EVOLUTION : CORPORATE GOVERNANCE

History records Pataliputra, the capital of the Mauryan Empire, as a city “astonishingly well organised and administered according to the best principles of governance”.Writing about the ideal conduct of the King Kautilya,an official says an ideal king is one for whom-

“In the happiness & well being of the subjects, is the well being of the king, In the Welfare of the subjects, lies the welfare of the King, What is desirable and beneficial to the subjects and not his personal desires and ambitions is desirable and beneficial to the King”

Kautilya further elaborates on the fourfold duty of a King as: Raksha or Protection Vruddhi or Enhancement Palana or Maintaineance Yogakshema or Safeguard

The substitution of the state with the company, the King with the CEO oe the Board of the Company & the subjects with the Shareholders, brings out the spirit of the Corporate Governance

So, the fourfold duties of the King/CEO/Board of a Company can be interpreted to imply- Raksha or Protection - Shareholders Wealth Vruddhi or Enhancement - Wealth through proper utilisation of assets Palana or Maintaineance - Of that Wealth Yogakshema or Safeguard - Interest of the Shareholders

INTRODUCTION

Corporate governance is the set of processes, customs, policies, laws and institutions affecting

the way a corporation 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. The principal stakeholders are the shareholders, management and the board of

directors. Other stakeholders include employees, suppliers, customers, banks and other lenders,

regulators, the environment and the community at large.

Corporate governance is a multi-faceted subject. An important part of corporate governance

deals with accountability, fiduciary duty (trust, trustee), disclosure to shareholders and others,

and mechanism of auditing and control. In this sense, corporate governance players should

comply with codes to the overall good of all constituents. Another important focus is economic

efficiency, both within the corporation’s (such as the best practice guidelines) as well as

externally (national institutional frame works). In this” economic view, the corporate governance

system should be designed in such a way as to optimize results, as well as to detect and prevent

frauds. Some argue that the firm should act not only in the interest of the shareholders but also

off all the other stakeholders.

Governance makes decisions that the define expectations, grant power, or verify performance. It

consists either of a separate process or of a specific part of the management or leadership

processes. Sometimes people setup a government to administer these processes and systems. In

the case of a business or a nonprofit organization, governance develops and manages consistent,

cohesive policies, processes and decision-rights for a given area of responsibility. For example,

managing at a corporate level might involveevolvic policies on privacy, on internal investment,

and on the use of data.

WORD- ORIGIN

The word Governance derives from Latin origins that suggest the notion of “steering”. One can

contrast this sense of “steering” group or society with the traditional “Top-Down” approach of

governments “driving” society. Distinguish between governance’s “power to” and governments

“power over”.

DEFINITION

“Corporate Governance deals with the ways in which suppliers of finance toCorporations assure themselves of getting a return on their investment” (Shleifer and Vishny)

• “…the process and structure..to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business….”

– Where were the Directors? Guidelines for Improved Corporate Governance in Canada, TSE, 1994

• “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”

– Preamble to the OECD Principles of Corporate Governance, 2004

• “…fundamental objective of corporate governance is the ‘enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.”

• SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000

Some Further DefinitionsCorporate governance is essentially about leadership:

– leadership for efficiency;– leadership for probity;(honesty)– leadership with responsibility; and– leadership which is transparent and which is accountable.

- PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH

1. The OCED has defines corporate governance as involving ‘an asset of

Relationships between a company’s management, its board, its shareholder and other

stakeholders. Corporate governance also provides the structure through the objectives of the

company is set, and the means of attaining those objectives and monetary performance. Good

governance should provide proper incentives for the board management to pursue objectives that

are in the interest of the company and shareholders and should facilitate effective monitoring

thereby encouraging firms to use resources efficiently

WHAT IS CORPORATE GOVERNANCE?

Corporate governance is typically perceived by academic literature as dealing with ”problems

that results from the separation of ownership and control”. From this perspective, corporate

governance would focus on: the internal structure of BOD; the creation of independent

committee’s rules for disclosures of information to shareholders and creditors; and control of the

management.

An adequate institutional and legal framework is in place in India for effectively implementing a

code of sound corporate governance in banks. The statutes have build-in legal provisions that

prohibit or strongly limit activities and relationship that diminish the quality of corporate

governance in banks; they have been advised to place before their board of directors the report of

consultative group of directors of banks and setup to review the supervisory role of boards of

banks. The recommendations include the responsibility of the BOD, role and responsibility of

independent and non- executive directors, fit and proper norms for nomination of directors in

private sector banks, etc. The banks were advised to adopt and implement the recommendations

on the basis of the decisions taken by their board.

