The Head, UG & PG Dept. of Commerce K. L. E. Societys Basavaprabhu Kore Arts, Science and Commerce College, Chikodi 591 201. Dist. Belagavi.
Dr. S. B. HAGARAGI
1 - INTRODUCTION
Meaning and origin of corporate governance. Top corporate and sources of corporate
power. Theories of corporate governance Agency theory sources and cost of agency conflict, Stack holders theory Corporate governance mechanisms internal and external, Corporate governance models US UK model. European model and Japanese Model. Linkage between corporate governance and economic development.
To
provide
the
maximum
happiness
for
the
- Ayodhya Kand
Corporate Governance
What is Governance? Corporate Governance 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. -The Institute of Company Secretaries of India
Purpose of corporate governance is to have a demonstrable IMPACT on a corporations FINANCIAL PERFORMANCE.
'The primary purpose of corporate leadership is to create wealth legally and ethically...' The raison d'tre of every corporate body is to ensure predictability, sustainability and profitability.
The primary purpose of corporate leadership is to create wealth legally and ethically. This translates to bringing a high level of satisfaction to five constituencies - customers, employees, investors, vendors and the society-atlarge. The raison d'tre of every corporate body is to ensure predictability, sustainability and profitability of revenues year after year.
- N. R. Narayana Murthy Chairman of the Board and Chief Mentor
Some Definitions
Corporate Governance is the system by which companies are directed and controlled
-- Cadbury Report (UK), 1992
to do with Power and Accountability: who exercise power, on behalf of whom, how the exercise of power is controlled.
. Sir Adrian Cadbury, in Reflectiobns on Corporate Governance, Ernest Sykes Memorial Lecture, 1993.
A Canadian Definition
the process and structure..to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business.
Where were the Directors? Guidelines for Improved Corporate Governance in Canada, TSE, 1994
An OECD Definition
Corporate governance involves a set of
relationships between a companys management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.
Preamble to the OECD Principles of Corporate Governance, 2004 OECD = Organization of Economic Co-operation and Development ]
An Indian Definition
fundamental objective of corporate governance is the enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.
SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000
A Gandhian Definition
Trusteeship obligations inherent in company operations, where assets and resources are pooled and entrusted to the managers for optimal utilisation in the stakeholders interests.
CG it is observed that,
Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers?
Mckinsey & Company Report 2001. Giving new life to the Corporate Governance Reforms Agenda for Emerging
Markets
provided models based on two versions of governance Model -1 The Market Model governance chain Model 2 . The Control Model governance chairn.
The Processes & Operating Relationships that Best Achieve Organisational Goals
2)
Impact of Globalization
Integration with Foreign Market Foreign Investors expectations New Business Opportunities --- IT & ITES, BPO etc., New Capital formation FII, FDI
3)
Impact of Privatization
New structure of ownership Multinational Companies
CMS Energy
Overstated revenues in 2000 and 2001 thru round trip energy trades?
Dynegy
Transactions to cut taxes and artificially increase cash flow ?
Kmart
Suspected improper accounting for vendor allowances
Lucent Technologies
Adjusted fiscal 2000 revenues by $679 million.
Corporate Mis-Governance
In December 1995, CII set up a task force to design a voluntary code of corporate governance.
The final draft of this code was widely circulated in 1997. In April 1998, the code was released. It was called Desirable Corporate Governance: A Code. Between 1998 and 2000, over 25 leading companies voluntarily followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddys Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI
International scenario
Year
1992 1994 1995 1998 1999
1999
1999 2003 2003
OECD
CACG Derek Higgs Committee, UK ASX Corporate Governance Council, Australia
Indian scenario
Year Name of Areas/Aspects Covered Committee/Body
Confederation of Indian Industry (CII) Desirable Corporate Governance A Code
1998
1999
Corporate Governance
2002
2003
Corporate Governance
Rajkumar Adukia
23
&
Respected across the country, with very strong systems, high ethical values & a nurturing working atmosphere. Net income of US 1,155 million and revenue of US 4,176 million. At present having US 20.4 billion market capitalization.
Achievements
1)
Producing where it is most cost effective to produce & selling where it is most profitable to sell.
2)
Getting involved in a software development project at the earliest stage of its life cycle.
3)
PSPD Model
Concluding Observations
Code of CG should be redesigned to reflect international best practices Stringent enforcement of Law More effective coordination and cooperation between SEBI, DCA
WINNING EMPLOYEES
GROWING INVESTORS
DELIGHTED CUSTOMERS
HAPPY SOCIETY
GROUP-8 Debojit Roy H66 Sritanu Das Mahapatra H57 Abhisek Sahu H3 Krishnakant Pandey H25 Biswajit Ghosh H12
TRUSTED SUPPLIERS
Benefits of Good CG
1. Creation and enhancement of a corporations competitive advantage: 2. Enabling corporation perform efficiently by preventing fraud and malpractices. 3. Providing protection to shareholders Interest. 4. Enabling the valuation of an enterprise: 5. Ensuring compliance of laws and regulations.
