CHAMELIDEVI SCHOOL OF MANAGEMENT

INDORE SESSION 2011-2012

WELCOME

CORPORATE GOVERNANCE

CONTENTS
Meaning. Definition. Objectives. Theories. Problems. Conclusion.

MEANING
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

DEFINITION
Corporate Governance is the system by which companies are directed and controlled
Cadbury Report (UK), 1992

An Indian Definition
fundamental objective of corporate governance is the enhancement of the longterm shareholder value while at the same time protecting the interests of other stakeholders.
SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000

OBJECTIVES
To build up an environment of trust & confidence amongst competing & conflicting interest. To enhance shareholders value & protect the interest of other stakeholders by enhancing the corporate performance & accountability.

The Cadbury Report 1992

Focus on three areas
Board of Directors Auditing Shareholders

Recommendations
BODs are most important, so requires continuous monitoring and assessment. Focus on corporate transparency communication with shareholders. and

Role of Institutional Investors should be more active as they are most influential group of shareholders

Contt
Chairman and CEO The roles to be separated Chairman Head of the Board and CEO- Head of the Company Management Non-Executive directors - The board should have majority non-executive directors Top Management Compensation Separating salary and performance bonus

Contt
BOD should report on the effectiveness of companys systems of internal control The Directors service contracts should not exceed 3 years without approval by the shareholders Each listed company should establish an audit committee of at least 3 non executive directors

CG Committees formulated in India

CII Committee Birla Committee Narayana Murthy Committee JJ Irani Committee Clause 49 of Listing agreement of SEBI(Jan 2006)

THEORIES

Agency Theory. Stewardship Theory. Shareholder Theory. Stakeholder Theory. Political Theory

Agency Theory
The very term agency suggest a relationship between two elements or entities. In this case it is between principals or promoters of a company & their agents or managers who implements the formers brief.

 Agency relationships occur when one partner in a transaction (the principal) delegates authority to another (the agent) and the welfare of the principal is affected by the choices of the agent

Stewardship Theory
The stewardship theory assumes that managers are good & trustworthy. They are appointed mainly due to their good reputation. This is done with the intention to cut bureaucracy & increase motivation, which will help the managers take quick decisions.

 The inclination of individuals to act as selfless stewards may be culturally contingent. The 'company man' in Japan may place his employer before family. The voluntary resignation of executives is not uncommon when a firm is disgraced and instances of suicide are still reported.

Shareholder Theory
The important assumptions of this theory is that an individual has a complete & inalienable right to a private property & that individual liberty ensures it. Holding stocks or shares in a company are a form of private property ownership, & the shareholder alone is its rightful owner.

 shareholders residual claimants to the firms income. Creditors have fixed claims and employees remunerations negotiated in advance of performance .. Gains and losses from abnormally good or bad performance .. The lot of shareholders, who stand last in the queue .. Shareholders make discretionary decisions and bear consequences .. As such, .. Owners of business with important control rights
The Economic Structure of Corporate Law, Frank H Easterbrook and Daniel R Fischel (1991) OUP

Stakeholder Theory
The purpose of the firm is to create wealth or value for its stakeholders by covering their stakes into goods and services.

 In defining 'Stakeholder Theory' Clarkson (1994) states: '"The firm" is a system of stake holders operating within the larger system of the host society that provides the necessary legal and market infrastructure for the firm's activities. The purpose of the firm is to create wealth or value for its stake holders by converting their stakes into goods and services'.

The Political Theory

The political model recognises that the allocation of corporate power, privileges and profits between owners, managers and other stakeholders is determined by how governments favour their various constituencies. The ability of corporate stakeholders to influence allocations between themselves at the micro level is subject to the macro framework, which is interactively subjected to the influence of the corporate sector.

Models of CG

Anglo American Share holders

German Shareholders and employees /unions Elects Supervisory Board

Japanese Shareholders and banks

Elects Board of Directors

Elects Supervisory Board appoints President And President Appoints Executive Board Manage

Appoints Officers/Executive Manage

Appoints Management Board Manage

Company

Company

Company

Indian Model = Anglo American Model +German Model

Anglo American Model

Wide spread shareholding Separation of ownership and management Professional managers Single board structure Focus on mainly on Shareholders

Contt
In the case of German model employees have a role Where as in Japanese Banks/financial institutions have a role in the board as stake holders

Investors Favorite Companies

Tata Group 19% 5% 7% 9% % 35% Infosys L&T HDFC Mukesh Ambani Others

25%

Thanks A Lot