Transparency and disclosures standards are also important constituents of a sound corporate

governance mechanism. Transparency and accounting standards in India have been enhanced to

align with international best practices. However, there are many gaps in the disclosures in India

vis-a-vis the international standards, particularly in the areas of risk management strategies and

practices, risk parameters, risk concentrations, performance measures, component of capital

structure, etc. Hence, the disclosure standards need to be further broad-based in consonance with

improvements in the capability of market players to analyze the information objectively.

Thoughts on Corporate Governance

M. Damodaran :Investment and not as an expenditure V.R.S. Natarajan, CMD, Bharat Earth Movers Ltd: Ensuring transparency in

operations, performance, growth N.R. Narayana Murthy, Infosys Technologies Ltd.: Necessity, and no longer a luxury V.C. Burman, Chairman, Dabur India Ltd.:that good corporate governance and

impeccable track record Dr. Pratap C. Reddy, Chairman, Apollo Hospitals Enterprise Ltd: Enhance shareholder

value, instrument of investor protection.

 

TYPES OF GOVERNANCE:-1) Global Governance2) Project Governance3) Information Technology Governance4) Fair Governance

History

In the 19th century, state corporation laws enhanced the rights of corporate boards to govern

without unanimous consent of shareholders in exchange for statutory benefits like appraisal

rights, to make corporate governance more efficient. Since that time, and because most large

publicly traded corporations in the US are incorporated under corporate administration friendly

Delaware law, and because the US's wealth has been increasingly securitized into various

corporate entities and institutions, the rights of individual owners and shareholders have become

increasingly derivative and dissipated. The concerns of shareholders over administration pay and

stock losses periodically has led to more frequent calls for corporate governance reforms.

In the 20th century in the immediate aftermath of the Wall Street Crash of 1929legal scholars

such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C.Means pondered on the changing

role of the modern corporation in society. Berle and Means' monograph "The M

(1932, Macmillan) continues to have a profound influence on the conception of corporate

governance in scholarly debates today.

In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and World

com, as well as lesser corporate debacles, such as Adelphia Communications, AOL, Arthur

Andersen, Global Crossing, Tyco, and, more recently, Fannie Mae and Freddie Mac, led to

increased shareholder and governmental interest in corporate governance. This culminated in the

passage of the Sarbanes-Oxley Act of 2002. But, since then, the stock market has greatly

recovered, and shareholder zeal has waned accordingly.

Parties to corporate governance

Parties involved in corporate governance include the regulatory body (e.g. theChief Executive

Officer, the board of directors, management and shareholders).Other stakeholders who take part

include suppliers, employees, creditors, customers and the community at large.

All parties to corporate governance have an interest, whether direct or indirect, in the effective

performance of the organization. Directors, workers and management receive salaries, benefits

and reputation, while shareholders receive capital return. Customers receive goods and services;

suppliers receive compensation for their goods or services. In return these individuals provide

value in the form of natural, human, social and other forms of capital.

A key factor in an individual's decision to participate in an organization e.g. through providing

financial capital and trust that they will receive a fair share of the organizational returns. If some

parties are receiving more than their fair return then participants may choose to not continue

participating leading to organizational collapse.

OBJECTIVES:-

1) To build an environment of trust and confidence amongst these having Competition and conflicting interest.

2) To enhance shareholders value and protect the interest of stakeholders by Enhancing the corporate performance and accountability.

3) To have system and procedures which are transparent and which inform The stakeholders about the working of corporations.

Board Role & Responsibility

• Provide/ Exercise

– Leadership and Strategic Guidance

– Objective Judgement Independent of Management

– Control over the Company

• Direct and Control the Management of the Company

• Be Accountable at all times to All Shareholders

• Direction involves

– Formulation & Review of Company Policies, Strategies, Budgets and Plans, Risk Management Policies, Top Level HR Policies, etc

– Setting Objectives & Monitoring Performance

– Oversight of Acquisitions, Divestitures, Projects, Financial and Legal Compliance, etc

• Control Involves

– Prescribing Codes of Conduct,

– Overseeing Disclosure & Communication Processes,

– Ensuring Control Systems to Protect Company Assets

– Reviewing Performance & Realigning Action Initiatives to Achieve Company Objectives

• Accountability Involves

– Creating, Protecting and Enhancing Company Wealth and Resources

– Timely and Transparent Reporting

– Good Corporate Citizenry including Discharge of Stakeholder Obligations and Societal Responsibilities without Compromising the Shareholder Wealth Maximisation Goal

Corporate Governance & Capital Market Drivers: A Conceptual Framework

Listed Corporations(The Board & the Executive)

Regulators Government Stock Exchanges (SEBI/RBI) Legislation Listing Agreements

Market Operators Institutional Investors Press/Media (Rewards) (Pension Funds/Insce Cos) (Opinion Makers)

