Corporate Governance

Dr. Bhumija Chouhan

 Introduction
Governance is the process whereby people in power make
decisions that create, destroy or maintain social systems,
structures and processes.
Corporate Governance is the process where balance of
economic and social goals, between individual goals and
communal goals is maintained.
Corporate Governance is concerned with the
establishment of a system whereby the top management is
introduced with responsibilities and duties in relation to the
directions of corporate affairs.
Corporate Governance is a process to ensure that a
company is managed to suit the best interest to all which
includes structural and organizational matters.
 Contd.
Corporate Governance ensures transparency, full
disclosures and accountability of companies to all its
stakeholders since they have every right to information on
regular basis about the companys operation
Corporate Governance is a voluntary ethical code of
business of companies which is based on the core value of
the top management and the guiding principles that
inculcates from it.
Corporate Governance is concerned with accountability of
persons who are managing it towards stakeholders. It is also
concerned with the morals, ethics, values parameters of
conduct and behaviors of the company and its management.
 Corporate Governance the process whereby people in
power make decisions that create, destroy or maintain
social systems, structures and processes under which
they operate.
Corporate Governance is the enhancement of long term
shareholder value while at same time protecting the
interests of other stakeholders.
Definition
According to economist corporate governance is a field
in economics that investigates how to secure /motivate
efficient management of corporations by the use of
incentive mechanisms such as contracts, organisational
designs and legislation.
 Contd.
According to Mayor corporate governance is not solely
concerned with the efficiency with which companies
are operated in the interests of shareholders, it is also
intimately related to company strategy and life cycle
developments.
Individuals who are included under stakeholders are:
(1) Employees
(2) Partners
(3) Investors
(4) Suppliers
(5) Competitors
(6) Consumers
(7) Government
(8) Society
 Benefits/Importance of Corporate Governance
Organization gains a competitive edge in the global
economy.
Interests of stakeholders are protected
It helps in gaining value maximization of shareholders
value in the long term.
It is a framework for creating long term trust between
companies and stakeholders.
It improves the process of strategic thinking at the top by
inducting independent directors who can bring with them
a host of new innovative ideas and a wealth of combined
experience.
 It rationalizes the management and monitors
organisation performance so that a firm may successfully
encounter challenging situations both domestic as well
as global.
It limits the liability of the top management and directors
by articulating the process of decision making.
It ensures the clarity and integrity of financial reports
It helps in providing a reasonably good degree of
stakeholders confidence in order to help the proper
functioning of a market economy.
 Contd.
Factors affecting Corporate governance

Ownership structure of a corporation

Its financial structure
The structure and functioning of the corporate boards
The legal, political and regulatory environment within
which the company operates.
 Instituting Corporate governance
Companies need to follow certain guidelines in order to
establish sound and effective corporate governance its
rewards guidelines include:

(1) Treating shareholders fairly, giving them their rights and

helping them to exercise these rights

(2) Keeping the interests of all the stakeholders in mind.

(3) Establishing the rights and responsibilities of the board

of directors, clearly and unambiguously.
(4) Exhibiting integrity and ethical behavior and adhering
to legal rules and regulations.
(5) By Providing shareholders with timely and open
access to all factual information which will not only
check the companies sections and decisions but also
eliminate any temptation towards wrong action.
Process of Corporate Governance
PLAYERS:
Shareholders
Management
Directors

Result:
Capital Returns
/Dividends
for shareholders Practice C.G:
Salaries & Ethical Climate
benefits for Transparency
management &
Directors Accountability
Regulation &
image of organization
 Contd.
Mechanism for Corporate Governance in India:

Companies Act
SEBI
Corporate Control
Shareholder Participation
Statutory Audit
Code of Conduct
 Rating Corporate Governance
Corporate Governance rating is a new concept
worldwide and yet involving.
The rating of corporate governance is based upon the
basic principles given by OECD (Organization for
economic Corporation and Development).
The four pillar on basis of which edifice of corporate
governance is built are:(1) Fairness (2)
Transparency(3) Accountability (4) Responsibility.
The basic parameters on basis of which rating of
corporate governance are:
(a) Shareholder Structure
(b) Governance Structure
(c) Management Process
(d) Interrelationship between Stakeholders
(e) Reporting
(f) Transparency
 Areas to be considered for Effective Corporate
Governance are:
(1)A well functioning, well-informed board of directors
(2) A well constituted board
(3) Directors should simultaneously represent only optimal
number of boards
(4) Using committees to implement corporate governance
(5) Encouraging the board to exercise its right to question
(6) Establish Financial Disclosure Norms
(7) CEOs must facilitate corporate governance and lead by
examples.
 Benefits of Good Corporate Governance
It provides stability and growth to the companies which
build confidence
It reduces perceived risks by reducing cost of capital
It provides stability and long term association with
shareholders.
Potential stakeholders aspire to enter into relationship
with enterprise whose governance credentials are
excellent.
It enables the corporations to perform effectively and
efficiently by preventing fraud and malpractices.
It is beneficial for society since it helps in preventing
systemic banking crises
 Impact of Environment on Corporate Governance

Environment can be classified into two parts(1) External

Environment and (2) Internal Environment.

External Environment includes government regulations,

policies, guidelines, SEBI and external stakeholders.

Internal Environment includes company vision, mission,

policies, norms, internal stakeholders and board of
directors etc.
 Benefits and outcomes of Corporate Governance can be
increase in shareholder value, wealth creation, concern
for customer, investor protection and confidence,
transparency and sustaining healthy corporate sector
development
 Responsibilities of Board of Directors
Board organisation and selection, retention and
succession of management.
Strategic oversight
Risk Evaluation
Monitoring
Policies and procedures
Disclosures to shareholders and others
Financial maters and internal controls
General Legal obligations
 Models of Corporate Governance
Traditional (Structural) Model
Carver (Policy) Model
Cortex (Outcomes) Model
Consensus ( Process) Model
Competency (Skills/practices) Model
 Types of Board & Styles of Governance
Ownership Board
Advisory Board
Trusted Board
Operational Board
Marketing Board
Resource Board
Government Service Board
Religious Board
Charity Board
Professional Association Board