Corporate Governance

Agency
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

Divergence of Interest
The Concept of limited Liability in the corporate from organization has separated ownership and the management. This separation of ownership from management causes conflict of interests of managers (agents) with the interests of the owners ( Shareholders).

Agency Theory
The following are the sources of conflicts. The managers may demand: 1. The managers may demand excessive remuneration. 2. Decisions which puts managers job to risk are avoided. 3. Managers may act to enhance their personal reputation and not that of the firm. 4. Managers may work for their Individual objective.

Agency Costs
Agency costs; incur to protect principals interests and to reduce the possibility that agents will misbehave.

Monitoring expenditures by principals Bonding expenditures by agents Residual loss of the principal

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

CORPORATE GOVERNANCE

CORPORATE MANAGEMENT

External Focus Governance assumes an open system

Internal Focus Management assumes a closed system

Strategy-orientated

Task-orientated

Concerned with where the company is Concerned with getting the company going there

Corporate Governance of an Organization

Internal Governance
Internal Control of Organisation

External Governance
Monitoring Systems International Agencies, National Regulatory Agencies, Professional Institutes, Industry Associations NGO

Result

of

Appropriate Accountability & Responsibility to Stake holders

&

Constituents Of Corporate Governance

The Board of Directors
Pivotal role Accountable to stakeholders Directs management

The Shareholders & Stakeholders

To participate in appointment of directors To hold the BoD accountable for governance through proper disclosures

The Management
To act on the direction of the BoD To provide requisite information to the BoD for decision making To implement and monitor control systems

Corporate Governance Frame Work

1. Supervisory board/committee/team 2. Audit committee 3. Internal audit

4. Statutory audit
5. Disclosure of information 6. Risk management framework

7. Internal control framework

Corporate Governance
Accountability
Responsibility Transparency Fairness

Fundamental Pillars of Corporate Governance

Accountability
Clarifying governance roles & responsibilities, and supporting voluntary efforts to ensure the alignment of managerial and shareholder interests and monitoring by the board of directors capable of objectivity and sound judgment.

Transparency
Requiring timely disclosure of adequate information concerning corporate financial performance

Responsibility
Ensuring that corporations comply with relevant laws and regulations that reflect the societys values

Fairness
Ensuring the protection of shareholders rights and the enforceability of contracts with service/resource providers

Why Corporate governance matters?

Enhances performance of companies Enhances access to capital Enhances long term prosperity.

Provides a barrier to corrupt dealings- limiting discretionary decision

making, increasing oversight, introducing Codes of Ethics etc Impacts on the society as a whole: Better companies, Better societies.

Problem of corporate governance

We lay structures over the corporate business, and fail to organize the business Corporate Performance Management reports against overlaid structures Accounting accounts for only part of the business cycle and against the wrong entities We govern the corporation by rules and regulations, because we cannot manage the actual business

Theories of Corporate Governance

Anglo-American model
German model of CG

Japanese model of CG

History Of Corporate Governance in India

Unlike South-East and East Asia, the corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic collapse. Also, unlike most OECD countries, the initiative in India was initially driven by an industry association, the Confederation of Indian Industry.
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 and many others

Driving Forces of CG in India

1)

Unethical Business Practices

Security Scams ---Harshad Mehtha Security Scam Equity allotments at discount rates to the controlling groups Disappearance of Companies (1993-94) - around 4,000 companies with 25,000 crores without starting business Misdeed of Companies Plantation, Sheep rearing, etc.

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 Privatisation
New structure of ownership Multinational Companies

Factor influencing corporate governance

1. The ownership structure 2. The structure of company boards 3. The financial structure 4. The institutional environment

Corporate Mis-Governance

THE SEBI CODE

The key elements of the SEBI code, which is based on the recommendations of the Kumaramangalam Birla Committee report, are as follows:
At least one-half of the board shall comprise of non-executive directors and at least one-third of the board shall comprise of independent directors.

An audit committee of at least three non-executive directors shall be set up, the majority of them being independent. It shall meet at least thrice a year.
The remuneration paid to all directors shall be disclosed in the annual report. A Management Discussion and Analysis Report should form part of the annual report. Details of new appointees as directors shall be provided to the shareholders.

The annual report shall have a section on corporate governance.

The auditors of the company should give a certificate regarding compliance on corporate governance.
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EXECUTIVE COMPENSATION
Executive compensation has become a very controversial issue. It has generated a lot of debate among legislators, corporate observers, economists, journalists, and management experts. In contrast to the morass of unfounded charges and countercharges in which public debate has become entangled, researchers in the fields of economics, finance, and accounting have begun scientific enquiry into issues like : What are the sources of conflict between managers and shareholders? Why do executive compensation plans often fail to promote value creation? How should incentive compensation plans be designed to align the interests of managers with shareholders?
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&

Infosys Technologies: The Best among Indian Corporates

As per the Credit Lyonnais Securities Analysis (CLSA), the corporate governance ratings of the Software firms are higher than those of other Indian firms. Infosys, based in Bangalore, is a publicly held, ISO 9001 certified company offering information technology consulting & software services. The software offered include application development, Commerce & Internet Consulting, Software Maintenance. E-

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 capitalisation.

Achievements

Voted as the Best Managed Company in Asia.

Biggest exporters of Software. First to follow the US Generally Accepted Accounting Principles before going for Nasdaq listing in 1991. Championed Corporate Governance in India.

Narayana Murthys Global Strategy

1)

Global Delivery Model

Producing where it is most cost effective to produce & selling where it is most profitable to sell.

2)

Moving up the Value Chain

Getting involved in a software development project at the earliest stage of its life cycle.

3)

PSPD Model

Predictability of Revenues, Sustainability of Revenues, Profitability, De-risking.

ICSI National Award for Excellence in Corporate Governance

Best Governed Companies

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

CG mechanism should be flexible and suitable

Overall ethical values in all segments should be promoted for effective accounting, auditing, disclosure and transparent system.