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CORPORATE
GOVERNANCE
Presented By:
Group 5
CONCEPT
 Combinationofrules,processesorlaws
bywhichbusinessesareoperated,
regulatedorcontrolled.
 encompassestheinternalandexternal
factorsthataffecttheinterestsofa
company’sstakeholdersincluding
shareholders,customers,suppliers,
government
regulatorsandmanagement.
 TheBODisresponsibleforcreatingthe
frameworkforcorporategovernance
thatbestalignsbusinessconductwith
objectives.
ESSENTIAL ELEMENTS
• Appropriatesizeandstructure
• Independenceanddiligenceof BOD
• Clearly defined mission,vision, values, codesofconduct
• Appropriateorganizationalstructureanddesign
• Clearly articulatedlegalcomplianceandriskmanagement
frameworks
• Accountability,fairness andtransparencyinall business
activities
SCOPE OF CORPORATE GOVERNANCE
Shareholders
BoardofDirectors (BOD)
Management
External Auditors
Contractual Stakeholders
Government andCorporate Regulators
Stock MarketRegulators andFinancial
Intermediaries
Investigative Media
Societal InfluenceandOtherStakeholders
Significance of Corporate Governance
1. Riskreduction
• Employinggoodgovernancehelpsthecompanytoreducevarioustypesofrisks.
• Helpstopreventcorporatescandals, fraud,andpotentialcivilandcriminalliabilityofthe
organization.
• Itwillmakeclearhisorherdutiestoeverymanagerofthecompanyandencouragetokeep
thosedutiesinmindwhenmakingdecisions.
2. Attractinginvestment
• Observingthebasicprinciplesofgoodcorporategovernancehasbecomeanimportantfactor
forattractingdomesticaswellasforeigninvestment.
Significance of Corporate Governance
3.Goodwillandreputation
• Organizationsspendhugesumsofmoneytoearngoodwillandbuildreputation.
• Intheabsenceofcorporategovernance,thegoodwillofanorganizationisatstakebecauseany
fraudulentactivitywillspoiltheimageofcompany.
4.Betterstakeholderrelationshipsandimprovedperformance
• Helpstofosterrelationshipbetweencompanymanagementanditsemployees,suppliers,creditors
andotherparties.
5.Macroeconomicbenefits
• Itcontributestotheenhancementoftheefficiencyoftheeconomy.
• Itmitigatestherisksfacingtheeconomicsystem.
Theories Governing Corporate Governance
1. AgencyTheory
• HaveitsrootsineconomictheorywhichwasdemonstratedclearlybyAlchianand Demestz
(1972)andfurtherdevelopedbyJensenand Meckling(1976)
• Ownersor shareholdersaretheprincipalsandthemanagershiredbythemaretheagents
• Itbecomesthedutyoftheagentstolookaftertheinterestsofprincipalsandmaximizeprofit
forthem
• Thereistheproblemofinformationasymmetrywherebytheprincipalandtheagenthave
accesstodifferentlevelsofinformation
Fig: Theframework ofAgency Theory
Shareholders
(Principals)
Governance
Mechanisms
Managers
(Agents)
2.TransactionCostEconomics
• Derivedfromtheoriginalworkin1937byCoarse
• RefinedandpresentedbyWilliamsonin1975and1988
• Accordingtothistheory,everytypeoftransactionhasitsowncosttoafirmanditcanbe
reducedbyappropriategovernancestructureforthebenefitofmainlythestakeholders.
• Thetheorymakesanimportantpointthat itisthebasicpurposeofcorporategovernanceto
makethecostthelowest,reaptheeconomiesofscaleandmakethecompanyhighly
competitiveandcontestable.
• Anotherimportant pointisthat, bothmanagersandshareholdersmayenjoythebenefitsof
reducedcosts.
3. StewardshipTheory
• Propounded byDonaldsonandDavisin1991
• Thistheorylooks atgovernancethroughadifferent lensfrom agencytheory and
transactioncosteconomies
• Inanutshell, stewardship theorycanbededucedtothefollowingbasics:
 Managersthinklongtermrelationshipandtheyarenotmotivated merelybyshort
termeconomicobjectives
 Givenachoicebetween self-serving behaviorandpro-organizational behavior,a
steward’s behavior willnotdepartfrom theinterests ofhis/herorganization.
