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And Etihcs
Corporate
misgovernance
• In new millenium several
comanies in USA and else
where faced collapse.
• Existing framework seems
inadequate with the gigantic
business conglomerates.
Corporate
misgovernance in INDIA
• Increasing corruption in the
government and its various
services had kept the
management of country’s
industrial and business
organizations above
accountability for their
misdeeds, encouraging
them to indulged in more
unethical practices.
Corporate
misgovernance in INDIA
• First realize during BIG BULL, harshad mehta
case.
• Involving lagre no’s of banks and resulting in
the stock market nosediving for the first
time.
• Preferential allotment scam where investors
loose Rs 5000 Crore.
• Disappearance of companies during 1993-
1994, when stock market shot up to 120 %,
companies raised Rs25000 crore vanished
and did not step back to their projects.
• Plantation companies scam Rs 50,000 crore
• Non banking finance companies scam. etc
Corporate
misgovernance in USA
• Worldcom improperly booked 3.8b
in expenses, thus inflating profits.
• Bernie ebbers borrows $408 million
from phone company to cover
personal debts.
• Enron created outside partnerships
that helped hide poor financial
condition. Executive earned
millions by selling company stock.
Reasons for
misgovernance
• A closed economy.
• Sheltered market.
• Limited need and access to
global business.
• Lack of competitive spirit.
• Inefficient regulatory
authority framework.
Corporate Governance
• Problems that results from the
separation of leadership.
• Focus upon: internal structure,
rules of the board of directors,
audit committees, discloser of
information rules to shareholders
and creditors, control of
management.
Corporate Governance
• Definition by corporate and
academic point.
• Academic point.
Shareholders
Board
Management
Employees
Corporate Governance
• Corporate point of view
• Corporate governance deals with
ways in which suppliers of finance
to corporation assure themselves of
getting a return on their
investment. How do the suppliers of
finance get management to return
some of the profits to them?
• How do they make sure that
managers do not steal the capital
they supply or invest it in bad
projects?
• How do suppliers of finance control
managers?
Corporate Governance
MODEL
• Mc kinsey model.
• The Market model.
• Efficient, well developed
equity markets and
dispersed ownership.
• Developed nations.
• US, UK, CANADA and
AUSTRALIA.
SHAREHOLDERS INVIRONMENT INDEPENDENCE AND PERFORMANCE
Non-executive
Dispersed Majority
CORPORATE CONTEXT
INSTITUTIONAL CONTEXT
ownership boards
Sophisticated
Aligned
Institutional
incentives
ownership
Active High
Equity discloser
market Active
Takeover Shareholder
market equity
Concentrated Insider
boards
CORPORATE CONTEXT
INSTITUTIONAL CONTEXT
ownership
Reliance on
Incentive
family,
Aligned with
bank,
Core
public
shareholders
finance
Underdeveloped Limited
New issue Discloser
market Limited
takeover Inadequate
market minority
protection
AFFILATED DIRECTORS
INDEPENDENT DIRECTORS
NOMINEE
Issues in corporate
governance
3. Separation of the roles of the
CEO and chairperson
4. Should the board of directors
have committees.
Appointment of special committees
Nomination
Remuneration
auditing
Issues in corporate
governance
5. Appointment of the board and
director’s re-election.
6. Directors and executive’s
remuneration.
7. Discloser and audit.
8. Protection of shareholder rights
and their expectation.
9. Dialog with institutional
shareholders.
10.Should investor have a say in
making a company “socially
responsible corporate citizen”?.
Benefits Of Good
Corporate Governance To
•
A Corporation
Creation and enhancement of a
corporation’s competitive
advantage
• Enabling a corporation perform
efficiently by preventing fraud
and malpractices.
• Providing protection to
shareholders interest.
• Enhancing the valuation of an
enterprise.
• Ensuring compliance with laws
and regulations.
Theory In Corporate
Governance
AGENCY THEORY
• Adam smith who identified an agency
problem(managerial negligence and profusion).
• Shareholders (owners)- principals-they define objective
of the company.
• Agents-management who pursue such objectives.
• Chief executive desire and shareholders long term
investment.
• Mismatch objective leads to agency problem.
• Cost inflicted by such dissonance is the agency cost.
Theory In Corporate
Governance
AGENCY THEORY
Two broad mechanism that reduce
agency cost and improve
performance are:
• Fair and accurate financial
disclosures
• Efficient and independent board of
directors
Theory In Corporate
Governance
Stewardship theory:
• Managers are trustworthy and attach significant
value to their personal reputation
• Managers are steward whose motives are
aligned with the objectives of principles.
• Steward behavior will not depart from the
interests of his/her organization.
• Control can be counterproductive, because it
undermines the pro-organisational behavior of
the steward by lowering his/her motivation.
Theory In Corporate
Governance
Behavioral difference between agency and
stewardship theories
• Agent and steward
• Agency- sociological and psychological
• Steward- individualistic, opportunistic and self serving
With regard to psychological mechanisms
Agency theory states that motivation resolves around
lower order and extrinsic needs
Steward theory states it resolves around higher order
and intrinsic needs
Theory In Corporate
Governance
Stakeholder theory:
• Interest of all groups- employees,
customers, dealers, government and
society.
• Ethics of cares
• Ethics of fiduciary relationship
• Theory of property rights
• Criticised mainly because not applicable in
practice by corporations
Theory In Corporate
Governance
Sociological theory
• Focus on board composition
• Implication of power and wealth distribution
• Financial reporting
• Problems of interlocking dictatorship and
concentration in privilege class to equity
and social progress
• Socio-economic objective of corporations
Corporate Governance
Officers(managers) Regulation/legal
Monitor system
manage &
Lien on
Creditors Stake in
regulates
company
Anglo American Model
• Ownership is equally divided between
individual and institutional shareholders.
• Directors are rarely independent of
management.
• Run by professional managers who have
negligible ownership stake.
• Most institution investors are reluctant
activists.
• Discloser norms.
German Model
Management board
Employees and
(including shareholder
Labor unions
labor relation officer)
manage
Own
Company
Japanese Model
Consult
Main bank
Shareholders
Executive management
Primarily board of directors
Manages
Provides loans
Own Company
Own
Indian Model
HOMEWORK:
Draw Indian model on your notebooks
in next class.
Obligation To Society
• Towards shareholders
• Measures promoting transparency
and informed shareholder
participation
• Transparency
• Financial reporting and records
Obligation To Employees