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CORPORATE GOVERNANCE
INTRODUCTION
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Corporate Governance
Comparable failures in Australia (HIH, One.Tel) are associated with the eventual
passage of the CLERP 9 reforms. Similar corporate failures in other countries
stimulated increased regulatory interest (e.g., Parmalat in Italy).
Corporate governance has also been defined as "a system of law and sound
approaches by which corporations are directed and controlled focusing on the
internal and external corporate structures with the intention of monitoring the
actions of management and directors and thereby mitigating agency risks which
may stem from the misdeeds of corporate officers. In contemporary business
corporations, the main external stakeholder groups are shareholders, debt holders,
trade creditors, suppliers, customers and communities affected by the corporation's
activities. Internal stakeholders are the board of directors, executives, and other
employees.
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Corporate Governance
between upper-management (the "agent") which may have very different interests,
and by definition considerably more information, than shareholders (the
"principals"). The danger arises that rather than overseeing management on behalf
of shareholders, the board of directors may become insulated from shareholders
and beholden to management. This aspect is particularly present in contemporary
public debates and developments in regulatory policy.
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Corporate Governance
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Corporate Governance
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Corporate Governance
Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide stakeholders with a
level of accountability. They should also implement procedures to
independently verify and safeguard the integrity of the company's financial
reporting. Disclosure of material matters concerning the organization should
be timely and balanced to ensure that all investors have access to clear,
factual information.
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Corporate Governance
It lays down the framework for creating long-term trust between companies
and the external providers of capital.
It improves strategic thinking at the top by inducting independent directors
who bring a wealth of experience, and a host of new ideas
It has long term reputational effects among key stakeholders, both internally
(employees) and externally (clients, communities, political/regulatory
agents)
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Corporate Governance
That the Board adopts transparent procedures and practices and arrives at
decisions on the strength of adequate information;
That the Board has an effective machinery to sub serve the concerns of
stakeholders;
That the Board effectively and regularly monitors the functioning of the
management team, and
That the Board remains in effective control of the affairs of the company at
all times, The overall endeavor of the Board should be to take the
organization forward to maximize long-term value and shareholders wealth.
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Corporate Governance
Legislation:
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Corporate Governance
Management environment:
Board independence:
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Code of conduct:
Strategy setting:
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Audit Committees:
The Audit Committee is inter alia responsible for liaison with the
management; internal and statutory auditors, reviewing the adequacy of internal
control and compliance with significant policies and procedures, reporting to
the Board on the key issues. The quality of Audit Committee significantly
contributes to the governance of the company.
Risk management:
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Corporate Governance
For this purpose the company should subject itself to periodic external and
internal risk reviews.
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Corporate Governance
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Corporate Governance
The board of directors, with its legal authority to hire, fire and
compensate top management, safeguards invested capital. Regular board
meetings allow potential problems to be identified, discussed and avoided.
Whilst non-executive directors are thought to be more independent, they
may not always result in more effective corporate governance and may not
increase performance. Different board structures are optimal for different
firms. Moreover, the ability of the board to monitor the firm's executives is a
function of its access to information. Executive directors possess superior
knowledge of the decision-making process and therefore evaluate top
management on the basis of the quality of its decisions that lead to financial
performance outcomes, ex ante. It could be argued, therefore, that executive
directors look beyond the financial criteria.
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3. Balance of power:
4. Remuneration:
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Given their large investment in the firm, these stakeholders have the
incentives, combined with the right degree of control and power, to monitor
the management.
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Corporate Governance
Competition
Debt Covenants
Demand for and assessment of performance information (especially
financial statements)
Government Regulations
Managerial Labour Market
Media Pressure
Takeovers
REGULATIONS
Legal environment
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The U.S. passed the Foreign Corrupt Practices Act (FCPA) in 1977, with
subsequent modifications. This law made it illegal to bribe government officials
and required corporations to maintain adequate accounting controls. It is
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enforced by the U.S. Department of Justice and the Securities and Exchange
Commission (SEC). Substantial civil and criminal penalties have been levied on
corporations and executives convicted of bribery.