4.StakeholderTheory
• Thetheoryrepresentsasynthesis ofeconomics,behavioralscience,businessethicsandthe
stakeholder concept
• Thistheoryconsidersthefirmanopensystembyaddingexplicitlyadding allstakeholders-
employees,customers,suppliers,governmentandthesocietyatlarge-tothecorporatemix.
• Donaldson andPrestonstronglyarguedthat,thistheoryfocusesonmanagerialdecision-
makingforthebenefitofallthepartiesconcerned
• Ittendstosuggestthat mutualhelpandcooperationenrichesthestakeholders andthe
organizationitselfinmanyways.
Corporate Governance Best Practices
1. Buildastrong,QualifiedBoardofdirectorandevaluateperformance.
• Identifytheidealqualitiesandcharacteristicsandkeep“evergreen”listofsuitablecandidatestofill
boardvacancies
• Themajorityofdirectorshouldbeindependent
• Educatingandgivingnewdirectorsanorientationto familiarizathemwiththebusiness
• Regularyreviewboardmandatestoassesstheperformancesofthedirectors
2. DefineRolesAnd Responsibilites
• Createswrittenmandatesfortheboardeachcommitteeregardingtheirdutiesandaccountability
• Delegatecertainresponsibilitiestoagroupofdirector
• Developwrittenpositiondescriptionfortheboardchair,committee,CEOandseniorexecutives
• Separaterollsof theboardchairandCEO
3. EmphasizeintegrityandEthicalDealing
• Adoptaconflictofinterestpolicy,acodeofbusinessconductsettingoutthecompaniesrequirement
• Makesomeoneresponsiblefor oversiteandmanagementofthesepoliciesandprocedures
4. EvaluatetheperformanceandMakePrincipledCompensation
Decisions
• Setdirectorsfeetoattractsuitablecandidatestoavoidconflictindirectorsindependenceto
dischargetheirduites
• Establishmeasurableperformancetargetforexecutiveofficersto regularyassessandevaluatetheir
performance
• Establishthecompensationcommitteecomprisedofindependent directorstodevelopandoverview
theexecutivecompensationplans
5.Engagein effectiveRiskManagement
• TheBODandtheCEOareresponsibleforstrategicleadershipforrisktolerance
• Thememberof BODandCEOareresponsibletounderstandthecurrentandemergingriskthe
companyfacestoimprovetheperformances
Corporate Governance practice of some corporate entities
1. TheCocaColaCompany
• TheBODiselectedbyshareholderstooverseestheirinterestinthelong-termhealthandsuccessof
thebusiness
• TheBODselectsandoverseesthememberoftheseniormanagement
• TheBODhasestablishedthecorporategovernanceguidelineforeffectivefunctioningofthecompany
2. Standard charteredbankNepalltd
• Theboardofstandardcharteredbankisresponsibleandaccountabletotheshareholderandensure
propercorporategovernancesystemismaintained
• TheAuditcommitteereviewtheinternalandexternalinspectionreportandprovidethefeedbackto
thecommittee
• Theexecutivecommitteemanagethedaytodayoperationofthebank
• Theannualgeneralmeetingisusedtocommunicatewithallshareholders
• Thebankadherestotheapplicablelaws,regulationsanddirectivestomeettheregulatory
requirement
3.ButwalpowercompanyLtd
• ThiscompanyhasmaintainedcorporatevalueframeworkadaptedbytheBoard
• Theframeworkisbasedontheprinciplesofcorporategovernance,existinglegalrequirementsand
thememorandumandthearticlesofassociationofthecompany
• Thecompanyhasmaintainedhighestleveloftransparency,accountabilityandequity
• Alltheeffortsarededicatedtopromotetheenterprisevaluesandsafeguardthetrustofshareholders
Corporate Governance Failures
Corporate governance failure at Enron
TheEnronscandaldrewattentiontoaccountingandcorporatefraudasitsshareholderslost$74billioninthefouryears
leadinguptoitsbankruptcy,anditsemployeeslostbillionsinpensionbenefits. Increasedregulationandoversighthave
beenenactedtohelppreventcorporatescandalsof Enron'smagnitude.
