Corporate Governance & Strategic Control

Sujata Saha

Basic relationships in the financial reporting process

Providers of Capital Debt Investors Equity Investors
Interest & Principal

Legal Liability

Financial Accounting Statements

Attest

Auditors
Dividend s

Debt Investmen ts

Debt Contract s

Compensation Contracts

Professional Reputation & Ethics

Companies ( Managers)

Equity Investment s

What is Corporate Governance?

Corporate Governance refers to a system of

structuring, operation, and controlling a company to achieve the long term strategic goals for satisfying its stakeholders shareholders, creditors, employees, customers and others. Its goals should include improving shareholder value and a continuing commitment to growth. It should comply with all regulatory requirements including those relating to environment. There should be proper checks and balances to ensure good corporate behavior.

The necessity of corporate governance

Financial reporting information plays two

fundamental roles. First, it helps debt and equity investors evaluate managements past business decisions and predict future performance. Second, it contains numbers(eg.net income) used in debt and compensation contracts that influence management behavior. Strong corporate governance is necessary because management has incentives to act and report at the expense of the shareholders, and auditors face conflicting goals they are responsible to capital providers to perform independent and objective audits, but their fees are paid by management, who can choose to replace them.

Attributes
Fairness ensure rights of shareholders

Transparency disclosure of information on

financial performance Accountability proper handling of resources of the company on the part of the Board of Governors Responsibility discharging functions including compliance with regulations and code of conduct

Corporate Mis -governance

United States
1. XEROX falsifying
1. 2.

India
Securities Scam Harshad Mehta 92 Plantation companies 95-96 NBFC 95-96 Rs 50,000 crores raised by non existent firms Global Trust Bank overstating profit by Rs 40 crores .Merged with OBC 02-03 Satyam computer services09

financial results KPMG fired 2. ENRON creative accounting Arthur Andersen convicted 3. WORLDCOM overstating cash flows KPMG fired

3.

4.

5.

Some Recommendations
1. 2.

3. 4. 5. 6.

The Board should meet 6 times a year. A listed company with a turnover of Rs 100 crores should have professionally competent and independent non executive directors. A person should not hold directorships in more than 10 companies Attendance of 50% or more in meetings Key information must be placed before the Board Major stock exchanges should insist on compliance certificate signed by CEO and FCO.

Strategic control & Corporate Governance

The imperative for contemporary control systems in todays complex and rapidly changing competitive and general environments. 2. The benefits of having the proper balance among the three levers of behavioral control culture, rewards and incentives, and boundaries. 3. The role of corporate governance mechanism in ensuring that the interests of managers are aligned with those of stakeholders from both the Indian and international perspective.
1.

Ensuring Informational control

Traditional control system

Based largely on the feedback approach 2. Little or no action taken to revise strategies, goals & objectives Contemporary Control systems 1. Continually monitoring the environments (internal and external) 2. Identify trends and events that signal the need to revise strategies, goals and objectives
1.

Contemporary approach to strategic controls

Informational Control Concerned with whether or not the organization is doing the right things Behavioral Control Concerned with whether or not the organization is doing things right in the implementation of strategy Both types of conditions are necessary conditions for success

Informational Control
Update and challenge assumptions
Continuousl y Monitor Test Review Assumptions

Contemporary Control Systems

Premises

Goals

Strategies