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4corporate Governance

Corporate governance provides a framework that defines the rights and responsibilities of boards, management, and shareholders. It seeks to ensure boards act in shareholders' best interests, companies act lawfully and ethically, and shareholders are treated fairly. Considerations for corporate governance include ensuring board independence, executive compensation is appropriate, and shareholder rights like voting and initiating proposals. In India, corporate governance aims to prevent tunneling between controlling promoters and minority shareholders.

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36 views11 pages

4corporate Governance

Corporate governance provides a framework that defines the rights and responsibilities of boards, management, and shareholders. It seeks to ensure boards act in shareholders' best interests, companies act lawfully and ethically, and shareholders are treated fairly. Considerations for corporate governance include ensuring board independence, executive compensation is appropriate, and shareholder rights like voting and initiating proposals. In India, corporate governance aims to prevent tunneling between controlling promoters and minority shareholders.

Uploaded by

Sachin Yadav
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Corporate Governance

Concept
 System of internal controls and procedures by which
individual companies are managed
 Provides a framework that defines rights, roles and
responsibilities of different groups- Board,
management, shareholders
 Is the arrangement of checks, balances, incentives a
company needs, in order to minimize and manage
the conflicting interest between inside and outside
shareholders
 Purpose: to prevent one group from expropriating the
cash flows and assets of one or more other groups
CG seeks to ensure
(objectives):
 Board members act in the best interests of shareholders
 Co. acts in lawful and ethical manner
 All shareholders have same right to participate in governance of
the co. and receive fair treatment, rights are clearly delineated
and communicated
 Board and committees are structured to act independently
 Appropriate controls and procedures are in place to run day to
day operations of the co.
 Reporting of co.’s operating, financial and governance activities
to shareholders in a fair, accurate, timely, reliable, relevant,
complete and verifiable manner
CG Considerations
 For the Board
 For the Management
 For the Shareowners’ Rights
The Board
Investors and shareowners should determine
whether the Board:
 Has a majority of independent members
 Members have requisite qualifications
 Has budgetary authority to hire independent third
party consultants
 Members are elected annually or election process
staggers the terms
 Company engages in outside business relationships
with management or Board
 Has established independent audit committees to
oversee the audit process
 Has an independent committee to set and
supervise executive remuneration/
compensation
 Has an independent nominations committee
to recruit board members
 Has other committees for overseeing
management’s activities in select areas, such
as CG, M&As, legal matters, risk
management….
Management
 Investors and shareowners should determine whether:
 Co. has adopted a code of ethics and actions indicate conformity
to those
 Co. permits board members and management to use co. assets
for personal reasons
 Analyze amounts paid and manner of payment, to key
executives, to see that compensation structure is commensurate
with their responsibilities and performance
 Inquire into the size, purpose, means of financing and duration
of share repurchase programs and price stabilization efforts
Shareowner Rights
Investors and shareowners should determine
whether:
 Co. permits SHs to vote by proxy
 SHs are able to cast confidential votes
 Permits cumulative voting for electing board
members
 SHs can approve changes to corporate structures and
policies
 SHs can nominate individuals for election to the
Board
 SHs can submit/ initiate proposals for consideration
at the Co.’s AGM
 Board and mgt. are required to implement
proposals that SHs approve
 Ownership structure has different classes of
shares: DVS (differential voting shares)
 CG code and local law permits SHs to take
legal action to protect their rights
 Structure of takeover defenses is fair and
appropriate
CG in India
 CG normally arises to avoid agency costs: due to
separation of ownership and management
 However, in India, ownership structure is dominated
by promoters and FIs: entrenched system in pvt
sector, PSUs dominated by politicians and
bureaucrats
 Most companies are promoter driven, hence CG issue
is to avoid costs due to conflict of interest between
inside (management/ promoters owned) and outside
(external/ non promoters owned) SHs
 Tunneling: dominant SH may tunnel into the firm and
benefit at the expense of minority SHs
 Sarbanes Oxley Act of 2002
 FIs play a crucial role in ensuring CG in India
 Legal provisions and SEBI Code: defines roles,
structure, remuneration of the Board
 Clause 49 of the Listing Agreement covers provisions
relating to:
 Board of Directors
 Audit Committee
 Disclosures in annual reports
 CEO/ CFO certification
 ICRA rates companies on the quality of CG (CGR1 to
6)

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