Corporate governance failure at Parmalat
 LackofIndependenceofNon-executivedirectors
 ChairandCEOpositions androleswerenotseparated.
Disregardof compliancewithItaly’scorporategovernancecode
Failuretoimplementandadequateandeffective monitoringsystem
Corporate governance failure at Tyco
Early 2002,Tyco was alleged inviolation of theSecurities ExchangeActof 1934bynondisclosure ofmajor
financial information andartificially inflating itsearnings.OnJune17,2002, Tyco filed federal suitagainst
MarkH. Swartz,Tyco's former executivevicepresidentandchief corporate counsel,andFrank E.
Former chairmanand chiefexecutive DennisKozlowski andformer chieffinancial officer MarkH.Swartz were
accusedof thetheftof more thanUS$150million from thecompany.During theirtrial inMarch2004,they
contendedtheboard of directors authorized it ascompensation.
Challenges for Good Corporate Governance
• Lackofboardindependenceanddiligence.
• FailurebytheBOD tounderstandtherisks theirfirmistaking.
• Ineffective oversight byBOD.
• Lackofethicsandriskmanagementframeworks.
• Weakinternalcontrolsystem, orcontrols thatappearonlyon papers.
• Lackoftransparency,particularlythedisclosureof non-financialinformation.
• Lowshareholder awareness andengagement.
Impact of Corporate Governance on Business,
Society and the Economy
• Impact often refers to a
behavior's long-term
implications. Corporate
governance has long-term
impacts on society, the
economy, and the firm itself.
There are numerous
advantages to society and the
economy from good corporate
governance standards
Some of the major impact of Corporate Governance on Business, Society and
the Economy
Shareholders Confidence on Stock Price Appreciation
Business Growth and Development
Positive Public Perception of Business
Competitive Advantage of Business
Combating Corruption and Promoting Social Good
Positive Impact on the Economy
A) Shareholder confidence and stock price appreciation
• Goodcorporategovernancemayenhanceshareholdertrustbyconvincingthemthatthecompanyismakingsound
businessdecisions.
• Confidentshareholdersarelikely toinvestlargeramountsofmoneyinaneffectivelygovernedcompanybecausea
positivereturnontheinvestmentislikely.
• Thiscanleadtoimprovedmarketconfidenceinthecompany,whichcaneventually leadtostockpricerise.
B) Business Growth and Development
• Asacompany'svaluegrows,sodoesitsabilitytoraisefundsforfurther
expansion.
• Capitalnowflowswiththeclickofamouseacrossaborderlesselectric
globewiththeadvancementininformationandcommunicationtechnology,
anditflowstocompaniesthatexercisegoodgovernance.
c)Positive Public Perception of Business
• Corporate governance procedures may affect how the public perceives a company or
organization, and occasionally the entire community.
• A business can earn a lot of public goodwill by having solid corporate governance
processes and rules including ethical sourcing, worker treatment, and environmental
concerns.
• In a nation like Nepal where the general public opinion is not favorable, it is essential.
D) Competitive Advantage of Business
• Competitiveadvantageisanycorporateattributethatisdifferentfromwhatitsrivalsofferandthat
helpsthefirmattractbetterclients.
• Goodcorporategovernanceaidsinenhancingbusinessefficiencyandloweringoperatingcosts.
• Acompanywithgoodcorporategovernanceaddsvaluetoitscustomersbyofferinglow-costorhigh-
qualityproductswhilemaintainingacompetitiveadvantage.
e) Combating corruption and promoting social good
• Good corporate governance may be extremely important to fight over corruption in
developing nations like Nepal where governments have limited resources, capacity,
expertise, and will to enforce tight regulations that restrict fraudulent acts by both
bureaucrats and business people.
• The chance of corruption may be significantly reduced when businesses have systems in
place that require transparency in all business transactions and complete disclosure of
accounting and auditing practices.
