Corporate Governance

STRATEGY, STRUCTURE,
GOVERNANCE
 What is Corporate Governance?

―Corporate Governance is nothing but a step

towards strengthening of the organization so as to
face the challenges‖

―It is stepping into the shoes of the shareholders,

stakeholders, vendors, suppliers & employees by
the Top Managers and CEO of the company‖

―Process and mechanisms by which the capital

market monitors the actions of corporate
management‖

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 What is Corporate Governance?

Corporate Governance is concerned with

holding the balance between economic and
social goals and between individual and
communal goals.

 The corporate governance framework is

there to encourage the efficient use of
resources and equally to require
accountability for the stewardship of those
resources.

 The aim is to align as nearly as possible the

interests of individuals, corporations and
society
- Sir Adrian Cadbury
 What is Corporate Governance?

The primary purpose of corporate leadership is

to create wealth legally and ethically.
This translates to bringing a high level of
satisfaction to five constituencies: customers,
employees, investors, vendors and the society-
at-large.
The raison d'être of every corporate body is to
ensure predictability, sustainability and
profitability of revenues year after year.

- N R Narayana Murthy
 What is Corporate Governance?

 Corporate governance is the set of

processes, customs, policies, laws,
and institutions affecting the way a
corporation (or company) is directed,
administered or controlled.
 Corporate governance also includes
the relationships among the many
stakeholders involved and the goals
for which the corporation is
governed.
 In simpler terms it means the extent
to which companies are run in an
open & honest manner.
 What is Corporate Governance?
 Monitor corporate performance and evaluate
results compared to the strategic plans and
other long-range goals.
 Review the company’s financial controls and
reporting systems.
 Review and approve the company’s financial
statements and financial reporting.
 Review the company’s ethical standards and
legal compliance programs and procedures.
 Oversee the company’s management of
enterprise risk.
 Monitor relations with shareholders,
employees, and the communities in which the
company operates.
 Fundamental Objective of
Corporate Governance

 Enhancement of Shareholder
Value, keeping in view the
Interests of other Stakeholders

 CG is a Way of Life rather than a

Code
Constituents of Corporate
Governance
The Board of Directors
• Pivotal role
• Accountable to stakeholders
• Directs management
The Shareholders & Stakeholders
• To participate in appointment of directors
• To hold the BoD accountable for governance
through proper disclosures
The Management
• To act on the direction of the BoD
• To provide requisite information to the BoD
for decision making
• To implement and monitor control systems
Emergence of Corporate Governance in India
 SEBI appointed, in May 1997, the Kumar Mangalam Birla
Committee

 Companies Amendment Act, 2000 introduced

- Setting up of Audit Committee

- Directors’ Responsibility Statement

 Kumar Mangalam Birla Committee recommendations adopted by
SEBI in 2000

 Clause 49 introduced in Listing Agreement

 Narayana Murthy Committee recommendations revised Clause 49

• Definition of independent directors

• Certificate by CFO & CEO
• Risk Assessment & Mitigation strategy of the company
• Code of Conduct for top Management

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―Good governance is not simply about
corporate excellence. It is the key to
economic and social transformation.
The corporation of today are no longer
sheer economic entities. These are the
engines of economic and social
transformation.‖
-Dr Madhav Mehra, President of World Council For Corporate
Governance
The Importance of Good Governance
If a country does not have a
reputation for strong corporate
governance practices, capital will flow
elsewhere. If investors are not
confident with the level of disclosure,
capital will flow elsewhere. If a
country opts for lax accounting and
reporting standards, capital will flow
elsewhere. All enterprises in that
country – regardless of how steadfast
a particular company’s practices may
be – suffer the consequences.
Source: Arthur Levitt, Former Chair of US Securities and
Exchange Commission
Corporate Governance of an organisation

Internal External Result

Governance Governance

Internal Control of Monitoring Systems Appropriate

of International Accountability
Organisation &
Agencies, National
Regulatory Agencies, Responsibility
Professional to
Institutes, Industry Stakeholders
Associations & NGO
Effective corporate governance requires a
clear understanding of the respective roles of
the board and of senior management and
their relationships with others in the
corporate structure. The relationships of the
board and management with stockholders
should be characterized by candor; their
relationships with employees should be
characterized by fairness; their relationships
with the communities in which they operate
should be characterized by good citizenship;
and their relationships with government
should be characterized by a commitment to
compliance.
Source: The Business Roundtable
Why Corporate Governance?