Obligation to Society
11. Healthy and safe working conditions 12. Competition 13. Trusteeship
14. Accountability
15. Effectiveness and efficiency
Obligation to Investors:
1. Towards shareholders 2. Measures promoting transparency and informed shareholder participation 3. Transparency 4. Financial reporting and records
Obligation to Employees:
1. 2. 3. 4. 5. 6. 7. 8.
Fair employment practices Equal opportunities employer Encouraging whistle blowing Humane treatment Participation Empowerment Equity and inclusiveness Participative and collaborative environment
Obligation to Employees:
1. 2. 3. 4. 5. 6. 7. 8.
Fair employment practices Equal opportunities employer Encouraging whistle blowing Humane treatment Participation Empowerment Equity and inclusiveness Participative and collaborative environment
Obligation to Customers:
1. Quality of products and services 2. Products at affordable prices 3. Unwavering commitment to customer satisfaction.
Managerial Obligations
1. 2. 3. 4. 5. 6. Protecting companies assets Behavior towards government agencies Control Consensus oriented Gifts and donations Role and Responsibilities of corporate board and directors 7. Direction and management must be distinguished. 8. Managing and whole time directors.
Characteristics of Corporation 1. 2. 3. 4. 5. 6. Incorporated association Artificial legal existence Perpetual existence Common Seal Extensive membership Separation of management from ownership 7. Limited liability 8. Transferability of shares.
Theories of CG.
Agency Theory Stewardship theory Stakeholders theory Sociological theory
Agency Theory
Adam Smith identified the problem of agency cost. Managerial negligence and profusion is the basic problem By virtue of ownership shareholders as principals predetermine their objectives. Select directors either directly or indirectly as their agent. The directors are expected to show their performance in achieving principals objectives. But in practice it does happen so. The Agent directors/ managers always found in variance from the predetermined objectives. Directors try to build their own image by diversifying funds which may increase the value of shares in long run. Individual shareholders, widely scattered shareholders are not able to counteract the performance of the directors. The mismatch of objectives is called the agency problem & the cost involved in such diversified objectives is called agency cost. The agency theory therefore, argues for minimizing the agency cost by effective monitoring, corrective system which consolidate the objectives of two players, shareholders and directors as well.
Agency Theory.
The main thrust of agency theory is that the wide spread share holders are the owner principals and directors are the agents. It focus on the consolidation of objectives of both shareholders should get maximum return on their investment and the directors should get appropriate compensation for their efforts. The agency theory suggest to devise a mechanism which avoids agency loss on one hand and gives rich returns to shareholders. The incentive schemes includes allocation of shares to directors at confessional rates, high rates of commission for the returns given to shareholders. A device protecting the two interest certainly brings expected return and value their holdings in the long run.
2.
3. 4.
Equity shareholders have very poor control over board. The board should have self regulation for effective management of organization. 5. Two broad mechanisms to improve performance Fair and accurate financial disclosure Efficient and independent board of directors.
Stewardship Theory Trustworthiness of management The theory believes in, that the managers are not self centered rather they are trustworthy, reputed whose motives are based on their principles. Deserves high compensation. Stewardship is always aligned towards organizational goals. Controls may act counter productive. Great responsibility lies on board to shareholder to check and ensure the high order of corporate performance.
Stewardship Theory Trustworthiness of management Conflicts: Risk propensity of principles. It is very difficult to get support from all executives and investors. It is not new one. It was their even in our mythology. Mahatma Gandhi too propounded the theory of trusteeship.
Dif. betn. Agency and Stewardship theory based on psychological mechanisms. Agency Theory Stewardship theory
1. Motivation revolves around lower order and extrinsic needs. 2. Social comparison between compatriots 3. Little attachment to company 4.Powers rest with company
Stakeholders
It argues that those responsible for corporate governance have responsibilities not only to shareholders but also to others.
Stakeholder Theory
The theory dates back to 1930. It combines the economics, behavioral science, business ethics and stakeholders concept. The theory considers the firm as a input-output model by explicitly adding all interest groups employees, dealers, government and the society at large to the corporate mix. It is based on number of normative theories like ethics of care, fiduciary relationship, social contact theory, theory of stakeholders etc,. It argues on the responsibility to non-shareholders groups
Sociological Theory
The sociological theory focus on the compostion of board and the implications for power and wealth distribution in society. Interlocking of directorship and concentration of directorship in the hands of a privileged class are viewed as major challenges to equity and social progress. The theory argues for board composition, financial reporting, disclosure and auditing are necessary mechanisms to promote equity and fairness in society.
The Japanese
positive
workplace
management,
marketplace
responsibility, environmental stewardship, community engagement, and sustained financial performance. This is even more true now as we work worldwide to restore confidence and promote economic growth. Thierry buchs, head, private sector development division of switzerlands state secretariat for economic affairs (seco)