• In the long run, reducing corruption may benefit society in a variety of ways.
f) Positive impact on the economy
• Goodcorporategovernanceensurescorporatesuccessandeconomic
growth
• Strongcorporategovernancemaintainsinvestors'confidence,asaresultof
which,companycanraisecapitalefficientlyandeffectively.Itlowersthe
capitalcost.Thereisapositiveimpactontheshareprice.
• Effectivecorporategovernanceisessentialforpromotingeconomicactivity,
minimizingsystematiccompanyrisk,andhavingagoodinfluenceonthe
economyasawhole.

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CORPORATE.pptx

  • 3. ESSENTIAL ELEMENTS • Appropriatesizeandstructure • Independenceanddiligenceof BOD • Clearly defined mission,vision, values, codesofconduct • Appropriateorganizationalstructureanddesign • Clearly articulatedlegalcomplianceandriskmanagement frameworks • Accountability,fairness andtransparencyinall business activities
  • 4. SCOPE OF CORPORATE GOVERNANCE Shareholders BoardofDirectors (BOD) Management External Auditors Contractual Stakeholders Government andCorporate Regulators Stock MarketRegulators andFinancial Intermediaries Investigative Media Societal InfluenceandOtherStakeholders
  • 5. Significance of Corporate Governance 1. Riskreduction • Employinggoodgovernancehelpsthecompanytoreducevarioustypesofrisks. • Helpstopreventcorporatescandals, fraud,andpotentialcivilandcriminalliabilityofthe organization. • Itwillmakeclearhisorherdutiestoeverymanagerofthecompanyandencouragetokeep thosedutiesinmindwhenmakingdecisions. 2. Attractinginvestment • Observingthebasicprinciplesofgoodcorporategovernancehasbecomeanimportantfactor forattractingdomesticaswellasforeigninvestment.
  • 6. Significance of Corporate Governance 3.Goodwillandreputation • Organizationsspendhugesumsofmoneytoearngoodwillandbuildreputation. • Intheabsenceofcorporategovernance,thegoodwillofanorganizationisatstakebecauseany fraudulentactivitywillspoiltheimageofcompany. 4.Betterstakeholderrelationshipsandimprovedperformance • Helpstofosterrelationshipbetweencompanymanagementanditsemployees,suppliers,creditors andotherparties. 5.Macroeconomicbenefits • Itcontributestotheenhancementoftheefficiencyoftheeconomy. • Itmitigatestherisksfacingtheeconomicsystem.
  • 7. Theories Governing Corporate Governance 1. AgencyTheory • HaveitsrootsineconomictheorywhichwasdemonstratedclearlybyAlchianand Demestz (1972)andfurtherdevelopedbyJensenand Meckling(1976) • Ownersor shareholdersaretheprincipalsandthemanagershiredbythemaretheagents • Itbecomesthedutyoftheagentstolookaftertheinterestsofprincipalsandmaximizeprofit forthem • Thereistheproblemofinformationasymmetrywherebytheprincipalandtheagenthave accesstodifferentlevelsofinformation Fig: Theframework ofAgency Theory Shareholders (Principals) Governance Mechanisms Managers (Agents)
  • 8. 2.TransactionCostEconomics • Derivedfromtheoriginalworkin1937byCoarse • RefinedandpresentedbyWilliamsonin1975and1988 • Accordingtothistheory,everytypeoftransactionhasitsowncosttoafirmanditcanbe reducedbyappropriategovernancestructureforthebenefitofmainlythestakeholders. • Thetheorymakesanimportantpointthat itisthebasicpurposeofcorporategovernanceto makethecostthelowest,reaptheeconomiesofscaleandmakethecompanyhighly competitiveandcontestable. • Anotherimportant pointisthat, bothmanagersandshareholdersmayenjoythebenefitsof reducedcosts.
  • 9. 3. StewardshipTheory • Propounded byDonaldsonandDavisin1991 • Thistheorylooks atgovernancethroughadifferent lensfrom agencytheory and transactioncosteconomies • Inanutshell, stewardship theorycanbededucedtothefollowingbasics:  Managersthinklongtermrelationshipandtheyarenotmotivated merelybyshort termeconomicobjectives  Givenachoicebetween self-serving behaviorandpro-organizational behavior,a steward’s behavior willnotdepartfrom theinterests ofhis/herorganization.
