business ethics & corporate governance - 13 dec

8/12/2019 Business Ethics & Corporate Governance - 13 Dec

1/18

CORPORATE

GOVERNANCE


2/18

What is Corporate Governance

It describes the process by which

shareholders seek to ensure that theircorporation is run according to theirintensions.

It talks about total transparency, integrity,accountability of Management.


3/18

Corporate Governance: A principal-agent

relation

The CEO of Daimler Chrysler, merged Mercedes with Chrysler inorder to build a new global player in the automotive industry and

labeled it a merger of equals.

After a year, when it was revealed that Chrysler was in deepfinancial trouble, the CEO had disclosed that he had never intendedto have Chrysler as an equal partner in the long run but wanted thecompany as a part of his German conglomerate.

Based on this one of the key shareholders of Chrysler sued the CEOover his deception but finally lost the case.


4/18

This relation is called as Agency Relat ion.This means the shareholder is a principal who contractsmanagement as an agent to act in their interest within the boundaryof the firm.

2 features in this type of relationship:

- Confl ict o f interest:Shareholders want profits and rises in shareprice, which includes hard efforts from the managers. Managers

want high compensation and use the power to the detriment(damage) of shareholder value.E.g. acquisitions and mergers lead to higher returns for theshareholders and it often erodes the shareholder value.

- Informational asymmetry: The principal has little knowledge

about the qualifications, actions, and goals of the agent.E.g. The Chrysler shareholders were not aware about what theCEO had in mind but they could only listen to his plans later whendisclosed.


5/18

Governance & Performance

Good governance leads to good performance

It creates an open and transparent system

It improves communication and breaks down systematicbarriers to flow of information

Good governance allows decision making based on data& reduces risk

Good governance helps in creating a brand and createscomfort for all stakeholders and society


6/18

Corporate Governance Mechanism

Internal Governance Mechanisms

Board of director

Managerial incentive compensation Ownership concentration

External Governance Mechanisms Market for Corporate Control


7/18

Internal Mechanism of Control

Corporate governance mechanisms and controls are designed toreduce the inefficiencies that arise from moral hazard and adverseselection.

Monitoring by the board of directors

Internal control procedures and internal auditors

Balance of power

Remuneration

For example, to monitor managers' behavior, an independent thirdparty (the external auditor ) attests the accuracy ofinformation provided by management to investors.


8/18

External Mechanism of Control

It encompasses the control of external stake holdersexercise over the organization.

Competition

Debt agreements

Financial statements

Government regulations Media pressure

Take over


9/18

Benefits of Corporate Governance

Having better access to external finance

Lower costs of capital

Improved company performance

Higher firm valuation and share performance

Reduced risk of corporate crises and scandals


10/18

Why Corporate Governance is in news in

recent times

When Satyam announced its decision to buy stakes inMaytas Properties and Infrastructure for $1.3 billion.

The deal was soon called off owing to majordiscontentment on the part of shareholders and reducingshare-price.

Chairman Ramalinga Raju confessed that the profits inthe Satyam books had been inflated and that the cashreserve with the company was minimal.


11/18

Harshad Mehta Security Scam

Equity allotments at discount rates to the controllinggroups

Disappearance of Companies (1993-94) - around 4,000companies with 25,000 crores without starting business.

Foreign Investors expectations

New Business Opportunities --- IT & ITES, BPO


12/18

4Ps of CG

Purpose- Vision, Mission, Strategy

Process - Management, Compliances, Innovation

Performance - Efficiency, Growth

People - Ethics, Relationship


13/18

Ethical issues in corporate governance

Executive accountability and control:* A separate body of people that supervises and control

management on behalf of principles Board of

Directors

* Responsible for running the corporation ExecutiveDirectors

* Suppose toensure that the corporation is being run inthe interests of principles, usually shareholders Non-Executive Directors


14/18

To avoid any ethical issue, following important pointsshould be kept in mind:

Non-executive directors should be largely drawn fromoutside the corporation.

They should have a personal financial interest other thanthe shareholdersinterests.

Their appointment should be for a very a limited period,so that they would not get too close to the company.

They should be appointed independently, either by theshareholders during the AGM or by the supervisoryboard (stakeholders, banks, employees)


15/18

Executive remuneration

Salaries nowadays have a significant amount of sharesand share options to align shareholder and managersinterest.

* Salary levels have exploded, leading to unrest within thecompanies.

* This does not have any effect on the prices of theshares.

Thus the salaries has to be made performance-relatedfor all the executives.


16/18

The market for executive talent is a global oneand standards of highest level of pay seem to beacross the board.

This thus brings the influence of globalization.

There is also a limited influence of the board,which fails to reflect the shareholders interests.

Therefore, the shareholders would not want toreward a CEO who had overseen a period ofpoor performance.


17/18

Ethical aspects of mergers and

acquisitions

Hostile-takeovers: Investors or group of investors, intend topurchase a majority stake in a corporation against the wishes of theboard.

2 options in these kind of situation:

- Golden parachutes:A large sum of money would be paid if theyagree to the merger and their own redundancy (joblessness).

- Greenmail: In order not to lose the job after the takeover, themanagers secretly send greenmail to the potential hostile partyand offer to buy back the shares for the company at a higher pricethan the present market price.


18/18

The role of financial markets and insider

trading

Speculat ive Stoc k : Stock markets are based on theshareholders expecting a dividend and rise in stock

price as a decision to sell or buy their shares.

Ins ider trading: This occurs when securities are boughtor sold on the basis of material non-public information(events that are likely to a have a significant impact onthe companys share price well in advance of otherpotential traders.)

business ethics & corporate governance - 13 dec

Documents