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Corporate Governance

Arun Kumar Davay

What is Corporate Governance?


A Social Entity An Approach A Method A System A Set of Principles Processes and Structure By which Business and Affairs of Corporate Sector is Directed and Managed.

Definitions: Corporate Governance


Corporate Governance is the system by which companies are directed and controlled (Cadbury Report (UK), 1992)
to do with Power and Accountability: who exercises power, on behalf of whom, how the exercise of power is controlled. (Sir Adrian Cadbury, in Reflections on Corporate Governance) 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)

What is Corporate Governance?


Corporate governance is essentially about leadership: leadership for efficiency; leadership for probity; leadership with responsibility; and leadership which is transparent and which is accountable. (Principles for Corporate Governance in the Commonwealth)

The objective of CG
Directors are subjected to their duties, obligations, and responsibilities Act in the best interest of the company To give direction to the corporation To remain accountable to the shareholders and all other stakeholders To build up an environment of trust and confidence amongst those having competing and conflicting interest To enhance shareholders value and protect the interest of other stakeholders by enhancing the corporate performance and accountability

The ultimate objective of CG


To attain highest standard of procedures and practices followed by the Corporate World so as to have transparency in its functioning with an ultimate aim to Maximise the value of various Stakeholders.

Corporate Governance & Capital Market Drivers: A Conceptual Framework


REGULATION & LEGISLATION

Regulators (SEBI/RBI)
Lenders (Banks/ Depositors)

Government Legislation

Stock Exchanges Listing Agreements

Listed Corporations (The Board & the Executive)

Shareholders/ Stakeholders

Market Operators (Rewards)

Institutional Investors (Pension Funds/Insce Cos)

Press/Media (Opinion Makers)

Market Operations, Critique & Monitoring

An Enterprises Triple Effect on Society


Sustainable Development Waste Control Equal Opportunities Education & Culture Community Regeneration

Emissions Business Impact Energy Use Product Life-cycle Product Value Wealth Generation Productive Employment Ethical Trading

Economic

Human Rights Employee Volunteers

The Triple-Bottom line Impact

Economics

Business Impact Environment Society

Board Roles & Responsibilities


Provide/ Exercise Leadership and Strategic Guidance Objective Judgment Independent of Management Control over the Company Direct and Control the Management of the Company Be Accountable at all times to All Shareholders

Dimensions of Board Responsibility


Direction involves Formulation & Review of Company Policies, Strategies, Budgets and Plans, Risk Management Policies, Top Level HR Policies, etc Setting Objectives & Monitoring Performance Oversight of Acquisitions, Divestitures, Projects, Financial

and Legal Compliance, etc

Dimensions of Board Responsibility


Control Involves Prescribing Codes of Conduct, Overseeing Disclosure & Communication Processes, Ensuring Control Systems to Protect Company Assets Reviewing Performance & Realigning Action Initiatives to Achieve Company Objectives

Dimensions of Board Responsibility


Accountability Involves Creating, Protecting and Enhancing Company Wealth and Resources Timely and Transparent Reporting Good Corporate Citizenry including Discharge of Stakeholder Obligations and Societal Responsibilities without Compromising the Shareholder Wealth Maximisation Goal

Best practices are focused on:


Independence, tenure and age of directors Independent nomination committee Frequent meetings of board and sub committees with regular attendance Sufficient sub committees to handle key corporate issues Stringency of criteria for CEO to qualify for annual bonus Reasonable director compensation Distributed ownership is viewed as optimal to protect all shareholder interests History of equal treatment of shareholders

Best practices are focused on:


Increase the role and authority of independent directors Tighten the definition of independent directors Foster focus on good corporate governance Shareholders given opportunity to monitor & participate in governance process Establishing new control and enforcement mechanisms

Implementation of Corporate Governance in India


Shri Kumar Mangalam Committee constituted in may 1999 to promote and raise the standard of Corporate Governance in India: Mandatory recommendations of Birla committee: Applies to Listed Companies with Paid Up Capital of Rs.3 Crore and

above
Composition of Board of Directors optimum combination of executive & non-executive directors

Audit Committee with 3 Independent Directors with one having


financial and accounting knowledge.

Corporate Governance Issues


Ownership related Management Related Power- structure related Personal wealth creation

Creating Effective Boards


Respect, trust and candor Culture of open dissent Role maker rather a role taker Individual accountability Individual directors performance assessment Boards performance evaluation

Conclusion
Boards need to create wealth, utilize it and manage the same for human development and civilization Boards are social entities responsible various agents of the society It is the highest embodiment collective leadership and need to transform as role models in all walks of work and life Has a duty and responsibility to develop employees and market Corporate Boards are not personal properties minority or majority shareholders Right-Size the Board and its Composition Complementary Skill-Sets & Financial Acumen Essential Fit & Proper Criteria for Membership More Focus on Oversight, Less on Micro-Management Contribution as Important as Surveillance