  • 10. 4.StakeholderTheory • Thetheoryrepresentsasynthesis ofeconomics,behavioralscience,businessethicsandthe stakeholder concept • Thistheoryconsidersthefirmanopensystembyaddingexplicitlyadding allstakeholders- employees,customers,suppliers,governmentandthesocietyatlarge-tothecorporatemix. • Donaldson andPrestonstronglyarguedthat,thistheoryfocusesonmanagerialdecision- makingforthebenefitofallthepartiesconcerned • Ittendstosuggestthat mutualhelpandcooperationenrichesthestakeholders andthe organizationitselfinmanyways.
  • 11. Corporate Governance Best Practices 1. Buildastrong,QualifiedBoardofdirectorandevaluateperformance. • Identifytheidealqualitiesandcharacteristicsandkeep“evergreen”listofsuitablecandidatestofill boardvacancies • Themajorityofdirectorshouldbeindependent • Educatingandgivingnewdirectorsanorientationto familiarizathemwiththebusiness • Regularyreviewboardmandatestoassesstheperformancesofthedirectors
  • 12. 2. DefineRolesAnd Responsibilites • Createswrittenmandatesfortheboardeachcommitteeregardingtheirdutiesandaccountability • Delegatecertainresponsibilitiestoagroupofdirector • Developwrittenpositiondescriptionfortheboardchair,committee,CEOandseniorexecutives • Separaterollsof theboardchairandCEO
  • 14. 4. EvaluatetheperformanceandMakePrincipledCompensation Decisions • Setdirectorsfeetoattractsuitablecandidatestoavoidconflictindirectorsindependenceto dischargetheirduites • Establishmeasurableperformancetargetforexecutiveofficersto regularyassessandevaluatetheir performance • Establishthecompensationcommitteecomprisedofindependent directorstodevelopandoverview theexecutivecompensationplans
  • 15. 5.Engagein effectiveRiskManagement • TheBODandtheCEOareresponsibleforstrategicleadershipforrisktolerance • Thememberof BODandCEOareresponsibletounderstandthecurrentandemergingriskthe companyfacestoimprovetheperformances
  • 16. Corporate Governance practice of some corporate entities 1. TheCocaColaCompany • TheBODiselectedbyshareholderstooverseestheirinterestinthelong-termhealthandsuccessof thebusiness • TheBODselectsandoverseesthememberoftheseniormanagement • TheBODhasestablishedthecorporategovernanceguidelineforeffectivefunctioningofthecompany
  • 17. 2. Standard charteredbankNepalltd • Theboardofstandardcharteredbankisresponsibleandaccountabletotheshareholderandensure propercorporategovernancesystemismaintained • TheAuditcommitteereviewtheinternalandexternalinspectionreportandprovidethefeedbackto thecommittee • Theexecutivecommitteemanagethedaytodayoperationofthebank • Theannualgeneralmeetingisusedtocommunicatewithallshareholders • Thebankadherestotheapplicablelaws,regulationsanddirectivestomeettheregulatory requirement
  • 18. 3.ButwalpowercompanyLtd • ThiscompanyhasmaintainedcorporatevalueframeworkadaptedbytheBoard • Theframeworkisbasedontheprinciplesofcorporategovernance,existinglegalrequirementsand thememorandumandthearticlesofassociationofthecompany • Thecompanyhasmaintainedhighestleveloftransparency,accountabilityandequity • Alltheeffortsarededicatedtopromotetheenterprisevaluesandsafeguardthetrustofshareholders
  • 19. Corporate Governance Failures Corporate governance failure at Enron TheEnronscandaldrewattentiontoaccountingandcorporatefraudasitsshareholderslost$74billioninthefouryears leadinguptoitsbankruptcy,anditsemployeeslostbillionsinpensionbenefits. Increasedregulationandoversighthave beenenactedtohelppreventcorporatescandalsof Enron'smagnitude. Corporate governance failure at Parmalat  LackofIndependenceofNon-executivedirectors  ChairandCEOpositions androleswerenotseparated. Disregardof compliancewithItaly’scorporategovernancecode Failuretoimplementandadequateandeffective monitoringsystem
  • 20. Corporate governance failure at Tyco Early 2002,Tyco was alleged inviolation of theSecurities ExchangeActof 1934bynondisclosure ofmajor financial information andartificially inflating itsearnings.OnJune17,2002, Tyco filed federal suitagainst MarkH. Swartz,Tyco's former executivevicepresidentandchief corporate counsel,andFrank E. Former chairmanand chiefexecutive DennisKozlowski andformer chieffinancial officer MarkH.Swartz were accusedof thetheftof more thanUS$150million from thecompany.During theirtrial inMarch2004,they contendedtheboard of directors authorized it ascompensation.
