CORPORATE

GOVERNANCE
THREE LEVELS OF COMPANY RESPONSIBILITY
 Material obligation to the shareholders,
employees, customers, suppliers and creditors, to
pay taxes and meet statutory duties.
 Responsibilities arising out of actions of companies
in carrying out there primary task and includes
making the most of communities human resources
and avoiding environmental damage etc.
 Society’s priorities over company’s commercial
interests.
WHAT IS CORPORATE GOVERNANCE?
 Corporate governance, is about maximizing
shareholder value legally, ethically and on a
sustainable basis, while ensuring fairness to every
stakeholder---the company’s , employees, investors,
vendor-partners, the government of land and
community. Thus, corporate governance is a
reflection of a company’s culture, policies, how it
deals with its stakeholders, and its commitment to
values.
CORPORATE GOVERNANCE IS BASED ON
“ETHICS” NOT ON “MORALS”
 Ethics as a residing in relationships. They are
visible, negotiated commitments and behavior
between the parties involved. Individuals and
entities accountable to certain ‘others’ in a covert
way.
 Morals as privatized , individually arrived norms
that are based on axioms that the individual wishes
to base his or her morality upon. Accountability to
others in general, non particular overt sense.
DISTINCTION BETWEEN ETHICS AND
MORALITY MEANT TO……
 Highlight multiple roles contemporary managers have to play.
 Account for humanly created human aggregations such as
corporations etc. that have the status of a ‘person’.
 Be sensitive to the failure of certain traditional norms of
human conduct .
 Incorporate complexities of contemporary life both- private
and public.
 Ethical conduct requires moral imagination rather than
righteous rigidities.
WHAT IS A CORPORATION--
 Corporation is a body of persons (that is)
granted a charter legally recognizing them as
a separate entity having its own rights,
privileges and liabilities distinct from those
of its members.
 The privilege of engaging in such commerce
in corporate form is one which the state may
confer or may withhold as it sees fit.
WHY SHOULD A CORPORATION EXIST?
PURPOSE---
 To provide outlet for satisfaction of human
drives.
 Social structure: which brings together the
resources( financial and others).
 Efficiency and efficacy : return of resources use
and fulfillment of objectives.
 Ubiquity and flexibility : no boundaries of space
or time ; corporate is flexible precisely because
it is able to take risks.
PURPOSE---
 Identity : as a source of job, as a means to
exercise and hone one’s skills as an
employee, as a creator of brands.
 FOUR CHARACTERISTICS ESSENTIAL TO THE
VITALITY AND APPEAL OF CORPORATE FORM
ARE--
 Limited liability
 Free transferability of investor interests.
 Legal personality : (entity – attributable powers,
life span, purpose)
 Centralized management- shareholders give up part
of there right in exchange for limited liability .
Centralized management provides for efficient
operations without the shareholders interfering in
operational matters.
HOW CAN THE VITALITY MAINTAINED
AND PURPOSE ACCOMPLISHED.
Structures and processes that will provide for-
 Well developed, sophisticated level-playing
market place.
 Laws imposed by the legislature for governance.
 Private laws established by the corporate in its
dealing with the stakeholders.
 Behavior and visionary leadership in the
corporate organizations.
RULES AND “IMPOSED” STRUCTURES DO
NOT WORK
Classic case ENRON:
-- well developed, sophisticated level-playing
market place.
 Before the fail most admired company.
 Most respected auditor.
 Highly respected board : former Stanford professor,
member of British house of lords, former head of
GE power div., former deputy secretary of
treasury, prominent business leaders of Hong Kong.
SO, HOW DO YOU ENSURE GOOD
GOVERNANCE
 By creating structures that will make ensure
that the right questions get asked and checks
and balances are in place that reflect what is
best for the creation of long term,
sustainable value.
WHO ARE THE THREE KEY PLAYERS IN
CORPORATE GOVERNANCE?

Shareholders Management

Board
SHAREHOLDERS
 Call for shareholder Activism turns upside down
the traditional “competitive” view that a “stupid
silent and compliant” shareholder is a desirable
entity.
 Ownership involvement cannot be resisted
especially with IT and internet playing a
significant role .
 Ownership involvement is good even for
managers when true performance is incentivized.
BOD
Some facts
o Size: Typically 10-20
o More insiders in the US and UK than in INDIA,
JAPAN, GERMANY.
o Nomination committee selects the board members,
usually nomination committee chosen by CEO,
existing board influences the choice.
o Meetings: Once a month considered adequate.
o Increasing role in the affairs of the form.
ROLE OF BOD
 Select, regularly evaluate and, if necessary
replace the CEO, determining management
compensation, review succession planning.
 Review and where appropriate, approve the
financial objectives, major strategies, and
plans of the corporation.
 Review the adequacy of systems to comply
with all applicable laws and regulations.
BOD
MEANS OF INFLUENCE
 Auditcommittee
 Compensation committee( to top employees)
 Nomination committee
 Governance committee

Listing agreements with stock exchanges and

Companies Act 1956, makes first three
mandatory for companies registered in India.
MANAGEMENT
Some of the issues vis-à-vis governance era
 Executive compensation particularly that of CEO
 Research shows past success “cause” for downfall.
 Balance between shareholder activism and
operational freedom to the management.
 Controversial practices: such as
 Reissuing stock options when stock price is below
the option price
THANK YOU

 Dr Naresh Kumar
 By Ravi Hooda
 2407