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Definition

According to OECD:
(organization for economic corporation development)
Corporate Governance is the system by which business
corporations are directed and controlled. The corporate
governance structure specifies the distribution of rights
and responsibilities among different participants in the
corporation, such as, the board, managers, shareholders
and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs. By
doing this, it also provides the structure through which
the company objectives are set, and the means of
attaining these objectives and monitoring performance.
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Another Definition
According to LaPorta et al., (2000),
Corporate governance is a set of mechanisms
through which outside investors protect
themselves against expropriation by the
insiders. They define the insiders as both
managers and controlling shareholders.

Yet Another Definition


Corporate governance refers to the direction &
oversight provided for conducting the affairs
of a corporate body
in a manner that ensures that
the individual and collective interests
of all stakeholders are served and protected.
(Safdar A Butt)
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Governance and
Management
How do these terms differ?
Does Governance include Management?
Or
Does Management include Governance?

Governance & Management


Governance

Function

Management

Approval of Plans

Planning

Preparation of plans

Providing overall
leadership

Leading

Leading those who


implement plans

Arranging
resources

Organizing

Tasks division &


resource usage

Controlling
managers

Controlling

Controlling
employees
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Governance

Strategic
Setting Objectives
Devising plans to achieve these objectives
Setting rules or parameters
Not directly concerned with routine affairs
Protection of Interests of all stakeholders

Management

Current Affairs
Implementing the Plans
Developing Suggestions and Alternatives
Operational Matters

What is a Corporate Body?

Any Company is a corporate body. However, in a


broader sense only public limited companies are
taken to be the subject matter of CG.
So far the thrust of CG is only on listed companies.
Greatest emphasis is on those that are controlled by
closed groups.
In USA and Europe, companies are frequently run by
minority shareholders. Hence, they require even
greater degree of CG.

Stakeholders in a Company

Management and Employees


Lenders
Suppliers and Clients
Shareholders
Society at large (this includes government)

Classification of Stakeholders
Classified on
basis of Role
in the Company

Classified on basis of opportunity to protect individual interests


Those with
Full Opportunity

Those with a
Partial Opportunity

Those with
Virtually No opportunity

Owners

Controlling
Shareholders

Institutional Investors
with Board representation

Minority and individual


shareholders with no board
Representation

Lenders

Financial institutions
with elaborate lending
Contracts

Buyers of listed bonds


with trustee arrangements

Other lenders

Employees

Executive Directors

Senior Managers

Other employees
on regular or
contract terms

Business Associates

Suppliers who sell


only on cash terms

Major Suppliers and


clients with contracts

Smaller suppliers
and smaller clients

Government

Public at large

Society

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Opportunity to protect
individual interests

Managers and Employees have the greatest


opportunity to protect their interest(s)
Suppliers and Clients essentially go by each
transaction or contract.
Lenders and Shareholders are most vulnerable.
Society depends entirely on law

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Shareholders

Controlling Groups (Internal Equity)


Outsider Shareholders (External Equity)

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Controlling Groups
If in Majority:
Can protect their interest easily
Need monitoring
If in Minority:
Can protect their interest easily
Need highest degree of monitoring

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Outsider Shareholders
Institutional Investors
Have some means of protecting their interest
but still require protection
Individual or General Public
They require the greatest degree of protection,
as they have virtually no means of protecting
their interest.
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Lenders
Institutional Investors
Have some means of protecting their interest through
legal documentation, are relatively at lower risk but
still require protection
Individual or General Public
They require the greatest degree of protection, as they
have virtually no means of protecting their interest.

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Society at Large

Government (Taxes, Law and Order)


Clients (Value for money)
Community (Social Rights)
How do we ensure that these
stakeholders get their dues?

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Corporate Hierarchy
1.

2.
3.

Shareholders
Board of Directors
Management

4.

CEO
Executive Directors
Senior Managers

Employees

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Key Players

Shareholders (Voting power)


Board of Directors (Represents interests)
CEO (Delegated executive powers)
Senior Managers (Delegated executive powers)

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Scope of Corporate Governance

Interests

Individual

Stakeholders

Objectives / interests

Shareholders

Sustainable growth in net worth

Lenders

Security / timely interest payments

Employees

Continued employment at good


terms

Business
Associates

Continued business at good terms

Society

Good citizenship by the company

Tools / Techniques

General Management
Legal frame work
Professional Codes
Industrial practices

Continued profitable existence


Collective Interest of
all stakeholders

Strategic Management
Risk Management

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Different Board Types:


The Good, Bad, and Ugly
Yes-men Board
Rubber Stamp
Board

Good Old Boys


Board

The Real Thing

Country Club
Board
Trophy Board

Paper
Board

?
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Responsibilities of the Board

Oversight
Directional
Advisory

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The Oversight Function

Approving and monitoring Companys


Strategic Plans.
Approving annual budgets and plans.
Engaging outside auditors.
Ensuring integrity of financial statements
Review of major operational activities.

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The Directional Functions

Setting Mission Statement, Vision Statement


and Value Statement.
Appointment of CEO / Senior Managers
Planning for succession of these managers as
well as outside directors
Appointing various committees
Prescribing code of conduct for the
management.
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The Advisory Function

General guidance to management.


What is happening in the rest of the world.
Specialized input in certain areas

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Tools Available to the Board

Composition of the Board


Independence
Committees
Incentives
External Help
Government Intervention

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Code of Corporate Governance

Constitution of Board element of independence


Conduct of Meetings how, when and what
Management and Corporate Reporting contents and
frequency
Committees so far only Audit Committee is
mandatory
External Auditor
All common sense, should be done even if not
required by law
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Objectives of CCG

Protect the interest of all stakeholders


Infuse some independence in the Boards
Bring Transparency in conduct of meetings
Improve reliability of financial reporting
Introduce Professionalism in BoDs
Reduce undue influence of controlling groups
Develop a corporate culture

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