  • 21. Challenges for Good Corporate Governance • Lackofboardindependenceanddiligence. • FailurebytheBOD tounderstandtherisks theirfirmistaking. • Ineffective oversight byBOD. • Lackofethicsandriskmanagementframeworks. • Weakinternalcontrolsystem, orcontrols thatappearonlyon papers. • Lackoftransparency,particularlythedisclosureof non-financialinformation. • Lowshareholder awareness andengagement.
  • 22. Impact of Corporate Governance on Business, Society and the Economy • Impact often refers to a behavior's long-term implications. Corporate governance has long-term impacts on society, the economy, and the firm itself. There are numerous advantages to society and the economy from good corporate governance standards
  • 23. Some of the major impact of Corporate Governance on Business, Society and the Economy Shareholders Confidence on Stock Price Appreciation Business Growth and Development Positive Public Perception of Business Competitive Advantage of Business Combating Corruption and Promoting Social Good Positive Impact on the Economy
  • 24. A) Shareholder confidence and stock price appreciation • Goodcorporategovernancemayenhanceshareholdertrustbyconvincingthemthatthecompanyismakingsound businessdecisions. • Confidentshareholdersarelikely toinvestlargeramountsofmoneyinaneffectivelygovernedcompanybecausea positivereturnontheinvestmentislikely. • Thiscanleadtoimprovedmarketconfidenceinthecompany,whichcaneventually leadtostockpricerise.
  • 25. B) Business Growth and Development • Asacompany'svaluegrows,sodoesitsabilitytoraisefundsforfurther expansion. • Capitalnowflowswiththeclickofamouseacrossaborderlesselectric globewiththeadvancementininformationandcommunicationtechnology, anditflowstocompaniesthatexercisegoodgovernance.
  • 26. c)Positive Public Perception of Business • Corporate governance procedures may affect how the public perceives a company or organization, and occasionally the entire community. • A business can earn a lot of public goodwill by having solid corporate governance processes and rules including ethical sourcing, worker treatment, and environmental concerns. • In a nation like Nepal where the general public opinion is not favorable, it is essential.
  • 27. D) Competitive Advantage of Business • Competitiveadvantageisanycorporateattributethatisdifferentfromwhatitsrivalsofferandthat helpsthefirmattractbetterclients. • Goodcorporategovernanceaidsinenhancingbusinessefficiencyandloweringoperatingcosts. • Acompanywithgoodcorporategovernanceaddsvaluetoitscustomersbyofferinglow-costorhigh- qualityproductswhilemaintainingacompetitiveadvantage.
  • 28. e) Combating corruption and promoting social good • Good corporate governance may be extremely important to fight over corruption in developing nations like Nepal where governments have limited resources, capacity, expertise, and will to enforce tight regulations that restrict fraudulent acts by both bureaucrats and business people. • The chance of corruption may be significantly reduced when businesses have systems in place that require transparency in all business transactions and complete disclosure of accounting and auditing practices. • In the long run, reducing corruption may benefit society in a variety of ways.
  • 29. f) Positive impact on the economy • Goodcorporategovernanceensurescorporatesuccessandeconomic growth • Strongcorporategovernancemaintainsinvestors'confidence,asaresultof which,companycanraisecapitalefficientlyandeffectively.Itlowersthe capitalcost.Thereisapositiveimpactontheshareprice. • Effectivecorporategovernanceisessentialforpromotingeconomicactivity, minimizingsystematiccompanyrisk,andhavingagoodinfluenceonthe economyasawhole.