The UK passed the Bribery Act in 2010. This law made it illegal to bribe
either government or private citizens or make facilitating payments (i.e.,
payment to a government official to perform their routine duties more quickly).
It also required corporations to establish controls to prevent bribery.
There are many different models of corporate governance around the world.
These differ according to the variety of capitalism in which they are embedded.
The Anglo-American "model" tends to emphasize the interests of shareholders.
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Continental Europe
India
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the Indian approach is drawn from the Gandhian principle of trusteeship and the
Directive Principles of the Indian Constitution, but this conceptualization of
corporate objectives is also prevalent in Anglo-American and most other
jurisdictions.
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adopted the Model Business Corporation Act, but the dominant state law for
publicly traded corporations is Delaware, which continues to be the place of
incorporation for the majority of publicly traded corporations. Individual rules
for corporations are based upon the corporate charter and, less authoritatively,
the corporate bylaws. Shareholders cannot initiate changes in the corporate
charter although they can initiate changes to the corporate bylaws.
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Corporate Governance
One area of concern is whether the auditing firm acts as both the
independent auditor and management consultant to the firm they are auditing. This
may result in a conflict of interest which places the integrity of financial reports in
doubt due to client pressure to appease management. The power of the corporate
client to initiate and terminate management consulting services and, more
fundamentally, to select and dismiss accounting firms contradicts the concept of an
independent auditor. Changes enacted in the United States in the form of the
Sarbanes-Oxley Act (following numerous corporate scandals, culminating with the
Enron scandal) prohibit accounting firms from providing both auditing and
management consulting services. Similar provisions are in place under clause 49 of
Standard Listing Agreement in India.
1. Monitoring costs:
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Executive pay
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Even before the negative influence on public opinion caused by the 2006
backdating scandal, use of options faced various criticisms. A particularly
forceful and long running argument concerned the interaction of executive
options with corporate stock repurchase programs. Numerous authorities
(including U.S. Federal Reserve Board economist Weisbenner) determined
options may be employed in concert with stock buybacks in a manner contrary
to shareholder interests. These authors argued that, in part, corporate stock
buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion
annual rate in late 2006 because of the impact of options. A compendium of
academic works on the option/buyback issue is included in the study Scandal by
author M. Gumport issued in 2006.
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In 2004, 73.4% of U.S. companies had combined roles; this fell to 57.2%
by May 2012. Many U.S. companies with combined roles have appointed a
"Lead Director" to improve independence of the board from management.
German and UK companies have generally split the roles in nearly 100% of
listed companies. Empirical evidence does not indicate one model is superior to
the other in terms of performance. However, one study indicated that poorly
performing firms tend to remove separate CEO's more frequently than when the
CEO/Chair roles are combined.
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For instance, IT services has been rated the highest on the corporate
governance standards followed by FMCG and consumer products,
pharmaceuticals, automotive and financial services. Sectors with the poorest
governance practices include real estate, infrastructure, mining and metals, and
media and entertainment.
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Corporate Governance
So, what are the biggest issues that investors look for when it comes to
corporate governance? The survey says clarity in business and accounting practices
are considered the most important dimension in corporate governance. Other
important aspects include fair dealing with clients and suppliers, strong
representation from independent directors, compliance and remuneration.
While 54 per cent respondents said the Companies Act was sufficient to
address corporate governance concerns, 40 per cent said it was not sufficient.
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CONCLUSION
Corporate Governance has become the latest buzzword today. Almost every
country has institutionalized a set of Corporate Governance codes, spelt out best
practices and has sought to impose appropriate board structures. Despite the
Corporate Governance revolution there exists no universal benchmark for
effective levels of disclosure and transparency. There are several corporate
governance structures available in the developed world but there is no one
structure, which can be singled out as being better than the others. There is no one
size fits all structure for corporate governance. Corporate governance extends
beyond corporate law.
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WEBLIOGRAPHY
www.google.com
www.wikipedia.org
www.investopedia.com
www.indiatimes.com
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