Lenders(Banks/

Depositors)

Shareholders/Stakeholders

EXTERNAL CORPORATE GOVERNANCE CONTROLSExternal corporate governance controls encompass the controls externalstakeholders exercise over the organization. Examples include:•Competition•Debt covenants•demand for and assessment of performance information (especiallyfinancial statements)•government regulations•managerial labour market•media pressure•takeovers•telephone tapping

OVERVIEW OF BANK CORPORATE GOVERNANCE

Corporate governance for banking organizations is arguably of greater importance than for other

companies, given the crucial financial intermediation role of banks in an economy, the need to

safeguard depositors’ funds and their high degree of sensitivity to potential difficulties arising

from ineffective corporate governance. Effective corporate governance practices, on both a

system-wide and individual bank basis, are essential to achieving and maintaining public trust

and confidence in the banking system, which are critical to the proper functioning of the banking

sector and economy as a whole. Bank failures can pose significant public costs and consequences

due to their potential impact on deposit insurance mechanisms and the possibility of broader

macroeconomic implications, such as contagion risk and impact on payment systems. Indeed,

banks and other financial companies may lose large amounts of money in a short period in the

case of events such as fraud. In addition, poor corporate governance can lead markets to lose

confidence in the ability of a bank to properly manage its assets and liabilities, including

deposits, which could in turn trigger a liquidity crisis or a run on deposits. Banks also typically

have access to confidential customer information, which can potentially be misused by

employees for personal gains.

Moreover, review and analysis of the investments, activities, risk exposures and financial

statements of banks may in some cases be more complex than such reviews of other companies

for several reasons, including the unrated, borrower-specific nature of a bank’s loan portfolio, as

well as valuation challenges. In light of these sensitivities, minimum standards of corporate

governance for banks should therefore be more ambitious than for non-financial firms.

GLOBAL INITIATIVES TO IMPOSE CORPORATE GOVERNANCE

A number of committees were set up to look into various aspects of Corporate Governance these includes:

- Sir Adrian Cadbury Committee on Financial Aspects of Corporate Governance(1992)

- Mervyn E King’s Committee on Corporate Governance(1994)

- Jenkins Report, US (Sept, 1994).

- Toronto Stock Exchange Report, Canada (Dec.1994)

- Greenbury Committee on Directors Remuneration(1995)

- Hampel Report,UK (Dec,1997)

- Business Round Table(BRT) Statement on Corporate Governance(1997)

- Hampel Committee on Corporate Governance(1998)

- Blue Ribbon Committee on improving the Effectiveness of Audit Committee(1999)

- CACG Principles for Corporate Governance in Commonwealth(1999)

- Blue Ribbon Commisson Report, US,2000

INDIAN INITIATIVES TO IMPOSE CORPORATE GOVERNANCE

Following committees were set up to look into various aspects of Corporate Governance these includes:

- Kumar Mangalam Birla Committee(1999)

- The Naresh Chandra Committee(2002)

- The Narayan Murthy Committee(2003)

Clause 49 of the Listing Agreement, which deals with Corporate Governance that a listed entity should follow was 1st introduced in the F.Y.2000-01 based on the recommendations of Birla Committee.

After these recommendations were in place for about 2yrs, SEBI in order to evaluate the adequacy of the existing pratices set up Narayana Murthy Committee, which after holding 3 meetings submitted a Draft recommendations on Corporate Governance norms accordingly Clause 49 of Listing Agreement was revised but industry had some objections which forced the Murthy Committee to revise Clause 49 again.

This revised recommendations have considerably diluted the Original Murthy Committee recommendations.

KUMAR MANGALAM BIRLA COMMITTEE

Kumar Mangalam Birla committee on Corporate Governance

Several corporate governance structures

Extends beyond corporate law

The committee has primarily focused on investors and shareholders.

Committee believes that its recommendations will go a long way in raising the standards of corporate governance

N.R. NARAYANA MURTHY COMMITTEE ON CORPORATE GOVERNANCE

• Committee primarily related to audit committees, audit reports, independent directors, related parties, risk management, directorships and director compensation, codes of conduct and financial disclosures.

Corporate social responsibility (CSR) is a company’s obligation to be accountable to all of its stakeholders in all its operations and activities with the aim of achieving sustainable development not only in the economical dimension but also in the social and environmental dimensions

Reason behind CSR

• Capital reputation

• Eco-Social Perspective

• Rights to information

Advantages of CSR • Increased sales

• Customer loyalty

• Creating new business opportunities

• Enhanced reputation

• Brand value

• Tax benefits

EXAMPLE OF GOOD CORPORATE GOVERNANCE