities CorporateGovernance applies to all types of organisations not just companies in the private sector but also in the not for profit and public sectors Examples are NGOs, schools, hospitals, pension funds, state-owned enterprises
- 34. Corporate governance inIndia The Indian corporate scenario was more or less stagnant till the early 90s. The position and goals of the Indian corporate sector has changed a lot after the liberalisation of 90s. India’s economic reform programme made a steady progress in 1994. India with its 20 million shareholders, is one of the largest emerging markets in terms of the market capitalization.
- 35. Corporate governance ofIndia has undergone a paradigm shift In 1996, Confederation of Indian Industry (CII), took a special initiative on Corporate Governance. The objective was to develop and promote a code for corporate governance to be adopted and followed by Indian companies, be these in the Private Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate entities. This initiative by CII flowed from public concerns regarding the protection of investor interest, especially the small investor, the promotion of transparency within business and industry
- 36. Securities and ExchangeBoard of India The Government of India's securities watchdog, the Securities Board of India, announced strict corporate governance norms for publicly listed companies in India. The Indian Economy was liberalized in 1991. In order to achieve the full potential of liberalization and enable the Indian Stock Market to attract huge investments from foreign institutional investors (FIIs), it was necessary to introduce a series of stock market reforms. SEBI, established in 1988 and became a fully autonomous body by the year 1992 with defined responsibilities to cover both development and regulation of the market.
- 37. SEBI On April12, 1988, the Securities and Exchange Board of India (SEBI)was established with a dual objective of protecting the rights of small investors and regulating and developing the stock markets in India. In 1992, the ‘BSE’ ,the leading stock exchange in India, witnessed the first major scam masterminded by Harshad Mehta. Analysts felt that if more powers had been given to SEBI,the scam would not have happened. •As a result the‘GoI’ brought in a separate legislation by the name of‘SEBI Act 1992’and conferred statutory powers to it. Since then, SEBI had introduced several stock market reforms. These reforms significantly transformed the face of Indian Stock Markets
- 38. SEBI and Clause49 SEBI asked Indian firms above a certain size to implement Clause 49, a regulation that strengthens the role of independent directors serving on corporate boards. On August 26, 2003, SEBI announced an amended Clause 49 of the listing agreement which every public company listed on an Indian stock exchange is required to sign. The amended clauses come into immediate effect for companies seeking a new listing.
- 39. The major changesto Clause 49… Independent Directors:- 1/3 to ½depending whether the chairman of the board is a non-executive or executive position. Non-Executive Directors:- The total term of office of non- executive directors is now limited to three terms of three years each. Board of Directors:- The board is required to frame a code of conduct for all board members and senior management and each of them have to annually affirm compliance with the code.
- 40. Audit Committee:-Financial statements and the draft audit report of management discussion and analysis of… • Financial condition • Result of operations of compliance with laws • Risk management letters • Letters of weaknesses in internal controls issued by statutory • Internal auditors • Removal and terms of remuneration of the chief internal auditor Whistleblower Policy :-This policy has to be communicated to all employees and whistleblowers should be protected from unfair treatment and termination. Subsidiary Companies:- 50% non-executive directors & 1/3 & ½independent directors depending on whether the chairman is non-executive or executive.
- 41. Conclusion As Indiancompanies compete globally for access to capital markets, many are finding that the ability to benchmark against world-class organizations is essential. For a long time, India was a managed, protected economy with the corporate sector operating in an insular fashion. But as restrictions have eased, Indian corporations are emerging on the world stage and discovering that the old ways of doing business are no longer sufficient in such a fast-paced global environment.
- 42.