 TRANSPARENCY

 ACCOUNTABILITY

 CONTROL

 TRUSTEESHIP

 ETHICS

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 Corporate
Governance
Accountability

Responsibility
Transparency

Fairness
Fundamental Pillars of Corporate
Governance
Source: Malaysian Institute of Corporate Governance
Accountability
Clarifying governance roles &
responsibilities, and supporting voluntary
efforts to ensure the alignment of
managerial and shareholder interests and
monitoring by the board of directors capable
of objectivity and sound judgment.

Transparency
Requiring timely disclosure of adequate
information concerning corporate financial
performance
Responsibility
Ensuring that corporations comply with
relevant laws and regulations that reflect the
society’s values

Fairness
Ensuring the protection of shareholders’
rights and the enforceability of contracts with
service/resource providers
The Historical Roots of Corporate
Governance
 World wide privatization wave.

 Mergers and takeovers.

 Deregulation and capital market

integration.

 Scandals and failures at major

corporations.

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 International Initiatives on
Corporate Governance

 International Corporate Governance

Network founded by institutional
investors in Europe and North America
 Global Corporate Governance Forum
founded by OECD and World Bank
 Commonwealth Association for Corporate
Governance founded by Commonwealth
Heads of Government
 International Scenario
Year Name of Areas/Aspects Covered
Committee/Body
1992 Sir Adrian Cadbury Financial Aspects of Corporate Governance
Committee, UK
1994 Mervyn E . King’s Committee Corporate Governance
, South Africa
1995 Greenbury Committee , UK Directors’ Remuneration
1998 Hampel Committee, UK Combine Code of Best Practices
1999 Blue Ribbon Committee, US Improving the Effectiveness of Corporate Audit
Committees
1999 OECD Principles of Corporate Governance
1999 CACG Principles for Corporate Governance in
Commonwealth
2003 Derek Higgs Committee, UK Review of role of effectiveness of Non-executive
Directors
2003 ASX Corporate Governance Principles of Good Corporate Governance and
Council, Australia Best Practice Recommendations

Source: Rajkumar Adukia, Corporate Governance & Audit Committee

OECD
The Organisation for Economic Cooperation
and Development (OECD) started operations
in 1961to convene governments of countries
focused on democracy and the market
economy to support sustainable economic
growth, boost employment, raise living
standards, maintain financial stability, assist
in enhancing economic development, boost
growth in world trade, share expertise and
exchange views.
OECD Principles of Corporate
Governance

Endorsement of OECD Principles of Corporate Governance

1999 by OECD Ministers as an international benchmark for policy
makers, investors, corporations and other stakeholders worldwide

2004 Revised Principles of Corporate Governance.

OECD Steering Group on Corporate Governance issued the

2006 Methodology for Assessing Implementation of OECD Principles of
Corporate Governance.
OECD Principles of corporate
governance serve as framework for
Country Corporate Governance
Assessment, which is part of Reports
on the Observance of Standards and
Codes (ROSC) coordinated by World
Bank and International Monetary Fund
Reports on the Observance of
Standards and Codes (ROSC)
 ROSCs summarize the extent to which countries
observe certain internationally recognized
standards and codes.
 The IMF has recognized 12 areas and associated
standards as useful for the operational work of
the Fund and the World Bank.
 These comprise accounting; auditing; anti-
money laundering and countering the financing
of terrorism; banking supervision; corporate
governance; data dissemination; fiscal
transparency; insolvency and creditor rights;
insurance supervision; monetary and financial
policy transparency; payments systems; and
securities regulation.
Source: International Monetary Fund
 CORPORATE CORPORATE
GOVERNANCE MANAGEMENT

External Focus Internal Focus

Governance assumes an Management assumes a

open system closed system

Strategy-orientated Task-orientated

Concerned with where Concerned with getting

the company is going the company there
 ―Corporate governance is… holding the
balance between economic and social goals and
between individual and communal goals. The
governance framework is there to encourage
the efficient use of resources and equally to
require accountability for the stewardship of
those resources. The aim is to align as nearly
as possible the interests of individuals,
corporations and society. The incentive to
corporations is to achieve their corporate aims
and to attract investment. The incentive for
states is to strengthen their economics and
discourage fraud and mismanagement.‖

- Sir Adrian Cadbury, Corporate Governance:

A Framework for Implementation
Corporate Governance
Investors are Willing to Pay More for a Company
with Good Board Governance Practices

83 81 89

Companies are willing to pay 18 % to 28% more for better

governance.
Source: World Bank Institute
 CHIEF EXECUTIVE OFFICER (CEO)

“TheChief Executive Officer (CEO) is the officer

who
has ultimate management responsibility for
an organization.

The CEO reports directly to

the Board of Directors and appoints
other managers…to assist in carrying out the
responsibilities of the organization.”
Functions of CEO:

 To implement the strategic goals and objectives

of the organization

 Enable the Board of Directors to fulfill its

governance function

 To give direction and leadership toward the

achievement of the organization’s philosophy,
mission, strategy, and its annual goals and
objectives
Major Functions / Accountabilities:
 Board Administration and Support — Supports
operations and administration of Board by
advising and informing the Board of Directors,
interfacing between Board and staff, and
supporting Board’s evaluation of chief executive
 Program, Product and Service Delivery -
Oversees design, marketing, promotion, delivery
and quality of programs, products and services

 Financial, Tax, Risk and Facilities Management

— Recommends yearly budget for Board
approval and prudently manage organization’s
resources within those budget guidelines
according to current laws and regulations
 Merger / Acquisition / Investment decision-
If decision is to sell the company, establish price
and terms.
 Community and Public Relations — Assures the
organization and its mission, programs, products
and services are consistently presented in strong,
positive image to relevant stakeholders

 Fundraising — Oversees fundraising planning

and implementation, including identifying
resource requirements, researching funding
sources, establishing strategies to approach
funders, submitting proposals and
administrating fundraising records and
documentation
LEADER:

 Advises the Board

 Advocates / promotes organization and
stakeholder change related to organization
mission
 Supports motivation of employees in organization
products/programs and operations

VISIONARY / INFORMATION BEARER:

 Ensures staff and Board have sufficient and up-

to-date information
 Looks to the future for change opportunities
 Interfaces between Board and employees
 Interfaces between organization and community
DECISION MAKER:
 Formulates policies and planning
recommendations to the Board
 Decides or guides courses of action in
operations by staff

MANAGER:
 Oversees operations of organization

 Implements plans

 Manages human resources of organization

 Manages financial and physical resources

BOARD DEVELOPER:
 Assists in the selection and evaluation of board
members
 Makes recommendations, supports Board during
orientation and self-evaluation
 Responsibilities of CEO
1. Executive Leadership and Strategic Vision
CEO articulate strategic vision
CEO presents a role
CEO communicates high
performance standards and also
shows confidence in the followers
abilities.

2.Manage the strategic planning

process
 Time Management for CEOs
Categorize tasks into ABC
A = Most Urgent and important tasks
needing personal attention of CEO
B = Not so important tasks which could
be handled by others also
C = Not important now but may become
A or B category tasks later
 Time Management for CEOs

Tasks Preferred Actual Time

Time % %
Strategy 35
Monitoring 15
Performance
Leadership 30
Stake Holders 10
People 10
Development